Page Range | 33119-33794 | |
FR Document |
Page and Subject | |
---|---|
83 FR 33218 - Sunshine Act Meeting Notice | |
83 FR 33256 - Sunshine Act Meeting | |
83 FR 33276 - Sunshine Act Meetings | |
83 FR 33257 - Sunshine Act Meeting Notice | |
83 FR 33291 - Hours of Service of Drivers: Waste Management Holdings, Inc.; Application for Exemption | |
83 FR 33295 - Qualification of Drivers; Exemption Applications; Diabetes | |
83 FR 33297 - Qualification of Drivers; Exemption Applications; Diabetes Mellitus | |
83 FR 33292 - Qualification of Drivers; Exemption Applications; Vision | |
83 FR 33167 - Title I-Improving the Academic Achievement of the Disadvantaged-Supplement Not Supplant; Withdrawal | |
83 FR 33287 - Notice of Renewal of the Charter of the International Telecommunication Advisory Committee (ITAC) | |
83 FR 33308 - Health Services Research and Development Service, Scientific Merit Review Board; Notice of Meetings | |
83 FR 33215 - South Carolina Electric & Gas Company; Notice of Application Tendered for Filing With the Commission and Soliciting Additional Study Requests and Establishing Procedural Schedule for Relicensing and a Deadline for Submission of Final Amendments | |
83 FR 33217 - Notice of Settlement Agreement and Soliciting Comments: South Carolina Electric & Gas Company | |
83 FR 33234 - Agency Information Collection Activities: General Declaration | |
83 FR 33233 - Agency Information Collection Activities: Transfer of Cargo to a Container Station | |
83 FR 33124 - Special Local Regulations; Annual Les Cheneaux Islands Antique Wooden Boat Show; Hessel, MI | |
83 FR 33119 - Adoption of Updated EDGAR Filer Manual | |
83 FR 33177 - National Oil and Hazardous Substances Pollution Contingency Plan; National Priorities List: Deletion of the Dorney Road Landfill Superfund Site | |
83 FR 33186 - National Oil and Hazardous Substances Pollution Contingency Plan; National Priorities List: Deletion of the Recticon/Allied Steel Superfund Site | |
83 FR 33182 - National Oil and Hazardous Substances Pollution Contingency Plan; National Priorities List: Deletion of the Davis Timber Company Superfund Site | |
83 FR 33171 - National Oil and Hazardous Substances Pollution Contingency Plan; National Priorities List: Deletion of the Whitehouse Oil Pits Superfund Site | |
83 FR 33176 - National Oil and Hazardous Substances Pollution Contingency Plan; National Priorities List: Partial Deletion of the Naval Industrial Reserve Ordnance Plant Superfund Site | |
83 FR 33134 - National Oil and Hazardous Substances Pollution Contingency Plan; National Priorities List: Partial Deletion of the Naval Industrial Reserve Ordnance Plant Superfund Site | |
83 FR 33122 - Special Local Regulation; Grand Haven Coast Guard Festival Waterski Show, Grand Haven, MI | |
83 FR 33255 - Cumulative Report of Rescissions Proposals Pursuant to the Congressional Budget and Impoundment Control Act of 1974 | |
83 FR 33210 - International Whaling Commission; 67th Meeting; Announcement of Public Meeting | |
83 FR 33222 - Formations of, Acquisitions by, and Mergers of Bank Holding Companies | |
83 FR 33121 - Special Local Regulations: Recurring Marine Events in Captain of the Port Long Island Sound Zone | |
83 FR 33221 - Notice of Request for Comment on the Exposure Draft of a Classified Interpretation of Federal Financial Accounting Standards (SFFAS) 56: Classified Activities | |
83 FR 33287 - Notice of Public Meeting: National Dialogue on Highway Automation | |
83 FR 33288 - Proposed Guidance on Safe Harbor Rate Streamlining for Engineering and Design Services Consultant Contracts | |
83 FR 33193 - Notice of Request for Revision to and Extension of Approval of an Information Collection; Importation of Fruits and Vegetables | |
83 FR 33194 - Information Collection: Forest Industries and Logging Operations Data Collection Systems | |
83 FR 33231 - Advisory Committee for Women's Services (ACWS); Notice of Meeting | |
83 FR 33212 - Privacy Act of 1974; System of Records | |
83 FR 33195 - Steel Racks From the People's Republic of China: Initiation of Less-Than-Fair-Value Investigation | |
83 FR 33201 - Certain Steel Racks From the People's Republic: Initiation of Countervailing Duty Investigation | |
83 FR 33238 - Massachusetts; Major Disaster and Related Determinations | |
83 FR 33249 - Final Environmental Impact Statement and Draft Record of Decision on the Barton Springs/Edwards Aquifer Conservation District Habitat Conservation Plan for Two Salamander Species in Travis and Hays Counties, Texas | |
83 FR 33250 - Clad Steel Plate From Japan; Scheduling of a Full Five-Year Review | |
83 FR 33225 - Agency Information Collection Activities: Submission for OMB Review; Comment Request | |
83 FR 33237 - Agency Information Collection Activities: Submission for OMB Review; Comment Request; Threat and Hazard Identification and Risk Assessment (THIRA)-Stakeholder Preparedness Review (SPR) Reporting Tool | |
83 FR 33239 - Alaska; Major Disaster and Related Determinations | |
83 FR 33252 - Proposed Extension of Information Collection; Ventilation Plans, Tests, and Examinations in Underground Coal Mines | |
83 FR 33254 - Proposed Extension of Information Collection; Safety Standards for Roof Bolts in Metal and Nonmetal Mines and Underground Coal Mines | |
83 FR 33247 - Agency Information Collection Activities; Extension, Without Change, of a Currently Approved Collection: Petition for U Nonimmigrant Status | |
83 FR 33248 - Agency Information Collection Activities; Revision of a Currently Approved Collection: Petition To Classify Orphan as an Immediate Relative; Application for Advance Processing of an Orphan Petition; Supplement 1, Listing of an Adult Member of the Household; Supplement 2, Consent To Disclose Information | |
83 FR 33239 - Changes in Flood Hazard Determinations | |
83 FR 33306 - Reports, Forms, and Record Keeping Requirements | |
83 FR 33235 - Changes in Flood Hazard Determinations | |
83 FR 33304 - Reports, Forms, and Record Keeping Requirements Agency Information Collection Activity Under OMB Review | |
83 FR 33305 - Drugs that Impair Safe Driving; Request for Comments | |
83 FR 33251 - 192nd Meeting of the Advisory Council on Employee Welfare and Pension Benefit Plans; Notice of Meeting | |
83 FR 33220 - Clean Air Act Operating Permit Program; Petitions for Objection to State Operating Permit for Motiva Enterprises LLC, Port Arthur Refinery, Jefferson County, Texas | |
83 FR 33219 - Proposed Information Collection Request; Comment Request; Application Requirements for the Approval and Delegation of Federal Air Toxics Programs to State, Territorial, Local, and Tribal Agencies | |
83 FR 33195 - Notice of Petitions by Firms for Determination of Eligibility To Apply for Trade Adjustment Assistance | |
83 FR 33216 - Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 Authorization: Stonepeak Kestrel Energy Marketing LLC | |
83 FR 33217 - Combined Notice of Filings | |
83 FR 33216 - Combined Notice of Filings #2 | |
83 FR 33219 - Combined Notice of Filings #1 | |
83 FR 33209 - Endangered Species; File Nos. 18238, 21327 and 22123 | |
83 FR 33225 - Notice of Intent To Award a Single Supplement to the National Association of Area Agencies on Aging | |
83 FR 33210 - Proposed Information Collection; Comment Request; Environmental Compliance Questionnaire for National Oceanic and Atmospheric Administration Federal Financial Assistance Applicants | |
83 FR 33208 - Proposed Information Collection; Comment Request; Economic Expenditure Survey of Golden Crab Fishermen in the U.S. South Atlantic Region | |
83 FR 33231 - Eunice Kennedy Shriver National Institute of Child Health & Human Development; Notice of Closed Meetings | |
83 FR 33230 - Center for Scientific Review; Notice of Closed Meetings | |
83 FR 33227 - Agency Information Collection Request; 60-Day Public Comment Request | |
83 FR 33228 - Agency Information Collection Request. 60-Day Public Comment Request | |
83 FR 33226 - Agency Information Collection Request. 30-Day Public Comment Request | |
83 FR 33192 - Submission for OMB Review; Comment Request | |
83 FR 33165 - Safety Zone, S99 Alford Street Bridge-Emergency Grid Replacement Project, Mystic River, Charlestown and Everett, MA | |
83 FR 33127 - Safety Zone; Yankee Air Museum's Fundraiser Air Demonstration, Lake St. Clair, Grosse Pointe Farms, MI | |
83 FR 33232 - Quarterly IRS Interest Rates Used in Calculating Interest on Overdue Accounts and Refunds on Customs Duties | |
83 FR 33277 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change Relating to the First Trust Senior Loan Fund of First Trust Exchange Traded Fund IV | |
83 FR 33146 - Cost Accounting Standards: Revision of the Exemption From Cost Accounting Standards for Contracts and Subcontracts for the Acquisition of Commercial Items | |
83 FR 33285 - TriLine Index Solutions, LLC and ETF Series Solutions | |
83 FR 33286 - SL Advisors, LLC and ETF Series Solutions | |
83 FR 33244 - Agency Information Collection Activities: Case Assistance Form (Ombudsman Form DHS-7001, and Instructions) | |
83 FR 33139 - Connect America Fund, Connect America Fund-Alaska Plan | |
83 FR 33244 - Agency Information Collection Activities: Generic Clearance for the Collection of Qualitative Feedback on Agency Service Delivery | |
83 FR 33223 - Agency Information Collection Activities: Proposed Collection; Comment Request | |
83 FR 33255 - Arts Advisory Panel Meetings | |
83 FR 33256 - Meeting of Humanities Panel | |
83 FR 33165 - Filing Requirements for Information Returns Required on Magnetic Media (Electronically); Correction | |
83 FR 33129 - Removal of Rules Governing Trademark Interferences | |
83 FR 33211 - BroadbandUSA Webinar Series | |
83 FR 33125 - Special Local Regulation; 2018 Detroit Hydrofest, Detroit River, Detroit, MI | |
83 FR 33143 - Modernization of Payphone Compensation Rules; Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996; 2016 Biennial Review of Telecommunications Regulations | |
83 FR 33144 - Authorizing Permissive Use of the “Next Generation” Broadcast Television Standard | |
83 FR 33221 - Information Collections Being Reviewed by the Federal Communications Commission | |
83 FR 33163 - Proposed Amendment of Class E Airspace, Belfast, ME | |
83 FR 33132 - Air Plan Approval; Tennessee; Revisions to Stage I and II Vapor Recovery Requirements | |
83 FR 33168 - Air Plan Approval; Georgia; Revisions to VOC Definitions and Ambient Air Quality Standards | |
83 FR 33730 - Air Plan Approval; Kentucky; 2008 Ozone NAAQS Interstate Transport SIP Requirements | |
83 FR 33762 - Adjusting Program Fees for the Student and Exchange Visitor Program | |
83 FR 33222 - Determination Concerning a Petition To Add a Class of Employees to the Special Exposure Cohort | |
83 FR 33223 - Determination Concerning a Petition To Add a Class of Employees to the Special Exposure Cohort | |
83 FR 33608 - Request for Comments Concerning Proposed Modification of Action Pursuant to Section 301: China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation | |
83 FR 33205 - Cast Iron Soil Pipe Fittings From the People's Republic of China: Final Affirmative Determination of Sales at Less Than Fair Value and Final Determination of Critical Circumstances, in Part | |
83 FR 33148 - Atlantic Highly Migratory Species | |
83 FR 33263 - Biweekly Notice; Applications and Amendments to Facility Operating Licenses and Combined Licenses Involving No Significant Hazards Considerations | |
83 FR 33162 - Airworthiness Directives; The Boeing Company Airplanes | |
83 FR 33312 - Enterprise Capital Requirements | |
83 FR 33257 - State of Wyoming: NRC Staff Assessment of a Proposed Agreement Between the Nuclear Regulatory Commission and the State of Wyoming | |
83 FR 33140 - Protecting Consumers From Unauthorized Carrier Changes and Related Unauthorized Charges | |
83 FR 33159 - Airworthiness Directives; Airbus Airplanes | |
83 FR 33432 - Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds |
Animal and Plant Health Inspection Service
Forest Service
Economic Development Administration
International Trade Administration
National Oceanic and Atmospheric Administration
National Telecommunications and Information Administration
Patent and Trademark Office
Navy Department
Federal Energy Regulatory Commission
Centers for Disease Control and Prevention
Centers for Medicare & Medicaid Services
Community Living Administration
National Institutes of Health
Substance Abuse and Mental Health Services Administration
Coast Guard
Federal Emergency Management Agency
U.S. Citizenship and Immigration Services
U.S. Customs and Border Protection
U.S. Immigration and Customs Enforcement
Federal Housing Enterprise Oversight Office
Fish and Wildlife Service
Employee Benefits Security Administration
Mine Safety and Health Administration
Federal Procurement Policy Office
National Endowment for the Arts
National Endowment for the Humanities
Federal Aviation Administration
Federal Highway Administration
Federal Motor Carrier Safety Administration
National Highway Traffic Safety Administration
Comptroller of the Currency
Internal Revenue Service
Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, and notice of recently enacted public laws.
To subscribe to the Federal Register Table of Contents electronic mailing list, go to https://public.govdelivery.com/accounts/USGPOOFR/subscriber/new, enter your e-mail address, then follow the instructions to join, leave, or manage your subscription.
Securities and Exchange Commission.
Final rule.
The Securities and Exchange Commission (the “Commission”) is adopting revisions to the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) Filer Manual and related rules. The EDGAR system is scheduled to be upgraded on July 9, 2018.
Effective July 17, 2018. The incorporation by reference of the EDGAR Filer Manual is approved by the Director of the Federal Register as of July 17, 2018.
In the Division of Investment Management, for questions concerning Forms N-CSR or N-CSRS, contact Heather Fernandez at (202) 551-6708. In the Division of Trading and Markets, for questions concerning Form Funding Portal, contact Timothy White at (202) 551-7232. In the Office of Municipal Securities, for questions regarding Forms MA and MA-I, contact Ahmed A. Abonamah at (202) 551-3887. In the Division of Corporation Finance, for questions concerning the Form ABS-15G, Form C, and Form D, contact Heather Mackintosh at (202) 551-8111. In the Division of Economic and Risk Analysis, for questions concerning retired taxonomies and the updated 2018 IFRS taxonomy, contact Brian Hankin at (202) 551-8497.
We are adopting an updated EDGAR Filer Manual, Volume II. The Filer Manual describes the technical formatting requirements for the preparation and submission of electronic filings through the EDGAR system.
The revisions to the Filer Manual reflect changes within Volume II, entitled EDGAR Filer Manual, Volume II: “EDGAR Filing,” Version 47 (July 2018). The updated manual will be incorporated by reference into the Code of Federal Regulations.
The Filer Manual contains all the technical specifications for filers to submit filings using the EDGAR system. Filers must comply with the applicable provisions of the Filer Manual in order to assure the timely acceptance and processing of filings made in electronic format.
The EDGAR System and Filer Manual will be updated in Release 18.2 and will reflect the changes described below.
Release No. 33-10486 amended Forms Funding Portal, Form MA, Form MA-I, and Form MSD to eliminate the portions of such forms that requested filers furnish certain sensitive personally identifiable information (“PII”) of natural persons, including Social Security numbers, foreign identity numbers, dates of birth, and places of birth.
EDGAR will be revised to add the new exhibit “EX-99. IND PUB ACCT (Change of Independent Public Accountant)” for submission form types N-CSR, N-CSR/A, N-CSRS and N-CSRS/A. The new exhibit will allow registrants to report a change in their independent public accountant. Corresponding changes have been made to Appendix E (Automated Conformance Rules for EDGAR Data Fields) of the EDGAR Filer Manual, Volume II.
EDGAR will be revised to update submission form types ABS-15G and ABS-15G/A to remove “Issuing Entity Name” for the Registered Entity field in Items 2.01 and 2.02 and to remove “Issuing Entity CIK” from the Unregistered Entity field in Item 2.01 and from the Unregistered Entity under Rule 15Ga-2 field in Item 2.02. The revisions are designed to improve validation of filer identification header tag information by removing unnecessary header tag fields associated with these submission types. For further information, please see the “EDGARLink Online XML Technical Specification document” available on the SEC's public website at
EDGAR will be revised to update submission form types C, C/A, C-AR, C-AR/A, and C-TR to provide filers with an error message if they do not adhere to the EDGAR file naming standards specified in Chapter 5 (Constructing Attached Documents and Document Types) of the EDGAR Filer Manual, Volume II. In addition, submission form types C, C/A, C-A, C-AR, C-AR/A and C-U will be updated to allow filers to input a decimal value in the “Current Employees” field to denote any part-time employees. Corresponding changes have been made to Chapter 8 (Preparing and Transmitting Online Submissions) of the EDGAR Filer Manual, Volume II.
EDGAR will be revised to update submission form types D and D/A to increase the character limits from 150 to 200 characters for the following fields:
The EDGAR system will be updated to remove, and will no longer accept, the following submission form types: F-9, F-9/A, F-9POS, F-9EF, N-MFP, N-MFP/A, N-MFP1, N-MFP1/A, 497K1, 497K2, 497K3A, and 497K3B. These submission types either allow for filing of forms that have been rescinded by prior Commission action, or have been replaced by newer submission form types and are now obsolete. Corresponding changes have been made to Chapter 2 (Quick Guide to EDGAR Filing), Chapter 3 (Index to Forms), Chapter 4 (Filing Fee Information), Chapter 6 (Interactive Data), Chapter 8 (Preparing and Transmitting Online Submissions), and Appendix C (EDGAR Submission Types) of the EDGAR Filer Manual, Volume II.
The EDGAR system will be upgraded to remove the following taxonomies, which have been superseded: US-GAAP-2016, DEI-2013, DEI-2009, EXCH-2016, and RR-2010. The EDGAR system will be updated to reflect the 2018 version of the IFRS taxonomy. For further information please refer to the SEC's public website at
Chapter 5 (Constructing Attached Documents and Document Types) of the EDGAR Filer Manual, Volume II will be updated to provide clarifying instructions regarding the use of, and submission requirements for, PDF documents for specified submission form types. The EDGAR Filer Manual will also be revised to make clarifying changes to certain instructions by removing references to an application tool used to read XBRL data. The tool is no longer supported on sec.gov. Finally, the EDGAR Filer Manual will include revised instructions that clarify how filers may report shares outstanding for multiple classes of stock for XBRL validation. Corresponding changes have been made to Chapter 6 (Interactive Data) of the EDGAR Filer Manual, Volume II.
Along with the adoption of the Filer Manual, we are amending Rule 301 of Regulation S-T to provide for the incorporation by reference into the Code of Federal Regulations of today's revisions. This incorporation by reference was approved by the Director of the Federal Register in accordance with 5 U.S.C. 552(a) and 1 CFR part 51.
The updated EDGAR Filer Manual will be available for website viewing and printing; the address for the Filer Manual is
Since the Filer Manual and the corresponding rule and form amendments relate solely to agency procedures or practice, publication for notice and comment is not required under the Administrative Procedure Act (“APA”).
The effective date for the updated Filer Manual and the related rule and form amendments is July 17, 2018. In accordance with the APA,
We are adopting the amendments to Regulation S-T under the authority in Sections 6, 7, 8, 10, and 19(a) of the Securities Act of 1933,
Incorporation by reference, Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, title 17, chapter II of the Code of Federal Regulations is amended as follows:
15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 77sss(a), 78c(b), 78
Filers must prepare electronic filings in the manner prescribed by the EDGAR Filer Manual, promulgated by the Commission, which sets forth the technical formatting requirements for electronic submissions. The requirements for becoming an EDGAR Filer and updating company data are set forth in the updated EDGAR Filer Manual, Volume I: “General Information,” Version 30 (March 2018). The requirements for filing on EDGAR are set forth in the updated EDGAR Filer Manual, Volume II: “EDGAR Filing,” Version 47 (July 2018).
Additional provisions applicable to Form N-SAR filers are set forth in the EDGAR Filer Manual, Volume III: “N-SAR Supplement,” Version 6 (January 2017). All of these provisions have been incorporated by reference into the Code of Federal Regulations, which action was approved by the Director of the Federal Register in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. You must comply with these requirements in order for documents to be timely received and accepted. The EDGAR Filer Manual is available for website viewing and printing; the address for the Filer Manual is
By the Commission.
Coast Guard, DHS.
Notice of enforcement of regulation.
The Coast Guard will enforce five special local regulations for marine events in the Sector Long Island Sound area of responsibility on the dates and times listed in the table below. This action is necessary to provide for the safety of life on navigable waterways during the events. During the enforcement periods, no person or vessel may enter the safety zones without permission of the Captain of the Port (COTP) Sector Long Island Sound or designated representative.
The regulation in 33 CFR 100.100, Table to § 100.100 will be enforced for the following safety zones identified in the
If you have questions on this notice of enforcement, call or email Chief Petty Officer Katherine Linnick, Waterways Management Division, U.S. Coast Guard Sector Long Island Sound; telephone 203-468-4565, email
The Coast Guard will enforce the special local regulations listed in 33 CFR 100.100 Table 1 on the specified dates and times as indicated below.
Under the provisions of 33 CFR 100.100, the events listed above are established as special local regulations. During the enforcement period, persons and vessels are prohibited from entering into, transiting through, mooring, or anchoring within these regulated areas unless they receive permission from the COTP or designated representative.
This notice of enforcement is issued under authority of 33 CFR part 100 and 5 U.S.C. 552(a). In addition to this notice of enforcement in the
Coast Guard, DHS.
Temporary final rule.
The Coast Guard is amending a special local regulation for certain waters of the Grand River at Waterfront Stadium in Grand Haven, MI. This action is necessary and is intended to ensure safety of life on navigable waters to be used for a waterski show. This action will prohibit persons or vessels from entering certain waters immediately prior to, during, and immediately after the marine event. This special local regulation is needed to protect spectators, personnel, vessels, and the marine environment from potential hazards created by the Grand Haven Waterski Show.
This temporary final rule is effective from 7 p.m. through 9 p.m. on July 31, 2018.
To view documents mentioned in this preamble as being available in the docket, go to
If you have questions about this temporary rule, call or email marine event coordinator MSTC Kaleena Carpino, Prevention Department, Coast Guard Sector Lake Michigan, Milwaukee, WI; telephone (414) 747-7148, or email
The Coast Guard is issuing this temporary rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking (NPRM) with respect to this rule because The Grand Haven Waterski show is an annual event codified in 33 CFR 100.906. The coordinates listed therein are not accurate for this year's event, and final details for the event were not received in time to publish an NPRM. As such, it is impracticable to publish an NPRM because we lack sufficient time to provide a reasonable comment period and then consider those comments before issuing the rule.
Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the
The Coast Guard is issuing this rule under authority in 33 U.S.C. 1233. The Captain of the Port Lake Michigan (COTP) has determined that the combination of recreational vessels, commercial vessels, and an unknown number of spectators in close proximity to the waterski show pose extra and unusual hazards to public safety and property. Specific hazards include collisions among event participants, collisions between participants and recreational traffic, and other traffic that may cause injury or marine casualties. Therefore, the COTP is amending a Special Local Regulation around the event location to help minimize risks to safety of life and property to persons, vessels, and the marine environment during this event.
This rule establishes a temporary special local regulation from 7 p.m. until 9 p.m. on July 31, 2018. In light of the aforementioned hazards, the COTP has determined that a special local regulation is necessary to protect spectators, vessels, and the marine environment. The special local regulation will cover all navigable waters within the following coordinates: 43°04′5 N, 086°14′12.4″ W; then east to 43°04′2″ N, 086°14′1″ W; then south to 43°03′45″ N, 086°14′10″ W; then west to 43°03′48″ N, 086°14′17″ W; then back to the point of origin. No vessel or person will be permitted to enter the regulated area without obtaining permission from the COTP or a designated representative.
The COTP or his designated on-scene representative will notify the public of the enforcement of this rule by all appropriate means, including a Broadcast Notice to Mariners and Local Notice to Mariners. The COTP or his designated on-scene representative may be contacted via VHF Channel 16, or at (404) 747-7182.
We developed this rule after considering numerous statutes and executive orders related to rulemaking. Below we summarize our analyses based on these statutes and executive orders, and we discuss First Amendment rights of protestors.
Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.
This regulatory action determination is based on the size, location, duration, and time-of-day of the special local regulation. The event is in the evening hours, and will last for a maximum of 2 hours. Moreover, the Coast Guard will issue a Broadcast Notice to Mariners via VHF-FM marine channel 16 about the special local regulation, and the rule allows vessels to seek permission to enter the zone.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.
While some owners or operators of vessels intending to transit the safety zone may be small entities, for the reasons stated in section V.A above, this rule will not have a significant economic impact on any vessel owner or operator.
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.
This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this rule under Department of Homeland Security Directive 023-01 and Commandant Instruction M16475.1D, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves a safety zone lasting only 2 hours that will prohibit transit of the Grand River, in Grand Haven, MI in front of the Waterfront Stadium. It is categorically excluded from further review under paragraph L61 of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01.
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
Harbors, Marine safety, Navigation (water), Reporting and record keeping requirements, Waterways.
For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 100 as follows:
33 U.S.C. 1233.
(a)
(b)
(c)
Coast Guard, DHS.
Final rule.
The Coast Guard is adding a special local regulation to increase safety in the navigable waters of Marquette Bay, Hessel, MI during the annual Les Cheneaux Islands Antique Wooden Boat Show held annually in mid-August. The regulation will add a no wake zone to be enforced in the area around the show from 7 a.m. to 7 p.m.
This regulation is effective August 11th, 2018.
To view documents mentioned in this preamble as being available in the docket go to
If you have questions on this rule, call or email Chief Steven Durden, Waterways Management, Coast Guard Sector Sault Sainte Marie, U.S. Coast Guard; telephone 906-635-3222, email
The Les Cheneaux Antique Wooden Boat Show was founded in 1978 and the event is held every year in mid-August. During this event, a variety of vessel traffic is attracted to the area in and surrounding the Hessel Marina. A commercial ferry vessel, jet skis, kayaks, paddle boards, sail and power vessels all use this this waterway to view the show and to transit the area. This mix of vessels in close proximity to each other warrants additional safety measures. In response, the Coast Guard published a notice of proposed rulemaking (NPRM) on June 18th, 2018. There, we stated why we issued the NPRM, and invited comments on our proposed regulatory action related to this no wake zone. During the comment period that ended July 9th, 2018, we received no comments.
We are issuing this rule, and under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making it effective less than 30 days after publication in the
The legal basis for this final rulemaking is found at 33 U.S.C. 1233.
We received no comments from the NPRM published June 18th, 2018. There are no changes in the regulatory text of this rule from the proposed rule in the NPRM. The Captain of the Port Sault Sainte Marie (COTP) has determined that adding the Annual Les Cheneaux Islands Antique Wooden Boat Show to the list of Special Local Regulations to establish a no wake zone in the navigable waters of Marquette Bay near Hessel, MI is necessary to ensure the safety of the boating public.
We developed this rule after considering numerous statutes and Executive Orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive Orders, and we discuss First Amendment rights of protestors.
Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This NPRM has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, the NPRM has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.
This regulatory action determination is based on the size, location, duration, and time-of-day for the no wake zone. Vessel traffic will be able to safely transit through the no wake zone which will impact a small designated area within the COTP zone for a short duration of time. Moreover, the Coast Guard will issue Broadcast Notice to Mariners via VHF-FM marine channel 16 about the zone.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard received no comments from the Small Business Administration on this rulemaking. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.
While some owners or operators of vessels intending to transit the no wake zone may be small entities, for the reasons stated in section V.A. above, this rule will not have a significant economic impact on any vessel owner or operator.
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.
This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this proposed rule under Department of Homeland Security Management Directive 023-01 and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves creating a no wake zone for one day each year in a small area. It is categorically excluded from further review under paragraph L61 of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01. A preliminary Record of Environmental Consideration supporting this determination is available in the docket where indicated under
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
Marine safety, Navigation (water), Reporting and recordkeeping requirements, Waterways.
For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 100 as follows:
33 U.S.C. 1233.
(a)
(b)
(c)
Coast Guard, DHS.
Temporary final rule.
The Coast Guard is establishing a special local regulation for certain navigable waters of the Detroit River, Detroit, MI. This action is necessary and is intended to ensure safety of life on navigable waters immediately prior to, during, and immediately after the 2018 Detroit Hydrofest boat races.
This temporary final rule is effective from 7 a.m. on August 24, 2018, through 7 p.m. on August 26, 2018.
To view documents mentioned in this preamble as being available in the docket, go to
If you have questions on this temporary rule, call or email Tracy Girard, Prevention Department, Sector Detroit, Coast Guard; telephone (313) 568-9564, or email
The Coast Guard is issuing this temporary rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(B), the Coast Guard finds that
Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the
The Coast Guard is issuing this rule under authority in 33 U.S.C. 1233. The Captain of the Port Detroit (COTP) has determined that the likely combination of recreation vessels, commercial vessels, and an unknown number of spectators in close proximity to a high speed boat race along the water pose extra and unusual hazards to public safety and property. Therefore, the COTP is establishing a special local regulation around the event location to help minimize risks to safety of life and property during this event.
This rule establishes a temporary special local regulation from 7 a.m. on August 24, 2018 until 7 p.m. August 26, 2018. The regulation will be enforced from 12 p.m. until 7 p.m. on August 24, 2018, and from 7 a.m. until 7 p.m. on August 25 and August 26, 2018. In light of the aforementioned hazards, the COTP has determined that a special local regulation is necessary to protect spectators, vessels, and participants. The special local regulation will encompass all U.S. waters of the Detroit River in Scott Middle Ground, north of Belle Isle, Michigan, starting at positions 42°20.506′ N 083°00.016′ W on the Douglas MacArthur Bridge; extending east to the Belle Isle Crib Light at 42°21.205′ N 082°57.996′ W (NAD 83).
No vessel or person will be permitted to enter the special regulated area without obtaining permission from the COTP or a designated representative. The Captain of the Port Detroit or a designated on-scene representative may be contacted via VHF Channel 16 or via telephone at (313) 568-9560. The Coast Guard will issue Broadcast Notice to Mariners via VHF-FM marine channel 16 about the zone and the rule allows vessels to seek permission to enter the zone.
We developed this rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders, and we discuss First Amendment rights of protestors.
Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.
This regulatory action determination is based on the size, location, duration, and time-of-year of the special local regulation. Vessel traffic will be able to safely transit around this special local regulation zone which will impact a small designated area of the Detroit River from 7 a.m. on August 24, 2018 until 7 p.m. on August 26, 2018. Moreover, the Coast Guard will issue Broadcast Notice to Mariners via VHF-FM marine channel 16 about the special local regulation and the rule allows vessels to seek permission to enter the area.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.
While some owners or operators of vessels intending to transit the special local regulation may be small entities, for the reasons stated in section V.A above, this rule will not have a significant economic impact on any vessel owner or operator.
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.
This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this rule under Department of Homeland Security Directive 023-01 and Commandant Instruction M16475.1D, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves a special local regulation lasting 3 days that will prohibit entry into a designated area. It is categorically excluded from further review under paragraph L[61] of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01. A Record of Environmental Consideration supporting this determination is available in the docket where indicated under
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
Marine safety, Navigation (water), Reporting and record keeping requirements, Waterways.
For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 100 as follows:
33 U.S.C. 1233.
(a)
(b)
(c)
(2) The regulated area is closed to all vessel traffic, except as may be permitted by the Captain of the Port Detroit or his on-scene representative.
(3) The “on-scene representative” of the Captain of the Port Detroit is any Coast Guard commissioned, warrant or petty officer or a Federal, State, or local law enforcement officer designated by or assisting the Captain of the Port Detroit to act on his behalf.
(4) Vessel operators shall contact the Captain of the Port Detroit or his on-scene representative to obtain permission to enter or operate within the regulated area. The Captain of the Port Detroit or his on-scene representative may be contacted via VHF Channel 16 or at (313) 568-9560. Vessel operators given permission to enter or operate in the regulated area must comply with all directions given to them by the Captain of the Port Detroit or his on-scene representative.
Coast Guard, DHS.
Temporary final rule.
The Coast Guard is establishing a temporary safety zone for navigable waters in the vicinity of Grosse Pointe Farms, MI. This zone is necessary to protect spectators and vessels from potential hazards associated with the Yankee Air Museum's Fundraiser Air Demonstration.
This temporary final rule is effective from 8 p.m. until 8:30 p.m. July 18, 2018.
To view documents mentioned in this preamble as being available in the docket, go to
If you have questions on this temporary rule, call or email Tracy Girard, Prevention Department, Sector Detroit, Coast Guard; telephone 313-568-9564, or email
The Coast Guard is issuing this temporary rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(B), the Coast Guard finds that
Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the
The Coast Guard is issuing this rule under authority in 33 U.S.C. 1231. The Captain of the Port Detroit (COTP) has determined that an aircraft aerial display proximate to a gathering of watercraft poses a significant risk to public safety and property. This rule is needed to protect personnel, vessels, and the marine environment in the navigable waters within the safety zone while the air demonstration is being displayed.
This rule establishes a safety zone from 8 p.m. through 8:30 p.m. July 18, 2018. The safety zone will encompass all U.S. navigable waters of Lake St. Clair with in the following corner points: Northeast corner, 42°24.670′ N, 082°51.594′ W, Northwest corner 42°24.671′ N, 082°51.368′ W, Southeast corner 42°24.034′ N, 082°51.857′ W, Southwest corner 42°24.023′ N, 082°51.626′ W (NAD 83). No vessel or person will be permitted to enter the safety zone without obtaining permission from the COTP or a designated representative.
We developed this rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders, and we discuss First Amendment rights of protestors.
Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.
This regulatory action determination is based on the size, location, duration, and time-of-year of the safety zone. Vessel traffic will be able to safely transit around this safety zone which will impact a small designated area of Lake St. Clair for no more than thirty minutes. Moreover, the Coast Guard will issue Broadcast Notice to Mariners (BNM) via VHF-FM marine channel 16 about the zone and the rule allows vessels to seek permission to enter the zone.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.
While some owners or operators of vessels intending to transit the safety zone may be small entities, for the reasons stated in section V.A above, this rule will not have a significant economic impact on any vessel owner or operator.
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.
This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this rule under Department of Homeland Security Directive 023-01 and Commandant Instruction M16475.1D, which guide the Coast Guard in complying with the
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
Harbors, Marine safety, Navigation (water), Reporting and record keeping requirements, Security measures, Waterways.
For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 165 as follows:
33 U.S.C. 1231; 50 U.S.C. 191; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Department of Homeland Security Delegation No. 0170.1.
(a)
(b)
(c)
(2) The safety zone is closed to all vessel traffic, except as may be permitted by the COTP or his on-scene representative.
(3) The “on-scene representative” of COTP is any Coast Guard commissioned, warrant or petty officer or a Federal, State, or local law enforcement officer designated by or assisting the Captain of the Port Detroit to act on his behalf.
(4) Vessel operators shall contact the COTP or his on-scene representative to obtain permission to enter or operate within the safety zone. The COTP or his on-scene representative may be contacted via VHF Channel 16 or at 313-568-9464. Vessel operators given permission to enter or operate in the regulated area must comply with all directions given to them by the COTP or his on-scene representative.
United States Patent and Trademark Office, Commerce.
Final rule.
The United States Patent and Trademark Office (USPTO or Office) amends the Rules of Practice in Trademark Cases to remove the rules governing trademark interferences. This rule arises out of the USPTO's work during FY 2017 to identify and propose regulations for removal, modification, and streamlining because they are outdated, unnecessary, ineffective, costly, or unduly burdensome on the agency or the private sector. The revisions put into effect the work the USPTO has done, in part through its participation in the Regulatory Reform Task Force (Task Force) established by the Department of Commerce (Department or Commerce) pursuant to Executive Order 13777, to review and identify regulations that are candidates for removal.
This rule is effective on August 16, 2018.
Catherine Cain, Office of the Deputy Commissioner for Trademark Examination Policy, by email at
In accordance with Executive Order 13777, “Enforcing the Regulatory Reform Agenda,” the Department established a Task Force, comprising, among others, agency officials from the National Oceanic and Atmospheric Administration, the Bureau of Industry and Security, and the USPTO, and charged the Task Force with evaluating existing regulations and identifying those that should be repealed, replaced, or modified because they are outdated, unnecessary, ineffective, costly, or unduly burdensome to both government and private-sector operations.
To support its regulatory reform efforts on the Task Force, the USPTO assembled a Working Group on Regulatory Reform (Working Group), consisting of subject-matter experts from each of the business units that implement the USPTO's regulations, to consider, review, and recommend ways that the regulations could be improved, revised, and streamlined. In considering the revisions, the USPTO, through its Working Group, incorporated into its analyses all presidential directives relating to regulatory reform. The Working Group reviewed existing regulations, both discretionary rules and those required by statute or judicial order. The USPTO also solicited comments from stakeholders through a web page established to provide information on the USPTO's regulatory reform efforts and through the Department's
This rule removes the regulations concerning trademark interferences codified at 37 CFR 2.91-2.93, 2.96, and 2.98. The rule also revises the authority citation for part 2 and revises the undesignated center heading “INTERFERENCES AND CONCURRENT USE PROCEEDINGS” to read “CONCURRENT USE PROCEEDINGS” to more accurately reflect the final regulations. A trademark interference is a proceeding in which the Trademark Trial and Appeal Board (Board) determines which, if any, of the owners of conflicting applications (or of one or more applications and one or more conflicting registrations) is entitled to registration. 15 U.S.C. 1066. A trademark interference can be declared only upon petition to the Director of the USPTO (Director). However, the Director will grant such a petition only if the petitioner can show extraordinary circumstances that would result in a party being unduly prejudiced in the absence of an interference. 37 CFR 2.91(a). The availability of an opposition or cancellation proceeding to determine rights to registration ordinarily precludes the possibility of such undue prejudice to a party.
Trademark interferences have generally been limited to situations where a party would otherwise be required to engage in a series of opposition or cancellation proceedings involving substantially the same issues. Trademark Manual of Examining Procedure § 1507. The promulgation of the interference regulations suggests that at that time, the Office contemplated such situations arising with enough frequency to merit particular regulations governing interference proceedings. However, the rarity of interference proceedings over an extended period of time indicates that the regulations are unnecessary. To the extent that the USPTO's paper petition records are searchable, the USPTO reviewed them and its electronic records of petitions and found that since 1983, the USPTO has received an average of approximately one petition for a trademark interference per year, and almost all of them have been denied except for one petition that was granted in 1985 (32 years ago). The USPTO has been unable to identify a situation since that time in which the Director has granted a petition to declare a trademark interference. Given the extremely low rate of filing over this long period of time, and because parties would still retain an avenue for seeking a declaration of interference through the general petition regulations, the USPTO considers the trademark interference regulations unnecessary.
Section 16 of the Trademark Act, 15 U.S.C. 1066, states that the Director may declare an interference “[u]pon petition showing extraordinary circumstances.” Although eliminating §§ 2.91-2.93, 2.96, and 2.98 removes the regulations regarding the requirements for declaring a trademark interference, the statutory authority will remain. On the rare occasion that the Office receives a request that the Director declare a trademark interference, it is currently submitted as a petition under 37 CFR 2.146, a more general regulation on petitions. In the unlikely event that a need for an interference arose, it is still possible for a party to seek institution of a trademark interference by petitioning the Director under 37 CFR 2.146(a)(4), whereby a petitioner may seek relief in any case not specifically defined and provided for by Part 2 of Title 37. Thus, even after removal of these rules, parties retain an avenue for seeking a declaration of interference.
Removal of the identified trademark interference regulations in this rule achieves the objective of making the USPTO regulations more effective and more streamlined, while enabling the USPTO to fulfill its mission goals. The USPTO's economic analysis shows that while the removal of these regulations is not expected to substantially reduce the burden on the impacted community, the regulations are nonetheless being eliminated because they are “outdated, unnecessary, or ineffective” regulations encompassed by the directives in Executive Order 13777.
The USPTO published a proposed rule on October 18, 2017 at 82 FR 48469, soliciting comments on the proposed amendments. In response, the USPTO received three comments relevant to the proposed rule. The commenters generally supported the proposed amendments as meeting the stated objectives. The USPTO appreciates the positive input, and these comments require no response.
One commenter noted that the removal of the trademark interference rules will not relieve any burden, as a party can petition the Director to declare an interference with or without these rules, and suggested “that there should be real amendments which actually mitigate regulatory burden to incent entrepreneurship and market growth.” As noted above, removal of the identified regulations achieves the objective of making the USPTO regulations more effective and more streamlined, while enabling the USPTO to fulfill its mission goals. Moreover, although removal of these regulations is not expected to substantially reduce the burden on the impacted community, they are being eliminated because they are “outdated, unnecessary, or ineffective” regulations that are encompassed by the directives in Executive Order 13777. The Office sought public suggestions on regulatory changes to reduce burdens in order to benefit from the public's input.
All comments are posted on the USPTO's website at
The USPTO revises the authority citation for part 2 to add “Sec. 2.99 also issued under secs. 16, 17, 60 Stat. 434; 15 U.S.C. 1066, 1067.” The USPTO revises the undesignated center heading “INTERFERENCES AND CONCURRENT USE PROCEEDINGS” to read “CONCURRENT USE PROCEEDINGS” and removes the authority citation immediately following that heading. The USPTO removes and reserves §§ 2.91-2.93, 2.96, and 2.98.
Accordingly, prior notice and opportunity for public comment for the changes in this rulemaking are not required pursuant to 5 U.S.C. 553(b) or (c), or any other law.
This rule removes the regulations addressing trademark interferences codified at 37 CFR 2.91-2.93, 2.96, and 2.98. In trademark interferences, the Board determines which, if any, of the owners of conflicting applications (or of one or more applications and one or more conflicting registrations) is entitled to registration. 15 U.S.C. 1066. Where searchable, the USPTO reviewed its paper and electronic records of petitions and found that since 1983, USPTO has received an average of approximately 1 such petition a year, and almost all of them have been denied except for one petition that was granted in 1985 (32 years ago). Because these regulations have rarely been invoked in the last 32 years and no trademark interference proceedings occurred during that time, the USPTO considers these regulations unnecessary and has determined to remove them. Removing the trademark interference regulations in this rule achieves the objective of making the USPTO regulations more effective and more streamlined, while enabling the USPTO to fulfill its mission goals. The removal of these regulations is not expected to substantively impact parties as, in the unlikely event that a need for a trademark interference arose, a party would be able to petition the Director under 37 CFR 2.146(a)(4) for institution of an interference. For these reasons, this rulemaking will not have a significant economic impact on a substantial number of small entities.
Notwithstanding any other provision of law, no person is required to respond to nor shall a person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number.
Administrative practice and procedure, Trademarks.
For the reasons stated in the preamble and under the authority contained in 15 U.S.C. 1123 and 35 U.S.C. 2, as amended, the Office amends part 2 of title 37 as follows:
15 U.S.C. 1123 and 35 U.S.C. 2 unless otherwise noted. Sec. 2.99 also issued under secs. 16, 17, 60 Stat. 434; 15 U.S.C. 1066, 1067.
Environmental Protection Agency (EPA).
Final rule.
The Environmental Protection Agency (EPA) is approving a State Implementation Plan (SIP) revision submitted by the State of Tennessee through the Tennessee Department of Environment and Conservation (TDEC) on November 11, 2017, for the purpose of establishing minor changes to the gasoline dispensing regulations, including adding clarifying language and effective and compliance dates and specifying the counties subject to the reporting requirement rule. EPA has determined that Tennessee's November 11, 2017, SIP revision is approvable because it is consistent with the Clean Air Act (CAA or Act) and with EPA's regulations and guidance.
This rule is effective August 16, 2018.
EPA has established a docket for this action under Docket Identification No. EPA-R04-OAR-2017-0740. All documents in the docket are listed on the
Kelly Sheckler, Air Regulatory Management Section, Air Planning and Implementation Branch, Air, Pesticides and Toxics Management Division, Region 4, U.S. Environmental Protection Agency, 61 Forsyth Street SW, Atlanta, Georgia 30303-8960. The telephone number is (404) 562-9222. Ms. Sheckler can also be reached via electronic mail at sheckler.kelly@
On November 11, 2017, TDEC submitted a SIP revision to EPA seeking to add clarity for the benefit of the regulated community with gasoline dispensing facilities. Tennessee is making a minor change to its rules regarding gasoline dispensing facilities (GDF) at subparagraph (1)(d) of rule 1200-03-18-.24—“For any GDF otherwise exempt from subparagraph (c) of this paragraph based on monthly throughput, if the GDF
In addition, this revision replaces the phrase “the effective date of this rule” with the actual effective date of the rule (July 14, 2016) and replaces “three years after effective date” with the actual date of the rule for compliance (August 14, 2019). Finally, this revision adds the list of counties (Davidson, Rutherford, Shelby, Sumner, Knox, Anderson, Williamson and Wilson) that need to report to their permitting authority (if they emit more than 25 tons in a calendar year) and the cross reference to the existing reporting requirement in rule 1200-03-18-.02 to simplify the issuances of notices of authorization under pending permit-by-rule provisions.
Pursuant to CAA section 110(l), the Administrator shall not approve a revision of a plan if the revision would interfere with any applicable requirement concerning attainment and reasonable further progress (as defined in CAA section 171), or any other applicable requirement of the Act. The State's addition of clarifying language, specific dates for the gas dispensing rule's effective and compliance dates, as well as specifying the counties subject to the reporting requirement under the cross-referenced rule are approvable under section 110(l) because they merely clarify the application of the rule and are consistent with the CAA and federal regulations.
In this action, EPA is approving TDEC's request to revise the Stage II requirements in the State of Tennessee. EPA published a proposed rulemaking on April 12, 2018 (83 FR 16279), to approve this revision. The details of Tennessee's submittal and the rationale for EPA's action are explained in the proposed rulemaking. The comment period for this proposed rulemaking closed on May 16, 2018. While EPA received six unrelated comments, EPA did not receive any adverse comments for the proposed approval during the public comment period.
In this rule, EPA is finalizing regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, EPA is finalizing the incorporation by reference of TDEC Regulation section 1200-03-18-.24 entitled “Gasoline Dispensing Facilities-Stage I and II Vapor Recovery,” effective August 31, 2017. EPA has made, and will continue to make, these materials generally available through
EPA is taking final action to approve the November 11, 2017, revision to the Tennessee SIP, concerning Regulation 1200-03-18-24,
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations.
• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
The SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it impose substantial direct costs on tribal governments or preempt tribal law.
The Congressional Review Act, 5 U.S.C. 801
Under section 307(b)(1) of the CAA, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by September 17, 2018. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this action for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements.
Environmental protection, Air pollution control, Carbon monoxide, Incorporation by reference, Intergovernmental relations, Lead, Nitrogen dioxide, Ozone, Particulate matter, Reporting and recordkeeping
40 CFR part 52 is amended as follows:
42.U.S.C. 7401
(c) * * *
Environmental Protection Agency (EPA).
Direct final rule.
The Environmental Protection Agency (EPA) Region 5 is publishing a direct final Notice of Deletion of Operable Unit 3 (OU3) of the Naval Industrial Reserve Ordnance Plant (NIROP) Superfund Site (Site), located in Fridley, Minnesota, from the National Priorities List (NPL). The NPL, promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, is an appendix of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP). This direct final partial deletion is being published by EPA with the concurrence of the State of Minnesota, through the Minnesota Pollution Control Agency (MPCA), because EPA has determined that all appropriate response actions under CERCLA at OU3, other than operation, maintenance, and five-year reviews, have been completed. However, this partial deletion does not preclude future actions under Superfund.
This direct final partial deletion is effective September 17, 2018 unless EPA receives adverse comments by August 16, 2018. If adverse comments are received, EPA will publish a timely withdrawal of the direct final partial deletion in the
Submit your comments, identified by Docket ID No. EPA-HQ-SFUND-1989-0007, by one of the following methods:
U.S. Environmental Protection Agency, Region 5, Superfund Records Center, 77 West Jackson Boulevard, 7th Floor South, Chicago, IL 60604, Phone: (312) 886-0900, Hours: Monday through Friday, 8 a.m. to 4 p.m., excluding Federal holidays.
Mississippi Library, 410 Mississippi St. NE, Fridley, MN 55432, Phone: (763) 324-1560, Hours: Monday and Wednesday, 12:00 p.m. to 8:00 p.m., Tuesday and Thursday, 10:00 a.m. to 6:00 p.m., Friday, 12:00 p.m. to 6:00 p.m. and Saturday 10:00 a.m. to 5:00 p.m.
The Navy has an online repository for the NIROP Site at the link below. Please click on the Administrative Records link to see all the documents.
The Minnesota Pollution Control Agency has an information repository for the NIROP Site at their offices: 520 Lafayette Road, St. Paul, MN 55155. Call (651) 296-6300 or toll-free at (800) 657-3864 to schedule an appointment.
Randolph Cano, NPL Deletion Coordinator, U.S. Environmental Protection Agency Region 5 (SR-6J), 77 West Jackson Boulevard, Chicago, IL 60604, (312)886-6036, or via email at
EPA Region 5 is publishing this direct final Notice of Partial Deletion for the Naval Industrial Reserve Ordnance Plant (NIROP) Superfund Site (Site) from the National Priorities List (NPL). This partial deletion pertains to OU3, which includes all the unsaturated soils underlying the former Plating Shop Area. The NPL constitutes Appendix B of 40 CFR part 300, which is the National Oil and Hazardous Substances Pollution Contingency Plan (NCP), which EPA promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended. EPA maintains the NPL as the list of sites that appear to present a significant risk to public health, welfare, or the environment. Sites on the NPL may be the subject of remedial actions financed by the Hazardous Substance Superfund (Fund). This partial deletion of the NIROP Site is proposed in accordance with 40 CFR 300.425(e) and is consistent with the Notice of Policy Change: Partial Deletion of Sites Listed on the National Priorities List. 60 FR 55466 (Nov. 1, 1995). As described in 300.425(e)(3) of the NCP, a portion of a site deleted from the NPL remains eligible for Fund-financed remedial action if future conditions warrant such actions.
Section II of this document explains the criteria for deleting sites from the NPL. Section III discusses procedures that EPA is using for this action. Section IV discusses OU3 of the NIROP Site and demonstrates how OU3 meets the deletion criteria. Section V discusses EPA's action to partially delete OU3 of the Site from the NPL unless adverse comments are received during the public comment period.
The NCP establishes the criteria that EPA uses to delete sites from the NPL. In accordance with 40 CFR 300.425(e), sites may be deleted from the NPL where no further response is appropriate. In making such a determination pursuant to 40 CFR 300.425(e), EPA will consider, in consultation with the State, whether any of the following criteria have been met:
i. Responsible parties or other persons have implemented all appropriate response actions required;
ii. all appropriate Fund-financed response under CERCLA has been implemented, and no further response action by responsible parties is appropriate; or
iii. the remedial investigation has shown that the release poses no significant threat to public health or the environment and, therefore, the taking of remedial measures is not appropriate.
Pursuant to CERCLA section 121(c) and the NCP, EPA conducts five-year reviews (FYRs) to ensure the continued protectiveness of remedial actions where hazardous substances, pollutants, or contaminants remain at a site above levels that allow for unlimited use and unrestricted exposure. EPA conducts such FYRs even if a site is deleted from the NPL. EPA may initiate further action to ensure continued protectiveness at a deleted site if new information becomes available that indicates it is appropriate. Whenever there is a significant release from a site deleted from the NPL, the deleted site may be restored to the NPL without application of the hazard ranking system.
The following procedures apply to the deletion of OU3 of the NIROP Site:
(1) EPA has consulted with the State of Minnesota prior to developing this direct final Notice of Partial Deletion and the Notification of Intent for Partial Deletion published in the “Proposed Rules” section of the
(2) EPA has provided the State thirty (30) working days for review of this action and the parallel Notification of Intent for Partial Deletion prior to their publication today, and the State, through the Minnesota Pollution Control Agency (MPCA), has concurred on the partial deletion of the Site from the NPL.
(3) Concurrent with the publication of this direct final Notice of Partial Deletion, a notice of the availability of the parallel Notification of Intent for Partial Deletion is being published in a major local newspaper, the Sun Focus, located in Fridley, Minnesota. The newspaper notice announces the 30-day public comment period concerning the Notification of Intent for Partial Deletion of the Site from the NPL.
(4) EPA placed copies of documents supporting the partial deletion in the deletion docket and made these items available for public inspection and copying at the Site information repositories identified in the Addresses Section of this rule.
(5) If adverse comments are received within the 30-day public comment period on this partial deletion action, EPA will publish a timely notice of withdrawal of this direct final Notice of Partial Deletion before its effective date and will prepare a response to comments and continue with the deletion process on the basis of the Notice of Intent for Partial Deletion and the comments already received.
Deletion of a portion of a site from the NPL does not itself create, alter, or revoke any individual's rights or obligations. Deletion of a portion of a site from the NPL does not in any way alter EPA's right to take enforcement actions, as appropriate. The NPL is designed primarily for informational purposes and to assist EPA management. Section 300.425(e)(3) of the NCP states that the deletion of a site from the NPL does not preclude eligibility for further response actions, should future conditions warrant such actions.
The following information provides EPA's rationale for deleting OU3 of the NIROP Site from the NPL. EPA believes it is appropriate to delete OU3 of the NIROP Site because all appropriate response actions under CERCLA, other than operation, maintenance, and FYRs, have been completed at OU3 and it is ready for redevelopment as a commercial and/or industrial property.
The NIROP Site (CERCLIS ID MN3170022914) is located in the northern portion of the Minneapolis/St. Paul Metropolitan Area in an industrial/commercial area at 4800 E. River Road within the limits of Fridley, Anoka County, Minnesota. The NIROP Site is not adjacent to any residential areas and is not located in an environmentally sensitive area, nor near any known environmentally sensitive areas.
The Site is approximately 82.6 acres, most of which are covered with buildings or pavement. The U.S. Navy and/or its contractors produced advanced weapons systems at the facility beginning in 1940. In 2004, the U.S. Navy sold the property to FMC (now BAE). BAE then sold the property to ELT Minneapolis, LLC. ELT Minneapolis owned the former NIROP property and leased the space to United Defense LP until 2013. In 2013, ELT sold the property to Fridley Land, LLC, the current owner. Fridley Land LLC is in the process of redeveloping the property in phases for commercial and/or industrial use.
The formerly government-owned portion of the facility constitutes what is now the NIROP Site. See the site map in NIROP Map Delineating Operable Units, Docket Document ID No. EPA-HQ-SFUND-1989-0007-0075 in the Deletion Docket for OU3. (Note: portions of the main facility building depicted in the Site Map have since been demolished for redevelopment.) The Site Map also shows that the southern portion of the original facility is not part of the NIROP Site.
The Navy and/or its contractors disposed paint sludges and chlorinated solvents generated from ordnance manufacturing processes in pits and trenches in the undeveloped area of the NIROP Site immediately north of the main facility building in the early 1970s. This area is called the North 40 area. MPCA received information concerning the historical waste disposal practices at NIROP and about the contaminant sources in the North 40 area and beneath the NIROP building in 1980.
Trichloroethylene (TCE) was discovered in on-site groundwater wells and in the City of Minneapolis's drinking water treatment plant intake pipe, located in the Mississippi River less than 1 mile downstream from the Site, in 1981. The Navy conducted investigations in 1983 which identified pits and trenches in the North 40 area of the NIROP Site where drummed wastes were deposited. The Navy excavated approximately 1,200 cubic yards of contaminated soil and 43 (55-gallon) drums and disposed them off-site from November 1983 to March 1984.
EPA proposed the NIROP Site to the NPL on July 14, 1989 (54 FR 29820). EPA finalized the NIROP Site on the NPL on November 21, 1989 (54 FR 48184).
EPA, MPCA and the Navy signed a Federal Facilities Agreement (FFA) in March 1991. Per the FFA, one of the purposes of that agreement was to ”Identify alternatives for Remedial Action for Operable Units” appropriate for the Site prior to the implementation of Final Remedial Actions for the Site.
EPA divided the NIROP Site into three operable units (OUs) to make it easier to address the contaminant issues at the Site. OU3, the subject of this partial deletion, includes all the unsaturated soils underlying the former Plating Shop Area of the Site. The extent of OU3 is detailed in the site map in NIROP Map Delineating Operable Units, Docket Document ID No. EPA-HQ-SFUND-1989-0007-0075 in the Deletion Docket for OU3.
The current scope of OU3 is provided in EPA's August 12, 2013 Memorandum to File that restructured the OUs at the Site. OU3 initially included: (1) All saturated and unsaturated soil underneath the main NIROP manufacturing building, excluding the extreme southern portion of the building, and (2) all saturated soil under and outside the main NIROP manufacturing building, within the legal boundaries of the Site.
EPA's 2013 Memorandum limited the scope of OU3 to unsaturated soil under the former Plating Shop Area. The saturated soils that were initially part of OU3 are now included with OU1. The remaining unsaturated soil under the main NIROP building outside the former Plating Shop Area that were part of OU3 are being addressed as part of OU2.
OU1, which includes the contaminated groundwater within and originating from the NIROP Site, and now saturated soils, will remain on the NPL and is not being considered for deletion as part of this action. EPA deleted OU2, which includes all the unsaturated soils within the legal boundaries of the NIROP Site excluding the unsaturated soils under the former Plating Shop Area, from the NPL effective August 29, 2014 (79 FR 36658, June 30, 2014).
The groundwater in the unconsolidated aquifer beneath the Site is contaminated with volatile organic compounds (VOCs), including: TCE, 1,1,1-trichloroethane (TCA), 1,2-dichloroethylene (DCE), tetrachloroethylene (PERC), 1,1-dichloroethane, toluene, xylene, and ethylbenzene. Some or all of the contaminants identified are hazardous substances as defined in section 104(14) of CERCLA, 42 U.S.C. 9601(14), and 40 CFR 302.4. TCE was found more frequently and at higher concentrations than any other VOC, and is considered to be the best indicator chemical for the Site.
In April 1995, the Navy was renovating the East Plating Shop (now called the former Plating Shop Area or OU3) inside the main manufacturing building, to accommodate an electrical assembly facility. During the renovation, when all of the tanks were removed and prior to the floor repairs being made, the Navy collected soil and groundwater samples to determine whether past plating activities had impacted soil and groundwater beneath the building.
The Navy detected TCE, TCA, PERC and DCE at elevated levels in soil and groundwater. The Navy also found
The Navy detected the highest concentrations of TCE and PERC in the 1995 sampling event in surface (0 to 4 feet below ground surface [bgs]), shallow subsurface (4 to 12 feet bgs), and deep subsurface (>12 feet bgs) soil samples collected from the East Plating Shop. This indicated the possible presence of a “hot spot” of TCE and PERC in this area and the likelihood that the East Plating Shop was the source area for these VOCs and chromium.
The 2002 Baseline Human Health Risk Assessment (HHRA) identified an unacceptable potential risk/hazard in OU3 for exposure to soil in the East Plating Shop area under the major-infrequent construction worker exposure scenario. The major-infrequent construction worker exposure scenario assumed construction workers would have a short-term exposure to the maximum concentration of soil contaminants detected from 0-12 feet bgs in the East Plating Shop area during major modifications to the building slab and foundations. The HHRA did not identify any unacceptable risks or hazards to exposure to OU3 soil under a commercial/industrial scenario.
The cancer risk calculated for the major-infrequent construction worker in the 2002 HHRA was 2.1 × 10
The noncancer risks calculated for the major-infrequent construction worker in OU3 in the 2002 HHRA was a hazard quotient (HQ) of 1.35 for chromium, and a total hazard index (HI) of 2.9 for all chemicals. These levels exceed EPA's acceptable noncancer HQ of 1 for individual contaminants and a HI of 1 for multiple chemicals, and MCPA's acceptable subchronic HQ and HI levels of 1 for individual and multiple chemicals.
Chromium is most commonly present in its less-toxic trivalent form because environmental conditions typically favor the reduction of the more-toxic hexavalent chromium to its less-toxic trivalent state. The 2002 HHRA, however, conservatively assumed that 100 percent of the chromium detected in the East Plating Shop area was in the hexavalent form, due to the absence of site-specific speciated data and considering historic Site use. Based on this assumption of 100 percent hexavalent chromium, the potential risks to OU3 receptors from exposure to chromium in the 2002 HHRA were likely overestimated.
Several years after the OU3 remedy was selected and implemented, in 2015, the Navy conducted additional soil sampling in OU3 for total and hexavalent chromium analysis. The analytical results show that at most, the more toxic hexavalent chromium constitutes only 7 percent of the total OU3 chromium measured. The 2015 total and hexavalent chromium concentrations in soil were both below the MPCA soil reference values for industrial use. The Navy used these speciated chromium results to complete a more accurate, focused risk assessment for OU3 chromium in 2016.
In 2016, the Navy also excavated soils beneath the East Plating Shop to remove a potential source of TCE to the groundwater. The excavated soil was in the same area as the elevated chromium concentrations evaluated in the 2002 HHRA. This soil removal aided in reducing any potential health risks associated with chromium.
The Navy completed the Focused Human Health Risk Assessment (FHHRA) for the East Plating Shop area in 2016. The Navy did not include in the data set the soil samples collected in 2015 in the areas subsequently excavated as part of the 2016 East Plating Shop excavation because they were no longer present or available for contact by human receptors.
The FHHRA determined that, for the major-infrequent construction worker exposure scenario, the potential non-cancer HI for all contaminants of potential concern (COPCs)/target organs combined is 0.16. This HI is below EPA's and MPCA's target HI of 1 and does not exceed MPCA's target HQ level of 0.2 for individual COCs. Therefore, the 2016 FHHRA concluded that there are no unacceptable risks or hazards for major-infrequent construction workers who may be exposed to chemicals in mixed OU3 soil.
EPA, MPCA and the Navy issued a Record of Decision (ROD) for OU1 on September 28, 1990, and a ROD for OU2 and OU3 on September 17, 2003. EPA issued a Memorandum to File on September 5, 2013 clarifying the OU definitions at the site. The changes to the structure of the OUs in the 2013 Memorandum to File did not alter any of the selected remedies for the Site. EPA, MPCA and the Navy issued an Explanation of Significant Differences (ESD) documenting a requirement for groundwater institutional controls (ICs) as part of the OU1 remedy on September 26, 2014. EPA, MPCA and the Navy issued an ESD documenting a change in some of the IC requirements for OU3 on July 19, 2017. These documents are available the Docket under Docket Document IDs EPA-HQ-SFUND-1989-0007-0062 (1990 OU1 ROD), EPA-HQ-SFUND-1989-0007-0063 (2003 OU2 and OU3 ROD), EPA-HQ-SFUND-1989-0007-0068 (2013 Memorandum to File), EPA-HQ-SFUND-1989-0007-0069 (2014 OU1 ESD) and EPA-HQ-SFUND-1989-0007-0071 (2017 OU3 ESD).
The original remedial action objectives (RAOs) for OU3 in the 2003 OU2 and OU3 ROD were: (1) To prevent unacceptable risks due to residential or other unrestricted exposures to contaminated soils at the Site, and (2) to prevent unacceptable risks to industrial or construction workers due to exposures to contaminated soils at the Site. The remedial action specified for OU3 soils in the 2003 ROD were engineering controls (ECs) and ICs. The original selected remedy for OU3 was: (1) To restrict the use of the Property to industrial or restricted commercial use, until and unless EPA and MPCA determine that concentrations of hazardous substances in the soils have been reduced to levels that allow for a less restrictive use; (2) to prohibit the disturbance of soils beneath the Designated Restricted Area known as the concrete pit foundations where metal-finishing operations previously occurred at the former Plating Shop within the Main Manufacturing Building without the prior written approval of the EPA and MPCA; and (3) to ensure that the concrete pit floor (approximately 8 to 12 feet below grade floor) where metal finishing operations previously occurred at the former Plating Shop within the Main Manufacturing Building is not removed without the prior written approval of EPA and MPCA. That floor will serve as an EC.
On July 19, 2017, EPA, MPCA and the Navy issued an ESD to remove the requirement for some of the ICs and ECs in the OU3 remedy. The remedy components described in the 2003 OU2 and OU3 ROD were initially required to ensure the long-term protectiveness of the OU3 soil because the OU3 soil contamination remained at the Site above levels that allow for unlimited use and unrestricted exposure.
The 2017 ESD modified the selected remedy for OU3 by removing the second and third remedy components described above from the OU3 remedy.
EPA, MPCA and the Navy included these two OU3 remedy components in the 2003 ROD based on the conservative assumption in the 2002 HHRA that all of the chromium in OU3 soil was in the more-toxic hexavalent form. Based on the 2015 sampling data, which included speciated chromium results, and the 2016 FHHRA, which found no unacceptable risks or hazards for the major-infrequent construction worker scenario at OU3, the floor in the Plating Shop is no longer needed as an EC and OU3 ICs prohibiting the soils beneath the Plating Shop from being disturbed are no longer necessary.
The IC restricting OU3 to industrial or restricted commercial use in the 2003 OU2 and OU3 ROD [
EPA concurred with the Navy's March 2004 Land Use Control Remedial Design (LUCRD) for OU3 in August 2004. The LUCRD specifies how the OU3 remedy will be implemented, maintained, and enforced if any breach of the remedy should occur. The LUCRD details the Navy's continuing responsibilities with respect to OU3, including: Ensuring that annual on-site physical inspections of OU3 are performed to confirm continued compliance with all Land Use Control (LUC) Performance Objectives; ensuring that annual LUC Compliance Certifications are provided to EPA and MPCA that explain any deficiency, if found; conducting FYRs of the remedy as required by CERCLA and the NCP; notifying EPA and MPCA prior to any planned property conveyance; providing EPA and MPCA the opportunity to review the text of intended deed provisions; and notifying EPA and MPCA if Site activities might interfere with LUC effectiveness.
The LUCs were incorporated into a Quitclaim Deed that was executed by the property owner, the United States and MPCA on June 17, 2004. The Quitclaim Deed acts as an environmental covenant describing the property restrictions. The deed restrictions run with the land such that any subsequent property owner is bound by the same restrictions. The LUCs are to remain in place until EPA and MPCA determine that the concentrations of hazardous substances in the OU3 soils have been reduced to levels that allow for a less restrictive use.
In 2017, EPA, MPCA and the Navy issued an ESD for OU3 removing the requirement for two of the three OU3 LUCs required by the 2003 OU2 and OU3 ROD. The 2017 ESD removed the requirement for the LUCs that required the concrete pit floor in the former Plating Shop to remain in place and for the soils in the former Plating Shop area to remain undisturbed.
There was no cleanup associated with the original remedy for OU3. In 2016, however, soils beneath the East Plating Shop were excavated and replaced with clean soil to address a potential source of TCE to the groundwater as part of OU1. The excavated soil was in the same area as the elevated chromium concentrations evaluated in the 2002 HHRA. The 2016 TCE soil removal also aided in reducing any potential health risk associated with chromium. This further justified the removal of the LUCs for the former Plating Shop floor and for the soil below the floor described in the 2017 OU3 ESD.
The Navy is the lead agency for the Site and is responsible for conducting routine inspections to ensure that the LUCs are maintained and enforced. The Navy is responsible for reporting the results of the inspections and any breach of the LUCs to the MPCA and EPA.
The Navy conducted the last FYR at the Site in October 2013. The 2013 FYR concluded that the remedy at NIROP for OU3 is protective of human health and the environment. The 2013 FYR did not identify any issues or recommendations for OU3. The FYR calls for the Navy to continue long-term stewardship to ensure that the LUC restricting land use at the Site to industrial or restricted commercial use is maintained. The next FYR for the Site is scheduled for October 2018.
Redevelopment is currently underway to redevelop the NIROP Site into a commercial office/warehouse complex. This redevelopment is consistent with the existing Land Use Designation for the Site. The three parties to the FFA agree that delisting OU3 from the NPL will facilitate the redevelopment effort and allow OU3 to become eligible for State and Federal Brownfields funding. Superfund NPL site property is not eligible for Federal Brownfields funding.
A developer has enrolled the NIROP Site and adjacent land into MPCA's Voluntary Investigation and Cleanup (VIC) program. In conjunction with the redevelopment of the NIROP Site, any additional investigations will be conducted under the oversight and direction of MPCA's VIC program. Under the VIC program, MPCA also requested that all buildings at the NIROP Site have vapor mitigation units installed them and the builder has complied.
Public participation activities have been satisfied as required in CERCLA section 113(k), 42 U.S.C. 9613(k), and CERCLA section 117, 42 U.S.C. 9617. EPA published a document announcing this proposed Direct Final Partial Deletion and announcing the 30-day public comment period in the Sun Focus concurrent with publishing this partial deletion in the
The NCP (40 CFR 300.425(e)) states that portions of a site may be deleted from the NPL when no further response action is appropriate in that area or media. All cleanup actions specified for OU3 of the NIROP Site in the 2003 OU2 and OU3 ROD and the 2017 OU3 ESD have been implemented at the Site. EPA, in consultation with the State of Minnesota, has determined that no further action is warranted to protect human health and the environment at OU3 and that OU3 of the NIROP Site meets the criteria for Partial Deletion from the NPL.
EPA, with concurrence of the State of Minnesota through the MPCA, has determined that all appropriate response actions under CERCLA at OU3, other than operation, maintenance, and five-year reviews, have been completed. Therefore, EPA is deleting OU3 of the NIROP Site from the NPL.
Because EPA considers this action to be noncontroversial and routine, EPA is
Environmental protection, Air pollution control, Chemicals, Hazardous waste, Hazardous substances, Intergovernmental relations, Penalties, Reporting and recordkeeping requirements, Superfund, Water pollution control, Water supply.
33 U.S.C. 1321(d); 42 U.S.C. 9601-9657; E.O. 13626, 77 FR 56749, 3 CFR, 2013 Comp., p. 306; E.O. 12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR 2923, 3 CFR, 1987 Comp., p. 193.
Federal Communications Commission.
Final rule; announcement of effective date.
In this document, the Federal Communications Commission (Commission) announces that the Office of Management and Budget (OMB) has approved, for a period of three years, an information collection associated with the rules for the Connect America Fund contained in the Commission's
The amendments regarding §§ 54.313(f)(1)(i), 54.313(f)(3) and 54.313(l) published at 81 FR 69696, October 7, 2016, are effective July 17, 2018.
Alexander Minard, Wireline Competition Bureau at (202) 418-7400 or TTY (202) 418-0484. For additional information concerning the Paperwork Reduction Act information collection requirements contact Nicole Ongele at (202) 418-2991 or via email:
The Commission submitted revised information collection requirements for review and approval by OMB, as required by the Paperwork Reduction Act (PRA) of 1995, on May 30, 2018, which were approved by OMB on July 2, 2018. The information collection requirements are contained in the Commission's
To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to
As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), the Commission is notifying the public that it received OMB approval on July 2, 2018, for the information collection requirements contained in 47 CFR 54.313(f)(1)(i), 54.313(f)(3) and 54.313(l), published at 81 FR 69696, October 7, 2016. Under 5 CFR part 1320, an agency may not conduct or sponsor a collection of information unless it displays a current, valid OMB Control Number.
No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act that does not display a current, valid OMB Control Number. The OMB Control Number is 3060-0986.
The foregoing notice is required by the Paperwork Reduction Act of 1995, Public Law 104-13, October 1, 1995, and 44 U.S.C. 3507.
The total annual reporting burdens and costs for the respondents are as follows:
More recently, on August 23, 2016, the Commission adopted the
On July 7, 2017, the Commission adopted the
Further, since the previous filing deadline associated with this collection, changing circumstances have made filing certain information no longer necessary or required under the rules. For instance, the final Connect America Phase I incremental support deployment deadlines were in early 2017, so there are no longer any reporting obligations associated with that support.
Moreover, because the Connect America Phase II challenge process has ended, the Commission removed Form 505 from this collection. The Commission also moved FCC Form 507, FCC Form 508, FCC Form 509 and the accompanying instructions to information collection 3060-0233.
The Commission therefore revises this information collection, as well as Form 481 and its accompanying instructions, to reflect these new or modified requirements. The Commission also implemented a number of non-substantive changes to the Form 481 and accompanying instructions. Any increased burdens for particular reporting requirements are associated with ETCs newly subject to those requirements as a condition of receiving high-cost support.
Federal Communications Commission.
Final rule.
In this document, the Commission takes measures to strengthen our rules to protect consumers from slamming and cramming by codifying rules against sales call misrepresentations and cramming and revising rules to improve the effectiveness of the third-party verification (TPV) process. Slamming is an unauthorized change in a consumers' telephone provider and cramming is the placement of an unauthorized charge on the consumers' telephone bill.
Effective August 16, 2018.
Richard D. Smith, Consumer and Governmental Affairs Bureau (717) 338-2797, email
This is a summary of the Commission's Report and Order, document FCC 18-78, adopted on June 7, 2018, and released on June 8, 2018, in CG Docket No. 17-169. The full text of document FCC 18-78 will be available for public inspection and copying via the Commission's Electronic Comment Filing System (ECFS), and during regular business hours at the FCC Reference Information Center, Portals II, 445 12th Street SW, Room CY-A257, Washington, DC 20554. To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to
The Commission will send a copy of document FCC 18-78 to Congress and the Government Accountability Office pursuant to the Congressional Review Act,
The
1. The Commission's recent enforcement actions reveal that misrepresentations on sales calls are a
2. Upon a finding of material misrepresentation in the sales call, the consumer's authorization to change carriers will be deemed invalid even if the carrier has some evidence of consumer authorization of a switch. In this regard, our enforcement cases make clear that sales misrepresentations may not be cured by a facially valid TPV. When a consumer's decision to switch carriers is predicated on false information provided in a sales call, that consumer's authorization to switch carriers can no longer be considered binding.
3. A codified rule is consistent with the Commission's statutory authority and prior enforcement actions. Section 201(b) of the Act states, in pertinent part, that “[a]ll charges, practices, classifications, and regulations for and in connection with [interstate or foreign] communication service [by wire or radio], shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is declared to be unlawful.” The Commission has found that misrepresentations made by interstate common carriers constitute unjust and unreasonable practices under section 201(b) of the Act. Sales calls that contain misrepresentations undermine the effectiveness of the carrier's validation procedures under Section 258 of the Act, and thus are an unjust and unreasonable practice that is “in connection with” the communication service that is the subject of the verification process.
4.
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7. Nonetheless, the Commission encourages carriers and their agents to record sales calls. The Commission clarifies that a consumer's allegation of a sales call misrepresentation shifts the burden of proof to the carrier making the sales call to provide persuasive evidence to rebut the claim. The Commission believes that in those instances in which a consumer has provided credible evidence of a misrepresentation that a carrier is uniquely positioned via its access to sales scripts, recordings, training, and other relevant materials relating to sales calls to proffer evidence to rebut those claims if they are without merit. In most instances, the consumer will not have access to these same materials. An accurate and complete sales call recording may be a carrier's best such evidence, and the record indicates that at least some carriers already record calls for training and monitoring purposes. Those carriers that do not and/or choose not to record sales calls will have to develop other means to rebut credible consumer allegations of misrepresentations on sales calls.
8. The Commission codifies a prohibition on the placement of unauthorized charges on telephone bills. Although cramming has been a long-standing issue addressed in various enforcement actions, and the Commission has adopted truth-in-billing rules to help detect it, the Commission has never codified a rule against cramming. The Commission thus codifies in a new § 64.2401(g) of the Commission's truth-in-billing rules the prohibition against cramming that it has long enforced under section 201(b) of the Act. The Commission believes codifying the cramming prohibition for wireline and wireless carriers will act as a deterrent to this conduct. In so doing, the Commission agrees with commenters that codifying a ban against cramming provides greater clarity to interested parties and will aid its enforcement efforts. In addition, codifying this prohibition into its rules will provide consumers with more specific information and notice of this prohibited practice.
9. The Commission agrees with those commenters who contend that wireless consumers should be afforded the same consumer protections as wireline consumers when such unauthorized charges appear on their telephone bills. This approach is also consistent with the Commission's prior enforcement
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12. In light of the enhanced consumer protections afforded by the rules adopted in document FCC 18-78, the apparent diminishing nature of the slamming and cramming problem as evidenced by recent complaint data, and the potential costs of compliance with additional requirements, the Commission declines to mandate any other changes to its rules.
13. As required by the Regulatory Flexibility Act of 1980, as amended (RFA) an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the
14. This document FCC 18-78 adopts rules to strengthen consumer protections from slamming and cramming. Slamming is the unauthorized change of a consumer's preferred interexchange telecommunications service provider, and cramming is the placement of unauthorized charges on a consumer's telephone bill. Despite existing slamming and truth-in-billing rules, recent enforcement actions indicate that the most vulnerable consumers, including the elderly and non-English speakers, remain at significant risk of being the victims of these fraudulent practices because unscrupulous carriers often make it difficult to detect such conduct. Specifically, the Commission adopts rules designed to provide greater clarity of these existing prohibitions and assist in our enforcement actions where such conduct occurs.
15. Section 258 of the Act makes it unlawful for any telecommunication carrier to “submit or execute a change in accordance with such verification procedures as the Commission shall prescribe.” The rules adopted in document FCC 18-78 will strengthen the Commission's ability to deter slamming by addressing misleading statements made in sales calls which the record confirms are a substantial factor in slamming. For example, when a consumer's decision to switch carriers is made based on false information provided in a sales call, that consumer's authorization to switch carrier will no longer be considered binding. In addition, the Commission streamlines the carrier change process by eliminating the requirement that the consumer's authorization be obtained for every service to be switched when selling more than one telecommunications service. This will improve the efficiency for both carriers and consumers when making carrier change requests by eliminating unnecessary regulatory impediments. Finally, any telecommunications carrier that is the subject of a Commission forfeiture action will be suspended for a period of five years from using that process to confirm a consumer switch. This will ensure that greater care is taken by both carriers and verifiers to avoid TPV abuses.
16. The Commission has found on numerous instances that cramming is an “unjust and unreasonable” practice in violation of section 201(b) of the Act but has never codified a prohibition against cramming in our rules. Doing so in document FCC 18-78 provides greater clarity of this long-recognized prohibition to interested parties and will assist in our enforcement efforts of this prohibited practice.
17. One comment was filed that specifically addressed the proposed rules and policies presented in the IRFA. Although supporting the adoption of the two proposed rules contained in the
18. Pursuant to the Small Business Jobs Act of 2010, which amended the RFA, the Commission is required to respond to any comments filed by the Chief Counsel for Advocacy of the Small Business Administration, and to provide a detailed statement of any change made to the proposed rules as a result of those comments.
19. The Chief Counsel did not file any comments in response to the proposed rules in this proceeding.
20. The rules adopted in document FCC 18-78 will affect obligations of Wireline and Wireless telecommunications carriers.
21. In document FCC 18-78, the Commission adopt rules to enhance the existing consumer protections from slamming and cramming. Specifically, the Commission adopts rules to codify a ban on: (i) Material misrepresentations
22. The RFA requires an agency to describe any significant, specifically small business alternatives that it has considered in developing its approach, which may include the following four alternatives (among others): “(1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, standards; and (4) an exemption from coverage of the rule, or any part thereof, for small entities.”
23. The rules adopted in document FCC 18-78 codify long-recognized consumer protections from slamming and cramming. In prior enforcement actions, the Commission has previously held that these practices are unjust and unreasonable practices under section 201(b) of the Act. As a result, the economic impact on affected carriers should be minimal because they impose no new requirements. In declining to adopt other measures discussed in the
Pursuant to sections 1-4, 201(b), and 258 of the Communications Act of 1934, as amended, 47 U.S.C. 151-154, 201, 258, document FCC 18-78
The Commission's Consumer and Governmental Affairs Bureau, Reference Information Center,
The Commission's Consumer and Governmental Affairs Bureau, Reference Information Center,
Communications common carriers, Telecommunications.
For the reasons discussed in the preamble, the Federal Communications Commission amends 47 CFR part 64 as follows:
47 U.S.C. 154, 201, 202, 218, 222, 225, 226, 227, 228, 251(e), 254(k), 403(b)(2)(B), (c), 616, 620, 1401-1473, unless otherwise noted.
(a) * * *
(1) * * *
(i) Authorization from the subscriber, subject to the following:
(A) Material misrepresentation on the sales call is prohibited. Upon a consumer's credible allegation of a sales call misrepresentation, the burden of proof shifts to the carrier making the sales call to provide persuasive evidence to rebut the claim. Upon a finding that such a material misrepresentation has occurred on a sales call, the subscriber's authorization to switch carriers will be deemed invalid.
(B) [Reserved]
(b) Any telecommunications carrier that becomes the subject of a Commission forfeiture action through a violation of the third-party verification process set forth in paragraph (c)(3) of this section will be suspended for a five-year period from utilizing the third-party verification process to confirm a carrier change.
(g)
Federal Communications Commission.
Final rule; announcement of effective date.
In this document, the Commission announces that the Office of Management and Budget (OMB) has approved, for a period of three years, the information collection associated with the Commission's payphone compensation rules. This document is consistent with the
The amendment to 47 CFR 64.1310(a)(3) published at 83 FR 11422, March 15, 2018, is effective on July 17, 2018.
Michele Levy Berlove, Attorney Advisor, Wireline Competition Bureau, at (202) 418-1477, or by email at
This document announces that, on July 2, 2018, OMB approved, for a period of three years, the information collection requirements relating to certain payphone compensation rules contained in the Commission's
The OMB Control Number is 3060-1046. The Commission publishes this document as an announcement of the effective date of the rules. If you have any comments on the burden estimates listed below, or how the Commission can improve the collections and reduce any burdens caused thereby, please contact Nicole Ongele, Federal Communications Commission, Room 1-A620, 445 12th Street SW, Washington, DC 20554. Please include the OMB Control Number, 3060-1046, in your correspondence. The Commission will also accept your comments via email at
To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to
As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), the FCC is notifying the public that it received final OMB approval on July 2, 2018, for the information collection requirements contained in the modifications to the Commission's rules in 47 CFR part 64. Under 5 CFR part 1320, an agency may not conduct or sponsor a collection of information unless it displays a current, valid OMB Control Number.
No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act that does not display a current, valid OMB Control Number. The OMB Control Number is 3060-1046. The foregoing notice is required by the Paperwork Reduction Act of 1995, Public Law 104-13, October 1, 1995, and 44 U.S.C. 3507.
The total annual reporting burdens and costs for the respondents are as follows:
Federal Communications Commission.
Final rule; announcement of effective date.
In this document, the Commission announces that the Office of Management and Budget (OMB) has approved, for a period of three years, the information collection requirements associated with FCC 17-158. This
The additions of 47 CFR 73.3801, 73.6029, and 74.782 as published at 83 FR 4998, February 2, 2018, are effective as of July 17, 2018.
Evan Baranoff, Policy Division, Media Bureau, at 202-418-7142, or via email at
This document announces that, on July 2, 2018, OMB approved the information collection requirements contained in §§ 73.3801, 73.6029, and 74.782 of the Commission's rules. The OMB Control Number is 3060-1254. The Commission publishes this document as an announcement of the effective date of these rules. If you have any comments on the burden estimates listed below, or how the Commission can improve the collections and reduce any burdens caused thereby, please contact Cathy Williams, Federal Communications Commission, Room 1-C823, 445 12th Street SW, Washington, DC 20554. Please include the OMB Control Number, 3060-1254, in your correspondence. The Commission will also accept your comments via email at
As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), the FCC is notifying the public that it received final OMB approval on July 2, 2018, for the information collection requirements contained in §§ 73.3801, 73.6029, and 74.782 of the Commission's rules. Under 5 CFR part 1320, an agency may not conduct or sponsor a collection of information unless it displays a current, valid OMB Control Number.
No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act that does not display a current, valid OMB Control Number.
The foregoing notice is required by the Paperwork Reduction Act of 1995, Public Law 104-13, October 1, 1995, and 44 U.S.C. 3507.
The total annual reporting burdens and costs for the respondents are as follows:
Cost Accounting Standards Board, Office of Federal Procurement Policy, Office of Management and Budget.
Final rule.
The Office of Federal Procurement Policy (OFPP), Cost Accounting Standards (CAS) Board, is publishing a final rule revising the exemption for contracts or subcontracts for the acquisition of commercial items. This final rule clarifies the types of contracts that are exempt from the application of Cost Accounting Standards when acquiring commercial items.
Raymond Wong, Staff Director, Cost Accounting Standards Board (telephone: 202-395-6805; email:
This final rule revises the exemption 48 CFR 9903.201-1(b)(6) for contracts or subcontracts for the acquisition of commercial items (hereafter referred to as the “(b)(6) commercial item exemption”).
The CAS Board's regulations and Standards are codified at 48 CFR chapter 99. This final rule amends a CAS Board regulation other than a Standard and, as such, is not subject to the statutorily prescribed rulemaking process for the promulgation of a Standard at 41 U.S.C. 1502(c) [formerly, 41 U.S.C. 422(g)].
In November 2012, the CAS Board issued a proposed rule to clarify the exemption from CAS when acquiring commercial items. 77 FR 69422. The exemption enumerates the contract types that are authorized when procuring commercial items. Over the years, the CAS Board has issued several rules addressing the exemption to reflect statutory changes regarding the types of contracts that may be used in commercial item acquisitions. See 61 FR 39360 (providing an exemption for firm-fixed-price contracts and subcontracts for the acquisition of commercial items as authorized by section 4305 of the Clinger-Cohen Act of 1996 (FARA), Pub. L. 104-106); 62 FR 31294 (adding fixed-price contracts with economic price adjustments other than those based on actual incurred costs for labor and materials); and 72 FR 36367 (expanding the list of exempt contract types to include time-and-material and labor- hour contracts, in response to changes made by section 1432 of the Services Acquisition Reform Act of 2003, Pub. L. 108-136, which authorized these types of contracts for the acquisition of commercial items).
Since enactment of the Federal Acquisition Streamlining Act in 1994 (Pub. L. 103-355), the Federal Acquisition Regulation (FAR) has included an enumerated list of contract types authorized for use in acquiring commercial items. See 48 CFR part 12.207. Similar to the CAS Board, the Federal Acquisition Regulatory Council has amended FAR 12.207 several times to reflect statutory changes and clarify the intent of the regulation. An inconsistency has developed between the list of contract types recognized for use in acquiring commercial items set forth in paragraph (b)(6) and that commercial item exemption and contract types reflected in FAR 12.207. For example, FAR 12.207 allows the use of firmed fixed price contracts in conjunction with award fee incentives or performance or delivery incentives, known as fixed-price incentive (FPI) contracts, when the award fee or incentive is based solely on factors other than cost. However, the (b)(6) exemption does not expressly recognize FPI contracts on the enumerated list of exempt contracts. Because of this discrepancy, some commenters on a prior CAS Board rulemaking expressed concern that these types of FPI contracts might be excluded under a literal reading of the (b)(6) exemption. See 72 FR 36367.
In its proposed rule, the CAS Board sought to address the inconsistencies between the lists in the (b)(6) exemption and FAR 12.207 by removing reference to specific contract types in the (b)(6) exemption and instead making simple reference to “contracts and subcontracts for the acquisition of commercial items.” The CAS Board explained that this generalized language would “obviate the continuing need to update and keep current a detailed listing of permissible contract types for the acquisition of commercial items, which continues to evolve with the passage of time.” 77 FR 69424. The CAS Board further explained that this language tracks the exemption set forth in its authorizing statute at 41 U.S.C. 1502(b)(1)(C)(i) as well as the language in section 4205 of the Clinger-Cohen Act.
The CAS Board received several comments in response to the proposed rule. A discussion of the comments and the Board's responses are set forth in section C. Of particular note, some commenters raised concern that more general language may perpetuate ambiguities regarding what contract types are covered by the exemption. After review of the public comments and further deliberation, the CAS Board has concluded that the desired goal of clarification can be more effectively achieved by adding language to the exemption that cross references to FAR 12.207 and its enumeration of contract types authorized for the acquisition of commercial items. The CAS Board
Accordingly, this final rule amends the language at 9903.201-1(b)(6) to exempt contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items. The CAS Board intends to monitor the effectiveness of this rule in achieving the intent of the law regarding CAS exemptions.
The CAS Board published a Notice of Proposed Rulemaking (NPR) on November 19, 2012, proposing to revise the (b)(6) commercial item exemption to read: “[c]ontracts and subcontracts for the acquisition of commercial items,” (77 FR 69422). In response to the NPR, the CAS Board received comments from four entities, one of which supported the proposed rule without change and three of which raised concerns. A summary of concerns and the CAS Board's response are below.
1.
The Board intends to monitor the effectiveness of this final rule in achieving the intent of the law regarding CAS exemptions and retains the right to change the approach in the future should any changes to FAR 12.207 that the Board believes are inconsistent with this objective occur.
2.
3.
The Paperwork Reduction Act (44 U.S.C. Chapter 35, Subchapter I) does not apply to this rulemaking, because this rule will impose no paperwork burden on offerors, affected contractors and subcontractors, or members of the public which requires the approval of OMB under 44 U.S.C. 3501,
This rule provides technical clarification on the application of exemptions from CAS for commercial
Cost Accounting Standards, Government procurement.
For the reasons set forth in this preamble, 48 CFR part 9903 is amended as follows:
Pub. L. 111-350, 124 Stat. 3677, 41 U.S.C. 1502.
(b) * * *
(6) Contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items.
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Final rule; technical amendments.
This final rule makes editorial corrections amending the regulations for Atlantic highly migratory species (HMS). This final action will make the rules easier to use by making the cross-references in the regulations accurate, correcting grammatical and punctuation issues, and reformatting the regulations where needed to be consistent with
This final rule is effective on July 17, 2018.
Documents related to HMS fisheries management, such as the 2006 Consolidated HMS Fishery Management Plan (FMP) and its amendments, are available from the HMS Management Division website at
Lauren Latchford, Larry Redd, or Karyl Brewster-Geisz by phone at 301-427-8503.
Atlantic HMS are managed under the dual authority of the Magnuson-Stevens Fishery Conservation and Management Act, 16 U.S.C. 1801
The regulations at 50 CFR part 635 are promulgated under ATCA and the Magnuson-Stevens Act for the conservation and management of Atlantic highly migratory species, including species of tunas, billfish, sharks, and swordfish. In 2006, NMFS consolidated Atlantic HMS management into one fishery management plan, the 2006 Consolidated HMS FMP. Since then, NMFS has amended the FMP ten times through the fishery management plan amendment process and has made numerous other regulatory changes through framework actions. With this volume of regulatory action, some small grammatical and other errors have accumulated over time. As described in the sections below, this technical amendment corrects grammatical, punctuation, consistency, cross-reference errors in the HMS regulations at 50 CFR part 635. As explained in the Consistency section below, it also simplifies regulatory text by removing unnecessary language in several limited instances.
The following grammatical, punctuation, or clerical errors (
The definition of “CK” at § 635.2 does not spell out the words for which it is an acronym. This final action therefore adds “Cleithrum to Caudal Keel” before the acronym “CK.” The definition of “Hammerhead Sharks” at § 635.2 capitalizes the word “shark(s).” This final action changes to lowercase the word “shark(s).” The regulation at § 635.4(l)(2)(viii) does not capitalize the word “tunas” in the permit title, “Atlantic Tunas Longline category LAP.” This final action capitalizes the word “Tunas.” The regulation at § 635.5(b)(1)(i) has commas incorrectly after the words “all” and “swordfish” in the sentence, “All reports must be species-specific and must include the required information about all, swordfish, and sharks received by the dealer.” This final action removes the misplaced commas. The regulation at § 635.5(c)(2) is missing apostrophes and has extra parentheses in three places where the text should read, “owner's designee.” This final action adds apostrophes and removes the mistaken parentheses to correct this text. The regulations at § 635.6(b)(1)(ii) and (c)(1) do not capitalize the word “Arabic.” This final action corrects this error and
The regulations at §§ 635.2, 635.4(e)(3) and (g)(2), 635.21(d)(2)(ii), 635.27(b)(1), 635.28(b)(1)(iv), and 635.34(c) do not consistently capitalize the word “Table” and lowercase the word “appendix” in the phrase, “Table 1 of appendix A to this part.” This final action corrects the references to “Table 1 of appendix A to this part” in §§ 635.2, 635.4(e)(3) and (g)(2), 635.21(d)(2)(ii), 635.27(b)(1), 635.28(b)(1)(iv), and 635.34(c) so that capitalization and phrasing are consistent throughout.
The HMS regulations at § 635.2 currently provide a definition for “LAP,” defining it as an acronym for the “limited access permit.” The HMS regulations do not consistently use the acronym, however, and still refer to “limited access permits” or “limited access vessel permits” sometimes in the regulations. Consistency across the regulations would make them clearer. The regulations at §§ 635.4(a)(3), (d)(4), (e)(2) through (4), (f)(1), (2), (4), and (5), (h)(2), (l)(2)(ii)(A) through (C), (l)(2)(iii) through (ix), and (m)(2), 635.8(a)(1) and (3), (c)(2) and (3), 635.15(k) introductory text and (k)(4)(iii), 635.19(e)(4), 635.21(b)(1), (c)(3) and (4), (c)(5)(iii)(A) and (B), (g)(2) and (3), 635.27(c)(1)(i)(A) and (B), 635.28(a)(3), and 635.71(a)(53) and (e)(10) and (11) do not use the acronym “LAP” for “limited access permit.” This final action changes “limited access permit” to “LAP” so that the acronym defined at § 635.2 is used consistently across the HMS regulations. The regulations at §§ 635.15(k) and (l)(4)(iii) and 635.21(c)(5)(iii)(B) incorrectly use the word “permit” or “permitted” instead of the acronym “LAP” when referring to the Atlantic Tunas Longline category limited access permit. For consistency within the regulations referring to the Atlantic Tunas Longline category limited access permit, this final action changes the word “permit” or “permitted” to “LAP.” The regulations at §§ 635.4(l)(2)(iii) and 635.21(b)(1) incorrectly name a permit as “tuna longline LAPs.” This final action corrects the permit name to “Atlantic Tunas Longline category LAP.” The regulations at §§ 635.21(c)(5)(iii)(A) and 635.71(a)(40) and (b)(36) through (38), incorrectly list a permit name as “tunas Longline category permit.” This final action corrects the permit name to “Atlantic Tunas Longline category LAP.” The regulations at § 635.15(k) improperly exclude the word “category” from the permit name, “Atlantic Tunas Longline category LAP.” This final action corrects the error by adding the word “category.” The regulations at § 635.23(a)(2) incorrectly list the permit as “General category Atlantic Tunas permit.” This final action corrects the permit name to “Atlantic Tunas General category permit.” Additionally this final action removes language referring specifically to “one large medium or giant BFT per day” allowed to be caught or landed on days other than RFDs. Because NMFS may increase or decrease the daily retention limit of large medium and giant BFT over a range of zero to a maximum of five under cross reference § 635.23(a)(4), it is more clear to refer to the “daily retention limit in effect for that day.” The regulation at § 635.71(b)(20) incorrectly lists the relevant permit as “Purse Seine category Atlantic tuna permit.” This final action corrects the permit name to “Atlantic Tunas Purse Seine category LAP.”
This final action corrects the incorrect cross references found in the definitions and regulations at §§ 635.2 (definitions of “Display Permit” and “EFP”), 635.4(a)(8) and (h)(1)(iii), 635.5(a)(5)(ii), 635.21(c)(5)(ii)(C)(
Regulations at §§ 635.2 (definition of “Exporter”) and 635.4(a)(6) use a
At § 635.4(c)(2), this final action changes the word “issued” to “with” to be more internally consistent.
At § 635.4(l)(2)(viii), this final action removes the word “an” to be more internally consistent.
The current regulations do not consistently refer to swordfish and shark LAPs, sometimes referring to them as “catch LAPs” and other times spelling out “limited access permit.” This inconsistency in terminology can lead to confusion. As such, this final action changes these swordfish and shark LAP references to be more internally consistent to clarify the regulations. Specifically, the regulations at § 635.4(l)(2)(viii) and (ix) use the phrase, “a directed or incidental LAP for swordfish, a directed or an incidental catch LAP for shark.” This final action will correct the phrase to, “a directed or incidental swordfish LAP, a directed or incidental shark LAP.” The regulations at § 635.4(l)(2)(viii) uses the phrase “a LAP for swordfish.” This final action corrects the phrase to “a swordfish LAP.” The regulations at § 635.4(l)(2)(viii) and (ix) uses the phrase “a directed or incidental catch shark LAP,” respectively. This final action corrects the phrase to “a directed or incidental shark LAP,” respectively. The regulations at § 635.4(l)(2)(ix) use the phrase “directed or incidental catch swordfish or shark LAP.” This final action will correct the phrase to “directed or incidental swordfish or shark LAP.” The regulation at § 635.22(f) uses the phrase “incidental or handgear limited access swordfish permit.” This final action will correct the phrase to “incidental or handgear swordfish LAP.”
The definition of “Fishing Year” at § 635.2 includes incorrect language left over from past definitions. The fishing year for all tunas, sharks, billfish, and swordfish is January 1 through December 31, as reflected in the 2006 Consolidated HMS FMP. This final action removes this outdated text and simplifies the definition for tunas, sharks, billfish and swordfish to match the dates established in previous actions, reading “January 1 through December 31.”
The first sentence at § 635.20(b) starts with the phrase, “The size class of a BFT found with the head removed shall be determined using . . .” This phrase, referring to a BFT that is “found,” is confusing and inconsistent with a similar regulation at § 635.20(f) (“For a swordfish that has its head naturally attached . . .”). This final action re-words the phrase found in § 635.20(b) to be less confusing and more consistent with the wording at § 635.20(f). With this change, § 635.20(b) will read, “If the head of a BFT is no longer attached, the size class of the BFT shall be determined using . . .”
The regulation at § 635.40(b)(3) references 19 CFR 10.79, the “Declaration of Master and Two Members of Crew on Entry of Products of American Fisheries.” Section 10.79 no longer exists within title 19, and has instead been reserved. This final action removes language referencing this obsolete regulation and reserves this location. This change would not have any effect on the part 635 regulations since 19 CFR 10.79 has been amended and reserved.
Finally, the regulation at § 635.21(d)(1)(iii)(D) refers to out-of-date coordinates for the Charleston Deep Artificial Reef. This final action updates the old boundary coordinates for the Charleston Deep Artificial Reef to match the boundary changes that were recently made to the Charleston Deep Artificial Reef MPA via Snapper Grouper Amendment 36 (82 FR 29772, June 30, 2017).
The Assistant Administrator for Fisheries has determined that this final rule is necessary for the conservation and management of U.S. fisheries and that it is consistent with the Magnuson-Stevens Act, the 2006 Consolidated Atlantic HMS FMP and its amendments, ATCA, and other applicable law.
Pursuant to 5 U.S.C. 553(b)(B), there is good cause to waive prior notice and an opportunity for public comment on this action, as notice and comment are unnecessary and contrary to the public interest. This final rule makes only corrective, non-substantive changes to regulatory text, adds missing cross-references and/or corrects cross-references to HMS regulations, and in several instances, removes unnecessary language, and is solely administrative in nature. Therefore, public comment would serve no purpose and is unnecessary. Furthermore, it is in the public interest to revise the regulations as quickly as possible to reduce any potential confusion to the public of the regulatory requirements at 50 CFR part 635. Any delay in implementation would result in the continuation of this potential confusion. Thus, there is also good cause under 5 U.S.C. 553(d)(3) to waive the 30-day delay in effective date.
This final rule has been determined to be not significant for purposes of Executive Order 12866.
Because prior notice and opportunity for public comment are not required for this rule by 5 U.S.C. 553, or any other law, and a proposed rule is not being published, the analytical requirements of the Regulatory Flexibility Act, 5 U.S.C. 601
NMFS has determined that fishing activities conducted pursuant to this rule will not affect endangered and/or threatened species or critical habitat listed under the Endangered Species Act, or marine mammals protected by the Marine Mammal Protection Act, because the action is purely administrative in nature by making editorial corrections or clarifications to existing regulatory text, with no substantive changes or effects.
Fisheries, Fishing, Fishing vessels, Foreign relations, Imports, Penalties, Reporting and recordkeeping requirements, Treaties.
For the reasons set out in the preamble, 50 CFR part 635 is amended as follows:
16 U.S.C. 971
(a)
(3)
(6)
(8)
(c) * * *
(2) A vessel with a valid Atlantic Tunas General category permit issued under paragraph (d) of this section or with a valid Swordfish General Commercial permit issued under paragraph (f) of this section may fish in a recreational HMS fishing tournament if the vessel has registered for, paid an entry fee to, and is fishing under the rules of a tournament that has registered with NMFS' HMS Management Division as required under § 635.5(d). When a vessel with a valid Atlantic Tunas General category permit or a valid Swordfish General Commercial permit is fishing in such a tournament, such vessel must comply with HMS Angling category regulations, except as provided in paragraphs (c)(3) through (5) of this section.
(d) * * *
(4) A person can obtain an Atlantic Tunas Longline category LAP for a vessel only if the vessel has been issued both a LAP for shark and a LAP, other than handgear, for swordfish. Atlantic Tunas Longline category LAPs may only be obtained through transfer from current owners consistent with the provisions under paragraph (l)(2) of this section.
(e) * * *
(2) The owner of vessels that fish for, take, retain, or possess the Atlantic oceanic sharks listed in headings A, B, or C of Table 1 of appendix A to this part with an intention to sell must obtain a Federal Atlantic commercial shark directed or incidental LAP or an HMS Commercial Caribbean Small Boat permit. The only valid Federal commercial shark directed and shark incidental LAPs are those that have been issued under the limited access program consistent with the provisions under paragraphs (l) and (m) of this section.
(3) A vessel owner issued or required to be issued a Federal Atlantic commercial shark directed or shark incidental LAP may harvest, consistent with the other regulations in this part, any shark species listed in headings A, B, or C of Table 1 of appendix A to this part.
(4) Owners of vessels that fish for, take, retain, or possess the Atlantic oceanic sharks listed in heading E, Smoothhound Sharks, of Table 1 of appendix A to this part with an intention to sell them must obtain a Federal commercial smoothhound permit. In addition to other permits issued pursuant to this section or other authorities, a Federal commercial smoothhound permit may be issued to a vessel alone or to a vessel that also holds either a Federal Atlantic commercial shark directed or incidental LAP.
(f) * * *
(1) Except as specified in paragraphs (n) and (o) of this section, the owner of a vessel of the United States used to fish for or take swordfish commercially from the management unit, or on which swordfish from the management unit are retained or possessed with an intention to sell, or from which swordfish are sold, must obtain an HMS Charter/Headboat permit with a commercial sale endorsement issued under paragraph (b) of this section, or one of the following swordfish permits: A swordfish directed LAP, swordfish incidental LAP, swordfish handgear LAP, or a Swordfish General Commercial permit. These permits cannot be held in combination with each other on the same vessel, except that an HMS Charter/Headboat permit with a commercial sale endorsement may be held in combination with a swordfish handgear LAP on the same vessel. It is a rebuttable presumption that the owner or operator of a vessel on which swordfish are possessed in excess of the recreational retention limits intends to sell the swordfish. (2) The only valid commercial Federal vessel permits for swordfish are the HMS Charter/Headboat permit with a commercial sale endorsement issued under paragraph (b) of this section (and only when on a non for-hire trip), the Swordfish General Commercial permit issued under paragraph (f) of this section, a swordfish LAP issued consistent with paragraphs (l) and (m) of this section, or permits issued under paragraphs (n) and (o) of this section.
(4) A directed or incidental swordfish LAP is valid only when the vessel has on board a valid shark LAP and a valid Atlantic Tunas Longline category LAP issued for such vessel.
(5) A Swordfish General Commercial permit may not be held on a vessel in conjunction with an HMS Charter/Headboat permit issued under paragraph (b) of this section, an HMS Angling category permit issued under paragraph (c) of this section, a swordfish LAP issued consistent with paragraphs (l) and (m) of this section, an Incidental HMS Squid Trawl permit issued under paragraph (n) of this section, or an HMS Commercial Caribbean Small Boat permit issued under paragraph (o) of this section. A vessel issued a Swordfish General Commercial open access permit for a fishing year shall not be issued an HMS Angling permit or an HMS Charter/Headboat permit for that same fishing year, regardless of a change in the vessel's ownership.
(g) * * *
(2)
(h) * * *
(1) * * *
(iii) NMFS may require an applicant to provide documentation supporting the application before a permit is issued or to substantiate why such permit should not be revoked or otherwise sanctioned under paragraph (a)(6) of this section.
(2)
(l) * * *
(2) * * *
(ii) * * *
(A) The vessel baseline specifications are the respective specifications (length overall, gross registered tonnage, net tonnage, horsepower) of the first vessel that was issued an initial LAP or, if applicable, of that vessel's replacement owned as of May 28, 1999.
(B) Subsequent to the issuance of a swordfish handgear LAP, the vessel's horsepower may be increased, relative to the baseline specifications of the vessel initially issued the LAP, through refitting, replacement, or transfer. Such an increase may not exceed 20 percent of the baseline specifications of the vessel initially issued the LAP.
(C) Subsequent to the issuance of a swordfish handgear LAP, the vessel's length overall, gross registered tonnage, and net tonnage may be increased, relative to the baseline specifications of the vessel initially issued the LAP, through refitting, replacement, or transfer. An increase in any of these three specifications of vessel size may not exceed 10 percent of the baseline specifications of the vessel initially issued the LAP. This type of upgrade may be done separately from an engine horsepower upgrade.
(iii) No person or entity may own or control more than 5 percent of the vessels for which swordfish directed, shark directed, or Atlantic Tunas Longline category LAPs have been issued.
(iv) In order to transfer a swordfish, shark, or an Atlantic Tunas Longline category LAP to a replacement vessel, the owner of the vessel issued the LAP must submit a request to NMFS, at an address designated by NMFS, to transfer the LAP to another vessel, subject to requirements specified in paragraph (l)(2)(ii) of this section, if applicable. The owner must return the current valid LAP to NMFS with a complete application for a LAP, as specified in paragraph (h) of this section, for the replacement vessel. Copies of both vessels' U.S. Coast Guard documentation or state registration must accompany the application.
(v) For swordfish, shark, and Atlantic Tunas Longline category LAP transfers to a different person, the transferee must submit a request to NMFS, at an address designated by NMFS, to transfer the original LAP(s), subject to the requirements specified in paragraphs (l)(2)(ii) and (iii) of this section, if applicable. The following must accompany the completed application: The original LAP(s) with signatures of both parties to the transaction on the back of the permit(s) and the bill of sale for the permit(s). A person must include copies of both vessels' U.S. Coast Guard documentation or state registration for LAP transfers involving vessels.
(vi) For LAP transfers in conjunction with the sale of the permitted vessel, the transferee of the vessel and LAP(s) issued to that vessel must submit a request to NMFS, at an address designated by NMFS, to transfer the limited access permit(s) LAP(s), subject to the requirements specified in paragraphs (l)(2)(ii) and (iii) of this section, if applicable. The following must accompany the completed application: The original LAP(s) with signatures of both parties to the transaction on the back of the permit(s), the bill of sale for the LAP(s) and the vessel, and a copy of the vessel's U.S. Coast Guard documentation or state registration.
(vii) The owner of a vessel issued a LAP(s) who sells the permitted vessel but retains the LAP(s) must notify NMFS within 30 days after the sale of the change in application information in accordance with paragraph (i) of this section. If the owner wishes to transfer the LAP(s) to a replacement vessel, he/she must apply according to the procedures in paragraph (l)(2)(iv) of this section.
(viii) As specified in paragraph (f)(4) of this section, a directed or incidental swordfish LAP, a directed or incidental shark LAP, and an Atlantic Tunas Longline category LAP are required to retain swordfish for commercial purposes. Accordingly, a swordfish LAP obtained by transfer without either a directed or incidental shark LAP or an Atlantic Tunas Longline category LAP will not entitle an owner or operator to use a vessel to fish in the swordfish fishery.
(ix) As specified in paragraph (d)(4) of this section, a directed or incidental swordfish LAP, a directed or incidental shark LAP, and an Atlantic Tunas Longline category LAP are required to retain Atlantic tunas taken by pelagic longline gear. Accordingly, an Atlantic Tunas Longline category LAP obtained by transfer without either a directed or incidental swordfish or shark LAP will not entitle an owner or operator to use the permitted vessel to fish in the Atlantic tunas fishery with pelagic longline gear.
(m) * * *
(2)
(a) * * *
(5) * * *
(ii) Before fishing under a chartering arrangement, the owner of a fishing vessel subject to U.S. jurisdiction must apply for, and obtain, a chartering permit as specified in § 635.32(e) and (g). If a chartering permit is obtained, the vessel owner must submit catch information as specified in the terms and conditions of that permit. All catches will be recorded and counted against the applicable quota of the Contracting Party to which the chartering foreign entity is a member and, unless otherwise provided in the chartering permit, must be offloaded in the ports of the chartering foreign entity or offloaded under the direct supervision of the chartering foreign entity.
(b) * * *
(1) * * *
(i) Dealers that have been issued or should have been issued a Federal Atlantic BAYS tunas, swordfish, and/or shark dealer permit under § 635.4 must submit to NMFS all reports required under this section within the timeframe specified under paragraph (b)(1)(ii) of this section. BAYS tunas, swordfish, and sharks commercially-harvested by a vessel can only be first received by dealers that have been issued or should have been issued an Atlantic tunas, swordfish, and/or shark dealer permit under § 635.4. All federal Atlantic HMS dealers must provide a detailed report of all fish first received to NMFS within the period specified under paragraph (b)(1)(ii) of this section. All reports must be species-specific and must include the required information about all swordfish and sharks received by the dealer, including the required vessel information, regardless of where the fish were harvested or whether the harvesting vessel is permitted under § 635.4. For sharks, each report must specify the total weight of the carcass(es) without the fins for each species, and the total fin weight by grade for all sharks combined. Dealers are also required to submit “negative” reports, indicating no receipt of any species, within the timeframe specified under paragraph (b)(1)(ii) of this section if they did not first receive any fish during the reporting period. As stated in § 635.4(a)(6), failure to comply with these recordkeeping and reporting requirements may result in existing dealer permit(s) being revoked, suspended, or modified, and in the denial of any permit applications.
(c) * * *
(2)
(b) * * *
(1) * * *
(ii) In block Arabic numerals permanently affixed to or painted on the vessel in contrasting color to the background.
(c) * * *
(1) The owner or operator of a vessel for which a permit has been issued under § 635.4 and that uses handline, buoy gear, harpoon, longline, or gillnet, must display the vessel's name, registration number, or Atlantic Tunas, HMS Angling, or HMS Charter/Headboat permit number on each float attached to a handline, buoy gear, or harpoon, and on the terminal floats and high-flyers (if applicable) on a longline or gillnet used by the vessel. The vessel's name or number must be at least 1 inch (2.5 cm) in height in block letters or Arabic numerals in a color that contrasts with the background color of the float or high-flyer.
(a) * * *
(1) Both the owner and operator of a vessel that fishes with longline or gillnet gear must be certified by NMFS, or its designee, as having completed a workshop on the safe handling, release, and identification of protected species before a shark or swordfish LAP, pursuant to § 635.4(e) and (f), is renewed. For the purposes of this section, it is a rebuttable presumption that a vessel fishes with longline or gillnet gear if: Longline or gillnet gear is onboard the vessel; logbook reports indicate that longline or gillnet gear was used on at least one trip in the preceding year; or, in the case of a permit transfer to new owners that occurred less than a year ago, logbook reports indicate that longline or gillnet gear was used on at least one trip since the permit transfer.
(3) The owner of a vessel that fishes with longline or gillnet gear, as specified in paragraph (a)(1) of this section, is required to possess on board the vessel a valid protected species safe handling, release, and identification workshop certificate issued to that vessel owner. A copy of a valid protected species safe handling, release, and identification workshop certificate issued to the vessel owner for a vessel that fishes with longline or gillnet gear must be included in the application package to renew or obtain a shark or swordfish LAP.
(c) * * *
(2) If a vessel fishes with longline or gillnet gear as described in paragraph (a)(1) of this section, the vessel owner may not renew a shark or swordfish LAP, issued pursuant to § 635.4(e) or (f), without submitting a valid protected species workshop certificate with the permit renewal application. (3) A vessel that fishes with longline or gillnet gear as described in paragraph (a)(1) of this section and that has been, or should be, issued a valid LAP pursuant to § 635.4(e) or (f), may not fish unless a valid protected species safe handling, release, and identification workshop certificate has been issued to both the owner and operator of that vessel.
(e) * * *
(4)
(b) * * *
(1)
(c) * * *
(3) * * *
(iv)
(k)
(4) * * *
(iii)
(e) * * *
(4) Except for persons aboard a vessel that has been issued a directed, incidental, or handgear swordfish LAP, a Swordfish General Commercial permit, an Incidental HMS squid trawl permit, or an HMS Commercial Caribbean Small Boat permit under § 635.4, no person may fish for North Atlantic swordfish with, or possess a North Atlantic swordfish taken by, any gear other than handline or rod and reel.
(b)
(b) * * *
(1) All vessels that have pelagic or bottom longline gear onboard and that have been issued, or are required to have, a swordfish, shark, or Atlantic Tunas Longline category LAP for use in the Atlantic Ocean including the Caribbean Sea and the Gulf of Mexico must possess inside the wheelhouse the document provided by NMFS entitled
(c) * * *
(3) A vessel that has been issued, or is required to have been issued, a LAP under this part may fish with pelagic longline gear in the Cape Hatteras gear restricted area described in paragraph (c)(2)(v) of this section, provided the vessel has been determined by NMFS to be “qualified,” (for the relevant year) using the performance metrics described in § 635.14.
(4) In the Gulf of Mexico, pelagic longline gear may not be fished or deployed from a vessel issued or required to have been issued a LAP under this part with live bait affixed to the hooks; and, a person aboard a vessel issued or required to have been issued a LAP under this part that has pelagic longline gear on board may not possess live baitfish, maintain live baitfish in any tank or well on board the vessel, or set up or attach an aeration or water circulation device in or to any such tank or well. For the purposes of this section, the Gulf of Mexico includes all waters of the U.S. EEZ west and north of the boundary stipulated at 50 CFR 600.105(c).
(5) * * *
(ii) * * *
(C) * * *
(
(iii) * * *
(A)
(B)
(iv)
(d) * * *
(1) * * *
(iii) * * *
(D)
(2) * * *
(ii)
(g) * * *
(1) Persons fishing with gillnet gear must comply with the provisions implementing the Atlantic Large Whale Take Reduction Plan, the Bottlenose Dolphin Take Reduction Plan, the Harbor Porpoise Take Reduction Plan, and any other relevant Take Reduction Plan set forth in §§ 229.32 through 229.35 of this title. If a listed whale is taken, the vessel operator must cease fishing operations immediately and contact NMFS as required under part 229 of this title.
(2) While fishing with a drift gillnet, a vessel issued or required to be issued a Federal Atlantic commercial shark LAP and/or a Federal commercial smoothhound permit must conduct net checks at least every 2 hours to look for and remove any sea turtles, marine mammals, Atlantic sturgeon, or smalltooth sawfish, and the drift gillnet must remain attached to at least one vessel at one end, except during net checks. Smalltooth sawfish must not be removed from the water while being removed from the net.
(3) While fishing with a sink gillnet, vessels issued or required to be issued a Federal Atlantic commercial shark LAP and/or a Federal commercial smoothhound permit must limit the soak time of the sink gillnet gear to no more than 24 hours, measured from the time the sink gillnet first enters the water to the time it is completely removed from the water. Smalltooth sawfish must not be removed from the water while being removed from the net.
(c) * * *
(1) The recreational retention limit for sharks applies to any person who fishes in any manner, except to persons aboard a vessel that has been issued a Federal Atlantic commercial shark vessel permit under § 635.4. The retention limit can change depending on the species being caught and the size limit under which they are being caught as specified under § 635.20(e). If a commercial Atlantic shark quota is closed under § 635.28(b), the recreational retention limit for sharks and no sale provision in paragraph (a) of this section may be applied to persons aboard a vessel issued a Federal Atlantic commercial shark vessel permit under § 635.4(e),
(5) Sharks listed in Table 1 of appendix A to this part that are not listed in this section, must be released by persons aboard a vessel that has not been issued a Federal Atlantic commercial shark vessel permit under § 635.4(e).
(d)
(f)
(a) * * *
(2) On an RFD, no person aboard a vessel that has been issued an Atlantic Tunas General category permit may fish for, possess, retain, land, or sell a BFT of any size class, and catch-and-release or tag-and-release fishing for BFT under § 635.26(a) is not authorized from such vessel. On days other than RFDs, and when the General category is open, large medium or giant BFT may be caught and landed from such vessels up to the daily retention limit in effect for that day. NMFS will annually publish a schedule of RFDs in the
(4) To provide for maximum utilization of the quota for BFT, NMFS may increase or decrease the daily retention limit of large medium and giant BFT over a range from zero (on RFDs) to a maximum of five per vessel. Such increase or decrease will be based on the criteria provided under § 635.27(a)(8). NMFS will adjust the daily retention limit specified in paragraph (a)(2) of this section by filing an adjustment with the Office of the Federal Register for publication. In no case shall such adjustment be effective less than 3 calendar days after the date of filing with the Office of the Federal Register, except that previously designated RFDs may be waived effective upon closure of the General category fishery so that persons aboard vessels permitted in the General category may conduct tag-and-release fishing for BFT under § 635.26(a).
(b) * * *
(1)
(c) * * *
(1) * * *
(i) * * *
(A) A swordfish from the North Atlantic stock caught prior to the directed fishery closure by a vessel for which a directed swordfish LAP, a swordfish handgear LAP, an HMS Commercial Caribbean Small Boat permit, a Swordfish General Commercial open access permit, or an HMS Charter/Headboat permit with a commercial sale endorsement (and only when on a non for-hire trip) has been issued or is required to have been issued is counted against the directed fishery quota. The total baseline annual fishery quota, before any adjustments, is 2,937.6 mt dw for each fishing year. Consistent with applicable ICCAT recommendations, a portion of the total baseline annual fishery quota may be used for transfers to another ICCAT contracting party. The annual directed category quota is calculated by adjusting for over- or under harvests, dead discards, any applicable transfers, the incidental category quota, the reserve quota and other adjustments as needed, and is subdivided into two equal semiannual periods: One for January 1 through June 30, and the other for July 1 through December 31.
(B) A swordfish from the North Atlantic swordfish stock landed by a vessel for which an incidental swordfish LAP, an incidental HMS Squid Trawl permit, an HMS Angling permit, or an HMS Charter/Headboat permit (and only when on a for-hire trip) has been issued, or a swordfish from the North Atlantic stock caught after the effective date of a closure of the directed fishery from a vessel for which a swordfish directed LAP, a swordfish handgear LAP, an HMS Commercial Caribbean Small Boat permit, a Swordfish General Commercial open access permit, or an HMS Charter/Headboat permit with a commercial sale endorsement (when on a non for-hire trip) has been issued, is counted against the incidental category
(d) * * *
(1) Unless adjusted under paragraph (d)(2) of this section or by an ICCAT recommendation, the annual landings limit is 250 Atlantic blue and white marlin, combined. Annual landings of roundscale spearfish are also included to the blue and white marlin annual landings limit. Should the U.S. recreational Atlantic marlin landing limit be adjusted by an ICCAT recommendation, NMFS will file a notice identifying the new landing limit with the Office of the Federal Register for publication prior to the start of the next fishing year or as early as possible.
(a) * * *
(3) When the Atlantic Tunas Longline category quota is reached, projected to be reached, or exceeded, or when there is high uncertainty regarding the estimated or documented levels of bluefin tuna catch, NMFS will file a closure action with the Office of the
(b) * * *
(1) * * *
(iv) The species is a prohibited species as listed under heading D, Prohibited Species of Table 1 of appendix A to this part; or
(7) If the Atlantic Tunas Longline category quota is closed as specified in paragraph (a)(3) of this section, vessels that have pelagic longline gear on board cannot possess, retain, land, or sell sharks.
(c) * * *
(3)
(d)
(d) * * *
(2) Atlantic swordfish dealers may first receive a swordfish harvested from the Atlantic Ocean only from an owner or operator of a fishing vessel that has a valid commercial permit for swordfish issued under this part, and only if the dealer has submitted reports to NMFS according to reporting requirements of § 635.5(b)(1)(ii). Atlantic swordfish dealers may first receive a swordfish from a vessel that has pelagic longline gear onboard only if the Atlantic Tunas Longline category has not been closed, as specified in § 635.28(a)(3).
(c) NMFS may add species to the prohibited shark species group specified in heading D, Prohibited Sharks, of Table 1 of appendix A to this part if, after considering the criteria in paragraphs (c)(1) through (4) of this section, the species is determined to meet at least two of the criteria. Alternatively, NMFS may remove species from the prohibited shark species group and place them in the appropriate shark species group in Table 1 of appendix A if, after considering the criteria in paragraphs (c)(1) through (4) of this section, NMFS determines the species only meets one criterion.
(b) * * *
(1) For the purposes of paragraph (a) of this section and section 971d(6)(a) of ATCA, a shipment of fish in any form of the species under regulation or under investigation by ICCAT offered for entry, directly or indirectly, from a country named in a finding filed with the Office of the Federal Register for publication under paragraph (a) of this section is eligible for entry if the shipment is accompanied by a completed ATCA COE attached to the invoice certifying that the fish in the shipment:
(a) * * *
(53) Fish for, catch, possess, retain, or land an Atlantic swordfish using, or captured on, “buoy gear” as defined at § 635.2, unless the vessel owner has been issued a swordfish directed limited access 125 permit or a swordfish handgear LAP in accordance with § 635.4(f) or a valid HMS Commercial Caribbean Small Boat permit in accordance with § 635.4(o).
(b) * * *
(20) Approach to within 100 yd (91.5 m) of the cork line of a purse seine net used by a vessel fishing for Atlantic tuna, or for a purse seine vessel to approach to within 100 yd (91.5 m) of a vessel actively fishing for Atlantic tuna, except that two vessels that have Atlantic Tunas Purse Seine category LAPs may approach closer to each other.
(36) Possess J-hooks onboard a vessel that has pelagic longline gear onboard, and that has been issued, or is required to have, a swordfish, shark, or Atlantic Tunas Longline category LAP for use in the Atlantic Ocean, including the Caribbean Sea and the Gulf of Mexico, except when green-stick gear is onboard,
(37) Use or deploy J-hooks with pelagic longline gear from a vessel that has been issued, or is required to have, a swordfish, shark, or Atlantic Tunas Longline category LAP for use in the Atlantic Ocean, including the Caribbean Sea and Gulf of Mexico, as specified in § 635.21(c)(5)(iii)(B).
(38) As specified in § 635.21(c)(5)(iii)(B)(
(40) Possess, use, or deploy J-hooks smaller than 1.5 inch (38.1 mm), when measured in a straight line over the longest distance from the eye to any part of the hook, when fishing with or possessing green-stick gear onboard a vessel that has been issued, or is required to have, a swordfish, shark, or Atlantic Tunas Longline category LAP for use in the Atlantic Ocean, including the Caribbean Sea and Gulf of Mexico, as specified at § 635.21(c)(5)(iii)(B)(
(e) * * *
(10) Fish for, catch, possess, retain, or land an Atlantic swordfish using, or captured on, “buoy gear” as defined at § 635.2, unless, as specified in § 635.19(e)(3), the vessel owner has been issued a swordfish directed LAP or a swordfish handgear LAP in accordance with § 635.4(f) or a valid HMS Commercial Caribbean Small Boat permit in accordance with § 635.4(o).
(11) As the owner of a vessel permitted, or required to be permitted, in the swordfish directed, swordfish handgear LAP category, or issued a valid HMS Commercial Caribbean Small Boat permit and utilizing buoy gear, to possess or deploy more than 35 individual floatation devices, to deploy more than 35 individual buoy gears per vessel, or to deploy buoy gear without affixed monitoring equipment, as specified at § 635.21(h).
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM).
We propose to adopt a new airworthiness directive (AD) for certain Airbus Model A318 series airplanes; Model A319 series airplanes; Model A320 series airplanes; and Model A321-111, -112, -131, -211, -212, -213, -231, -232, -251N, -253N, and -271N airplanes. This proposed AD was prompted by a revision of an airworthiness limitation item (ALI) document, which requires more restrictive maintenance requirements and airworthiness limitations. This proposed AD would require revising the maintenance or inspection program, as applicable, to incorporate new maintenance requirements and airworthiness limitations. We are proposing this AD to address the unsafe condition on these products.
We must receive comments on this proposed AD by August 31, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
For service information identified in this NPRM, contact Airbus, Airworthiness Office—EIAS, Rond-Point Emile Dewoitine No: 2, 31700 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44 51; email
You may examine the AD docket on the internet at
Sanjay Ralhan, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206-231-3223.
We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the
We will post all comments we receive, without change, to
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2017-0168, dated September 7, 2017 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Airbus Model A318 series airplanes; Model A319 series airplanes; Model A320 series airplanes; and Model A321-111, -112, -131, -211, -212, -213, -231, -232, -251N, -253N, and -271N airplanes. The MCAI states:
The airworthiness limitations for Airbus A320 family aeroplanes are currently defined and published in Airbus A318/A319/A320/A321 Airworthiness Limitations Section (ALS) documents. The airworthiness limitations applicable to the Certification Maintenance Requirements (CMR), which are approved by EASA, are published in ALS Part 3.
The instructions contained in the ALS Part 3 have been identified as mandatory actions for continued airworthiness. Failure to comply with these instructions could result in an unsafe condition.
Previously, EASA issued AD 2016-0092 [which corresponds to FAA AD 2017-25-04, Amendment 39-19118 (82 FR 58098, December 11, 2017) (“AD 2017-25-04”)], to require accomplishment of all maintenance tasks as described in ALS Part 3 at Revision 03. The new ALS Part 3 Revision 05 (hereafter referred to as “the ALS” in this [EASA] AD) includes new and/or more restrictive requirements and extends the applicability to model A320-251N, A320-271N, A321-251N, A321-253N and A321-271N aeroplanes.
For the reason described above, this [EASA] AD retains the requirements of EASA AD 2016-0092, which is superseded, and requires accomplishment of all maintenance tasks as described in the ALS.
The unsafe condition is a safety-significant latent failure (that is not annunciated), which, in combination with one or more other specific failures or events, could result in a hazardous or catastrophic failure condition. You may examine the MCAI in the AD docket on the internet at
This NPRM does not propose to supersede AD 2017-25-04. Rather, we have determined that a stand-alone AD would be more appropriate to address
Airbus has issued Airbus A318/A319/A320/A321 Airworthiness Limitations Section (ALS) Part 3, Certification Maintenance Requirements (CMR), Revision 05, dated April 6, 2017. The service information describes maintenance instructions and airworthiness limitations, including updated inspections and intervals to be incorporated into the maintenance or inspection program. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop on other products of these same type designs.
This proposed AD would require revising the maintenance or inspection program to incorporate new or revised airworthiness limitation requirements, except as discussed under “Differences Between this Proposed AD and the MCAI.”
This proposed AD would require revisions to certain operator maintenance documents to include new actions (
The FAA recently became aware of an issue related to the applicability of ADs that require incorporation of an ALS revision into an operator's maintenance or inspection program.
Typically, when these types of ADs are issued by civil aviation authorities of other countries, they apply to all airplanes covered under an identified type certificate (TC). The corresponding FAA AD typically retains applicability to all of those airplanes.
In addition, U.S. operators must operate their airplanes in an airworthy condition, in accordance with 14 CFR 91.7(a). Included in this obligation is the requirement to perform any maintenance or inspections specified in the ALS, and in accordance with the ALS as specified in 14 CFR 43.16 and 91.403(c), unless an alternative has been approved by the FAA.
When a type certificate is issued for a type design, the specific ALS, including the current revision in effect, is a part of that type design, as specified in 14 CFR 21.31(c).
The sum effect of these operational and maintenance requirements is an obligation to comply with the ALS revision defined in the type design referenced in the manufacturer's conformity statement. This obligation may introduce a conflict with an AD that requires a specific ALS revision if new airplanes are delivered with a later revision as part of their type design. Note: When a new airplane is delivered with a later ALS revision, the revised ALS must correct the unsafe condition associated with an existing AD, as specified in 14 CFR 21.21(b)(2).
To address this conflict, the FAA has approved alternative methods of compliance (AMOCs) that allow operators to incorporate the most recent ALS revision (
However, compliance with AMOCs is normally optional, and we recently became aware that some operators choose to retain the AD-mandated ALS revision in their fleet-wide maintenance/inspection programs, including those for new airplanes delivered with later ALS revisions, to help standardize the maintenance of the fleet. To ensure that operators comply with the applicable ALS revision for newly delivered airplanes containing a later revision than that specified in an AD, we plan to limit the applicability of ADs that mandate ALS revisions to those airplanes that are subject to an earlier revision of the ALS, either as part of the type design or as mandated by an earlier AD.
This proposed AD therefore would apply to Airbus Model A318 series airplanes; Model A319 series airplanes; Model A320 series airplanes; and Model A321-111, -112, -131, -211, -212, -213, -231, -232, -251N, -253N, and -271N airplanes with an original certificate of airworthiness or original export certificate of airworthiness that was issued on or before the date of the ALS revision identified in this proposed AD. Operators of airplanes with an original certificate of airworthiness or original export certificate of airworthiness issued after that date must comply with the airworthiness limitations specified as part of the approved type design and referenced on the type certificate data sheet.
The MCAI specifies that if there are findings from the ALS inspection tasks, corrective actions must be accomplished in accordance with Airbus maintenance documentation. However, this proposed AD does not include that requirement. Operators of U.S.-registered airplanes are required by general airworthiness and operational regulations to perform maintenance using methods that are acceptable to the FAA. We consider those methods to be adequate to address any corrective actions necessitated by the findings of ALS inspections required by this proposed AD.
We estimate that this proposed AD affects 1,250 airplanes of U.S. registry. We estimate the following costs to comply with this proposed AD:
We have determined that revising the maintenance or inspection program takes an average of 90 work-hours per operator, although we recognize that this number may vary from operator to operator. In the past, we have estimated that this action takes 1 work-hour per airplane. Since operators incorporate maintenance or inspection program changes for their affected fleet(s), we have determined that a per-operator estimate is more accurate than a per-airplane estimate. Therefore, we estimate the total cost per operator to be
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This proposed AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this proposed regulation:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
We must receive comments by August 31, 2018.
This AD affects AD 2017-25-04, Amendment 39-19118 (82 FR 58098, December 11, 2017) (“AD 2017-25-04”).
This AD applies to the Airbus airplanes identified in paragraphs (c)(1), (c)(2), (c)(3), and (c)(4) of this AD, certificated in any category, with an original certificate of airworthiness or original export certificate of airworthiness issued on or before April 6, 2017.
(1) Model A318-111, -112, -121, and -122 airplanes.
(2) Model A319-111, -112, -113, -114, -115, -131, -132, and -133 airplanes.
(3) Model A320-211, -212, -214, -216, -231, -232, -233, -251N, and -271N airplanes.
(4) Model A321-111, -112, -131, -211, -212, -213, -231, -232, -251N, -253N, and -271N airplanes.
Air Transport Association (ATA) of America Code 05, Time Limits/Maintenance Checks.
This AD was prompted by a revision of an airworthiness limitation item (ALI) document, which requires more restrictive maintenance requirements and airworthiness limitations. We are issuing this AD to address a safety-significant latent failure (that is not annunciated), which, in combination with one or more other specific failures or events, could result in a hazardous or catastrophic failure condition.
Comply with this AD within the compliance times specified, unless already done.
Within 90 days after the effective date of this AD, revise the maintenance or inspection program, as applicable, to incorporate the information specified in Airbus A318/A319/A320/A321 Airworthiness Limitations Section (ALS) Part 3, Certification Maintenance Requirements (CMR), Revision 05, dated April 6, 2017 (“ALS Part 3 CMR, R5”). The initial compliance time for accomplishing the tasks specified in ALS Part 3 CMR, R5, is at the applicable time specified in ALS Part 3 CMR, R5, or within 90 days after the effective date of this AD, whichever occurs later.
Accomplishing the actions required by paragraph (g) of this AD terminates all of the requirements of AD 2017-25-04.
After the maintenance or inspection program, as applicable, has been revised as required by paragraph (g) of this AD, no alternative actions (
The following provisions also apply to this AD:
(1)
(i) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.
(ii) AMOCs applicable previously for AD 2017-25-04 or AD 2014-22-08, Amendment 39-18013 (79 FR 67042, November 12, 2014) that require incorporation of ALS Part 3 CMR, R5, are considered approved as AMOCs for the corresponding provisions of this AD.
(2)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA AD
(2) For more information about this AD, contact Sanjay Ralhan, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206-231-3223.
(3) For service information identified in this AD, contact Airbus, Airworthiness Office—EIAS, Rond-Point Emile Dewoitine No: 2, 31700 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44 51; email
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM); removal of airworthiness directive (AD).
We propose to remove AD 93-14-19, which applies to certain The Boeing Company Model 767-200 and -300 series airplanes. AD 93-14-19 requires inspections for disbonding of the trailing edge wedge of the leading edge slat; and repair, if necessary. Since we issued AD 93-14-19, an updated stability and control analysis showed that the worst-case scenario of a trailing edge wedge disbond in-flight would not adversely affect the controllability of the airplane. Accordingly, we propose to remove AD 93-14-19.
We must receive comments on this proposed AD by August 31, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
You may examine the AD docket on the internet at
Wayne Lockett, Aerospace Engineer, Airframe Section, FAA, Seattle ACO Branch, 2200 South 216th St., Des Moines, WA 98198; phone and fax: 206-231-3524; email:
We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the
We will post all comments we receive, without change, to
We issued AD 93-14-19, Amendment 39-8644 (58 FR 41177, August 3, 1993) (“AD 93-14-19”), for certain The Boeing Company Model 767-200 and -300 series airplanes. AD 93-14-19 requires visual inspections and either “Coin Tap” inspections or ultrasonic inspections for disbonding of the trailing edge wedge of the leading edge slat, and repair, if necessary. AD 93-14-19 resulted from reports of wedge damage or disbonding; in two cases the damage resulted in loss of a portion of the trailing edge wedge. The trailing edge wedge disbonding was caused by moisture ingression at the wedge end seals and in the skin bonds along the spar chords. Moisture in the aluminum honeycomb core would cause corrosion that would eventually result in disbonding between the skin and the aluminum honeycomb core. We issued AD 93-14-19 to prevent the loss of a trailing edge wedge, which could result in reduced maneuver margins, reduced speed margins to stall, and unexpected roll before stall warning, all of which would adversely affect the controllability of the airplane.
Since we issued AD 93-14-19, an updated stability and control analysis showed that the worst-case scenario of a trailing edge wedge disbond in-flight would not adversely affect the controllability of the airplane. Simulation analysis shows that the airplane has sufficient lateral control up to the stick shaker to counter the rolling moment caused by a trailing edge wedge loss, at all flap settings. Therefore, the unsafe condition no longer exists on these products worldwide.
Upon further consideration, we have determined that AD 93-14-19 must be removed. Accordingly, this proposed AD would remove AD 93-14-19. Removal of AD 93-14-19 would not preclude the FAA from issuing another related action or commit the FAA to any course of action in the future.
AD 93-14-19 affects approximately 180 airplanes of U.S. registry. The estimated costs for the actions required by AD 93-14-19 for U.S. operators is $79,200, or $440 per airplane. Removing AD 93-14-19 would eliminate those costs.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority.
This proposed AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes and associated appliances to the Director of the System Oversight Division.
We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify that the proposed regulation:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),
(3) Will not affect intrastate aviation in Alaska, and
(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
The FAA must receive comments on this AD action by August 31, 2018.
This AD removes AD 93-14-19, Amendment 39-8644 (58 FR 41177, August 3, 1993).
This AD applies to The Boeing Company Model 767 series airplanes, certificated in any category, line numbers 1 through 488 inclusive.
Air Transport Association (ATA) of America Code 57, Wings.
For more information about this AD, contact Wayne Lockett, Aerospace Engineer, Airframe Section, FAA, Seattle ACO Branch, 2200 South 216th St., Des Moines, WA 98198; phone and fax: 206-231-3524; email:
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM).
This action proposes to amend Class E airspace extending upward from 700 feet above the surface at Belfast Municipal Airport, Belfast, ME, to accommodate airspace reconfiguration due to the decommissioning of the Belfast non-directional radio beacon and cancellation of the NDB approach. Controlled airspace is necessary for the safety and management of instrument flight rules (IFR) operations at this airport. This action also would update the geographic coordinates of this airport.
Comments must be received on or before August 31, 2018.
Send comments on this proposal to: The U.S. Department of Transportation, Docket Operations, 1200 New Jersey Avenue SE, West Building Ground Floor, Room W12-140, Washington, DC 20590-0001; Telephone: (800) 647-5527, or (202) 366-9826. You must identify the Docket No. FAA-2018-0199; Airspace Docket No. 18-ANE-3, at the beginning of your comments. You may also submit comments through the internet at
FAA Order 7400.11B, Airspace Designations and Reporting Points, and subsequent amendments can be viewed on line at
FAA Order 7400.11, Airspace Designations and Reporting Points, is published yearly and effective on September 15.
John Fornito, Operations Support Group, Eastern Service Center, Federal Aviation Administration, 1701 Columbia Ave., College Park, GA 30337; telephone (404) 305-6364.
The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the United States Code. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of
Interested persons are invited to comment on this proposed rulemaking by submitting such written data, views, or arguments, as they may desire. Comments that provide the factual basis supporting the views and suggestions presented are particularly helpful in developing reasoned regulatory decisions on the proposal. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal.
Communications should identify both docket numbers (Docket No. FAA-2018-0199 and Airspace Docket No. 18-ANE-3) and be submitted in triplicate to DOT Docket Operations (see
Persons wishing the FAA to acknowledge receipt of their comments on this action must submit with those comments a self-addressed stamped postcard on which the following statement is made: “Comments to FAA Docket No. FAA-2018-0199; Airspace Docket No. 18-ANE-3.” The postcard will be date/time stamped and returned to the commenter.
All communications received before the specified closing date for comments will be considered before taking action on the proposed rule. The proposal contained in this document may be changed in light of the comments received. All comments submitted will be available for examination in the public docket both before and after the comment closing date. A report summarizing each substantive public contact with FAA personnel concerned with this rulemaking will be filed in the docket.
An electronic copy of this document may be downloaded through the internet at
You may review the public docket containing the proposal, any comments received, and any final disposition in person in the Dockets Office (see the
This document proposes to amend FAA Order 7400.11B, Airspace Designations and Reporting Points, dated August 3, 2017, and effective September 15, 2017. FAA Order 7400.11B is publicly available as listed in the
The FAA proposes an amendment to Title 14, Code of Federal Regulations (14 CFR) part 71 to modify Class E airspace extending upward from 700 feet or more above the surface within an 9.4-mile radius (increased from a 6.4-mile radius) of Belfast Municipal Airport, Belfast, NH, due to the decommissioning of the Belfast NDB, and cancellation of the NDB approach. The airspace redesign would enhance the safety and management of IFR operations at the airport. The geographic coordinates of the airport also would be adjusted to coincide with the FAAs aeronautical database.
Class E airspace designations are published in Paragraph 6005 of FAA Order 7400.11B, dated August 3, 2017, and effective September 15, 2017, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designation listed in this document will be published subsequently in the Order.
The FAA has determined that this proposed regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. It, therefore: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a Regulatory Evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this proposed rule, when promulgated, will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
This proposal will be subject to an environmental analysis in accordance with FAA Order 1050.1F, “Environmental Impacts: Policies and Procedures” prior to any FAA final regulatory action.
Airspace, Incorporation by reference, Navigation (air).
In consideration of the foregoing, the Federal Aviation Administration proposes to amend 14 CFR part 71 as follows:
49 U.S.C. 106(f), 106(g); 40103, 40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959-1963 Comp., p. 389.
That airspace extending upward from 700 feet above the surface within a 9.4-mile radius of Belfast Municipal Airport.
Internal Revenue Service (IRS), Treasury.
Correction to a notice of proposed rulemaking.
This document contains a correction to notice of proposed rulemaking (REG-102951-16) that was published in the
Written or electronic comments and request for a public hearing for the notice of proposed rulemaking at 83 FR 24948, May 31, 2018, are still being accepted and must be received by July 30, 2018.
Concerning the proposed regulations, Michael Hara at (202) 317-6845; concerning the submission of comments and request for a public hearing, Regina L. Johnson, (202) 317-5177 (not a toll-free number).
The notice of proposed rulemaking that is subject of this document is under section 6011 of the Internal Revenue Code.
As published, the notice of proposed rulemaking (REG-102951-16) contains an error that may prove to be misleading and are in need of clarification.
Accordingly, in the notice of proposed rulemaking (REG-102951-16) that is subject to FR Doc. 2018-11749, beginning on page 24948 in the issue of May 31, 2018, make the following correction in the
Coast Guard, DHS.
Notice of proposed rulemaking.
The Coast Guard proposes to establish a temporary safety zone for the navigable waters within 150-yards of the S99 Alford Street Bridge, at mile 1.4 on the Mystic River between Charlestown and Everett, Massachusetts from October 1, 2018 through April 30, 2019. The safety zone is necessary to protect personnel, vessels and the marine environment from potential hazards created during the emergency replacement of the steel grid deck on all four bascule spans of the S99 Alford Street Bridge. This proposed rule would prohibit vessels and persons from being in the safety zone unless authorized by the Captain of the Port Boston or a designated representative. We invite your comments on this proposed rulemaking.
Comments and related material must be received by the Coast Guard on or before August 16, 2018.
You may submit comments identified by docket number USCG-2018-0343 using the Federal eRulemaking Portal at
If you have questions about this proposed rulemaking, call or email Mark Cutter, Waterways Management Division, U.S. Coast Guard Sector Boston, telephone 617-223-4000, email
On April 6, 2018, the City of Boston notified the Coast Guard that the Massachusetts Department of Transportation's Highways Division will be conducting emergency repairs to the S99 Alford Street Drawbridge at mile 1.4 on the Mystic River between Charlestown and Everett Massachusetts from May 2018 through the summer of 2019. The emergency repairs consist of replacing the steel grid bridge decking on all four bascule spans. To complete these repairs by the summer of 2019 and still maintain regional transportation, each side span of the bascule bridge will need to be closed at different times. To make the necessary repairs, workers will need to use barges in the waterway underneath the bridge span to access the side spans. Bridge span closures and use of the waterway underneath the bridge to effectuate the repairs are scheduled to commence on October 1, 2018, and be completed by April 30, 2019.
Hazards from bridge span closures and use of the waterway underneath include heavy lift operations, falling equipment and materials, and construction vessels. The Captain of the Port (COTP) Boston has determined that potential hazards associated with the bridge repairs would be a safety concern for anyone in or on Mystic River waters within 150-yards of the bridge. No vessel or person will be permitted to enter the safety zone without obtaining permission from the COTP Boston or a designated representative. The Coast Guard will notify the public through the Massachusetts Bay Harbor Safety Committee meetings, Boston's Port Operators Group meetings, and Local Notice to Mariners. Moreover, the Coast Guard would issue a Safety Marine Information Broadcast via marine channel 16 (VHF-FM) fourteen (14) days in advance of the commencement of the Safety Zone. If the project is completed before April 30, 2019, enforcement of the safety zone will be suspended and notice given to the public to the greatest extent possible.
The purpose of this rulemaking is to protect personnel, vessels and the marine environment from potential hazards created during repairs on the
The Coast Guard proposes to establish a safety zone starting at 12:01 a.m. on October 1, 2018, and to make it effective to 11:59 p.m. on April 30, 2019. The safety zone would cover all navigable waters within 150-yards of the S99 Alford Street Bridge, at mile 1.4 on the Mystic River between Charlestown and Everett Massachusetts. The duration of the zone is intended to ensure the safety of vessels, the maritime public, construction workers, and these navigable waters during the repairs on the S99 Alford Street Bridge over the main channel of the Mystic River. No vessel or person would be permitted to enter the safety zone without obtaining permission from the COTP Boston or a designated representative.
We developed this proposed rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders and we discuss First Amendment rights of protestors.
Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This NPRM has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, the NPRM has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.
This regulatory action determination is based on the size, location, duration, and time-of-year of the safety zone. We expect the adverse economic impact of this proposed rule to be minimal since we will provide ample notice of the safety zone effective dates and vessels will be able to enter safety zone when construction equipment is not occupying the channel. Although this regulation may have some adverse impact on the public, the potential impact will be minimal because boating season for vessels on the Mystic River usually concludes around mid-October and consequently the amount of traffic in this waterway during the effective period for the safety zone is limited.
This safety zone is of similar dimension and a shorter duration to the one established in 2011 (73916 FR/Vol. 77, NO. 239) for the original rehabilitation of the bridge. The regulatory text we are proposing appears at the end of this document.
Notification of the emergency repairs to the Alford Street Drawbridge and the associated safety zone will be made to mariners through the Massachusetts Bay Harbor Safety Committee meetings, Boston's Port Operators Group meetings, and Local Notice to Mariners. Moreover, the Coast Guard would issue a Safety Marine Information Broadcast via marine channel 16 (VHF-FM) fourteen (14) days in advance of the commencement of the Safety Zone. The rule would allow vessels to seek permission to enter the zone when the channel is not being occupy by construction equipment.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities.
If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
This proposed rule would not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this proposed rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this proposed rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this proposed rule has implications for federalism or Indian tribes, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this proposed rule would not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this proposed rule under Department of Homeland Security Directive 023-01 and Commandant Instruction M16475.1D, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This proposed rule
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
We view public participation as essential to effective rulemaking, and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation.
We encourage you to submit comments through the Federal eRulemaking Portal at
We accept anonymous comments. All comments received will be posted without change to
Documents mentioned in this NPRM as being available in the docket, and all public comments, will be in our online docket at
Harbors, Marine safety, Navigation (water), Reporting and recordkeeping requirements, Security measures, Waterways.
For the reasons discussed in the preamble, the Coast Guard proposes to amend 33 CFR part 165 as follows:
33 U.S.C. 1231; 50 U.S.C. 191; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Department of Homeland Security Delegation No. 0170.1.
(a)
(b)
(c)
(d)
(1) No person or vessel may enter or remain in this safety zone without the permission of the COTP Boston or the COTP's designated representatives. However, any person or vessel permitted to enter the safety zone must comply with the directions and orders of the COTP Boston or the COTP's designated representatives.
(2) To obtain permission required by this regulation, individuals may reach the COTP Boston or a COTP designated representative via Channel 16 (VHF-FM) or 617-223-5757 (Sector Boston Command Center).
(3)
Office of Elementary and Secondary Education, Department of Education.
Proposed rule; withdrawal.
The U.S. Department of Education (Department) is withdrawing the notice of proposed rulemaking (NPRM) pertaining to the supplement not supplant requirements under title I, part A of the Elementary and Secondary Education Act of 1965 (ESEA), as amended by the Every Student Succeeds Act (ESSA).
As of July 17, 2018, the proposed regulations published on September 6, 2016, at 81 FR 61148 are withdrawn.
Patrick Rooney, U.S. Department of Education, 400 Maryland Avenue SW, Room 3W202, Washington, DC 20202. Telephone: (202) 453-5514. Email:
If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.
Section 1118(b)(2) of the ESEA, as amended by
Subsequently, on September 6, 2016, the Department published in the
You may also access documents of the Department published in the
Environmental Protection Agency.
Proposed rule.
On November 13, 2017, the State of Georgia through the Georgia Environmental Protection Division (EPD), submitted revisions to the Georgia State Implementation Plan (SIP). The Environmental Protection Agency (EPA) is proposing to approve SIP revisions, which modify the State's air quality regulations as incorporated into the SIP. Specifically, the revisions pertain to definition changes, including the modification of the definition of “volatile organic compounds,” (VOC) and changes to the State's air quality standards for sulfur dioxide (SO
Comments must be received on or before August 16, 2018.
Submit your comments, identified by Docket ID No. EPA-R04-OAR-2018-0116 at
Tiereny Bell, Air Regulatory Management Section, Air Planning and Implementation Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street SW, Atlanta, Georgia 30303-8960. The telephone number is (404) 562-9088. Ms. Bell can also be reached via electronic mail at
In this rulemaking, EPA is proposing to approve changes into the Georgia SIP, submitted by the State on November 13, 2017. The submission revises Rule 391-3-1-.01, “Definitions” by adding t-Butyl acetate (also known as tertiary butyl acetate or TBAC) and 1,1,2,2-Tetrafluoro-1-(2,2,2-trifluoroethoxy) ethane to the list of organic compounds having negligible photochemical reactivity. The definition of VOC is also being updated by removing the recordkeeping requirements for t-Butyl acetate. Finally, the definition of VOC is being revised to include chemical names to clarify previous exemptions. EPA is also proposing to approve changes into the Georgia SIP to amend Rule 391-3-1-.02(4), “Ambient Air Standards,” by updating Georgia's air quality standard to be consistent with the NAAQS. The submittal by the State can be found in the docket for this rulemaking at
Tropospheric ozone, commonly known as smog, occurs when VOC and nitrogen oxides (NO
EPA determines whether a given carbon compound has “negligible” reactivity by comparing the compound's reactivity to the reactivity of ethane. It has been EPA's policy that compounds of carbon with negligible reactivity need not be regulated to reduce ozone and should be excluded from the regulatory definition of VOC.
On November 29, 2004,
Pursuant to CAA section 110(l), the Administrator shall not approve a revision of a plan if the revision would interfere with any applicable requirement concerning attainment and reasonable further progress, or any other applicable requirement of the Act. The State's addition of certain chemical names is approvable under section 110(l) because the revision merely clarifies previous exemptions. The State's addition of exemptions from the definition of VOCs, and the removal of recordkeeping, emissions reporting, photochemical dispersion modeling, and inventory requirements for t-Butyl acetate
The November 13, 2017, SIP submission revises the State's ambient air quality standards to reflect the historical and current NAAQS for SO
Sections 108 and 109 of the CAA govern the establishment, review, and revision, as appropriate, of the NAAQS to protect public health and welfare. The CAA requires periodic review of the air quality criteria—the science upon which the standards are based—and the standards themselves. EPA's regulatory provisions that govern the NAAQS are found at 40 CFR 50—
On June 22, 2010, EPA promulgated a revised primary SO
On July 18, 1997, EPA promulgated a new 24-hour primary and secondary NAAQS for PM
EPA initially established the NAAQS for CO on April 30, 1971. The standards were set at 9 parts per million (ppm), as an 8-hour average, and 35 ppm, as a 1-hour average, neither to be exceeded more than once per year.
On March 27, 2008, EPA promulgated a new 8-hour primary and secondary NAAQS for ozone at a level of 0.075 ppm (the 2008 8-hour Ozone NAAQS), based on an annual fourth-highest maximum 8-hour concentration averaged over three years.
On November 12, 2008, EPA promulgated a new 1-hour primary and secondary NAAQS for Pb at a level of 0.15 μg/m
On February 9, 2010, EPA promulgated a new 1-hour primary NAAQS for NO
EPA has reviewed the revisions to Rule 391-3-1-.02(4) in the November 13, 2017, SIP submission, including the NAAQS updates for SO
In this document, EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, EPA is proposing to incorporate by reference Georgia Rule 391-3-1-.01, “Definitions,” effective July 20, 2017, which revises the definition of VOC; and Rule 391-3-1-.02(4), “Ambient Air Standards,” effective July 20, 2017, which revises the State's ambient air quality standards to be consistent with the NAAQS. EPA has made, and will continue to make, these materials generally available through
EPA is proposing to approve the State of Georgia's November 13, 2017, SIP revisions identified in section II above. These changes are consistent with the CAA.
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations.
• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866.
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
The SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it impose substantial direct costs on tribal governments or preempt tribal law.
Environmental protection, Air pollution control, Carbon monoxide, Incorporation by reference, Intergovernmental relations, Lead, Nitrogen dioxide, Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.
42 U.S.C. 7401
Environmental Protection Agency.
Proposed rule; notice of intent.
The Environmental Protection Agency (EPA) Region 4 is issuing a Notice of Intent to Delete the Whitehouse Oil Pits Superfund Site (Site) located in Whitehouse, Florida, from the National Priorities List (NPL) and requests public comments on this proposed action. This site is also known as the Whitehouse Waste Oil Pits Site. The NPL, promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, is an appendix of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP). The EPA and the State of Florida (State), through the Florida Department of Environmental Protection (FDEP), have determined that all appropriate response actions under CERCLA, other than operations and maintenance, monitoring and five-year reviews, have been completed. However, this deletion does not preclude future actions under Superfund.
Comments must be received by August 16, 2018.
Submit your comments, identified by Docket ID no. EPA-HQ-SFUND-1983-0002 by one of the following methods:
(1)
(2)
(3)
(4)
(1) USEPA Region 4, 61 Forsyth Street SW, Atlanta, GA 30303-8909, Monday through Friday, 7:30 a.m. to 4:30 p.m., Contact Tina Terrell 404-562-8835; and
(2) West Regional Jacksonville Public Library, 1425 Chaffee Rd. S, Jacksonville, FL 32221, Monday-
Rusty Kestle, Remedial Project Manager, Superfund Restoration and Sustainability Branch, Superfund Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street SW, Atlanta, GA 30303-8960, phone 404-562-8819, email:
The EPA announces its intent to delete the Whitehouse Oil Pits Superfund Site from the NPL and requests public comment on this proposed action. The NPL constitutes Appendix B of 40 CFR part 300 which is the NCP, which the EPA promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980, as amended. The EPA maintains the NPL as the list of sites that appear to present a significant risk to public health, welfare, or the environment. Sites on the NPL may be the subject of remedial actions financed by the Hazardous Substance Superfund (Fund). As described in 40 CFR 300.425(e)(3) of the NCP, sites deleted from the NPL remain eligible for Fund-financed remedial actions if future conditions warrant such actions.
The EPA will accept comments on the proposal to delete this site for thirty (30) days after publication of this document in the
Section II of this document explains the criteria for deleting sites from the NPL. Section III discusses procedures that the EPA is using for this action. Section IV discusses the Whitehouse Oil Pits Superfund Site and demonstrates how it meets the deletion criteria.
The NCP establishes the criteria that the EPA uses to delete sites from the NPL. In accordance with 40 CFR 300.425(e), sites may be deleted from the NPL where no further response is appropriate. In making such a determination pursuant to 40 CFR 300.425(e), the EPA will consider, in consultation with the State, whether any of the following criteria have been met:
i. Responsible parties or other persons have implemented all appropriate response actions required;
ii. All appropriate Fund-financed response under CERCLA has been implemented, and no further response action by responsible parties is appropriate; or
iii. The remedial investigation has shown that the release poses no significant threat to public health or the environment and, therefore, the taking of remedial measures is not appropriate.
Pursuant to CERCLA section 121(c) and the NCP, the EPA conducts five-year reviews (FYRs) to ensure the continued protectiveness of remedial actions where hazardous substances, pollutants, or contaminants remain at a site above levels that allow for unlimited use and unrestricted exposure. The EPA conducts such FYRs even if a site is deleted from the NPL. The EPA may initiate further action to ensure continued protectiveness at a deleted site if new information becomes available that indicates it is appropriate. Whenever there is a significant release from a site deleted from the NPL, the deleted site may be restored to the NPL without application of the hazard ranking system.
The following procedures apply to deletion of the Site:
(1) The EPA consulted with the State before developing this Notice of Intent to Delete.
(2) The EPA has provided the State 30 working days for review of this notice prior to publication of it today.
(3) In accordance with the criteria discussed above, the EPA has determined that no further response is appropriate.
(4) The State, through the FDEP, has concurred with deletion of the Site from the NPL.
(5) Concurrently with the publication of this Notice of Intent to Delete in the
(6) The EPA placed copies of documents supporting the proposed deletion in the deletion docket and made these items available for public inspection and copying at the Site information repositories identified above.
If comments are received within the 30-day public comment period on this document, the EPA will evaluate and respond appropriately to the comments before making a final decision to delete. If necessary, the EPA will prepare a responsiveness summary to address any significant public comments received. After the public comment period, if the EPA determines it is still appropriate to delete the Site, the Regional Administrator will publish a final Notice of Deletion in the
Deletion of a site from the NPL does not itself create, alter, or revoke any individual's rights or obligations. Deletion of a site from the NPL does not in any way alter the EPA's right to take enforcement actions, as appropriate. The NPL is designed primarily for informational purposes and to assist the EPA management. Section 300.425(e)(3) of the NCP states that the deletion of a site from the NPL does not preclude eligibility for future response actions, should future conditions warrant such actions.
The following information provides the EPA's rationale for deleting the Site from the NPL:
The Whitehouse Oil Pits Superfund Site is an abandoned waste oil sludge disposal facility located in Whitehouse, about 10 miles west of downtown Jacksonville, Duval County, Florida. The Site occupies seven acres west of Chaffee Road, about four tenths of a mile north of U.S. Highway 90. Between 1958 and 1968, Allied Petro Product, Inc. (Allied), disposed of contaminated acidic waste oil sludge from their oil reclaiming operations in seven unlined pits on the Site. Allied operated the Site as a repository for waste oil sludge and acidic oil re-refinery byproducts from 1958 until 1968. The waste oil recovery process used an acid-clay process to form corrosive by-products including waste-acid tar and spent acidic clays. Allied constructed the first pits in 1958 to dispose of waste oil sludge and acid from its oil reclaiming process, and by 1968 the company had constructed and filled seven pits. The EPA later found that the waste contained Polycyclic Aromatic Hydrocarbons (PAHs), Polychlorinated Biphenyls (PCBs) and heavy metals, which impacted soil, groundwater, surface water and sediment. Allied went bankrupt in 1968 and the pits containing wastes were abandoned; the City of Jacksonville assumed ownership of the Site by tax default.
In 1968, the diking around pit number 7 ruptured and spilled waste into the
After draining water from the pits, the Jacksonville Mosquito Control Branch took measures to stabilize the ponds. Since the remaining viscous waste oil sludge would not support heavy construction equipment, the ponds were backfilled with selected construction debris, scrap lumber, trees, wood chips and non-degradable wastes. A three-inch layer of automobile shredder waste was placed on top of these materials. The liquid portion of the waste oil sludge was pumped off, mixed with a stabilizing agent, and then used as a backfill/sealer over the automobile shredder waste. The relatively impervious layer of stabilizing agent and oil was intended to prevent vertical percolation of rainwater. The stabilizing agent and oil mixture was covered with eight to twelve inches of clean earth (mostly sand). After the project ran out of stabilizing agent, local clay was substituted as a landfill capping material. The Site was then planted with local grasses and ditches were constructed to control drainage.
In 1979, monitoring by the City of Jacksonville showed the continuing release of contaminants to surface water and groundwater which the City of Jacksonville attempted to address by covering the surface and sides of the pits and dike with six inches of low-permeability local clay, followed by twelve inches of topsoil. This cover was revegetated using local grasses. The drainage was modified to control leachate seepage into the ditches. The dikes around the pits were strengthened and drop structures were constructed to control flow velocity and erosion in the ditches. The modified drainage configuration diverted surface water away from the landfill, thus reducing the mechanism for contaminant transport. This second stabilization project was completed during the summer of 1980.
On December 30,1982 (47 FR 58476), the Site was proposed for listing on the EPA's NPL. The Site's listing on the NPL was finalized on September 8, 1983 (48 FR 40865). The Site ID is FLD980602767.
In 1983, the Florida Department of Environmental Regulation (FDER), which is now referred to as the FDEP, completed a remedial investigation (RI) under a cooperative agreement with the EPA. The RI characterized Site wastes and the extent of contamination. The Site's RI showed contamination of soil, groundwater, surface water, and sediment with numerous organic compounds, including PAHs and PCBs, and heavy metals. In 1985, the EPA completed a feasibility study (FS), which evaluated risk and remedial alternatives for the Site. The risk assessment indicated that the greater risk was posed by migration of contaminants into drinking water supplies. Several alternative remedies were considered: No action; no action with groundwater monitoring; excavation with variations that included a treatment or offsite disposal of soil, sludges, and sediment and treatment of groundwater; and excavation, extraction, and treatment supplemented by construction of a barrier wall to contain the remaining contaminated media and prevent its leaching into the groundwater and surface water.
Ultimately, several remedies were required over time to address the contamination or prior remedy failures. The remedies were selected in a 1985 Record of Decision (ROD), revised in an amended ROD (AROD) in 1992, and then further revised in the 1998 AROD based on additional investigations and a treatability study. An Explanation of Significant Differences (ESD) was issued in 2001.
Based on the findings of the 1985 RI/FS, the EPA issued a ROD on May 30, 1985. Remedial action objectives (RAOs) defined in the 1985 ROD included:
1. Prevent further migration of contaminated groundwater into the underlying aquitard.
2. Prevent contamination of the local drinking water supply.
3. Reduce or eliminate migration of contamination to surface water.
4. Eliminate the source sludge, treat the source sludge to a less hazardous or non-hazardous state, or contain the release of the hazardous pollutants offsite.
5. Reduce or eliminate the migration of contaminated soils and sediments.
The remedy components included in the 1985 ROD were:
1. Installation of a slurry wall around the Site, isolating the waste.
2. Recovery and treatment of contaminated groundwater within the walled area, thus contributing to waste isolation.
3. Removal of contaminated sediment from the northeast tributary of McGirts Creek and placement within the isolation area.
4. Construction of a surface cap over the Site to reduce the flow of water into the walled area.
The 1985 ROD did not provide a tabulation of specific remediation goals. However, the goals were generally defined to meet the FDER's drinking water standards and surface water quality criteria. Where no cleanup criteria had been established, the cleanup goals were set at background or minimal risk levels.
The EPA began but suspended implementation of the 1985 remedy for several reasons, including failure of the cap, a determination that the groundwater treatment methodology was inappropriate for the Site, discovery that the analysis of the shallow aquifer was unreliable, and realization that the operations and maintenance costs were grossly underestimated. Moreover, in 1986, Congress amended CERCLA by passing the Superfund Amendments and Reauthorization Act (SARA) which stressed the importance of permanent remedies. As a result, the EPA reevaluated the 1985 remedy and began to search for alternatives that would permanently and significantly reduce the mobility, toxicity, and volume of hazardous substances at the Site. The EPA conducted additional studies between 1989 and 1992. These studies included a baseline risk assessment, a supplemental feasibility study, and a treatability study in 1991 to examine a treatment train of soils washing, biological treatment and stabilization.
The remedy components included in the 1992 AROD were:
1. Excavation of contaminated waste pits.
2. Separation of construction debris, stumps, etc., from contaminated soils and steam cleaning prior to offsite disposal.
3. Volume reduction by soils washing.
4. Biotreatment to biologically degrade wash water contaminants.
5. Stabilization/solidification of biotreated material exceeding cleanup criteria.
6. On-site disposal of washed soils and stabilization/solidification of contaminant fines and sludge.
7. Extraction and treatment of contaminated groundwater using activated carbon and chemical precipitation, with discharge to the northeast tributary of McGirts Creek.
8. Installation and maintenance of a six-inch vegetative cover over the excavated area.
9. Installation and maintenance of a fence around the Site during remedial activities.
10. Implementation of institutional controls (ICs), including deed restrictions.
The 1992 AROD included contingencies if groundwater recovery and treatment were determined to be ineffective. Contingencies included:
1. Containment measures involving engineering controls or long-term gradient controls.
2. Waiver of chemical-specific ARARs for the aquifer based on the technical impracticability of achieving further contaminant reduction.
3. Institutional controls for groundwater.
4. Continued monitoring of on-site and off-site wells.
Cleanup goals were developed for soils and groundwater in the 1992 AROD. Following the signing of the 1992 AROD, the EPA issued special notice letters to initiate negotiations with the potentially responsible parties (PRPs). Because a settlement could not be reached, the EPA proceeded with a fund-lead remedial design. During the design phase for the 1992 AROD remedy, the EPA discovered most of the components of the treatment train identified for source materials would not work. For example, lead concentrations and pH levels encountered in the waste sludge would be toxic to bacteria, rendering biological treatment ineffective. In April 1994, the EPA and the PRPs, the Whitehouse Remedial Action Group (WRAG), signed an Administrative Order on Consent (AOC) under which the PRPs conducted the additional studies. The results of those studies indicated that additional treatability and feasibility studies were required. In January1995, the WRAG agreed to modify the AOC with the EPA to perform the additional work. After completing these additional studies, the WRAG prepared and finalized the supplemental treatability and feasibility study (FS) in July 1997.
Based on the treatability and feasibility study findings in July 1997, the EPA issued an AROD in September 1998 to incorporate elements of the contingency remedy in the 1992 AROD, as well as elements of the original 1985 ROD. The 1998 AROD addressed all contaminated media at the Site by containing the onsite waste sludge, contaminated soils, wetlands, sediment and groundwater. The remedy's function was to isolate the Site as a source of groundwater and surface water contamination and reduce the risks associated with exposure to the contaminated materials.
The major components of the selected remedy included:
1. In-situ stabilization/solidification treatment of lifts 1 (topsoil and clay) and 2 (thin layer of shredded foam rubber and plastic overlying a layer of sawdust, wood chips, dimensional lumber, debris and silty sand) with a geogrid to enhance structural stability.
2. Installation of a slurry wall (slurry wall or geosynthetic sheet pile wall) to isolate and contain contaminated soils, sludge, wetlands, sediments and groundwater.
3. Installation of a lime curtain inside the containment system to adjust groundwater pH.
4. Construction of a low permeability cap over the contained area that meets Resource Conservation and Recovery Act (RCRA) closure requirements under 40 CFR 264.228(a)(2).
5. Realignment of the McGirts Creek tributary to optimize the area of groundwater containment.
6. Extension of the municipal water supply to residents along Machelle Drive and Chaffee Road and plugging of private supply wells.
7. Installation of a permanent security fence around the containment area and installation and maintenance of appropriate storm water management controls.
8. Monitored natural attenuation of contaminated groundwater outside the containment system.
9. Sampling of offsite surface soils and downstream surface water and sediment during design to determine if additional measures are necessary.
10. Imposition of deed restrictions to control future land and groundwater use.
The AROD established cleanup goals for groundwater and soils based on federal or state primary maximum contaminant levels (MCLs) or risk based numbers. These cleanup goals and the source of the cleanup level can be found Tables 8-1 and 8-2 of the Final Risk Assessment, dated September 1, 1991, and Table 2-1 of the Final Remedial Action Report. Soils contaminants of concern addressed by the remedy include organic compounds (Benzene, Benzo(a)pyrene, Bis (2-Ethyl Hexyl) Phthalate, Chlorobenzene, 1,4-Dichlorochlorobenzene, Di-N-Butyl Phthalate, Methylene Chloride, Polychlorinated Biphenyls (PCB) 1260, 2-Methylnaphthalene, Naphthalene, Phenol, Tetrachloroethene, Toluene and Trichloroethene) and inorganic compounds (Antimony, Arsenic, Barium, Cadmium, Chromium, Copper, Lead and Nickel). Groundwater contaminants of concern include organic compounds (Acetone, Benzene, Benzo(a)pyrene, Bis (2-Ehtyl Hexyl) Phthalate, Carbon Disulfide, Di-N-Butyl Phthalate, Ethylbenzene, Methyl Ethyl Ketone, 3/4 Methylphenol, Naphthalene, 2-Methylnaphthalene, Phenol, Toluene, Trichloroethene and Xylene) and inorganic compounds (Antimony, Arsenic, Barium, Cadmium, Chromium, Copper, Lead, Manganese, Nickel, Selenium, Vanadium and Zinc).
An ESD was issued in 2001 to remove the lime curtain from the selected remedy due to concerns that it might adversely affect the sodium based slurry wall. The ESD also increased the size of the slurry wall, size of the cap, and area of the tributary to be realigned based on the discovery of additional contamination.
Remedial action objectives (RAOs) established in the 1985 ROD and adopted in the 1998 AROD address groundwater, surface water, sludge, sediment and soils. The 2001 ESD did not alter the original RAOs. The RAOs include:
1. Prevent further migration of contaminated groundwater into the underlying aquitard.
2. Prevent contamination of the local drinking water supply.
3. Reduce or eliminate migration of contamination to surface water.
4. Eliminate the source sludge, treat the source sludge to a less hazardous or non-hazardous state, or contain the release of the hazardous pollutants off site.
5. Reduce or eliminate the migration of contaminated soils and sediments.
Response actions are discussed above. Construction of the remedy began in 2003 and was completed in May 2007 with the finalization of the Remedial Action Report. The City of Jacksonville, now the owner of the property comprising the Site, entered into a restrictive covenant with FDEP on January 27, 2011. This institutional control restricts activities on the property and the future use of the property.
Groundwater sampling events have occurred at the Site since August 2006 when the first year of operations maintenance and monitoring (OM&M) began and have continued over the last ten years under the thirty-year OM&M Plan. The groundwater levels are determined inside the barrier wall and groundwater levels and monitoring data are collected at monitoring wells outside of the barrier wall. Contaminants 1,4-dichlorobenzene, chlorobenzene, methylene chloride, tetrachloroethene, di-n-butyl phthalate, and PCB-1260 were sampled for during the first quarter of groundwater sampling. The sampling verified that these contaminants were not found at detectable levels outside of the barrier wall and would not require monitoring during future sampling. Manganese has been detected at levels slightly above the State of Florida secondary MCL of 50 ppb upgradient and downgradient of the contaminant source. Therefore, the elevated manganese levels are not thought to be Site related. Monitoring for manganese will continue and action will be taken if levels continue to be elevated and are determined to be Site related. All other groundwater COCs were monitored regularly over the last ten years and their detected levels were below cleanup levels; this includes groundwater arsenic concentrations which have largely been below 1 µg/L. The highest reading was less than 2 µg/L which is well below the current MCL of 10 µg/L. Groundwater is the only media that is monitored at the Site because the remaining contamination in soils and sediment is contained within a barrier wall and cap that prevents lateral contaminant migration.
The OM&M Plan for the Site was approved by the EPA and OM&M activities began in July 2006, and continue to this day. The scope of the OM&M Plan included monthly Site inspections to monitor the following components, except for passive gas management (quarterly) and wetland planting monitoring (semi-annual):
1. Closure cap.
2. Passive gas management system.
3. Storm water management system.
4. Created wetland planting areas.
5. Site security system.
6. Groundwater monitoring system.
In addition to inspecting the remedial components above, the cap is mowed on a quarterly basis. Originally, water levels of wells inside and outside of the barrier wall were monitored on a monthly basis to evaluate the performance of the barrier wall. Groundwater wells were sampled semi-annually for Volatile Organic Compounds (VOCs), Semi-Volatile Compounds (SVOCs) and metals. In April 2013, the EPA and FDEP agreed that sampling could be limited to metals. Now, the monitoring program consists of semi-annual monitoring of 23 wells for metals only and semi-annual water level monitoring of 23 wells and 6 piezometers. At this time, all sampling data are below cleanup criteria. The Site is owned by the City of Jacksonville, which is part of the WRAG PRP group. ICs are maintained by the PRP group through OM&M inspections. City/county zoning and permitting requirements for land and groundwater use in the area add another layer of protection.
Pursuant to CERCLA section 121(c), 42 U.S.C. 9601
The 2014 FYR stated the remedy was protective only in the short term and included two issues and recommendations. The Operations, Maintenance and Monitoring (OM&M) Plan did not include contingency activities to address groundwater overtopping the containment area and internal flow gradients had not been adequately monitored to assess the structural integrity of the containment system. Recommendations were made to continue to monitor metals concentrations in the groundwater and to modify the OM&M Plan. The OM&M Plan was modified in June 2015 to include more specific contingency actions to address groundwater overtopping the containment area and include monitoring of groundwater flow gradients inside and outside the barrier wall to assess the effectiveness of the containment remedy. Monitoring of groundwater for metals continues. Required actions were completed to make the Site protective of human health and the environment. However, the EPA does not consider groundwater overtopping the containment area to be a justifiable concern for several reasons: (1) The average depth of the barrier wall was designed to extend through the full depth of the surficial unconfined aquifer and key into the underlying semi-confining strata (estimated to be 40 ft.), thus, there can be no lateral or vertical movement of groundwater into the containment area; (2) the entire Site is covered with a multi-layered cap system with a permeability of at least 1E-07 intended to shed any rainwater falling on the cap; (3) the cap system has a network of internal drains which carry any flows penetrating the cap to the ditch system surrounding the cap; and (4) there is no evidence that groundwater levels within the barrier wall are trending up. The Site will continue to be monitored as part of the OM&M Plan and the next FYR is due May 2019.
Community involvement activities were undertaken throughout the thirty-year history of the Site in the form of public meetings, FYR interviews and Site update mail-outs. There are currently no major community concerns about the Site. The FYR community involvement process will continue to monitor any potential community concerns.
The residents of the surrounding neighborhood stated in the 2013 Site interviews that they are concerned about periodic flooding that occurs in
The implemented remedy achieves the degree of cleanup and protection specified in the RODs for the Site for all pathways of exposure. The selected remedy at the Site is protective of human health and the environment because all exposure pathways that could result in unacceptable risks are being controlled. Contamination remaining onsite is being contained to the capped portion. The barrier walls were designed and constructed to contain the contamination and prevent any lateral or vertical movement of groundwater in or out of the containment area; ICs are in place in the form of land and groundwater use restrictions. These ICs are in the form of a Declaration of Restrictive Covenant executed between FDEP and the City of Jacksonville. This IC was executed on the 2nd of February 2011, and restricts activities on the property and the future use of the property. All selected remedial and removal actions, remedial action objectives, and associated cleanup goals are consistent with the EPA policy and guidance; the EPA has followed the procedures required by 40 CFR 300.425(e) and these actions, objectives and goals have all been achieved and, therefore, no further Superfund response is needed to protect human health and the environment.
Environmental protection, Air pollution control, Chemicals, Hazardous substances, Hazardous waste, Intergovernmental relations, Penalties, Reporting and recordkeeping requirements, Superfund, Water pollution control, Water supply.
33 U.S.C. 1321(d); 42 U.S.C. 9601-9657; E.O. 13626, 77 FR 56749, 3 CFR, 2013 Comp., p. 306; E.O. 12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR 2923, 3 CFR, 1987 Comp., p. 193.
Environmental Protection Agency (EPA).
Proposed rule; notification of intent.
The Environmental Protection Agency (EPA) Region 5 is issuing a Notice of Intent to Delete Operable Unit 3 (OU3) of the Naval Industrial Reserve Ordnance Plant (NIROP) Superfund Site (Site), located in Fridley, Minnesota, from the National Priorities List (NPL) and requests public comments on this proposed action. The NPL, promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, is an appendix of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP). EPA and the State of Minnesota, through the Minnesota Pollution Control Agency (MPCA), have determined that all appropriate response actions at the OU, identified under CERCLA, other than operation, maintenance, and five-year reviews, have been completed. However, this partial deletion does not preclude future actions under Superfund. This partial deletion pertains to the OU3 portion of the NIROP Site, which includes all the unsaturated soils underlying the former Plating Shop Area of the NIROP Superfund Site.
Comments must be received by August 16, 2018.
Submit your comments, identified by Docket ID no. EPA-HQ-SFUND-1989-0007, by mail to Randolph Cano, NPL Deletion Coordinator, U.S. Environmental Protection Agency Region 5 (SR-6J), 77 West Jackson Boulevard, Chicago, IL 60604. Comments may also be submitted electronically or through hand delivery/courier by following the detailed instructions in the
Randolph Cano, NPL Deletion Coordinator, U.S. Environmental Protection Agency Region 5 (SR-6J), 77 West Jackson Boulevard, Chicago, IL 60604, (312) 886-6036, email:
In the “Rules and Regulations” section of this issue of the
For additional information, see the direct final Notice of Partial Deletion which is located in the “Rules and Regulations” section of this issue of the
Environmental protection, Air pollution control, Chemicals, Hazardous waste, Hazardous substances, Intergovernmental relations, Penalties, Reporting and recordkeeping requirements, Superfund, Water pollution control, Water supply.
33 U.S.C. 1321(d); 42 U.S.C. 9601-9657; E.O. 13626, 77 FR 56749, 3 CFR, 2013 Comp., p. 306; E.O. 12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR 2923, 3 CFR, 1987 Comp., p. 193.
Environmental Protection Agency (EPA).
Proposed rule; notice of intent.
The Environmental Protection Agency (EPA) Region III is issuing a Notice of Intent to Delete the Dorney Road Landfill Superfund Site (Site) located in Longswamp and Upper Macungie Townships, in Berks and Lehigh Counties, Pennsylvania from the National Priorities List (NPL) and requests public comments on this proposed action. The NPL, promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, is an appendix of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP). The EPA and the Commonwealth of Pennsylvania (the Commonwealth), through the Pennsylvania Department of Environmental Protection (PADEP), have determined that all appropriate response actions under CERCLA, other than operation and maintenance (O&M), monitoring, and Five-Year Reviews, have been completed. However, this deletion would not preclude future actions under Superfund.
Comments must be received by August 16, 2018.
Submit your comments, identified by Docket ID No. EPA-HQ-SFUND-2005-0011, by one of the following methods:
•
•
•
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David Greaves, Remedial Project Manager, U.S. Environmental Protection Agency, Region 3, 3HS211650 Arch Street Philadelphia, PA 19103, (215) 814-5729, email:
EPA Region III announces its intent to delete the Dorney Road Landfill Superfund Site from the National Priorities List (NPL) and requests public comment on this proposed action. The NPL constitutes Appendix B of 40 CFR part 300 which is the National Oil and Hazardous Substances Pollution Contingency Plan (NCP), which EPA promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended. EPA maintains the NPL as the list of sites that appear to present a significant risk to public health, welfare, or the environment. Sites on the NPL may be the subject of remedial actions financed by the Hazardous Substance Superfund (Fund). As described in 40 CFR 300.425(e)(3) of the NCP, sites deleted from the NPL remain eligible for Fund-financed remedial actions if future conditions warrant such actions.
EPA will accept comments on the proposal to delete this Site for thirty (30) days after publication of this document in the
Section II of this document explains the criteria for deleting sites from the NPL. Section III discusses procedures that EPA is using for this action. Section IV discusses the Dorney Road Landfill Superfund Site and demonstrates how it meets the deletion criteria.
The NCP establishes the criteria that EPA uses to delete sites from the NPL. In accordance with 40 CFR 300.425(e), sites may be deleted from the NPL where no further response is appropriate. In making such a determination pursuant to 40 CFR 300.425(e), EPA will consider, in consultation with the Commonwealth, whether any of the following criteria have been met:
i. Responsible parties or other persons have implemented all appropriate response actions required;
ii. all appropriate Fund-financed response under CERCLA has been implemented, and no further response action by responsible parties is appropriate; or
iii. the remedial investigation has shown that the release poses no significant threat to public health or the environment and, therefore, the taking of remedial measures is not appropriate.
Pursuant to CERCLA section 121(c) and the NCP, EPA conducts five-year reviews to ensure the continued protectiveness of remedial actions where hazardous substances, pollutants, or contaminants remain at a site above levels that allow for unlimited use and unrestricted exposure. EPA conducts such five-year reviews even if a site is deleted from the NPL. EPA may initiate further action to ensure continued protectiveness at a deleted site if new information becomes available that indicates it is appropriate. Whenever there is a significant release from a site deleted from the NPL, the deleted site may be restored to the NPL without application of the hazard ranking system.
The following procedures apply to deletion of the Site:
(1) EPA consulted with the Commonwealth before developing this Notice of Intent to Delete.
(2) EPA has provided the Commonwealth 30 working days for review of this notice prior to publication of it today.
(3) In accordance with the criteria discussed above, EPA has determined that no further response is appropriate.
(4) The Commonwealth of Pennsylvania, through the Pennsylvania Department of Environmental Protection (PADEP), has concurred with deletion of the Site from the NPL.
(5) Concurrently with the publication of this Notice of Intent to Delete in the
(6) The EPA placed copies of documents supporting the proposed deletion in the deletion docket and made these items available for public inspection and copying at the Site information repositories identified above.
If comments are received within the 30-day public comment period on this document, EPA will evaluate and respond appropriately to the comments before making a final decision to delete. If necessary, EPA will prepare a Responsiveness Summary to address any significant public comments received. After the public comment period, if EPA determines it is still appropriate to delete the Site, the Regional Administrator will publish a final Notice of Deletion in the
Deletion of a site from the NPL does not itself create, alter, or revoke any individual's rights or obligations. Deletion of a site from the NPL does not in any way alter EPA's right to take enforcement actions, as appropriate. The NPL is designed primarily for informational purposes and to assist EPA management. Section 300.425(e)(3) of the NCP states that the deletion of a site from the NPL does not preclude eligibility for future response actions, should future conditions warrant such actions.
The following information provides EPA's rationale for deleting the Site from the NPL:
EPA proposed the Dorney Road Landfill Superfund Site (Site) (CERCLIS ID PAD980508832) to the NPL on September 8, 1983 (48 FR 40674) and added the Site as final on the NPL on September 21, 1984 (49 FR 37070). The Site is located along the southwest boundary of Upper Macungie Township in Lehigh County, PA, with a small portion of the Site extending into Longswamp Township in Berks County.
The 27-acre Site consists of an abandoned iron mine pit that was used as a landfill, a surrounding soil berm, and adjacent land. Beginning in 1962, the Site was operated as an open dump, with the majority of waste disposed in an abandoned mine pit. The landfill was expanded to except a variety of household and industrial waste from regional municipalities and local businesses, until operations ceased in December 1978.
In all areas of the Site, except for the northwestern portion, the water table occurs in the bedrock near or below the bedrock/overburden interface. The overburden is approximately 70 feet thick. The landfill waste is contained within the overburden. The water table exists within the overburden areas of relatively thick overburden and in the bedrock where the overburden is relatively thin. The water table is not in contact with the waste material. The direction of regional groundwater flow in the bedrock-overburden aquifer is generally from the northwest to the southeast.
In January 1970, the Pennsylvania State Health Center notified the landfill owner that the landfill constituted a public health threat and required the owner to compact the fill and apply cover to the landfill. A follow-up letter stated that the owner did not comply with the directive. In June 1970, a representative from the Pennsylvania Department of the Environmental Resources (PADER, formerly, the Pennsylvania State Health Center) visited the landfill and noted the approximate location of an on-site area used for the disposal of sludge. Other visits identified the disposal of petroleum products, asbestos, and battery casings.
Contaminants in the leachate and groundwater included ketones, vinyl chloride, trichloroethene (TCE), benzene, heavy metals, and arsenic. Soils contained the pesticide dieldrin, as well as lead and chromium. The apparent source of contamination was the waste buried and dumped on the soil at the landfill.
In 1986, EPA performed an Emergency Removal Action at the Site to ensure that landfill-related materials were not transported off of the property by storm water. The removal action consisted of re-grading the Site to prevent surface water runoff. The construction of on-site ponds allowed for controlled discharge of surface water via two major spillways. Although a soil cover was applied to portions of the Site, the landfill had never been graded and capped, and waste continued to be exposed in some areas.
The Site consists of two operable units (OUs). OU1 addresses the source of the contamination by capping the landfill. OU2 focuses on addressing
A Cooperative Agreement was signed between EPA and PADER, and PADER became the lead agency for work in the RI/FS phase. The OU1 RI was performed from January to June 1988. Due to difficulties encountered during Phase I activities, additional data needs were identified and investigative activities were proposed as a Phase II RI effort. Results of the OU1 RI were presented in the Final Remedial Investigation Report for OU1 dated August 11, 1988. A Feasibility Study for OU1, focusing on the landfill waste, was also submitted in August 1988. The OU2 RI/FS was performed by PADER from March to July 1991. The study focused on the groundwater and primarily consisted of additional sampling of wells installed during the OU1 RI.
Major field activities conducted during Phase I of the OU1 RI included:
• Air sampling;
• On-site surface water and seep sampling;
• On-site sediment sampling;
• On-site and off-site, surface and subsurface soil sampling;
• Monitoring well installation;
• Groundwater monitoring well and residential well sampling;
• Hydraulic conductivity testing;
• Fracture trace analysis;
• Surface geophysical investigation.
The major field activities performed during Phase II of the OU1 RI included:
• Installed one deep well off-site (MW-6) to the southeast to obtain downgradient groundwater data.
• Installed an off-site well nest (MW-7/7D) to the northwest of the landfill to provide additional groundwater quality data and flow information.
• Installed on-site boring (TB-LMW-4) to determine the thickness of gravel between the base of the refuse and the top of the bedrock.
• Installed four borings (TB-1,2,3,4) along the southeast corner of the site to identify the presence or absence of a shallow groundwater zone identified during the OU1 Phase I RI.
• Obtained six additional groundwater samples (MW-6, 7, 7D, two rounds) and analyzed for unfiltered metals.
• Performed borehole geophysics in off-site wells (MW-2D, 3D, 4, 5D, 6, 7, 7D). Borehole geophysics were performed to supplement the minimal lithological data obtained during the OU1 Phase 1 and Phase II RI drilling and well installation activities due to difficulty in drilling and poor recoveries.
Air sampling was performed to determine the quantity and quality of ambient airborne contaminants to evaluate the potential exposure to on-site workers and neighboring populations. The data was used to determine the appropriate level of protection on-site, and to establish the exclusion, contamination reduction, and support zone delineations used during the field activities.
A fracture trace analysis was performed to provide information on the number, size, frequency and orientation of bedrock joints, fractures, and large-scale lineaments. The data was used for determining monitoring well locations and for evaluation of the potential for contaminant migration through bedrock.
A geophysical investigation (seismic refraction survey) was performed to obtain information on the thickness of overburden and the depth to bedrock, the thickness of the landfill waste, the condition of the bedrock at the iron mine pit, and to verify any lineaments previously identified.
Sampling and analysis of the on-site ponds was performed to collect data on the contaminant concentrations in the standing liquid and bottom sediments. The data was used to estimate the extent and degree of contamination and estimate the volumes of liquid and soil to be treated and/or removed.
Soil sampling was performed to provide data on the chemical characteristics of soils both on-site and off-site, to determine the degree of off-site migration of contamination, and to provide data concerning the on-site vertical and horizontal extent of contamination. For comparison to on-site data, a background sample was collected approximately 900 ft. west of the Site and was assumed to be isolated from any site-related conditions. On-site soils exceeded EPA's acceptable levels for both cancer risk and non-cancer hazard index primarily due to polycyclic aromatic hydrocarbons (PAHs), arsenic, lead and chromium. Contaminants in leachate and groundwater included ketones, 1,1-dichloroethene (1,1-DCE), 1,2-dichloroethane (1,2-DCA), TCE, tetrachloroethylene (PCE), vinyl chloride, benzene and arsenic. Both cancer and non-cancer groundwater risk substantially exceeded EPA's acceptable criteria. Risk at the Site was due to dermal contact and incidental ingestion of landfill soil, solid waste and on-site ponded waters (OU1) and residential exposure via ingestion of contaminated groundwater and inhalation of volatile contaminants while showering (OU2).
On September 29, 1988, the Acting Regional Administrator signed a Record of Decision (ROD) for OU1. The Selected Remedy in the 1988 OU1 ROD consists of the following components:
The Remedial Action objectives (RAOs) were not explicitly stated in the ROD for OU1. The following RAOs were inferred:
• Control contaminant migration off-site by containment of contaminated landfill soil and waste material;
• Prevent dermal contact and incidental ingestion; and
• Prevent continued leaching of precipitation and ponded waters through the contaminated landfill material.
On September 18, 1991, the Regional Administrator signed an Explanation of Significant Differences (ESD) for OU1. The 1991 ESD was issued to address compliance with wetlands Applicable or Relevant and Appropriate Requirements (ARARs). The Selected Remedy in the 1988 OU1 ROD required the destruction of approximately seven acres of wetlands during construction of the cap. The 1991 ESD allowed the sedimentation ponds required to control run-on/run-off from the cap to also mitigate the destroyed wetlands and become a quality habitat for the varied wildlife at the Site.
On September 30, 1991, the Regional Administrator signed a ROD for OU2 (1991 OU2 ROD), selecting a remedy with the following major components:
• Wellhead treatment units to be provided to residences if levels of site-related contaminants exceeded federal Maximum Contaminant Levels (MCLs);
• Groundwater monitoring.
The RAO for OU2 was not explicitly stated in the 1991 OU2 ROD; however, the RAO is inferred to be to eliminate exposure to contaminated groundwater.
In September 1990, EPA issued a Unilateral Administrative Order (UAO), EPA Docket No. III-90-45-DC, to seven Potentially Responsible Parties (PRPs) after negotiations were unsuccessful. A second UAO, EPA Docket No. III-91-26-DC, was issued to an eighth PRP on January 25, 1991, and a third UAO, EPA Docket No. III-92-33-DC, was issued to five additional PRPs on August 13, 1992. The UAOs required the PRPs to implement the Selected Remedy described in the 1988 OU1 ROD. The
The Remedial Action (RA) for OU1 began in April 1998. The major components of the RA included the following:
• Site clearing which included removal of ponded water, clearing of vegetative cover, chipping woody vegetation, and relocation of fugitive surface debris under the cover system;
• Monitoring well abandonment;
• Gas trench construction, which was designed to minimize the lateral flow of landfill gas outside the landfill limits below the surface. The design included a peripheral gas collection trench just beyond the lateral extent of the landfill;
• Landfill regrading to achieve the grades and slopes for the acceptance of the cover system;
• Subgrade preparation which involved grading and placement of compacted general fill;
• Construction of a gas vent layer on top of the landfill. A geocomposite was used as a gas vent layer on the side slopes of the landfill.
• Gas vent collection piping system consisting of flexible 4-inch perforated High Density Polyethylene (HDPE) pipe along the top of the gas trench connected to seventeen 4-inch HDPE conveyance pipes which were connected to seventeen peripheral passive vents along the crest of the cap. On the surface of the cap, an additional fourteen passive vents were installed with four horizontal perforated flexible HDPE feeder pipes to collect the gas and vent it passively through vent pipes;
• A geotextile was placed over the gas venting layer prior to installation of the grading layer;
• Two types of geomembrane were installed. A 40-millimeter smooth HDPE geomembrane was installed where the slopes were minimal and a 40-millimeter textured HDPE geomembrane was installed on the embankment slopes along the periphery of the landfill;
• On the top of the landfill, a geotextile cushion layer was placed over the geomembrane to protect it from the overlying sand drainage layer;
• A sand drainage layer was put in place and another separation geotextile was put on top of the drainage layer;
• An 18-inch layer of compacted general fill on the cover system and 24-inches of general fill on the cover system slopes serve as protection layer over the underlying system;
• A vegetative layer was the final cover;
• Surface drainage was designed with five basic drainage patterns. These patterns were rough graded during initial landfill grading operations and incorporated as part of the temporary erosion sediment control plan. Permanent drainage incorporated the use of stormwater pipes, riprap channels and natural drainage systems;
• A replacement wetland was constructed, which also serves as a stormwater drainage area; and
• A chain link security fence was installed with proper signage.
The contractor conducted the RA basically as designed, with only minor modifications. One modification had to be made for the construction of the wetlands. The west pond contained a large rock which had to be excavated with a rock hammer and processed using a rock crusher. This generated approximately 30,000 cubic yards of fill that was used on the general fill layer of the landfill cap. Another modification was with the placement of the fence on Dorney Road. A variance was needed from the Township to construct the fence closer to the street than 6 feet in order to avoid puncturing the cap with the fence posts. The variance was granted and the fence was installed according to the specifications.
EPA, PADEP and the U.S. Army Corps of Engineers (COE) conducted a pre-final inspection on September 20, 1999. The inspection resulted in a schedule for the contractor to correct some minor construction items.
EPA issued a UAO for the OU2 RD/RA, EPA Docket No. III-92-27-DC, to twelve PRPs on August 18, 1992. The baseline residential well sampling for OU2 was conducted during the first two weeks of March 1999. The 1991 OU2 ROD and RD required residential groundwater samples to be compared to federal MCLs. If the sampling results were above the MCLs, wellhead treatment units would be required. The baseline results were below the MCLs at all residential wells and no wellhead treatment units were installed. Residential monitoring is ongoing. The operation and maintenance plans (O&M Plans) for OU1 and OU2 were approved by EPA and PADEP in October 1997 and September 1996, respectively. The Preliminary Closeout Report (PCOR) was issued for the Site on September 28, 1999. The PCOR documents that construction activities were completed at the Site in accordance with
Groundwater monitoring is performed in accordance with the 1988 OU1 ROD and 1995 OU1 O&M Plan at the landfill monitoring well network and in accordance with the 1991 OU2 ROD and 1996 O&M Plan at the residential well monitoring network.
Landfill monitoring is conducted to detect any changes in groundwater quality due to leaching of landfill contaminants. The landfill monitoring network consists of the following wells: MW-2S, MW-2DR, MW-3S, MW-7S, MW-11S and MW-11D. During each sampling event, groundwater samples are analyzed for volatile organic compounds (VOCs) and dissolved metals. Field activities, groundwater elevation data, groundwater quality data and the results of the data validation are presented in each summary report. A summary of all historical data is also presented in the summary reports.
During the 2013-2017 period, several metals were detected in the landfill monitoring wells. The detected VOCs included PCE, TCE, and chloromethane. All detections during the 2013-2017 period were within the historical range of concentrations and remain very low. Most are well below MCLs except for manganese, mercury and thallium in MW-7S and thallium in MW-3S. MW-7S is up gradient of the landfill and these exceedances do not appear to be site related. Thallium was only detected in MW-3S during two sampling events in 2016, but had not been detected previously or in subsequent sampling events. Based on a review of historical monitoring from 2013 to 2017 from all other monitoring wells, there have been no exceedances of MCLs during this period.
The 1988 OU1 ROD did not select chemical-specific ARARs for groundwater. Instead, the 1988 OU1 ROD required groundwater monitoring upgradient and downgradient of the Site to detect any changes in groundwater quality due to the potential leaching of landfill contaminants into groundwater. As indicated above, detections of Site-related compounds in groundwater are generally below the respective MCLs and have remained consistent with historic groundwater sampling results. Therefore, no impacts to groundwater as a result of leaching of landfill contaminants have been observed and the groundwater cleanup goal established in the 1988 OU1 ROD has been achieved.
Residential wells are sampled quarterly on a rotating basis so the same wells are not sampled every event. Groundwater samples are collected from an inside or outside spigot and analyzed for VOCs. Twenty-eight residential wells were sampled between the 2013 and 2017. Of those 28 wells, 14 wells
The 1991 OU2 ROD waived the Pennsylvania Hazardous Waste Management Regulations [25 PA Code §§ 264.90-264.100, specifically 25 PA Code § 264.97(i) and (j) and § 264.100(a)(9)], which require remediation of groundwater to background levels, as well as the requirement to remediate groundwater to federal Maximum Contaminant Levels (MCLs) under the Safe Drinking Water Act, 42 U.S.C. 300g-l and set forth in 40 CFR 141.61. These ARARs were waived in accordance with CERCLA (42 U.S.C. 9621(d)(4)(C)) and the NCP (40 CFR 300.430(f)(1)(ii)(C)(3)) due to technical impracticability of achieving background levels (from an engineering perspective) and MCLs throughout the groundwater contaminant plume. As indicated above, detections of Site-related compounds in groundwater are generally below the respective MCLs in Site monitoring wells.
The 1991 OU2 ROD required that MCLs be met for Site related contaminants of concern (COCs) at the tap prior to use of the groundwater by nearby residents. Wellhead treatment systems would be provided if any Site related MCL exceedances were identified. As indicated above, no Site-related compounds exceeded MCLs in any residential samples during the most recent Five-Year Review period from 2013 to 2017. Additionally, no Site related COCs have been identified in any residential samples above MCLs since sampling began in 1999. Therefore, the RAO of eliminating exposure to contaminated groundwater has been achieved. Residential monitoring will continue to ensure that groundwater cleanup goals continue to be met.
The PRP group conducts long-term monitoring and maintenance activities at the Site in accordance with the EPA-approved August 1995 OU1 O&M Plan and January 1996 OU2 O&M Plan. The primary activities associated with O&M include the following:
• Visual inspection of the cap with regard to vegetative cover, settlement, stability, and any need for corrective action. In addition, the cap is scheduled for periodic mowing;
• Inspection of the drainage swales for blockage, erosion and instability, and any need for corrective action;
• Inspection of the condition of the groundwater monitoring wells;
• Quarterly groundwater monitoring, which includes monitoring of the landfill wells and residential wells; and
• Engineered wetlands inspection and assessment. Inspections are conducted primarily for the purposes of assessing both weed control needs and the survival of plantings. Assessments are performed to determine if engineered wetlands are meeting the performance standards regarding survival and density of the desired wetlands species.
The City of Allentown conducts the quarterly inspections of the landfill, as well as the quarterly groundwater sampling of both the landfill wells and the residential wells. Over the last five years there have been few, if any, problems with the landfill.
As established in the 1991 OU2 ROD, long-term monitoring is conducted on a quarterly basis at five residences selected based on the previous sampling results. The quarterly sampling is conducted by the City of Allentown. The quarterly sampling program may be modified by EPA, in such areas as the number of wells, location of wells, frequency of sampling, and analytical parameters. If quarterly sampling indicates that a residential well that exceeds MCLs, a wellhead treatment system would be provided and maintained. There have been no quarterly residential samples which have been above MCLs since sampling began in March 1999.
In March of 2007 EPA issued a second ESD (2007 ESD) that required institutional controls (ICs) (
The ICs were established to prevent the disturbance of the landfill cap and the installation of groundwater wells on the capped portion of the Dorney Road Landfill property and to prevent future use of the property that would compromise the effectiveness of the Selected Remedy.
EPA surveyed the landfill property to determine the parcel boundaries and to confirm the current property owners in 2011. An assessment of the ICs already in place concluded that ICs to protect the integrity of the cap cover system and prevent the installation of drinking water wells on the landfill were implemented by the following instruments with the four Site owners:
Pursuant to CERCLA section 121(c) and as provided in the current guidance on Five-Year Reviews,
No issues or recommendations were identified in the 2018 Fourth Five-Year Review. The Protectiveness Statement in the 2018 Fourth Five-Year Review was as follows:
The remedies in place at the Site are protective of human health and the environment. The landfill cap prevents direct contact with site contamination and prevents migration of contaminants to groundwater. Groundwater contamination is stable in landfill wells with most contaminants below MCLs. Residential monitoring indicates site contaminants remain below MCLs. The institutional controls in place are adequate to protect the engineered remedy and prevent installation of drinking water wells on the landfill.”
EPA community relations staff conducted an active campaign to ensure that the residents were well informed about activities at the Site. Community relations activities included the following:
In accordance with the requirements of 40 CFR 300.425(e)(4), EPA's community involvement activities associated with this deletion will consist of information supporting the deletion docket in the local Site information repository and placing a public notice of EPA's intent to delete the Site from the NPL in the
Construction of the Selected Remedy at the Site has been completed and O&M has been untaken and is still ongoing in accordance with the EPA-approved O&M Plans. All RAOs, Performance Standards, and cleanup goals established in the 1988 OU1 ROD, 1991 OU2 ROD, 1991 ESD and 2007 ESD have been achieved and the Selected Remedy is protective of human health and the environment. No further Superfund response actions, other than O&M, monitoring, and Five-Year Reviews, are necessary to protect human health and the environment.
The procedures specified in 40 CFR 300.425(e) have been followed for the deletion of the Site. EPA, with concurrence of the Commonwealth through PADEP, has determined that all appropriate response actions under CERCLA, have been completed. Therefore, EPA is deleting the Site from the NPL.
Environmental protection, Air pollution control, Chemicals, Hazardous waste, Hazardous substances, Intergovernmental relations, Penalties, Reporting and recordkeeping requirements, Superfund, Water pollution control, Water supply.
33 U.S.C. 1321(d); 42 U.S.C. 9601-9657; E.O. 13626, 77 FR 56749, 3 CFR, 2013 Comp., p. 306; E.O. 12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR 2923, 3 CFR, 1987 Comp., p. 193.
Environmental Protection Agency.
Proposed rule; notice of intent.
The Environmental Protection Agency (EPA) Region 4 is issuing a Notice of Intent to Delete the Davis Timber Company Superfund Site (Site) located in Hattiesburg, Lamar County, Mississippi, from the National Priorities List (NPL). The NPL, promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, is an appendix of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP). The EPA and the State of Mississippi (State), through the Mississippi Department of Environmental Quality (MDEQ), have determined that all appropriate response actions under CERCLA, other than operations and maintenance and five-year reviews, have been completed. However, this deletion does not preclude future actions under Superfund.
Comments must be received by August 16, 2018.
Submit your comments, identified by Docket ID no. EPA-HQ-SFUND-2000-0003, by one of the following methods:
(1)
(2)
(3)
(4)
(1) USEPA Region 4, 61 Forsyth Street SW, Atlanta, Georgia 30303-8960, Monday-Friday 7:30 a.m.-4:30 p.m., Contact Tina Terrell 404-562-8835; and
(2) Oak Grove Public Library (in the Reference Section) 4958 Old Highway 11, Hattiesburg, Mississippi, 39402, Monday-Friday 9:00 a.m.-6:00 p.m.; and Saturdays 10:00 a.m. to 2:00 p.m.; Phone: 601-296-1620.
Scott Martin, Remedial Project Manager, Superfund Restoration and Sustainability Branch, Superfund Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street SW, Atlanta, Georgia 30303-8960, phone 404-562-8916, email:
The EPA announces its intent to delete the Davis Timber Company Superfund Site from the NPL and requests public comment on this proposed action. The NPL constitutes Appendix B of 40 CFR part 300 which is the NCP, which the EPA promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980, as amended. The EPA maintains the NPL as the list of sites that appear to present a significant risk to public health, welfare, or the environment. Sites on the NPL may be the subject of remedial actions financed by the Hazardous Substance Superfund (Fund). As described in 40 CFR 300.425(e)(3) of the NCP, sites deleted from the NPL remain eligible for Fund-financed remedial actions if future conditions warrant such actions.
The EPA will accept comments on the proposal to delete this site for thirty (30) days after publication of this document in the
Section II of this document explains the criteria for deleting sites from the NPL. Section III discusses procedures that the EPA is using for this action. Section IV discusses the Davis Timber Superfund Site and demonstrates how it meets the deletion criteria.
The NCP establishes the criteria that the EPA uses to delete sites from the NPL. In accordance with 40 CFR 300.425(e), sites may be deleted from the NPL where no further response is appropriate. In making such a determination pursuant to 40 CFR 300.425(e), the EPA will consider, in consultation with the State, whether any of the following criteria have been met:
i. Responsible parties or other persons have implemented all appropriate response actions required;
ii. All appropriate Fund-financed response under CERCLA has been implemented, and no further response action by responsible parties is appropriate; or
iii. The remedial investigation has shown that the release poses no significant threat to public health or the environment and, therefore, the taking of remedial measures is not appropriate.
Pursuant to CERCLA section 121(c) and the NCP, the EPA conducts five-year reviews (FYRs) to ensure the continued protectiveness of remedial actions where hazardous substances, pollutants, or contaminants remain at a site above levels that allow for unlimited use and unrestricted exposure. The EPA conducts such FYRs even if a site is deleted from the NPL. The EPA may initiate further action to ensure continued protectiveness at a deleted site if new information becomes available that indicates it is appropriate. Whenever there is a significant release from a site deleted from the NPL, the deleted site may be restored to the NPL without application of the hazard ranking system.
The following procedures apply to deletion of the Site:
(1) The EPA consulted with the State before developing this Notice of Intent to Delete.
(2) The EPA has provided the State 30 working days for review of this notice prior to publication of it today.
(3) In accordance with the criteria discussed above, the EPA has determined that no further response is appropriate.
(4) The State, through the MDEQ, has concurred with deletion of the Site from the NPL.
(5) Concurrently with the publication of this Notice of Intent to Delete in the
(6) The EPA placed copies of documents supporting the proposed deletion in the deletion docket and made these items available for public inspection and copying at the Site information repositories identified above.
If comments are received within the 30-day public comment period on this document, the EPA will evaluate and respond appropriately to the comments before making a final decision to delete. If necessary, the EPA will prepare a responsiveness summary to address any significant public comments received. After the public comment period, if the EPA determines it is still appropriate to delete the Site, the Regional Administrator will publish a final Notice of Deletion in the
Deletion of a site from the NPL does not itself create, alter, or revoke any individual's rights or obligations. Deletion of a site from the NPL does not in any way alter the EPA's right to take enforcement actions, as appropriate. The NPL is designed primarily for informational purposes and to assist the EPA management. Section 300.425(e)(3) of the NCP states that the deletion of a site from the NPL does not preclude eligibility for future response actions, should future conditions warrant such actions.
The following information provides the EPA's rationale for deleting the Site from the NPL.
The Davis Timber Company Site is located at 107 Jackson Road, approximately 6 miles northwest of Hattiesburg, in Lamar County, Mississippi. The Davis Timber Company produced treated pine poles, pilings, and timber at the Site from 1972 to 1987. Operations at the Site included bark removal, treatment of wood with pentachlorophenol (PCP), and product storage. The Site is approximately 30 acres and was comprised of a scragg mill, debarker, pole peeler, office and shop, treatment cylinder, cooling pond, oil storage tank, two aboveground PCP-solution storage tanks, a storage yard, and a large former PCP and waste bark Impoundment (Impoundment).
Surface soil on the Site consists of a very thin layer of sandy clay, which overlies a very thick clay unit, the Hattiesburg formation, that inhibits
Between December 1974 and January 1987, the MDEQ documented six fish kills in Country Club Estates Lake. Several of the fish kills were attributed to documented releases of PCP from the Impoundment. In 1987, MDEQ ordered Davis Timber Company to discontinue wood preserving operations. According to MDEQ, Davis Timber Company subsequently declared bankruptcy in 1990. Since 1987, Mississippi officials collected fish from Country Club Estates Lake seven times and analyzed the fish tissue for dioxin compounds. In 1989, after obtaining the first set of fish tissue data, MDEQ issued an advisory against both commercial fishing and consumption of fish caught in Country Club Estates Lake due to the high levels of dioxin compounds in the fish tissue. In 1989, the Agency for Toxic Substances and Disease Registry (ATSDR) was petitioned by the MDEQ to conduct a public health assessment at Country Club Estates Lake on behalf of the residents of Country Club Estates. In that public health assessment, released in January 1993, ATSDR classified Country Club Estates Lake as a public health hazard because of concentrations of PCP and chlorinated dibenzodioxins (dioxins) and dibenzofurans (furans) detected in the Lake. In July 2000, MDEQ collected fish from Country Club Estates Lake. According to these sampling results, dioxin levels in fish from Country Club Estates Lake declined below 5 pg/g, which is Mississippi's lower limit for issuing consumption advisories for dioxin. In June 2001, Mississippi officials lifted the ban on consumption of fish caught near the Site because dioxin levels in fish showed a significant decrease over a 10-year period.
The Site was proposed as a NPL Site on May 11, 2000 (65 FR 30489). It was finalized as a NPL Site in July 2000 (65 FR 46096). The EPA's Identification Number is MSD046497012.
The Remedial Investigation (RI) was conducted by the EPA Region 4 Science and Ecosystem Support Division (SESD) between May 2000 and September 2001. During this period, SESD collected 30 subsurface soil samples, 6 groundwater samples, 51 sediment samples, 11 surface water samples, 27 surface soil samples, and multiple fish tissue samples (individual and composite). The Site was divided into 49 grids measuring 200-ft by 200-ft except in the central-northern portion of the Site, which was divided into 100-ft by 100-ft grids. A 3 to 5-point composite surface sample was collected from each grid and a subsurface sample was collected from the center of each grid at a depth of 18 to 24 inches.
Contamination was delineated based on those constituents detected at concentrations exceeding the EPA Region 9 Preliminary Remediation Goals (PRGs) and/or Federal Maximum Contaminant Levels (MCLs) for surface water and groundwater; or human health risk-based Region 4 PRGs (
Appreciable quantities of groundwater have not been observed at the Site. Of the four permanent monitoring wells installed outside the Impoundment area, only one produced an adequate quantity of water to collect a groundwater sample. No Volatile Organic Compounds (VOCs), PCP, or Polycyclic Aromatic Hydrocarbons (PAHs) were detected in the groundwater sample collected from this well outside the Impoundment area. Temporary monitoring wells were installed and sampled in the initial field investigation. After evaluation of historical aerial photographs, it is believed these temporary monitoring wells were installed within the footprint of the Impoundment and the fluid sampled was not groundwater but fluid remaining within the Impoundment. The four permanent monitoring wells have been properly abandoned. The groundwater was not a pathway of contaminant migration, and a groundwater response action was not required.
The site is comprised of one Operable Unit (OU). The Record of Decision (ROD) for the Davis Timber Site was signed on September 24, 2009 following consideration of public comment on the proposed plan. The Site's ROD identified the following Remedial Action Objectives (RAOs):
i. Reduce or eliminate human exposure to contaminated surface and subsurface soil;
ii. Reduce human exposure to contaminated surface water; and
iii. Reduce exposure of ecological receptors to contaminated surface soil and sediment.
The remedial action specified for this site has been deemed necessary by the EPA to protect public health, welfare, and the environment from actual or threatened releases of hazardous substances from this site into the environment. The remedial actions chosen for the Site are summarized as follows:
(1) Extract the liquid from the closed Impoundment, and treat the liquid to remove the dissolved contamination and discharge the clean water to West Mineral Creek;
(2) Move a 500 to 1,000-foot portion of West Mineral Creek (immediately adjacent to the Impoundment area) approximately 200 feet west of its current location;
(3) Construct an earthen retaining wall or berm structure along the western boundary of the Impoundment between it and the relocated portion of West Mineral Creek;
(4) Excavate and move contaminated soil into the Impoundment area;
(5) Dredge contaminated sediment from the creeks, ponds, and wetlands, and remove excess water and move into the Impoundment area;
(6) Construct a cap over the Impoundment area (designed with a stabilizing sub-cap);
(7) Backfill excavated and dredged locations with clean borrow material;
(8) Implement land-use/deed restrictions to limit construction over the capped Impoundment and contaminated soil areas;
(9) Grade and prepare the site for optimal storm water drainage control; and
(10) Establish and implement a long-term monitoring program to assess the effectiveness of the remedial action.
Remedial action physical construction activities began during October 2011 following receipt of remedial action funding through the President's Jobs Initiative Program. Remedial action construction services were procured through the existing Region 4 Emergency Response and Removal Services (ERRS) contract.
Construction activities were completed in August 2012, and included the following:
(1) Site clearing and demolition of on-site structures;
(2) Installation of the Impoundment liquid extraction and treatment system (this system treated approximately 539,000 gallons of liquid);
(3) West Mineral Creek Relocation (relocated approximately 1,046 linear feet of creek approximately 200 feet west of its current location);
(4) Impoundment berm construction;
(5) Cooling pond and areas of surface soil contamination excavation (excavated approximately 3,060 cubic yards);
(6) East Mineral Creek Excavation (approximately 525 linear feet and 101 cubic yards of soil);
(7) Impoundment cap construction; and
(8) Final grading and vegetation.
The selected remedy required Institutional Controls (land use or deed restrictions) to control and limit on-site activities to preserve the integrity of the capped Impoundment and all components of the engineered containment system. Site use is restricted to activities compatible with the future anticipated recreational land use.
The Site parcel has an environmental covenant which does not allow residential use and restricts excavation before meeting notification requirements of Mississippi's One Call law.
The RA successfully achieved compliance with the defined performance standards documented in the ROD and the RD.
The water extraction and treatment system removed and treated 539,454 gallons of contaminated water from the closed Impoundment. Approximately 77 percent of the water was removed from the Impoundment. The remedial design established performance standards for the treatment system discharge to West Mineral Creek as the Mississippi Water Quality Criteria for Intrastate, Interstate and Coastal Waters. These standards comply with the requirements of a Mississippi National Pollutant Discharge Elimination System (NPDES) permit. Operation of the treatment system continued until May 30, 2012, when diminishing recovery volumes and water levels indicated the practical limit of dewatering had been reached.
The remedial design specified excavation of contaminated soil from two areas of the Site:
(1) Within the footprint of the former cooling pond; and
(2) Within the delineated area of surface soil contamination surrounding the former cooling pond and process area.
Two additional areas of contaminated soil were discovered during the remedial action and were also excavated:
(1) Beneath the former maintenance building; and
(2) Beneath the location of the former treatment cylinder.
Contaminated soil in these additional soil areas were excavated and disposed of in the Impoundment area until the visible extent of contamination was removed and vapor screening indicated total organic vapors of less than 10 parts per million.
Post-excavation subsurface soil samples collected from the base of the cooling pond excavation and the surface soil excavation were analyzed for dioxins, furans and PCP. The 2013 Remedial Action Report summarized the sampling results as follows:
(1) Three composite subsurface soil samples were collected from the base of the cooling pond excavation and compared to the dioxin Toxic Equivalency Quotient (TEQ) cleanup level of 5 µg/kg. All three sample results were below the cleanup level, ranging from 0.088 to 0.40 µg/kg.
(2) Five composite subsurface soil samples and one duplicate sample were collected from the bottom of the surface soil excavation area. All of the sample results were below the dioxin TEQ cleanup goal of 5 µ g/kg.
Prior to excavation, the EPA contractor collected additional sediment samples from East Mineral Creek and analyzed for dioxins and furans. All results were below the cleanup goal for dioxin TEQs. Contaminated sediment was excavated from three areas of East Mineral Creek that had shown the highest concentrations during the RI. A total of 101 cubic yards of sediment was removed and disposed of in the closed Impoundment area. Three post-excavation sediment samples and one duplicate sample were collected from the creek to confirm that cleanup goals were achieved. Dioxin TEQ results were below the ROD cleanup level of 1.9 µg/kg for all samples, with values ranging from 0.21 to 0.73 µg/kg. All samples collected during the RI were below the sediment cleanup goal for PCP except for one (8,200 µg/kg, performance standard 7,600 µg/kg).
No appreciable quantities of groundwater have been observed at the Site. Of the four permanent monitoring wells installed outside the Impoundment area, only one produced an adequate quantity of water to collect a groundwater sample. No volatile organic compounds (VOCs), PCP, or polycyclic aromatic hydrocarbons (PAHs) were detected in the groundwater sample collected from this well outside the Impoundment area.
Post-excavation soil sampling performed by Onedia Total Integrated Enterprise (OTIE) confirmed that soil and sediment cleanup levels were achieved. All work performed by WRS Compass (WRSC) during the RA was conducted in accordance with the RD specifications, unless otherwise documented and approved by the EPA Remedial Project Manager (RPM). The EPA had a representative on-site for much of the RA construction who, in conjunction with the OTIE representative, ensured that the remedy was constructed in accordance with the RD specifications and that the construction quality control requirements of the specifications were strictly adhered to.
The responsibility for operations and maintenance (O&M) was transferred to the State on October 20, 2014. Future O&M activities at the site are expected to be limited to mowing, inspections, and FYRs. Periodic inspections will need to be implemented to ensure the Impoundment cap and berm retain their integrity, and to ensure that stormwater and sediment controls, the West Mineral Creek channel, and revegetated areas operate as intended.
The purpose of a the FYR is to evaluate the implementation and performance of a remedy to determine if the remedy is and will continue to be protective of human health and the environment. In addition, FYR reports identify issues found during the review,
The FYR was conducted pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) section 121, consistent with the NCP (40 CFR 300.430(f)(4)(ii)), and considering the EPA policy. The triggering action for this statutory review is the on-site construction start date of the remedial action. The FYR has been prepared because hazardous substances, pollutants or contaminants remain at the Site above levels that allow for unlimited use and unrestricted exposure (UU/UE).
The Site consists of one operable unit (OU1), and OU1 consisted of all contaminated media, which includes soil and sediment, associated with the Site.
The FYR concluded that the remedy at OU1 currently protects human health and the environment because there are no completed exposure pathways; contaminated soil and sediment were excavated and capped, and Impoundment water was treated and discharged. The FYR had no issues or recommendations. The next FYR will be conducted in 2021.
Throughout the removal and remedial process, the EPA has kept the public informed of the activities being conducted at the Site by way of public meetings, progress fact sheets, and the announcement through local newspaper advertisement on the availability of documents related to the site and FYRs.
The notice of the availability of the Administrative Record and an announcement of the Proposed Plan for a public meeting was published in the Hattiesburg American newspaper on July 15, 2009. A public comment period was held from July 15, 2009, to August 14, 2009. The Proposed Plan was presented to the community during a public meeting on August 10 at the Breland Community Center, 79 Jackson Road, Hattiesburg, MS 39402. At this meeting, representatives from the EPA and MDEQ answered questions from the community concerning the proposed remedy and the remedial alternatives that were evaluated. The Administrative Record file was available to the public and was placed in the information repository maintained at the EPA Region 4 Superfund Record Center and at the Oak Grove Public Library (in the Reference Section) 4958 Old Highway 11, Hattiesburg, Mississippi, 39402.
Public participation activities have been satisfied as required in CERCLA section 113(k), 42 U.S.C. 9613(k) and CERCLA section 117, 42 U.S.C. 9617. Documents in the deletion docket, which the EPA relied on for recommendation of the deletion from the NPL, are available to the public in the information repositories identified above.
The EPA has followed the procedures required by 40 CFR 300.425(e) as mentioned above and the implemented remedy achieves the degree of cleanup specified in the ROD for all pathways of exposure. Specifically, post-excavation soil sampling performed by OTIE confirmed that soil and sediment cleanup levels were achieved. These results verify that the Site has achieved the ROD cleanup standards, and that all cleanup actions specified in the ROD have been implemented. All selected remedial and removal action objectives and associated cleanup levels are consistent with agency policy and guidance. This Site meets all the site completion requirements as specified in Office of Solid Waste and Emergency Response (OSWER) Directive 9320.22,
The EPA, with concurrence of the State through MDEQ, has determined that all appropriate response actions under CERCLA have been completed. Therefore, the EPA is proposing to delete the Site from the NPL.
Environmental protection, Air pollution control, Chemicals, Hazardous substances, Hazardous waste, Intergovernmental relations, Penalties, Reporting and recordkeeping requirements, Superfund, Water pollution control, Water supply.
33 U.S.C. 1321(d); 42 U.S.C. 9601-9657; E.O. 13626, 77 FR 56749, 3 CFR, 2013 Comp., p. 306; E.O. 12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR 2923, 3 CFR, 1987 Comp., p. 193.
Environmental Protection Agency (EPA).
Proposed rule; notice of intent.
The Environmental Protection Agency (EPA) Region III is issuing a Notice of Intent to Delete the Recticon/Allied Steel Superfund Site (Site) located in East Coventry Township, Chester County, Pennsylvania, from the National Priorities List (NPL) and requests public comments on this proposed action. The NPL, promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as amended, is an appendix of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP). The EPA and the Commonwealth of Pennsylvania (the Commonwealth), through the Pennsylvania Department of Environmental Protection (PADEP), have determined that all appropriate response actions under CERCLA have been completed. However, this deletion does not preclude future actions under Superfund.
Comments must be received by August 16, 2018.
Submit your comments, identified by Docket ID no. EPA-HQ-SFUND-1989-0011, by one of the following methods:
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Andrew Hass, Remedial Project Manager, U.S. Environmental Protection Agency, Region 3, 3HS21 1650 Arch Street Philadelphia, PA 19103, (215) 814-2049, email:
EPA Region III announces its intent to delete the Recticon/Allied Steel Superfund Site from the National Priorities List (NPL) and requests public comment on this proposed action. The NPL constitutes Appendix B of 40 CFR part 300 which is the National Oil and Hazardous Substances Pollution Contingency Plan (NCP), which EPA promulgated pursuant to section 105 of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980, as amended. EPA maintains the NPL as the list of sites that appear to present a significant risk to public health, welfare, or the environment. Sites on the NPL may be the subject of remedial actions financed by the Hazardous Substance Superfund (Fund). As described in 40 CFR 300.425(e)(3) of the NCP, sites deleted from the NPL remain eligible for Fund-financed remedial actions if future conditions warrant such actions.
EPA will accept comments on the proposal to delete this Site for thirty (30) days after publication of this document in the
Section II of this document explains the criteria for deleting sites from the NPL. Section III discusses procedures that EPA is using for this action. Section IV discusses the Recticon/Allied Steel Superfund Site and demonstrates how it meets the deletion criteria.
The NCP establishes the criteria that EPA uses to delete sites from the NPL. In accordance with 40 CFR 300.425(e), sites may be deleted from the NPL where no further response is appropriate. In making such a determination pursuant to 40 CFR 300.425(e), EPA will consider, in consultation with the Commonwealth, whether any of the following criteria have been met:
i. responsible parties or other persons have implemented all appropriate response actions required;
ii. all appropriate Fund-financed response under CERCLA has been implemented, and no further response action by responsible parties is appropriate; or
iii. the remedial investigation has shown that the release poses no significant threat to public health or the environment and, therefore, the taking of remedial measures is not appropriate.
Pursuant to CERCLA section 121(c) and the NCP, EPA conducts Five-Year Reviews to ensure the continued protectiveness of remedial actions where hazardous substances, pollutants, or contaminants remain at a site above levels that allow for unlimited use and unrestricted exposure. Five-Year Reviews are no longer required at this Site; however, EPA may initiate further action to ensure continued protectiveness at a deleted site if new information becomes available that indicates it is appropriate. Whenever there is a significant release from a site deleted from the NPL, the deleted site may be restored to the NPL without application of the hazard ranking system.
The following procedures apply to deletion of the Site:
(1) EPA consulted with the Commonwealth before developing this Notice of Intent to Delete.
(2) EPA has provided the Commonwealth 30 working days for review of this notice prior to publication of it today
(3) In accordance with the criteria discussed above, EPA has determined that no further response is appropriate;
(4) The Commonwealth of Pennsylvania, through the Pennsylvania Department of Environmental Protection (PADEP), has concurred with deletion of the Site from the NPL.
(5) Concurrently with the publication of this Notice of Intent to Delete in the
(6) The EPA placed copies of documents supporting the proposed deletion in the deletion docket and made these items available for public inspection and copying at the Site information repositories identified above.
If comments are received within the 30-day public comment period on this document, EPA will evaluate and respond appropriately to the comments before making a final decision to delete. If necessary, EPA will prepare a Responsiveness Summary to address any significant public comments received. After the public comment period, if EPA determines it is still appropriate to delete the Site, the Regional Administrator will publish a final Notice of Deletion in the
Deletion of a site from the NPL does not itself create, alter, or revoke any individual's rights or obligations. Deletion of a site from the NPL does not in any way alter EPA's right to take enforcement actions, as appropriate. The NPL is designed primarily for informational purposes and to assist EPA management. Section 300.425(e)(3) of the NCP states that the deletion of a site from the NPL does not preclude eligibility for future response actions, should future conditions warrant such actions.
The following information provides EPA's rationale for deleting the Site from the NPL:
EPA proposed the Recticon/Allied Steel Superfund Site (Site) (CERCLIS ID PAD002353969) to the NPL on June 24, 1988 (53 FR 23988) and added the Site as final on the NPL on October 4, 1989 (54 FR 41000). The Site is located at the intersection of State Route 724 and Wells Road in East Coventry Township, PA and is approximately 8 miles northwest of Phoenixville, PA and 3.2 miles southeast of Pottstown, PA. The 5-acre Recticon/Allied Steel Site consists of two properties, the former Allied Steel Products Corporation facility and the former Recticon facility.
From 1972-1988, Allied Steel Products Corporation (Allied) began fabrication of various steel products on a property located on the eastern corner of the intersection. Recticon was a subsidiary of Rockwell International and manufactured silicon wafers for the electronics industry from 1974 to 1981 on the western corner of the intersection. In 1979, the Pennsylvania Department of Environmental Resources (PADER), now known as the Pennsylvania Department of Environmental Protection (PADEP), detected trichloroethylene (TCE) in the groundwater beneath the Site. In 1980, a contractor determined that leakage in the area of Allied's compressor room had released TCE onto the ground. High levels of TCE were found in Allied's on-site well. In addition, sediment samples taken from the drainage ditch alongside the Allied building yielded high levels of copper and zinc, well above ecological risk levels.
The Commonwealth of Pennsylvania and Recticon entered into a Consent Order in 1981 to undertake initial cleanup actions at the Site. Recticon, under PADER oversight, removed contaminated soils from the Site and transported them to an EPA-approved facility for disposal. Recticon also pumped and treated some of the groundwater beneath the Site for a few months. Under PADER oversight, Allied Steel also excavated contaminated soil and shipped it off-site for proper disposal. In 1990, EPA entered into two Consent Orders with Rockwell International, the former parent company of Recticon, to provide residential well filters to nearby residents and to conduct the Remedial Investigation/Feasibility Study (RI/FS).
The RI/FS was conducted from January 1991 through May 1993 and determined that soil, sediment, and groundwater were impacted by volatile organic compounds (VOCs) and metals from the historic operation of the Allied and Recticon facilities.
The Selected Remedy for the Site was documented in a June 30, 1993 Record of Decision (ROD) and modified in an August 29, 1997 ROD Amendment; a September 10, 2004 Explanation of Significant Differences (ESD); and a May 26, 2010 ESD. The following sections discuss the components of the Selected Remedy and details on implementation.
The Remedial Action Objectives (RAOs) for the Site as established in the 1993 ROD were as follows:
1. Prevent human exposure to contaminants in the groundwater.
2. Restore contaminated groundwater to its beneficial use and to background concentrations, if technically practicable, or Maximum Contaminant Levels (MCLs), whichever is more stringent.
3. Protect uncontaminated groundwater and surface water for current and future use, and environmental receptors.
After the 1993 ROD was finalized, EPA divided the Site remedial work into three operable units (OUs) to facilitate management of the remedial process.
The Selected Remedy for OU1 in the 1993 ROD consisted of the installation of a public water supply to East Coventry Township to 14 residences and businesses.
The Selected Remedy for OU2 in the 1993 ROD consisted of the excavation and off-site disposal of contaminated soils. The soil cleanup levels in the 1993 ROD were based on the amount of contamination that could remain in the soil without further contributing to groundwater contamination above “background” concentrations.
The 1997 ROD Amendment changed the cleanup levels for Site contaminants of concern (COCs) in groundwater from “background” concentrations to MCLs. This change was based on the Commonwealth of Pennsylvania's enactment of the Land Recycling and Environmental Remediation Standards Act (Act 2) on May 19, 1995, 35 Pa. Stat. § 6026.101
The 1997 ROD Amendment also required that institutional controls be implemented to prohibit soil excavation on the Recticon property that could result in exposure to contaminated soil via direct contact and to prohibit any new wells on Site until the groundwater cleanup levels are met.
The 2004 ESD eliminated the requirement for institutional controls to prohibit direct contact with the soil on the Recticon property. The ESD identified PADEP Act 2 Media Specific Concentrations (MSCs) for TCE for direct contact with soils as the cleanup level that would need to be exceeded for new institutional controls to be necessary. No TCE was detected in soil at the Site exceeding the PADEP Act 2 MSC for direct contact.
The ESD also eliminated the requirement to prohibit the construction of new groundwater wells at the Site.
The Selected Remedy for OU3 initially consisted of extraction and treatment of groundwater with discharge to the Schuylkill River following a pre-design hydrogeologic investigation and well abandonment. In accordance with the 1993 ROD, a comprehensive pre-design study of the groundwater at the Site was conducted to further define the outer boundaries of the groundwater plume and the hydraulic properties within the aquifer. Based on the findings of this study, a groundwater recovery system for contaminated groundwater was designed. The groundwater recovery system consisted of extraction, shallow tray air stripping and granular activated carbon treatment to remove the VOCs, and discharge of treated water to the Schuylkill River.
The 2010 ESD changed the groundwater extraction and treatment remedy to enhanced natural bioremediation of TCE. A successful pilot test, which reduced the levels of TCE in the Site wells, had been conducted using this technology. The 2010 ESD also re-instituted the requirement for institutional controls for groundwater use on both the Recticon and Allied properties, since all wells on these properties were not below the cleanup levels.
The Remedial Design and Remedial Action (RD/RA) were performed by Rockwell under Unilateral Administrative Order (UAO) No. III-94-16-DC issued on March 24, 1994. In accordance with the 1993 ROD, a Phase 1 Archeological Survey was performed in April 1995 prior to the start of onsite construction activity and determined that the Site had no historical significance. In 1999, Rockwell spun off its semiconductor business as an independent company called Conexant Systems, Inc. Conexant assumed responsibility for performing the RD/RA as required by the UAO.
Construction of the water line was completed between September 1998 through November 1999 and consisted of extending a water main to the Site area and connecting 14 residences and businesses. Once the municipal water lines were connected, filtration systems previously used at the properties were no longer necessary. EPA performed the final inspection of the water line and connections on December 13, 1999.
In accordance with the 1993 ROD, verification sampling was conducted on the soil at the former Allied facility to determine the source and extent of copper and zinc contamination. An ecological assessment indicated that the copper and zinc levels exceeded the Region III Biological Technical Assistance Group (BTAG) screening values, and that any terrestrial or aquatic receptors on or near the Site would be exposed to unacceptable levels of these contaminants. As a result, EPA conducted a time-critical removal at the Site in April 1998. Six inches of contaminated soil were excavated and removed from a small portion of the Site known as the “crane area” and shipped off-site for proper disposal. The area was backfilled with clean soil and grass was planted.
The 1993 ROD also required the excavation of TCE contaminated soils on the former Recticon facility. This requirement was modified by the 1997 ROD Amendment, which changed the soil cleanup level. As a result of this change, no further soil excavation was required and institutional controls were instead required to prohibit soil excavation. The 2004 ESD subsequently eliminated the requirement for institutional controls for soil.
Construction of the groundwater portion of the remedy started in June 1998 and consisted of the installation of approximately 10 additional monitoring wells, an extraction well and the construction of a groundwater extraction and treatment system. EPA conducted a pre-final inspection of OU3 on April 19, 1999 and determined that Rockwell and its contractors had constructed the remedy in accordance with remedial design plans and specifications. A Preliminary Closeout Report (PCOR) was issued on December 14, 1999, documenting Construction Completion for the Site.
A Pilot Study was initiated in 2001 to evaluate the effectiveness of using enhanced bioremediation to treat groundwater contamination more effectively than groundwater extraction and treatment. The study consisted of injecting non-toxic food-grade amendments and other approved supplements into the groundwater to enhance the natural biodegradation occurring at the Site. A total of 13 injections were completed during the Pilot Study from June 2001 through February 2007 utilizing several different amendments. The Pilot Study effectively reduced VOC contamination in the groundwater close to groundwater cleanup levels. The 2010 ESD replaced groundwater extraction and treatment with enhanced bioremediation based on the results of the Pilot Study.
Table 1 describes the soil and groundwater cleanup levels established in the 1997 ROD Amendment:
No soil was identified with TCE concentrations exceeding 1,600 μg/kg; therefore, no soil excavation was performed. Soil contaminated with zinc and copper at the Allied facility was excavated and disposed offsite under a time-critical removal action by EPA in 1998.
Groundwater COC concentrations at all sampling locations were below the groundwater cleanup levels during the 2011 annual sampling event. In accordance with the 1993 ROD, twelve (12) quarters of groundwater sampling were performed between October 2011 and September 2014 to confirm that the cleanup levels have been achieved. Vinyl chloride was detected in one well during this sampling at a concentration exceeding the cleanup level of 2 μg/L and TCE was detected in one well at a concentration exceeding the cleanup level of 5 μg/L. For these two wells, statistical tools specified in EPA program guidance were used to evaluate attainment for vinyl chloride and TCE. These data were statistically analyzed and the cleanup level exceedances were determined not to be statistically significant. No other samples identified any COC above the groundwater cleanup levels throughout the twelve quarters of sampling.
Additionally, EPA performed a cumulative risk assessment using the 2014 groundwater sampling results. Groundwater COC concentrations were compared to EPA Tap Water Risk Screening Level (RSLs) and if the RSL was exceeded during any of the 2014 sampling events, a risk assessment was performed. The data were grouped in Exposure Areas (EAs) based on groundwater sampling locations. The cumulative risk results were below or within EPA's acceptable risk range for each of the EAs.
Based on the results of the twelve quarters of groundwater monitoring and the results of the cumulative risk assessment, the groundwater cleanup levels have been achieved at the Site.
EPA subsequently issued a Final Close Out Report (FCOR) for the Site dated December 17, 2017. The FCOR summarized the remedial activities conducted at the Site, and concluded that EPA has successfully completed all response actions for the Site in accordance with
Operation and Maintenance (O&M) activities for the Site were focused on the groundwater portion of the remedy (OU3). The initial groundwater remedy involved extraction and treatment of contaminated groundwater at the Site from 1998 through 2002. The water was treated using a shallow tray air stripper and GAC and the treated water was discharged to the Schuylkill River. The discharge was in continuous compliance with the substantive requirements of the National Pollutant Discharge Elimination System (NPDES). The system treated approximately 200 million gallons of contaminated groundwater prior to being shut down in December 2002.
The 2010 ESD replaced the groundwater extraction and treatment component of the Selected Remedy with enhanced bioremediation. Groundwater monitoring confirmed that groundwater cleanup levels have been achieved at the Site and no ongoing or future O&M or additional groundwater monitoring is necessary.
The 1993 ROD required an institutional control to restrict access to those portions of the aquifer where contaminants remain above performance standards. Institutional controls were also included in the 1997 ROD Amendment to prohibit soil excavation on the Recticon property and installation of new wells on the Recticon property until groundwater cleanup levels were met.
The 2004 ESD stated that institutional controls were no longer required for soil and that the groundwater was making progress toward achieving cleanup levels, therefore, institutional controls prohibiting new wells were no longer required. However, in the 2010 ESD, EPA determined that institutional controls for groundwater were still required since the groundwater cleanup levels had not yet been achieved. Therefore, the installation of new groundwater wells on the two properties comprising the Site needed to be prohibited until the groundwater at the Site meets the cleanup levels selected in the 1997 ROD Amendment. This institutional control has been implemented by deed notices which have been placed on the titles for the two Site properties pursuant to a 2002 Prospective Purchaser Agreement with the current owner of the Allied portion of the Site, and a 2005 Consent Decree with Wellsford, Inc., the current owner of the Recticon portion of the Site.
The Chester County Health Departments Rules and Regulations, § 501.12.5.1, currently provide an additional layer of use restriction for the Site groundwater by prohibiting the installation or use of drinking water supply wells in the vicinity of the Site unless the wells are tested for contamination and treated if contamination is identified. The relevant provisions of the regulations are provided below:
As discussed in detail above, groundwater cleanup levels have been achieved at the Site. Therefore, in accordance with the 2010 ESD, institutional controls prohibiting the installation of new wells at the Site are no longer required.
Pursuant to CERCLA section 121(c) and as provided in the current guidance on Five-Year Reviews
No issues or recommendations were identified in the 2015 Third Five-Year Review. The Protectiveness Statement in the 2015 Third Five-Year Review was as follows:
There are no hazardous substances or materials left on-site above levels that would not allow for unlimited use and unrestricted exposure; therefore, additional Five-Year Reviews are not required in the future.
EPA community relations staff conducted an active campaign to ensure that the residents were well informed about activities at the Site. Community relations activities included the following:
• Interviews of East Coventry Township officials for Five-Year Reviews
• Annual Meetings with Chester County Board of Health
In accordance with the requirements of 40 CFR 300.425(e)(4), EPA's community involvement activities associated with this deletion will consist of placing the deletion docket in the local Site information repository and placing a public notice of EPA's intent to delete the Site from the NPL in the
Construction of the Selected Remedy at the Site has been completed and O&M was completed in accordance with the EPA-approved O&M Plan. Institutional controls are no longer necessary at the Site. All RAOs, performance standards, and cleanup levels established in the 1993 ROD, 1997 ROD Amendment, 2004 ESD, and 2010 ESD have been achieved and the Selected Remedy is protective of human health and the environment in the short- and long-term. No further Superfund response is necessary to protect human health and the environment.
The Site Deletion procedures specified in 40 CFR 300.425(e) have been followed for the deletion of the Site. EPA, with concurrence of the Commonwealth through PADEP, has determined that all appropriate response actions under CERCLA, have been completed. Therefore, EPA is deleting the Site from the NPL.
Environmental protection, Air pollution control, Chemicals, Hazardous waste, Hazardous substances, Intergovernmental relations, Penalties, Reporting and recordkeeping requirements, Superfund, Water pollution control, Water supply.
33 U.S.C. 1321(d); 42 U.S.C. 9601-9657; E.O. 13626, 77 FR 56749, 3 CFR, 2013 Comp., p. 306; E.O. 12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR 2923, 3 CFR, 1987 Comp., p. 193.
The Department of Agriculture will submit the following information collection requirement(s) to OMB for review and clearance under the Paperwork Reduction Act of 1995, Public Law 104-13 on or after the date of publication of this notice. Comments are requested regarding: (1) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) the accuracy of the agency's estimate of burden including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology should be addressed to: Desk Officer for Agriculture, Office of Information and Regulatory Affairs, Office of Management and Budget (OMB), New Executive Office Building, Washington, DC; New Executive Office Building, 725 17th Street NW, Washington, DC 20503. Commenters are encouraged to submit their comments to OMB via email to:
Comments regarding these information collections are best assured of having their full effect if received by August 16, 2018. Copies of the submission(s) may be obtained by calling (202) 720-8681.
An agency may not conduct or sponsor a collection of information unless the collection of information displays a currently valid OMB control number and the agency informs potential persons who are to respond to the collection of information that such persons are not required to respond to the collection of information unless it displays a currently valid OMB control number.
The Department of Agriculture has submitted the following information collection requirement(s) to OMB for review and clearance under the Paperwork Reduction Act of 1995, Public Law 104-13. Comments are requested regarding (1) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) the accuracy of the agency's estimate of burden including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology.
Comments regarding this information collection received by August 16, 2018 will be considered. Written comments should be addressed to: Desk Officer for Agriculture, Office of Information and Regulatory Affairs, Office of Management and Budget (OMB),
An agency may not conduct or sponsor a collection of information unless the collection of information displays a currently valid OMB control number and the agency informs potential persons who are to respond to the collection of information that such persons are not required to respond to the collection of information unless it displays a currently valid OMB control number.
Additionally, there are government-wide regulations under 7 CFR 210.21, 220.16, 225.17, 226.22, and 2 CFR 200 that also apply to these procurements. SFA procurement procedures must adhere to CN program and government-wide regulations and guidance, and State and local policies related to procurement.
Animal and Plant Health Inspection Service, USDA.
Revision to and extension of approval of an information collection; comment request.
In accordance with the Paperwork Reduction Act of 1995, this notice announces the Animal and Plant Health Inspection Service's intention to request a revision to and extension of approval of an information collection associated with the regulations for the importation of fruits and vegetables into the United States.
We will consider all comments that we receive on or before September 17, 2018.
You may submit comments by either of the following methods:
•
•
Supporting documents and any comments we receive on this docket may be viewed at
For information on the regulations for the importation of fruits and vegetables into the United States, contact Mr. Juan Román, Senior Regulatory Policy Specialist, RCC, RPM, PHP, PPQ, APHIS, 4700 River Road Unit 133, Riverdale, MD 20737; (301) 851-2242. For copies of more detailed information on the information collection, contact Ms. Kimberly Hardy, APHIS' Information Collection Coordinator, at (301) 851-2483.
The regulations in “Subpart—Fruits and Vegetables” (7 CFR 319.56-1 through 319.56-83) allow a number of fruits and vegetables to be imported into the United States, under specified conditions, from certain parts of the world while continuing to protect against the introduction of pests into the United States. Under these regulations, the importation of a variety of fruits and vegetables from specified countries require the use of information collection activities such as phytosanitary certificates, trapping records, compliance agreements, application of sterile insect technique, monitoring, safeguarding, emergency action notifications, and notices of arrival.
We are asking the Office of Management and Budget (OMB) to approve our use of these information collection activities, as described, for an additional 3 years.
The purpose of this notice is to solicit comments from the public (as well as affected agencies) concerning our information collection. These comments will help us:
(1) Evaluate whether the collection of information is necessary for the proper performance of the functions of the Agency, including whether the information will have practical utility;
(2) Evaluate the accuracy of our estimate of the burden of the collection of information, including the validity of the methodology and assumptions used;
(3) Enhance the quality, utility, and clarity of the information to be collected; and
(4) Minimize the burden of the collection of information on those who are to respond, through use, as appropriate, of automated, electronic, mechanical, and other collection technologies;
All responses to this notice will be summarized and included in the request for OMB approval. All comments will also become a matter of public record.
Forest Service, USDA.
Notice; request for comment.
In accordance with the Paperwork Reduction Act of 1995, the USDA Forest Service is seeking comments from all interested individuals and organizations on the renewal of a currently approved information collection,
Comments must be received in writing on or before September 17, 2018 to be assured of consideration. Comments received after that date will be considered to the extent practicable.
Comments concerning this notice should be addressed to: USDA, Forest Service, Attn: James Bentley, Southern Research Station, Forest Inventory and Analysis, 4700 Old Kingston Pike, Knoxville, TN 37919. Comments also may be submitted via facsimile to 865-862-0262 or by email to:
Comments submitted in response to this notice may be made available to the public through relevant websites and upon request. For this reason, please do not include in your comments information of a confidential nature, such as sensitive personal information or proprietary information. If you send an email comment, your email address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the internet. Please note that responses to this public comment request containing any routine notice about the confidentiality of the communication will be treated as public comments that may be made available to the public notwithstanding the inclusion of the routine notice.
The public may inspect comments received at the Southern Research Station, 4700 Old Kingston Pike, Knoxville, TN, during normal business hours. Visitors are encouraged to call ahead to 865-862-2000 to facilitate entry to the building.
James Bentley, Southern Research Station, at 865-862-2056. Individuals who use telecommunication devices for the deaf (TDD) may call the Federal Relay Service (FRS) at 1-800-877-8339 twenty-four hours a day, every day of the year, including holidays.
• Describe the timber resource and its use in detail;
• Evaluate trends in resource use;
• Forecast future anticipated level of demand on the resource; and
• Analyze the ramifications of any changes in timber demand.
For this renewal, we are proposing a new sample design to guide the annual collection of information from primary wood-using mills, replacing the periodic approach. This new approach is more efficient and cost-effective, and ultimately will generate more accurate, comprehensive, and timely information.
To collect this information, USDA Forest Service or state natural resource agency personnel will use three questionnaires. Two questionnaires, the Pulpwood Questionnaire and the Logs and Other Roundwood Questionnaire, will be paper or electronic. Paper questionnaires will be returned in pre-paid postage envelopes, and electronic questionnaires returned via email. The third questionnaire, the Logging Operations Questionnaire, will be administered in person by field personnel collecting tree utilization data at sampled logging sites.
Comment is invited on: (1) Whether this collection of information is necessary for the stated purposes and the proper performance of the functions of the Agency, including whether the information will have practical or scientific utility; (2) the accuracy of the Agency's estimate of the burden of the collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on respondents, including the use of automated, electronic, mechanical, or other technological collection techniques or other forms of information technology.
All comments received in response to this notice, including names and addresses when provided, will be a matter of public record. Comments will be summarized and included in the submission request toward Office of Management and Budget approval.
Economic Development Administration, U.S. Department of Commerce.
Notice and opportunity for public comment.
The Economic Development Administration (EDA) has received petitions for certification of eligibility to apply for Trade Adjustment Assistance from the firms listed below. Accordingly, EDA has initiated investigations to determine whether increased imports into the United States of articles like or directly competitive with those produced by each of the firms contributed importantly to the total or partial separation of the firms' workers, or threat thereof, and to a decrease in sales or production of each petitioning firm.
Any party having a substantial interest in these proceedings may request a public hearing on the matter. A written request for a hearing must be submitted to the Trade Adjustment Assistance Division, Room 71030, Economic Development Administration, U.S. Department of Commerce, Washington, DC 20230, no later than ten (10) calendar days following publication of this notice. These petitions are received pursuant to section 251 of the Trade Act of 1974, as amended.
Please follow the requirements set forth in EDA's regulations at 13 CFR 315.9 for procedures to request a public hearing. The Catalog of Federal Domestic Assistance official number and title for the program under which these petitions are submitted is 11.313, Trade Adjustment Assistance for Firms.
Enforcement and Compliance, International Trade Administration, Department of Commerce.
Applicable July 10, 2018.
Jonathan Hill or Patrick O'Connor at (202) 482-3518 or (202) 482-0989, respectively; AD/CVD Operations, Enforcement and Compliance, International Trade Administration,
On June 20, 2018, the U.S. Department of Commerce (Commerce) received an antidumping duty (AD) Petition concerning imports of steel racks from the People's Republic of China (China), filed in proper form on behalf of the Coalition of Fair Rack Imports (the petitioner).
On June 22, 2018, Commerce requested supplemental information pertaining to certain aspects of the Petition in two separate supplemental questionnaires, one dealing with general issues with the petition and the other with issues related to Volume II of the Petition.
The petitioner filed its responses to the supplemental questionnaires on June 26.
In accordance with section 732(b) of the Tariff Act of 1930, as amended (the Act), the petitioner alleges that imports of steel racks from China are being, or are likely to be, sold in the United States at less than fair value within the meaning of section 731 of the Act, and that such imports are materially injuring, or threatening material injury to, the domestic industry producing steel racks in the United States. Consistent with section 732(b)(1) of the Act, the Petition is accompanied by information reasonably available to the petitioner supporting its allegation.
Commerce finds that the petitioner filed the Petition on behalf of the domestic industry because the petitioner is an interested party as defined in section 771(9)(E) of the Act. Commerce also finds that the petitioner demonstrated sufficient industry support with respect to the initiation of the AD investigation that the petitioner is requesting.
Because China is a non-market economy (NME) country, pursuant to 19 CFR 351.204(b)(1), the period of investigation (POI) is October 1, 2017, through March 31, 2018.
The product covered by this investigation is steel racks from China. For a full description of the scope of this investigation,
During our review of the Petition, Commerce contacted the petitioner regarding the proposed scope language to ensure that the scope language in the Petition is an accurate reflection of the products for which the domestic industry is seeking relief.
As discussed in the preamble to Commerce's regulations, we are setting aside a period for interested parties to raise issues regarding product coverage (scope).
Commerce requests that any factual information parties consider relevant to the scope of the investigation be submitted during this period. However, if a party subsequently finds that additional factual information pertaining to the scope of the investigation may be relevant, the party may contact Commerce and request permission to submit the additional information. All such submissions must be filed on the records of the concurrent AD and CVD investigations.
All submissions to Commerce must be filed electronically using Enforcement and Compliance's Antidumping Duty and Countervailing Duty Centralized Electronic Service System (ACCESS).
Commerce is providing interested parties an opportunity to comment on the appropriate physical characteristics
Interested parties may provide any information or comments that they feel are relevant to the development of an accurate list of physical characteristics. In order to consider the suggestions of interested parties in developing and issuing the AD questionnaire, all product characteristics comments must be filed by 5:00 p.m. ET on July 30, 2018, which is 20 calendar days from the signature date of this notice.
Section 732(b)(1) of the Act requires that a petition be filed on behalf of the domestic industry. Section 732(c)(4)(A) of the Act provides that a petition meets this requirement if the domestic producers or workers who support the petition account for: (i) At least 25 percent of the total production of the domestic like product; and (ii) more than 50 percent of the production of the domestic like product produced by that portion of the industry expressing support for, or opposition to, the petition. Moreover, section 732(c)(4)(D) of the Act provides that, if the petition does not establish support of domestic producers or workers accounting for more than 50 percent of the total production of the domestic like product, Commerce shall: (i) poll the industry or rely on other information in order to determine if there is support for the petition, as required by subparagraph (A); or (ii) determine industry support using a statistically valid sampling method to poll the “industry.”
Section 771(4)(A) of the Act defines the “industry” as the producers as a whole of a domestic like product. Thus, to determine whether a petition has the requisite industry support, the statute directs Commerce to look to producers and workers who produce the domestic like product. The International Trade Commission (ITC), which is responsible for determining whether “the domestic industry” has been injured, must also determine what constitutes a domestic like product in order to define the industry. While both Commerce and the ITC must apply the same statutory definition regarding the domestic like product,
Section 771(10) of the Act defines the domestic like product as “a product which is like, or in the absence of like, most similar in characteristics and uses with, the article subject to an investigation under this title.” Thus, the reference point from which the domestic like product analysis begins is “the article subject to an investigation” (
With regard to the domestic like product, the petitioner does not offer a definition of the domestic like product distinct from the scope of the investigation.
In determining whether the petitioner has standing under section 732(c)(4)(A) of the Act, we considered the industry support data contained in the Petition with reference to the domestic like product as defined in the “Scope of the Investigation,” in the Appendix to this notice. To establish industry support, the petitioner provided its own 2017 shipments of the domestic like product and compared this to the estimated total shipments of the domestic like product for the entire domestic industry.
In its July 3, 2018, letter, Jiaxing Zhongda Import & Export Co., Ltd. (Jiaxing Zhongda), a Chinese exporter/producer, submitted comments on industry support and requested that Commerce poll the industry to determine industry support.
Our review of the data provided in the Petition, the General Issues Supplement, the Second General Issues Supplement, letters from Jiaxing Zhongda, Guangdong Wireking, and UMH, the Industry Support Supplement, the Second Industry Support Supplement, the Third Industry Support Supplement, and other information readily available to Commerce indicates that the petitioner has established industry support for the Petition.
Commerce finds that the petitioner filed the Petition on behalf of the domestic industry because it is an interested party as defined in section 771(9)(E) of the Act and it has demonstrated sufficient industry support with respect to the AD investigation that it is requesting that Commerce initiate.
The petitioner alleges that the U.S. industry producing the domestic like product is being materially injured, or is threatened with material injury, by reason of the imports of the subject merchandise sold at less than normal value (NV). In addition, the petitioner alleges that subject imports exceed the negligibility threshold provided for under section 771(24)(A) of the Act.
The petitioner contends that the industry's injured condition is illustrated by a significant and increasing volume of subject imports; reduced market share; underselling and price depression or suppression; lost sales and lost revenues; decline in production, quantity of U.S. shipments, and capacity utilization rate; and decline in the domestic industry's profitability.
The following is a description of the allegations of sales at less than fair value upon which Commerce based its decision to initiate an AD investigation of imports of steel racks from China. The sources of data for the deductions and adjustments relating to U.S. price and NV are discussed in greater detail in the China AD Initiation Checklist.
The petitioner based U.S. export prices (EP) on price quotes.
Commerce considers China to be an NME country.
The petitioner claims that Brazil is an appropriate surrogate country for China because it is a market economy country that is at a level of economic development comparable to that of China and it is a significant producer of comparable merchandise.
Interested parties will have the opportunity to submit comments regarding surrogate country selection and, pursuant to 19 CFR 351.301(c)(3)(i), will be provided an opportunity to submit publicly available information to value FOPs within 30 days before the scheduled date of the preliminary determination.
Based on its assertion that information regarding the FOPs and volume of inputs consumed by Chinese producers/exporters of steel racks was not reasonably available to the petitioner, the petitioner used the consumption rates of a U.S. steel racks producer to estimate the Chinese manufacturers' FOPs.
Based on the data provided by the petitioner, there is reason to believe that imports of steel racks from China are being, or are likely to be, sold in the United States at less than fair value. Based on comparisons of EP to NV in accordance with sections 772 and 773 of the Act, the estimated dumping margins for steel racks from China are 130.0-144.5 percent.
Based upon the examination of the Petition, we find that the Petition meets the requirements of section 732 of the Act. Therefore, we are initiating an AD investigation to determine whether imports of steel racks from China are being, or are likely to be, sold in the United States at less than fair value. In accordance with section 733(b)(1)(A) of the Act and 19 CFR 351.205(b)(1), unless postponed, we will make our preliminary determination no later than 140 days after the date of this initiation.
The petitioner named 93 producers/exporters as accounting for the majority of exports of steel racks to the United States from China.
Producers/exporters of steel racks from China that do not receive Q&V questionnaires by mail may still submit a response to the Q&V questionnaire and can obtain a copy of the Q&V questionnaire from Enforcement & Compliance's website. The Q&V questionnaire response must be submitted by the relevant Chinese exporters/producers no later than 5:00 p.m. ET on July 24, 2018, which is two weeks from the signature date of this notice. All Q&V responses must be filed electronically via ACCESS.
In order to obtain separate-rate status in an NME investigation, exporters and producers must submit a separate-rate application.
Commerce will calculate combination rates for certain respondents that are eligible for a separate rate in an NME investigation. The Separate Rates and Combination Rates Bulletin states:
In accordance with section 732(b)(3)(A) of the Act and 19 CFR 351.202(f), copies of the public version of the Petition have been provided to the government of China
We will notify the ITC of our initiation, as required by section 732(d) of the Act.
The ITC will preliminarily determine, within 45 days after the date on which the Petition was filed, whether there is a reasonable indication that imports of steel racks from China are materially injuring or threatening material injury to a U.S. industry. A negative ITC determination will result in the investigation being terminated.
Factual information is defined in 19 CFR 351.102(b)(21) as: (i) Evidence submitted in response to questionnaires; (ii) evidence submitted in support of allegations; (iii) publicly available information to value factors under 19 CFR 351.408(c) or to measure the adequacy of remuneration under 19 CFR 351.511(a)(2); (iv) evidence placed on the record by Commerce; and (v) evidence other than factual information described in (i)-(iv). 19 CFR 351.301(b) requires any party, when submitting factual information, to specify under which subsection of 19 CFR 351.102(b)(21) the information is being submitted
Parties may request an extension of time limits before the expiration of a time limit established under 19 CFR 351.301, or as otherwise specified by the Secretary. In general, an extension request will be considered untimely if it is filed after the expiration of the time limit established under 19 CFR 351.301. For submissions that are due from multiple parties simultaneously, an extension request will be considered untimely if it is filed after 10:00 a.m. ET on the due date. Under certain circumstances, we may elect to specify a different time limit by which extension requests will be considered untimely for submissions which are due from multiple parties simultaneously. In such a case, we will inform parties in a letter or memorandum of the deadline (including a specified time) by which extension requests must be filed to be considered timely. An extension request must be made in a separate, stand-alone submission; under limited circumstances we will grant untimely-filed requests for the extension of time limits. Parties should review
Any party submitting factual information in an AD or CVD proceeding must certify to the accuracy and completeness of that information.
Interested parties must submit applications for disclosure under APO in accordance with 19 CFR 351.305. On January 22, 2008, Commerce published
This notice is issued and published pursuant to sections 732(c)(2) and 777(i) of the Act, and 19 CFR 351.203(c).
The merchandise covered by this investigation is steel racks and parts thereof, assembled, to any extent, or unassembled, including but not limited to, vertical components (
Steel rack components can be assembled into structures of various dimensions and configurations by welding, bolting, clipping, or with the use of devices such as clips, end plates, and beam connectors, including, but not limited to the following configurations: (1) Racks with upright frames perpendicular to the aisles that are independently adjustable, with positive locking beams parallel to the aisle spanning the upright frames with braces; and (2) cantilever racks with vertical components parallel to the aisle and cantilever beams or arms connected to the vertical components perpendicular to the aisle. Steel racks may be referred to as pallet racks, storage racks, stacker racks, retail racks, pick modules, selective racks, or cantilever racks and may incorporate moving components and be referred to as pallet-flow racks, carton-flow racks, push-back racks, movable-shelf racks, drive-in racks, and drive-through racks. While steel racks may be made to ANSI MH16.l or ANSI MH16.3 standards, all steel racks and parts thereof meeting the description set out herein are covered by the scope of this investigation, whether or not produced according to a particular standard.
The scope includes all steel racks and parts thereof meeting the description above, regardless of
(1) dimensions, weight, strength, gauge, or load rating;
(2) vertical components or frame type (including structural, roll-form, or other);
(3) horizontal support or beam/brace type (including but not limited to structural, roll-form, slotted, unslotted, Z-beam, C-beam, L-beam, step beam, and cantilever beam);
(4) number of supports;
(5) number of levels;
(6) surface coating, if any (including but not limited to paint, epoxy, powder coating, zinc, or other metallic coatings);
(7) shape (including but not limited to rectangular, square, corner, and cantilever);
(8) the method by which the vertical and horizontal supports connect (including but not limited to locking tabs or slots, bolting, clamping, and welding); and
(9) whether or not the steel rack has moving components (including but not limited to rails, wheels, rollers, tracks, channels, carts, and conveyors).
Subject merchandise includes merchandise matching the above description that has been finished or packaged in a third country. Finishing includes, but is not limited to, coating, painting, or assembly, including attaching the merchandise to another product, or any other finishing or assembly operation that would not remove the merchandise from the scope of the investigation if performed in the country of manufacture of the steel racks and parts thereof. Packaging includes packaging the merchandise with or without another product or any other packaging operation that would not remove the merchandise from the scope of the investigation if performed in the country of manufacture of the steel racks and parts thereof.
Steel racks and parts thereof are included in the scope of this investigation whether or not imported attached to, or included with, other parts or accessories such as wire decking, nuts, and bolts. If steel racks and parts thereof are imported attached to, or included with, such non-subject merchandise, only the steel racks and parts thereof are included in the scope.
The scope of this investigation does not cover: (1) Decks,
Specifically excluded from the scope of this investigation are any products covered by Commerce's existing antidumping and countervailing duty orders on boltless steel shelving units prepackaged for sale from the People's Republic of China.
Merchandise covered by this investigation is currently classified in the Harmonized Tariff Schedule of the United States (HTSUS) under the following subheadings: 7326.90.8688, 9403.20.0080, and 9403.90.8041. Subject merchandise may also enter under subheadings 7308.90.3000, 7308.90.6000, 7308.90.9590, and 9403.20.0090. The HTSUS subheadings are provided for convenience and U.S. Customs purposes only. The written description of the scope is dispositive.
Enforcement and Compliance, International Trade Administration, Department of Commerce.
Applicable July 10, 2018.
Eli Lovely or Robert Galantucci at (202) 482-1593 or (202) 482-2923, respectively, AD/CVD Operations, Enforcement and Compliance, International Trade Administration, U.S. Department of Commerce, 1401 Constitution Avenue NW, Washington, DC 20230.
On June 20, 2018, the U.S. Department of Commerce (Commerce) received a countervailing duty (CVD) Petition concerning imports of certain steel racks (steel racks) from the People's Republic of China (China), filed in proper form on behalf of the Coalition for Fair Rack Imports (the petitioner), the members of which are domestic producers of steel racks.
On June 22, 2018, Commerce requested supplemental information pertaining to certain aspects of the Petition in two separate supplemental questionnaires, one dealing with CVD programs and one primarily with scope clarification issues.
On June 28, 2018, Commerce requested supplemental information pertaining to industry support and import statistics.
In accordance with section 702(b)(1) of the Tariff Act of 1930, as amended (the Act), the petitioner alleges that the Government of China (GOC) is providing countervailable subsidies, within the meaning of sections 701 and 771(5) of the Act, to producers of steel racks in China and that imports of such products are materially injuring, or threatening material injury to, the domestic steel racks industry in the United States. Consistent with section 702(b)(1) of the Act and 19 CFR 351.202(b), for those alleged programs on which we are initiating a CVD investigation, the Petition is accompanied by information reasonably available to the petitioner supporting its allegations.
Commerce finds that the petitioner filed the Petition on behalf of the domestic industry because the petitioner is an interested party as defined in section 771(9)(E) of the Act. Commerce also finds that the petitioner demonstrated sufficient industry support necessary for the initiation of the requested CVD investigation.
Because the Petition was filed on June 20, 2018, the period of investigation is
January 1, 2017, through December 31, 2017.
The product covered by this investigation is steel racks from China. For a full description of the scope of these investigations,
During our review of the Petition, Commerce received proposed scope language from the petitioner to ensure that the scope language in the Petition is an accurate reflection of the products for which the domestic industry is seeking relief.
As discussed in the Preamble to Commerce's regulations, we are setting aside a period for interested parties to raise issues regarding product coverage (scope).
Commerce requests that any factual information parties consider relevant to the scope of the investigation be submitted during this period. However,
All submissions to Commerce must be filed electronically using Enforcement and Compliance's Antidumping Duty and Countervailing Duty Centralized Electronic Service System (ACCESS).
Pursuant to sections 702(b)(4)(A)(i) and (ii) of the Act, Commerce notified representatives of the GOC of the receipt of the Petition and provided them the opportunity for consultations with respect to the CVD Petition.
Section 702(b)(1) of the Act requires that a petition be filed on behalf of the domestic industry. Section 702(c)(4)(A) of the Act provides that a petition meets this requirement if the domestic producers or workers who support the petition account for: (i) At least 25 percent of the total production of the domestic like product; and (ii) more than 50 percent of the production of the domestic like product produced by that portion of the industry expressing support for, or opposition to, the petition. Moreover, section 702(c)(4)(D) of the Act provides that, if the petition does not establish support of domestic producers or workers accounting for more than 50 percent of the total production of the domestic like product, Commerce shall: (i) Poll the industry or rely on other information in order to determine if there is support for the petition, as required by subparagraph (A); or (ii) determine industry support using a statistically valid sampling method to poll the “industry.”
Section 771(4)(A) of the Act defines the “industry” as the producers as a whole of a domestic like product. Thus, to determine whether a petition has the requisite industry support, the statute directs Commerce to look to producers and workers who produce the domestic like product. The International Trade Commission (ITC), which is responsible for determining whether “the domestic industry” has been injured, must also determine what constitutes a domestic like product in order to define the industry. While both Commerce and the ITC must apply the same statutory definition regarding the domestic like product,
Section 771(10) of the Act defines the domestic like product as “a product which is like, or in the absence of like, most similar in characteristics and uses with, the article subject to an investigation under this title.” Thus, the reference point from which the domestic like product analysis begins is “the article subject to an investigation” (
With regard to the domestic like product, the petitioner does not offer a definition of the domestic like product distinct from the scope of the investigation.
In determining whether the petitioner has standing under section 702(c)(4)(A) of the Act, we considered the industry support data contained in the Petition with reference to the domestic like product as defined in the “Scope of the Investigation,” in the Appendix to this notice. To establish industry support, the petitioner provided its own 2017 shipments of the domestic like product and compared this to the estimated total shipments of the domestic like product for the entire domestic industry.
In its July 3, 2018, letter, Jiaxing Zhongda Import & Export Co., Ltd. (Jiaxing Zhongda), a Chinese exporter/producer, submitted comments on industry support and requested that Commerce poll the industry to determine industry support.
Our review of the data provided in the Petition, the General Issues Supplement, the Second General Issues Supplement, letters from Jiaxing Zhongda, Guangdong Wireking, and UMH, the Industry Support Supplement, the Second Industry Support Supplement, the Third Industry Support Supplement, and other information readily available to Commerce indicates that the petitioner has established industry support for the Petition.
Commerce finds that the petitioner filed the Petition on behalf of the domestic industry because it is an interested party as defined in section 771(9)(E) of the Act, and it has demonstrated sufficient industry support with respect to the CVD investigation that it is requesting that Commerce initiate.
Because China is a “Subsidies Agreement Country” within the meaning of section 701(b) of the Act, section 701(a)(2) of the Act applies to this investigation. Accordingly, the ITC must determine whether imports of the subject merchandise from China materially injure, or threaten material injury to, a U.S. industry.
The petitioner alleges that imports of the subject merchandise are benefitting from countervailable subsidies and that such imports are causing, or threaten to cause, material injury to the U.S. industry producing the domestic like product. In addition, the petitioner alleges that subject imports exceed the negligibility threshold provided for under section 771(24)(A) of the Act.
The petitioner contends that the industry's injured condition is illustrated by a significant and increasing volume of subject imports; reduced market share; underselling and price depression or suppression; lost sales and lost revenues; decline in production, quantity of U.S. shipments, and capacity utilization rate; and decline in the domestic industry's profitability.
Based on the examination of the Petition, we find that the Petition meets the requirements of section 702 of the Act. Therefore, we are initiating a CVD investigation to determine whether imports of steel racks from China benefit from countervailable subsidies conferred by the GOC. In accordance with section 703(b)(1) of the Act and 19 CFR 351.205(b)(1), unless postponed, we will make our preliminary determinations no later than 65 days after the date of this initiation.
Based on our review of the Petition, we find that there is sufficient information to initiate a CVD investigation on 25 of the 28 subsidy programs alleged in the petition. For a full discussion of the basis for our decision to initiate or not on each program,
The petitioner named 93 producers/exporters as accounting for the majority of exports of steel racks to the United States from China.
Exporters and producers of steel racks from China that do not receive Q&V questionnaires by mail may still submit a response to the Q&V questionnaire and can obtain a copy of the Q&V questionnaire from the Enforcement and Compliance website. The Q&V questionnaire must be submitted by the relevant Chinese exporters/producers no later than 5:00 p.m. ET on July 24, 2018, which is two weeks from the signature date of this notice. All Q&V responses must be filed electronically via ACCESS.
Interested parties must submit applications for disclosure under APO in accordance with 19 CFR 351.305(b). Instructions for filing such applications may be found on the Commerce's website at
Comments must be filed electronically using ACCESS. An electronically filed document must be received successfully, in its entirety, by ACCESS no later than 5:00 p.m. ET on the date noted above. We intend to finalize our decisions regarding respondent selection within 20 days of publication of this notice.
In accordance with section 702(b)(4)(A)(i) of the Act and 19 CFR 351.202(f), copies of the public versions of the Petition have been provided to the GOC
We will notify the ITC of our initiation, as required by section 702(d) of the Act.
The ITC will preliminarily determine, within 45 days after the date on which the Petition was filed, whether there is a reasonable indication that imports of steel racks from China are materially injuring, or threatening material injury to, a U.S. industry.
Factual information is defined in 19 CFR 351.102(b)(21) as: (i) Evidence submitted in response to questionnaires; (ii) evidence submitted in support of allegations; (iii) publicly available information to value factors under 19 CFR 351.408(c) or to measure the adequacy of remuneration under 19 CFR 351.511(a)(2); (iv) evidence placed on the record by Commerce; and (v) evidence other than factual information described in (i)-(iv). 19 CFR 351.301(b) requires any party, when submitting factual information, to specify under which subsection of 19 CFR 351.102(b)(21) the information is being submitted
Parties may request an extension of time limits before the expiration of a time limit established under 19 CFR 351.301, or as otherwise specified by the Secretary. In general, an extension request will be considered untimely if it is filed after the expiration of the time limit established under 19 CFR 351.301. For submissions that are due from multiple parties simultaneously, an extension request will be considered untimely if it is filed after 10:00 a.m. ET on the due date. Under certain circumstances, we may elect to specify a different time limit by which extension requests will be considered untimely for submissions which are due from multiple parties simultaneously. In such a case, we will inform parties in the letter or memorandum setting forth the deadline (including a specified time) by which extension requests must be filed to be considered timely. An extension request must be made in a separate, stand-alone submission; under limited circumstances we will grant untimely-filed requests for the extension of time limits. Parties should review
Any party submitting factual information in an AD or CVD proceeding must certify to the accuracy and completeness of that information.
Interested parties must submit applications for disclosure under APO in accordance with 19 CFR 351.305. On January 22, 2008, Commerce published
This notice is issued and published pursuant to sections 702 and 777(i) of the Act and 19 CFR 351.203(c).
The merchandise covered by this investigation is steel racks and parts thereof, assembled, to any extent, or unassembled, including but not limited to, vertical components (
Steel rack components can be assembled into structures of various dimensions and configurations by welding, bolting, clipping, or with the use of devices such as clips, end plates, and beam connectors, including, but not limited to the following configurations: (1) Racks with upright frames perpendicular to the aisles that are independently adjustable, with positive locking beams parallel to the aisle spanning the upright frames with braces; and (2) cantilever racks with vertical components parallel to the aisle and cantilever beams or arms connected to the vertical components perpendicular to the aisle. Steel racks may be referred to as pallet racks, storage racks, stacker racks, retail racks, pick modules, selective racks, or cantilever racks and may incorporate moving components and be referred to as pallet-flow racks, carton-flow racks, push-back racks, movable-shelf racks, drive-in racks, and drive-through racks. While steel racks may be made to ANSI MH16.l or ANSI MH16.3 standards, all steel racks and parts thereof meeting the description set out herein are covered by the scope of this investigation, whether or not produced according to a particular standard.
The scope includes all steel racks and parts thereof meeting the description above, regardless of
(1) Dimensions, weight, strength, gauge, or load rating;
(2) vertical components or frame type (including structural, roll-form, or other);
(3) horizontal support or beam/brace type (including but not limited to structural, roll-form, slotted, unslotted, Z-beam, C-beam, L-beam, step beam, and cantilever beam);
(4) number of supports;
(5) number of levels;
(6) surface coating, if any (including but not limited to paint, epoxy, powder coating, zinc, or other metallic coatings);
(7) shape (including but not limited to rectangular, square, corner, and cantilever);
(8) the method by which the vertical and horizontal supports connect (including but not limited to locking tabs or slots, bolting, clamping, and welding); and
(9) whether or not the steel rack has moving components (including but not limited to rails, wheels, rollers, tracks, channels, carts, and conveyors).
Subject merchandise includes merchandise matching the above description that has been finished or packaged in a third country. Finishing includes, but is not limited to, coating, painting, or assembly, including attaching the merchandise to another product, or any other finishing or assembly operation that would not remove the merchandise from the scope of the investigation if performed in the country of manufacture of the steel racks and parts thereof. Packaging includes packaging the merchandise with or without another product or any other packaging operation that would not remove the merchandise from the scope of the investigation if performed in the country of manufacture of the steel racks and parts thereof.
Steel racks and parts thereof are included in the scope of this investigation whether or not imported attached to, or included with, other parts or accessories such as wire decking, nuts, and bolts. If steel racks and parts thereof are imported attached to, or included with, such non-subject merchandise, only the steel racks and parts thereof are included in the scope.
The scope of this investigation does not cover: (1) Decks,
Specifically excluded from the scope of this investigation are any products covered by Commerce's existing antidumping and countervailing duty orders on boltless steel shelving units prepackaged for sale from the People's Republic of China.
Merchandise covered by this investigation is currently classified in the Harmonized Tariff Schedule of the United States (HTSUS) under the following subheadings: 7326.90.8688, 9403.20.0080, and 9403.90.8041. Subject merchandise may also enter under subheadings 7308.90.3000, 7308.90.6000, 7308.90.9590, and 9403.20.0090. The HTSUS subheadings are provided for convenience and U.S. Customs purposes only. The written description of the scope is dispositive.
Enforcement and Compliance, International Trade Administration, Department of Commerce.
The Department of Commerce (Commerce) determines that cast iron soil pipe fittings from the People's Republic of China (China) are being, or are likely to be, sold in the United States at less than fair value (LTFV). The period of investigation is January 1, 2017, through June 30, 2017.
Applicable July 17, 2018.
Sergio Balbontin or Denisa Ursu, AD/CVD Operations, Office VIII, Enforcement and Compliance, International Trade Administration, U.S. Department of Commerce, 1401 Constitution Avenue NW, Washington, DC 20230; telephone: (202) 482-6478 and (202) 482-2285 respectively.
On February 20, 2018, Commerce published in the
A summary of the events that occurred since Commerce published the
The products covered by this investigation are cast iron soil pipe fittings from China. For a full description of the scope of this investigation,
The issues raised in the case and rebuttal briefs submitted by parties in this investigation are addressed in the Issues and Decision Memorandum. A list of the issues that parties raised, and to which we responded in the Issues and Decision Memorandum is attached to this notice at Appendix II.
In accordance with section 733(e)(1) of the Act and 19 CFR 351.206, we preliminarily found that critical circumstances exist with respect to imports of cast iron soil pipe fittings from the China-wide entity, the non-selected separate rate respondents, and Sibo, but do not exist with respect to Xuanshi and Wor-Biz.
After the
In selecting the AFA rate for the China-wide entity, Commerce's practice is to select a rate that is sufficiently adverse to ensure that the uncooperative party does not obtain a more favorable result by failing to cooperate than if it had fully cooperated.
For the final determination, we continue to find that Xuanshi and Wor-Biz are eligible to separate rates, as noted below. Section 735(c)(5)(A) of the Act provides that the estimated “all-others” rate shall be an amount equal to the weighted average of the estimated weighted-average dumping margins established for exporters and producers individually investigated, excluding zero or
In the
Based on our review and analysis of the comments received from interested parties and our findings at verification, we made certain changes to the calculation of the antidumping duty margin applicable to Xuanshi and Wor-Biz. For a discussion of these changes,
Commerce determines that cast iron soil pipe fittings from China are being, or are likely to be, sold in the United States at LTFV, and that the following dumping margins exist:
Commerce intends to disclose to interested parties the calculations performed in connection with this final determination within five days of any public announcement or, if there is no public announcement, within five days of the date of publication of the notice of final determination in the
In accordance with section 735(c)(1)(B) of the Act, we will instruct U.S. Customs and Border Protection (CBP) to continue to suspend liquidation of all entries of cast iron soil pipe fittings from China, as described in the “Scope of the Investigation” section, exported by Xuanshi and Wor-Biz, entered or withdrawn from warehouse, for consumption on or after February 20, 2018, the date of publication of the
Furthermore, we continue to find that critical circumstances exist pursuant to section 735(c)(4)(A) of the Act with respect to the China-wide entity. Therefore, for this entity, we will instruct CBP to continue to suspend liquidation for all appropriate entries of cast iron soil pipe fittings entered, or withdrawn from warehouse, for consumption on or after November 22, 2017, which is 90 days prior to the date of publication of the
To determine the cash deposit rate,
In addition, pursuant to section 735(c)(1)(B)(ii) of the Act, Commerce will instruct CBP to require a cash deposit equal to the weighted-average amount by which NV exceeds U.S. price as follows: (1) The cash deposit rate for the exporter/producer combination listed in the table above will be the rate identified for that combination in the table; (2) for all combinations of exporters/producers of merchandise under consideration that have not received their own separate rate above, the cash-deposit rate will be the cash deposit rate established for the China-wide entity; and (3) for all non-Chinese exporters of the merchandise under consideration which have not received their own separate rate above, the cash deposit rate will be the cash deposit rate applicable to the Chinese exporter/producer combination that supplied that non-Chinese exporter. These suspension of liquidation instructions will remain in effect until further notice.
In accordance with section 735(d) of the Act, we will notify the International Trade Commission (ITC) of the final affirmative determination of sales at LTFV.
As Commerce's final determination is affirmative, in accordance with section 735(b)(2) of the Act, the ITC will determine, within 45 days, whether the domestic industry in the United States is materially injured, or threatened with material injury, by reason of imports of cast iron soil pipe fittings from China, or sales (or the likelihood of sales) for importation, of cast iron soil pipe fittings from China. If the ITC determines that such injury does not exist, this proceeding will be terminated and all securities posted will be refunded or canceled. If the ITC determines that such injury does exist, Commerce intends to issue an antidumping duty order directing CBP to assess, upon further instruction by Commerce, antidumping duties on all imports of the subject merchandise entered, or withdrawn from warehouse, for consumption on or after the effective date of the suspension of liquidation.
In the event that the ITC issues a final negative injury determination, this notice will serve as the only reminder to parties subject to an APO of their responsibility concerning the destruction of proprietary information disclosed under APO in accordance with 19 CFR 351.305(a)(3). Timely written notification of the return/destruction of APO materials or conversion to judicial protective order is hereby requested. Failure to comply with the regulations and terms of an APO is a violation which is subject to sanction.
This determination is issued and published pursuant to sections 735(d) and 777(i) of the Act and 19 CFR 351.210(c).
The merchandise covered by this investigation is cast iron soil pipe fittings, finished and unfinished, regardless of industry or proprietary specifications, and regardless of size. Cast iron soil pipe fittings are nonmalleable iron castings of various designs and sizes, including, but not limited to, bends, tees, wyes, traps, drains, and other common or special fittings, with or without side inlets.
Cast iron soil pipe fittings are classified into two major types—hubless and hub and spigot. Hubless cast iron soil pipe fittings are manufactured without a hub, generally in compliance with Cast Iron Soil Pipe Institute (CISPI) specification 301 and/or American Society for Testing and Materials (ASTM) specification A888. Hub and spigot pipe fittings have hubs into which the spigot (plain end) of the pipe or fitting is inserted. Cast iron soil pipe fittings are generally distinguished from other types of nonmalleable cast iron fittings by the manner in which they are connected to cast iron soil pipe and other fittings.
The subject imports are normally classified in subheading 7307.11.0045 of the Harmonized Tariff Schedule of the United States (HTSUS): Cast fittings of nonmalleable cast iron for cast iron soil pipe. They may also be entered under HTSUS 7324.29.0000 and 7307.92.3010. The HTSUS subheadings and specifications are provided for convenience and customs purposes only; the written description of the scope of this investigation is dispositive.
National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice.
The Department of Commerce, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to take this opportunity to comment on
Written comments must be submitted on or before September 17, 2018.
Direct all written comments to Jennifer Jessup, Departmental Paperwork Clearance Officer, Department of Commerce, Room 6616, 14th and Constitution Avenue NW, Washington, DC 20230 (or via the internet at
Requests for additional information or copies of the information collection instrument and instructions should be directed to Dr. Scott Crosson, (305) 361-4468 or
This request is for extension of a currently approved information collection. The National Marine Fisheries Service (NMFS) proposes to collect economic information from golden-crab landing commercial fishermen in the United States (U.S.) South Atlantic region. The data gathered will be used to evaluate the likely economic impacts of management proposals. In addition, the information will be used to satisfy legal mandates under Executive Order 12898, the Magnuson-Stevens Fishery Conservation and Management Act (U.S.C. 1801
A standardized survey will be administered via in-person, telephone and/or mail to all fishermen participating in the fishery.
Estimated Total Annual Burden Hours: 9.
Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency's estimate of the burden (including hours and cost) of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology.
Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval of this information collection; they also will become a matter of public record.
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice; receipt of applications for permits and a permit modification.
Notice is hereby given that three applicants have applied in due form for a permit or permit modification to take green (
Written, telefaxed, or email comments must be received on or before August 16, 2018.
The application and related documents are available for review by selecting “Records Open for Public Comment” from the “Features” box on the Applications and Permits for Protected Species (APPS) home page,
These documents are also available upon written request or by appointment in the Permits and Conservation Division, Office of Protected Resources, NMFS, 1315 East-West Highway, Room 13705, Silver Spring, MD 20910; phone (301) 427-8401; fax (301) 713-0376.
Written comments on the applications should be submitted to the Chief, Permits and Conservation Division, at the address listed above. Comments may also be submitted by facsimile to (301) 713-0376, or by email to
Those individuals requesting a public hearing should submit a written request to the Chief, Permits and Conservation Division at the address listed above. The request should set forth the specific reasons why a hearing on the application would be appropriate.
Amy Hapeman (for File No. 18238-01) or Erin Markin (for File Nos. 21327 and 22123), (301) 427-8401.
The subject permits and permit modification are requested under the authority of the Endangered Species Act of 1973, as amended (ESA; 16 U.S.C. 1531
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice of public meeting.
This notice announces the date, time, and location of the public meeting being held prior to the 67th meeting of the International Whaling Commission (IWC). Because the meeting will address U.S. positions, any U.S. citizen with an identifiable interest in U.S. whale conservation policy may participate, but NOAA reserves the authority to inquire about the interests of any person who appears at the meeting and to determine the appropriateness of that person's participation.
The public meeting will be held August 7, 2018 at 9:00 a.m.
The meeting will be held at the Silver Spring Civic Center, 1 Veterans Pl, Silver Spring, MD 20910, in the Spring Room.
Carolyn Doherty, Office of International Affairs and Seafood Inspection, NOAA Fisheries (phone: (301) 427-8385 or email:
The Secretary of Commerce is responsible for discharging the domestic obligations of the United States under the International Convention for the Regulation of Whaling, 1946. The U.S. IWC Commissioner has responsibility for the preparation and negotiation of U.S. positions on international issues concerning whaling and for all matters involving the IWC. The U.S. IWC Commissioner is staffed by the Department of Commerce and assisted by the Department of State, the Department of the Interior, the Marine Mammal Commission, and other U.S. Government agencies.
Additional information about the IWC meeting, including a draft agenda for the meeting, is posted on the IWC Secretariat's website at
NOAA will a hold public meeting to discuss the tentative U.S. positions for the September 2018 IWC meeting in Florianopolis, Brazil. Because the meeting will address U.S. positions, the substance of the meeting must be kept confidential. Any U.S. citizen with an identifiable interest in U.S. whale conservation policy may participate, but NOAA reserves the authority to inquire about the interests of any person who appears at the meeting and to determine the appropriateness of that person's participation. In particular, persons who represent foreign interests may not attend. Persons deemed by NOAA to be ineligible to attend will be asked to leave the meeting. These stringent measures are necessary to protect the confidentiality of U.S. negotiating positions.
The August 7, 2018, meeting will be held at 9:00 a.m. in the Spring Room of the Silver Spring Civic Center, 1 Veterans Pl, Silver Spring, MD 20910.
The meeting is physically accessible to people with disabilities. Requests for sign language interpretation or other auxiliary aids should be directed to Carolyn Doherty,
National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice.
The Department of Commerce, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to take this opportunity to comment on proposed and/or continuing information collections, as required by the Paperwork Reduction Act of 1995.
Written comments must be submitted on or before September 17, 2018.
Direct all written comments to Jennifer Jessup, Departmental
Requests for additional information or copies of the information collection instrument and instructions should be directed to Frank M. Sprtel, (301) 628-1641 or
This request is for a revision and extension of a currently approved information collection through the
The NOFO will indicate the specific questions to which an applicant must respond in one of three ways: (1) The applicable questions are inserted directly into the NOFO with reference to the OMB Control Number (0648-0538) for this form; (2) the NOFO will specify which questions (
This Questionnaire has been revised to (1) remove repetitive questions; (2) revise specific questions to use plain language; and (3) add questions that would be helpful to a wider range of NOAA programs.
The information may be submitted electronically or on paper (faxed or mailed).
Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency's estimate of the burden (including hours and cost) of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology.
Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval of this information collection; they also will become a matter of public record.
National Telecommunications and Information Administration, U.S. Department of Commerce.
Notice of open meetings—monthly webinars.
The National Telecommunications and Information Administration (NTIA), as part of its BroadbandUSA program, will host a series of webinars on a monthly basis to engage the public and stakeholders with information to accelerate broadband connectivity, improve digital inclusion, strengthen policies and support local priorities. The Practical Broadband Conversations webinar series will provide an ongoing source of information on a range of topics and issues being addressed by BroadbandUSA, including but not limited to best practices for improving broadband deployment, digital inclusion, workforce skills, and e-government.
BroadbandUSA will hold the webinars from 2:00 p.m. to 3:00 p.m. Eastern Time on the third Wednesday of every month, beginning October 17, 2018 and continuing through September 18, 2019.
This is a virtual meeting. NTIA will post the registration information on its BroadbandUSA website
Elaine Sloan, National Telecommunications and Information Administration, U.S. Department of Commerce, Room 4872, 1401 Constitution Avenue NW, Washington, DC 20230; telephone: (202) 482-8231; email:
NTIA's BroadbandUSA program serves as a trusted and neutral strategic advisor, collaborating with federal, state and local government, and industry leaders working to advance smart city and broadband initiatives designed to attract new employers, create quality jobs, improve educational opportunities, increase health outcomes and advance public safety.
BroadbandUSA convenes workshops on a regular basis to bring stakeholders together to discuss ways to improve broadband policies, share best practices, and connect state and local stakeholders to other federal agencies and funding sources for the purpose of expanding broadband infrastructure and adoption throughout America. Experts from NTIA's BroadbandUSA program are available to provide technical assistance and to connect stakeholders with additional resources, such as best practices, guides and program models.
NTIA's BroadbandUSA team convenes events around the country to bring together government, industry and non-profit personnel working to expand broadband connectivity and improve digital inclusion and workforce skills. These webinars are among the events BroadbandUSA uses to share broadband information with the public, broadband stakeholders, tribal, local and state governments and federal programs.
Details on specific webinar topics and webinar registration information will be posted on the BroadbandUSA website
The public is invited to participate in these webinars. General questions and comments are welcome at any time during webinars via email to
Department of the Navy, DoD.
Notice of a new system of records.
The Department of the Navy (DON) is proposing to establish a new system of records that will be used to verify eligibility of current DON law enforcement officers for assigned duties and to determine if reassignment, reclassification, detail or other administrative action is warranted based on an officer's ability to obtain or maintain credential qualification requirements; verify and validate eligibility of current, separating or separated and retired DON law enforcement officers to ship, transport, possess or receive Government-issued or private firearms or ammunition; and to verify and validate eligibility of current, separating or separated, and retired DON law enforcement officers to receive DON endorsed law enforcement credentials, to include Law Enforcement Officers Safety Act (LEOSA).
Comments will be accepted on or before August 16, 2018. This proposed action will be effective the day following the end of the comment period unless comments are received which result in a contrary determination.
You may submit comments, identified by docket number and title, by any of the following methods:
•
•
Sally A. Hughes, Head, FOIA/PA Programs (ARSF), Headquarters, U.S. Marine Corps, 3000 Marine Corps Pentagon, Washington, DC 20350-3000, telephone (703) 614-3685.
The Law Enforcement Officers Safety Act (LEOSA) is a United States federal law that allows two classes of persons—the “qualified law enforcement officer” and the “qualified retired law enforcement officer”—to carry a concealed firearm in any jurisdiction in the United States.
The Department of the Navy's notices for systems of records subject to the Privacy Act of 1974, as amended, have been published in the
The proposed system report, as required by the Privacy Act of 1974, as amended, was submitted on May 16, 2018 to the House Committee on Oversight and Government Reform, the Senate Committee on Governmental Affairs, and the Office of Management and Budget (OMB) pursuant to paragraph 7 of OMB Circular No. A-108, “Federal Agency Responsibilities for Review, Reporting, and Publication under the Privacy Act,” revised December 23, 2016 (December 23, 2016 81 FR 94424).
Law Enforcement Officer Eligibility and Credential Records, NM05580-2.
Unclassified.
Organization elements of the Department of the Navy (DON). Official mailing addresses are published in the Standard Navy Distribution List available, as an appendix to the Navy's compilation of system of records notices, or may be obtained from the system manager. Applications are submitted via Defense Consulting Services, 15750-W-1-10, San Antonio, TX 78249. Third Party services for USMC are provided by LEOSA Credential Manager, 701 South Courthouse Road, Building 2, Floor 2, Arlington, VA 22204. Tel: (703) 604-4502, Email:
LEOSA Program Manager, Commander, Navy Installations Command, 716 Sicard Street SE, Suite 1000, Washington Navy Yard, DC 20374-5140. Tel: (202)-433-9567.
Marine Corps Policy Official, Head, Law Enforcement and Corrections Branch, Security Division, Plans, Policies and Operations (PP&O), Headquarters, U.S. Marine Corps, 3000 Pentagon, Room 4A324, Washington, DC 20350-3000. Tel: (703) 614-1068.
Record Holders Commanding officers of the U.S. Navy activity in question and/or Marine Corps Credential Approving Authorities at Marine Corps Headquarters, installations, and units. Official mailing addresses are published
10 U.S.C. 5013, Secretary of the Navy; 10 U.S.C. 5041, Headquarters, Marine Corps function, composition; 18 U.S.C. 922, Unlawful Acts; 18 U.S.C. 926B and 926C, Carrying of concealed firearms by qualified retired law enforcement officers; DoD Instruction 5525.12 Implementation of the Law Enforcement Officers Safety Act of 2004 (LEOSA); and E.O. 9397 (SSN), as amended.
To verify eligibility of current DON law enforcement officers for assigned duties and to determine if reassignment, reclassification, detail or other administrative action is warranted based on an officer's ability to obtain or maintain credential qualification requirements.
To verify and validate eligibility of current, separating or separated and retired DON law enforcement officers to ship, transport, possess or receive Government-issued or private firearms or ammunition.
To verify and validate eligibility of current, separating or separated, and retired DON law enforcement officers to receive DON endorsed law enforcement credentials, to include LEOSA credentials.
Current, separating or separated, and retired DON law enforcement officers including military police, masters at arms, and civilian police officers.
Name, Social Security Number (SSN), Department of Defense (DoD) Identification (ID) Number, date and place of birth, gender, citizenship, badge number, physical description, passport type photograph, copy of military identification card, copy of state driver's license or state issued identification card, copy of Federal Bureau of Investigation (FBI) Identity History Summary, service status, dates of service, Military Occupational Specialty (MOS) code, title/series/grade, assignments, related education and training completed, statements of medical qualification, certifications granted and/or revoked, copies of credentials, clearances, notice of personnel actions, notice of convictions, type of separation, affiliated law enforcement experience including dates of employment, position/job title and reason for leaving, work and home phone numbers, email addresses, and mailing addresses, applications for DON issued certification of eligibility, applicant signed statements of eligibility and understanding of requirements, copies of DD 2760, DD-214, and SF-50.
Individuals, DoD, DON, Navy and U.S. Marine Corps security offices, the FBI, and system managers.
In addition to those disclosures generally permitted under 5 U.S.C. 552a(b) of the Privacy Act of 1974, as amended, the records contained herein may specifically be disclosed outside the DoD as a routine use pursuant to 5 U.S.C. 552a(b)(3) as follows:
a. To the Department of Justice for the purpose of inclusion in the National Instant Criminal Background Check System, which may be used by firearm licensees (importers, manufacturers or dealers) to determine whether individuals are qualified to receive or possess firearms and ammunition.
b. To contractors, grantees, experts, consultants, students, and others performing or working on a contract, service, grant, cooperative agreement, or other assignment for the federal government when necessary to accomplish an agency function related to this system of records.
c. To designated officers and employees of Federal, State, local, territorial or tribal, international, or foreign agencies maintaining civil, criminal, enforcement, or other pertinent information, such as current licenses, if necessary to obtain information relevant and necessary to a DoD Component decision concerning the hiring or retention of an employee, the issuance of a security clearance, the letting of a contract, or the issuance of a license, grant, or other benefit.
d. To designated officers and employees of Federal, State, local, territorial, tribal, international, or foreign agencies in connection with the hiring or retention of an employee, the conduct of a suitability or security investigation, the letting of a contract, or the issuance of a license, grant or other benefit by the requesting agency, to the extent that the information is relevant and necessary to the requesting agency's decision on the matter and the Department deems appropriate.
e. To the Office of Personnel Management (OPM) for the purpose of addressing civilian pay and leave, benefits, retirement deduction, and any other information necessary for the OPM to carry out its legally authorized government-wide personnel management functions and studies
f. To the appropriate Federal, State, local, territorial, tribal, foreign, or international law enforcement authority or other appropriate entity where a record, either alone or in conjunction with other information, indicates a violation or potential violation of law, whether criminal, civil, or regulatory in nature.
g. To any component of the Department of Justice for the purpose of representing the DoD, or its components, officers, employees, or members in pending or potential litigation to which the record is pertinent.
h. In an appropriate proceeding before a court, grand jury, or administrative or adjudicative body or official, when the DoD or other Agency representing the DoD determines that the records are relevant and necessary to the proceeding; or in an appropriate proceeding before an administrative or adjudicative body when the adjudicator determines the records to be relevant to the proceeding.
i. To the National Archives and Records Administration for the purpose of records management inspections conducted under the authority of 44 U.S.C. 2904 and 2906.
j. To a Member of Congress or staff acting upon the Member's behalf when the Member or staff requests the information on behalf of, and at the request of, the individual who is the subject of the record.
k. To appropriate agencies, entities, and persons when (1) the DoD suspects or has confirmed that there has been a breach of the system of records; (2) the DoD has determined that as a result of the suspected or confirmed breach there is a risk of harm to individuals, the DoD (including its information systems, programs, and operations), the Federal Government, or national security; and (3) the disclosure made to such agencies, entities, and persons is reasonably necessary to assist in connection with the DoD's efforts to respond to the suspected or confirmed breach or to prevent, minimize, or remedy such harm.
l. To another Federal agency or Federal entity, when the DoD determines that information from this system of records is reasonably necessary to assist the recipient agency or entity in (1) responding to a suspected or confirmed breach or (2) preventing, minimizing, or remedying the risk of harm to individuals, the recipient agency or entity (including its information systems, programs and operations), the Federal Government, or
Paper records and/or electronic storage media.
Name, last four of SSN or DoD ID number.
Current DON law enforcement officer general eligibility verification records: Destroy upon separation or transfer of employee or when 2 years old, whichever is earlier.
Application packages for active duty/currently employed Navy and Marine Corps law enforcement officer 926B LEOSA Credentials:
1. DD Form 2760, Qualification to Possess Firearms or Ammunition.
a. Enlisted military police (MP): Destroy 5 years after initial issuance of law enforcement credentials or upon submission of updated DD Form 2760 during law enforcement credential renewal.
b. Commissioned officers, warrant officers, and Navy and Marine Corps civilian police officers: Destroy 10 years after initial issuance of law enforcement credentials or upon submission of updated DD Form 2760 during law enforcement credential renewal.
2. LEOSA 926B Certificate of Eligibility.
Destroy 5 years after initial issuance of law enforcement credentials or upon submission of updated LEOSA 926B Certificate of Eligibility during law enforcement credential renewal.
Application packages for Retired/Separated Navy and Marine Corps law enforcement officer 926C LEOSA Credentials are destroyed 2 years after issuance of law enforcement credentials.
The DD Form 2760, Qualification to Possess Firearms or Ammunition and the LEOSA 926C Certification of Eligibility are PERMANENT records and transferred to the National Archives 2 years after issuance of law enforcement credentials.
a. Destroy paper/electronic copies upon receipt of acceptance by NARA.
Collection forms, paper and/or plastic badges/passes are shredded or incinerated using DoD approved procedures. If any IT system or data storage media fails and must be replaced, the data storage component (
Access is provided on a need-to-know basis only. Paper records are maintained in file cabinets under the control of authorized personnel during working hours. The office space in which the file cabinets are located is locked outside of official working hours. Computer terminals are located in supervised areas. Access is controlled by password and/or Primary Key Infrastructure (PKI)/Common Access Card (CAC). Computerized records maintained in a controlled area are accessible only to authorized personnel. Records are maintained in a controlled facility. Physical entry is restricted by the use of locks, guards, and is accessible only to authorized personnel. Physical and electronic access is restricted to designated individuals having a need-to-know in the performance of official duties and who are properly screened and cleared for need-to-know.
Individuals seeking access to records about themselves contained in this system should address written inquiries to Commanding Officer of the activity in question. Official mailing addresses are published in the Standard Navy Distribution List available as an appendix to the Navy's compilation of system of records notices or may be obtained from the system manager.
For Marine Corps LEOSA 926C and 926B Credential application records, individuals should address written inquiries to the Commandant of the Marine Corps, Plans, Policies, and Operations, Security Division, Law Enforcement and Corrections Branch (PSL), 3000 Marine Corps Pentagon, Washington, DC 20380-1775.
For verification purposes, the individual should provide full name, SSN and/or DoD ID Number, sufficient details to permit locating pertinent records, and either a notarized statement or an unsworn declaration made in accordance with 28 U.S.C. 1746, in the following format:
If executed outside the United States: “I declare (or certify, verify, or state) under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed on (date). (Signature).”
If executed within the United States, its territories, possessions, or commonwealths: “I declare (or certify, verify, or state) under penalty of perjury that the foregoing is true and correct. Executed on (date). (Signature)”.
The Navy's rules for accessing records, and for contesting contents and appealing initial agency determinations are published in Secretary of the Navy Instruction 5211.5E; 32 CFR part 701; or may be obtained from the system manager.
Individuals seeking to determine whether information about themselves is contained in this system should address written inquiries to the Commanding Officer of the activity in question. Official mailing addresses are published in the Standard Navy Distribution List available as an appendix to the Navy's compilation of system of records notices or may be obtained from the system manager.
For Marine Corps LEOSA 926C and 926B Credential application records, individuals should address written inquiries to the Commandant of the Marine Corps, Plans, Policies, and Operations, Security Division, Law Enforcement and Corrections Branch (PSL), 3000 Marine Corps Pentagon, Washington, DC 20380-1775.
For verification purposes, individual should provide full name, SSN and/or DoD ID Number, sufficient details to permit locating pertinent records, and either a notarized statement or an unsworn declaration made in accordance with 28 U.S.C. 1746, in the following format:
If executed outside the United States: “I declare (or certify, verify, or state) under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed on (date). (Signature).”
If executed within the United States, its territories, possessions, or commonwealths: “I declare (or certify, verify, or state) under penalty of perjury that the foregoing is true and correct. Executed on (date). (Signature)”.
None.
None.
Take notice that the following hydroelectric application has been filed with the Commission and is available for public inspection.
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b.
c.
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j. This application is not ready for environmental analysis at this time.
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l. Pursuant to section 4.32(b)(7) of 18 CFR of the Commission's regulations, if any resource agency, Indian Tribe, or person believes that an additional scientific study should be conducted in order to form an adequate factual basis for a complete analysis of the application on its merit, the resource agency, Indian Tribe, or person must file a request for a study with the Commission not later than 60 days from the date of filing of the application, and serve a copy of the request on the applicant.
m.
The Commission strongly encourages electronic filing. Please file additional study requests and requests for cooperating agency status using the Commission's eFiling system at
n.
The Parr Shoals Development consists of: (1) The 15-mile-long, 4,250-acre Parr Reservoir, at full pond elevation 265.3 feet North American Vertical Datum of 1988 (NAVD 88); (2) the 2,690-foot-long Parr Shoals Dam, which includes a non-overflow section and powerhouse intake section; (3) a powerhouse integral with the dam, with six generating units; and (4) transmission facilities that consist of three 950-foot-long, 13.8-kilovolt lines extending from the hydro station to the non-project Parr sub-station.
The Fairfield Pumped Storage Development is operated to generate during peak demand periods. Generation usually occurs during the day, with the upper reservoir replenished by pumping water at night (non-peak period). The Parr Shoals Development serves as the lower reservoir for the pumped storage project.
o. A copy of the application is available for review at the Commission in the Public Reference Room, or may be viewed on the Commission's website at
You may also register online at
p.
Final amendments to the application must be filed with the Commission no later than 30 days from the issuance date of the notice of ready for environmental analysis.
This is a supplemental notice in the above-referenced proceeding Stonepeak Kestrel Energy Marketing LLC's application for market-based rate authority, with an accompanying rate tariff, noting that such application includes a request for blanket authorization, under 18 CFR part 34, of future issuances of securities and assumptions of liability.
Any person desiring to intervene or to protest should file with the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211 and 385.214). Anyone filing a motion to intervene or protest must serve a copy of that document on the Applicant.
Notice is hereby given that the deadline for filing protests with regard to the applicant's request for blanket authorization, under 18 CFR part 34, of future issuances of securities and assumptions of liability, is July 31, 2018.
The Commission encourages electronic submission of protests and interventions in lieu of paper, using the FERC Online links at
Persons unable to file electronically should submit an original and 5 copies of the intervention or protest to the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426.
The filings in the above-referenced proceeding are accessible in the Commission's eLibrary system by clicking on the appropriate link in the above list. They are also available for electronic review in the Commission's Public Reference Room in Washington, DC. There is an eSubscription link on the website that enables subscribers to receive email notification when a document is added to a subscribed docket(s). For assistance with any FERC Online service, please email
Take notice that the Commission received the following electric rate filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
Take notice that the following settlement agreement has been filed with the Commission and is available for public inspection.
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b.
c.
d.
e.
f.
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j.
The Commission strongly encourages electronic filing. Please file comments using the Commission's eFiling system at
The Commission's Rules of Practice require all intervenors filing documents with the Commission to serve a copy of that document on each person on the official service list for the project. Further, if an intervenor files comments or documents with the Commission relating to the merits of an issue that may affect the responsibilities of a particular resource agency, they must also serve a copy of the document on that resource agency.
k.
l. A copy of the Settlement Agreement is available for review at the Commission in the Public Reference Room, or may be viewed on the Commission's website at
You may also register online at
Take notice that the Commission has received the following Natural Gas Pipeline Rate and Refund Report filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified date(s). Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
The following notice of meeting is published pursuant to section 3(a) of the government in the Sunshine Act (Pub. L. 94-409), 5 U.S.C. 552b:
Federal Energy Regulatory Commission.
July 19, 2018, 10:00 a.m.
Room 2C, 888 First Street NE, Washington, DC 20426.
Open.
Agenda.*
Kimberly D. Bose, Secretary, Telephone (202) 502-8400.
For a recorded message listing items struck from or added to the meeting, call (202) 502-8627.
This is a list of matters to be considered by the Commission. It does not include a listing of all documents relevant to the items on the agenda. All public documents, however, may be viewed on line at the Commission's website at
A free webcast of this event is available through
Immediately following the conclusion of the Commission Meeting, a press briefing will be held in the Commission Meeting Room. Members of the public may view this briefing in the designated overflow room. This statement is intended to notify the public that the press briefings that follow Commission meetings may now be viewed remotely at Commission headquarters, but will not be telecast through the Capitol Connection service.
Take notice that the Commission received the following electric rate filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
Environmental Protection Agency (EPA).
Notice.
The Environmental Protection Agency (EPA) is planning to submit an information collection request (ICR), “Proposed Information Collection Request; Comment Request; Application Requirements for the Approval and Delegation of Federal Air Toxics Programs to State, Territorial, Local, and Tribal Agencies” (EPA ICR No. 1643.09, OMB Control No. 2060-0264) to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act (PRA). Before doing so, the EPA is soliciting public comments on specific aspects of the proposed information collection as described below. This is a proposed extension of the ICR, which is currently approved through August 31, 2018. An Agency
Comments must be submitted on or before September 17, 2018.
Submit your comments, referencing Docket ID No. EPA-HQ-OAR-2004-0065, online using
The EPA's policy is that all comments received will be included in the public docket without change including any personal information provided, unless the comment includes profanity, threats, information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute.
John Schaefer, Sector Policies and Programs Division (D205-02), Office of Air Quality Planning and Standards, Environmental Protection Agency, Research Triangle Park, NC 27711; telephone number: 919-541-0296; fax number: 919-541-4991; email address:
Supporting documents which explain in detail the information that the EPA will be collecting are available in the public docket for this ICR. The docket can be viewed online at
Pursuant to section 3506(c)(2)(A) of the PRA, the EPA is soliciting comments and information to enable it to: (1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Agency, including whether the information will have practical utility; (2) evaluate the accuracy of the Agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) enhance the quality, utility, and clarity of the information to be collected; and; (5) minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology,
Environmental Protection Agency (EPA).
Notice of final Order on Petition for objection to Clean Air Act title V operating permit.
The Environmental Protection Agency (EPA) Administrator signed an Order dated May 31, 2018, granting in part and denying in part a Petition dated November 8, 2016 from the Environmental Integrity Project, Sierra Club, and Air Alliance Houston. The Petition requested that the EPA object to a Clean Air Act (CAA) title V operating permit issued by the Texas Commission on Environmental Quality (TCEQ) to Motiva Enterprises LLC (Motiva) for its Port Arthur Refinery located in Jefferson County, Texas.
The EPA requests that you contact the individual listed in the
Kyndall Cox, EPA Region 6, (214) 665-8567,
The CAA affords EPA a 45-day period to review and object to, as appropriate, operating permits proposed by state permitting authorities under title V of the CAA. Section 505(b)(2) of the CAA authorizes any person to petition the EPA Administrator to object to a title V operating permit within 60 days after the expiration of the EPA's 45-day review period if the EPA has not objected on its own initiative. Petitions must be based only on objections to the permit that were raised with reasonable specificity during the public comment period provided by the state, unless the petitioner demonstrates that it was impracticable to raise these issues during the comment period or unless the grounds for the issue arose after this period.
The EPA received the Petition from the Environmental Integrity Project, Sierra Club, and Air Alliance Houston dated November 8, 2016, requesting that the EPA object to the issuance of operating permit no. O1386, issued by TCEQ to Motiva's Port Arthur Refinery in Jefferson County, Texas. The Petition has six claims (1-6) that the proposed permit fails to require monitoring, recordkeeping and reporting sufficient to assure compliance with various emission limits and operational requirements for units authorized by New Source Review (NSR) permits and permits by rule (PBRs); one claim (7) that the proposed permit's incorporation by reference of permit by rule requirements fails to assure compliance with applicable requirements; and one claim (8) that the proposed permit fails to identify monitoring, recordkeeping and reporting for emission units subject to NSPS and NESHAP federal rules.
On May 31, 2018, the EPA Administrator issued an Order granting in part and denying in part the Petition. The Order explains the basis for EPA's decision.
Sections 307(b) and 505(b)(2) of the CAA provide that a petitioner may request judicial review of those portions of an order that deny issues in a petition. Any petition for review shall be filed in the United States Court of Appeals for the appropriate circuit no later than September 17, 2018.
Federal Accounting Standards Advisory Board.
Notice.
Pursuant to 31 U.S.C. 3511(d), the Federal Advisory Committee Act (Pub. L. 92-463), as amended, and the FASAB Rules Of Procedure, as amended in October 2010, notice is hereby given that the Federal Accounting Standards Advisory Board (FASAB) has issued an exposure draft of a classified Interpretation of Federal Financial Accounting Standards (SFFAS) 56:
Due to the classified nature of the proposal, the exposure draft will only be made available to those individuals who have been designated as having a need to know and who hold the proper clearances.
Additionally, FASAB staff will hold two classified reading sessions for those individuals without SIPR accounts to review the exposure draft. Only those individuals who have been designated as having a need to know and hold the proper clearances will be allowed to attend.
To request attendance at one of the reading sessions please contact Monica Valentine at
The Board requests comments on the exposure draft by August 13, 2018 and encourages respondents to provide responses to all of the questions raised and the reasons for their positions.
Ms. Wendy M. Payne, Executive Director, 441 G Street NW, Suite 1155, Washington, DC 20548, or call (202) 512-7350.
Federal Advisory Committee Act, Pub. L. 92-463.
Federal Communications Commission.
Notice and request for comments.
As part of its continuing effort to reduce paperwork burdens, and as required by the Paperwork Reduction Act of 1995 (PRA), the Federal Communications Commission (FCC or Commission) invites the general public and other Federal agencies to take this opportunity to comment on the following information collections. Comments are requested concerning: whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; the accuracy of the Commission's burden estimate; ways to enhance the quality, utility, and clarity of the information collected; ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology; and ways to further reduce the information collection burden on small business concerns with fewer than 25 employees.
The FCC may not conduct or sponsor a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number. No person shall be subject to any penalty for failing to comply with a collection of information subject to the PRA that does not display a valid OMB control number.
Written PRA comments should be submitted on or before September 17, 2018. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this notice, you should advise the contact listed below as soon as possible.
Direct all PRA comments to Cathy Williams, FCC, via email to
For additional information about the information collection, contact Cathy Williams at (202) 418-2918.
The companies listed in this notice have applied to the Board for approval, pursuant to the Bank Holding Company Act of 1956 (12 U.S.C. 1841
The applications listed below, as well as other related filings required by the Board, are available for immediate inspection at the Federal Reserve Bank indicated. The applications will also be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing on the standards enumerated in the BHC Act (12 U.S.C. 1842(c)). If the proposal also involves the acquisition of a nonbanking company, the review also includes whether the acquisition of the nonbanking company complies with the standards in section 4 of the BHC Act (12 U.S.C. 1843). Unless otherwise noted, nonbanking activities will be conducted throughout the United States.
Unless otherwise noted, comments regarding each of these applications must be received at the Reserve Bank indicated or the offices of the Board of Governors not later than August 9, 2018.
1.
National Institute for Occupational Safety and Health (NIOSH), Centers for Disease Control and Prevention, Department of Health and Human Services (HHS).
Notice.
HHS gives notice of a determination concerning a petition to add a class of employees from the Feed Materials Production Center (FMPC), in Fernald, Ohio, to the Special Exposure Cohort (SEC) under the Energy Employees Occupational Illness Compensation Program Act of 2000 (EEOICPA).
Stuart L. Hinnefeld, Director, Division of Compensation Analysis and Support, National Institute for Occupational Safety and Health (NIOSH), 1090 Tusculum Avenue, MS C-46, Cincinnati, OH 45226-1938, Telephone 1-877-222-7570. Information requests can also be submitted by email to
On June 21, 2018, the Secretary of HHS
“(1) All employees of the Department of Energy (DOE), its predecessor agencies, and their contractors and subcontractors who worked in any area of the Feed Materials Production Center at Fernald, Ohio, from January 1, 1984, through December 31, 1989; and (2) all employees of the DOE, its predecessor agencies, National Lead of Ohio, or NLO, Inc., in any area of the Feed Materials Production Center from January 1, 1979, through December 31, 1983.”
42 U.S.C.7384q.
National Institute for Occupational Safety and Health (NIOSH), Centers for Disease Control and Prevention, Department of Health and Human Services (HHS).
Notice.
HHS gives notice of a determination concerning a petition to add a class of employees from the Grand Junction Facilities, in Grand Junction, Colorado, to the Special Exposure Cohort (SEC) under the Energy Employees Occupational Illness Compensation Program Act of 2000 (EEOICPA).
Stuart L. Hinnefeld, Director, Division of Compensation Analysis and Support, National Institute for Occupational Safety and Health (NIOSH), 1090 Tusculum Avenue, MS C-46, Cincinnati, OH 45226-1938, Telephone 1-877-222-7570. Information requests can also be submitted by email to
On June 21, 2018, the Secretary of HHS determined that the following class of employees does not meet the statutory criteria for addition to the SEC as authorized under EEOICPA:
“All employees who worked in any area of the Grand Junction Facilities in Grand Junction, Colorado, from January 1, 1986, through July 31, 2010.”
42 U.S.C.7384q.
Centers for Medicare & Medicaid Services.
Notice.
The Centers for Medicare & Medicaid Services (CMS) is announcing an opportunity for the public to comment on CMS' intention to collect information from the public. Under the Paperwork Reduction Act of 1995 (the PRA), federal agencies are required to publish notice in the
Comments must be received by September 17, 2018.
When commenting, please reference the document identifier or OMB control number. To be assured consideration, comments and recommendations must be submitted in any one of the following ways:
1.
2.
To obtain copies of a supporting statement and any related forms for the proposed collection(s) summarized in this notice, you may make your request using one of following:
1. Access CMS' website address at
2. Email your request, including your address, phone number, OMB number, and CMS document identifier, to
3. Call the Reports Clearance Office at (410) 786-1326.
William Parham at (410) 786-4669.
This notice sets out a summary of the use and burden associated with the following information collections. More detailed information can be found in each collection's supporting statement and associated materials (see
Under the PRA (44 U.S.C. 3501-3520), federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. The term “collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes agency requests or requirements that members of the public submit reports, keep
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2.
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Centers for Medicare & Medicaid Services, HHS.
Notice.
The Centers for Medicare & Medicaid Services (CMS) is announcing an opportunity for the public to comment on CMS' intention to collect information from the public. Under the Paperwork Reduction Act of 1995 (PRA), federal agencies are required to publish notice in the
Comments on the collection(s) of information must be received by the OMB desk officer by August 16, 2018.
When commenting on the proposed information collections, please reference the document identifier or OMB control number. To be assured consideration, comments and recommendations must be received by the OMB desk officer via one of the following transmissions: OMB, Office of Information and Regulatory Affairs, Attention: CMS Desk Officer, Fax Number: (202) 395-5806
To obtain copies of a supporting statement and any related forms for the proposed collection(s) summarized in this notice, you may make your request using one of following:
1. Access CMS' website address at
2. Email your request, including your address, phone number, OMB number, and CMS document identifier, to
3. Call the Reports Clearance Office at (410) 786-1326.
Reports Clearance Office at (410) 786-1326.
Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501-3520), federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. The term “collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A)) requires federal agencies to publish a 30-day notice in the
1.
The State must conduct RetroDUR which provides for the ongoing periodic examination of claims data and other records in order to identify patterns of fraud, abuse, inappropriate or medically unnecessary care. Patterns or trends of drug therapy problems are identified and reviewed to determine the need for intervention activity with pharmacists and/or physicians. States may conduct interventions via telephone, correspondence, or face-to-face contact.
Annual reports are submitted to CMS for the purposes of monitoring compliance and evaluating the progress of States' DUR programs. The information submitted by States is reviewed and results are compiled by CMS in a format intended to provide information, comparisons and trends related to States' experiences with DUR. The States benefit from the information and may enhance their programs each year based on State reported innovative practices that are compiled by CMS from the DUR annual reports.
Notice of Intent to award a single supplement to the National Association of Area Agencies on Aging.
The Administration for Community Living (ACL) is announcing supplemental funding for the National Resource Center for Engaging Older Adults program. The National Resource Center for Engaging Older Adults program works to identify and disseminate information about emerging trends, resources, and replication strategies that the Aging Network can use and tailor in their communities to support the engagement of older adults. The purpose of this announcement is to award supplemental funds to the National Association of Area Agencies on Aging to support staff and the development of enhanced resources and tools to support the Aging Network.
The Administration on Aging, an agency of the U.S. Administration for Community Living, established the Engagement and Older Adults Resource Center to better ensure that the Aging Network has the tools and resources necessary for the development of programs that provide older adults effective ways to stay socially engaged. Through myriad approaches such as a website, webinars, fact sheets, and other materials the project is identifying, synthesizing, and disseminating innovative social engagements practices and programming.
In recent years with growing research demonstrating the correlation between social engagement and healthy aging, there has been an increase in the Aging Network's desire to seek new and innovative approaches to assist older adults remain active and engaged in the community. The Resource Center has been conducting webinars and identifying engagement resources to highlight on the Center's website, but there is a need for the project to accelerate the development of tools and resources, such as best practice profiles, fact sheets, and toolkits, to meet the needs of the Aging Network. The supplemental funding will be used to support additional staff to more rapidly identify successful engagement programs and strategies that can be shared with the aging network via the website, webinars, and other written products.
Evaluation Criteria: ACL will use the following evaluation criteria to ensure that proposed activities are within the approved scope and budget of the grant:
Is the purpose of the funding clearly described? Does it reflect a coherent and feasible approach for successfully achieving the identified outcome(s)? Is the project work plan clear and comprehensive? Does it include sensible and feasible timeframes for the accomplishment of tasks presented?
Is the budget justified with respect to the adequacy and reasonableness of resources requested? Are budget line items clearly delineated and consistent with project objectives?
Are the expected project benefits/results clear, realistic, and consistent with the objectives and purpose of the project?
Application will be reviewed by Federal staff.
For further information or comments regarding this program expansion supplement, contact Sherri Clark, U.S. Department of Health and Human Services, Administration for Community Living, Administration on Aging, Washington, DC 20201; telephone (202) 795-7327; email
Office of the Secretary, HHS.
Notice.
In compliance with the requirement of the Paperwork Reduction Act of 1995, the Office of the Secretary (OS), Department of Health and Human Services, is publishing the following summary of a proposed collection for public comment.
Comments on the ICR must be received on or before August 16, 2018.
Submit your comments to
Sherrette Funn,
Interested persons are invited to send comments regarding this burden estimate or any other aspect of this collection of information, including any of the following subjects: (1) The necessity and utility of the proposed information collection for the proper performance of the agency's functions; (2) the accuracy of the estimated burden; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) the use of automated collection techniques or other forms of information technology to minimize the information collection burden.
Program data are gathered from recipients for both ad-hoc episodic reporting as well as required reporting as part of the HPP Cooperative Agreement. Ad-hoc reporting includes but is not limited to Coalition Assessment Tool (CAT) Data Collection Tool, Impact Survey, HPP Partner Survey, CA after action reports, Ebola and Other Special Pathogens. Required reporting include Mid-Year and End-of-Year Progress Reports and other similar information collections (ICs) that account for recipient spending and program performance on all activities conducted in pursuit of achieving the HPP Cooperative Agreement goals.
This generic data collection effort is crucial to HPP's decision-making process regarding the continued existence, design and funding levels of this program. Results from these data analyses enable HPP to monitor health care emergency preparedness and progress towards national preparedness and response goals. HPP supports
Office of the Secretary, HHS.
Notice.
In compliance with the requirement of the Paperwork Reduction Act of 1995, the Office of the Secretary (OS), Department of Health and Human Services, is publishing the following summary of a proposed collection for public comment.
Comments on the ICR must be received on or before September 17, 2018.
Submit your comments to
When submitting comments or requesting information, please include the document identifier 0990-New-60D and project title for reference, to
Interested persons are invited to send comments regarding this burden estimate or any other aspect of this collection of information, including any of the following subjects: (1) The necessity and utility of the proposed information collection for the proper performance of the agency's functions; (2) the accuracy of the estimated burden; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) the use of automated collection techniques or other forms of information technology to minimize the information collection burden.
Office of the Secretary, HHS.
Notice.
In compliance with the requirement of the Paperwork Reduction Act of 1995, the Office of the Secretary (OS), Department of Health and Human Services, is publishing the following summary of proposed extensions of collections for public comment.
Comments on the ICR must be received on or before September 17, 2018.
Submit your comments to
When submitting comments or requesting information, please include the document identifier 0990-New-60D and project title for reference, to
Interested persons are invited to send comments regarding this burden estimate or any other aspect of this collection of information, including any of the following subjects: (1) The necessity and utility of the proposed information collection for the proper performance of the agency's functions; (2) the accuracy of the estimated burden; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) the use of automated collection techniques or other forms of information technology to minimize the information collection burden.
The Agency is requesting a 3 year extension to collect this information from public or private businesses.
The Agency is requesting a 3-year extension to collect this information from public or private businesses.
The Agency is requesting a 3-year extension to collect this information from public or private businesses.
The Agency is requesting a 3-year extension to collect this information from public or private businesses.
The Agency is requesting a 3-year extension to collect this information from public or private businesses.
The Agency is requesting a 3-year extension to collect this information from public or private businesses.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
This notice is being published less than 15 days prior to the meeting due to the timing limitations imposed by the review and funding cycle.
301-408-9866,
This notice is being published less than 15 days prior to the meeting due to the timing limitations imposed by the review and funding cycle.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
This notice is being published less than 15 days prior to the meeting due to the timing limitations imposed by the review and funding cycle.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to Public Law 92-463, notice is hereby given of a meeting of the Substance Abuse and Mental Health Services Administration's (SAMHSA) Advisory Committee for Women's Services (ACWS) on August 1, 2018.
The meeting will include discussions on assessing SAMHSA's current strategies and a discussion on American Indian/Native American women with behavioral health needs. Additionally, the ACWS will be speaking with the Assistant Secretary of Mental Health and Substance Use regarding priorities and directions around behavioral health services and access for women and children.
The meeting is open to the public and will be held at SAMHSA, 5600 Fishers Lane, Rockville, MD, 20857, in Conference Room 5E29. Attendance by the public will be limited to space available. Interested persons may present data, information, or views, orally or in writing, on issues pending before the committee. Written submissions should be forwarded to the contact person by July 24, 2018. Oral presentations from the public will be scheduled at the conclusion of the meeting. Individuals interested in making oral presentations are encouraged to notify the contact person
The meeting may be accesed via telephone. To attend on site, obtain the call-in number and access code, submit written or brief oral comments, or request special accommodations for persons with disabilities, please register on-line at
Substantive meeting information and a roster of ACWS members may be obtained either by accessing the SAMHSA Committees' Web
U.S. Customs and Border Protection, Department of Homeland Security.
General notice.
This notice advises the public that the quarterly Internal Revenue Service interest rates used to calculate interest on overdue accounts (underpayments) and refunds (overpayments) of customs duties will remain the same from the previous quarter. For the calendar quarter beginning July 1, 2018, the interest rates for overpayments will be 4 percent for corporations and 5 percent for non-corporations, and the interest rate for underpayments will be 5 percent for both corporations and non-corporations. This notice is published for the convenience of the importing public and U.S. Customs and Border Protection personnel.
The rates announced in this notice are applicable as of July 1, 2018.
Shawn Kaus, Revenue Division, Collection Refunds & Analysis Branch, 6650 Telecom Drive, Suite #100, Indianapolis, Indiana 46278; telephone (317) 614-4485.
Pursuant to 19 U.S.C. 1505 and Treasury Decision 85-93, published in the
The interest rates are based on the Federal short-term rate and determined by the Internal Revenue Service (IRS) on behalf of the Secretary of the Treasury on a quarterly basis. The rates effective for a quarter are determined during the first-month period of the previous quarter.
In Revenue Ruling 2018-18, the IRS determined the rates of interest for the calendar quarter beginning July 1, 2018, and ending on September 30, 2018. The interest rate paid to the Treasury for underpayments will be the Federal short-term rate (2%) plus three percentage points (3%) for a total of five percent (5%) for both corporations and non-corporations. For corporate overpayments, the rate is the Federal short-term rate (2%) plus two percentage points (2%) for a total of four percent (4%). For overpayments made by non-corporations, the rate is the Federal short-term rate (2%) plus three percentage points (3%) for a total of five percent (5%). These interest rates used to calculate interest on overdue accounts (underpayments) and refunds (overpayments) of customs duties are the same from the previous quarter. These interest rates are subject to change for the calendar quarter beginning October 1, 2018, and ending December 31, 2018.
For the convenience of the importing public and U.S. Customs and Border Protection personnel the following list of IRS interest rates used, covering the period from July of 1974 to date, to calculate interest on overdue accounts and refunds of customs duties, is published in summary format.
U.S. Customs and Border Protection (CBP), Department of Homeland Security.
60-Day notice and request for comments; extension of an existing collection of information.
The Department of Homeland Security, U.S. Customs and Border Protection will be submitting the following information collection request to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act of 1995 (PRA). The information collection is published in the
Written comments and/or suggestions regarding the item(s) contained in this notice must include the OMB Control Number 1651-0096 in the subject line and the agency name. To avoid duplicate submissions, please use only
(1)
(2)
Requests for additional PRA information should be directed to Seth Renkema, Chief, Economic Impact Analysis Branch, U.S. Customs and Border Protection, Office of Trade, Regulations and Rulings, 90 K Street NE, 10th Floor, Washington, DC 20229-1177, Telephone number (202) 325-0056 or via email
CBP invites the general public and other Federal agencies to comment on the proposed and/or continuing information collections pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
U.S. Customs and Border Protection (CBP), Department of Homeland Security.
60-Day notice and request for comments; extension of an existing collection of information.
The Department of Homeland Security, U.S. Customs and Border Protection will be submitting the following information collection request to the Office of Management and Budget (OMB) for review and approval in accordance with the Paperwork Reduction Act of 1995 (PRA). The information collection is published in the
Comments are encouraged and will be accepted (no later than September 17, 2018) to be assured of consideration.
Written comments and/or suggestions regarding the item(s) contained in this notice must include the OMB Control Number 1651-0002 in the subject line and the agency name. To avoid duplicate submissions, please use only
(1)
(2)
Requests for additional PRA information should be directed to Seth Renkema, Chief, Economic Impact Analysis Branch, U.S. Customs and Border Protection, Office of Trade, Regulations and Rulings, 90 K Street NE, 10th Floor, Washington, DC 20229-1177, Telephone number (202) 325-0056 or via email
CBP invites the general public and other Federal agencies to comment on the proposed and/or continuing information collections pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
CBP Form 7507 is authorized by 42 U.S.C 268, 19 U.S.C. 1431, 1433, and 1644a; and provided for by 19 CFR 122.43, 122.52, 122.54, 122.73, 122.144, 42 CFR 71.21 and 71.32. This form is accessible at:
Federal Emergency Management Agency, DHS.
Notice.
New or modified Base (1-percent annual chance) Flood Elevations (BFEs), base flood depths, Special Flood Hazard Area (SFHA) boundaries or zone designations, and/or regulatory floodways (hereinafter referred to as flood hazard determinations) as shown on the indicated Letter of Map Revision (LOMR) for each of the communities listed in the table below are finalized. Each LOMR revises the Flood Insurance Rate Maps (FIRMs), and in some cases the Flood Insurance Study (FIS) reports, currently in effect for the listed communities. The flood hazard determinations modified by each LOMR will be used to calculate flood insurance premium rates for new buildings and their contents.
Each LOMR was finalized as in the table below.
Each LOMR is available for inspection at both the respective Community Map Repository address listed in the table below and online through the FEMA Map Service Center at
Rick Sacbibit, Chief, Engineering Services Branch, Federal Insurance and Mitigation Administration, FEMA, 400 C Street SW, Washington, DC 20472, (202) 646-7659, or (email)
The Federal Emergency Management Agency (FEMA) makes the final flood hazard determinations as shown in the LOMRs for each community listed in the table below. Notice of these modified flood hazard determinations has been published in newspapers of local circulation and 90 days have elapsed since that publication. The Deputy Associate Administrator for Insurance and Mitigation has resolved any appeals resulting from this notification.
The modified flood hazard determinations are made pursuant to section 206 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4105, and are in accordance with the National Flood Insurance Act of 1968, 42 U.S.C. 4001
For rating purposes, the currently effective community number is shown and must be used for all new policies and renewals.
The new or modified flood hazard information is the basis for the floodplain management measures that the community is required either to adopt or to show evidence of being already in effect in order to remain qualified for participation in the National Flood Insurance Program (NFIP).
This new or modified flood hazard information, together with the floodplain management criteria required by 44 CFR 60.3, are the minimum that are required. They should not be construed to mean that the community must change any existing ordinances that are more stringent in their floodplain management requirements. The community may at any time enact stricter requirements of its own or pursuant to policies established by other Federal, State, or regional entities.
This new or modified flood hazard determinations are used to meet the floodplain management requirements of the NFIP and are used to calculate the appropriate flood insurance premium rates for new buildings, and for the contents in those buildings. The changes in flood hazard determinations are in accordance with 44 CFR 65.4.
Interested lessees and owners of real property are encouraged to review the final flood hazard information available at the address cited below for each community or online through the FEMA Map Service Center at
Federal Emergency Management Agency, DHS.
Notice and request for comments.
The Federal Emergency Management Agency (FEMA) will submit the information collection abstracted below to the Office of Management and Budget for review and clearance in accordance with the requirements of the Paperwork Reduction Act of 1995. The submission will describe the nature of the information collection, the categories of respondents, the estimated burden (
Comments must be submitted on or before August 16, 2018.
Submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, Office of Management and Budget. Comments should be addressed to the Desk Officer for the Department of Homeland Security, Federal Emergency Management Agency, and sent via electronic mail to
Requests for additional information or copies of the information collection should be made to Director, Information Management Division, 500 C Street SW, Washington, DC 20472, email address
This proposed information collection previously published in the
Three commenters suggested that FEMA use the Tribal Consultation process for information collection 1660-0131. Two commenters stated that FEMA should not be placing additional unfunded requirements for Tribes to participate in the Tribal Homeland Security Grant Program (THSGP). One commenter stated that a Tribe should not be charged for FEMA's help and should be able to obtain help without any penalties. Two commenters stated that the Federal Government has a trust responsibility to meet its treaty obligations to all Tribes by providing for base level capability and capacities.
While THSGP recipients, generally 24 Tribes each year, will now have to complete the SPR in addition to the THIRA, FEMA has determined that the new Tribal requirements will not only likely decrease their reporting burden, but produce more useful information Tribes can use to support other emergency management activities. FEMA will also be able to use this information to improve the support it offers to Tribes. Previously, when
FEMA is hosting three in-person technical assistance sessions this year to help communities understand and complete the THIRA/SPR, and offered invitational travel for grantees required to complete the THIRA/SPR. The technical assistance sessions themselves are free for communities to attend, with no admission fee, nor are there any penalties for obtaining FEMA's help.
FEMA is also developing tools, materials, and guidance to help communities learn and complete the new methodology. Communities requiring assistance with their THIRA/SPR can also reach out to their Regional Preparedness Analysts and Planning Officers or the THIRA/SPR helpdesk at
The purpose of this notice is to notify the public that FEMA will submit the information collection abstracted below to the Office of Management and Budget for review and clearance.
Comments may be submitted as indicated in the
Federal Emergency Management Agency, DHS.
Notice.
This is a notice of the Presidential declaration of a major disaster for the Commonwealth of Massachusetts (FEMA-4372-DR), dated June 25, 2018, and related determinations.
The declaration was issued June 25, 2018.
Dean Webster, Office of Response and Recovery, Federal Emergency Management Agency, 500 C Street SW, Washington, DC 20472, (202) 646-2833.
Notice is hereby given that, in a letter dated June 25, 2018, the President issued a major disaster declaration under the authority of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121
I have determined that the damage in certain areas of the Commonwealth of Massachusetts resulting from a severe winter storm and flooding during the period of March 2-3, 2018, is of sufficient severity and magnitude to warrant a major disaster declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121
In order to provide Federal assistance, you are hereby authorized to allocate from funds available for these purposes such amounts as you find necessary for Federal disaster assistance and administrative expenses.
You are authorized to provide Public Assistance in the designated areas and Hazard Mitigation throughout the Commonwealth. Consistent with the requirement that Federal assistance be supplemental, any Federal funds provided under the Stafford Act for Hazard Mitigation will be limited to 75 percent of the total eligible costs. Federal funds provided under the Stafford Act for Public Assistance also will be limited to 75 percent of the total eligible costs, with the exception of projects that meet the eligibility criteria for a higher Federal cost-sharing percentage under the Public Assistance Alternative Procedures Pilot Program for Debris Removal implemented pursuant to section 428 of the Stafford Act.
Further, you are authorized to make changes to this declaration for the approved assistance to the extent allowable under the Stafford Act.
The Federal Emergency Management Agency (FEMA) hereby gives notice that pursuant to the authority vested in the Administrator, under Executive Order 12148, as amended, James N. Russo, of FEMA is appointed to act as the Federal Coordinating Officer for this major disaster.
The following areas of the Commonwealth of Massachusetts have been designated as adversely affected by this major disaster:
Barnstable, Bristol, Essex, Nantucket, Norfolk, and Plymouth Counties for Public Assistance.
All areas within the Commonwealth of Massachusetts are eligible for assistance under the Hazard Mitigation Grant Program.
The following Catalog of Federal Domestic Assistance Numbers (CFDA) are to be used for reporting and drawing funds: 97.030, Community Disaster Loans; 97.031, Cora Brown Fund; 97.032, Crisis Counseling; 97.033, Disaster Legal Services; 97.034, Disaster Unemployment Assistance (DUA); 97.046, Fire Management Assistance Grant; 97.048, Disaster Housing Assistance to Individuals and Households In Presidentially Declared Disaster Areas; 97.049, Presidentially Declared Disaster Assistance—Disaster Housing Operations for Individuals and Households; 97.050, Presidentially Declared Disaster Assistance to Individuals and Households—Other Needs; 97.036, Disaster Grants—Public Assistance (Presidentially Declared Disasters); 97.039, Hazard Mitigation Grant.
Federal Emergency Management Agency, DHS.
Notice.
This is a notice of the Presidential declaration of a major disaster for the State of Alaska (FEMA-4369-DR), dated June 8, 2018, and related determinations.
The declaration was issued June 8, 2018.
Dean Webster, Office of Response and Recovery, Federal Emergency Management Agency, 500 C Street SW, Washington, DC 20472, (202) 646-2833.
Notice is hereby given that, in a letter dated June 8, 2018, the President issued a major disaster declaration under the authority of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121
I have determined that the damage in certain areas of the State of Alaska resulting from a severe storm on December 4, 2017, is of sufficient severity and magnitude to warrant a major disaster declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121
In order to provide Federal assistance, you are hereby authorized to allocate from funds available for these purposes such amounts as you find necessary for Federal disaster assistance and administrative expenses.
You are authorized to provide Public Assistance in the designated area and Hazard Mitigation throughout the State. Consistent with the requirement that Federal assistance be supplemental, any Federal funds provided under the Stafford Act for Hazard Mitigation will be limited to 75 percent of the total eligible costs. Federal funds provided under the Stafford Act for Public Assistance also will be limited to 75 percent of the total eligible costs, with the exception of projects that meet the eligibility criteria for a higher Federal cost-sharing percentage under the Public Assistance Alternative Procedures Pilot Program for Debris Removal implemented pursuant to section 428 of the Stafford Act.
Further, you are authorized to make changes to this declaration for the approved assistance to the extent allowable under the Stafford Act.
The Federal Emergency Management Agency (FEMA) hereby gives notice that pursuant to the authority vested in the Administrator, under Executive Order 12148, as amended, Thomas J. Dargan, of FEMA is appointed to act as the Federal Coordinating Officer for this major disaster.
The following areas of the State of Alaska have been designated as adversely affected by this major disaster:
The Kenai Peninsula Borough for Public Assistance.
All areas within the State of Alaska are eligible for assistance under the Hazard Mitigation Grant Program.
The following Catalog of Federal Domestic Assistance Numbers (CFDA) are to be used for reporting and drawing funds: 97.030, Community Disaster Loans; 97.031, Cora Brown Fund; 97.032, Crisis Counseling; 97.033, Disaster Legal Services; 97.034, Disaster Unemployment Assistance (DUA); 97.046, Fire Management Assistance Grant; 97.048, Disaster Housing Assistance to Individuals and Households In Presidentially Declared Disaster Areas; 97.049, Presidentially Declared Disaster Assistance—Disaster Housing Operations for Individuals and Households; 97.050, Presidentially Declared Disaster Assistance to Individuals and Households—Other Needs; 97.036, Disaster Grants—Public Assistance (Presidentially Declared Disasters); 97.039, Hazard Mitigation Grant.
Federal Emergency Management Agency, DHS.
Notice.
This notice lists communities where the addition or modification of Base Flood Elevations (BFEs), base flood depths, Special Flood Hazard Area (SFHA) boundaries or zone designations, or the regulatory floodway (hereinafter referred to as flood hazard determinations), as shown on the Flood Insurance Rate Maps (FIRMs), and where applicable, in the supporting Flood Insurance Study (FIS) reports, prepared by the Federal Emergency Management Agency (FEMA) for each community, is appropriate because of new scientific or technical data. The FIRM, and where applicable, portions of the FIS report, have been revised to reflect these flood hazard determinations through issuance of a Letter of Map Revision (LOMR), in accordance with Federal Regulations. The LOMR will be used by insurance agents and others to calculate appropriate flood insurance premium rates for new buildings and the contents of those buildings. For rating purposes, the currently effective community number is shown in the table below and must be used for all new policies and renewals.
These flood hazard determinations will be finalized on the dates listed in the table below and revise the FIRM panels and FIS report in effect prior to this determination for the listed communities.
From the date of the second publication of notification of these changes in a newspaper of local circulation, any person has 90 days in which to request through the community that the Deputy Associate Administrator for Insurance and Mitigation reconsider the changes. The flood hazard determination information may be changed during the 90-day period.
The affected communities are listed in the table below. Revised flood hazard information for each community is available for inspection at both the online location and the respective community map repository address listed in the table below. Additionally, the current effective FIRM and FIS report for each community are accessible online through the FEMA Map Service Center at
Submit comments and/or appeals to the Chief Executive Officer of the community as listed in the table below.
Rick Sacbibit, Chief, Engineering Services Branch, Federal Insurance and Mitigation Administration, FEMA, 400 C Street SW, Washington, DC 20472, (202) 646-7659, or (email)
The specific flood hazard determinations are not described for each community in this notice. However, the online location and local community map repository address where the flood hazard determination information is available for inspection is provided.
Any request for reconsideration of flood hazard determinations must be submitted to the Chief Executive Officer of the community as listed in the table below.
The modifications are made pursuant to section 201 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4105, and are in accordance with the National Flood Insurance Act of 1968, 42 U.S.C. 4001
The FIRM and FIS report are the basis of the floodplain management measures that the community is required either to adopt or to show evidence of having in effect in order to qualify or remain qualified for participation in the National Flood Insurance Program (NFIP).
These flood hazard determinations, together with the floodplain management criteria required by 44 CFR 60.3, are the minimum that are required. They should not be construed to mean that the community must change any existing ordinances that are more stringent in their floodplain management requirements. The community may at any time enact stricter requirements of its own or pursuant to policies established by other Federal, State, or regional entities. The flood hazard determinations are in accordance with 44 CFR 65.4.
The affected communities are listed in the following table. Flood hazard determination information for each community is available for inspection at both the online location and the respective community map repository address listed in the table below. Additionally, the current effective FIRM and FIS report for each community are accessible online through the FEMA Map Service Center at
Department of Homeland Security (DHS).
30-Day notice and request for comments; extension without change of a currently approved collection, 1601-0014.
DHS will submit the following Information Collection Request (ICR) to the Office of Management and Budget (OMB) for review and clearance in accordance with the Paperwork Reduction Act of 1995. The information collection activity will garner qualitative customer and stakeholder feedback in an efficient, timely manner, in accordance with the Administration's commitment to improving service delivery. DHS previously published this ICR in the
Comments are encouraged and will be accepted until August 16, 2018. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, OMB. Comments should be addressed to OMB Desk Officer, DHS and sent via electronic mail to
The information collection activity will garner qualitative customer and stakeholder feedback in an efficient, timely manner, in accordance with the Administration's commitment to improving service delivery. By qualitative feedback we mean information that provides useful insights on perceptions and opinions, but are not statistical surveys that yield quantitative results that can be generalized to the population of study. This feedback will provide insights into customer or stakeholder perceptions, experiences and expectations, provide an early warning of issues with service, or focus attention on areas where communication, training or changes in operations might improve delivery of products or services. These collections will allow for ongoing, collaborative and actionable communications between the Agency and its customers and stakeholders. It will also allow feedback to contribute directly to the improvement of program management. Feedback collected under this generic clearance will provide useful information, but it will not yield data that can be generalized to the overall population. This type of generic clearance for qualitative information will not be used for quantitative information collections that are designed to yield reliably actionable results, such as monitoring trends over time or documenting program performance. Such data uses require more rigorous designs that address: The target population to which generalizations will be made, the sampling frame, the sample design (including stratification and clustering), the precision requirements or power calculations that justify the proposed sample size, the expected response rate, methods for assessing potential nonresponse bias, the protocols for data collection, and any testing procedures that were or will be undertaken prior fielding the study. Depending on the degree of influence the results are likely to have, such collections may still be eligible for submission for other generic mechanisms that are designed to yield quantitative results.
This is an extension of a currently approved collection, 1601-0014. DHS previously published this ICR in the
1. Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
Office of the Citizenship and Immigration Services Ombudsman, Department of Homeland Security (DHS).
30-Day notice and request for comments; extension of a currently approved collection, 1601-0004.
The DHS Office of the Citizenship and Immigration Services (CIS) Ombudsman will submit the following Information Collection Request (ICR) to the Office of Management and Budget (OMB) for review and clearance in accordance with the Paperwork Reduction Act of 1995. The information collected on this form will allow the CIS Ombudsman to identify the problem such as: (1) A case problem which is a request for information about a case that was filed with U.S. Citizenship and Immigration Services (USCIS) (“case problem”); or (2) the identification of a systemic issue that may or may not pertain to an individual case which the individual, attorney or employer is seeking to bring to the attention of the CIS Ombudsman (“trend”). DHS previously published this information collection request (ICR) in the
Comments are encouraged and will be accepted until August 16, 2018. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, OMB. Comments should be addressed to OMB Desk Officer, DHS and sent via electronic mail to
The CIS Ombudsman was created under section 452 of the Homeland Security Act of 2002 (Pub. L. 107-296) to: (1) Assist individuals and employers in resolving problems with the USCIS; (2) to identify areas in which individuals and employers have problems in dealing with USCIS; and (3) to the extent possible, propose changes in the administrative practices of USCIS to mitigate problems. This form is used by an applicant who is experiencing problems with USCIS during the processing of an immigration benefit.
The information collected on this form will allow the CIS Ombudsman to identify the problem such as: (1) A case problem which is a request for information about a case that was filed with USCIS (“case problem”); or (2) the identification of a systemic issue that may or may not pertain to an individual case which the individual, attorney or employer is seeking to bring to the attention of the CIS Ombudsman (“trend”).
For case problems, the CIS Ombudsman will refer case specific issues to the Customer Assistance Office for USCIS for further research, and review.
For trends received, the CIS Ombudsman notes the systemic issue identified in the correspondence which may or may not be incorporated into future recommendations submitted to the Director of USCIS pursuant to section 452(d)(4) of Public Law 107-296.
The use of this form provides the most efficient means for collecting and processing the required data. The CIS Ombudsman also employs the use of information technology in collecting and processing information by offering the option for electronic submission of the DHS Form 7001 through the Ombudsman Online Case Assistance System. Per PRA requirements, a fillable PDF version of the form is provided on the CIS Ombudsman's website. The PDF form can be completed online, printed out and sent to the CIS Ombudsman's office at the address indicated on the form. It is noted on the form that using the paper method can result in significant processing delays for the CIS Ombudsman's office to provide the requested case assistance. After approval of the changes to the form detailed in this supporting statement, both the online form and PDF will be updated and posted on the Ombudsman's website at
The assurance of confidentiality provided to the respondents for this information collection is provided by: (a) The CIS Ombudsman authorizing legislation and mandate as established by Homeland Security Act of 2002 at Section 452; (b) the Privacy Impact Assessment and the (c) Systems of Records Notice titled “Department of Homeland Security Citizenship and Immigration Services Ombudsman—001 Online Ombudsman Form DHS-7001 and Ombudsman Case Assistance Online System of Records”. The DHS Privacy Office will receive the entire package of documents for this information collection to assure authorization for renewal of the collection.
The Ombudsman Form DHS-7001 (PDF) and the Ombudsman Case Assistance Online System are constructed in compliance with all applicable DHS Privacy Office, DHS CIO, DHS Records Management, and OMB regulations regarding data collection, use, storage, and retrieval. The proposed public use data collection system is therefore intended to be distributed for public use primarily by electronic means with limited paper distribution and processing of paper forms.
The Ombudsman Form DHS-7001 (PDF) and the Online Ombudsman Form DHS-7001 (Ombudsman Case Assistance Online System) have been constructed in compliance with regulations and authorities under the purview of the DHS Privacy Office, DHS CIO, DHS Records Management, and OMB regulations regarding data collection, use, sharing, storage, information security and retrieval of information.
There has been an increase of 3,200 in the estimated annual burden hours previously reported for this information collection. The increase in burden hours is a reflection of agency estimates.
There is no change in the information being collected, however there have been cosmetic changes to the form including punctuation, formatting, and text changes to make the form more understandable and streamlined for use by respondents. In 2015, the following changes were made:
a. Number of response fields was reduced from 13 to 12 and arranged in a way that streamlines completion, submission and processing of the form.
b. The title of the form was changed from “Case Problem Submission Worksheet (CIS Ombudsman Form DHS-7001)” to “Case Assistance Form (Ombudsman Form DHS-7001)”.
c. The name of the system was changed from “Virtual Ombudsman System” to “Ombudsman Case Assistance Online System”.
The following narrative explains the changes made on the form in 2015 and the corresponding instructions. The ORIGINAL 7001 form had the sections arranged in the following order:
1. Name: Please identify the individual or employer encountering difficulties with USCIS (applicant/beneficiary/petitioner).
2. Contact Information: Please provide information on the individual or employer encountering difficulties with USCIS (applicant/beneficiary/petitioner).
3. Date of Birth.
4. Country of Birth and Citizenship.
5. Alien Registration Number (A-Number); The A-number appears in the following format: A123-456-789.
6. Person Preparing This Form: Please indicate who is completing this form.
7. Applications/Petitions Filed: List all applications and/or petitions
8. Type of Immigration Benefit: Please provide the type of immigration benefit sought from USCIS.
9. Reason for Inquiry: Please indicate if any of the options apply. Provide a description in section 10.
10. Description: Describe the difficulties experienced with USCIS. Attach additional pages if needed.
11. Prior Actions Taken: Check all that apply: Please describe the response USCIS provided and attach any relevant correspondence.
12. Consent: If you are the beneficiary of an immigration petition, consent of the individual who submitted the petition on your behalf is required. The petitioner must sign.
13. Attorney or Accredited Representative: Please complete this section if you are an attorney, a representative of an organization, an accredited representative, or anyone else preparing this form on behalf of the individual or employer encountering difficulties with USCIS.
The AMENDED 7001 form has the sections arranged in the following order:
1. Name: Please identify the name of the individual or employer (applicant/beneficiary/petitioner) encountering or difficulties with USCIS. Do not enter the attorney/law firm's name here.
2. Date of Birth: Country of Birth: Country of Citizenship.
3. Alien Registration Number (A-Number); The A-number appears in the following format: A123-456-789.
4. Contact Information: Please provide the contact information of the individual or employer (applicant/beneficiary/petitioner) encountering difficulties with USCIS. Please include the primary E-Mail address for the CIS Ombudsman to provide updates.
5. Applications/Petitions Filed: List all applications and/or petitions pending with USCIS related to your case inquiry.
6. Type of Immigration Benefit Sought: Please provide the type of immigration benefit sought from USCIS.
7. Reason for Inquiry/Case Assistance Request: Check all that apply. Provide a description in section 8 and add documentation related to your inquiry.
8. Description of your Case Problem: Describe the difficulties experienced with USCIS including all responses USCIS provided. Attach relevant correspondence concerning actions taken to resolve the issue before submitting with the Ombudsman's Office including: Receipt notices; requests for evidence; decisions; notices and any other correspondence from USCIS about your case. Attach additional pages if needed.
9. Prior Actions Taken to Remedy the Problem:
Check all that apply and provide the additional information requested for each selection in the space provided. Note that if selecting Option a “Visited USCIS My Case Status at
a. Visited USCIS My Case Status at
b. Contacted the National Customer Service Center (NCSC) for information and/or assistance regarding this case at their toll-free number 1-800-375-5283. Provide SRMT Number:
c. Attended an InfoPass Appointment with USCIS. Provide InfoPass Number:
d. Sent an Email to USCIS. Provide date E-Mail sent: Provide USCIS Email address:
e. Contacted a U.S. Government Department or Agency for assistance. Provide name and contact information:
f. Contacted a U.S. Congressional Representative for assistance. Provide name and contact information:
g. Other. Please describe.
10. Person Preparing This Form:
Please indicate who is completing this form.
11. Attorney or Accredited Representative:
Please complete this section if you are an attorney, a representative of an organization, an accredited representative, or anyone else preparing this form on behalf of the individual or employer encountering difficulties with USCIS. Please attach copy of your Form G-28.
12. Consent: Please note that if you are the beneficiary of an immigration petition, consent of the individual or employer that submitted the petition on your behalf is required. The petitioner must sign.
The instructions have been updated to reflect the electronic submission options as detailed in the previous paragraphs.
Instructions for electronic submission will be posted on the CIS Ombudsman website at
There is no change in the terms of clearance from the previously approved collection as addressed by the: (a) Privacy Impact Assessment and (b) Systems of Records Notice titled “Department of Homeland Security Citizenship and Immigration Services Ombudsman—001 Online Ombudsman Form DHS-7001 and Ombudsman Case Assistance Online System of Records”.
This is an extension of a currently approved collection, 1601-0004. DHS previously published this ICR in the
1. Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
U.S. Citizenship and Immigration Services, Department of Homeland Security.
60-Day notice.
The Department of Homeland Security (DHS), U.S. Citizenship and Immigration (USCIS) invites the general public and other Federal agencies to comment upon this proposed extension of a currently approved collection of information. In accordance with the Paperwork Reduction Act (PRA) of 1995, the information collection notice is published in the
Comments are encouraged and will be accepted for 60 days until September 17, 2018.
All submissions received must include the OMB Control Number 1615-0104 in the body of the letter, the agency name and Docket ID USCIS-2010-0004. To avoid duplicate submissions, please use only
(1)
(2)
USCIS, Office of Policy and Strategy, Regulatory Coordination Division, Samantha Deshommes, Chief, 20 Massachusetts Avenue NW, Washington, DC 20529-2140, telephone number 202-272-8377 (This is not a toll-free number. Comments are not accepted via telephone message). Please note contact information provided here is solely for questions regarding this notice. It is not for individual case status inquiries. Applicants seeking information about the status of their individual cases can check Case Status Online, available at the USCIS website at
You may access the information collection instrument with instructions, or additional information by visiting the Federal eRulemaking Portal site at:
Written comments and suggestions from the public and affected agencies should address one or more of the following four points:
(1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
(3) Enhance the quality, utility, and clarity of the information to be collected; and
(4) Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
(1)
(2)
(3)
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U.S. Citizenship and Immigration Services, Department of Homeland Security.
60-Day notice.
The Department of Homeland Security (DHS), U.S. Citizenship and Immigration (USCIS) invites the general public and other Federal agencies to comment upon this proposed revision of a currently approved collection of information or new collection of information. In accordance with the Paperwork Reduction Act (PRA) of 1995, the information collection notice is published in the
Comments are encouraged and will be accepted for 60 days until September 17, 2018.
All submissions received must include the OMB Control Number 1615-0028 in the body of the letter, the agency name and Docket ID USCIS-2008-0020. To avoid duplicate submissions, please use only
(1)
(2)
USCIS, Office of Policy and Strategy, Regulatory Coordination Division, Samantha Deshommes, Chief, 20 Massachusetts Avenue NW, Washington, DC 20529-2140, telephone number 202-272-8377 (This is not a toll-free number. Comments are not accepted via telephone message). Please note contact information provided here is solely for questions regarding this notice. It is not for individual case status inquiries. Applicants seeking information about the status of their individual cases can check Case Status Online, available at the USCIS website at
You may access the information collection instrument with instructions, or additional information by visiting the Federal eRulemaking Portal site at:
Written comments and suggestions from the public and affected agencies should address one or more of the following four points:
(1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
(3) Enhance the quality, utility, and clarity of the information to be collected; and
(4) Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
(1)
(2)
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Fish and Wildlife Service, Department of the Interior.
Notice of availability.
We, the U.S. Fish and Wildlife Service, under the National Environmental Policy Act, make available the final environmental impact statement and draft record of decision analyzing the impacts of issuance of an incidental take permit for implementation of the Barton Springs/Edwards Aquifer Conservation District (BSEACD) Habitat Conservation Plan (HCP). Our decision is to issue a 20-year incidental take permit for implementation of the BSEACD HCP, which authorizes incidental take of two listed salamanders under the Endangered Species Act.
We will finalize the record of decision and issue a permit no sooner than August 13, 2018.
You may obtain copies of the documents in the following formats:
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○ Department of the Interior, Natural Resources Library, 1849 C Street NW, Washington, DC 20240. Call (202) 208-5815.
○ U.S. Fish and Wildlife Service, 500 Gold Avenue SW, Room 6034, Albuquerque, NM 87102. Call (505) 248-6920.
○ U.S. Fish and Wildlife Service, 10711 Burnet Road Suite 200, Austin, TX 78758. Call (512) 490-0057.
Mr. Adam Zerrenner, Field Supervisor, by phone at 512-490-0057, via fax at 512-490-0974, or by U.S. mail at U.S. Fish and Wildlife Service, 10711 Burnet Road, Suite 200, Austin, TX 78758.
We, the U.S. Fish and Wildlife Service (Service), announce the availability of several documents related to an incidental take permit (ITP) application under the Endangered Species Act of 1973, as amended (ESA; 16 U.S.C. 1531
Our proposed action is to issue an ITP to the applicants under section 10(a)(1)(B) of the ESA that authorizes incidental take of the Barton Springs salamander (
The minimization measures include: Providing the most efficient use of groundwater, controlling and preventing waste of groundwater, addressing conjunctive surface water management issues, addressing natural resource management issues, addressing drought conditions, addressing demand reduction through conservation, addressing supply through structural enhancement, and quantitatively addressing established desired future conditions.
The mitigation measures include a commitment to:
• Support the operations of an existing refugium through in-kind, contracted support, cash provision, or other appropriate means;
• conduct a feasibility study of dissolved oxygen augmentation and, if warranted, implement a pilot project at Main Spring at Barton Springs;
• maintain and operate the Antioch Recharge Enhancement Facility for the permit term;
• establish a new reserve fund for closing abandoned wells to eliminate high-risk abandoned wells as potential conduits for contaminants from the surface or adjacent formations into the aquifer, with priority given to problematic wells close to the Barton Springs outlets or those associated with water chemistry concerns under severe drought conditions; and
• provide leadership and technical assistance to other government entities, organizations, and individuals when prospective land-use and groundwater management activities in those entities' purview will, in the District's assessment, significantly affect the quantity or quality of groundwater in the Aquifer.
In addition to this notice, the Environmental Protection Agency (EPA) published a notice announcing the EIS on July 13, 2018, as required under the Clean Air Act, section 309 (42 U.S.C. 7401
The applicants have applied for an ITP (TE10607C-0) under the ESA that would authorize incidental take of two covered species and would be in effect for a period of 20 years. The proposed
Section 9 of the ESA and its implementing regulations in title 50 of the Code of Federal Regulations (CFR) prohibit “take” of fish and wildlife species listed as endangered or threatened under the ESA. The ESA defines “take” as “to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect listed animal species, or attempt to engage in such conduct” (16 U.S.C. 1533). The term “harm” is defined in the regulations as significant habitat modification or degradation that results in death or injury to listed species by significantly impairing essential behavioral patterns, including breeding, feeding, or sheltering (50 CFR 17.3). However, we may, under specified circumstances, issue permits that allow the take of federally listed species, provided that the take is incidental to, but not the purpose of, otherwise lawful activity. Regulations governing ITPs for endangered and threatened species are at 50 CFR 17.22 and 17.32, respectively.
On July 18, 2017, we issued a draft EIS and requested public comment on our evaluation of the potential impacts associated with issuance of an ITP for implementation of the BSEACD HCP and to evaluate alternatives (82 FR 32861). We held a public meeting in Austin, Texas, August 22, 2017. The public comment period closed on September 18, 2017.
We identified key issues and relevant factors through public scoping and meetings, working with other agencies and groups, and reviewing comments from the public. We received responses from one local government agency and two nongovernmental agencies. We believe these comments are addressed and reasonably accommodated in the final documents, and we have included the public's comments and our responses in Appendix A5-1 of the final EIS.
We intend to issue an ITP allowing the applicants to implement the BSEACD HCP. Our decision is based on a thorough review of the alternatives and their environmental consequences. Implementing this decision entails issuing an ITP to BSEACD and full implementation of the HCP by the applicants, including minimization and mitigation measures, monitoring and adaptive management, and complying with all terms and conditions in the ITP.
A final ITP decision will be made no sooner than 30 days after the publication of this notice of availability and completion of the record of decision.
In addition, EPA published a notice on July 13, 2018, in the
The EPA also serves as the repository (EIS database) for EISs, which Federal agencies prepare. All EISs must be filed with EPA, which publishes a notice of availability on Fridays in the
United States International Trade Commission.
Notice.
The Commission hereby gives notice of the scheduling of a full review pursuant to the Tariff Act of 1930 (“the Act”) to determine whether revocation of the antidumping duty order on clad steel plate from Japan would be likely to lead to continuation or recurrence of material injury within a reasonably foreseeable time. The Commission has determined to exercise its authority to extend the review period by up to 90 days.
July 10, 2018.
Andrew Dushkes ((202) 205-3229), Office of Investigations, U.S. International Trade Commission,500 E Street SW, Washington, DC 20436. Hearing-impaired persons can obtain information on this matter by contacting the Commission's TDD terminal on 202-205-1810. Persons with mobility impairments who will need special assistance in gaining access to the Commission should contact the Office of the Secretary at 202-205-2000. General information concerning the Commission may also be obtained by accessing its internet server (
For further information concerning the conduct of this review and rules of general application, consult the Commission's Rules of Practice and Procedure, part 201, subparts A and B (19 CFR part 201), and part 207, subparts A, D, E, and F (19 CFR part 207).
Additional written submissions to the Commission, including requests pursuant to section 201.12 of the Commission's rules, shall not be accepted unless good cause is shown for accepting such submissions, or unless the submission is pursuant to a specific request by a Commissioner or Commission staff.
In accordance with sections 201.16(c) and 207.3 of the Commission's rules, each document filed by a party to the review must be served on all other parties to the review (as identified by either the public or BPI service list), and a certificate of service must be timely filed. The Secretary will not accept a document for filing without a certificate of service.
The Commission has determined that this review is extraordinarily complicated and therefore has determined to exercise its authority to extend the review period by up to 90 days pursuant to 19 U.S.C.1675(c)(5)(B).
By order of the Commission.
Pursuant to the authority contained in Section 512 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1142, the 192nd meeting of the Advisory Council on Employee Welfare and Pension Benefit Plans (also known as the ERISA Advisory Council) will be held on August 14-16, 2018.
The three-day meeting will take place at the U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210, in C5521 Room 4. The meeting will run from 1:00 p.m. to approximately 5:30 p.m. on August 14 and from 9:00 a.m. to approximately 5:30 p.m. on August 15, with a one hour break for lunch, and from 9:00 a.m. to 11:00 a.m. on August 16. The purpose of the open meeting is for Advisory Council members to hear testimony from invited witnesses and to receive an update from the Employee Benefits Security Administration (EBSA). The EBSA update is scheduled for the morning of August 16, subject to change.
The Advisory Council will study the following topics: (1) Evaluating the Department's Regulations and Guidance on ERISA Bonding Requirements and Exploring Reform Considerations (on August 14); and, (2) Lifetime Income Products as a Qualified Default Investment Option (QDIA)—Focus on Decumulation and Rollovers (on August 15). It will continue with discussions of its topics on August 16. Descriptions of these topics are available on the Advisory Council page of the EBSA website, at
Organizations or members of the public wishing to submit a written statement may do so by submitting 40 copies on or before August 7, 2018, to Larry Good, Executive Secretary, ERISA Advisory Council, U.S. Department of Labor, Suite N-5623, 200 Constitution Avenue NW, Washington, DC 20210. Statements also may be submitted as email attachments in word processing or pdf format transmitted to
Individuals or representatives of organizations wishing to address the Advisory Council should forward their requests to the Executive Secretary or telephone (202) 693-8668. Oral presentations will be limited to 10 minutes, time permitting, but an extended statement may be submitted for the record. Individuals with disabilities who need special accommodations should contact the Executive Secretary by August 7.
Mine Safety and Health Administration, Labor.
Request for public comments.
The Department of Labor, as part of its continuing effort to reduce paperwork and respondent burden, conducts a pre-clearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed collections of information in accordance with the Paperwork Reduction Act of 1995. This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. Currently, the Mine Safety and Health Administration (MSHA) is soliciting comments on the information collection for Ventilation Plans, Tests, and Examinations in Underground Coal Mines.
All comments must be received on or before September 17, 2018.
Comments concerning the information collection requirements of this notice may be sent by any of the methods listed below.
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Sheila McConnell, Director, Office of Standards, Regulations, and Variances, MSHA, at
Section 103(h) of the Federal Mine Safety and Health Act of 1977 (Mine Act), 30 U.S.C. 813(h), authorizes MSHA to collect information necessary to carry out its duty in protecting the safety and health of miners. Under Section 101(a) of the Federal Mine Safety and Health Act of 1977 (Mine Act), the Secretary of Labor (Secretary) may by rule in accordance with procedures set forth in this section and in accordance with section 553 of Title 5, United States Code (without regard to any reference in such section to sections 556 and 557 of such title), develop, promulgate, and revise as may be appropriate, improved mandatory health or safety standards for the protection of life and prevention of injuries in coal or other mines. In addition, section 303 requires that all underground coal mines be ventilated by mechanical ventilation equipment installed and operated in a manner approved by an authorized representative of the Secretary and such equipment be examined daily and a record be kept of such examination.
Underground coal mines usually present harsh and hostile working environments. The ventilation system is the most vital life support system in underground mining and a properly operating ventilation system is essential for maintaining a safe and healthful working environment. Lack of adequate ventilation in underground mines has resulted in fatalities from asphyxiation and explosions.
An underground mine is a maze of tunnels that must be adequately ventilated with fresh air to provide a safe environment for miners. Methane is liberated from the strata, and noxious gases and dusts from blasting and other mining activities may be present. The explosive and noxious gases and dusts must be diluted, rendered harmless, and carried to the surface by the ventilating currents. Sufficient air must be provided to maintain the level of respirable dust at or below specific exposure limits and air quality must be maintained in accordance with MSHA standards. Mechanical ventilation equipment of sufficient capacity must operate at all times while miners are in the mine. Ground conditions are subject to frequent changes, thus sufficient tests and examinations are necessary to ensure the integrity of the ventilation system and to detect any changes that may require adjustments in the system. Records of tests and examinations are necessary to ensure that the ventilation system is being maintained and that changes which could adversely affect the integrity of the system or the safety of the miners are not occurring. These examination, reporting and recordkeeping requirements of sections 75.310, 75.312, 75.342, 75.351, 75.360 through 75.364, 75.370, 75.371, and 75.382 also incorporate examinations of other critical aspects of the underground work environment such as roof conditions and electrical equipment which have historically caused numerous fatalities when not properly maintained and operated.
Section 75.362, On-shift Examinations, was revised at subsection 75.362 (a)(2) and (g)(2)-(4) by MSHA's rule titled “Lowering Miners' Exposure to Respirable Coal Mine Dust, Including
Subsection 75.362(a)(2) requires that a person designated by the operator conduct an examination and record the results and the corrective actions taken to assure compliance with the respirable dust control parameters specified in the approved mine ventilation plan.
Under subsection 75.362(g)(2)(i), the certified person directing the on-shift examination must certify by initials, date, and time on a board maintained at the section load out or similar location showing that the examination was made prior to resuming production. No increased burden is estimated for section 75.362(g)(2)(i) in this Information Collection Request (ICR) because MSHA does not expect the burden to be different from the burden in existing section 75.362(g)(2)).
Under section 75.362(g)(2)(ii), the certified person directing the on-shift examination must verify, by initials, date and time, the record of the results of the examination required under section 75.362(a)(2) to assure compliance with the respirable dust control parameters specified in the mine ventilation plan. Further, section 75.362(g)(3) requires a mine foreman or equivalent mine official to countersign each examination record required under section 75.362(a)(2) after it is verified by the certified person under section 75.362(g)(2)(ii), and no later than the end of the mine foreman's or equivalent mine official's next regularly scheduled working shift. Section 75.362(g)(2)(ii) and (g)(3) are additional burdens that are accounted for in this ICR and 75.362(g)(2)(ii)(4) requires the records be retained at a surface location at the mine for at least 1 year and shall be made available for inspection by authorized representatives of the Secretary and the representative of miners.
Paragraph (a)(2) in section 75.370 (Mine ventilation plan; submission and approval) contains the burden for underground coal mine operators to submit mine ventilation plan revisions for District Manager approval. Each mine ventilation plan must include information that is specified by section 75.371 (Mine ventilation plan; contents).
Section 75.371(f) adds the following information that a mine operator must include in the mine ventilation plan: the minimum quantity of air that will be delivered to the working section for each mechanized mining unit (MMU), and the identification by make and model, of each different dust suppression system used on equipment on each working section, including: (1) The number, types, location, orientation, operating pressure, and flow rate of operating water sprays; (2) the maximum distance that ventilation control devices will be installed from each working face when mining or installing roof bolts in entries and crosscuts; (3) procedures for maintaining the roof bolter dust collection system in approved condition; and (4) recommended best work practices for equipment operators to minimize dust exposure.
Section 75.371(j) adds a requirement that for machine mounted dust collectors, the ventilation plan must include the type and size of dust collector screens used and a description of the procedures to be followed to properly maintain dust collectors used on the equipment.
Section 75.370(a)(2) requires all underground coal mine operators to submit revisions for mine ventilation plans to MSHA. The burden to submit the additional information required by section 75.371(f) and (j) as proposed revisions to the plan is accounted for in this package under section 75.370(a)(2). In addition, section 75.370(a)(3)(i) requires underground coal mine operators to notify the miners' representative at least 5 days prior to submission of mine ventilation plan revisions and, if requested, provide a copy of the revisions to the miners' representative at the time of notification. Section 75.370(a)(3)(iii) and (f)(3) require the operator to post a copy of the plan revisions, and section 75.370(f)(1) requires that the operator provide a copy of the revisions to the miners' representative, if requested. MSHA assumes that a copy of the revisions will be requested. The burdens for notification, providing requested copies, and posting associated with mine ventilation plan revisions resulting from section 75.371(f) and (j) are accounted for in this package under section 75.370(a)(3)(i), (f)(1), (a)(3)(iii), and (f)(3) respectively.
MSHA is soliciting comments concerning the proposed information collection related to Ventilation Plans, Tests, and Examinations in Underground Coal Mines. MSHA is particularly interested in comments that:
• Evaluate whether the collection of information is necessary for the proper performance of the functions of the Agency, including whether the information has practical utility;
• Evaluate the accuracy of MSHA's estimate of the burden of the collection of information, including the validity of the methodology and assumptions used;
• Suggest methods to enhance the quality, utility, and clarity of the information to be collected; and
• Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
The information collection request will be available on
The public may also examine publicly available documents at USDOL-Mine Safety and Health Administration, 201 12th South, Suite 4E401, Arlington, VA 22202-5452. Sign in at the receptionist's desk on the 4th floor via the East elevator.
Questions about the information collection requirements may be directed to the person listed in the
This request for collection of information contains provisions for Ventilation Plans, Tests, and Examinations in Underground Coal Mines. MSHA has updated the data with respect to the number of respondents, responses, burden hours, and burden costs supporting this information collection request.
Comments submitted in response to this notice will be summarized and included in the request for Office of Management and Budget approval of the
Mine Safety and Health Administration, Labor.
Request for public comments.
The Department of Labor, as part of its continuing effort to reduce paperwork and respondent burden, conducts a pre-clearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed collections of information in accordance with the Paperwork Reduction Act of 1995. This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. Currently, the Mine Safety and Health Administration (MSHA) is soliciting comments on the information collection for Safety Standards for Roof Bolts in Metal and Nonmetal Mines and Underground Coal Mines.
All comments must be received on or before September 17, 2018.
Comments concerning the information collection requirements of this notice may be sent by any of the methods listed below.
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Sheila McConnell, Director, Office of Standards, Regulations, and Variances, MSHA, at
Section 103(h) of the Federal Mine Safety and Health Act of 1977 (Mine Act), 30 U.S.C. 813(h), authorizes MSHA to collect information necessary to carry out its duty in protecting the safety and health of miners. Further, section 101(a) of the Mine Act, 30 U.S.C. 811, authorizes the Secretary of Labor (Secretary) to develop, promulgate, and revise as may be appropriate, improved mandatory health or safety standards for the protection of life and prevention of injuries in coal and metal and nonmetal mines.
Accidents involving falls of roof, face, and rib in underground mines or falls of highwall in surface mines, historically, have been among the leading causes of injuries and deaths. Prevention or control of falls of roof, face, and rib is uniquely difficult because of the variety of conditions encountered in mines that can affect the stability of various types of strata and the changing nature of the forces affecting ground stability at any given operation and time. Roof and rock bolts and accessories are an integral part of ground control systems and are used to prevent the fall of roof, face, and rib. Advancements in technology of roof and rock bolts and accessories have aided in reducing the hazards associated with falls of roof, face, and rib.
The American Society for Testing and Materials (ASTM) publication “Standard Specification for Roof and Rock Bolts and Accessories” is a consensus standard used throughout the United States. It contains specifications for the chemical, mechanical, and dimensional requirements for roof and rock bolts and accessories used for ground support systems. The ASTM standard for roof and rock bolts and accessories is updated periodically to reflect advances in technology.
Title 30 Code of Federal Regulations, Parts 56 and 57 Subpart B-Ground Control, section 56.3203 and section 57.3203, and Part 75 Subpart C-Roof Support, section 75.204, address the quality of roof and rock bolts and accessories and their installation. MSHA's objective in these regulations is to ensure the quality and effectiveness of roof and rock bolts and accessories and, as technology evolves, to allow for the use of new materials which are proven to be reliable and effective in controlling the mine roof, face, and rib.
Title 30 CFR 56.3203(a), 57.3203(a), and 75.204(a) require: (1) That mine operators obtain a certification from the manufacturer that roof and rock bolts and accessories are manufactured and tested in accordance with the applicable ASTM specifications, and (2) that the manufacturer's certification is made available to an authorized representative of the Secretary.
Title 30 CFR 56.3203(h) and 57.3203(h) require that if the mine operator uses other tensioned and nontensioned fixtures and accessories for ground control that are not addressed by the applicable ASTM standard listed in sections 56.3203(a) and 57.3203(a), test methods must be established by the mine operator and used to verify their ground control effectiveness. Title 30 CFR 56.3203(i) and 57.3203(i) require that the mine operator certify that the tests developed under sections 56.3203(h) and 57.3203(h) were conducted and such certifications be made available to an authorized representative of the Secretary.
Title 30 CFR 75.204(f)(6) requires that the mine operator or a person designated by the operator certify by signature and date the measurements required by paragraph (f)(5) of this section have been made. Paragraph (f)(5) requires that in working places from which coal is produced during any portion of a 24-hour period, the actual torque or tension on at least one out of every ten previously installed mechanically anchored tensioned roof bolts is measured from the outby corner of the last open crosscut to the face in each advancing section. This certification shall be maintained for at least one year and shall be made available to an authorized representative of the Secretary and representatives of the miners.
MSHA has found that the certification requirements have been successful in maintaining compliance with requirements for roof and rock bolts and accessories.
MSHA is soliciting comments concerning the proposed information collection related to Safety Standards for Roof Bolts in Metal and Nonmetal Mines and Underground Coal Mines. MSHA is particularly interested in comments that:
• Evaluate whether the collection of information is necessary for the proper performance of the functions of the Agency, including whether the information has practical utility;
• Evaluate the accuracy of MSHA's estimate of the burden of the collection of information, including the validity of the methodology and assumptions used;
• Suggest methods to enhance the quality, utility, and clarity of the information to be collected; and
• Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
The information collection request will be available on
The public may also examine publicly available documents at USDOL-Mine Safety and Health Administration, 201 12th South, Suite 4E401, Arlington, VA 22202-5452. Sign in at the receptionist's desk on the 4th floor via the East elevator.
Questions about the information collection requirements may be directed to the person listed in the
This request for collection of information contains provisions for Safety Standards for Roof Bolts in Metal and Nonmetal Mines and Underground Coal Mines. MSHA has updated the data with respect to the number of respondents, responses, burden hours, and burden costs supporting this information collection request.
Comments submitted in response to this notice will be summarized and included in the request for Office of Management and Budget approval of the information collection request; they will also become a matter of public record.
Executive Office of the President, Office of Management and Budget.
Notice of monthly cumulative report pursuant to the Congressional Budget and Impoundment Control Act of 1974.
Pursuant to the Congressional Budget and Impoundment Control Act of 1974, OMB is issuing a monthly cumulative report (for July, 2018) from the Director detailing the status of rescission proposals that were previously transmitted to the Congress on May 8, 2018, and amended by the supplementary message transmitted on June 5, 2018.
The July, 2018 cumulative report is available on-line on the OMB website at:
Jessica Andreasen, 6001 New Executive Office Building, Washington, DC 20503, Email address:
National Endowment for the Arts, National Foundation on the Arts and the Humanities.
Notice of meetings.
Pursuant to the Federal Advisory Committee Act, as amended, notice is hereby given that 5 meetings of the Arts Advisory Panel to the National Council on the Arts will be held by teleconference.
See the
National Endowment for the Arts, Constitution Center, 400 7th St. SW, Washington, DC 20506.
Further information with reference to these meetings can be obtained from Ms. Sherry Hale, Office of Guidelines & Panel Operations, National Endowment for the Arts, Washington, DC 20506;
The closed portions of meetings are for the purpose of Panel review, discussion, evaluation, and recommendations on financial assistance under the National Foundation on the Arts and the Humanities Act of 1965, as amended, including information given in confidence to the agency. In accordance with the determination of the Chairman of July 5, 2016, these sessions will be closed to the public pursuant to subsection (c)(6) of section 552b of title 5, United States Code.
The upcoming meetings are:
National Endowment for the Humanities.
Notice of meeting.
The National Endowment for the Humanities will hold twenty-one meetings of the Humanities Panel, a federal advisory committee, during August 2018. The purpose of the meetings is for panel review, discussion, evaluation, and recommendation of applications for financial assistance under the National Foundation on the Arts and Humanities Act of 1965.
See
The meetings will be held at Constitution Center at 400 7th Street SW, Washington, DC 20506, unless otherwise indicated.
Elizabeth Voyatzis, Committee Management Officer, 400 7th Street SW, Room 4060, Washington, DC 20506; (202) 606-8322;
Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (5 U.S.C. App.), notice is hereby given of the following meeting:
1.
This meeting will discuss applications on the topics of American History and Studies, and Media Studies, for the NEH-Mellon Fellowships, submitted to the Division of Research Programs.
2.
This meeting will discuss applications on the topics of European History and Archaeology: Ancient to Modern, for the Fellowships grant program, submitted to the Division of Research Programs.
3.
This meeting will discuss applications on the topic of Literature, for the Fellowships grant program, submitted to the Division of Research Programs.
4.
This meeting will discuss applications on the topics of Religion and Asian Studies, for the Fellowships grant program, submitted to the Division of Research Programs.
5.
This meeting will discuss applications on the topic of the Arts, for the Fellowships grant program, submitted to the Division of Research Programs.
6.
This meeting will discuss applications on the topic of American History, for the Fellowships grant program, submitted to the Division of Research Programs.
7.
This meeting will discuss applications on the topics of Arts & Languages (Level I projects), for Digital Humanities Advancement Grants, submitted to the Office of Digital Humanities.
8.
This meeting will discuss applications on the topic of American Studies, for the Fellowships grant program, submitted to the Division of Research Programs.
9.
This meeting will discuss applications on the topics of Political Science, Social Sciences, History of Science, and Philosophy, for the Fellowships grant program, submitted to the Division of Research Programs.
10.
This meeting will discuss applications on the topics of Area Studies and Anthropology, for the Fellowships grant program, submitted to the Division of Research Programs.
11.
This meeting will discuss applications on the topic of Literature, for the Fellowships grant program, submitted to the Division of Research Programs.
12.
This meeting will discuss applications on the topic of History (Level I projects), for Digital Humanities Advancement Grants, submitted to the Office of Digital Humanities.
13.
This meeting will discuss applications for the Preservation Education and Training grant program, submitted to the Division of Preservation and Access.
14.
This meeting will discuss applications for the Preservation Education and Training grant program, submitted to the Division of Preservation and Access.
15.
This meeting will discuss applications on the topics of Textual Analysis and Linguistics, for Digital Humanities Advancement Grants, submitted to the Office of Digital Humanities.
16.
This meeting will discuss applications on the topic of Media Studies, for Digital Humanities Advancement Grants, submitted to the Office of Digital Humanities.
17.
This meeting will discuss applications on the topics of Digital Collections and Archives, for Digital Humanities Advancement Grants, submitted to the Office of Digital Humanities.
18.
This meeting will discuss applications on the topic of Cultural Heritage, for the Research and Development grant program, submitted to the Division of Preservation and Access.
19.
This meeting will discuss applications on the topics of Geospatial and Visualization, for Digital Humanities Advancement Grants, submitted to the Office of Digital Humanities.
20.
This meeting will discuss applications on the topics of Conservation and Material Studies, for the Research and Development grant program, submitted to the Division of Preservation and Access.
21.
This meeting will discuss applications on the topic of Digital Preservation, for the Research and Development grant program, submitted to the Division of Preservation and Access.
Because these meetings will include review of personal and/or proprietary financial and commercial information given in confidence to the agency by grant applicants, the meetings will be closed to the public pursuant to sections 552b(c)(4) and 552b(c)(6) of Title 5, U.S.C., as amended. I have made this determination pursuant to the authority granted me by the Chairman's Delegation of Authority to Close Advisory Committee Meetings dated April 15, 2016.
9:30 a.m., Tuesday, August 7, 2018.
NTSB Conference Center, 429 L'Enfant Plaza SW, Washington, DC 20594.
The one item is open to the public.
Telephone: (202) 314-6100.
The press and public may enter the NTSB Conference Center one hour prior to the meeting for set up and seating.
Individuals requesting specific accommodations should contact Rochelle McCallister at (202) 314-6305 or by email at
The public may view the meeting via a live or archived webcast by accessing a link under “News & Events” on the NTSB home page at
Schedule updates, including weather-related cancellations, are also available at
Candi Bing at (202) 314-6403 or by email at
Peter Knudson at (202) 314-6100 or by email at
Weeks of July 16, 23, 30, August 6, 13, 20, 2018.
Commissioners' Conference Room, 11555 Rockville Pike, Rockville, Maryland.
Public and Closed.
There are no meetings scheduled for the week of July 16, 2018.
There are no meetings scheduled for the week of July 23, 2018.
There are no meetings scheduled for the week of July 30, 2018.
There are no meetings scheduled for the week of August 6, 2018.
There are no meetings scheduled for the week of August 13, 2018.
There are no meetings scheduled for the week of August 20, 2018.
The schedule for Commission meetings is subject to change on short notice. For more information or to verify the status of meetings, contact Denise McGovern at 301-415-0681 or via email at
The NRC Commission Meeting Schedule can be found on the internet at:
The NRC provides reasonable accommodation to individuals with disabilities where appropriate. If you need a reasonable accommodation to participate in these public meetings, or need this meeting notice or the transcript or other information from the public meetings in another format (
Members of the public may request to receive this information electronically. If you would like to be added to the distribution, please contact the Nuclear Regulatory Commission, Office of the Secretary, Washington, DC 20555 (301-415-1969), or you may email
Nuclear Regulatory Commission.
Proposed state agreement; request for comment.
By letter dated November 14, 2017, Governor Matthew H. Mead of the State of Wyoming requested that the U.S. Nuclear Regulatory Commission (NRC or Commission) enter into an Agreement with the State of Wyoming as authorized by Section 274b. of the Atomic Energy Act of 1954, as amended (AEA).
Under the proposed Agreement, the Commission would discontinue, and the State of Wyoming would assume, regulatory authority over the management and disposal of byproduct materials as defined in Section 11e.(2) of the AEA and a subcategory of source material associated with uranium or thorium milling within the State. Pursuit to Commission direction, the proposed Agreement would state that the NRC will retain regulatory authority over the American Nuclear Corporation (ANC) license.
As required by Section 274e. of the AEA, the NRC is publishing the proposed Agreement for public comment. The NRC is also publishing the summary of a draft assessment by the NRC staff of the State of Wyoming's regulatory program. Comments are requested on the proposed Agreement, especially its effect on public health and safety. Comments are also requested on the draft staff assessment, the adequacy of the State of Wyoming's program, and the State's program staff, as discussed in this notice.
The proposed Agreement would exempt persons who possess or use byproduct materials as defined in Section 11e.(2) of the AEA and a subcategory of source material involved in the extraction or concentration of uranium or thorium in source material or ores at uranium or thorium milling facilities in the State of Wyoming from portions of the Commission's regulatory authority. Radioactive materials not covered by the proposed Agreement will continue to be subject to the Commission's regulatory authority. Section 274e. of the AEA requires that the NRC publish these exemptions. Notice is hereby given that the pertinent exemptions have been previously published in the
The NRC is giving notice once each week for four consecutive weeks of the proposed Agreement. This is the second notice that has been published.
Submit comments by July 26, 2018. Comments received after this date will be considered if it is practical to do so, but the Commission is able to ensure consideration only for comments received before this date.
You may submit comments by the following method:
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For additional direction on obtaining information and submitting comments, see “Obtaining Information and Submitting Comments” in the
Stephen Poy, Office of Nuclear Material Safety and Safeguards, telephone: 301-415-7135, email:
Please refer to Docket ID NRC-2018-0104 when contacting the NRC about the availability of information for this action. You may obtain publicly-available information related to this action by any of the following methods:
•
•
•
Please include Docket ID NRC-2018-0104 in your comment submission. The NRC cautions you not to include identifying or contact information that you do not want to be publicly disclosed in your comment submission. The NRC will post all comment submissions at
If you are requesting or aggregating comments from other persons for submission to the NRC, then you should inform those persons not to include identifying or contact information that they do not want to be publicly disclosed in their comment submission. Your request should state that the NRC does not routinely edit comment submissions to remove such information before making the comment submissions available to the public or entering the comment into ADAMS.
Since Section 274 of the AEA was added in 1959, the Commission has entered into Agreements with 37 States (Agreement States). The 37 Agreement States currently regulate approximately 16,500 Agreement material licenses, while the NRC regulates approximately 2,800 licenses. Under the proposed Agreement, 14 NRC uranium mill licenses will transfer to the State of Wyoming. The NRC periodically reviews the performance of the Agreement States to assure compliance with the provisions of Section 274.
Section 274e. of the AEA requires that the terms of the proposed Agreement be published in the
(a) Section 274b. of the AEA provides the mechanism for a State to assume regulatory authority from the NRC over certain radioactive materials and activities that involve use of these materials. The radioactive materials, sometimes referred to as “Agreement materials,” are byproduct materials as defined in Sections 11e.(1), 11e.(2), 11e.(3), and 11e.(4) of the AEA; source material as defined in Section 11z. of the AEA; and special nuclear material as defined in Section 11aa. of the AEA, restricted to quantities not sufficient to form a critical mass.
The radioactive materials and activities (which together are usually referred to as the “categories of materials”) that the State of Wyoming requests authority over are the possession and use of byproduct materials as defined in Section 11e.(2) of the AEA and a subcategory of source material involved in the extraction or concentration of uranium or thorium in source material or ores at uranium or thorium milling facilities (source material associated with milling activities).
(b) The proposed Agreement contains articles that
(i) Specify the materials and activities over which authority is transferred;
(ii) Specify the materials and activities over which the Commission will retain regulatory authority;
(iii) Continue the authority of the Commission to safeguard special nuclear material, and restricted data and protect common defense and security;
(iv) Commit the State of Wyoming and the NRC to exchange information as necessary to maintain coordinated and compatible programs;
(v) Provide for the reciprocal recognition of licenses;
(vi) Provide for the suspension or termination of the Agreement; and
(vii) Specify the effective date of the proposed Agreement.
The Commission reserves the option to modify the terms of the proposed Agreement in response to comments, to correct errors, and to make editorial changes. The final text of the proposed Agreement, with the effective date, will be published after the Agreement is approved by the Commission and signed by the NRC Chairman and the Governor of Wyoming.
(c) The regulatory program is authorized by law under the State of Wyoming Statute Section 35-11-2001, which provides the Governor with the authority to enter into an Agreement with the Commission. The State of Wyoming law contains provisions for the orderly transfer of regulatory authority over affected licensees from the NRC to the State. In a letter dated November 14, 2017, Governor Mead certified that the State of Wyoming has a program for the control of radiation hazards that is adequate to protect public health and safety within the State of Wyoming for the materials and activities specified in the proposed Agreement, and that the State desires to
(d) The NRC draft staff assessment finds that the Wyoming Department of Environmental Quality, Land Quality Division, Uranium Recovery Program, is adequate to protect public health and safety and is compatible with the NRC program for the regulation of Agreement materials. Pursuant to Commission direction, the proposed Agreement includes a provision that the State of Wyoming has until the end of the 2019 legislative session to amend Wyoming Statute Section 35-11-2004(c) to be compatible with AEA Section 83b.(1)(A), or the Agreement will terminate without further NRC action. The proposed Agreement also explicitly states that, prior to the requisite amendment of Wyoming Statute Section 35-11-2004(c), the NRC will reject any State of Wyoming request to terminate a license that proposes to bifurcate the ownership of byproduct material and its disposal site between the State and the Federal government. Pursuant to Commission direction, the Agreement contains a provision that requires the State of Wyoming to revise Statute Section 35-11-2004(c) during the next legislative session to be compatible with AEA Section 83b.(1)(A). If the Wyoming Statute Section 35-11-2004(c) is not amended by the end of the 2019 legislative session, the Agreement will terminate.
The NRC staff has examined the State of Wyoming's request for an Agreement with respect to the ability of the State's radiation control program to regulate Agreement materials. The examination was based on the Commission's Policy Statement, “Criteria for Guidance of States and NRC in Discontinuance of NRC Regulatory Authority and Assumption Thereof by States Through Agreement,” (46 FR 7540; January 23, 1981, as amended by Policy Statements published at 46 FR 36969; July 16, 1981, and at 48 FR 33376; July 21, 1983) (Policy Statement), and the Office of Nuclear Material Safety and Safeguards Procedure SA-700, “Processing an Agreement” (available at
(a) Organization and Personnel. These areas were reviewed under Criteria 1, 2, 20, 24, 33, and 34 in the draft staff assessment. The State of Wyoming's proposed Agreement materials program for the regulation of radioactive materials is the Uranium Recovery Program. The Uranium Recovery Program will be located within the existing Land Quality Division of the Wyoming Department of Environmental Quality.
The educational requirements for the Uranium Recovery Program staff members are specified in the State of Wyoming's personnel position descriptions and meet the NRC criteria with respect to formal education or combined education and experience requirements. All current staff members hold a Bachelor of Science Degree or Master's Degree in one of the following subject areas: environmental science, health physics, nuclear engineering, geology, or ecology. All have training and work experience in radiation protection. Supervisory level staff have at least 5 years of working experience in radiation protection, with most having more than 10 years of experience.
The State of Wyoming performed an analysis of the expected workload under the proposed Agreement. Based on the NRC staff review of the State of Wyoming's analysis, the State has an adequate number of staff to regulate radioactive materials under the terms of the proposed Agreement. The State of Wyoming will employ the equivalent of 7.2 full-time professional and technical staff to support the Uranium Recovery Program.
The State of Wyoming has indicated that the Uranium Recovery Program has an adequate number of trained and qualified staff in place. The State of Wyoming has developed qualification procedures for license reviewers and inspectors that are similar to the NRC's procedures. The Uranium Recovery Program staff is accompanying the NRC staff on inspections of NRC licensees in Wyoming. The Uranium Recovery Program staff is also actively supplementing their experience through direct meetings, discussions, and facility visits with the NRC licensees in the State of Wyoming and through self-study, in-house training, and formal training.
Overall, the NRC staff concluded that the Uranium Recovery Program staff identified by the State of Wyoming to participate in the Agreement materials program has sufficient knowledge and experience in radiation protection, the use of radioactive materials, the standards for the evaluation of applications for licensing, and the techniques of inspecting licensed users of Agreement materials.
(b) Legislation and Regulations. These areas were reviewed under Criteria 1-14, 17, 19, 21, and 23-33 in the draft staff assessment. The Wyoming Statutes Sections 35-11-2001(a) through (c) provide the authority to enter into the Agreement and establish the Wyoming Department of Environmental Quality as the lead agency for the State's Uranium Recovery Program. The Department has the requisite authority to promulgate regulations under Wyoming Statute Section 35-11-2002(b) for protection against radiation. The Wyoming Statutes Sections 35-11-2001 through -2005 also provide the Uranium Recovery Program the authority to issue licenses and orders; conduct inspections; and enforce compliance with regulations, license conditions, and orders. The Wyoming Statute Section 35-11-2003(d) requires licensees to provide access to inspectors.
The Wyoming Statute Section 35-11-2001(e) does not provide the State of Wyoming with authority over independent or commercial laboratories. Under the proposed Agreement, the NRC would retain regulatory authority over laboratory facilities that are not located at facilities licensed under the State of Wyoming's regulatory authority. The State of Wyoming would only regulate laboratory facilities located at uranium or thorium mills. The NRC staff verified that the State of Wyoming adopted the relevant NRC regulations in parts 19, 20, 40, 71, and 150 of title 10 of the
(c) Storage and Disposal. These areas were reviewed under Criteria 8, 9a, 11, 29, 30, 31, and 32 in the draft staff assessment. The State of Wyoming has adopted NRC compatible requirements for the handling and storage of radioactive material. The State of Wyoming has adopted an adequate and
As a result of the class of byproduct material it will be regulating (Section 11e.(2) of the AEA), the State of Wyoming is not required to have regulations compatible to 10 CFR part 61 for waste disposal. Rather, the State of Wyoming is required to have regulations that are compatible with 10 CFR part 40 for the disposal of byproduct material as defined in Section 11e.(2) of the AEA and source material associated with milling activities. The NRC staff confirmed that the State of Wyoming has adopted regulations that are compatible with the NRC regulations in 10 CFR part 40 for the disposal of byproduct material and source material associated with milling activities, which are equivalent to the applicable standards contained in 10 CFR part 61.
These regulations address the general requirements for waste disposal and are applicable to all licensees covered under this proposed Agreement.
The NRC staff identified one portion of the Wyoming Statute that is potentially not compatible with NRC requirements. Section 83b.(1)(A) of the AEA ensures that ownership of the byproduct material itself is inseparable from the site on which it is disposed. Consequently, the State of Wyoming has the option of taking title to the material and its disposal site, but the Uranium Mill Tailings Radiation Control Act (UMTRCA) does not permit a State to bifurcate ownership of the disposed byproduct material and the property rights necessary to ensure its safe disposal. The Wyoming Statute Section 35-11-2004(c), enacted in anticipation of the State of Wyoming's assumption of the NRC's regulatory authority for uranium and thorium milling, could permit the bifurcation of the disposed byproduct material and its disposal site by the State. As discussed in Criterion 30c. of the draft staff assessment, this bifurcation of the land and the disposed byproduct material could conflict with the AEA (as amended by UMTRCA), and Article II.B.2.b. in the proposed Agreement.
Based on Commission direction, the NRC staff concluded that Criterion 30c. is satisfied in the following manner: the Commission could complete the process for the final application package for the Agreement, including publishing the proposed Agreement for comment, by noting that the Commission's finding of compatibility is contingent on the State of Wyoming revising this provision, during the next legislative session, to be compatible with AEA Section 83b.(1)(A). Thus, an Agreement could be executed, but it would include a provision that the State of Wyoming has until the end of the 2019 legislative session to amend Wyoming Statute Section 35-11-2004(c) to be compatible with AEA Section 83b.(1)(A), or the Agreement will terminate without further NRC action. The Agreement would also explicitly state that the NRC will reject any State of Wyoming request to terminate a license that proposes to bifurcate the ownership of byproduct material and its disposal site between the State and the federal government. The NRC staff determined that there is little practical risk that the State of Wyoming's current statutory provisions would result in the bifurcation of the 11e.(2) byproduct material from the land since the NRC is required to review and approve any State-proposed termination of a uranium mill license.
(d) Transportation of Radioactive Material. This area was reviewed under Criteria 10 and 35 in the draft staff assessment. The State of Wyoming has adopted compatible regulations to the NRC regulations in 10 CFR part 71. Part 71 contains the requirements licensees must follow when preparing packages containing radioactive material for transport.
Part 71 also contains requirements related to the licensing of packaging for use in transporting radioactive materials.
(e) Recordkeeping and Incident Reporting. These areas were reviewed under Criteria 1, 11, and 35 in the draft staff assessment. The State of Wyoming has adopted compatible regulations to the sections of the NRC regulations that specify requirements for licensees to keep records and to report incidents or accidents involving the State's regulated Agreement materials.
(f) Evaluation of License Applications. This area was reviewed under Criteria 1, 7, 8, 9a, 13, 14, 20, 23, 25, and 29-35 in the draft staff assessment. The State of Wyoming has adopted compatible regulations to the NRC regulations that specify the requirements a person must meet to get a license to possess or use radioactive materials. The State of Wyoming has also developed a licensing procedure manual, along with accompanying regulatory guides, which are adapted from similar NRC documents and contain guidance for the program staff when evaluating license applications.
(g) Inspections and Enforcement. These areas were reviewed under Criteria 1, 16, 18, 19, 23, 35, and 36 in the draft staff assessment. The State of Wyoming has adopted a schedule providing for the inspection of licensees as frequently as, or more frequently than, the inspection schedule used by the NRC. The State of Wyoming's Uranium Recovery Program has adopted procedures for the conduct of inspections, reporting of inspection findings, and reporting inspection results to the licensees. Additionally, the State of Wyoming has also adopted procedures for the enforcement of regulatory requirements.
(h) Regulatory Administration. This area was reviewed under Criterion 23 in the draft staff assessment. The State of Wyoming is bound by requirements specified in its State law for rulemaking, issuing licenses, and taking enforcement actions. The State of Wyoming has also adopted administrative procedures to assure fair and impartial treatment of license applicants. The State of Wyoming law prescribes standards of ethical conduct for State employees.
(i) Cooperation with Other Agencies. This area was reviewed under Criteria 25, 26, and 27 in the draft staff assessment. The State of Wyoming law provides for the recognition of existing NRC and Agreement State licenses and the State has a process in place for the transition of active NRC licenses. Upon the effective date of the Agreement, all active uranium recovery NRC licenses issued to facilities in the State of Wyoming, with the exception of the ANC license, will be recognized as Wyoming Department of Environmental Quality licenses.
The State of Wyoming also provides for “timely renewal.” This provision affords the continuance of licenses for which an application for renewal has been filed more than 30 days prior to the date of expiration of the license. NRC licenses transferred while in timely renewal are included under the continuation provision.
The State of Wyoming regulations, in Chapter 4, Section 6(d), provide exemptions from the State's requirements for the NRC and the U.S. Department of Energy contractors or subcontractors; the exemptions must be authorized by law and determined not to endanger life or property and to otherwise be in the public interest. The proposed Agreement commits the State of Wyoming to use its best efforts to cooperate with the NRC and the other Agreement States in the formulation of standards and regulatory programs for the protection against hazards of radiation, and to assure that the State's program will continue to be compatible with the Commission's program for the regulation of Agreement materials. The proposed Agreement specifies the
There are six UMTRCA Title II sites in the State of Wyoming (ADAMS Accession No. ML16300A294) undergoing decommissioning. These sites are: (1) Anadarko Bear Creek, Powder River Basin; (2) Pathfinder, Lucky Mc, Gas Hills; (3) Umetco Minerals Corporation, Gas Hills; (4) Western Nuclear Inc., Split Rock, Jeffrey City; (5) Exxon Mobile, Highlands, Converse County; and (6) ANC, Gas Hills.
The State of Wyoming indicated it was opposed to assuming regulatory authority over the ANC site because the licensee is insolvent. To address the State of Wyoming's proposed exclusion of the ANC site from the proposed Agreement, the NRC staff provided SECY-17-0081 “Status and Resolution of Issues Associated with the Transfer of Six Decommissioning Uranium Mill Sites to the State of Wyoming” (ADAMS Accession No. ML17087A355) to the Commission. In SRM-SECY-17-0081 (ADAMS Accession No. ML17277A783), the Commission approved the NRC staff's recommendation for the NRC to retain regulatory authority over the ANC site and stated that the Commission's retention of the ANC site “is not a change to the Commission's current Agreement State policy, but is instead an exception to that policy based on case-specific facts.” Article II.A.14. of the proposed Agreement specifies that the Commission retains regulatory authority over the ANC license.
With regard to the five other decommissioning UMTRCA sites, the NRC staff has developed a draft Memorandum of Understanding (MOU) between the NRC and the State of Wyoming as a separate document from the proposed Agreement. The objective of the MOU is to delineate specific actions that the NRC and the State of Wyoming would take to verify completion of the decommissioning of these sites. The MOU has been drafted and the NRC staff is currently working with the State of Wyoming to delineate how license termination will be addressed for each of the five sites. An assessment of the decommissioning status of the five UMTRCA sites and the activities that need to be completed prior to license termination (ADAMS Accession No. ML17040A501) has been completed. Once the MOU is completed and signed by both the NRC and the State of Wyoming, it will be published in the
Section 274d. of the AEA provides that the Commission shall enter into an Agreement under Section 274b. with any State if:
(a) The Governor of the State certifies that the State has a program for the control of radiation hazards adequate to protect public health and safety with respect to the Agreement materials within the State and that the State desires to assume regulatory responsibility for the Agreement materials; and
(b) The Commission finds that the State program is in accordance with the requirements of Subsection 274o. and in all other respects compatible with the Commission's program for the regulation of materials, and that the State program is adequate to protect public health and safety with respect to the materials covered by the proposed Agreement.
The NRC staff has reviewed the proposed Agreement, the certification of Wyoming Governor Mead, and the supporting information provided by the Uranium Recovery Program of the Wyoming Department of Environmental Quality and Wyoming's Office of the Attorney General. Based upon this review, the NRC staff concludes that the State of Wyoming Uranium Recovery Program satisfies the Section 274d. criteria as well as the criteria in the Commission's Policy Statement “Criteria for Guidance of States and NRC in Discontinuance of NRC Regulatory Authority and Assumption Thereof by States Through Agreement.” As noted above, the proposed Agreement includes a provision that the State of Wyoming has until the end of the 2019 legislative session to amend Wyoming Statute Section 35-11-2004(c) to be compatible with AEA Section 83b.(1)(A) or the Agreement will terminate without further NRC action. The proposed Agreement also explicitly states that the NRC will reject any State of Wyoming request to terminate a license that proposes to bifurcate the ownership of byproduct material and its disposal site between the State and the Federal government. Pursuant to Commission direction, the NRC staff finding of compatibility is contingent on the State of Wyoming revising Wyoming Statute Section 35-11-2004(c) during the next legislative session to be compatible with AEA Section 83b.(1)(A). The proposed State of Wyoming program to regulate Agreement materials, as comprised of statutes, regulations, procedures, and staffing is compatible with the Commission's program and is adequate to protect public health and safety with respect to the materials covered by the proposed Agreement. Therefore, the proposed Agreement meets the requirements of Section 274 of the AEA.
For the Nuclear Regulatory Commission.
Subject to the exceptions provided in Articles II, IV, and V, the Commission shall discontinue, as of the effective date of this Agreement, the regulatory authority of the Commission in the State under Chapters, 7, and 8, and Section 161 of the Act with respect to the following materials:
A. Byproduct material as defined in Section 11e.(2) of the Act; and,
B. Source material involved in the extraction or concentration of uranium or thorium in source material or ores at uranium or thorium milling facilities (hereinafter referred to as “source material associated with milling activities”).
A. This Agreement does not provide for the discontinuance of any authority, and the Commission shall retain authority and responsibility, with respect to:
1. Byproduct material as defined in Section 11e.(1) of the Act;
2. Byproduct material as defined in Section 11e.(3) of the Act;
3. Byproduct material as defined in Section 11e.(4) of the Act;
4. Source material except for source material as defined in Article I.B. of this Agreement;
5. Special nuclear material;
6. The regulation of the land disposal of byproduct, source, or special nuclear material received from other persons, excluding 11e.(2) byproduct material or source material described in Article I.A. and B. of this Agreement;
7. The evaluation of radiation safety information on sealed sources or devices containing byproduct, source, or special nuclear material and the registration of the sealed sources or devices for distribution, as provided for in regulations or orders of the Commission;
8. The regulation of the construction and operation of any production or utilization facility or any uranium enrichment facility;
9. The regulation of the export from or import into the United States of byproduct, source, or special nuclear material, or of any production or utilization facility;
10. The regulation of the disposal into the ocean or sea of byproduct, source, or special nuclear material waste as defined in the regulations or orders of the Commission;
11. The regulation of the disposal of such other byproduct, source, or special nuclear material as the Commission from time to time determines by regulation or order should, because of the hazards or potential hazards thereof, not to be so disposed without a license from the Commission;
12. The regulation of activities not exempt from Commission regulation as stated in 10 CFR part 150;
13. The regulation of laboratory facilities that are not located at facilities licensed under the authority relinquished under Article I.A. and B. of this Agreement; and,
14. Notwithstanding this Agreement, the Commission shall retain regulatory authority over the American Nuclear Corporation license.
B. Notwithstanding this Agreement, the Commission retains the following authorities pertaining to byproduct material as defined in Section 11e.(2) of the Act:
1. Prior to the termination of a State license for such byproduct material, or for any activity that results in the production of such material, the Commission shall have made a determination that all applicable standards and requirements pertaining to such material have been met.
2. The Commission reserves the authority to establish minimum standards governing reclamation, long-term surveillance or maintenance, and ownership of such byproduct material and of land used as its disposal site for such material. Such reserved authority includes:
a. The authority to establish terms and conditions as the Commission determines necessary to assure that, prior to termination of any license for such byproduct material, or for any activity that results in the production of such material, the licensee shall comply with decontamination, decommissioning, and reclamation standards prescribed by the Commission and with ownership requirements for such material and its disposal site;
b. The authority to require that prior to termination of any license for such byproduct material or for any activity that results in the production of such material, title to such byproduct material and its disposal site be transferred to the United States or the State at the option of the State (provided such option is exercised prior to termination of the license);
c. The authority to permit use of the surface or subsurface estates, or both, of the land transferred to the United States or a State pursuant to paragraph 2.b. in this section in a manner consistent with the provisions of the Uranium Mill Tailings Radiation Control Act of 1978, provided that the Commission determines that such use would not endanger public health, safety, welfare, or the environment;
d. The authority to require, in the case of a license for any activity that produces such byproduct material (which license was in effect on November 8, 1981), transfer of land and material pursuant to paragraph 2.b. in this section taking into consideration the status of such material and land and interests therein and the ability of the licensee to transfer title and custody thereof to the United States or a State;
e. The authority to require the Secretary of the United States Department of Energy, other Federal agency, or State, whichever has custody of such byproduct material and its disposal site, to undertake such monitoring, maintenance, and emergency measures as are necessary to protect public health and safety and other actions as the Commission deems necessary; and,
f. The authority to enter into arrangements as may be appropriate to assure Federal long-term surveillance or maintenance of such byproduct material and its disposal site on land held in trust by the United States for any Indian Tribe or land owned by an Indian Tribe and subject to a restriction against alienation imposed by the United States.
3. The Commission retains the authority to reject any State request to terminate a license that proposes to bifurcate the ownership of 11e.(2) byproduct material and its disposal site between the State and the Federal government. Upon passage of a revised Wyoming Statute Section 35-11-2004(c) that the NRC finds compatible with Section 83b.(1)(A) of the Act, this paragraph expires and is no longer part of this Agreement.
With the exception of those activities identified in Article II, A.8 through A.11, this Agreement may be amended, upon application by the State and approval by the Commission to include one or more of the additional activities specified in Article II, A.1 through A.7, whereby the State may then exert regulatory authority and responsibility with respect to those activities.
Notwithstanding this Agreement, the Commission may from time to time by rule, regulation, or order, require that the manufacturer, processor, or producer of any equipment, device, commodity, or other product containing source, byproduct, or special nuclear material shall not transfer possession or control of such product except pursuant to a license or an exemption for licensing issued by the Commission.
This Agreement shall not affect the authority of the Commission under Subsection 161b. or 161i. of the Act to issue rules, regulations, or orders to protect the common defense and security, to protect restricted data, or to guard against the loss or diversion of special nuclear material.
The Commission will cooperate with the State and other Agreement States in the formulation of standards and regulatory programs of the State and the Commission for protection against hazards of radiation and to assure that Commission and State programs for protection against hazards of radiation will be coordinated and compatible. The State agrees to cooperate with the Commission and other Agreement States in the formulation of standards and regulatory programs of the State and the Commission for protection against hazards of radiation and to assure that the State's program will continue to be compatible with the program of the Commission for the regulation of materials covered by this Agreement.
The State and the Commission agree to keep each other informed of proposed changes in their respective rules and regulations and to provide each other the opportunity for early and substantive contribution to the proposed changes.
The State and the Commission agree to keep each other informed of events, accidents, and licensee performance that may have generic implication or otherwise be of regulatory interest.
The Commission and the State agree that it is desirable to provide reciprocal recognition of licenses for the materials listed in Article I licensed by the other party or by any other Agreement State.
Accordingly, the Commission and the State agree to develop appropriate rules, regulations, and procedures by which reciprocity will be accorded.
A. The Commission, upon its own initiative after reasonable notice and opportunity for hearing to the State or upon request of the Governor of the State, may terminate or suspend all or part of this agreement and reassert the licensing and regulatory authority vested in it under the Act if the Commission finds that (1) such termination or suspension is required to protect public health and safety, or (2) the State has not complied with one or more of the requirements of Section 274 of the Act.
1. This Agreement will terminate without further NRC action if the State does not amend Wyoming Statute Section 35-11-2004(c) to be compatible with Section 83b.(1)(A) of the Act by the end of the 2019 Wyoming legislative session. Upon passage of a revised Wyoming Statute Section 35-11-2004(c) that the NRC finds compatible with Section 83b.(1)(A) of the Act, this paragraph expires and is no longer part of the Agreement.
B. The Commission may also, pursuant to Section 274j. of the Act, temporarily suspend all or part of this agreement if, in the judgment of the Commission, an emergency situation exists requiring immediate action to protect public health and safety and the State has failed to take necessary steps. The Commission shall periodically review actions taken by the State under this Agreement to ensure compliance with Section 274 of the Act, which requires a State program to be adequate to protect public health and safety with respect to the materials covered by this Agreement and to be compatible with the Commission's program.
In the licensing and regulation of byproduct material as defined in Section 11e.(2) of the Act, or of any activity that results in production of such material, the State shall comply with the provisions of Section 274o. of the Act, if in such licensing and regulation, the State requires financial surety arrangements for reclamation or long-term surveillance and maintenance of such material.
A. The total amount of funds the State collects for such purposes shall be transferred to the United States if custody of such material and its disposal site is transferred to the United States upon termination of the State license for such material or any activity that results in the production of such material. Such funds include, but are not limited to, sums collected for long-term surveillance or maintenance. Such funds do not, however, include monies held as surety where no default has occurred and the reclamation or other bonded activity has been performed; and,
B. Such surety or other financial requirements must be sufficient to ensure compliance with those standards established by the Commission pertaining to bonds, sureties, and financial arrangements to ensure adequate reclamation and long-term management of such byproduct material and its disposal site.
This Agreement shall become effective on [date], and shall remain in effect unless and until such time as it is terminated pursuant to Article VIII.
Done at [location] this [date] day of [month], 2018.
For the Nuclear Regulatory Commission.
Done at [location] this [date] day of [month], 2018.
For the State of Wyoming.
Nuclear Regulatory Commission.
Biweekly notice.
Pursuant to Section 189a.(2) of the Atomic Energy Act of 1954, as amended (the Act), the U.S. Nuclear Regulatory Commission (NRC) is publishing this regular biweekly notice. The Act requires the Commission to publish notice of any amendments issued, or proposed to be issued, and grants the Commission the authority to issue and make immediately effective any amendment to an operating license or combined license, as applicable, upon a determination by the Commission that such amendment involves no significant hazards consideration, notwithstanding the pendency before the Commission of a request for a hearing from any person.
This biweekly notice includes all notices of amendments issued, or proposed to be issued, from June 18, 2018, to June 29, 2018. The last biweekly notice was published on July 3, 2018.
Comments must be filed by August 16, 2018. A request for a hearing must be filed by September 17, 2018.
You may submit comments by any of the following methods:
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For additional direction on obtaining information and submitting comments, see “Obtaining Information and Submitting Comments” in the
Janet C. Burkhardt, Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001; telephone: 301-415-1384, email:
Please refer to Docket ID NRC-2018-0140, facility name, unit number(s), plant docket number, application date, and subject when contacting the NRC about the availability of information for this action. You may obtain publicly-available information related to this action by any of the following methods:
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Please include Docket ID NRC-2018-0140, facility name, unit number(s), plant docket number, application date, and subject in your comment submission.
The NRC cautions you not to include identifying or contact information that you do not want to be publicly disclosed in your comment submission. The NRC will post all comment submissions at
If you are requesting or aggregating comments from other persons for submission to the NRC, then you should inform those persons not to include identifying or contact information that they do not want to be publicly disclosed in their comment submission. Your request should state that the NRC does not routinely edit comment submissions to remove such information before making the comment submissions available to the public or entering the comment into ADAMS.
The Commission has made a proposed determination that the following amendment requests involve no significant hazards consideration. Under the Commission's regulations in section 50.92 of title 10 of the
The Commission is seeking public comments on this proposed determination. Any comments received within 30 days after the date of publication of this notice will be considered in making any final determination.
Normally, the Commission will not issue the amendment until the expiration of 60 days after the date of publication of this notice. The Commission may issue the license amendment before expiration of the 60-day period provided that its final determination is that the amendment involves no significant hazards consideration. In addition, the Commission may issue the amendment prior to the expiration of the 30-day comment period if circumstances change during the 30-day comment period such that failure to act in a timely way would result, for example in derating or shutdown of the facility. If the Commission takes action prior to the expiration of either the comment period or the notice period, it will publish in the
Within 60 days after the date of publication of this notice, any persons (petitioner) whose interest may be affected by this action may file a request for a hearing and petition for leave to intervene (petition) with respect to the action. Petitions shall be filed in accordance with the Commission's “Agency Rules of Practice and Procedure” in 10 CFR part 2. Interested persons should consult a current copy of 10 CFR 2.309. The NRC's regulations are accessible electronically from the NRC Library on the NRC's website at
As required by 10 CFR 2.309(d) the petition should specifically explain the reasons why intervention should be permitted with particular reference to the following general requirements for standing: (1) The name, address, and telephone number of the petitioner; (2) the nature of the petitioner's right under the Act to be made a party to the proceeding; (3) the nature and extent of the petitioner's property, financial, or other interest in the proceeding; and (4) the possible effect of any decision or order which may be entered in the proceeding on the petitioner's interest.
In accordance with 10 CFR 2.309(f), the petition must also set forth the specific contentions which the petitioner seeks to have litigated in the proceeding. Each contention must consist of a specific statement of the issue of law or fact to be raised or controverted. In addition, the petitioner must provide a brief explanation of the bases for the contention and a concise statement of the alleged facts or expert opinion which support the contention and on which the petitioner intends to rely in proving the contention at the hearing. The petitioner must also provide references to the specific sources and documents on which the petitioner intends to rely to support its position on the issue. The petition must include sufficient information to show that a genuine dispute exists with the applicant or licensee on a material issue of law or fact. Contentions must be limited to matters within the scope of the proceeding. The contention must be one which, if proven, would entitle the petitioner to relief. A petitioner who fails to satisfy the requirements at 10 CFR 2.309(f) with respect to at least one contention will not be permitted to participate as a party.
Those permitted to intervene become parties to the proceeding, subject to any limitations in the order granting leave to intervene. Parties have the opportunity to participate fully in the conduct of the hearing with respect to resolution of that party's admitted contentions, including the opportunity to present evidence, consistent with the NRC's regulations, policies, and procedures.
Petitions must be filed no later than 60 days from the date of publication of this notice. Petitions and motions for leave to file new or amended contentions that are filed after the deadline will not be entertained absent a determination by the presiding officer that the filing demonstrates good cause by satisfying the three factors in 10 CFR 2.309(c)(1)(i) through (iii). The petition must be filed in accordance with the filing instructions in the “Electronic Submissions (E-Filing)” section of this document.
If a hearing is requested, and the Commission has not made a final determination on the issue of no significant hazards consideration, the Commission will make a final determination on the issue of no significant hazards consideration. The final determination will serve to establish when the hearing is held. If the final determination is that the amendment request involves no significant hazards consideration, the Commission may issue the amendment and make it immediately effective, notwithstanding the request for a hearing. Any hearing would take place after issuance of the amendment. If the final determination is that the
A State, local governmental body, Federally-recognized Indian Tribe, or agency thereof, may submit a petition to the Commission to participate as a party under 10 CFR 2.309(h)(1). The petition should state the nature and extent of the petitioner's interest in the proceeding. The petition should be submitted to the Commission no later than 60 days from the date of publication of this notice. The petition must be filed in accordance with the filing instructions in the “Electronic Submissions (E-Filing)” section of this document, and should meet the requirements for petitions set forth in this section, except that under 10 CFR 2.309(h)(2) a State, local governmental body, or Federally-recognized Indian Tribe, or agency thereof does not need to address the standing requirements in 10 CFR 2.309(d) if the facility is located within its boundaries. Alternatively, a State, local governmental body, Federally-recognized Indian Tribe, or agency thereof may participate as a non-party under 10 CFR 2.315(c).
If a hearing is granted, any person who is not a party to the proceeding and is not affiliated with or represented by a party may, at the discretion of the presiding officer, be permitted to make a limited appearance pursuant to the provisions of 10 CFR 2.315(a). A person making a limited appearance may make an oral or written statement of his or her position on the issues but may not otherwise participate in the proceeding. A limited appearance may be made at any session of the hearing or at any prehearing conference, subject to the limits and conditions as may be imposed by the presiding officer. Details regarding the opportunity to make a limited appearance will be provided by the presiding officer if such sessions are scheduled.
All documents filed in NRC adjudicatory proceedings, including a request for hearing and petition for leave to intervene (petition), any motion or other document filed in the proceeding prior to the submission of a request for hearing or petition to intervene, and documents filed by interested governmental entities that request to participate under 10 CFR 2.315(c), must be filed in accordance with the NRC's E-Filing rule (72 FR 49139; August 28, 2007, as amended at 77 FR 46562; August 3, 2012). The E-Filing process requires participants to submit and serve all adjudicatory documents over the internet, or in some cases to mail copies on electronic storage media. Detailed guidance on making electronic submissions may be found in the Guidance for Electronic Submissions to the NRC and on the NRC website at
To comply with the procedural requirements of E-Filing, at least 10 days prior to the filing deadline, the participant should contact the Office of the Secretary by email at
Information about applying for a digital ID certificate is available on the NRC's public website at
A person filing electronically using the NRC's adjudicatory E-Filing system may seek assistance by contacting the NRC's Electronic Filing Help Desk through the “Contact Us” link located on the NRC's public website at
Participants who believe that they have a good cause for not submitting documents electronically must file an exemption request, in accordance with 10 CFR 2.302(g), with their initial paper filing stating why there is good cause for not filing electronically and requesting authorization to continue to submit documents in paper format. Such filings must be submitted by: (1) First class mail addressed to the Office of the Secretary of the Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, Attention: Rulemaking and Adjudications Staff; or (2) courier, express mail, or expedited delivery service to the Office of the Secretary, 11555 Rockville Pike, Rockville, Maryland 20852, Attention: Rulemaking and Adjudications Staff. Participants filing adjudicatory documents in this manner are responsible for serving the document on all other participants. Filing is considered complete by first-class mail as of the time of deposit in the mail, or by courier, express mail, or expedited delivery service upon depositing the document with the provider of the service. A presiding officer, having granted an exemption request from using E-Filing, may require a participant or party to use E-Filing if the presiding officer subsequently determines that the reason for granting the exemption from use of E-Filing no longer exists.
Documents submitted in adjudicatory proceedings will appear in the NRC's electronic hearing docket which is available to the public at
For further details with respect to these license amendment applications, see the application for amendment which is available for public inspection in ADAMS and at the NRC's PDR. For additional direction on accessing information related to this document, see the “Obtaining Information and Submitting Comments” section of this document.
1. Does the proposed change involve a significant increase in the probability or consequences of an accident previously evaluated?
Operation of MPS3 in accordance with the proposed change does not involve a significant increase in the probability or consequences of an accident previously evaluated. The proposed change removes an overly restrictive requirement and adds a conservative requirement for actions to be taken when there is a loss of operability of the CREVS actuation instrumentation. This does not increase the probability of an accident previously evaluated since the CREVS actuation itself is not an accident initiator. The proposed change is consistent with standard TSs for Westinghouse plants (NUREG-1431) and provides assurance that the CREVS is in the conservative mode of operation for a response to an accident. Analysis demonstrates that with one train of the CREVS in the emergency mode of operation, control room operators are adequately protected from the radiological consequences of design basis accident events. Therefore, the probability or consequences of an accident previously evaluated is not significantly increased.
Based on the above, the proposed change does not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed change create the possibility of a new or different kind of accident from any accident previously evaluated?
Operation of MPS3 in accordance with the proposed change does not create the possibility of a new or different kind of accident from any accident previously evaluated. The proposed change does not involve a physical alteration of the plant or change in the methods governing normal plant operation. The proposed change replaces the overly restrictive shutdown requirement with a conservative action to be taken upon loss of CREVS actuation instrumentation operability, thereby avoiding the risk associated with an immediate controlled shutdown. Therefore, the possibility of a new or different kind of accident from any accident previously evaluated is not created.
With one train of CREVS in the emergency mode of operation, DENC has confirmed that MPS3 is in compliance with the current radiological analyses of record for design basis accidents with dose consequences to the control room. Therefore, the proposed change does not affect the design basis analyses and does not alter the assumptions made in the MPS3 accident analysis.
Based on the above, the proposed amendment does not create the possibility of a new or different kind of accident previously evaluated.
3. Does the proposed change involve a significant reduction in the margin of safety?
Operation of MPS3 in accordance with the proposed change does not involve a significant reduction in the margin of safety. The proposed change revises and reformats the Control Building lnlet Ventilation Radiation TS to place the CREVS in the conservative mode of operation for a response to an accident. The proposed change provides additional time to restore an inoperable radiation monitor channel instead of requiring an immediate controlled plant shutdown and suspension of movement of recently irradiated fuel assemblies, if applicable. A plant shutdown is a transient that may be avoided by providing a limited time to make repairs. In addition, the control room operators are adequately protected from the radiological consequences of design basis accident events with one train of the CREVS in the emergency mode of operation. The potential to avoid a plant transient in conjunction with protecting control room operators offsets any risk associated with the proposed change.
Therefore, the proposed change does not involve a significant reduction in a margin of safety.
Based on the above, the proposed amendment does not involve a significant reduction in the margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
1. Does the proposed change involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed license amendment adopts the NRC approved methodology described in Boiling Water Reactor Owner's Group (BWROG) Licensing Topical Report (LTR) (BWROG-TP-11-022-A, SIR-05-044, Revision 1-A), “Pressure Temperature Limits Report Methodology for Boiling Water Reactors.” The BSEP PTLR was developed based on the methodology and template provided in the BWROG LTR.
10 CFR 50, Appendix G, establishes requirements to protect the integrity of the reactor coolant pressure boundary (RCPB) in nuclear power plants.
Implementing this NRC approved methodology does not reduce the ability to protect the reactor coolant pressure boundary as specified in Appendix G, nor will this change increase the probability of malfunction of plant equipment, or the failure of plant structures, systems, or components. Incorporation of the new methodology for calculating pressure and temperature limit curves, and the relocation of the pressure and temperature limit curves from the TS to the PTLR provides an equivalent level of assurance that the reactor coolant pressure boundary is capable of performing its intended safety functions.
The proposed changes do not adversely affect accident initiators or precursors, and do not alter the design assumptions, conditions, or configuration of the plant or the manner in which the plant is operated and maintained. The ability of structures, systems, and components to perform their intended safety functions is not altered or prevented by the proposed changes, and the assumptions used in determining the radiological consequences of previously evaluated accidents are not affected.
Therefore, the proposed amendment does not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed change create the possibility of a new or different kind of accident from any accident previously evaluated?
Creation of the possibility of a new or different kind of accident requires creating one or more new accident precursors. New accident precursors may be created by modifications of plant configuration, including changes in allowable modes of operation.
The change in methodology for calculating pressure and temperature limits and the relocation of those limits to the PTLR do not alter or involve any design basis accident initiators. Reactor coolant pressure boundary integrity will continue to be maintained in accordance with 10 CFR part 50, Appendix G, and the assumed accident performance of plant structures, systems and components will not be affected. The proposed changes do not involve a physical alteration of the plant (
Therefore, the proposed amendment does not create the possibility of a new or different kind of accident from any accident previously evaluated.
3. Does the proposed change involve a significant reduction in a margin of safety?
The proposed changes do not affect the function of the reactor coolant pressure boundary or its response during plant transients. Calculating the Brunswick pressure temperature limits using the NRC approved structural integrity methodology ensures adequate margins of safety relating to reactor coolant pressure boundary integrity are maintained. The proposed changes do not alter the manner in which the Limiting Conditions for Operation pressure and temperature limits for the reactor coolant pressure boundary are determined. There are no changes to the setpoints at which protective actions are initiated, and the operability requirements for equipment assumed to operate for accident mitigation are not affected.
Therefore, the proposed amendment does not result in a significant reduction in the margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
1. Does the proposed amendment involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed changes to FitzPatrick's EAL schemes to adopt the NRC-endorsed guidance in NEI 99-01, Revision 6 do not reduce the capability to meet the emergency planning requirements established in 10 CFR 50.47 and 10 CFR part 50, Appendix E. The proposed changes do not reduce the functionality, performance, or capability of FitzPatrick's ERO [emergency response organization] to respond in mitigating the consequences of any design basis accident.
The probability of a reactor accident requiring implementation of Emergency Plan EALs has no relevance in determining whether the proposed changes to the EALs reduce the effectiveness of the Emergency Plans. As discussed in Section D, “Planning Basis,” of NUREG-0654, Revision 1, “Criteria for Preparation and Evaluation of Radiological Emergency Response Plants and Preparedness in Support of Nuclear Power Plants:”
“. . . The overall objective of emergency response plans is to provide dose savings (and in some cases immediate life saving) for a spectrum of accidents that could produce offsite doses in excess of Protective Action Guides (PAGs). No single specific accident sequence should be isolated as the one for which to plan because each accident could have different consequences, both in nature and degree. Further, the range of possible selection for a planning basis is very large, starting with a zero point of requiring no planning at all because significant offsite radiological accident consequences are unlikely to occur, to planning for the worst possible accident, regardless of its extremely low likelihood. . . .”
Therefore, Exelon did not consider the risk insights regarding any specific accident initiation or progression in evaluating the proposed changes.
The proposed changes do not involve any physical changes to plant equipment or systems, nor do they alter the assumptions of any accident analyses. The proposed changes do not adversely affect accident initiators or precursors nor do they alter the design assumptions, conditions, and configuration or the manner in which the plants are operated and maintained. The proposed changes do not adversely affect the ability of Structures, Systems, or Components (SSCs) to perform their intended safety functions in mitigating the consequences of an initiating event within the assumed acceptance limits.
Therefore, the proposed changes do not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed amendment create the possibility of a new or different kind of
The proposed changes to FitzPatrick's EAL schemes to adopt the NRC-endorsed guidance in NEI 99-01, Revision 6 do not involve any physical changes to plant systems or equipment. The proposed changes do not involve the addition of any new plant equipment. The proposed changes will not alter the design configuration, or method of operation of plant equipment beyond its normal functional capabilities. All FitzPatrick ERO functions will continue to be performed as required. The proposed changes do not create any new credible failure mechanisms, malfunctions, or accident initiators.
Therefore, the proposed changes do not create the possibility of a new or different kind of accident from those that have been previously evaluated.
3. Does the proposed amendment involve a significant reduction in a margin of safety?
The proposed changes to FitzPatrick's EAL schemes to adopt the NRC-endorsed guidance in NEI 99-01, Revision 6 do not alter or exceed a design basis or safety limit. There is no change being made to safety analysis assumptions, safety limits, or limiting safety system settings that would adversely affect plant safety as a result of the proposed changes. There are no changes to setpoints or environmental conditions of any SSC or the manner in which any SSC is operated. Margins of safety are unaffected by the proposed changes to adopt the NEI 99-01, Revision 6 EAL scheme guidance. The applicable requirements of 10 CFR 50.47 and 10 CFR part 50, Appendix E will continue to be met.
Therefore, the proposed changes do not involve any reduction in a margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
1. Does the proposed amendment involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed changes to the TMI Emergency Plan do not impact the function of plant Structures, Systems, or Components (SSCs). The proposed changes do not involve the modification of any plant equipment or affect plant operation. The proposed changes do not affect accident initiators or precursors, nor do the proposed changes alter design assumptions. The proposed changes do not prevent the ability of the on-shift staff and ERO to perform their intended functions to mitigate the consequences of any accident or event that will be credible in the permanently defueled condition. The proposed changes only remove positions that will no longer be needed or credited in the Emergency Plan in the permanently defueled condition.
Therefore, the proposed changes do not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed amendment create the possibility of a new or different kind of accident from any accident previously evaluated?
The proposed changes reduce the number of on-shift and ERO positions commensurate with the hazards associated with a permanently shutdown and defueled facility. The proposed changes do not involve installation of new equipment or modification of existing equipment, so that no new equipment failure modes are introduced. Also, the proposed changes do not result in a change to the way that the equipment or facility is operated so that no new accident initiators are created.
Therefore, the proposed changes do not create the possibility of a new or different kind of accident from any previously evaluated.
3. Does the proposed amendment involve a significant reduction in a margin of safety?
Margin of safety is associated with confidence in the ability of the fission product barriers (
Therefore, the proposed changes do not involve a significant reduction in a margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
1. Does the proposed amendment involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed changes to the [site] Emergency Plan do not increase the probability or consequences of an accident. The proposed changes do not impact the function of plant Structures, Systems, or Components (SSCs). The proposed changes do not affect accident initiators or accident precursors, nor do the changes alter design assumptions. The proposed changes do not alter or prevent the ability of the onsite ERO to perform their intended functions to mitigate the consequences of an accident or event. The proposed changes remove ERO positions no longer credited or considered necessary in support of Emergency Plan implementation.
Therefore, the proposed changes to the [site] Emergency Plan do not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed amendment create the possibility of a new or different kind of accident from any accident previously evaluated?
The proposed changes have no impact on the design, function, or operation of any plant SSCs. The proposed changes do not affect plant equipment or accident analyses. The proposed changes do not involve a physical alteration of the plant (
Therefore, the proposed changes to the [site] Emergency Plan do not create the possibility of a new or different kind of accident from any accident previously evaluated.
3. Does the proposed amendment involve a significant reduction in a margin of safety?
Margin of safety is associated with confidence in the ability of the fission product barriers (
The proposed changes do not adversely affect existing plant safety margins or the reliability of the equipment assumed to operate in the safety analyses. There are no changes being made to safety analysis assumptions, safety limits, or limiting safety system settings that would adversely affect plant safety as a result of the proposed changes. Margins of safety are unaffected by the proposed changes to the ERO staffing. The proposed changes are associated with the [site] Emergency Plan staffing and do not impact operation of the plant or its response to transients or accidents. The proposed changes do not affect the Technical Specifications. The proposed changes do not involve a change in the method of plant operation, and no accident analyses will be affected by the proposed changes. Safety analysis acceptance criteria are not affected by these proposed changes. The proposed changes to the Emergency Plan will continue to provide the necessary onsite ERO response staff.
Therefore, the proposed changes to the [site] Emergency Plan do not involve a significant reduction in a margin of safety.
The NRC staff has reviewed the licensee's analysis for each site and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the requested amendments involve no significant hazards consideration.
1. Does the proposed amendment involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed changes to Section 1.3 and LCO 3.0.4 have no effect on the requirement for systems to be Operable and have no effect on the application of TS actions. The proposed change to SR 3.0.3 states that the allowance may only be used when there is a reasonable expectation the surveillance will be met when performed. Since the proposed change does not significantly affect system Operability, the proposed change will have no effect on the initiating events for accidents previously evaluated and will have no significant effect on the ability of the systems to mitigate accidents previously evaluated.
Therefore, it is concluded that this change does not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed change create the possibility of a new or different kind of accident from any accident previously evaluated?
The proposed change to the TS usage rules does not affect the design or function of any plant systems. The proposed change does not change the Operability requirements for plant systems or the actions taken when plant systems are not operable.
Therefore, it is concluded that this change does not create the possibility of a new or different kind of accident from any accident previously evaluated.
3. Does the proposed change involve a significant reduction in a margin of safety?
The proposed change clarifies the application of Section 1.3 and LCO 3.0.4 and does not result in changes in plant operation. SR 3.0.3 is revised to allow application of SR 3.0.3 when an SR has not been previously performed if there is reasonable expectation that the SR will be met when performed. This expands the use of SR 3.0.3 while ensuring the affected system is capable of performing its safety function. As a result, plant safety is either improved or unaffected.
Therefore, it is concluded that this change does not involve a significant reduction in a margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
1. Does the proposed amendment involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed changes do not involve changes to current plant design or safety analysis assumptions. These changes provide Technical Specifications consistency with the approved plant design and safety analysis assumptions. The changes do not affect the operation of any systems or equipment that initiate an analyzed accident or alter any structures, systems, and components (SSCs) accident initiator or initiating sequence of events. The proposed changes do not result in any increase in the probability of an analyzed accident occurring. Therefore, the requested amendment does not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the proposed amendment create the possibility of a new or different kind of accident from any accident previously evaluated?
The proposed changes do not involve changes to current plant design or safety analysis assumptions. These changes provide Technical Specifications consistency with the approved plant design and safety analysis assumptions. The proposed changes do not affect plant protection instrumentation systems, and do not affect the design function, support, design, or operation of mechanical and fluid systems. The proposed changes do not result in a new failure mechanism or introduce any new accident precursors. No design function described in the Updated Final Safety Analysis Report (UFSAR) is affected by the proposed changes. Therefore, the requested amendment does not create the possibility of a new or different kind accident from any accident previously evaluated.
3. Does the proposed amendment involve a significant reduction in a margin of safety?
The proposed changes do not involve changes to current plant design or safety analysis assumptions. These changes provide Technical Specifications consistency with the approved plant design and safety analysis assumptions. No safety analysis or design basis acceptance limit/criterion is involved. Therefore, the proposed amendment does not involve a significant reduction in a margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
1. Does the proposed amendment involve a significant increase in the probability or consequences of an accident previously evaluated?
The proposed amendment adds the reference to this letter to the BFN RFOL License Condition paragraphs 2.C.(13), 2.C.(14), and 2.C.(7) for BFN Units 1, 2, and 3, respectively. The change encompassed by the proposed amendment is to correct the entry in Attachment A Table B-1 of the BFN Transition Report.
The proposed change does not adversely affect accident initiators or precursors nor alter the design assumptions, conditions, and configuration of the facility or the manner in which the plant is operated and maintained. The proposed change does not affect the ability of structures, systems and components (SSCs) to perform their intended safety function to mitigate the consequences of an initiating event within the assumed acceptance limits.
Therefore, these proposed changes do not involve a significant increase in the probability of consequences of an accident previously identified.
2. Does the proposed amendment create the possibility of a new or different kind of accident from any accident previously evaluated?
The proposed amendment adds the reference to this letter to the BFN RFOL License Condition paragraphs 2.C.(13), 2.C.(14), and 2.C.(7) for BFN Units 1, 2, and 3, respectively. The change encompassed by the proposed amendment is to correct the entry in Attachment A Table B-1 of the BFN Transition Report.
There is no risk impact to Core Damage Frequency (CDF) or Large Early Release Frequency (LERF) because this is an administrative change. Plant secondary combustibles, including insulating materials, are considered in the fire modeling input to the Fire PRA [Probabilistic Risk Assessment].
The proposed change does not result in any new or different kinds of accident from that previously evaluated because it does not change any precursors or equipment that is previously credited for accident mitigation.
Therefore, the proposed change does not create the possibility of a new or different kind of accident from any accident previously evaluated.
3. Does the proposed amendment involve a significant reduction in a margin of safety?
The proposed amendment adds the reference to this letter to the BFN RFOL License Condition paragraphs 2.C.(13), 2.C.(14), and 2.C.(7) for BFN Units 1, 2, and 3, respectively. The change encompassed by the proposed amendment are to correct the entry in Attachment A Table B-1 of the BFN Transition Report.
This proposed change corrects erroneous information to previously approved information in the BFN Transition Report. This proposed change will have an insignificant impact on the accident analysis as it is a clarifying or administrative change. Plant secondary combustibles, including insulating materials, are considered in the fire modeling input to the Fire PRA.
The proposed change will not result in any new or different kinds of accident from that previously evaluated because it does not change any precursors or equipment that is previously credited for accident mitigation.
Therefore, based on the above discussion, these proposed changes do not involve a reduction in the margin of safety.
The NRC staff has reviewed the licensee's analysis and, based on this review, it appears that the three standards of 10 CFR 50.92(c) are satisfied. Therefore, the NRC staff proposes to determine that the amendment request involves no significant hazards consideration.
During the period since publication of the last biweekly notice, the Commission has issued the following amendments. The Commission has determined for each of these amendments that the application complies with the standards and requirements of the Atomic Energy Act of 1954, as amended (the Act), and the Commission's rules and regulations. The Commission has made appropriate findings as required by the Act and the Commission's rules and regulations in 10 CFR chapter I, which are set forth in the license amendment.
A notice of consideration of issuance of amendment to facility operating license or combined license, as applicable, proposed no significant hazards consideration determination, and opportunity for a hearing in connection with these actions, was published in the
Unless otherwise indicated, the Commission has determined that these amendments satisfy the criteria for categorical exclusion in accordance with 10 CFR 51.22. Therefore, pursuant to 10 CFR 51.22(b), no environmental impact statement or environmental assessment need be prepared for these amendments. If the Commission has prepared an environmental assessment under the special circumstances provision in 10 CFR 51.22(b) and has made a determination based on that assessment, it is so indicated.
For further details with respect to the action see (1) the applications for amendment, (2) the amendment, and (3) the Commission's related letter, Safety Evaluation and/or Environmental Assessment as indicated. All of these items can be accessed as described in the “Obtaining Information and Submitting Comments” section of this document.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 20, 2018.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 27, 2018.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 19, 2018.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 19, 2018.
The Commission's related evaluation of the amendments is contained in a Safety Evaluation dated June 26, 2018.
The Commission's related evaluation of the amendments is contained in a Safety Evaluation dated June 29, 2018.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 25, 2018.
The Commission's related evaluation of the amendments is contained in a Safety Evaluation dated June 27, 2018.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 25, 2018.
The Commission's related evaluation of the amendment is contained in a Safety Evaluation dated June 28, 2018.
The Commission's related evaluation of the amendments is contained in a Safety Evaluation dated June 27, 2018.
The Commission's related evaluation of the amendments is contained in a Safety Evaluation dated June 26, 2018.
The Commission's related evaluation of the amendments is contained in a Safety Evaluation dated June 26, 2018.
During the period since publication of the last biweekly notice, the Commission has issued the following amendment. The Commission has determined for this amendment that the application for the amendment complies with the standards and requirements of the Atomic Energy Act of 1954, as amended (the Act), and the Commission's rules and regulations. The Commission has made appropriate findings as required by the Act and the Commission's rules and regulations in 10 CFR chapter I, which are set forth in the license amendment.
Because of exigent or emergency circumstances associated with the date the amendment was needed, there was not time for the Commission to publish, for public comment before issuance, its usual notice of consideration of issuance of amendment, proposed no significant hazards consideration determination, and opportunity for a hearing.
For exigent circumstances, the Commission has either issued a
In circumstances where failure to act in a timely way would have resulted, for example, in derating or shutdown of a nuclear power plant or in prevention of either resumption of operation or of increase in power output up to the plant's licensed power level, the Commission may not have had an opportunity to provide for public comment on its no significant hazards consideration determination. In such case, the license amendment has been issued without opportunity for comment. If there has been some time for public comment but less than 30 days, the Commission may provide an opportunity for public comment. If comments have been requested, it is so stated. In either event, the State has been consulted by telephone whenever possible.
Under its regulations, the Commission may issue and make an amendment immediately effective, notwithstanding the pendency before it of a request for a hearing from any person, in advance of the holding and completion of any required hearing, where it has determined that no significant hazards consideration is involved.
The Commission has applied the standards of 10 CFR 50.92 and has made a final determination that the amendment involves no significant hazards consideration. The basis for this determination is contained in the documents related to this action. Accordingly, the amendment has been issued and made effective as indicated.
Unless otherwise indicated, the Commission has determined that this amendment satisfies the criteria for categorical exclusion in accordance with 10 CFR 51.22. Therefore, pursuant to 10 CFR 51.22(b), no environmental impact statement or environmental assessment need be prepared for this amendment. If the Commission has prepared an environmental assessment under the special circumstances provision in 10 CFR 51.12(b) and has made a determination based on that assessment, it is so indicated.
For further details with respect to the action see (1) the application for amendment, (2) the amendment to Facility Operating License or Combined License, as applicable, and (3) the Commission's related letter, Safety Evaluation and/or Environmental Assessment, as indicated. All of these items can be accessed as described in the “Obtaining Information and Submitting Comments” section of this document.
The Commission is also offering an opportunity for a hearing with respect to the issuance of the amendment. Within 60 days after the date of publication of this notice, any persons (petitioner) whose interest may be affected by this
As required by 10 CFR 2.309(d) the petition should specifically explain the reasons why intervention should be permitted with particular reference to the following general requirements for standing: (1) The name, address, and telephone number of the petitioner; (2) the nature of the petitioner's right under the Act to be made a party to the proceeding; (3) the nature and extent of the petitioner's property, financial, or other interest in the proceeding; and (4) the possible effect of any decision or order which may be entered in the proceeding on the petitioner's interest.
In accordance with 10 CFR 2.309(f), the petition must also set forth the specific contentions which the petitioner seeks to have litigated in the proceeding. Each contention must consist of a specific statement of the issue of law or fact to be raised or controverted. In addition, the petitioner must provide a brief explanation of the bases for the contention and a concise statement of the alleged facts or expert opinion which support the contention and on which the petitioner intends to rely in proving the contention at the hearing. The petitioner must also provide references to the specific sources and documents on which the petitioner intends to rely to support its position on the issue. The petition must include sufficient information to show that a genuine dispute exists with the applicant or licensee on a material issue of law or fact. Contentions must be limited to matters within the scope of the proceeding. The contention must be one which, if proven, would entitle the petitioner to relief. A petitioner who fails to satisfy the requirements at 10 CFR 2.309(f) with respect to at least one contention will not be permitted to participate as a party.
Those permitted to intervene become parties to the proceeding, subject to any limitations in the order granting leave to intervene. Parties have the opportunity to participate fully in the conduct of the hearing with respect to resolution of that party's admitted contentions, including the opportunity to present evidence, consistent with the NRC's regulations, policies, and procedures.
Petitions must be filed no later than 60 days from the date of publication of this notice. Petitions and motions for leave to file new or amended contentions that are filed after the deadline will not be entertained absent a determination by the presiding officer that the filing demonstrates good cause by satisfying the three factors in 10 CFR 2.309(c)(1)(i) through (iii). The petition must be filed in accordance with the filing instructions in the “Electronic Submissions (E-Filing)” section of this document.
If a hearing is requested, and the Commission has not made a final determination on the issue of no significant hazards consideration, the Commission will make a final determination on the issue of no significant hazards consideration. The final determination will serve to establish when the hearing is held. If the final determination is that the amendment request involves no significant hazards consideration, the Commission may issue the amendment and make it immediately effective, notwithstanding the request for a hearing. Any hearing would take place after issuance of the amendment. If the final determination is that the amendment request involves a significant hazards consideration, then any hearing held would take place before the issuance of the amendment unless the Commission finds an imminent danger to the health or safety of the public, in which case it will issue an appropriate order or rule under 10 CFR part 2.
A State, local governmental body, Federally-recognized Indian Tribe, or agency thereof, may submit a petition to the Commission to participate as a party under 10 CFR 2.309(h)(1). The petition should state the nature and extent of the petitioner's interest in the proceeding. The petition should be submitted to the Commission no later than 60 days from the date of publication of this notice. The petition must be filed in accordance with the filing instructions in the “Electronic Submissions (E-Filing)” section of this document, and should meet the requirements for petitions set forth in this section, except that under 10 CFR 2.309(h)(2) a State, local governmental body, or Federally-recognized Indian Tribe, or agency thereof does not need to address the standing requirements in 10 CFR 2.309(d) if the facility is located within its boundaries. Alternatively, a State, local governmental body, Federally-recognized Indian Tribe, or agency thereof may participate as a non-party under 10 CFR 2.315(c).
If a hearing is granted, any person who is not a party to the proceeding and is not affiliated with or represented by a party may, at the discretion of the presiding officer, be permitted to make a limited appearance pursuant to the provisions of 10 CFR 2.315(a). A person making a limited appearance may make an oral or written statement of his or her position on the issues but may not otherwise participate in the proceeding. A limited appearance may be made at any session of the hearing or at any prehearing conference, subject to the limits and conditions as may be imposed by the presiding officer. Details regarding the opportunity to make a limited appearance will be provided by the presiding officer if such sessions are scheduled.
All documents filed in NRC adjudicatory proceedings, including a request for hearing and petition for leave to intervene (petition), any motion or other document filed in the proceeding prior to the submission of a request for hearing or petition to intervene, and documents filed by interested governmental entities that request to participate under 10 CFR 2.315(c), must be filed in accordance with the NRC's E-Filing rule (72 FR 49139; August 28, 2007, as amended at 77 FR 46562; August 3, 2012). The E-Filing process requires participants to submit and serve all adjudicatory documents over the internet, or in some cases to mail copies on electronic storage media. Detailed guidance on making electronic submissions may be found in the Guidance for Electronic Submissions to the NRC and on the NRC website at
To comply with the procedural requirements of E-Filing, at least 10 days prior to the filing deadline, the participant should contact the Office of the Secretary by email at
Information about applying for a digital ID certificate is available on the NRC's public website at
A person filing electronically using the NRC's adjudicatory E-Filing system may seek assistance by contacting the NRC's Electronic Filing Help Desk through the “Contact Us” link located on the NRC's public website at
Participants who believe that they have a good cause for not submitting documents electronically must file an exemption request, in accordance with 10 CFR 2.302(g), with their initial paper filing stating why there is good cause for not filing electronically and requesting authorization to continue to submit documents in paper format. Such filings must be submitted by: (1) First class mail addressed to the Office of the Secretary of the Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, Attention: Rulemaking and Adjudications Staff; or (2) courier, express mail, or expedited delivery service to the Office of the Secretary, 11555 Rockville Pike, Rockville, Maryland 20852, Attention: Rulemaking and Adjudications Staff. Participants filing adjudicatory documents in this manner are responsible for serving the document on all other participants. Filing is considered complete by first-class mail as of the time of deposit in the mail, or by courier, express mail, or expedited delivery service upon depositing the document with the provider of the service. A presiding officer, having granted an exemption request from using E-Filing, may require a participant or party to use E-Filing if the presiding officer subsequently determines that the reason for granting the exemption from use of E-Filing no longer exists.
Documents submitted in adjudicatory proceedings will appear in the NRC's electronic hearing docket which is available to the public at
The Commission's related evaluation of the amendments, finding of emergency circumstances, State consultation, and final no significant hazards consideration determination are contained in a Safety Evaluation dated June 23, 2018.
For the Nuclear Regulatory Commission.
2:00 p.m. on Thursday, July 19, 2018.
Closed Commission Hearing Room 10800.
This meeting will be closed to the public.
Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the closed meeting. Certain staff members who have an interest in the matters also may be present.
The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B) and (10) and 17 CFR 200.402(a)(3), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and (a)(10), permit consideration of the scheduled matters at the closed meeting.
Commissioner Stein, as duty officer, voted to consider the items listed for the closed meeting in closed session.
The subject matters of the closed meeting will be:
Institution and settlement of injunctive actions;
Institution and settlement of administrative proceedings; and
Other matters relating to enforcement proceedings.
At times, changes in Commission priorities require alterations in the scheduling of meeting items.
For further information and to ascertain what, if any, matters have been added, deleted or postponed; please contact Brent J. Fields from the Office of the Secretary at (202) 551-5400.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
[sic] Exchange's proposed rule change relating to the First Trust Senior Loan Fund (the “Fund”) of First Trust Exchange-Traded Fund IV (the “Trust”), the shares of which have been approved by the Commission for listing and trading under Nasdaq Rule 5735 (“Managed Fund Shares”). The shares of the Fund are collectively referred to herein as the “Shares.”
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The Commission has approved the listing and trading of Shares under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares on the Exchange.
The Fund is an actively-managed exchange-traded fund (“ETF”). The Shares are offered by the Trust, which was established as a Massachusetts business trust on September 15, 2010. The Trust, which is registered with the Commission as an investment company under the Investment Company Act of 1940 (the “1940 Act”), has filed a registration statement on Form N-1A (“Registration Statement”) relating to the Fund with the Commission.
The purpose of this proposed rule change is to modify certain provisions set forth in the Prior Notice pertaining to (1) the meaning of the term “under normal market conditions”; (2) the Fund's investments in Senior Loans
It is important to note that notwithstanding the proposed changes, consistent with the Prior Notice, it is anticipated that the Fund, in accordance with its principal investment strategy, would continue to invest approximately 50% to 75% of its net assets in Senior Loans that are eligible for inclusion in and meet the liquidity thresholds of the S&P/LSTA U.S. Leveraged Loan 100 Index (the “Primary Index”) and/or the Markit iBoxx USD Liquid Leveraged Loan Index (the “Secondary Index”
The following selection criteria are used to derive the eligible universe from the Markit/WSO USD-denominated loan universe: (i) Loan type (only USD-denominated loans are eligible, and the Secondary Index Description includes a list of eligible loan types and ineligible loan types); (ii) minimum size (a minimum facility size of USD $500 million nominal is required); (iii) liquidity/depth of market (described below); (iv) credit rating (only sub-investment grade loans are eligible, defaulted loans are eligible provided they meet all other criteria, and loans designated as “Not Rated” by both Moody's Investors Service, Inc., and Standard & Poor's must have a minimum current spread of 125 basis points over LIBOR); (v) spread (rated loans must have a minimum current spread of 125 basis points over LIBOR); and (vi) minimum time to maturity (a minimum initial time to maturity of one year is required).
According to the Secondary Index Description, liquidity/depth of the market can be measured by the number of prices available for a particular loan and the length of time prices have been provided by the minimum required number of price contributors. The liquidity check is based on the 3-month period prior to the rebalancing cut-off date (liquidity test period). Only loans with a minimum liquidity/depth of 2 for at least 50% of trading days of the liquidity test period are eligible. Loans issued less than three months prior to the rebalancing cut-off date require a minimum liquidity/depth of 3 for at least 50% of trading days in the period from the issue date to the rebalancing cut-off date.
In conjunction with the liquidity ranking procedure referenced above, in order to determine the final Secondary Index constituents, the loans in the eligible universe are ranked according to their liquidity scores, as provided by the Markit Loan Pricing Service. Each loan in the MarkitWSO database is assigned a daily score based on the loan's performance on the following liquidity metrics:
Each loan carries a score ranging from 1 to 5 in ascending order of liquidity, depending on the daily values for the above components. A loan with a score of 1 will have the best performance in each of the categories above. In the liquidity ranking procedure (described in detail in the Secondary Index Description), average liquidity scores are calculated for each loan, over a calendar one- or three-month period immediately preceding each rebalancing date.
In addition, consistent with the Prior Notice, the aggregate amount of the Fund's net assets permitted to be held in illiquid securities (calculated at the time of investment), including Rule 144A securities, junior subordinated loans and unsecured loans deemed illiquid by the Adviser, would continue to be limited to 15%.
The Prior Notice stated that according to the Fund's Registration Statement, in pursuing its investment objective, the Fund, under normal market conditions, would seek to outperform a primary and secondary loan index by investing at least 80% of its net assets (plus any borrowings for investment purposes) in “Senior Loans” (the “80% Requirement”). In conjunction with describing and defining the term “under normal market conditions,” footnote 10 of the Prior Notice provided the following (the “Normal Market Conditions Definition”):
The term “under normal market conditions” as used herein includes, but is not limited to, the absence of adverse market, economic, political or other conditions, including extreme volatility or trading halts in the fixed income markets or the financial markets generally; operational issues causing dissemination of inaccurate market information; or
To provide additional flexibility and greater consistency with more recent proposed rule change filings relating to other ETFs advised by the Adviser,
The term “under normal market conditions” as used herein includes, but is not limited to, the absence of adverse market, economic, political or other conditions, including extreme volatility or trading halts in the fixed income markets or the financial markets generally; operational issues causing dissemination of inaccurate market information; or
The proposed new Normal Market Conditions Definition reflects additional situations where it would be appropriate for the Fund to have the ability to depart from its principal investment strategies, including “periods of high cash inflows or outflows” and times when the Adviser believes that securities in which the Fund normally invests “have elevated risks due to political or economic factors and in other extraordinary circumstances.” The Exchange does not believe that the proposed changes to the Normal Market Conditions Definition raise concerns. Rather, the Exchange believes that the changes would provide the Fund with appropriate flexibility to adapt to challenging conditions. In particular, the Exchange notes that the term “periods of high cash inflows or outflows” is specifically and narrowly defined, and the proposed modifications would potentially help the Fund mitigate risks that may accompany adverse political or economic factors and other extraordinary circumstances.
Under the heading “Principal Investments” (and in certain other provisions of the Prior Notice), the Prior Notice included various representations that were applicable to Senior Loans and, in certain cases, to other debt in which the Fund may invest. As described below, the Adviser is seeking to modify certain of these representations to permit the Fund to invest a limited portion of its net assets in Senior Loans and other floating rate loans that are in default. The Adviser believes that while the proposed changes would provide additional flexibility, the changes would not conflict with the Fund's investment objectives or overall investment strategies or be inconsistent with the Adviser's overall approach to managing the Fund. Rather, the proposed changes would enhance the Adviser's investment opportunities in managing the Fund. In this regard, as stated in the Prior Notice, in selecting securities for the Fund, the Adviser would continue to seek to construct a portfolio of loans that it believes is less volatile than the general loan market. In addition, as stated in the Prior Notice, when making investments, the Adviser would continue to seek to maintain appropriate liquidity and price transparency for the Fund, and the key considerations of portfolio construction would continue to include liquidity, diversification and relative value. The Exchange believes that concerns related to manipulation should be mitigated given that the proposed changes (a) would be limited in scope, and (b) would be subject to the provisions set forth below, which should provide support regarding the Fund's anticipated liquidity profile going forward.
The discussion set forth in the Prior Notice under the heading “Principal Investments” included the following “Defaulted Senior Loan Representation”: “The Adviser does not intend to purchase Senior Loans that are in default. However, the Fund may hold a Senior Loan that has defaulted subsequent to its purchase by the Fund.” In addition, the discussion under the heading “Other Investments” (pursuant to which the Fund may invest a portion of its assets in, among other things, floating rate loans) included the following “Floating Rate Loan Representation”: “The Fund will not invest in floating rate loans of companies whose financial condition is troubled or uncertain and that have defaulted on current debt obligations, as measured at the time of investment.”
The Adviser believes that there may be situations where it would be desirable for the Fund, in pursuing its investment objectives, to have the ability to invest a limited portion of its net assets in Senior Loans and/or other floating rate loans that are in default (collectively, “Defaulted Loans”). Therefore, to provide the Adviser with additional flexibility in managing the Fund, the Exchange is proposing that, going forward, the Defaulted Senior Loan Representation and the Floating Rate Loan Representation would be deleted and the Fund would be specifically permitted to purchase Defaulted Loans.
For consistency with the above proposed changes, the Exchange is proposing that certain other representations that are set forth under the heading “Principal Investments”, but that apply to both Senior Loans and other debt, be modified. First, the discussion set forth under the heading “Principal Investments” included the following statement (the “Credit Metrics Representation”): “The Fund will include borrowers that the Adviser believes have strong credit metrics, based on its evaluation of cash flows, collateral coverage and management teams.” In light of the proposed changes described above, the Exchange is proposing that the Credit Metrics Representation be modified to read as follows: “As a general matter, the Fund will include borrowers that the Adviser believes have strong credit metrics, based on its evaluation of cash flows, collateral coverage and management teams.”
Additionally, to enhance consistency with the above proposed changes, the Exchange is proposing that the three paragraphs set forth in the Prior Notice immediately below the Defaulted Senior Loan Representation (which related to certain attributes that the Adviser intended to seek in selecting investments for the Fund) (the “Senior Loan/Other Debt Representations”) be replaced with the following:
“As a general matter, the Adviser intends to invest in Senior Loans or other debt of companies that it believes have developed strong positions within their respective markets and exhibit the potential to maintain sufficient cash flows and profitability to service their obligations in a range of economic environments. The Adviser will generally seek to invest in Senior Loans or other debt of companies that it believes possess advantages in scale, scope, customer loyalty, product pricing, or product quality versus their competitors, thereby minimizing business risk and protecting profitability.
As a general matter, the Adviser will seek to invest in Senior Loans or other debt of established companies it believes have demonstrated a record of profitability and cash flows over several economic cycles. The Adviser does not generally intend to invest in Senior Loans or other debt of primarily start-up companies, companies in turnaround situations or companies with speculative business plans; however, it may invest in such companies from time to time.
As a general matter, the Adviser intends to focus on investments in which the Senior Loans or other debt of a target company has an experienced management team with an established track record of success. The Adviser will generally require companies to have in place proper incentives to align management's goals with the Fund's goals.”
The discussion set forth in the Prior Notice under the heading “Criteria to Be Applied to the Fund” included a representation by the Adviser that under normal market conditions, the Fund would generally satisfy the generic fixed income initial listing requirements in Nasdaq Rule 5705(b)(4) on a continuous basis measured at the time of purchase, as described in the discussion under such heading. The Adviser confirms that going forward, the Fund would generally satisfy the generic fixed income listing requirements in Nasdaq Rule 5705(b)(4) (as such requirements have been modified since the issuance of the Prior Order) on a continuous basis measured at the time of purchase,
Additionally, the discussion set forth in the Prior Notice under the heading “Description of Senior Loans and the Senior Loan Market” (the “Senior Loan Discussion”) included certain representations as well as information pertaining to the Senior Loan market as it existed at or close to the time of the Prior Notice. Given the time that has elapsed, the Adviser believes that although certain provisions of the Senior Loan Discussion continue to be relevant, much of such discussion is no longer particularly useful. Therefore, the Exchange is proposing that the Senior Loan Discussion and accompanying heading be deleted in their entirety and, for purposes of this filing, replaced with the following:
The Fund will primarily invest in the more liquid and higher rated segment of the Senior Loan market. In this regard, the average credit rating of the Senior Loans that the Fund typically will hold will be rated between the categories of BB and B as rated by S&P. Further, the most actively traded loans in the Senior Loan market will generally have a tranche size outstanding (or total float of the issue) in excess of $250 million. The borrowers of these broadly syndicated bank loans will typically be followed by many “buy-side” and “sell-side” credit analysts who will in turn rely on the borrower to provide transparent financial information concerning its business performance and operating results. The Adviser represents that such borrowers typically provide significant financial transparency to the market through the delivery of financial statements on at least a quarterly basis as required by the executed credit agreements. Additionally, bids and offers in the Senior Loans are available throughout the trading day on larger Senior Loans issues with multiple dealer quotes available.
The Adviser represents that the underwriters, or agent banks, which distribute, syndicate and trade Senior Loans are among the largest global financial institutions. It is common for multiple firms to act as underwriters and market makers for a specific Senior Loan issue.
The Adviser represents that the segment of the Senior Loan market that the Fund will focus on is highly liquid.
As described in the Prior Notice, under normal market conditions, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in Senior Loans. Additionally, under the heading “Other Investments”, the Prior Notice stated that the Fund “may receive equity, warrants, corporate bonds and other such securities” (collectively, “Received
Although the Adviser's overall approach to managing the Fund would not change, the Adviser believes that under certain circumstances, a limited ability to retain Received Instruments beyond the parameters set forth in the Prior Notice may serve to benefit shareholders to the extent it helps the Fund to pursue its investment objectives by retaining an investment interest, which the Adviser believes has merit, relating to a particular issuer.
Except as described in this filing, the Fund's ability to retain Equity-Based Received Instruments would continue to be subject to the Fund's investment objectives, restrictions and strategies, as described in the Prior Notice. As indicated above, the Fund would not hold more than 20% of its net assets in Equity-Based Received Instruments.
Going forward, the Exchange is proposing that the Fund may retain in its portfolio, without regard to the Credit Metrics Representation (modified as described above), the Senior Loan/Other Debt Representations (modified as described above), the Par Amount Representation or the Convertible Securities Restriction, Received Instruments. Further, the Exchange is proposing that the Fund would be permitted to continue to retain in its portfolio Received Instruments that are convertible securities after such securities have converted (
Except as described in this filing, the Fund's investments in, and ability to hold, Senior Loans, convertible securities and other debt instruments would continue to be subject to the Fund's investment objectives, restrictions and strategies, as described in the Prior Notice. As indicated above, the Fund would not hold more than 20% of its net assets, in the aggregate, in (1) Received Instruments that are not Senior Loans and (2) Received Instruments that are Senior Loans and do not satisfy the Par Amount Representation. Although it is possible that the Fund's holdings may include certain Received Instruments that are Senior Loans that
Intra-day executable price quotations for the Senior Loans, fixed income securities and other assets (including any Received Instruments and Defaulted Loans) held by the Fund would be available from major broker-dealer firms and/or market data vendors (and/or, if applicable, on the exchange on which they are traded). Intra-day price information for the holdings of the Fund would be available through subscription services, such as Markit, Bloomberg and Thomson Reuters, which can be accessed by authorized participants and other investors, and/or from independent pricing services.
The Exchange represents that trading in the Shares would be subject to the existing trading surveillances, administered by both Nasdaq and also the Financial Industry Regulatory Authority (“FINRA”), on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.
The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations.
FINRA, on behalf of the Exchange, would communicate as needed regarding trading in the Shares and the exchange-listed instruments held by the Fund (including exchange-listed Equity-Based Received Instruments (if any) and any other exchange-listed equity securities) with other markets and other entities that are members of ISG or exchanges with which the Exchange has a comprehensive surveillance sharing agreement
In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, (c) dissemination and availability of the reference asset or intraday indicative values, or (d) the applicability of Exchange listing rules shall constitute continued listing requirements for listing the Shares on the Exchange. In addition, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the Nasdaq 5800 Series.
The Adviser represents that there would be no change to the Fund's investment objectives. Except as provided herein, all other representations made in the Prior Notice would remain unchanged.
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in general and Section 6(b)(5) of the Act, in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The purpose of the proposed rule change is to modify certain provisions set forth in the Prior Notice pertaining to (1) the Normal Market Conditions Definition; (2) the Fund's investments in Senior Loans and other debt, including, in particular, its investments in Defaulted Loans; and (3) the Fund's ability to retain Received Instruments. Except as provided herein, all other representations made in the Prior Notice would remain unchanged. Except for the generic listing standards and as otherwise provided in this filing, the Fund and the Shares would continue to comply with the requirements applicable to Managed Fund Shares under Nasdaq Rule 5735.
The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares would continue to be listed and traded on the Exchange pursuant to Nasdaq Rule 5735. The Exchange also notes the continued listing representations set forth above and that except as provided herein, all other representations made in the Prior Notice would remain unchanged. The Exchange represents that trading in the Shares would continue to be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA, on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws. FINRA, on behalf of the Exchange, would communicate as needed regarding trading in the Shares and the exchange-listed instruments held by the Fund (including exchange-listed Equity-Based Received Instruments (if any) and any other exchange-listed equity securities) with other markets and other entities that are members of ISG or exchanges with which the Exchange has a comprehensive surveillance sharing agreement and FINRA and the Exchange both may obtain information regarding trading in the Shares and such exchange-listed instruments held by the Fund from markets and other entities that are members of ISG, which include securities exchanges, or with which the Exchange has in place a comprehensive surveillance sharing agreement. Moreover, FINRA, on behalf of the Exchange, would be able to access, as needed, trade information for certain fixed income securities held by the Fund reported to FINRA's TRACE. The Exchange notes that although the proposed changes in this filing would permit the Fund to retain, without regard to the ISG Restriction and the Non-U.S. Equity Restriction, Equity-Based Received Instruments, the Fund would not hold more than 20% of its net assets in Equity-Based Received Instruments (which would not be taken into account for purposes of compliance with the 80% Requirement), and the Adviser expects that generally, over time, significantly less than 20% of the Fund's net assets would be comprised of Equity-Based Received Instruments, which, together, should mitigate the risks associated with manipulation.
The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Adviser represents that the purpose of the proposed changes is to provide it with greater flexibility in meeting the Fund's investment objectives by modifying certain provisions in the Prior Notice. Notwithstanding the proposed changes, however, consistent with the Prior Notice, it is anticipated that the Fund, in accordance with its principal investment strategy, would continue to invest approximately 50% to 75% of its net assets in Senior Loans that are eligible for inclusion in and meet the liquidity thresholds of the Primary Index and/or the Secondary Index.
With respect to the proposed changes relating to the Normal Market Conditions Definition, the Exchange does not believe that the proposed changes raise concerns. Rather, the Exchange believes that the proposed changes would provide the Fund with appropriate flexibility to adapt to challenging conditions and would potentially help the Fund mitigate risks that may accompany adverse political or economic factors and other extraordinary circumstances. Moreover, the proposed changes are consistent with prior Commission approvals of proposed rule changes relating to other ETFs advised by the Adviser.
With respect to the proposed changes relating to Defaulted Loans, the Exchange notes that the Adviser believes that while the proposed changes would provide additional flexibility, the changes would not conflict with the Fund's investment objectives or overall investment strategies or be inconsistent with the Adviser's overall approach to managing the Fund. Rather, the proposed changes would enhance the Adviser's investment opportunities in managing the Fund. In this regard, as stated in the Prior Notice, in selecting securities for the Fund, the Adviser would continue to seek to construct a portfolio of loans that it believes is less volatile than the general loan market.
In addition, when making investments, the Adviser would continue to seek to maintain appropriate liquidity and price transparency for the Fund, and the key considerations of portfolio construction would continue to include liquidity, diversification and relative value. The Exchange believes that concerns related to manipulation should be mitigated given that the proposed changes (a) would be limited in scope, and (b) would be subject to the provisions described above, which should provide support regarding the Fund's anticipated liquidity profile going forward. In particular, pursuant to the 15% Limitation, Defaulted Loans would comprise no more than 15% of the Fund's net assets, as determined at the time of purchase. If, subsequent to being purchased or otherwise obtained by the Fund, a Senior Loan or other floating rate loan defaulted, the Fund could continue to hold such Senior
With respect to the proposed changes relating to Received Instruments, although the Adviser's overall approach to managing the Fund would not change, the Adviser believes that under certain circumstances, a limited ability to retain Received Instruments beyond the parameters set forth in the Prior Notice may serve to benefit shareholders to the extent it helps the Fund to pursue its investment objectives by retaining an investment interest, which the Adviser believes has merit, relating to a particular issuer. The Exchange believes that concerns related to manipulation should be mitigated given that the proposed changes (a) would be limited in scope, and (b) would be subject to the limits described above, which should provide support regarding the Fund's anticipated liquidity profile going forward. As indicated above, the Fund would not hold more than 20% of its net assets, in the aggregate, in (1) Received Instruments that are not Senior Loans and (2) Received Instruments that are Senior Loans and do not satisfy the Par Amount Representation. Further, although it is possible that the Fund's holdings may include certain Received Instruments that are Senior Loans that
Additionally, the Exchange believes that the Adviser's expectation that generally, over time, significantly less than 20% of the Fund's net assets would be comprised of Equity-Based Received Instruments (which means that significantly less than 20% of the Fund's net assets are expected to be comprised of instruments that do not satisfy the ISG Restriction) should help to alleviate manipulation concerns. Further, Equity-Based Received Instruments would not be taken into account for purposes of compliance with the 80% Requirement. Based on the foregoing, the Exchange does not believe that the proposed changes will adversely affect investors or Exchange trading.
In addition, a large amount of information would continue to be publicly available regarding the Fund and the Shares, thereby promoting market transparency. For example, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service, would continue to be widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds during the Regular Market Session. On each business day, before commencement of trading in Shares in the Regular Market Session on the Exchange, the Fund would continue to disclose on the applicable website
The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that the additional flexibility to be afforded to the Adviser under the proposed rule change is intended to enhance its ability to meet the Fund's investment objectives, to the benefit of investors. In addition, consistent with the Prior Notice, NAV per Share would continue to be calculated daily, and NAV and the Disclosed Portfolio would continue to be made available to all market participants at the same time. Further, as noted above and/or in the Prior Notice, investors would continue to have ready access to information regarding the Fund's holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares.
For the above reasons, Nasdaq believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act.
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed rule change would provide the Adviser with additional flexibility, thereby helping the Fund to achieve its investment objectives. As such, it is expected that the Fund may become a more attractive investment product in the marketplace and, therefore, that the proposed rule change would not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
No written comments were either solicited or received.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Securities and Exchange Commission (“Commission”).
Notice.
Notice of an application under section 6(c) of the Investment Company Act of 1940 (“Act”) for an exemption from section 15(a) of the Act and rule 18f-2 under the Act, as well as from certain disclosure requirements in rule 20a-1 under the Act, Item 19(a)(3) of Form N-1A, Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A under the Securities Exchange Act of 1934, and Sections 6-07(2)(a), (b), and (c) of Regulation S-X (“Disclosure Requirements”). The requested exemption would permit an investment adviser to hire and replace certain sub-advisers without shareholder approval and grant relief from the Disclosure Requirements as they relate to fees paid to the sub-advisers.
ETF Series Solutions (the “Trust”), a Delaware statutory trust registered under the Act as an open-end management investment company with multiple series, and TriLine Index Solutions, LLC (the “Initial Adviser”), a Delaware limited liability company registered as an investment adviser under the Investment Advisers Act of 1940.
The application was filed on October 4, 2017 and amended on May 2, 2018.
An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on August 3, 2018, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0-5 under the Act, hearing requests should state the nature of the writer's interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary.
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. Applicants: ETF Series Solutions, 615 E Michigan Street, Milwaukee, WI 53202, and TriLine Index Solutions, LLC, 8117 Preston Road, Suite 260, Dallas, TX 75225.
Bruce R. MacNeil, Senior Counsel, at (202) 551-6817, or Kaitlin C. Bottock, Branch Chief, at (202) 551-6825 (Division of Investment Management, Chief Counsel's Office).
The following is a summary of the application. The complete application may be obtained via the Commission's website by searching for the file number, or for an applicant using the Company name box, at
1. The Initial Adviser is the investment adviser to the Trust's Pickens Oil Response ETF (“Initial Fund”) pursuant to an investment management agreement with the Trust (“Investment Management Agreement”).
2. Applicants request an order to permit the Adviser, subject to the approval of the Board, to enter into investment sub-advisory agreements with the Sub-Advisers (each, a “Sub-Advisory Agreement”) and materially amend such Sub-Advisory Agreements without obtaining the shareholder approval required under section 15(a) of the Act and rule 18f-2 under the Act.
3. Applicants agree that any order granting the requested relief will be subject to the terms and conditions stated in the application. Such terms and conditions provide for, among other safeguards, appropriate disclosure to Subadvised Funds' shareholders and notification about sub-advisory changes and enhanced Board oversight to protect the interests of the Subadvised Funds' shareholders.
4. Section 6(c) of the Act provides that the Commission may exempt any person, security, or transaction or any class or classes of persons, securities, or transactions from any provisions of the Act, or any rule thereunder, if such relief is necessary or appropriate in the public interest and consistent with the protection of investors and purposes fairly intended by the policy and provisions of the Act. Applicants believe that the requested relief meets this standard because, as further explained in the application, the Investment Management Agreements will remain subject to shareholder approval, while the role of the Sub-Advisers is substantially equivalent to that of individual portfolio managers, so that requiring shareholder approval of Sub-Advisory Agreements would impose unnecessary delays and expenses on the Subadvised Funds. Applicants believe that the requested relief from the Disclosure Requirements meets this standard because it will improve the Adviser's ability to negotiate fees paid to the Sub-Advisers that are more advantageous for the Subadvised Funds.
For the Commission, by the Division of Investment Management, under delegated authority.
Securities and Exchange Commission (“Commission”).
Notice.
Notice of an application under section 6(c) of the Investment Company Act of 1940 (“Act”) for an exemption from section 15(a) of the Act and rule 18f-2 under the Act, as well as from certain disclosure requirements in rule 20a-1 under the Act, Item 19(a)(3) of FormN-1A, Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A under the Securities Exchange Act of 1934, and Sections 6-07(2)(a), (b), and (c) of Regulation S-X (“Disclosure Requirements”). The requested exemption would permit an investment adviser to hire and replace certain sub-advisers without shareholder approval and grant relief from the Disclosure Requirements as they relate to fees paid to the sub-advisers.
ETF Series Solutions (the “Trust”), a Delaware statutory trust registered under the Act as an open-end management investment company with multiple series, and SL Advisors, LLC (the “Initial Adviser”), a New Jersey limited liability company registered as an investment adviser under the Investment Advisers Act of 1940.
The application was filed on October 2, 2017 and amended on May 3, 2018.
An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on August 3, 2018, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0-5 under the Act, hearing requests should state the nature of the writer's interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary.
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. Applicants: ETF Series Solutions, 615 E Michigan Street, Milwaukee, WI 53202, and SL Advisors, LLC, 210 Elmer Street, Westfield, NJ 07090-2128.
Bruce R. MacNeil, Senior Counsel, at (202) 551-6817, or Kaitlin C. Bottock, Branch Chief, at (202) 551-6825 (Division of Investment Management, Chief Counsel's Office).
The following is a summary of the application. The complete application may be obtained via the Commission's website by searching for the file number, or for an applicant using the Company name box, at
1. The Initial Adviser is the investment adviser to the American Energy Independence ETF (“Initial Fund”) pursuant to an investment management agreement with the Trust (“Investment Management Agreement”).
2. Applicants request an order to permit the Adviser, subject to the approval of the Board, to enter into investment sub-advisory agreements with the Sub-Advisers (each, a “Sub-Advisory Agreement”) and materially amend such Sub-Advisory Agreements without obtaining the shareholder approval required under section 15(a) of the Act and rule 18f-2 under the Act.
3. Applicants agree that any order granting the requested relief will be subject to the terms and conditions stated in the application. Such terms and conditions provide for, among other safeguards, appropriate disclosure to Subadvised Funds' shareholders and notification about sub-advisory changes and enhanced Board oversight to protect the interests of the Subadvised Funds' shareholders.
4. Section 6(c) of the Act provides that the Commission may exempt any person, security, or transaction or any class or classes of persons, securities, or transactions from any provisions of the Act, or any rule thereunder, if such relief is necessary or appropriate in the public interest and consistent with the protection of investors and purposes fairly intended by the policy and provisions of the Act. Applicants believe that the requested relief meets this standard because, as further explained in the application, the Investment Management Agreements will remain subject to shareholder approval, while the role of the Sub-Advisers is substantially equivalent to that of individual portfolio managers, so that requiring shareholder approval of Sub-Advisory Agreements would impose unnecessary delays and expenses on the Subadvised Funds. Applicants believe that the requested relief from the Disclosure Requirements meets this standard because it will improve the Adviser's ability to negotiate fees paid to the Sub-Advisers that are more advantageous for the Subadvised Funds.
For the Commission, by the Division of Investment Management, under delegated authority.
This notice announces the renewal of the Charter for the International Telecommunication Advisory Committees (ITAC). In accordance with the provisions of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C. Appendix) and the general authority of the Secretary of State and the Department of State set forth in Title 22 of the United States code, in particular Sections 2656 and 2707, the charter of the International Telecommunication Advisory Committee has been renewed for another two years. The ITAC consists of members of the telecommunications industry, ranging from network operators and service providers to equipment vendors, members of academia, members of civil society, and officials of interested government agencies. The ITAC provides views and advice to the Department of State on positions on international telecommunications and information policy matters. This advice has been a major factor in ensuring that the United States was well prepared to participate effectively in the international telecommunications and information policy arena, including the International Telecommunication Union (ITU), the Organization of American States Inter-American Telecommunication Commission (CITEL), the Organization for Economic Cooperation and Development (OECD), the Asia Pacific Economic Cooperation Forum Telecommunications and Information Working Group, and other international bodies addressing communication and information policy issues.
Please contact Franz Zichy at 202-647-5778,
Federal Highway Administration (FHWA), U.S. Department of Transportation (DOT).
Notice of public meetings.
The FHWA is holding a National Dialogue on Highway Automation through a series of public meetings across the country to seek input on the integration of automated vehicles on the Nation's roadways. The objectives of the public meetings are: (1) To engage with a diverse group of stakeholders to understand key issues regarding automated vehicles and their implications for the roadway infrastructure; and (2) to gather input on highway automation to help inform FHWA research, policy, and programs. The public meetings will have
The FHWA will hold the public meetings in approximately five locations across the country. A tentative schedule is outlined below and is subject to change. Meeting information will be updated and made available on the FHWA National Dialogue on Highway Automation website:
Tentative meetings include the following:
If you have questions about the public meeting, please contact John Corbin at
Registration is necessary for all attendees. Registration information will be available at
Automated vehicles have the potential to significantly transform the Nation's roadways. They could help save lives, expand access to transportation, and improve the convenience of travel. However, even as these technologies offer new opportunities, they may introduce new challenges for the agencies responsible for the planning, design, construction, operation, and maintenance of the Nation's roadway infrastructure. As a result, FHWA is interested in better understanding the implications of highway automation.
This National Dialogue on Highway Automation is an opportunity to engage the public and broader stakeholder community to understand their key areas of interest. These stakeholders will include original equipment manufacturers, technology suppliers, transportation network companies, associations, and public sector partners. The National Dialogue will help inform national research, policy, and implementation assistance activities to support automation readiness.
The National Dialogue meetings are designed to support significant interaction among participants. Workshops will include discussions with government and industry leaders, breakout sessions, listening sessions, and opportunities to collaborate with meeting participants. Each workshop will run from 1 to 1.5 days and will have opportunities for general and topic-specific input. Focus areas identified include policy and planning, data and digital infrastructure, freight, operations, safety, infrastructure, and multi-modal safety.
49 U.S.C. 1.25a.
Federal Highway Administration (FHWA), U.S. Department of Transportation (DOT).
Notice; request for comment.
The FHWA is soliciting comments regarding proposed guidance on implementation of a Safe Harbor indirect cost rate for certain engineering design service firms that find establishing such rates to be costly and a barrier to participating in engineering and design service contracts reimbursed with Federal-aid Highway Program (FAHP) Funds. The FHWA seeks comment on its proposed implementation of a Safe Harbor indirect cost rate and its intention to notify all contracting agencies receiving FAHP funds that an agency-developed Safe Harbor indirect cost rate for eligible consulting firms may be used as a component of a risk-based oversight process to provide reasonable assurance to FHWA that consultant costs on FAHP-funded contracts are allowable in accordance with the Federal regulations.
Comments must be received on or before August 16, 2018. Late-filed comments will be considered to the extent practicable.
Mail or hand deliver comments to the U.S. Department of Transportation, Dockets Management Facility, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590, or fax comments to (202) 493-2251. Alternatively, comments may be submitted to the Federal eRulemaking portal at:
For questions about the program discussed herein, contact John McAvoy, Consultant Services Program Manager, FHWA Office of Program Administration, (202) 853-5593 or via email at
You may submit or retrieve comments online through the Federal eRulemaking portal at:
The FHWA is requesting comment on its proposed guidance for implementation of a Safe Harbor indirect cost rate and its intention to notify all contracting agencies receiving FAHP funds that an agency-developed Safe Harbor indirect cost rate for eligible consulting firms may be used as a component of a risk-based oversight process to provide reasonable assurance to FHWA that consultant costs on FAHP-funded contracts are allowable in accordance with the Federal regulations. Comments received through this notice will be considered by FHWA to assess implementation of a Safe Harbor indirect cost rate.
Consulting firms and contractors providing services under a contract reimbursed with FAHP funds are required to account for, and bill, costs in accordance with the Federal cost principles of 48 CFR part 31. In addition, Federal law and regulations for the FAHP require contracting agencies to accept indirect cost rates developed in accordance with the Federal cost principles and to apply those rates for the purposes of contract estimation, negotiation, administration, reporting, and contract payment (as specified in 23 U.S.C. 112(b)(2) and 23 CFR 172.7). As such, consulting firms providing engineering and design-related services to a contracting agency under a contract funded by the FAHP are required to develop indirect cost rates in accordance with the Federal cost principles on an annual basis. Similarly, contracting agencies must provide reasonable assurance that consulting firm costs claimed under FAHP-funded contracts, including both direct and indirect costs, are allowable in accordance with the Federal cost principles.
Adhering to these accounting requirements can place a significant burden on some consulting firms and may create a barrier for otherwise eligible and qualified firms to compete for FAHP-funded contracts. For example, small firms, including many Disadvantaged Business Enterprise firms, may lack the financial expertise to develop an indirect cost rate that would be acceptable to a cognizant Federal or State government agency, or lack the resources to hire a Certified Public Accountant (CPA) to conduct an audit to provide assurance as to the development of an indirect cost rate compliant with Federal requirements. Often, a CPA audit is cost-prohibitive given the size and scope of the federally funded contracts for which the firm could compete. In addition, new or start-up firms generally do not have a contract-related cost history to use as a base for development of an indirect cost rate. Other well-established firms may not have previous experience with federally funded contracts for which a compliant indirect cost rate could be developed. Currently, these firms are prohibited from participating in FAHP-funded contracts without the development and application of a provisional indirect cost rate for the specific contract, which is adjusted based upon a contracting agency conducted final audit at the completion of the contract. Even the smallest final audit requires a significant commitment of contracting agency audit resources.
To remove these barriers for otherwise qualified consulting firms, and to enhance contracting agency oversight of compliance with Federal cost principles, in 2012, the FHWA developed the Safe Harbor Indirect Cost Rate Test and Evaluation pilot. Ten contracting agencies representing a diversity of location and size participated in the test. Eligible consulting firms with whom the contracting agencies do business have the option of applying a Safe Harbor indirect cost rate to contracts in instances where the firm does not have an established rate for the reasons stated above. The selected Safe Harbor indirect cost rate is significantly lower than the industry average rate, providing an incentive for firms to develop an actual rate, when able to do so and consistent with their cost experience, in accordance with the Federal cost principles as required in Federal law and regulation.
Test results have shown a reduction in the financial management barriers that prevented new, small, or disadvantaged but qualified consulting firms from entering the federally funded engineering services market, and creation of a framework for these consulting firms to establish a cognizant agency approved indirect cost rate. Contracting agencies report that 17 consulting firms have graduated from the program after developing a cost history leading to an approved indirect cost rate. In addition, following a risk-based approach allows contracting agency oversight and audit resources to shift focus from those firms opting to apply a Safe Harbor indirect cost rate (which are generally employed on fewer contracts or on smaller contracts) to those firms with multiple, higher dollar contracts and more complex accounting structures.
The test and evaluation of the Safe Harbor indirect cost rate was conducted by the following contracting agencies and respective FHWA Division Offices: Alabama DOT, California Department of Transportation, Michigan DOT, Missouri DOT, North Carolina DOT, North Dakota DOT, Ohio DOT, South Carolina DOT, Texas DOT, and Washington State DOT. In these States, eligible consulting firms have the option of using a Safe Harbor indirect cost rate on contracts executed within the established test period. A consulting firm is considered eligible if it has not had an indirect cost rate previously accepted by a cognizant agency (
Through collaboration with the test contracting agencies, FHWA's test and evaluation pilot used a nationwide Safe Harbor indirect cost rate of 110 percent of a firm's direct salary rate. The test contracting agencies agreed that this rate was conservative and significantly lower than the industry average of typically claimed indirect cost rates. As such, while still providing for reimbursement of a significant portion of basic overhead costs, the use of this conservative rate incentivized consulting firms to develop an actual indirect cost rate when able to do so. The Safe Harbor indirect cost rate also provided a minimal risk to contracting agencies for overpayment to those consulting firms participating in the program. Based on FHWA's experience with this pilot, FHWA is proposing to expand the use of the Safe Harbor indirect cost rate, beyond the 10 pilot States, to allow eligible consulting firms to use a State contracting agency-developed indirect cost rate.
A Safe Harbor indirect cost rate is not intended for use on field-based contracts involving field overhead rates. Other direct costs that are not
A Safe Harbor indirect cost rate is applied to new contracts executed with a contracting agency, or subrecipient. Once applied to a contract, the Safe Harbor indirect cost rate should be used for the duration of the contract. It is not uncommon for new or start-up firms to show large fluctuations in an indirect cost rate in the initial years of operation, before contract workload normalizes. Using the Safe Harbor indirect cost rate for the duration of a contract provides cost certainty in estimating the total contract amount and helps reduce the risk of costly contract modifications, necessary due to a significant fluctuation of an indirect cost rate. Similarly, a Safe Harbor indirect cost rate may be used in the determination of the fixed fee portion of the contract, which would not be subject to adjustment unless warranted by changes to the scope of work or duration of the contract.
Eligible consulting firms that use the Safe Harbor indirect cost rate, and do not have established salaries or wage rates for employees or classes of employees, use negotiated, fixed hourly labor rates for the direct labor portion of the contracted services. The negotiated direct labor rate should meet the reasonableness provisions as set forth in 2 CFR 200.404, considering the nature of the services to be provided. Where appropriate for the scope of services under contract, a “fully loaded” hourly rate could be established utilizing a reasonable hourly direct labor rate, a Safe Harbor indirect cost rate as the overhead rate component, and an appropriate amount of fixed fee that considers the complexity and risk involved.
The Safe Harbor indirect cost rate is intended to be a component of a contracting agency's risk-based oversight process. Contracting agencies using the Safe Harbor indirect cost rate must first develop written risk-based oversight procedures designed to provide reasonable assurance of consultant compliance with the Federal cost principles in accordance with 23 CFR 172.11(c)(2). The use of the Safe Harbor indirect cost rate is voluntary for both the contracting agency and for eligible firms. In reviewing the eligibility of a consulting firm opting to use the Safe Harbor indirect cost rate, it may be necessary to contact the State department of transportation in the home State of the consulting firm to verify the audit history of the firm and ensure the firm does not have an audited or otherwise accepted indirect cost rate developed in accordance with the Federal cost principles. Use and application of the Safe Harbor indirect cost rate by eligible firms is one component of this risk-based oversight process. Some evaluation of the accounting system of the consulting firms choosing to use the Safe Harbor indirect cost rate may be necessary to verify the capability of accumulating and tracking direct labor for applying the Safe Harbor indirect cost rate, as well as for billing other direct costs by contract, segregating indirect costs, etc. The Internal Control Questionnaire provided in Appendix B of the
If a contracting agency elects to use a Safe Harbor indirect cost rate program as an element of a risk-based oversight process in compliance with 23 CFR 172.11(c)(2), the agency shall prepare and maintain written policies and procedures establishing the program in accordance with 23 CFR 172.5(c)(10). In conjunction with the development of written risk-based oversight procedures, the contracting agency should consider any actions necessary to comply with State regulation, policy, and/or procedures, as well as any revisions needed in boilerplate contract language or cost certifications on contracts applying the Safe Harbor indirect cost rate.
The FHWA Division Office will serve as the primary point of contact and liaison for the contracting agency. The FHWA Division Offices also will monitor the respective contracting agency's use of the Safe Harbor indirect cost rate in accordance with the approved, written risk-based oversight procedures.
Federal regulations require contracting agencies to provide reasonable assurance to the FHWA that consultant costs on contracts reimbursed with FAHP funding are allowable in accordance with the Federal cost principles. The FHWA is seeking public comment on expanding the use of the Safe Harbor indirect cost rate, beyond the 10 pilot States, to allow other interested contracting agencies to use a self-administered Safe Harbor Program, under a risk-based approach compliant with 23 CFR 172.11(c), to provide that reasonable assurance. A self-administered Safe Harbor Program would involve, but not be limited to, the following:
(1) A contracting agency developed risk-based analysis compliant with 23 CFR 172.11(c)(2);
(2) Written policies and procedures (Work Plan) consistent with the pilot program detailed above; and
(3) Approval from the FHWA Division Office in the relevant State.
The workplan used in the test evaluation has been posted on the docket as an example of the elements that should be included in a risk-based oversight procedure submitted to FHWA for approval.
Commenters are encouraged to address any or all the areas listed above. The FHWA encourages commenters to submit any information or data demonstrating the benefits, costs, and cost-savings of this program. For example, FHWA would be interested in receiving quantifiable estimates of the burden associated with the annual development of an indirect cost rate, hiring a CPA to conduct necessary audits, and any other costs that would be avoided by a consulting firm or contracting agency in utilizing this Safe Harbor indirect cost rate. Commenters are also encouraged to focus on matters within the control of FHWA. The FHWA will consider public comment before adopting its final guidance on the application of a Safe Harbor indirect cost rate under a risk-based stewardship approach.
23 U.S.C. 112, 145 and 315; 23 CFR 1.32, and 172; 49 CFR 1.85.
Federal Motor Carrier Safety Administration (FMCSA), DOT.
Notice of application for exemption; request for comments.
FMCSA announces that it has received an application from Waste Management Holdings, Inc., (WMH) requesting an exemption from the requirement of the hours-of-service (HOS) regulations that drivers of commercial motor vehicles (CMVs) qualifying for the “short-haul—100 air-mile radius driver” exception must return to the original work reporting location within 12 hours of coming on duty. WMH asks that its short-haul CMV drivers be permitted to return within 14 hours withour losing their short-haul status. FMCSA requests public comment on WMH's application for exemption.
Comments must be received on or before August 16, 2018.
You may submit comments identified by Federal Docket Management System Number FMCSA-2018-0181 by any of the following methods:
•
•
•
•
Each submission must include the Agency name and the docket number of this notice. DOT posts all comments received without change to
For information concerning this notice, please contact Mr. Robert Schultz, FMCSA Driver and Carrier Operations Division; Telephone: (202) 366-2718; Email:
FMCSA encourages you to participate by submitting comments and related materials.
If you submit a comment, please include the docket number for this notice (FMCSA-2018-0181), the specific section of this document to which the comment applies, and provide reasons for suggestions or recommendations. You may submit online or by fax, mail, or hand delivery, but please use only one of these means. FMCSA recommends that you include your name and a mailing address, an email address, or a phone number in your document so the Agency can contact you if it has questions about your submission.
To submit your comments online, go to
FMCSA has authority under 49 U.S.C. 31136(e) and 31315 to grant exemptions from certain Federal Motor Carrier Safety Regulations (FMCSRs). FMCSA must publish a notice of each exemption request in the
The Agency reviews safety analyses and public comments submitted, and determines whether granting the exemption would likely achieve a level of safety equivalent to, or greater than, the level that would be achieved by the current regulation (49 CFR 381.305). The decision of the Agency must be published in the
Drivers qualifying for the HOS short-haul exception in 49 CFR 395.1(e)(1) do not have to maintain a record of duty status (RODS) on board the vehicle, provided that (among other things) they return to their normal work reporting location and are relased from work within 12 hours after coming on duty. A driver who exceeds the 12-hour limit loses the short-haul exception and must immediately prepare RODS for the entire day, often by means of an electronic logging device (ELD) (49 CFR 395.8(a)(1)(i)).
WMH seeks an exemption for approximately 18,000 drivers in 84 separate subsidiaries or affiliates who operate CMVs to collect waste and recycling materials. These drivers routinely qualify for the short-haul exception. 395.1(e)(1). However, occasionally they cannot complete their duty day within 12 hours. WMH seeks an exemption to allow its drivers to continue to qualify for the short-haul exception up to the 14th hour after coming on duty.
WM states that ELDs delay and distract its drivers working to collect waste and recycling materials because
WMH notes that certain CMV drivers may already operate up to 14 hours without forfeiting short-haul status, for example those in the ready-mixed concrete industry [49 CFR 395.1(e)(1)(ii)(B)] or the asphalt-paving business [83 FR 3864, Jan. 26, 2018]. It asserts that WMH's operations are similar to these industries because its drivers “spend a significant portion of their days conducting non-driving duties.” It states that WMH anticipates “no reduction in safety from the exemption requested, and a potential for increased safety due to reduced [driver] distraction.”
WMH cites its fatigue management program as further evidence that operations with the exemption in place would equal or exceed the level of safety under the current HOS regulations. This program includes the use of video event recorders triggered by unusual events suggestive of driver fatigue, like aggressive braking, steering, or acceleration. When WMH's assessment of the recording indicates that driver fatigue is involved, WMH managers may discipline the driver. More commonly, WMH managers assess the driver's overall lifestyle and health, including his or her off-duty activities and medical history, and counsel the individual on changes he or she can undertake to ameliorate fatigue. WMH managers also ride with each employee-driver several times a year to observe his or her performance.
WMH requests a 5-year exemption. WMH's application for exemption, including a list of its 84 operating companies, is available for review in the docket for this notice.
Federal Motor Carrier Safety Administration (FMCSA), DOT.
Notice of applications for exemption; request for comments.
FMCSA announces receipt of applications from 13 individuals for an exemption from the vision requirement in the Federal Motor Carrier Safety Regulations (FMCSRs) to operate a commercial motor vehicle (CMV) in interstate commerce. If granted, the exemptions will enable these individuals to operate CMVs in interstate commerce without meeting the vision requirement in one eye.
Comments must be received on or before August 16, 2018.
You may submit comments bearing the Federal Docket Management System (FDMS) Docket No. FMCSA-2018-0014 using any of the following methods:
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online instructions for submitting comments.
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Ms. Christine A. Hydock, Chief, Medical Programs Division, (202) 366-4001,
Under 49 U.S.C. 31136(e) and 31315, FMCSA may grant an exemption from the FMCSRs for a five-year period if it finds “such exemption would likely achieve a level of safety that is equivalent to or greater than the level that would be achieved absent such exemption.” The statute also allows the Agency to renew exemptions at the end of the five-year period. FMCSA grants exemptions from the FMCSRs for a two-year period to align with the maximum duration of a driver's medical certification.
The 13 individuals listed in this notice have requested an exemption from the vision requirement in 49 CFR 391.41(b)(10). Accordingly, the Agency will evaluate the qualifications of each applicant to determine whether granting an exemption will achieve the required level of safety mandated by statute.
The physical qualification standard for drivers regarding vision found in 49 CFR 391.41(b)(10) states that a person is physically qualified to drive a CMV if that person has distant visual acuity of at least 20/40 (Snellen) in each eye without corrective lenses or visual acuity separately corrected to 20/40 (Snellen) or better with corrective lenses, distant binocular acuity of at least 20/40 (Snellen) in both eyes with or without corrective lenses, field of vision of at least 70° in the horizontal
In July 1992, the Agency first published the criteria for the Vision Waiver Program, which listed the conditions and reporting standards that CMV drivers approved for participation would need to meet (Qualification of Drivers; Vision Waivers, 57 FR 31458, July 16, 1992). The current Vision Exemption Program was established in 1998, following the enactment of amendments to the statutes governing exemptions made by § 4007 of the Transportation Equity Act for the 21st Century (TEA-21), Public Law 105-178, 112 Stat. 107, 401 (June 9, 1998). Vision exemptions are considered under the procedures established in 49 CFR part 381 subpart C, on a case-by-case basis upon application by CMV drivers who do not meet the vision standards of 49 CFR 391.41(b)(10).
To qualify for an exemption from the vision requirement, FMCSA requires a person to present verifiable evidence that he/she has driven a commercial vehicle safely with the vision deficiency for the past three years. Recent driving performance is especially important in evaluating future safety, according to several research studies designed to correlate past and future driving performance. Results of these studies support the principle that the best predictor of future performance by a driver is his/her past record of crashes and traffic violations. Copies of the studies may be found at Docket Number FMCSA-1998-3637.
FMCSA believes it can properly apply the principle to monocular drivers, because data from the Federal Highway Administration's (FHWA) former waiver study program clearly demonstrated the driving performance of experienced monocular drivers in the program is better than that of all CMV drivers collectively (See 61 FR 13338, 13345, March 26, 1996). The fact that experienced monocular drivers demonstrated safe driving records in the waiver program supports a conclusion that other monocular drivers, meeting the same qualifying conditions as those required by the waiver program, are also likely to have adapted to their vision deficiency and will continue to operate safely.
The first major research correlating past and future performance was done in England by Greenwood and Yule in 1920. Subsequent studies, building on that model, concluded that crash rates for the same individual exposed to certain risks for two different time periods vary only slightly (See Bates and Neyman, University of California Publications in Statistics, April 1952). Other studies demonstrated theories of predicting crash proneness from crash history coupled with other factors. These factors—such as age, sex, geographic location, mileage driven and conviction history—are used every day by insurance companies and motor vehicle bureaus to predict the probability of an individual experiencing future crashes (See Weber, Donald C., “Accident Rate Potential: An Application of Multiple Regression Analysis of a Poisson Process,” Journal of American Statistical Association, June 1971). A 1964 California Driver Record Study prepared by the California Department of Motor Vehicles concluded that the best overall crash predictor for both concurrent and nonconcurrent events is the number of single convictions. This study used three consecutive years of data, comparing the experiences of drivers in the first two years with their experiences in the final year.
Mr. Blakely, 63, has had amblyopia in his left eye since childhood. The visual acuity in his right eye is 20/20, and in his left eye, 20/50. Following an examination in 2018, his optometrist stated, “I feel that Ron has sufficient vision to perform the driving tasks required to operate a commercial vehicle since the amblyopia is longstanding, stable, and he is well adjusted.” Mr. Blakely reported that he has driven straight trucks for 35 years, accumulating 1.58 million miles, and buses for one year, accumulating 25,000 miles. He holds a Class CB CDL from Michigan. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Dominguez, 51, has a prosthetic left eye due to a traumatic incident in 2000. The visual acuity in his right eye is 20/20, and in his left eye, no light perception. Following an examination in 2018, his optometrist stated, “In my opinion Mr. Dominguez has sufficient vision to perform the driving tasks required to operate a commercial vehicle.” Mr. Dominguez reported that he has driven tractor-trailer combinations for four years, accumulating 340,000 miles. He holds a Class A CDL from Texas. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. George, 59, has had a corneal scar in his right eye since childhood. The visual acuity in his right eye is counting fingers, and in his left eye, 20/25. Following an examination in 2018, his ophthalmologist stated, “Mr. George's vision is sufficient to drive a commercial vehicle.” Mr. George reported that he has driven straight trucks for two years, accumulating 100,000 miles, and tractor-trailer combinations for 30 years, accumulating 6 million miles. He holds an operator's license from Louisiana. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Hetrick, 38, has complete loss of vision in his left eye due to a traumatic incident in 1987. The visual acuity in his right eye is 20/20, and in his left eye, no light perception. Following an examination in 2018, his optometrist stated, “Based on my understanding of the visual requirements for commercial vehicle operation, Mr. Hetrick has sufficient vision to perform the driving tasks required to operate a commercial vehicle.” Mr. Hetrick reported that he has driven straight trucks for 25 years, accumulating 381,250 miles, and tractor-trailer combinations for seven years, accumulating 3,500 miles. He holds an operator's license from Pennsylvania. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Hildebrand, 40, has had posterior staphyloma in his right eye since childhood. The visual acuity in his right eye is count fingers, and in his left eye, 20/20. Following an examination in 2018, his optometrist stated, “In my medical opinion, Michael Hildebrand has sufficient vision to perform the driving tasks required to operate a commercial vehicle.” Mr. Hildebrand reported that he has driven straight trucks for 12 years, accumulating 374,400 miles. He holds an operator's license from Pennsylvania. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Isenberg, 63, has had amblyopia in his left eye since birth. The visual acuity in his right eye is 20/20, and in his left eye, 20/400. Following an examination in 2018, his optometrist stated, “In my opinion, Junior Isenberg has sufficient vision to perform the
Mr. Livingston, 55, has had amblyopia in his right eye since childhood. The visual acuity in his right eye is 20/200, and in his left eye, 20/20. Following an examination in 2018, his optometrist stated, “This is a second letter to express that it is my medical opinion that Mr. Livingston has sufficient vision in his left eye to perform the driving tasks required to operate a commercial vehicle.” Mr. Livingston reported that he has driven straight trucks for 18 years, accumulating 360,000 miles, and tractor-trailer combinations for 18 years, accumulating 360,000 miles. He holds a Class A CDL from Vermont. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Markley, 61, has had macular myelinated nerve fibers in his right eye since birth. The visual acuity in his right eye is counting fingers, and in his left eye, 20/25. Following an examination in 2018, his ophthalmologist stated, “Mr. Markley has sufficient vision in left eye to perform the tasks required to operate a commercial vehicle.” Mr. Markley reported that he has driven straight trucks for 39 years, accumulating 42,900 miles, and tractor-trailer combinations for 39 years, accumulating 91,650 miles. He holds a Class AM CDL from Pennsylvania. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Redford, 65, has an irregularly shaped pupil in his left eye due to a traumatic incident in childhood. The visual acuity in his right eye is 20/20, and in his left eye, counting fingers. Following an examination in 2018, his optometrist stated, “I hereby certify that in my medical opinion the patient has sufficient vision to perform the driving tasks required to operate a commercial vehicle.” Mr. Redford reported that he has driven straight trucks for ten years, accumulating 500,000 miles. He holds an operator's license from Idaho. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
Mr. Tavarez, 49, has had amblyopia in his right eye since birth. The visual acuity in his right eye is hand motion, and in his left eye, 20/20. Following an examination in 2018, his optometrist stated, “Based upon the color vision testing,binocular
Mr. Van Drielen, 56, has a macular scar in his left eye due to a traumatic incident in 2012. The visual acuity in his right eye is 20/20, and in his left eye, 20/50. Following an examination in 2018, his optometrist stated, “In my medical opinion, Mr. Vandrielen
Mr. White, 62, has had optic nerve damage in his left eye since 2012. The visual acuity in his right eye is 20/20, and in his left eye, light perception. Following an examination in 2018, his optometrist stated, “In my medical opinion this patient has sufficient vision to perform the driving tasks required to operate a commercial vehicle.” Mr. White reported that he has driven straight trucks for ten years, accumulating 150,000 miles, and tractor-trailer combinations for 20 years, accumulating two million miles. He holds a Class A CDL from Nevada. His driving record for the last three years shows no crashes and one conviction for a moving violation in a CMV; he exceeded the speed limit by 9 mph.
Mr. Williams, 63, has a retinal detachment in his right eye due to a traumatic incident in 2010. The visual acuity in his right eye is hand motion, and in his left eye, 20/20. Following an examination in 2017, his optometrist stated, “In my opinion Mr. Williams has sufficient vision to perform the daily task required to operate a commercial vehicle.” Mr. Williams reported that he has driven straight trucks for 26 years, accumulating 1.24 million miles, and tractor-trailer combinations for 26 years, accumulating 1.24 million miles. He holds a Class A CDL from Missouri. His driving record for the last three years shows no crashes and no convictions for moving violations in a CMV.
In accordance with 49 U.S.C. 31136(e) and 31315, FMCSA requests public comment from all interested persons on the exemption petitions described in this notice. We will consider all comments and material received before the close of business on the closing date indicated in the dates section of the notice.
You may submit your comments and material online or by fax, mail, or hand delivery, but please use only one of these means. FMCSA recommends that you include your name and a mailing address, an email address, or a phone number in the body of your document so that FMCSA can contact you if there are questions regarding your submission.
To submit your comment online, go to
We will consider all comments and materials received during the comment period. FMCSA may issue a final determination at any time after the close of the comment period.
To view comments, as well as any documents mentioned in this preamble, go to
Federal Motor Carrier Safety Administration (FMCSA), DOT.
Notice of renewal of exemptions; request for comments.
FMCSA announces its decision to renew exemptions for 94 individuals from its prohibition in the Federal Motor Carrier Safety Regulations (FMCSRs) against persons with insulin-treated diabetes mellitus (ITDM) from operating commercial motor vehicles (CMVs) in interstate commerce. The exemptions enable these individuals with ITDM to continue to operate CMVs in interstate commerce.
Each group of renewed exemptions were applicable on the dates stated in the discussions below and will expire on the dates stated in the discussions below. Comments must be received on or before August 16, 2018.
You may submit comments bearing the Federal Docket Management System (FDMS) Docket No. FMCSA-2006-24210; FMCSA-2010-0162; FMCSA-2012-0162; FMCSA-2012-0163; FMCSA-2014-0018 using any of the following methods:
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Ms. Christine A. Hydock, Chief, Medical Programs Division, 202-366-4001,
Under 49 U.S.C. 31136(e) and 31315, FMCSA may grant an exemption for five years if it finds “such exemption would likely achieve a level of safety that is equivalent to or greater than the level that would be achieved absent such exemption.” The statute also allows the Agency to renew exemptions at the end of the five-year period. FMCSA grants exemptions from the FMCSRs for a two-year period to align with the maximum duration of a driver's medical certification.
The physical qualification standard for drivers regarding diabetes found in 49 CFR 391.41(b)(3) states that a person is physically qualified to drive a CMV if that person has no established medical history or clinical diagnosis of diabetes mellitus currently requiring insulin for control.
The 94 individuals listed in this notice have requested renewal of their exemptions from the diabetes standard in 49 CFR 391.41(b)(3), in accordance with FMCSA procedures. Accordingly, FMCSA has evaluated these applications for renewal on their merits and decided to extend each exemption for a renewable two-year period.
Interested parties or organizations possessing information that would otherwise show that any, or all, of these drivers are not currently achieving the statutory level of safety should immediately notify FMCSA. The Agency will evaluate any adverse evidence submitted and, if safety is being compromised or if continuation of the exemption would not be consistent with the goals and objectives of 49 U.S.C. 31136(e) and 31315, FMCSA will take immediate steps to revoke the exemption of a driver.
Under 49 U.S.C. 31315(b)(1), an exemption may be granted for no longer than two years from its approval date and may be renewed upon application. In accordance with 49 U.S.C. 31136(e) and 31315, each of the 94 applicants has satisfied the renewal conditions for obtaining an exemption from the diabetes requirement (71 FR 32177; 71 FR 45097; 75 FR 36775; 75 FR 50797; 77 FR 36333; 77 FR 40941; 77 FR 46791; 77 FR 51845; 79 FR 41723; 79 FR 56105; 81 FR 91242). They have maintained their required medical monitoring and have not exhibited any medical issues that would compromise their ability to safely operate a CMV during the previous two-year exemption period. These factors provide an adequate basis for predicting each driver's ability to continue to drive safely in interstate commerce. Therefore, FMCSA concludes that extending the exemption for each of these drivers for a period of two years is likely to achieve a level of safety equal to that existing without the exemption.
In accordance with 49 U.S.C. 31136(e) and 31315, the following groups of drivers received renewed exemptions in the month of August and are discussed below:
As of August 6, 2018, and in accordance with 49 U.S.C. 31136(e) and 31315, the following ten individuals have satisfied the renewal conditions for obtaining an exemption from the rule prohibiting drivers with ITDM from
The drivers were included in docket number FMCSA-2012-0162. Their exemptions are applicable as of August 6, 2018, and will expire on August 6, 2020.
As of August 8, 2018, and in accordance with 49 U.S.C. 31136(e) and 31315, the following 23 individuals have satisfied the renewal conditions for obtaining an exemption from the rule prohibiting drivers with ITDM from driving CMVs in interstate commerce (71 FR 32177; 71 FR 45097; 81 FR 91242):
The drivers were included in docket number FMCSA-2006-24210. Their exemptions are applicable as of August 8, 2018, and will expire on August 8, 2020.
As of August 17, 2018, and in accordance with 49 U.S.C. 31136(e) and 31315, the following 7 individuals have satisfied the renewal conditions for obtaining an exemption from the rule prohibiting drivers with ITDM from driving CMVs in interstate commerce (75 FR 36775; 75 FR 50797; 81 FR 91242):
The drivers were included in docket number FMCSA-2010-0162. Their exemptions are applicable as of August 17, 2018, and will expire on August 17, 2020.
As of August 19, 2018, and in accordance with 49 U.S.C. 31136(e) and 31315, the following 45 individuals have satisfied the renewal conditions for obtaining an exemption from the rule prohibiting drivers with ITDM from driving CMVs in interstate commerce (79 FR 41723; 79 FR 56105; 81 FR 91242):
The drivers were included in docket number FMCSA-2014-0018. Their exemptions are applicable as of August 19, 2018, and will expire on August 19, 2020.
As of August 27, 2018, and in accordance with 49 U.S.C. 31136(e) and 31315, the following nine individuals have satisfied the renewal conditions for obtaining an exemption from the rule prohibiting drivers with ITDM from driving CMVs in interstate commerce (77 FR 40941; 77 FR 51845; 81 FR 91242):
The drivers were included in docket number FMCSA-2012-0163. Their exemptions are applicable as of August 27, 2018, and will expire on August 27, 2020.
The exemptions are extended subject to the following conditions: (1) Each driver must submit a quarterly monitoring checklist completed by the treating endocrinologist as well as an annual checklist with a comprehensive medical evaluation; (2) each driver must report within two business days of occurrence, all episodes of severe hypoglycemia, significant complications, or inability to manage diabetes; also, any involvement in an accident or any other adverse event in a CMV or personal vehicle, whether or not it is related to an episode of hypoglycemia; (3) each driver must submit an annual ophthalmologist's or optometrist's report; and (4) each driver must provide a copy of the annual medical certification to the employer for retention in the driver's qualification file, or keep a copy in his/her driver's qualification file if he/she is self-employed. The driver must also have a copy of the exemption when driving, for presentation to a duly authorized Federal, State, or local enforcement official. The exemption will be rescinded if: (1) The person fails to comply with the terms and conditions of the exemption; (2) the exemption has resulted in a lower level of safety than was maintained before it was granted; or (3) continuation of the exemption would not be consistent with the goals and objectives of 49 U.S.C. 31136(e) and 31315.
During the period the exemption is in effect, no State shall enforce any law or regulation that conflicts with this exemption with respect to a person operating under the exemption.
Based upon its evaluation of the 94 exemption applications, FMCSA renews the exemptions of the aforementioned drivers from the rule prohibiting drivers with ITDM from driving CMVs in interstate commerce. In accordance with 49 U.S.C. 31136(e) and 31315, each exemption will be valid for two years unless revoked earlier by FMCSA.
Federal Motor Carrier Safety Administration (FMCSA), DOT.
Notice of applications for exemption; request for comments.
FMCSA announces receipt of applications from 54 individuals for an exemption from the prohibition in the Federal Motor Carrier Safety Regulations (FMCSRs) against persons with insulin-treated diabetes mellitus (ITDM) operating a commercial motor vehicle (CMV) in interstate commerce. If granted, the exemptions would enable these individuals with ITDM to operate CMVs in interstate commerce.
Comments must be received on or before August 16, 2018.
You may submit comments bearing the Federal Docket Management System (FDMS) Docket No. FMCSA-2018-0032 using any of the following methods:
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Ms. Christine A. Hydock, Chief, Medical Programs Division, (202) 366-4001,
Under 49 U.S.C. 31136(e) and 31315, FMCSA may grant an exemption from the FMCSRs for a five-year period if it finds “such exemption would likely achieve a level of safety that is equivalent to or greater than the level that would be achieved absent such exemption.” The statute also allows the Agency to renew exemptions at the end of the five-year period. FMCSA grants exemptions from the FMCSRs for a two-year period to align with the maximum duration of a driver's medical certification.
The 54 individuals listed in this notice have requested an exemption from the diabetes prohibition in 49 CFR 391.41(b)(3). Accordingly, the Agency will evaluate the qualifications of each applicant to determine whether granting the exemption will achieve the required level of safety mandated by statute.
The physical qualification standard for drivers regarding diabetes found in 49 CFR 391.41(b)(3) states that a person is physically qualified to drive a CMV if that person has no established medical history or clinical diagnosis of diabetes mellitus currently requiring insulin for control. The Agency established the current requirement for diabetes in 1970 because several risk studies indicated that drivers with diabetes had a higher rate of crash involvement than the general population.
FMCSA established its diabetes exemption program, based on the Agency's July 2000 study entitled “A Report to Congress on the Feasibility of a Program to Qualify Individuals with Insulin-Treated Diabetes Mellitus to Operate in Interstate Commerce as Directed by the Transportation Act for the 21st Century.” The report concluded that a safe and practicable protocol to allow some drivers with ITDM to operate CMVs is feasible. The September 3, 2003 (68 FR 52441),
FMCSA notes that section 4129 of the Safe, Accountable, Flexible and Efficient Transportation Equity Act: A Legacy for Users requires the Secretary to revise its diabetes exemption program established on September 3, 2003 (68 FR 52441). The revision must provide for individual assessment of drivers with diabetes mellitus, and be consistent with the criteria described in section 4018 of the Transportation Equity Act for the 21st Century (49 U.S.C. 31305). Section 4129 requires: (1) Elimination of the requirement for three years of experience operating CMVs while being treated with insulin; and (2) establishment of a specified minimum period of insulin use to demonstrate stable control of diabetes before being allowed to operate a CMV.
In response to section 4129, FMCSA made immediate revisions to the diabetes exemption program established by the September 3, 2003 notice. FMCSA discontinued use of the three-year driving experience and fulfilled the requirements of section 4129 while continuing to ensure that operation of CMVs by drivers with ITDM will achieve the requisite level of safety required of all exemptions granted under 49 U.S.C. 31136 (e). Section
Mr. Amado, 45, has had ITDM since 2015. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Amado understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Amado meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from California.
Mr. Arcand, 60, has had ITDM since 1972. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Arcand understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Arcand meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2017 and certified that he has stable nonproliferative diabetic retinopathy. He holds an operator's license from Wisconsin.
Mr. Archuleta, 58, has had ITDM since 2004. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Archuleta understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Archuleta meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from Pennsylvania.
Mr. Bartlett, 28, has had ITDM since 2005. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Bartlett understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Bartlett meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2017 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Iowa
Mr. Bateman, 28, has had ITDM since 2005. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Bateman understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Bateman meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from New York.
Mr. Battle, 40, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Battle, Jr. understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Battle, Jr. meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class A CDL from Georgia
Mr. Bayles, 66, has had ITDM since 2015. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Bayles understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Bayles meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Utah.
Mr. Behrer, 55, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Behrer understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Behrer meets the
Mr. Boeding, 39, has had ITDM since 1980. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Boeding understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Boeding meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from Minnesota.
Mr. Bowman, 61, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Bowman understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Bowman meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Kentucky.
Mr. Cohen, 48, has had ITDM since 2014. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Cohen understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Cohen meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from New York.
Mr. Delucca, 69, has had ITDM since 2015. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Delucca understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Delucca meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Indiana.
Mr. Dubay, 57, has had ITDM since 2018. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Dubay understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Dubay meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Michigan.
Mr. Frizell, 57, has had ITDM since 2015. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Frizell understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Frizell meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Iowa.
Mr. Gonzalez, 32, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Gonzalez understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Gonzalez meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from New Jersey.
Mr. Gross, 57, has had ITDM since 2018. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Gross understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Gross meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Pennsylvania.
Mr. Kirby, 58, has had ITDM since 2008. His endocrinologist examined him in 2017 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in
Mr. Kirkland, 37, has had ITDM since 2018. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Kirkland understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Kirkland meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Ohio.
Mr. Kiser, 45, has had ITDM since 2016. His endocrinologist examined him in 2017 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Kiser understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Kiser meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2017 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Georgia.
Mr. Koehn, 68, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Koehn understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Koehn meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Alabama.
Mr. Kracht, 48, has had ITDM since 2015. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Kracht understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Kracht meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Iowa.
Mr. Kramer, 56, has had ITDM since 1992. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Kramer understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Kramer meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class B CDL from Ohio.
Mr. Ligols, 54, has had ITDM since 2000. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Ligols understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Ligols meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from Massachusetts.
Mr. Lubanski, 29, has had ITDM since 2011. His endocrinologist examined him in 2017 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Lubanski understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Lubanski meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from New Jersey.
Mr. Markham, 61, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Markham understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Markham meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2017 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Minnesota.
Mr. McAtee, 49, has had ITDM since 2014. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the
Mr. McEntire, 24, has had ITDM since 2007. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. McEntire understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. McEntire meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he has stable nonproliferative diabetic retinopathy. He holds an operator's license from South Carolina.
Mr. Miles, 45, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Miles understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Miles meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Indiana.
Mr. Morgan, 46, has had ITDM since 2001. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Morgan understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Morgan meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Vermont.
Mr. Morris, 60, has had ITDM since 2014. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Morris understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Morris meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Kentucky.
Mr. O'Connor, 32, has had ITDM since 2004. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. O'Connor understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. O'Connor meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Massachusetts.
Mr. Orr, 38, has had ITDM since 2010. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Orr understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Orr meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Texas.
Mr. Pangrazio, 60, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Pangrazio understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Pangrazio meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from New York.
Mr. Phipps, 48, has had ITDM since 2010. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Phipps understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Phipps meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018
Mr. Pope, 53, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Pope understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Pope meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Iowa.
Mr. Powers, 71, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Powers understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Powers meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Missouri.
Mr. Richardson, 54, has had ITDM since 2012. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Richardson understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Richardson meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class A CDL from Washington.
Mr. Rosario, 49, has had ITDM since 2004. His endocrinologist examined him in 2017 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Rosario understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Rosario meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Massachusetts.
Mr. Ryan, 61, has had ITDM since 2018. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Ryan understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Ryan meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Delaware.
Mr. Schrepp, 63, has had ITDM since 2013. His endocrinologist examined him in 2017 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Schrepp understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Schrepp meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from Georgia.
Mr. Shirk, 59, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Shirk understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Shirk meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2017 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Pennsylvania.
Mr. Simko, 28, has had ITDM since 2013. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Simko understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Simko meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Pennsylvania.
Mr. Smith, 57, has had ITDM since 2005. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist
Mr. Snodgrass, 57, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Snodgrass understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Snodgrass meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Indiana.
Mr. Stewart, 70, has had ITDM since 2017. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Stewart understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Stewart meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from North Carolina.
Mr. Symons, 36, has had ITDM since 2018. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Symons understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Symons meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Michigan.
Mr. Torres, 48, has had ITDM since 2013. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Torres understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Torres meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Texas.
Mr. Triplett, 77, has had ITDM since 2004. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Triplett understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Triplett meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Tennessee.
Mr. Trujillo, 50, has had ITDM since 2012. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Trujillo understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Trujillo meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from New Mexico.
Ms. Vance, 34, has had ITDM since 2018. Her endocrinologist examined her in 2018 and certified that she has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. Her endocrinologist certifies that Ms. Vance understands diabetes management and monitoring, has stable control of her diabetes using insulin, and is able to drive a CMV safely. Ms. Vance meets the requirements of the vision standard at 49 CFR 391.41(b)(10). Her optometrist examined her in 2018 and certified that she does not have diabetic retinopathy. She holds an operator's license from Tennessee.
Mr. Vazquez, 21, has had ITDM since 1997. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Vazquez understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Vazquez meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Connecticut.
Mr. Vigna, 61, has had ITDM since 2017. His endocrinologist examined him
Mr. Walsh, 47, has had ITDM since 1998. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Walsh understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Walsh meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2018 and certified that he does not have diabetic retinopathy. He holds an operator's license from Iowa.
Mr. Watson, 25, has had ITDM since 1994. His endocrinologist examined him in 2018 and certified that he has had no severe hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 12 months and no recurrent (two or more) severe hypoglycemic episodes in the last five years. His endocrinologist certifies that Mr. Watson understands diabetes management and monitoring, has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Watson meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2017 and certified that he does not have diabetic retinopathy. He holds an operator's license from Texas.
In accordance with 49 U.S.C. 31136(e) and 31315, FMCSA requests public comment from all interested persons on the exemption petitions described in this notice. We will consider all comments received before the close of business on the closing date indicated in the dates section of the notice.
You may submit your comments and material online or by fax, mail, or hand delivery, but please use only one of these means. FMCSA recommends that you include your name and a mailing address, an email address, or a phone number in the body of your document so that FMCSA can contact you if there are questions regarding your submission.
To submit your comment online, go to
We will consider all comments and materials received during the comment period. FMCSA may issue a final determination at any time after the close of the comment period.
To view comments, as well as any documents mentioned in this preamble, go to
National Highway Traffic Safety Administration (NHTSA), DOT.
Notice of the OMB review of information collection; request for comments.
In compliance with the Paperwork Reduction Act of 1995, this notice announces that the Information Collection Request (ICR) abstracted below will be submitted to the Office of Management and Budget (OMB) for review. A
Submit comments on or before August 16, 2018.
Submit comments through one of the following methods:
• Electronically through
•
Kathryn Wochinger, Office of Behavioral Safety Research (NPD-310), NHTSA, W46-487, 1200 New Jersey Avenue SE, Washington, DC 20590. Dr. Wochinger's phone number is (202) 366-4300, and email address is
A comment to OMB is most effective if OMB receives it within 30 days of publication of this notice.
The Paperwork Reduction Act of 1995; 44 U.S.C. Section 3506(c)(2)(A).
National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT).
Request for comment.
NHTSA is reviewing the literature on drug use and driving with the aim of updating its Drugs and Human Performance Fact Sheets that are used by the criminal justice community and others as they address drug-impaired driving. The current edition of the Fact Sheets was released in 2004 and included information on the following drugs: Carisoprodol, cocaine, dextromethorphan, diazepam, diphenhydramine, gamma-hydroxybutyrate (GHB), ketamine, lysergic acid diethylamide (LSD), marijuana, methadone, methamphetamine, methylenedioxymethamphetamine (MDMA), morphine, phencyclidine (PCP), toluene, and zolpidem. NHTSA welcomes comments and suggestions for additional drugs to be considered for inclusion in the new edition of the Fact Sheets as well as relevant research studies that have become available since 2004 that could be included in the updated fact sheets. To the extent possible, such comments and suggestions should be accompanied by information about the drug, including the extent of its use, its pharmacology and pharmodynamics, and how impairing it is for driving, along with references.
Interested parties are invited to submit comments and suggestions on or before September 1, 2018.
If you have questions about this request for comment, please contact Richard Compton at
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•
•
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In the early 2000s, NHTSA convened a panel of international experts on drug-impaired driving to review developments in the field of drugs and human performance and to identify the specific effects that both high priority illicit and prescription drugs have on driving. The experts represented the fields of psychopharmacology, behavioral psychology, drug chemistry, forensic toxicology, medicine, and law enforcement. That effort resulted in the publication of a document entitled Drugs and Human Performance Fact Sheets (DOT HS 809 725) in June 2004.
Each Fact Sheet covered one of the selected sixteen drugs that impair driving. The selected drugs included over-the-counter medications such as dextromethorphan and diphenhydramine; prescription medications such as carisoprodol, diazepam, and zolpidem; and abused and/or illegal drugs such as cocaine, GHB, ketamine, LSD, marijuana, methadone, methamphetamine, MDMA, morphine, PCP, and toluene. Each individual drug Fact Sheet covered information regarding drug chemistry, usage and dosage information, pharmacology, drug effects, effects on driving, drug evaluation and classification, and the panel's assessment of driving risks. More specifically, the Fact Sheets provided details on the physical description of the drug, synonyms, and pharmaceutical or illicit sources; medical and recreational uses, recommended and abused doses, typical routes of administration, and potency and purity; mechanism of drug action and major receptor sites; drug absorption, distribution, metabolism and elimination data; blood and urine concentrations; psychological and physiological effects, and drug interactions; drug effects on psychomotor performance effects; driving simulator and epidemiology studies; and drug recognition evaluation profiles. Each Fact Sheet concludes with general statements about the drugs' ability to impair driving performance. A list of key references and recommended reading was also provided for each drug.
Since 2004, new research on these and other impairing drugs has become available. As a result, NHTSA plans to evaluate whether additional drugs that impair driving should be included in the Fact Sheets and to add them as appropriate, as well as to update information on the effects of the sixteen aforementioned drugs on driving. NHTSA will base the revised Fact Sheets on the state of current scientific knowledge. The agency intends to design the revised Fact Sheets to continue to provide practical guidance to toxicologists, pharmacologists, law enforcement officers, attorneys, and the general public to use in the evaluation of future cases.
In order to assist on the development of the new edition of the Fact Sheets, NHTSA invites comments and suggestions from the general public on additional drugs as well as relevant research studies that have become available since 2004 that could be included in the updated fact sheets. To the extent possible, such comments and suggestions should be accompanied by information about the drug, including the extent of its use, its pharmacology and pharmodynamics, and how impairing it is for driving, along with references.
44 U.S.C. Section 3506(c)(2)(A).
National Highway Traffic Safety Administration (NHTSA), DOT.
Request for public comment on proposed collection of information.
Before a Federal agency can collect certain information from the public, it must receive approval from the Office of Management and Budget (OMB). Under procedures established by the Paperwork Reduction Act of 1995, before seeking OMB approval, Federal agencies must solicit public comment on proposed collections of information, including extensions and reinstatements of previously approved collections. This document describes the collection of information for which NHTSA intends to seek OMB approval.
Comments must be received on or before September 17, 2018.
You may submit comments identified by DOT Docket Number NHTSA-2018-0060 using any of the following methods:
Mary Byrd, Contracting Officer's Representative, Office of Behavioral Safety Research (NPD-320), National Highway Traffic Safety Administration, 1200 New Jersey Avenue SE, Washington, DC 20590. Ms. Byrd's phone number is 202-366-5595, and her email address is
Under the Paperwork Reduction Act of 1995, before an agency submits a proposed collection of information to OMB for approval, it must publish a document in the
(i) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
(ii) the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
(iii) how to enhance the quality, utility, and clarity of the information to be collected; and
(iv) how to minimize the burden of the collection of information on those who are to respond, including the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
In compliance with these requirements, NHTSA asks public comment on the following proposed collection of information:
A 2015 NHTSA study published at EMSworld.com found that on average there are 4,500 crashes per year involving ambulances, and these crashes result in an average of 33 deaths per year. As indicated in various media reports of high profile crashes, fatigue and sleep deprivation are likely contributors. Furthermore, a 2012 study by Patterson, Weaver, Frank, et al. published in
While greater than half of EMS personnel report work-related fatigue, there are no guidelines for the management of fatigue in EMS. In 2013, the National EMS Advisory Council (NEMSAC) adopted an advisory that recommended NHTSA and federal partners disseminate evidence-based information to aid the EMS community in efforts to develop fatigue risk management programs. In response, NHTSA kicked off the “Fatigue in EMS” initiative in 2016. The project aims to address the potential dangers of drowsiness and fatigue among EMS workers, including the risk of traffic crashes, injuries to providers and patients, and medical errors. After an extensive review of more than 30,000 published research articles, the project team released its evidence-based guidelines for fatigue risk management, along with companion materials and expert commentaries in January 2018. The guidelines, which are described in a 2018 publication by Patterson, Higgins, Van Dogen, et al. in
1. Reliable and/or valid fatigue and sleepiness survey instruments should be used to measure and monitor fatigue in EMS personnel.
2. EMS personnel should work shifts shorter than 24 hours in duration.
3. EMS workers should have access to caffeine as a fatigue countermeasure.
4. EMS personnel should have the opportunity to nap while on duty to mitigate fatigue.
5. EMS personnel should receive education and training to mitigate fatigue and fatigue-related risks.
The research team will have the 1,500 eligible individuals watch a video explaining the study and the consent process and will then ask them to indicate their consent to participate. The consenting process is expected to take 10 minutes for a total expected burden of 250 hours. The research team expects 1,200 eligible individuals to consent and agree to participate. These individuals will then complete the registration process including providing demographic information and shift schedules, complete a baseline survey including self-reported fatigue and sleepiness. Half of the participants will be asked to complete ten training sessions of ten minutes each within ten days. The other half will be asked to complete the training within ten days of the mid-point of the study. The expected burden for the registration process, baseline survey and training intervention is 145 minutes per participant for a total burden of 2,900 hours. Once the study is underway, participants will be asked to respond to daily text messages about sleepiness and fatigue for eight weeks of the 24-week study. The expected burden of responding is 5 minutes per response for a total burden of 5,600. The research team also will ask participants to complete follow-up surveys at the study mid-point and at the end of the study. The expect burden of responding is 25 minutes per survey for a total burden of 1,000 hours.
A subset of participants (30 of the 1,200) will complete a daily sleep diary for eight weeks of the 24-week study. Completing the diary is expected to take 3 minutes per day for a total burden of 84 hours. This subset also will be asked to take a brief Psychomotor Vigilance Task test twice per day (at the start and at the end of shift) for a total of eight days spread across the study period. Completing each test is expected to take five minutes for a total burden of 40 hours. The purpose of these additional data collections is to assess the validity and reliability of the self-reported study measures.
44 U.S.C. Section 3506(c)(2)(A).
The Department of Veterans Affairs (VA) gives notice under the Federal Advisory Committee Act that the Health Services Research and Development Service Scientific Merit Review Board will conduct in-person and teleconference meetings of its eleven Health Services Research (HSR) subcommittees on the dates below from 8:00 a.m. to approximately 4:30 p.m. (unless otherwise listed) at the FHI 360 Conference Center, 1825 Connecticut Avenue NW, Washington, DC 20009 (unless otherwise listed):
• HSR 0—Community Care on August 21, 2018;
• HSR 1—Health Care and Clinical Management on August 21-22, 2018;
• HSR 2—Behavioral, Social, and Cultural Determinants of Health and Care on August 23-24, 2018;
• HSR 3—Healthcare Informatics on August 23, 2018;
• HSR 4—Mental and Behavioral Health on August 21-22, 2018;
• HSR 5—Health Care System Organization and Delivery on August 23-24, 2018;
• HSR 6—Post-acute and Long-term Care on August 22, 2018;
• HSR 7—Opioid and Pain Management Special Emphasis on August 24, 2018;
• MRA 0—Mentored Research on August 24, 2018;
• HSR 8—Implementation Research Project on August 23, 2018;
• HS8 A—Randomized Program Evaluations on August 23, 2018; and
• HSR 9—Learning Health Initiative on August 23, 2018.
The purpose of the Board is to review health services research and development applications involving: the measurement and evaluation of health care services; the testing of new methods of health care delivery and management; and mentored research. Applications are reviewed for scientific and technical merit, mission relevance, and the protection of human and animal subjects. Recommendations regarding funding are submitted to the Chief Research and Development Officer.
Each subcommittee meeting of the Board will be open to the public the first day for approximately one half-hour from 8:00 a.m. to 8:30 a.m. at the start of the meeting on August 21 (HSR 0, 1, 4), August 22 (HSR 1, 4, 6), August 23 (HSR 2, 3, 5, 8, 9, and HS8A), and August 24 (HSR 2, 5, 7, and MRA 0) to cover administrative matters and to discuss the general status of the program. Members of the public who wish to attend the open portion of the subcommittee meetings may dial 1 (800) 767-1750, participant code 10443#.
The remaining portion of each subcommittee meeting will be closed for the discussion, examination, reference to, and oral review of the intramural research proposals and critiques. During the closed portion of each subcommittee meeting, discussion and recommendations will include qualifications of the personnel conducting the studies (the disclosure of which would constitute a clearly unwarranted invasion of personal privacy), as well as research information (the premature disclosure of which would likely compromise significantly the implementation of proposed agency action regarding such research projects). As provided by subsection 10(d) of Public Law 92-463, as amended by Public Law 94-409, closing the meeting is in accordance with 5 U.S.C. 552b(c)(6) and (9)(B).
No oral or written comments will be accepted from the public for either portion of the meetings. Those who plan to participate during the open portion of a subcommittee meeting should contact Ms. Liza Catucci, Administrative Officer, Department of Veterans Affairs, Health Services Research and Development Service (10P9H), 810 Vermont Avenue NW, Washington, DC 20420, or by email at
Federal Housing Finance Agency; Office of Federal Housing Enterprise Oversight
Notice of proposed rulemaking.
The Federal Housing Finance Agency (FHFA or the Agency) is proposing a new regulatory capital framework for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises), which includes a new framework for risk-based capital requirements and two alternatives for an updated minimum leverage capital requirement. The risk-based framework would provide a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk, operational risk, and going-concern buffer components. The proposed rule would maintain the statutory definitions of core capital and total capital.
FHFA has suspended the Enterprises' capital requirements since the beginning of conservatorship, and FHFA plans to continue this suspension while the Enterprises remain in conservatorship. Despite this suspension, FHFA believes it is appropriate to update the Agency's standards on Enterprise capital requirements to provide transparency to all stakeholders about FHFA's supervisory view on this topic. In addition, while the Enterprises are in conservatorship, FHFA will expect Fannie Mae and Freddie Mac to use assumptions about capital described in the rule's risk-based capital requirements in making pricing and other business decisions. Feedback on this proposed rule will also inform FHFA's views in evaluating Enterprise business decisions while the Enterprises remain in conservatorship.
Comments must be received on or before September 17, 2018.
You may submit your comments on the proposed rule, identified by regulatory information number (RIN) 2590-AA95, by any one of the following methods:
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Naa Awaa Tagoe, Senior Associate Director, Office of Financial Analysis, Modeling & Simulations, (202) 649-3140,
FHFA invites comments on all aspects of the proposed rule and will take all comments into consideration before issuing a final rule. Copies of all comments will be posted without change, and will include any personal information you provide such as your name, address, email address, and telephone number, on the FHFA website at
FHFA's predecessor agency, the Office of Federal Housing Enterprise Oversight (OFHEO), last adopted capital rules for Fannie Mae and Freddie Mac in 2001. The Housing and Economic Recovery Act of 2008 (HERA) gave FHFA greater authority to determine capital standards for the Enterprises. Each Enterprise was placed into conservatorship shortly after the enactment of HERA. FHFA suspended the statutory capital classifications and regulatory capital requirements during conservatorship, due to the Enterprises having entered the control of the conservator. Today, the Senior Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury (Treasury Department) limit each Enterprise's ability to hold capital.
Prior to proposing this rule, FHFA has taken other steps to assess adequate capital assumptions for the Enterprises while they operate in conservatorship. Despite the Enterprises' limited ability to hold capital, FHFA identified the need to develop an aligned risk measurement framework to better evaluate each Enterprise's business decisions while they are in conservatorship. FHFA's purpose in pursuing this effort was to ensure that the Enterprises make prudent business decisions when pricing transactions and managing their books of business. The initial framework developed as a result of this effort is called the Conservatorship Capital Framework (CCF) and was put into place in 2017 under FHFA's oversight as conservator.
The CCF is the foundation for FHFA's proposed capital regulation. Although the capital requirements in the rule would need to be suspended after adoption of a final rule because the Enterprises remain in conservatorship and are supported by the Treasury Department through the PSPAs which limit their ability to retain capital, the updated rule would achieve several objectives. The proposed rule serves to transparently communicate FHFA's views as a financial regulator about capital adequacy for the Enterprises under current statutory language and authorities. The fact that FHFA has suspended the Enterprises' capital requirements does not eliminate FHFA's responsibility, as a prudential regulator, to articulate a view about Enterprise capital requirements. It also prepares the Agency to modify the capital standards for future housing finance entities, even if they are significantly different from the Enterprises, upon completion of housing finance reform by Congress and the Administration, instead of starting from the outdated OFHEO rules. In addition, publication of this proposed rule will enable the public to provide input on these important issues.
While the Enterprises currently operate under the PSPAs with the Treasury Department, the proposed rule does not take the PSPAs into account. The proposed risk-based capital requirements are designed to establish the necessary minimum capital for the Enterprises to continue operating after a stress event comparable to the recent financial crisis. In a reformed housing finance system, policymakers would need to determine whether to retain support like that provided by the PSPAs for future housing finance entities.
In proposing this rule, FHFA is not attempting to take a position on housing finance reform. Similarly, this proposed rule is not a step towards recapitalizing the Enterprises and administratively releasing them from conservatorship. FHFA's position continues to be that it is the role of Congress and the Administration to determine the future of housing finance reform and what role, if any, the Enterprises should play in that system.
Publication of this proposed rule will assist with FHFA's administration of the conservatorships of Fannie Mae and Freddie Mac by potentially refining the CCF. As with other proposed rules, the rulemaking provides the public with an opportunity to comment on the proposed capital requirements. As FHFA reviews the public comments and works to finalize the rule, the Agency expects to adopt material and appropriate changes into the existing CCF.
FHFA is proposing a regulatory capital framework for the Enterprises that would implement two components: A new framework for risk-based capital requirements and a revised minimum leverage capital requirement specified as a percentage of total assets and off-balance sheet guarantees. FHFA's proposed rule is based on a capital framework that is generally consistent with the regulatory capital framework for large banks, but reflects differences in the charters, business operations, and risk profiles of the Enterprises. The proposed rule uses concepts from the Basel framework with appropriate modifications for the Enterprises. FHFA's proposed framework recognizes that the Enterprises are monoline businesses with assets and guarantees heavily concentrated in residential mortgages with risk profiles that differ from large diversified banks.
In order to fulfill their charter responsibilities of providing stability to the secondary mortgage market, the Enterprises must remain as functioning entities both during and after a period of severe financial stress. To achieve this objective, the proposed risk-based capital framework targets a risk-invariant minimum capital level after surviving a stress event, referred to as the going-concern buffer.
The Enterprises' assets and operations are exposed to different types of risks. The proposed risk-based capital framework would address the key exposures by explicitly covering credit risk, including counterparty risk, as well as market risk and operational risk. The proposed framework would define the requirements by risk factor for each key group of the Enterprises' assets and guarantees.
In establishing risk-based capital requirements and updating the minimum leverage requirement, FHFA is seeking to ensure that the two sets of requirements complement one another. For the risk-based capital requirements, FHFA is proposing a comprehensive framework that provides a detailed assessment of the Enterprises' risk of incurring unexpected losses. Instead of applying the Basel standardized approach of a 50 percent risk weight for all mortgage assets regardless of different product features or terms, FHFA's proposed risk-based capital requirements would use a series of approaches, which include base grids, risk multipliers, assessments of counterparty risk, and capital relief due to credit risk transfer transactions, to produce tailored capital requirements for mortgage loans, guarantees, and securities. These asset-specific capital requirements would then be applied across each Enterprise's book of business to produce total risk-based capital requirements.
By differentiating between the types and features of mortgage assets, guarantees, and securities purchased by the Enterprises, FHFA believes the proposed risk-based capital requirements would represent a substantial step forward in articulating the relative risk levels of mortgage loans and quantifying the associated capital requirements for the Enterprises.
In coordination with the proposed risk-based capital requirements, FHFA is also proposing two alternative minimum leverage capital requirements. Each of these alternatives would update the existing minimum leverage requirements established by statute for the Enterprises. Under the first alternative, the “2.5 percent alternative,” the Enterprises would be required to hold capital equal to 2.5 percent of total assets (as determined in accordance with generally accepted accounting principles (GAAP)) and off-balance sheet guarantees related to securitization activities, regardless of the risk characteristics of the assets and guarantees or how they are held on the Enterprises' balance sheets. Under the second alternative, the “bifurcated alternative,” the Enterprises would be required to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets, where trust assets are defined as Fannie Mae mortgage-backed securities or Freddie Mac participation certificates held by third parties and off-balance sheet guarantees related to securitization activities, and non-trust assets are defined as total assets as determined in accordance with GAAP plus off-balance sheet guarantees related to securitization activities minus trust assets. The Enterprises' retained portfolios would be included in non-trust assets. In proposing these two alternatives, FHFA seeks to obtain feedback about how to balance the following considerations.
On the one hand, FHFA seeks to establish a minimum leverage requirement that would serve as a backstop capital requirement to guard against the potential that the risk-based capital requirements would be underestimated or would become too low in the future following periods of sustained, strong economic conditions. A meaningful minimum leverage requirement would also guard against the risk that the risk-based capital measure significantly underestimates necessary capital levels. An underestimation of capital could occur for different reasons, including the potential for model estimation error, the possibility that loans perform differently than similar loans did in the historical periods used to estimate the models, the emergence of new products that are inadequately capitalized because of a lack of historical performance data as occurred during the financial crisis, and the possibility that the proposed risk-based capital approach would overestimate the amount of capital relief attributed to CRT transactions. A leverage backstop would also protect against a reduced risk-based capital measure during times of overly aggressive house price appreciation and low unemployment, which would result in lower capital requirements and the release of capital when loan-to-value ratios fall. In the absence of a meaningful minimum leverage capital requirement, aggressively low risk-based capital requirements could result in the Enterprises facing difficulty raising capital in worsening economic conditions when capital is most needed. A leverage backstop would also mitigate the risk of rapid deleveraging for institutions that depend on short-term funding, though, as discussed herein, this rationale applies more to large depository institutions than to the Enterprises. Lastly, a leverage backstop would provide a floor beyond the proposed going-concern buffer and operational risk capital requirement for the amount of capital released as a result of credit risk transfer transactions.
On the other hand, FHFA also seeks to avoid setting a minimum leverage requirement that is too high and would regularly eclipse the risk-based capital requirements, which could have adverse consequences. Because leverage requirements generally require firms to hold the same amount of capital for any type of asset irrespective of the asset's risk profile, a binding leverage requirement could incent firms to hold riskier assets on their balance sheets. Instead of reducing risk to the Enterprises, a high leverage requirement that surpasses risk-based capital requirements could encourage the Enterprises to forgo lower-risk assets in favor of those with higher-risks because the same capital requirement would apply for either asset. In addition, a binding leverage requirement could lead an Enterprise to reduce or halt its CRT transactions. This could occur because the proposed risk-based capital requirements provide capital relief for CRT transactions, whereas the minimum leverage capital requirements in this proposed rule do not provide capital relief for CRT transactions. As a
Each of these proposed capital requirements are discussed in section II.
Effective July 30, 2008, HERA created FHFA as a new independent agency of the Federal Government. The part of HERA that applies to FHFA is the Federal Housing Finance Regulatory Reform Act of 2008,
HERA transferred to FHFA the supervisory and oversight responsibilities of OFHEO over Fannie Mae and Freddie Mac. HERA also transferred the oversight responsibilities of the Federal Housing Finance Board over the Federal Home Loan Banks (Banks) and the Office of Finance, which acts as the Banks' fiscal agent, and certain functions of the Department of Housing and Urban Development (HUD) with respect to the affordable housing mission of the Enterprises. In addition to transferring supervisory responsibilities to FHFA, HERA gave the Agency greater authority than OFHEO had to determine the capital standards for the Enterprises.
As originally enacted, the 1992 statute specified a minimum capital requirement in the form of a leverage ratio for the Enterprises and a highly prescriptive approach to risk-based capital requirements for the Enterprises. The statute required that OFHEO establish a risk-based capital stress test by regulation such that each Enterprise could survive a ten-year period with large credit losses and large movements in interest rates. The statute specified two interest rate scenarios, with falling and rising rates, and provided the interest rate paths for each scenario. The statute set parameters for a benchmark loss experience for default and loss severity, but provided OFHEO discretion to determine other aspects of the capital test.
To implement this statutory language, OFHEO developed a risk-based capital standard for the Enterprises, and issued a series of
On September 6, 2008, the Director of FHFA appointed FHFA as the conservator for each Enterprise, pursuant to authority in the Safety and Soundness Act. Conservatorship is a statutory process intended to preserve and conserve the assets of the Enterprises and to put the companies in a sound and solvent condition. FHFA suspended the capital classifications and the regulatory capital requirements applicable at that time, and they remain suspended.
Although the capital requirements are suspended while the Enterprises are in conservatorship, this section reviews the Enterprise capital standards in the prior OFHEO rule, which, though suspended, has not yet been replaced.
The Enterprises are required by statute to maintain the capital necessary to meet certain minimum leverage and risk-based capital levels. Under HERA, the Enterprises continue to operate under the regulations issued by OFHEO until those regulations are superseded by regulations issued by FHFA. The OFHEO rule's minimum leverage and risk-based capital requirements are applied simultaneously, but are not additive. The Enterprises must meet both requirements in order to be classified as adequately capitalized.
If any Enterprise is classified as other than adequately capitalized, it triggers a series of prompt corrective actions. Since the ability of the Enterprises to obtain adequate capital was fatally impaired due to the financial crisis, capital support for the Enterprises was provided by the PSPAs with the Treasury Department when the Enterprises were put into conservatorship. Accordingly, FHFA suspended the capital classifications as well as the OFHEO capital regulation.
The minimum leverage capital requirement specified in the Safety and Soundness Act is equal to 2.5 percent of on-balance sheet assets and 0.45 percent of off-balance sheet obligations. These levels are applied to the retained portfolio and guarantee business, respectively.
The statute, as amended by HERA, also requires the Enterprises to meet a risk-based capital standard, to be prescribed by FHFA by regulation. The OFHEO capital rule contains a stress test, which is to be applied to each Enterprise's book of business. As prescribed by the 1992 statute, the stress test is designed such that each Enterprise could survive a ten-year period with large credit losses and large movements in interest rates. There are two interest rate scenarios, with falling and rising rates, and interest rate paths for each scenario. The test has parameters for a benchmark loss experience for default and loss severity, and uses the House Price Index produced by OFHEO (which FHFA now produces).
The statute, both in 1992 and today, requires the risk-based capital requirement to be met with total capital, which is the sum of core capital and a general allowance for foreclosure losses, plus “[a]ny other amounts from sources of funds available to absorb losses incurred by the enterprise, that the Director by regulation determines are appropriate to include in determining
The statute, both in 1992 and today, defines a critical capital level, which is the amount of core capital below which an Enterprise is classified as critically undercapitalized. The critical capital level is 1.25 percent of on-balance sheet assets (retained portfolio) and 0.25 percent of off-balance sheet obligations (guarantee business).
Under the statute, both in 1992 and today, an Enterprise is considered adequately capitalized when core capital meets, or exceeds, the minimum capital requirement and total capital meets, or exceeds, the risk-based capital requirement. An Enterprise is considered undercapitalized if it fails the risk-based requirement, but meets the minimum capital requirement. It is significantly undercapitalized when it fails both the minimum and risk-based capital requirements, but still has enough critical capital. It becomes critically undercapitalized when it fails both the minimum and risk-based capital requirements, as well as the critical capital requirement.
If an Enterprise becomes undercapitalized or significantly undercapitalized, under the prompt corrective action framework in the statute the Enterprise is subject to heightened supervision. This includes being required to submit a capital restoration plan, and having restrictions imposed on capital distributions and asset growth. A significantly undercapitalized Enterprise must also improve management through a change in the board of directors or executive officers. If an Enterprise becomes critically undercapitalized, then the Enterprise may be placed in conservatorship or receivership.
FHFA's broader capital regulation authority provided by the amendments made by HERA creates an opportunity for FHFA to develop a new risk-based capital standard and an increased minimum leverage requirement. FHFA's authority to establish risk-based capital requirements was amended under HERA by removing the specific stress test requirements that had been mandated for OFHEO's rulemaking and providing FHFA with the authority to establish risk-based capital requirements “to ensure that the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.”
Section 165
The Enterprises' business model of supporting single-family and multifamily housing consists of both a guarantee business and a portfolio business. In the portfolio business, the Enterprises issue debt and invest the proceeds in whole loans and mortgage-backed securities. The mortgage securities held in the retained portfolio were traditionally the Enterprises' own guaranteed mortgage-backed securities. In the years leading up to the crisis, however, the Enterprises became active participants in the market for private-label mortgage securities, which exposed the Enterprises to significant fair value losses.
The Enterprises earned net interest income on the difference between rates on the mortgage securities (interest income) and the debt costs (interest expense) on their retained portfolio business. The net interest income was at risk since longer-term assets were funded by shorter-term debt. The Enterprises managed this duration mismatch using interest-rate swaps and “swaptions” in the derivatives market. By holding leveraged positions in mortgage securities and funding them with shorter-term debt, the Enterprises took on substantial market risks, in addition to supporting core business functions. Sources of this market risk include the risk of loss from changes in interest rates and the basis risk associated with imperfect hedging.
The Enterprises also used the retained portfolios to hold whole loans that could not be easily securitized, such as certain affordable loans and loans being reworked through loss mitigation. In addition, the retained portfolios were used to support the cash window for smaller lenders. This use of the retained portfolio supported core business functions and helped the Enterprises to fulfill their mission. However, during the pre-conservatorship period, the purchase of mortgage securities dominated the portfolio business.
In the guarantee business, private lenders participated in the mortgage-backed security swap program and cash window program. Through these programs, private lenders originated loans according to Enterprises' standards, and either exchanged those loans for securities that were guaranteed by either Enterprise, or sold loans directly to the Enterprises for cash. When lenders in the swap program received guaranteed mortgage-backed securities, they often sold those securities to replenish funds, enabling the lenders to make more loans. When smaller lenders sold their loans to the Enterprises for cash, the price they received was the market price for the loans less an implied guarantee fee. The Enterprises were able to quickly aggregate the cash window purchases from multiple smaller lenders and issue the guaranteed securities with a larger pool size directly. In addition, loans purchased through Freddie Mac's cash window or Fannie Mae's whole loan conduit (collectively referred to
In the years leading up to the financial crisis, competition in the primary mortgage market for revenue and market share led mortgage lenders to relax underwriting standards and originate riskier mortgages to less creditworthy borrowers. Many of these loans were packaged into subprime and “Alt-A” private-label securities that were sold without backing from the Enterprises. Investor appetite for these loans enabled lenders to lower standards for underwriting, including credit scores, which increased the potential pool of borrowers and helped to drive up house prices. Consequently, subprime mortgages were given to borrowers with lower credit scores and low down payments.
In addition, Alt-A loans were increasingly offered to borrowers considered riskier than “A” or prime paper and less risky than subprime. Alt-A mortgages were characterized by less than the full documentation by the lender of a borrower's income and assets, which markedly increased the credit risk and fueled speculation. These high-risk loans often had features that made it increasingly difficult for borrowers to repay the loans, including low teaser rates that would reset, balloon payments, prepayment penalties, interest-only periods, and negative amortization. Weak underwriting standards during this period often included inflated appraised values, which compounded the problems. In addition, many loans had “risk-layering” of more than one higher risk attribute, significantly increasing credit exposures.
The private-label securities were divided into tranches with different terms and credit risk attributes. Prior to 2003, the Enterprises maintained relatively high underwriting standards. However, as the Enterprises faced declining market shares of the total mortgage market with the growth of the private-label market, the Enterprises sought to increase business revenue by buying significant amounts of the AAA-rated tranches of private-label subprime and Alt-A securities for their retained portfolios. In addition, the Enterprises guaranteed increasingly larger amounts of Alt-A whole mortgage loans with non-traditional credit standards from lenders through bulk sales, outside of the normal business standards for the guarantee business.
The financial crisis began in 2007 with stresses in the subprime and Alt-A mortgage market. The crisis grew to other financial sectors in the United States and globally. Several large financial firms failed and others had to be supported through government intervention. After the crisis, the Dodd-Frank Act was enacted in the United States, and the Basel III capital standards were adopted globally to promote financial stability.
In the build-up to the crisis, growth in subprime and Alt-A lending drove house prices increasingly higher. The overvaluation of non-traditional mortgages was based on the assumption that house prices would continue to rise. However, as the market for those loans began to weaken, house prices started to decline nationwide, further exacerbating the problems and spreading stress to markets beyond the housing sector. By September 2008 when the Enterprises entered conservatorship, the average U.S. house price had declined by over 20 percent from its mid-2006 peak. Many borrowers were faced with underwater mortgages such that the unpaid balances of the loans exceeded the value of the homes. The economic stress affected not only the subprime and Alt-A mortgages in the Enterprises' guarantee book, but also the mortgages in the guarantee book that had been approved under more traditional mortgage underwriting standards.
The financial crisis had a major impact on the value of the private-label securities held by the Enterprises in their retained portfolios. From 2002 to 2008, Fannie Mae purchased $240 billion of subprime and Alt-A private-label single-family mortgage securities. From 2006 to 2008, Freddie Mac purchased $160 billion of these securities.
The SFAS 157 accounting standard issued in 2006 for fair value accounting required that tradable assets such as mortgage securities that were purchased with the intent to resell in either a short time frame (trading securities) or in a longer time frame (available-for-sale securities) be valued according to their current market value rather than historic cost or some future expected value. When the market for private-label securities collapsed, the value losses had a major financial effect on the holders of these securities. Upon entering conservatorship, the Enterprises ceased buying both subprime and Alt-A securities, and began to wind down those positions.
In addition to the private-label security losses in the portfolio, the guarantee book experienced severe stress from the financial crisis. Fannie Mae's single-family serious delinquency rate rose from 0.65 percent in 2006 to 2.42 percent in 2008, peaking at 5.38 percent in 2009. Subsequently, the delinquency rate fell below 2.00 percent by 2014 and to 1.24 percent at the end of 2017. Freddie Mac's delinquency rate rose from 0.42 percent in 2006 to 1.83 percent in 2008, peaking at 3.98 percent in 2009. At the end of 2017, ten years after the start of the financial crisis, Freddie Mac's delinquency rate had fallen to 1.08 percent.
The serious delinquency rates from the financial crisis translated into high credit losses for the Enterprises and a sharp increase in real estate owned properties (REO)
As asset prices fell and other large financial firms failed, it became increasingly difficult for the Enterprises to issue debt to fund their retained portfolios, to raise new capital to cover the mark-to-market losses from private-label securities, and to build reserves for projected credit losses from credit guarantees. In the financial crisis, it became apparent that the Enterprises were not adequately capitalized to absorb these types of shocks.
In response to the substantial deterioration in the housing market that
As conservator, FHFA directs the operations of each Enterprise. The Agency has empowered the Enterprises' boards of directors and senior management to manage most day-to-day operations of the Enterprises, so that the companies can continue to support the mortgage markets without interruption. The approach that FHFA uses to exercise control and manage the conservatorships of Fannie Mae and Freddie Mac is discussed in the next section.
While the Enterprises are in conservatorship, the Treasury Department provides Fannie Mae and Freddie Mac with financial support through PSPAs. This support is unprecedented, and was necessary for the Enterprises to be able to meet their outstanding obligations and to continue to provide liquidity to the mortgage market. The initial PSPAs in September 2008 included an initial issuance to the Treasury Department of preferred stock with a liquidation preference of $1 billion each in Fannie Mae and Freddie Mac and warrants for a 79.9 percent common equity stake in each Enterprise.
Quarterly draws were designed to allow each Enterprise to maintain positive net worth. The maximum permitted amount was set at $100 billion for each Enterprise. The dividend rate on senior preferred stock purchased by the Treasury Department was set at 10 percent. In addition, the PSPAs provided for a “periodic commitment fee” to compensate the Treasury Department for its continuing commitment to purchase further senior preferred stock, up to a maximum commitment amount, as necessary to maintain the solvency of the Enterprises. (The Treasury Department regularly waived that fee, and in the August 2012 third amendment to the PSPAs, the fee was indefinitely suspended for so long as the “net worth sweep” established by that amendment remained in effect.) The PSPAs also included a requirement for each Enterprise to reduce the size of the retained portfolio by at least 10 percent each year, but allowed a $250 billion portfolio per Enterprise to support core business functions. The first amendment to the agreement in May 2009 doubled the maximum cumulative draw per Enterprise to $200 billion, and a second amendment in December 2009 replaced the maximum draw amount with a formulaic approach.
The third amendment to the agreement in August 2012 replaced the 10 percent dividend and the periodic commitment fee with a variable structure, under which the net income of each Enterprise in excess of a small capital buffer (the “Applicable Capital Reserve Amount”) is swept to the Treasury Department. In many quarters, the payment equals quarterly net profits. With this amendment, all of the Enterprises' earnings are used to benefit taxpayers. The third amendment also provided for the uniform reduction of the Applicable Capital Reserve Amount from $3 billion to $0 at the end of 2017. In addition, the third amendment increased the rate of reduction in the size of the retained portfolios. Each Enterprise must reduce its portfolio by 15 percent per year, which is a faster reduction rate than the previous 10 percent annual reduction. This reduces the maximum retained portfolios to $250 billion by the end of 2018.
In December 2017, the PSPAs were revised to restore the Applicable Capital Reserve Amount to $3 billion. FHFA considers this capital reserve amount to be sufficient to cover normal fluctuations in income in the course of each Enterprise's business.
FHFA uses four key approaches to manage the conservatorships of Fannie Mae and Freddie Mac. First, it establishes the overall strategic direction for the Enterprises in the Strategic Plan for the Conservatorships and an annual scorecard. Next, within the scope of the Strategic Plan and annual scorecard, FHFA authorizes the board of directors and senior management of each Enterprise to carry out the day-to-day operations of the companies. Third, for certain actions which FHFA has carved out as requiring advance approval by the Agency, it reviews and considers those requests. Finally, FHFA oversees and monitors the Enterprises' activities.
FHFA's conservatorship strategic plan has three goals: (1) To maintain foreclosure prevention activities and new credit availability in a safe and sound manner, (2) to reduce taxpayer risk through increasing the role of private capital, and (3) to build a new securitization infrastructure. The annual scorecards provide more specific direction for meeting these goals. FHFA reports to the public on its yearly activities through a number of reports, including an Annual Report to Congress, scorecard progress reports, credit risk transfer progress reports, and updates on the implementation of the common securitization platform and single security.
As discussed earlier, the Enterprises' business model before conservatorship of supporting single-family and multifamily housing traditionally consisted of both a guarantee business and a portfolio business. In the guarantee business, lenders may exchange loans for a guaranteed mortgage-backed security, which may then be sold by the lender into the secondary market to recoup funds to make more loans, or they may sell loans directly to an Enterprise through the cash window. The Enterprises purchase loans through the cash window from multiple smaller-volume lenders to aggregate and later securitize and guarantee. Loans purchased through the cash window are held in portfolio until they are securitized and become part of the guarantee business. The Enterprises charge a guarantee fee to cover the costs of providing the guarantee. In the portfolio business, the Enterprises invest in assets such as whole loans or mortgage-backed securities, and funds those purchases with debt issuances.
Consistent with the terms of the PSPAs with the Treasury Department, the portfolio business has been reduced substantially in size during conservatorship, with the guarantee business assuming a much larger role. While the portfolio business involves both credit and market risk, in the guarantee business the Enterprises assume the credit risk and the market risk is borne by private investors in the guaranteed mortgage-backed securities. In conservatorship, consistent with direction provided by FHFA in its strategic plan and annual scorecard, the Enterprises have developed programs to transfer a significant portion of the credit risk in the single-family guarantee business to the private sector.
In addition to reducing the size of the retained portfolios, the Enterprises have also strengthened underwriting and
The Enterprises charge fees to lenders in return for guaranteeing the credit risk on mortgage-backed securities. In response to the housing crisis and in conservatorship, the Enterprises have made a number of changes to these guarantee fees. As a result, the average single-family guarantee fee increased from 22 basis points in 2007 to 57 basis points in 2016.
In 2008, to better align fees with credit risk, the Enterprises increased ongoing guarantee fees and added two new upfront fees: A fee based on the combination of a borrower's credit score and loan-to-value ratio, and a 25 basis point adverse market charge. In late 2008 through 2011, the Enterprises gradually raised fees and further refined their upfront fee schedules. In late 2011, as mandated by the Temporary Payroll Tax Cut Continuation Act of 2011,
In 2012, FHFA directed the Enterprises to raise fees by an additional 10 basis points on average to better compensate taxpayers for the Enterprises' credit risk. Fees were raised in a manner that helped eliminate volume-based discounts and thereby provide a level playing field for lenders of all sizes.
In 2013, FHFA announced another round of fee increases but subsequently suspended the implementation of those changes in order to perform a comprehensive review of the Enterprises' guarantee fees. After completing that review in 2015, FHFA directed the Enterprises to implement certain adjustments. These adjustments included the elimination of the adverse market charge in all markets and targeted increases for specific loan groups. The set of fee changes was approximately revenue neutral with little to no impact for most borrowers.
In 2016, in response to findings in its ongoing quarterly guarantee fee reviews, FHFA established minimum guarantee fees by product type to help ensure the continued safety and soundness of the Enterprises.
Under the PSPAs with the Treasury Department and direction from FHFA, the unpaid balance of each Enterprise's mortgage portfolio is subject to a cap that decreases by 15 percent each year until the cap reaches $250 billion. The Enterprises have made significant progress on reducing their retained portfolios, and toward using the portfolios to support core business activities rather than as a source of investment income. The Enterprises have reduced their retained portfolios by over 60 percent since 2009, and both Enterprises are ahead of schedule in meeting the 2018 maximum portfolio limits.
Most of the portfolio reduction has resulted from prepayments and regular amortization of mortgages. The Enterprises have also sold less-liquid assets, such as private-label securities and non-performing and re-performing loans, in order to transfer risk to private investors. The Enterprises also securitized certain re-performing mortgages held on their books and sold those securities into the market. Fannie Mae's holdings of Fannie Mae-guaranteed securities fell from $229 billion at the end of 2008 to $49 billion in 2017, and holdings of other securities fell from $133 billion to $5 billion over the same period. Freddie Mac's retained portfolio experienced similar declines, as holdings of Freddie Mac-guaranteed securities fell from $425 billion in 2008 to $132 billion in 2017, and other mortgage securities fell from $269 billion to $14 billion over the same period.
The Enterprises' retained portfolios now primarily support the core business activities of aggregating loans from single-family and multifamily lenders to facilitate securitization, and holding delinquent loans in portfolio to facilitate loan modifications in order to keep borrowers in their homes and reduce Enterprise losses. The portfolios also support certain affordable products that cannot be easily securitized. In addition, the Enterprises' retained portfolios may be used to support underserved markets under Duty-to-Serve Plans that the Enterprises have begun to implement in 2018.
The Enterprises have significantly expanded their practice of transferring credit risk to the private sector in recent years. Credit risk transfer (CRT) has long been a part of each Enterprise's multifamily business. In 2016, the Enterprises transferred a portion of credit risk to private investors on over 90 percent of their combined multifamily acquisition volume. In 2013, the Enterprises began to develop programs to transfer a portion of the credit risk on their single-family new-acquisition businesses. The purpose is to reduce the risk to the Enterprises and taxpayers of future borrower defaults where it is economically sensible to do so.
FHFA assesses the Enterprises' CRT programs using certain core principles. The transactions must transfer a meaningful amount of credit risk to private investors to reduce taxpayer risk, and the cost of the credit risk transfers must be economically sensible in relation to the cost of the Enterprises self-insuring the risk. In addition, the transactions may not interfere with the Enterprises' core business, including the ability of borrowers to access credit. The CRT programs are intended to attract a broad investor base, be scalable, and incorporate a regular program of issuances. In transactions where credit risk may not be not fully collateralized, the program counterparties must be financially strong and able to fulfill their commitments even in adverse market conditions.
Loans targeted for single-family CRT include fixed-rate mortgages with loan-to-value ratios greater than 60 percent and original term greater than 20 years. These loans carry the majority of the Enterprises' credit risk exposure. Loans targeted for credit risk transfer have grown from 42 percent of total Enterprise acquisitions in 2013 to 62 percent of acquisitions in the first half of 2017. The Enterprises continue to assume the full credit risk on less risky loans with lower loan-to-value ratios and shorter terms, as well as on certain higher risk legacy loans where the economics do not favor CRT transactions. The Enterprises also transfer risk on loans outside of the targeted loan population.
The single-family CRT programs, implemented since 2013, supplement the more traditional credit enhancements required by the Enterprises' charters. The charters require loans with loan-to-value ratios above 80 percent to have loan-level credit enhancement, most often obtained through private mortgage insurance. From 2013 through the first half of 2017, the Enterprises transferred a portion of the credit risk through their single-family CRT programs on $1.8 trillion of mortgages with a combined risk in force of $61 billion, or 3.4 percent of the credit risk. During the same period, primary mortgage insurers also covered a portion of credit risk on $837 billion of unpaid principal
Since 2013, the CRT programs have become a core part of the single-family business. In the second quarter of 2017, the Enterprises transferred risk on $213 billion of mortgages, with risk in force of $6 billion or nearly 3 percent of risk. Debt issuances accounted for 70 percent of the risk in force, insurance and reinsurance transactions accounted for 25 percent, and lender risk sharing accounted for the remaining 5 percent. Front-end reinsurance transactions increased from 2 percent of the risk in force in the first quarter of 2017 to 4 percent in the second quarter. In the first half of 2017, loans targeted for CRT represented 62 percent of the Enterprises' single-family loan production.
Enterprise debt issuances have been the primary risk transfer vehicle to date. Fannie Mae uses a structure called Connecticut Avenue Securities (CAS), while Freddie Mac issues Structured Agency Credit Risk (STACR) securities. CAS and STACR have been designed to track the performance of a reference pool of loans previously securitized in Enterprise guaranteed MBS. These debt transactions are fully collateralized, since investors pay for the notes in full and absorb credit losses through a reduction in the principal due on the underlying notes. The Enterprises typically retain the first 50 basis points of expected losses in most transactions because purchasing protection for this portion may not offer economic benefits. While debt transactions have been the primary CRT method, the Enterprises have worked to broaden their investor base through other structures, and to compare executions across different structures and market environments.
Insurance and reinsurance transactions are considered part of the Enterprises' CRT programs and are separate from the Enterprises' charter requirements for loans with loan-to-value ratios above 80 percent. These transactions generally involve pool-level policies that cover a specified amount of credit risk for a large pool of loans. Fannie Mae uses a structure called Credit Insurance Risk Transfer (CIRT), while Freddie Mac uses the Agency Credit Insurance Structure (ACIS). These structures are partially collateralized, and the Enterprises distribute risk among a group of highly-rated insurers and reinsurers to reduce counterparty and correlation risk.
In senior/subordinate transactions, an Enterprise sells a group of mortgages to a trust that securitizes the cash flows into different bond tranches. Prior to 2017, super conforming loans that would otherwise have backed Freddie Mac mortgage-backed securities were used as collateral in Freddie Mac's single-family senior/subordinate transactions called Whole Loan Securities (WLS). The subordinate and mezzanine tranches, which are not guaranteed, absorb the expected and unexpected credit losses. The senior bonds, which were guaranteed by the Enterprise, have historically traded at a slight discount to comparable Freddie Mac mortgage-backed securities. In order to provide a more scalable and economic solution, in 2017 Freddie Mac introduced a revised structure to its WLS, called STACR Securitized Participation Interests (SPI). This new structure allows for the issuance of mortgage-backed securities rather than guaranteed senior certificates to improve the pricing execution in the credit risk transfer. The STACR SPI trust will continue to issue unguaranteed credit certificates as subordinate and mezzanine tranches. In contrast to synthetic CRT structures, the senior/subordinate structure is eligible for purchase by real estate investment trusts (REITs).
Another form of single-family risk structure is lender front-end CRT, where the credit risk is transferred prior to or simultaneous with the Enterprise loan acquisition. Lender front-end risk transfer can be structured through the issuance of securities with the lender holding the credit risk by retaining the securities, or by selling the securities to credit risk investors. Alternatively, in traditional lender recourse transactions, the lender may forgo securities issuance and simply retain the credit risk. The lender will often, but not always, fully collateralize its obligation. While the Enterprise charter requirement for loan-level credit enhancement is typically through private mortgage insurance, the charters allow the Enterprises to accept lender recourse as an alternative, so lender retention of credit risk has been used to a lesser extent in the past. However, this lender recourse has not always been fully collateralized.
While the newest forms of single-family CRT started in 2013, risk sharing has been an integral part of the Enterprises' multifamily business for many years. Fannie Mae's primary multifamily risk-transfer program exists through its Delegated Underwriting and Servicing (DUS). In this program, lenders typically share up to one-third of the credit losses on a pro-rata basis with the Enterprises. In an effort to broaden its program offerings, Fannie Mae completed the first non-DUS CRT in 2016 when it transferred a portion of its credit risk to the reinsurance industry. Freddie Mac's multifamily risk-transfer program generally exists through its K-Deal program in which Freddie Mac purchases loans that are put into diversified pools, and placed into multiclass securities for sale to private investors. The subordinate and mezzanine bond tranches are not guaranteed by Freddie Mac. Instead, the subordinate or “B-piece” holders are in the first-loss position in the event of a mortgage default. If losses exceed the “B-piece” level, holders of the mezzanine bond tranche assume the additional losses. The subordinate and mezzanine tranches are sized such that virtually all credit risk is transferred to the investors in those securities. The senior bonds comprise the remainder of the K-Deal and are guaranteed by Freddie Mac.
The Enterprises are required to emphasize sound underwriting practices in their purchase guidelines. Since entering conservatorship, the Enterprises have continued to refine automated underwriting systems to better assess risk, reduce risk layering, improve the use of compensating factors, and enable access to credit in a safe and sound manner. The Enterprises launched the Uniform Mortgage Data Program to standardize data in the mortgage industry to help improve loan quality and mortgage risk management. The Enterprises also revamped the Representation and Warranty Framework to reduce lender uncertainty around requirements to repurchase loans from the Enterprises and to support access to credit.
In the Dodd-Frank Act, Congress adopted ability-to-repay requirements for nearly all closed-end residential mortgage loans. Congress also established a presumption of compliance with these requirements for a certain category of loans called Qualified Mortgages (QM). The Consumer Financial Protection Bureau (CFPB) adopted an ability-to-repay rule to implement these provisions.
A loan is generally considered a Qualified Mortgage if: (1) The points and fees do not exceed 3 percent of the loan amount, (2) the term does not exceed 30 years, (3) the loan is fully amortizing with no negative amortization, interest-only, or balloon features, and (4) the borrower's debt-to-income (DTI) ratio does not exceed 43 percent. CFPB also defined a special transitional class of QM loans that are not subject to the 43 percent DTI limit if they are eligible for sale to either Enterprise.
Before the CFPB rule became final, the Enterprises had already improved underwriting standards and eliminated purchases of the higher risk products such as negative amortization and interest-only loans. In 2013, after the CFPB rule became final, FHFA directed each Enterprise to acquire only loans that meet the points and fees, term and amortization requirements of the CFPB's rule for Qualified Mortgages.
FHFA has also worked with the Enterprises to develop effective loss mitigation programs to minimize losses and enable borrowers to avoid foreclosure whenever possible. The Enterprises aligned their loss mitigation standards and developed updated loan modification and streamlined refinance products. The Enterprises are also pursuing efforts to stabilize distressed neighborhoods through the Neighborhood Stabilization Initiative. Better underwriting standards, improved loss mitigation, and an improving economy have resulted in the Enterprises' serious delinquency rates falling to their lowest level since the Enterprises entered into conservatorship in 2008.
During conservatorship, the Enterprises have worked to build a new single-family securitization infrastructure. This includes development of a common securitization platform (CSP) and a single Enterprise mortgage-backed security. Fannie Mae and Freddie Mac established Common Securitization Solutions, LLC (CSS) as a jointly-owned company to develop and operate the platform. The platform will replace some of the proprietary systems used by the Enterprises to securitize mortgages and perform the back office functions.
In 2015, FHFA announced a two-part process for the CSP and single security. Release 1, which was implemented in 2016, uses the CSP to issue Freddie Mac's existing single-class securities. Release 2, the implementation of which is planned for the second quarter of 2019, will enable the issuance of the single security called the Uniform Mortgage Backed Security (UMBS) through the CSP. The single security initiative will increase the liquidity of the TBA market for newly issued mortgage-backed securities and will eliminate the differences in pricing between Fannie Mae and Freddie Mac securities.
When FHFA placed the Enterprises into conservatorship, it replaced most members of the boards of directors and many senior managers. Through conservatorship and regular supervisory oversight, the Agency required the Enterprises to improve risk management, update legacy systems, and improve data management. As part of its supervision function, FHFA issues advisory bulletins, which communicate FHFA's supervisory expectations to the Enterprises on specific supervisory matters and topics. In addition, through its supervision program, FHFA's on-site examiners conduct supervisory activities to ensure safe and sound operations of the Enterprises. These supervisory activities include the examination of the Enterprises to determine whether they comply with their own policies and procedures and regulatory and statutory requirements, and whether they comply with FHFA directives and meet the expectations set in FHFA's advisory bulletins.
FHFA has reviewed and used the regulatory capital standards applicable to commercial banks as a point of comparison in developing the proposed capital requirements for the Enterprises. In conducting this evaluation, it was important for FHFA to consider both similarities and differences in the Enterprise and bank business models. This section reviews capital requirements for depository institutions and then discusses the differences in Enterprise and bank business models.
The Basel Accords set the international framework for bank capital requirements. The initial framework, Basel I, was replaced by Basel II, which was in place during the financial crisis. After the financial crisis, regulators adopted standards consistent with Basel III. Each country has a different way of applying the Basel standards to meet their national legal framework. The Federal Reserve Board (Board), Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation have federal regulatory and supervisory jurisdiction over banks in the United States.
The Basel Accords have evolved over time. The 1988 Basel Accord, also known as Basel I, was implemented by the Group of Ten (G-10) countries in 1992. In Basel I, credit risk was addressed by using simple ratios, there was little attention given to market risk, and no provision was made for operational risk. The Basel II update was initially published in 2004 to make the capital calculation more risk sensitive. Basel II had three pillars: Risk-based capital requirements, supervisory review, and market discipline. For the risk-based capital requirements under Basel II, credit risk, market risk, and operational risk were all quantified based on data, and credit risk could be quantified using either the standardized approach or internal ratings based (IRB) approach. Under the supervisory review pillar, Basel II provided a framework for supervisory review of systemic, concentration, and liquidity risk among others. Under the market discipline pillar, Basel II included a set of disclosure requirements to allow market participants to better understand an institution's capital adequacy.
When the U.S. banking regulators issued the final Basel II rules in late 2007 and in 2008, the regulators required each bank to follow the set of rules that was the most conservative for the bank. The largest banks were required to use the internal ratings based approach, while the smaller banks were given a choice between using the standardized approach or the internal ratings based approach.
Basel III was developed in response to the financial crisis and was agreed to by Basel members in 2010-11. Basel III strengthened the requirements in Basel II and introduced bank liquidity requirements to reduce the risk of a run on a bank. Basel III also added capital buffers as extra capital cushions on top of regulatory capital minimums, to absorb unexpected shocks. Basel III is being phased in through 2019.
Under current regulations implemented by U.S. regulators to align with Basel III, U.S. banks must meet certain leverage and risk-based capital requirements to be considered adequately capitalized. These capital adequacy standards protect deposit holders and the stability of the financial system. Two types of capital are measured: Tier 1 and Tier 2. Tier 1 capital comprises common stock, retained earnings, non-cumulative perpetual preferred stock, and accumulated other comprehensive income (AOCI). Common equity Tier 1 capital excludes cumulative preferred stock. Tier 2 capital is supplementary
Banks must also meet certain risk-based capital ratios and leverage ratios under existing regulations. As part of the risk-based capital standard for credit risk, the capital ratio is the ratio of capital to risk-weighted assets (RWA). Basel allows banks to choose between two methods for calculating their capital requirement for credit risk, and U.S. regulators have implemented both methods under existing regulations: The standardized approach and the internal ratings based approach. Under the standardized approach, regulators require use of prescribed risk weights for every type of exposure to determine the credit risk RWA amount. Mortgages have a risk weight of 50 percent under the standardized approach, regardless of the loan-to-value ratio, credit score, and other risk attributes. The largest banks in the U.S. are required to use the internal ratings based (IRB) approach to determine the risk weights of asset classes. In the IRB approach, the capital charge for a mortgage varies based on the risk attributes of the specific mortgage loan using the credit model and loss experience of the bank. However, when calculating minimum capital requirements, under the Dodd-Frank Act's Collins Amendment large U.S. banks must compute their risk-weighted assets using both a standardized approach and the advanced approach, and must use the higher of these two numbers when computing pre-stress risk-based capital ratios. Because the standardized approach often results in a higher ratio, the Collins Amendment effectively makes the standardized approach the binding requirement for large U.S. banks, and serves to place all banks, regardless of size, on equal footing in terms of minimum risk-based capital requirements. In contrast to the risk-based capital ratios, the leverage ratios compare capital to assets without any weighting for risk.
The Federal Deposit Insurance Act requires insured depository institutions and federal banking regulators to take prompt corrective action to resolve capital deficiencies as defined under the prompt corrective action framework.
The banking regulators also mandate three capital buffers relative to the risk-based capital ratios: The capital conservation buffer, the countercyclical capital buffer, and the global systemically important bank (G-SIB) surcharge. Banks must meet applicable buffers to avoid restrictions on capital distributions.
The capital conservation buffer requires banks to maintain each of the three risk-based capital ratios (Common Equity Tier 1, Tier 1, and Total Capital) at levels in excess of 2.5 percent above the minimum required levels. The countercyclical capital buffer requires banks to maintain an additional amount of excess capital during economic periods of non-stress. The countercyclical buffer has a potential range of 0 percent to 2.5 percent, and is currently set to zero. As it is structured, the countercyclical capital buffer functions as an extension of the capital conservation buffer. The G-SIB surcharge is applied in addition to the capital conservation buffer, but only on the largest banks identified as globally systemically important. The G-SIB surcharge is based on defined criteria that determine the size of the bank's systemic footprint, which represents the risk that the bank poses to the global financial system in excess of risk posed by financial institutions not subject to the surcharge. The different buffers are being phased-in through 2019.
In addition to the risk-based capital requirement, federal banking regulators have also established a 4 percent Tier 1 leverage ratio that measures the Tier 1 capital available relative to average consolidated assets. This measure does not capitalize off-balance sheet exposures.
Bank regulatory capital rules also require calculation of a supplementary leverage ratio (Tier 1 capital/total leverage exposure) for banks that are subject to that requirement starting in January 2018.
In addition to the requirements that are tied to a prompt corrective action framework, the Federal Reserve Board's annual CCAR also assesses the capital adequacy of large bank holding companies with at least $50 billion in assets. The CCAR review is based on a going-concern structure, where the bank holding company must hold enough capital to withstand a severely adverse scenario, continue to lend, and meet creditor obligations over a nine-quarter period of time. The CCAR stress tests are tied to the Board's capital plan requiring that these bank holding companies submit a capital plan to the Federal Reserve each year. The bank holding companies are required to report the results of stress tests conducted under supervisory scenarios provided by the Board and under a baseline scenario and a stress scenario designed by the bank holding company.
The Board's qualitative assessment of each bank holding company's capital plan considers the institution's capital planning process, including the stress testing methods, internal controls, and governance. The quantitative assessment of the plan is based on the supervisory and institution-run stress tests that are conducted in part under the Dodd-Frank Act stress test rules.
Under CCAR, during anticipated stress periods defined by the stress test scenarios required by the Board, banks are expected to maintain capital levels above the minimum risk-based and leverage capital ratios for adequately capitalized institutions under the prompt corrective action framework described earlier.
While the Enterprises are comparable in size to some of the largest depository institutions, the relative risks of banks compared to the Enterprises differ in important ways. These differences include, among others, the sources and associated risk level of income and assets, differences in funding risk, and the relative exposure to mortgage assets. Each of these differences is discussed below.
First, while banks have a more diversified source of income and assets compared to the Enterprises, the overall risk of Enterprise mortgage assets is lower than that of banks. Banks are depository institutions that attract customer deposits on which banks pay interest expense, and lend those funds through loans in diversified asset classes to other customers from whom the bank earns interest income, thereby earning net interest income. Bank lending covers a number of different asset classes, not just real estate lending, such as credit cards, car loans, and business loans. Since the repeal of the Glass-Steagall Act in 1999, banks have also been more active in earning non-interest income through brokerage fees and other business activities. However, traditional depository institutions still rely primarily on net-interest income, as compared to investment banks.
The Enterprises are monoline businesses focused on mortgage assets. For banks, mortgage assets carry a 50 percent risk weight in the Basel standardized framework. Therefore, the Enterprises' aggregate risk weight is lower than the average risk weight of banks with an abundance of assets with risk weights higher than 50 percent. To derive the risk-weighted asset density of bank assets, FHFA looked at the 31 largest bank holding companies subject to CCAR, to calculate an average risk-weighted asset density using end-of-quarter data from the first quarter of 2011 through the fourth quarter of 2014. The analysis estimated an overall risk-weighted asset density of 72 percent for the banks compared to 50 percent for residential mortgages.
Second, banks rely on more volatile funding sources compared to the Enterprises, which exposes banks to a greater degree of funding risk during times of market and economic stress. Banks use short-term customer deposits and debt as sources of funding for their business activity, both of which can leave a bank in need of new funding sources during times of economic uncertainty, such as during the recent financial crisis. In such situations, a bank could find that new sources of debt become considerably more expensive, if such sources are available at all. This type of funding risk is commonly referred to as rollover risk. By comparison, the Enterprises' core credit guarantee business of purchasing and securitizing mortgage loans provides a more stable source of funding that cannot be withdrawn during periods of market and economic stress, and is therefore not subject to rollover risk. Investors purchasing Enterprise mortgage-backed securities provide the companies with match-funding for these mortgage assets. The funding risk associated with the Enterprises' retained portfolios is more comparable to the funding risks of banks described above.
Third, even when comparing risk specifically associated with mortgage lending the Enterprises hold less risk compared to the mortgage investments of banks. Banks hold a larger portion of mortgages—both single-family and multifamily loans—as whole loans on their balance sheets. This exposes banks to interest rate, market, and credit risks associated with those loans. On the other hand, through their core guarantee business of purchasing mortgage loans and issuing mortgage-backed securities, the Enterprises transfer the interest rate and market risk of these loans to private investors. In addition, as mentioned above, the Enterprises also face substantially less funding risk compared to banks because of the match funding provided through mortgage-backed securities investors.
While the Enterprises remain responsible following securitizations for guaranteeing the credit risk of securitized loans, they have also developed ways to transfer significant parts of their credit risk to private market participants. During conservatorship, the Enterprises have developed credit risk transfer programs to transfer a portion of the credit risk for single-family mortgage purchases to private investors. In addition, the Enterprises' unique business models transfer credit risk on multifamily loans to private investors. Thus, the Enterprises have transferred a significant portion of the credit risk associated with their whole mortgage loans, whereas comparable whole mortgage loans are typically held by banks on their balance sheets.
The risk associated with the Enterprises' retained portfolios is similar in nature to risks held by banks. However, the Enterprises' retained portfolios have declined by more than a combined 60 percent while in conservatorship and are required by the PSPAs not to exceed $250 billion. While the Enterprises still have legacy assets that were purchased before conservatorship as part of their retained portfolios, their ongoing use of retained portfolios during conservatorship has focused on supporting their core credit guarantee business. The Enterprises use their cash window to purchase single-family and multifamily loans directly from lenders, often smaller lenders, and aggregate these loans for subsequent securitization. The cash window enables smaller lenders to access the secondary market at competitive rates. The Enterprises also use their retained portfolios to repurchase non-performing loans as part of loss mitigation efforts to reduce losses for the Enterprises and taxpayers, and to help homeowners stay in their homes whenever possible.
FHFA is also not including separate buffers in this proposed rule beyond the proposed risk-invariant going-concern buffer for several reasons. First, FHFA believes that the robust features it selected for the proposed risk-based capital requirements make including a separate buffer unnecessary. These features include (1) covering losses for different loan categories for a severe stress event comparable to the recent financial crisis,
Section 165 of the Dodd-Frank Act required the annual stress testing of certain financial companies with consolidated assets over $10 billion that are supervised by a federal regulator. Consistent with the Act, FHFA conducts stress tests of the Enterprises to determine whether each firm has the capital necessary to absorb losses during a period of adverse economic conditions. While in conservatorship, the Enterprises receive financial support through the PSPAs with the Treasury Department. Although the PSPAs restrict the ability of the Enterprises to hold equity capital beyond their approved capital buffers, FHFA expects the Enterprises to have procedures in place to support sound business decisions and the Enterprises have continued to consider capital levels and return on capital as integral parts of their business decision-making processes.
FHFA's stress testing rule establishes the basic requirements for the Enterprises on how to conduct the Dodd-Frank Act Stress Test (DFAST) each year. The Dodd-Frank Act requires financial regulators to use generally consistent and comparable stress scenarios. FHFA has generally aligned the stress scenarios for the Enterprises with the Federal Reserve Board's supervisory scenarios for annual stress testing required under the DFAST rule and CCAR. Each year, FHFA provides the Enterprises with specific instructions and guidance for conducting the stress tests, as well as for reporting and publishing results.
The annual stress testing process includes three distinct scenarios—baseline, adverse, and severely adverse—with each scenario covering a nine-quarter period. The scenarios include macroeconomic variables, interest-rate variables, and indices (
Since the Enterprises began conducting the annual DFAST process in 2014, the severely adverse scenario has generally represented economic conditions similar to those that occurred during the 2008 financial crisis. Although the specific scenario variables differ from year to year, the conditions represented by the macroeconomic, interest rate, and asset price shocks in the severely adverse scenario are consistent with a major market disruption similar to the disruption experienced in the 2008 crisis.
The severely adverse scenario also includes a global market shock component which is tailored to include particular risks faced by the Enterprises. This shock is treated as an add-on to the macroeconomic scenario and is taken as an instantaneous loss and reduction of capital in the first quarter of the nine-quarter planning horizon. It is assumed that none of these losses are recovered over the nine quarters. The Enterprises apply the shock to portfolio assets that are subject to fair value accounting (
The Federal Reserve Board releases DFAST supervisory scenarios in January or February of each year. FHFA provides the Enterprises with summary instructions and guidance within 30 days following the issuance of the Federal Reserve Board's final element of its supervisory scenarios. The instructions include submission templates for use in compiling and reporting the DFAST results for the three stress scenarios. The Enterprises conduct the stress tests and submit their results to FHFA on or before May 20 each year. For capital planning purposes, the Enterprises focus on the severely adverse scenario. FHFA requires the Enterprises to publicly disclose the DFAST stress test results under the severely adverse scenario between August 1 and August 15 each year.
For DFAST reporting purposes, FHFA requires the Enterprises to report two sets of financial results for the severely adverse scenario: One with and one without the establishment of a valuation allowance on deferred tax assets. In general, deferred tax assets are considered a capital component because these assets have loss absorbing capability by offsetting losses through the reduction of taxes. A valuation allowance on deferred tax assets is typically established to reduce deferred tax assets when it is more likely than not that an institution would not generate sufficient taxable income in the foreseeable future to realize all or a portion of its deferred tax assets. A valuation allowance on deferred tax assets is a non-cash charge resulting in a reduction in income and the retained earnings component of capital.
In 2008, during the financial crisis, Fannie Mae and Freddie Mac established partial valuation allowances on deferred tax assets of $30.8 billion and $22.4 billion, respectively. The reduction in capital from partial valuation allowances in 2008 contributed to the Enterprises' draws from the Treasury Department. Both Enterprises released the valuation allowances on deferred tax assets several years later, which resulted in a benefit to income at both Enterprises. For full transparency of the potential impact of deferred tax assets on the Enterprises' capital positions in a stress scenario, FHFA requires the Enterprises to disclose the severely adverse results both with and without the establishment of a valuation allowance on deferred tax assets. In the 2017 DFAST severely adverse scenario, for results that do not include establishing a valuation allowance on deferred tax assets, Fannie Mae's cumulative stress losses were $15 billion and Freddie Mac's cumulative stress losses were $20 billion. For results that include establishing a valuation allowance on deferred tax assets, Fannie Mae's cumulative stress losses were $58 billion and Freddie Mac's cumulative stress losses were $42 billion.
In summary, in developing the proposed rule, FHFA considered all information in this proposal and developed the proposed rule with the following factors in mind:
1. The Enterprises should operate under a robust capital framework that is similar to capital frameworks applicable to banks and other financial institutions, but appropriately differentiates from other capital requirements based on the actual risks associated with the Enterprises' businesses;
2. In proposing capital requirements, FHFA should use the substantial expertise and experience gained during the protracted conservatorships of the Enterprises to ensure that the capital requirements secure the safety and soundness of the Enterprises while also supporting their statutory missions to foster and increase liquidity of mortgage investments and promote access to mortgage credit throughout the Nation;
3. FHFA considers it prudent to have risk-based capital requirements that include components of credit risk, operational risk, market risk, and a risk-invariant going-concern buffer; that require full life-of-loan capital for each loan acquisition; that are calculated to cover losses in a severe stress event comparable to the recent financial crisis, but with house price recoveries that are somewhat more conservative than experienced following that crisis; and that do not count future Enterprise revenue toward capital;
4. FHFA's ongoing authority under the Safety and Soundness Act to increase by order or regulation capital requirements—either risk-based or minimum leverage—reduces the need to put in place at this time specific limited-purpose or countercyclical buffers; and
5. It may be necessary in the future for FHFA to revise this rule or to develop a separate capital planning rule to more fully address stress testing of the Enterprises, the timing and substance of which will depend on the status of the Enterprises after housing finance reform.
The Enterprises' assets and operations are exposed to different types of risk, and the proposed risk-based capital requirements would provide a granular and comprehensive approach for assigning capital requirements to individual asset and guarantee categories. The proposed risk-based capital requirements cover credit risk, including counterparty risk, as well as market risk and operational risk capital requirements for each asset and guarantee category. The proposed risk-based capital requirements also include a going-concern buffer, which would require the Enterprises to hold additional capital beyond what is required to cover economic losses during a severe financial stress event in order to maintain market confidence.
The credit risk capital requirements in the proposed rule are based on unexpected losses (stress losses minus expected losses) over the lifetime of mortgage assets. The proposed requirements were developed using historical loss data, including loss experience from the recent financial crisis. In addition, the proposed rule requires the Enterprises to hold this capital at the time of purchasing or guaranteeing an asset, and it does not, in general, count any future revenue toward the credit risk capital requirements.
For single-family and multifamily whole loans and guarantees, the proposed credit risk capital requirements use look-up tables consisting of base grids and risk multipliers to adjust capital requirements for the risk characteristics of each type of mortgage asset. Under this approach, an Enterprise's required capital will change with the composition of its book of business.
The proposed rule also includes a framework through which the Enterprises' credit risk capital requirements would be reduced to reflect the benefit of credit risk transfer transactions that protect the Enterprises and taxpayers from bearing potential credit losses. FHFA's proposed approach to calculating the capital relief provided by credit risk transfer transactions seeks to capture the credit risk protection provided while also accounting for counterparty risk for those transactions that are not fully funded up front.
The market risk component of the proposed risk-based capital framework establishes specific requirements for the market risk associated with certain Enterprise assets. The proposed approach focuses on capturing the spread risk associated with holding different assets in the retained portfolio: Single-family whole loans, multifamily whole loans, private label securities (PLS), commercial mortgage-backed securities (CMBS) and other assets with market risk exposure.
The operational risk component of the proposed risk-based capital framework establishes an operational risk capital requirement of 8 basis points for all assets and guarantees to reflect the inherent risk in ongoing business operations.
The going-concern buffer component of the proposed risk-based capital framework establishes a 75 basis point requirement for most assets and guarantees, regardless of credit, market, or operational risk capital requirements. This buffer would ensure that the Enterprises maintain at least 75 basis points of capital on any mortgage guarantee, whole loan, or mortgage-related security held by the Enterprises. Based on the current size and composition of the Enterprises' books of business, FHFA estimates that the going-concern buffer would provide the Enterprises with sufficient capital to continue operating without external capital support for one to two years after a stress event.
FHFA sought to reduce model risk by developing the proposed risk-based requirements using a combination of the results from multiple models.
The proposed rule includes two alternative minimum leverage capital requirement proposals for consideration. Under the first approach, the 2.5 percent alternative, the Enterprises would be required to hold capital equal to 2.5 percent of total assets (as determined in accordance with GAAP) and off-balance sheet guarantees related to securitization activities, regardless of the risk characteristics of the assets and guarantees or how they are held on the Enterprises' balance sheets. Under the second approach, the bifurcated alternative, the Enterprises would be required to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets, where trust assets are defined as Fannie Mae mortgage-backed securities or Freddie Mac participation certificates held by third parties and off-balance sheet guarantees related to securitization activities, and non-trust assets are defined as total assets as determined in accordance with GAAP plus off-balance sheet guarantees related to securitization activities minus trust assets. The Enterprises' retained portfolios would be included in non-trust assets. Both the 2.5 percent alternative and the bifurcated alternative are discussed in greater detail in the Minimum Leverage Capital Requirements section.
In considering both the need for and the structure of an updated minimum leverage capital requirement, FHFA has taken into consideration several factors, including (1) how to best set the minimum leverage requirement as a backstop to the risk-based capital requirements; and (2) how to appropriately capture the funding risks of the Enterprises. The Safety and Soundness Act requires that FHFA establish, like other financial regulators, a minimum leverage requirement that can serve as a backstop in the event the risk-based capital standard becomes too low. As discussed earlier, risk-based capital requirements depend on models and, therefore are subject to the risk that the applicable model will underestimate or fail to address a developing risk. Another factor relevant in considering the leverage requirement's role as a backstop is the pro-cyclicality of a risk-based capital framework. Because the proposed risk-based requirements use mark-to-market LTVs for loans held or guaranteed by the Enterprises in determining capital requirements, as home prices appreciate the Enterprises would be allowed to release capital as LTVs fall. Should home prices continue to rise and unemployment continue to fall, as each have done over the last several years, risk-based capital requirements such as the requirements in this proposed rule, would be expected to fall. In this context, a minimum leverage capital requirement would reduce the amount of capital released as risk-based capital levels fell below an applicable leverage requirement. In addition, and as discussed further below, FHFA has authority to adjust components of the risk-based capital requirements as a means of avoiding the pro-cyclical release of capital.
In the banking regulatory context, leverage requirements serve to help mitigate the risk that short-term funding, on which many banks rely, will become unavailable during a stress event. In proposing minimum leverage requirements, FHFA has considered the unique funding risks facing the Enterprises. As discussed in more detail below, in both the single-family and multifamily guarantee business lines the Enterprises are provided a stable source of funding that is match-funded with the mortgage assets they purchase. While these mortgage assets are reflected on the balance sheets of the Enterprises and represent the vast majority of their assets, the funding for these assets has already been provided and cannot be withdrawn during times of market stress.
FHFA is seeking comment on all aspects of both the 2.5 percent alternative and the bifurcated alternative proposed minimum leverage capital requirements, including how the different approaches relate to and complement the proposed risk-based capital measure.
This section provides information about the impact of the proposed rule both at the end of 2007 (December 31, 2007) and at the end of the third quarter of 2017 (September 30, 2017). FHFA is providing this information to inform commenters about the impact the proposed rule would have on the Enterprises' capital requirements both leading up to the crisis and under the Enterprises' current operations in conservatorship. The summary information through the third quarter of 2017 is intended solely to provide context for commenters about what the impact of the proposed rule would be on the Enterprises if the Enterprises were able to build capital, and is specifically not intended by FHFA as suggesting steps toward recapitalizing the Enterprises while the Enterprises are in conservatorship. The summary information also provides context about the impact of the proposed rule on Enterprise business decisions being made while the Enterprises operate in conservatorship. While they are in conservatorship, FHFA expects the Enterprises to include capital assumptions in pricing and business decisions even though the Enterprises are unable to build capital and FHFA has suspended their regulatory capital classifications.
In 2008, the entire net worth of both Enterprises was depleted by losses. The Treasury Department invested in senior preferred stock of both Enterprises in order to offset losses. To offset losses and eliminate negative capital positions, Fannie Mae drew $116 billion from the Treasury Department between 2008 and the fourth quarter of 2011, while Freddie Mac drew $71 billion between 2008 and the first quarter of 2012. Including the loss of net worth at the start of 2008, Fannie Mae lost a total of $167 billion and Freddie Mac lost a total of $98 billion in the housing and financial crisis.
FHFA assessed whether the capital requirements in the proposed rule would have required the Enterprises to hold sufficient capital at the end of 2007, when combined with the Enterprises' revenues, to absorb losses sustained between 2008 and the dates at which the Enterprises no longer required draws from the Treasury Department to eliminate negative net worth—the fourth quarter of 2011 for Fannie Mae and the first quarter of 2012 for Freddie Mac.
FHFA compared each Enterprise's estimated minimum leverage capital requirement under both alternatives and the risk-based capital requirement based on the proposed rule for the entire portfolio of business at the end of 2007 to the Enterprises' peak cumulative capital losses as described above. The
FHFA also compared each Enterprise's single-family credit risk capital requirement as of December 31, 2007 to the Enterprise's single-family lifetime credit losses, where lifetime losses are defined in this section as actual single-family credit losses through June 30, 2017 plus projected remaining lifetime single-family credit losses on the December 31, 2007 portfolio.
A significant portion of the Enterprises' credit losses since 2007 resulted from higher risk loans which the Enterprises no longer purchase or guarantee due to the Ability to Repay and Qualified Mortgage rule issued by the CFPB in 2013 and due to the Enterprises' strengthened underwriting standards. Because the Enterprises no longer purchase these loans, FHFA also assessed whether the credit risk capital requirement under the proposed rule would have been sufficient to cover projected lifetime losses on loans that meet the Enterprises' current acquisition criteria.
In sum, the amount of capital required by the Enterprises under the proposed risk-based capital requirements would have exceeded the cumulative losses, net of revenues earned, at both Enterprises between 2008 and the respective date at which each Enterprise no longer required draws from the Treasury Department. In this analysis, cumulative losses include credit losses on all loans purchased, including those no longer eligible for purchase, and losses due to establishing a valuation allowance on DTAs. In evaluating how the proposed risk-based capital requirements would have applied to the Enterprises at the end of 2007, it is important to note that the proposed rule would establish a risk-based capital requirement for DTAs that would offset the DTAs included in core capital in a manner generally consistent to the U.S. financial regulators' treatment of DTAs.
Fannie Mae's statutory minimum leverage capital requirement was $42 billion as of December 31, 2007. For comparison, and as illustrated in the table below, Fannie Mae's estimated minimum leverage capital requirement as of December 31, 2007 based on the proposed rule would have been $76 billion under the 2.5 percent alternative or $68 billion under the bifurcated alternative. Fannie Mae's estimated minimum leverage capital requirement under either proposed alternative as of December 31, 2007 would have been insufficient to cover Fannie Mae's peak cumulative capital losses of $167 billion. However, Fannie Mae's estimated risk-based capital requirement of $171 billion based on the proposed rule would have exceeded Fannie Mae's peak cumulative capital losses of $167 billion. We include in Fannie Mae's peak cumulative capital losses the valuation allowance on deferred tax assets of $64 billion and revenues of $78 billion earned between 2008 and the fourth quarter of 2011.
Next, we analyzed Fannie Mae's single-family portfolio in the fourth quarter of 2007 and stripped out the loans that would not be acquired today under Fannie Mae's current acquisition criteria. We then added projected future credit losses for the loans that remained to the already realized credit losses to determine Fannie Mae's lifetime single-family credit losses on that portfolio. In both cases, the credit risk capital requirement would have exceeded the projected lifetime credit losses. As illustrated in the table below, Fannie Mae's estimated single-family credit risk
Freddie Mac's statutory minimum capital requirement was $26 billion as of December 31, 2007. For comparison, and as illustrated in the table below, Freddie Mac's estimated minimum leverage capital requirement as of December 31, 2007 based on the proposed rule would have been $54 billion under the 2.5 percent alternative or $53 billion under the bifurcated alternative. Freddie Mac's estimated minimum leverage capital requirement under either proposed alternative as of December 31, 2007 would have been insufficient to cover Freddie Mac's peak cumulative capital losses of $98 billion. However, Freddie Mac's estimated risk-based capital requirement of $110 billion based on the proposed rule would have exceeded Freddie Mac's peak cumulative capital losses of $98 billion by $12 billion. We include in Freddie Mac's peak cumulative capital losses the valuation allowance on deferred tax assets of $34 billion and revenues of $64 billion earned between 2008 and the first quarter of 2012.
Next, we analyzed Freddie Mac's single-family portfolio in the fourth quarter of 2007 and stripped out the loans that would not be acquired today under Freddie Mac's current acquisition criteria. We then added projected future credit losses for the loans that remained to the already realized credit losses to determine Freddie Mac's lifetime single-family credit losses on that portfolio. After stripping out the loans that would not be acquired under Freddie Mac's current acquisition criteria, the credit risk capital requirement would have exceeded the projected lifetime credit losses. As illustrated in the table below, Freddie Mac's estimated single-family credit risk capital requirement of $59 billion as of December 31, 2007 based on the proposed rule would not have exceeded Freddie Mac's lifetime single-family credit losses of $64 billion on the December 31, 2007 guarantee portfolio for all loans purchased. However, excluding loans that the Enterprises no longer acquire, Freddie Mac's credit risk capital requirement per the proposed rule of $24 billion would have exceeded projected lifetime losses of $20 billion.
FHFA estimated the impact of the proposed rule on the Enterprises as of September 30, 2017. Under the 2.5 percent alternative, FHFA estimates a combined minimum leverage capital requirement for both Enterprises of $139.4 billion as of September 30, 2017, while under the bifurcated alternative FHFA estimates a combined minimum leverage capital requirement for both Enterprises of $103 billion. FHFA also estimates a combined risk-based capital requirement of $180.9 billion or 3.2 percent of the Enterprises' portfolios as of September 30, 2017. Credit risk capital accounts for $112.0 billion before CRT and $90.5 billion after CRT, market risk capital accounts for $19.4 billion, operational risk capital accounts for $4.3 billion, and the going-concern buffer accounts for $39.9 billion. The capital requirement for the Enterprises' DTAs accounts for the remaining $26.8 billion. A detailed breakdown of FHFA's estimated risk-based capital requirements by risk category for the Enterprises combined, and separately for Fannie Mae and Freddie Mac, as of September 30, 2017 is presented in Table 5. A breakdown of FHFA's estimated risk-based capital requirements by asset category for the Enterprises combined, as of September 30, 2017, is presented in Table 6. A breakdown of FHFA's estimated minimum leverage capital requirement under both proposed alternatives for the Enterprises combined, and separately for Fannie Mae and Freddie Mac, as of September 30, 2017, is presented in Table 7.
The proposed rule would establish risk-based capital requirements across five categories of the Enterprises' mortgage guarantees and portfolio holdings: (1) Single-family whole loans, guarantees, and related securities, (2) private-label mortgage-backed securities (PLS), (3) multifamily whole loans, guarantees, and related securities, (4) commercial mortgage-backed securities (CMBS), and (5) other assets. An additional category, “Unassigned Assets,” would provide an approach to assigning capital requirements to new products or activities that do not have an explicit treatment in this rule. Under this proposal, each of these asset and guarantee categories may include capital requirements for three kinds of risk: Credit risk, market risk, and operational risk. FHFA's proposal for the credit risk and market risk associated with the five asset and guarantee categories reflects the Agency's view about the relative risks of these assets. The proposed rule would also establish a risk-invariant capital requirement for operational risk that applies across all asset and guarantee categories. Lastly, the proposal would apply a going-concern buffer across all asset and guarantee categories.
Each of the three risk categories (credit risk, market risk, and operational risk), in addition to the going-concern buffer, is further summarized below.
In evaluating the credit risk faced by the Enterprises, mortgage credit risk can be segmented into the following categories: (1) Expected loss; (2) unexpected loss; and (3) catastrophic loss. Expected losses result from the failure of some borrowers to make their payments during stable housing market conditions. Even in a stable and healthy housing market, some borrowers are likely to default on their loan as a result of certain life events such as illness, job loss, or divorce. Unexpected losses are the potentially much larger losses that could occur above expected losses should there be a stressful, yet plausible, macroeconomic event, such as a severe downturn in house price levels as might accompany a recession. For example, the credit losses that took place during the recent financial crisis and were in excess of the predicted loss amounts would be considered unexpected losses. Catastrophic losses are those losses beyond unexpected loss and would be deemed highly unlikely to occur. In general, losses beyond those experienced during the recent financial crisis would be considered catastrophic losses. However, there is not a bright line marking the transition from unexpected to catastrophic loss.
For purposes of this proposed rule, FHFA defines the risk-based credit risk capital requirement for single-family and multifamily whole loans and guarantees as unexpected loss. As described above, these stress losses are forecasted under scenarios that are
The starting point of the proposed risk-based credit risk capital requirement for single-family and multifamily whole loans and guarantees would be implemented through a series of look-up tables (“grids and risk multipliers”) that take into account loan risk characteristics. The proposed rule would utilize look-up tables because they are simple and transparent, are easily implemented, and allow easy comparison to other capital standards by regulators and the public. As an alternative to the use of look-up tables to implement the risk-based credit risk capital requirement for single-family and multifamily whole loans, FHFA considered using collections of econometric equations (“models”), either the Enterprises' internal models or an FHFA-specified model. FHFA determined that the use of a model would produce more nuanced results than the look-up tables, but would result in greater opacity and operational complexity. Furthermore, the use of the Enterprises' internal models for credit risk was rejected because it would result in inconsistent requirements between the Enterprises for assets with the same risk characteristics.
The proposed rule would use lifetime losses, as opposed to using a shorter horizon, in calculating the credit risk capital requirement in order to fully capture any variation in losses due to differences in loan risk characteristics. For example, if a seven year horizon were used, the risk associated with the payment reset of a multifamily loan with a ten year interest-only period would not be captured in the credit risk capital requirement. Furthermore, the use of lifetime losses is more conservative than a requirement based on losses over a shorter horizon as it covers the unexpected losses over the lifetime of the loan.
FHFA considered the inclusion of revenues into the credit risk capital requirements to reflect the fact that the Enterprises would be conducting new business and that vast majority of borrowers would continue to pay their mortgage even during a stressful macroeconomic event. For example, at the lowest point during the Great Recession, approximately 92 percent of borrowers with Enterprise guaranteed mortgages were current on their mortgages.
The proposed rule also would not incorporate the tax deductibility of losses in order to create a simple and transparent measure of risk and to maintain general consistency with other regulatory regimes. Inclusion of the tax deductibility of losses would add significant complexity to the proposed rule. Additionally, FHFA already has an assessment of capitalization, the annual Dodd-Frank Act Stress Test exercise which incorporates revenue, the tax deductibility of losses and accounting impacts.
The Enterprises are exposed to market risk, including interest rate risk and spread risk, through their ownership of whole loans and their investments in MBS. Interest rate risk is the risk of loss from adverse changes in the value of the Enterprises' assets or liabilities due to changes in interest rates. Spread risk is the risk of a loss in value of an asset relative to a risk free or funding benchmark due to changes in perceptions of performance or liquidity. The Enterprises have historically actively managed interest rate risk but have not fully hedged spread risk.
The proposed rule would establish risk-based capital requirements for the market risk associated with single-family whole loans, multifamily whole loans, single-family mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs), Government National Mortgage Association (Ginnie Mae) single-family and multifamily MBS, PLS, commercial mortgage-backed securities (CMBS), and other assets with market risk exposure held in the Enterprises' respective retained portfolios. While the Enterprises have legacy assets acquired prior to entering conservatorship, such as certain private-label securities investments, the ongoing use of the Enterprises' retained portfolios during conservatorship is now limited to transactions that support the Enterprises' core mortgage guarantee business activities. This includes supporting acquisitions through the cash window primarily for smaller lenders and buying delinquent loans out of securities in order to facilitate loss mitigation activities that benefit both borrowers and taxpayers. Because the Enterprises' retained portfolio activities have been greatly limited through conservatorship, these portfolios now represent a small share of the Enterprises' overall risk exposure, and the proposed methodology for calculating market risk capital requirements is therefore simple and straightforward. Although FHFA will automatically suspend a final rule because the Enterprises are in conservatorship and cannot build capital, the proposed rule is only intended to address market risks for the Enterprises as they are currently established under conservatorship. In a post-conservatorship housing finance system, FHFA may consider additional methodologies for calculating market risk capital requirements, and FHFA would have the regulatory flexibility to undertake such actions outside the scope of this proposed rulemaking.
The primary target of the risk-based capital requirement for market risk would be spread risk, as the Enterprises closely hedge interest rate risk at the portfolio level through the use of callable debt and derivatives. Spread risk is a loss in value of an asset relative to a risk free or funding benchmark. Generally, spread risk is calculated by multiplying the amount of spread widening by the spread duration of the asset. Spread widening is typically based on historical spread shocks. Spread duration, or the sensitivity of the market value of an asset to changes in the spread, is determined by using
The proposed rule would establish three approaches to determining the risk-based market risk capital requirement, each tailored to the Enterprises' businesses. The first approach defines market risk capital as a single point estimate provided by the proposed rule. The second approach is a spread duration approach that defines market risk capital by multiplying a spread shock, provided by the proposed rule, by a spread duration generated from an Enterprise's internal models. The third approach defines market risk capital through the exclusive use of an Enterprise's internal models. The proposed rule would assign the Enterprises' assets to one of the three approaches based on: (i) Whether the asset belongs to a small and declining portfolio where acquisition is limited as the result of conservatorship, (ii) the relative importance of market risk to credit risk for the asset, and (iii) the complexity of the product structure or prepayment sensitivity.
In general, the proposed rule would assign the simplified single point estimate to assets that are either (i) part of a small and declining portfolio or (ii) where credit risk is the predominant risk. A single point estimate, while simple, may inadequately capture the market risk attributes for assets with complex structures or products with high prepayment sensitivity. For instance, assets with complex structures, such as CMOs, can have different prepayment risk across different tranches, and products with high prepayment sensitivity can have spread durations varying across a wide range of characteristics.
For products with complex structures or high prepayment sensitivity, market risk capital results that rely on internal model calculations (the second and third approaches) could provide more accurate market risk capital estimates when compared with a single point estimate. Therefore, the proposed rule would rely on an Enterprise's internal models only when the market risk complexity is sufficiently high that using a single point estimate would inadequately represent the product's underlying market risk.
Market risk capital requirements resulting from the Enterprises' internal models are derived under an established model risk management governance process that includes FHFA's supervisory review. In particular, FHFA issues advisory bulletins, which are public documents that communicate FHFA's supervisory expectations to FHFA supervision staff and to the Enterprises on specific supervisory matters and topics. In addition, through FHFA's supervision program, FHFA on-site examiners conduct supervisory activities to ensure safe and sound operations of the Enterprises. These supervisory activities may include the examination of the Enterprises to determine whether they meet the expectations set in the advisory bulletins. Examinations may also be conducted to determine whether the Enterprises comply with their own policies and procedures, regulatory and statutory requirements, or FHFA directives.
FHFA's 2013-07 Advisory Bulletin reflects supervisory expectations for an Enterprise's model risk management. The Advisory Bulletin sets minimum thresholds for model risk management and differentiates between large, complex entities and smaller, less complex entities. As the Enterprises are large complex entities that develop and maintain internal market risk models, the Advisory Bulletin subjects them to heightened standards for internal audit, model risk management, model control framework, and model lifecycle management.
The proposed rule would establish a risk-invariant capital requirement for operational risk as discussed below. The operational risk capital requirement would be assessed as a fixed capital requirement on the unpaid principal balance of instruments with credit risk or on the market value of instruments with market risk. The Basel Basic Indicator Approach for operational risk would be used to determine the fixed capital requirement.
As also discussed below, the proposed rule would also establish a going-concern buffer to ensure the Enterprises have sufficient capital to support the mortgage markets during and after a period of severe financial stress. The going-concern buffer would be assessed as a fixed capital requirement on the unpaid principal balance of instruments with credit risk or on the market value of instruments with market risk.
As discussed above, the proposed rule's approach of using mark-to-market LTVs to determine credit risk capital requirements would more accurately represent the Enterprises' current risk profile than would using original LTVs. This is because the current value of a house influences both the probability that a homeowner will default on the mortgage and the magnitude of losses if a homeowner defaults. In times of house price appreciation mark-to-market LTVs would fall and credit risk capital requirements would decrease, while in times of house price depreciation mark-to-market LTVs would rise and credit risk capital requirements would increase. Therefore, not updating LTVs during a market downturn with decreasing house prices would, all else held constant, result in lower risk-based capital requirements relative to using mark-to-market LTVs. In such a scenario, not updating risk characteristics during a stress event could result in risk-based capital requirements being too low because original LTVs would be understated relative to current LTVs that account for decreased home values during the stress event. Whether using original LTVs or mark-to-market LTVs, the proposed credit risk capital requirements in the base grids for new originations are designed to account for a decline in house prices comparable to the 2008 financial crisis.
However, using original LTVs to determine credit risk capital requirements would reduce the pro-cyclicality of the proposed risk-based
Comparing the use of constant or mark-to-market LTVs under the U.S. regulatory implementation of Basel III requires consideration of how the standardized approach and internal ratings-based approach interact with one another. The standardized approach maintains a 50 percent risk weight for mortgages and does not update this risk weight as house prices increase or decrease. The internal ratings-based approach allows, but does not require, institutions to use updated risk factors such as mark-to-market LTVs.
Should FHFA consider reducing the pro-cyclicality of the proposed risk-based capital requirement? For example, should FHFA consider holding LTVs and/or other risk factors constant? What modifications or alternatives, if any, should FHFA consider to the proposed risk-based capital framework, and why?
The next sections discuss the components of FHFA's proposed risk-based capital requirements in more detail. This discussion begins with operational risk, which applies consistently across all of the Enterprises' mortgage loan/asset categories. The discussion continues with the proposed going-concern buffer, which would also apply consistently across all of the Enterprises' asset and guarantee categories. The following sections then discuss risk-based capital requirements for each asset and guarantee category, with subsections that address credit risk and market risk in detail along with summaries of the operational risk and going-concern buffer provisions.
The proposed rule would include an operational risk capital requirement of 8 basis points in the risk-based capital requirement. For assets and guarantees with credit risk, the 8 basis points would be multiplied by the unpaid principal balance of the asset or guarantee. For assets with market risk, the 8 basis points would be multiplied by the market value of the asset. For assets and guarantees with both credit and market risk, the 8 basis points would be multiplied by the unpaid principal balance.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, errors made by people and systems, or from external events. Operational risk is inherent in each Enterprise's business operations. Given the nature of such risks, it is challenging to quantify or estimate operational risk at the asset level. Under the Basel II framework, which requires banks to hold capital related to operational risk, there are three approaches used to measure the operational risk capital requirement: The Basic Indicator Approach, the Standardized Approach, and the Advanced Measurement Approach.
The Basic Indicator Approach is the simplest approach of the three, and it is generally used by banks without significant international operations. The Standardized Approach and the Advanced Measurement Approach employ increasing complexity for calculating operational risk capital requirements. The Advanced Measurement Approach is the most advanced approach and is subject to supervisory approval.
The Basic Indicator Approach requires banks to hold capital for operational risk equal to a fixed percentage (scalar) of the average positive gross income relative to total assets over the previous three years. The scalar of 15 percent is the fixed percentage set by the Basel Committee on Banking Supervision (BCBS), representing the prescribed relationship between operational risk loss and the aggregate level of gross income. The prescribed scalar of 15 percent is consistent with the percentage prescribed for the commercial banking business line under the Basel Standardized Approach. Gross income is defined as net interest income plus net non-interest income. The measure is gross of any provisions and operating expenses, and excludes realized profits or losses from the sale of securities and extraordinary or irregular items.
As reflected in the table below, FHFA calculated the operational risk capital requirement for each Enterprise based on a three-year average of gross income from 2014 to 2016.
Banks using the Basic Indicator Approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the
Gross income is defined as net interest income plus net non-interest income. It is intended that this measure should: (i) Be gross of any provisions (
FHFA combined the Enterprises' results to determine an operational risk capital requirement of 8 basis points.
The proposed rule would include a going-concern buffer of 75 basis points in the risk-based capital requirement. For assets and guarantees with credit risk, the 75 basis points would be multiplied by the unpaid principal balance of the asset or guarantee. For assets or guarantees with market risk, the 75 basis points would be multiplied by the market value of the asset or guarantee. For assets and guarantees with both credit and market risk, the 75 basis points would be multiplied by the unpaid principal balance.
The Enterprises are required by charter to provide liquidity to the mortgage markets during and after a period of severe financial stress. During a period of severe financial distress, the Enterprises would need capital to offset credit and market losses on their existing portfolios, to support the mortgage market by purchasing new loans, and more generally, to maintain market confidence in the Enterprises' securities. Losses on the Enterprises' existing portfolios would deplete capital and would incent the Enterprises to withdraw from riskier segments of the mortgage market in order to preserve capital. Raising new capital during a period of severe housing market stress, like that envisioned in this rule, would be very expensive, if not impossible; therefore, the proposed rule would require the Enterprises to hold additional capital on an on-going basis (“going-concern buffer”) in order to continue purchasing loans and to maintain market confidence during a period of severe distress.
To quantify the size of the going-concern buffer, FHFA looked to the Enterprises' DFAST results for the severely adverse scenario. The DFAST severely adverse scenario specified by FHFA incorporates an assumption that the Enterprises will originate new business during the stress period. DFAST results reflect the impact of the stress scenario on the earnings and capital of each Enterprise.
FHFA calculated the amount of capital necessary for the Enterprises to meet a 2.5 percent leverage requirement at the end of each quarter of the simulation of the severely adverse DFAST scenario (without DTA valuation allowance) and compared that amount to the aggregate risk-based capital requirement. The difference between these two measures provided an indicator for the size of the going-concern buffer. FHFA ultimately determined that the size of the going-concern buffer should be 75 basis points and that the going-concern buffer would be risk-invariant. This approach is useful because it includes a severe stress, an assumption of new business during the severe stress, and an assumption that an Enterprise has enough capital to meet its minimum leverage requirement during and at the end of the stress period, which should contribute to maintaining market confidence. As further validation of the proposed 75 basis points going-concern buffer, FHFA compared the capital obtained by applying the proposed going-concern buffer to the 2017 single-family book of business with the capital required to fund each Enterprise's 2017 new acquisitions. FHFA found the proposed going-concern buffer would provide sufficient capital for each Enterprise to fund an additional one to two years of new acquisitions comparable to their 2017 new acquisitions.
This section corresponds to Proposed Rule §§ 1240.5 through 1240.23.
The proposed rule would establish risk-based capital requirements for the Enterprises' single-family whole loans, guarantees, and securities held for investment. The core of the Enterprises' single-family businesses is acquiring and packaging single-family loans into mortgage-backed securities (MBS) and providing credit guarantees on the issued securities. The aim of the proposed single-family capital requirements is to ensure the continued operation of these important single-family business operations throughout periods of economic uncertainty. In the context of the proposed rule, single-family whole loans are single-family mortgage loans acquired by the Enterprises and held in portfolio, including those purchased out of MBS trusts due to issues related to payment performance. Likewise, single-family guarantees are guarantees provided by the Enterprises of the timely receipt of principal and interest payments to investors in mortgage-backed securities (MBS) that have been issued by the Enterprises and are backed by single-family mortgage loans. Except in cases where they transfer the risk to private investors, the Enterprises are exposed to credit risk through their ownership of single-family whole loans and guarantees issued on MBS. In addition, the Enterprises are exposed to market risk through their ownership of single-family whole loans and mortgage-backed securities held for investment purposes.
To implement the proposed single-family capital requirements, the Enterprises would use a set of single-family grids and risk multipliers to calculate credit risk capital, as well as a collection of straightforward formulas to calculate market risk capital, operational risk capital, and a going-concern buffer.
The proposed rule would first establish a framework through which the Enterprises would calculate their gross single-family credit risk capital requirements. The proposed methodology is simple and transparent, relying on a set of look-up tables (grids and risk multipliers) that would account for many important single-family risk factors in the calculation of gross credit risk capital requirements, including loan characteristics such as age, payment performance, loan-to-value (LTV), and credit score.
The proposed grid and multiplier framework is consistent with existing financial regulatory regimes, and would therefore facilitate comparison to those regimes and promote understanding of the framework's methodology and resulting capital requirements. In particular, the proposed rule is conceptually and methodologically similar to regulatory frameworks such as DFAST, CCAR, and the Basel Accords. FHFA believes that this straightforward and transparent approach, as opposed to one involving a complex set of credit models and econometric equations, would provide sufficient risk differentiation across the Enterprises' single-family businesses without obfuscating capital calculations or placing undue implementation and compliance burdens on the Enterprises.
Next, the proposed rule would provide a mechanism through which the Enterprises would calculate net credit risk capital requirements for single-family whole loans and guarantees by accounting for the benefits associated with loan-level credit enhancements such as mortgage insurance, while also accounting for the counterparty credit risk associated with third parties such as mortgage insurance companies.
The proposed rule would then provide a mechanism for the Enterprises to calculate capital relief by reducing net single-family credit risk capital requirements based on the amount of loss shared or risk transferred to private sector investors through the Enterprises' respective credit risk transfer programs. Collectively, the Enterprises engage in a variety of types of single-family credit risk transfer transactions, and this aspect of the proposed rule would account for differences in the Enterprises' single-family business models.
The proposed rule would establish market risk capital requirements for single-family whole loans and mortgage-backed securities held for investment. The proposed methodology would account for spread risk using either simple formulas or the Enterprises' internal models, depending on the risk characteristics of the single-family whole loans or guarantees being considered.
In addition, the proposed rule would establish an operational risk capital requirement for the Enterprises' single-family businesses that is invariant to risk. The proposed operational risk capital requirement is based on the Basel Basic Indicator Approach and would require the Enterprises to calculate operational risk capital as a fixed percentage of total unpaid principal balances or market values, depending on whether the Enterprises retain both credit and market risk for particular single-family assets or merely market risk.
Finally, as described above, the proposed rule would establish a going-concern buffer for the Enterprises' single-family businesses that is also invariant to risk with the objective of ensuring that, when combined with Enterprise revenue, the Enterprises have sufficient capital to continue operating their single-family businesses during and after a period of severe financial distress. Under the proposed rule, the Enterprises would be required to calculate the single-family going-concern buffer as a fixed percentage of total unpaid principal balances or market values, depending on whether the Enterprises retain both credit and market risk for particular single-family assets or merely market risk.
The proposed rule would apply equally to both Enterprises regardless of differences in their single-family business models. Although the Enterprises operate independently of one another, the common core of their single-family businesses is the acquisition of single-family mortgage loans from mortgage companies, commercial banks, credit unions, and other financial institutions, packaging those loans into mortgage-backed securities (MBS), and selling the MBS either back to the original lenders or to other private investors in exchange for a fee that represents a guarantee of timely principal and interest payments on those securities.
The Enterprises engage in the acquisition and securitization of single-family mortgages primarily through two types of transactions: Lender swap transactions and cash window transactions. In a lender swap transaction, lenders pool similar single-family loans together and deliver the pool of loans to an Enterprise in exchange for an MBS backed by those single-family mortgage loans, which the lenders generally then sell in order to use the proceeds to fund more mortgage loans. In a cash window transaction, an Enterprise purchases single-family loans from a large, diverse group of lenders and then securitizes the acquired loans into an MBS to sell at a later date. For MBS issued as a result of either lender swap transactions or cash window transactions, the Enterprises provide investors with a guarantee of the timely receipt of payments in exchange for a guarantee fee. Single-family loans that have been purchased but have not yet been securitized are held in the Enterprises' whole loan portfolios. In addition, the Enterprises also repurchase loans that have been delinquent for four or more consecutive months from the MBS they guarantee.
The Enterprises are exposed to credit risk through their ownership of single-family whole loans and the guarantees they issue on MBS. The Enterprises may incur a credit loss when borrowers default on their mortgage payments, so the Enterprises attempt to mitigate the likelihood of incurring such a loss in a variety of ways. One way to reduce potential credit losses is through the use of credit enhancements such as primary mortgage insurance. Credit enhancement is required by the Enterprises' charter acts for single-family loans with loan-to-value ratios over 80 percent.
The proposed rule would establish risk-based capital requirements for the Enterprises' single-family businesses, including requirements for their whole loans, guarantees, and securities held for investment. Using the proposed requirements, the Enterprises would calculate the minimum amount of funds needed to continue their single-family business operations under stressed economic conditions, as discussed in detail below. The proposed single-family capital requirements would have the following components: Credit risk capital, including relief for credit risk transfers; market risk capital; operational risk capital; and a going-concern buffer. Each component is discussed in detail in the ensuing subsections.
This section corresponds to Proposed Rule §§ 1240.5 through 1240.13.
The proposed rule would establish credit risk capital requirements for the Enterprises' conventional single-family whole loans and guarantees. For reasons discussed below, loans with a government guarantee would not be subject to the credit risk capital requirement. The single-family credit risk capital requirements would
Each Enterprise used economic scenarios that they defined to project loan-level credit risk capital. In addition, FHFA leveraged the baseline and severely adverse scenario defined in the Dodd-Frank Act Stress Tests (DFAST) to project expected and stress losses. The DFAST scenarios are well understood economic conditions updated annually by the Federal Reserve Board. FHFA used these pre-existing scenarios as a starting point for its estimations in order to provide economic scenarios consistent with those issued by other regulators to large financial institutions for stress tests required under DFAST. FHFA also used these scenarios to ensure a straightforward, transparent approach to the proposed rule's capital requirements. The DFAST scenarios include forecasts for macroeconomic variables including home prices, interest rates, and unemployment rates.
Home prices are generally considered to be the most important determinant of a strong single-family housing market. Home prices are used to define the loan-to-value ratio, where the likelihood of a loss occurring upon default increases as the proportion of equity to loan value deceases. Therefore, the projected home price path is the predominant macroeconomic driver for the requirements single-family stress scenarios.
The Enterprises used similar house price paths to project credit risk capital. In the stress scenarios used by FHFA and the Enterprises, nationally averaged home prices declined by 25 percent from peak to trough (the period of time between the shock and the recovery), which is consistent with the decline in home prices observed during the recent financial crisis. The 25 percent home price decline is also consistent with assumptions used in the DFAST severely adverse scenario over the past several years, although the 2017 DFAST cycle assumes a 30 percent home price decline in its severely adverse scenario. However, the trough and recovery assumptions used by FHFA and the Enterprises are somewhat more conservative than the observed house price recoveries post crisis. The single-family credit risk capital grids, discussed below, reflect estimations of stress losses and expected losses under these severely adverse economic conditions.
The proposed rule would require the Enterprises to calculate credit risk capital requirements for single-family whole loans and guarantees by completing the following simplified steps:
(1) Determine base single-family credit risk capital requirements using single-family-specific credit risk capital grids;
(2) Determine gross single-family credit risk capital requirements by adjusting base single-family credit risk capital requirements for additional risk characteristics using a set of single-family-specific risk multipliers;
(3) Determine net single-family credit risk capital requirements by adjusting gross single-family credit risk capital requirements for loan-level credit enhancements, including accounting for counterparty risk; and
(4) Determine capital relief from net single-family credit risk capital requirements due to credit risk transfer transactions.
This section corresponds to Proposed Rule §§ 1240.5 through 1240.16.
The proposed rule would require the Enterprises to calculate base credit risk capital requirements for single-family whole loans and guarantees using a set of five look-up tables or grids, one for each single-family loan segment. Accordingly, for the purpose of the proposed rule, the Enterprises would categorize their single-family whole loans and guarantees into five loan segments, with each loan segment representing a different period in the possible life cycle of a single-family mortgage loan.
The proposed single-family loan segments are based on age and payment performance because the expectation of a credit loss depends heavily on these two risk factors. Additional risk factors affect the expectation of credit loss differently depending on where a loan is in its life cycle. The amount of credit risk capital required for a single-family whole loan or guarantee therefore would change over the life cycle of a loan, decreasing when the loan is seasoned and performing, and increasing when the loan is delinquent or has recently experienced delinquency. These dynamics are often captured in credit loss forecasts by estimating different mortgage performance equations for loans in different life-cycle stages. The proposed rule would capture these dynamics in a similar fashion by having five different single-family credit risk capital grids and sets of multipliers for whole loans and guarantees in different life-cycle stages. The five proposed loan segments for single-family whole loans and guarantees are:
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Each single-family loan segment would have a unique two-dimensional credit risk capital grid that the Enterprises would use to calculate base credit risk capital requirements for every whole loan and guarantee in the loan segment. The dimensions of the credit risk capital grids would vary by loan segment to allow the grids to differentially incorporate key risk drivers into the base credit risk capital requirements on a segment-by-segment basis. For example, current (refreshed) credit scores and mark-to-market LTV (MTMLTV) are two primary drivers of credit losses in performing seasoned loans, while a primary driver of credit losses in modified re-performing loans (RPL) is the payment change due to modification. Accordingly, the dimensions of the credit risk capital grids for these segments would reflect the respective primary drivers of risk.
The credit risk capital grid for each single-family loan segment would determine the base credit risk capital requirement for any single-family whole loan or guarantee in that loan segment (where the base credit risk capital requirement refers to a capital calculation that does not yet recognize either the full impact of risk factors that are not one of the base grid's two dimensions or loan-level credit enhancements). The proposed grids were populated after carefully considering a combination of estimates
FHFA believes that constructing the proposed base credit risk capital grids in this manner provides for sufficient levels of granularity, accuracy, and transparency in the credit risk capital calculations. Each single-family whole loan and guarantee is segmented first by age and payment performance, then broken down further by its two primary risk drivers while simultaneously considering “typical” values for secondary risk drivers (which are further accounted for in the calculation of gross credit risk capital requirements using risk multipliers). FHFA carefully evaluated its own model estimations using these categorizations, as well as estimations provided by the Enterprises. The credit risk capital requirements in the five proposed grids do not take into account the effect of credit enhancements such as mortgage insurance and generally represent averages of the individual estimations, although in certain cases adjustments were made to ensure the capital requirements were reasonable. In addition, the risk factor breakpoints and ranges represented in the grids' dimensions were chosen in light of FHFA analysis and internal discussions, as well as discussions with the Enterprises. FHFA concluded that the proposed breakpoints and ranges would combine to form sufficiently granular pairwise buckets without imposing an undue compliance burden on the Enterprises. The proposed process for calculating credit risk capital requirements is therefore straightforward, and does not rely on quarterly calculations of complicated, opaque economic models or econometric equations.
The primary risk factors for single-family whole loans and guarantees in the new originations loan segment are original credit score and original loan-to-value (OLTV). The dimensions in the segment's credit risk capital grid would reflect these two risk factors. Original credit score correlates strongly with the probability of a borrower default, while OLTV relates to the severity of a potential loss should a borrower default (loss given default). Credit score and OLTV are often used by lenders to price new loans.
The proposed single-family credit risk capital grid for new originations is presented in Table 9.
Credit scores have values ranging from 300 to 850, and LTVs at origination typically range from 10 percent to 97 percent. FHFA chose the ranges and breakpoints represented in the dimensions of the Table 9 after reviewing the distributions of unpaid principal balances in the Enterprises' single-family businesses. FHFA notes that the Enterprises currently rely on Classic FICO for product eligibility, loan pricing, and financial disclosure purposes, and therefore the base grid for new originations was estimated using Classic FICO credit scores.
Aside from the primary risk factors represented in the dimensions of Table 9, there are several secondary risk factors accounted for in the risk profile of the synthetic loan used in the estimations underlying the credit risk capital requirements presented in Table 9. Those secondary risk factors, along with the values that determine the baseline risk profile for the credit risk capital grid for new originations, are as follows: Loan age less than six months, 30-year fixed rate, purchase, owner-occupied, single-unit, retail channel sourced, debt-to-income ratio between 25 percent and 40 percent, loan size greater than $100,000, no second lien, and has multiple borrowers. Variations from these risk characteristics would make the whole loan or guarantee more or less risky and would result in a higher or lower credit risk capital requirement relative to the base credit risk capital requirement. In the proposed rule, variations in these secondary risk factors would be captured using risk multipliers as described in the next section.
The primary risk factors for single-family whole loans and guarantees in the performing seasoned loan segment are refreshed credit score and mark-to-market loan-to-value (MTMLTV). The dimensions in the segment's credit risk capital grid would reflect these two risk factors. The more seasoned a loan gets, or the longer it has been since the loan was originated, the less relevant its original credit score and original LTV become.
But since credit score and LTV still relate strongly to the probability of default and loss given default, respectively, refreshed (updated) values of these two important risk factors are used as the primary risk factors and dimensions. The proposed single-family credit risk capital grid for whole loans and guarantees in the performing seasoned loan segment is presented in Table 10.
Credit scores have values ranging from 300 to 850, and MTMLTVs typically range from 10 percent to upwards of 120 percent. FHFA chose the ranges and breakpoints represented in the dimensions of the Table 10 after reviewing the distributions of unpaid principal balances in the Enterprises' single-family seasoned loan businesses. In the proposed credit risk capital grid for performing seasoned loans, FHFA included MTMLTV buckets beyond 95 percent to account for adverse changes in home prices subsequent to loan origination, as well as to account for the inclusion of streamlined refinance loans in the segment. In addition, loans with an 80 percent LTV are no longer highlighted.
Aside from the primary risk factors represented in the dimensions of Table 10, there are several secondary risk factors accounted for in the risk profile of the synthetic loans used in the estimations underlying the credit risk capital requirements presented in Table 10. Those secondary risk factors, along with the values that determine the baseline risk profile for the credit risk capital grid for performing seasoned loans, are: Loan age between six months and 12 months, 30-year fixed rate,
The primary risk factors for single-family whole loans and guarantees in the non-modified re-performing loan segment are re-performing duration and MTMLTV. The dimensions in the segment's credit risk capital grid would reflect these two risk factors. Re-performing duration is the number of months since a whole loan or guarantee was last delinquent, and is a strong predictor of the likelihood of a subsequent default for re-performing loans that have cured without prior modifications. MTMLTV is a strong predictor of loss given default for whole loans and guarantees in this segment.
The proposed single-family credit risk capital grid for whole loans and guarantees in the non-modified re-performing loan segment is presented in Table 11.
In the proposed rule, re-performing duration is divided into four categories such that credit risk capital requirements would decrease as re-performing duration increases. When the re-performing duration is greater than three years, the proposed credit risk capital requirement for a re-performing loan would approximate the credit risk capital requirements for a performing seasoned loan. Loans that re-perform for greater than four years, and have not been modified, would revert to being classified as performing seasoned and use the appropriate credit risk capital grid. The proposed ranges and breakpoints for MTMLTV are unchanged from those found in the performing seasoned loan grid (Table 10).
Aside from the primary risk factors represented in the dimensions of Table 11, there are many secondary risk factors accounted for in the risk profile of the synthetic loan used in the estimations underlying the credit risk
The primary risk factors for single-family whole loans and guarantees in the modified re-performing loan segment are similar to those in the non-modified re-performing loan segment. However, along with the MTMLTV, the second primary risk factor in the modified re-performing segment is either the re-performing duration or the performing duration, whichever is smaller. The re-performing duration measures the number of months since the last delinquency, while the performing duration measures the number of months a loan has been performing since it was last modified. The dimensions in the segment's credit risk capital grid would reflect these risk factors.
The proposed single-family credit risk capital grid for whole loans and guarantees in the modified re-performing loan segment is presented in Table 12.
Aside from the primary risk factors represented in the dimensions of Table 12, there are many secondary risk factors accounted for in the risk profile of the synthetic loan used in the estimations underlying the credit risk capital requirements presented in Table 12. These secondary risk factors, along with the values that determine the baseline risk profile for the credit risk capital grid for modified re-performing loans, are the same as those for non-modified re-performing loans. Variations from these risk characteristics would make the whole loan or guarantee more or less risky and would result in a higher or lower credit risk capital requirement relative to the base credit risk capital requirement. In the proposed rule, variations in these secondary risk factors would be captured using risk multipliers as described in the next section.
Contrary to re-performing single-family loans that have not been modified, loans in the modified re-
The primary risk factors for single-family whole loans and guarantees in the non-performing loan (NPL) segment are delinquency level and MTMLTV. The dimensions in the segment's credit risk capital grid would reflect these two risk factors. In the proposed rule, a non-performing single-family loan is a loan where at least the most recent payment has been missed. The delinquency level of a non-performing whole loan or guarantee is the number of payments missed since the loan became delinquent, and is a strong predictor of the likelihood of default for non-performing loans. MTMLTV is a strong predictor of loss given default for whole loans and guarantees in this segment. The proposed single-family credit risk capital grid for whole loans and guarantees in the non-performing loan segment is presented in Table 13.
The capital requirements detailed in Table 13 are non-monotonic as the number of missed payments increases, particularly in the highest (right-most) MTMLTV column. This is because as the number of missed payments increases for a non-performing loan with a very high LTV, so does the expected loss. Because capital is defined as the difference between stress loss and expected loss, when expected loss increases and grows closer to stress loss, the capital requirement shrinks. The increase in expected loss is reflected in commensurately higher loss reserves.
Aside from the primary risk factors represented in the dimensions of Table 13, there are many secondary risk factors accounted for in the risk profile of the synthetic loan used in the estimations underlying the credit risk capital requirements presented in Table 13. These secondary risk factors, along with the values that determine the baseline risk profile for the credit risk capital grid for non-performing loans, are the same as those for performing seasoned loans, with the inclusion of one additional feature: Refreshed credit scores between 640 and 700. Variations from these risk characteristics would make the whole loan or guarantee more or less risky and would result in higher or lower credit risk capital requirement relative to the base credit risk capital requirement. In the proposed rule, variations in these secondary risk factors would be captured using risk multipliers as described in the next section.
After the Enterprises calculate base credit risk capital requirements for single-family whole loans and guarantees using the single-family credit risk capital grids, the proposed rule would require the Enterprises to calculate gross credit risk capital requirements by adjusting the base credit risk capital requirements to account for additional loan characteristics using a set of single-family-specific risk multipliers. The proposed risk multipliers would refine single-family base credit risk capital requirements to account for risk factors beyond the primary risk factors reflected in the credit risk capital grids, and for variations in secondary risk factors not captured in the risk profiles of the synthetic loans underlying the credit risk capital grids. Gross single-family credit risk capital requirements would be the product of base single-family credit risk capital requirements and the single-family risk multipliers.
The proposed single-family risk multipliers represent common characteristics that increase or decrease the riskiness of a single-family whole loan or guarantee. Therefore, the proposed rule would provide a mechanism through which single-family credit risk capital requirements would be adjusted and refined up or down to reflect a more or less risky loan profile, respectively. FHFA believes that risk multipliers would provide for a simple and transparent characterization of the risks associated with different types of single-family whole loans and guarantees, and an effective way of adjusting credit risk capital requirements for those risks. Although the specified risk characteristics are not exhaustive, they capture key real estate loan performance drivers, and are commonly used in mortgage loan underwriting and rating. For these reasons, FHFA believes the use of risk multipliers in general, and the proposed risk multipliers in particular, would facilitate analysis and promote understanding of the Enterprises' single-family credit risk capital requirements while mitigating concerns associated with compliance and complex implementation.
The proposed risk multiplier values were determined using FHFA staff analysis and expertise, and in consideration of the Enterprises' contribution of model results and business expertise. To derive the proposed risk multiplier values, the Enterprises were asked to run their single-family credit models using comparable stressed economic conditions, as discussed above, and synthetic loans with a baseline risk profile with respect to risk factors other than those represented in the dimensions of each segment's credit risk capital grid. The segment-specific secondary risk factors, and their segment-specific baseline risk values, are discussed in detail in the prior section. The Enterprises then varied the secondary risk factors, by loan segment, to estimate each risk factor's multiplicative effects on the Enterprises' base credit risk capital projections (stress losses minus expected losses) for baseline whole loans and guarantees in each loan segment. FHFA then considered the multiplier values estimated by the Enterprises, which were generally consistent in magnitude and direction, in conjunction with its
Table 14 is structured in the following way: The first column represents secondary risk factors, the second column represents the values or ranges each secondary risk factor can take, and the third through seventh columns contain proposed risk multipliers, with each column containing proposed risk multipliers pertaining only to the single-family loan segment designated at the top of the column. There would be a different set of risk multipliers for each of the five single-family loan segments.
In the proposed rule, each risk factor could take multiple values, and each value or range of values would have a risk multiplier associated with it. For any particular single-family whole loan or guarantee, each risk multiplier could take a value of 1.0, above 1.0, or below 1.0. A multiplier of 1.0 would imply that the risk factor value for a whole loan or guarantee is similar to, or in a certain range of, the particular risk characteristic found in the segment's synthetic loans. A multiplier value above 1.0 would be assigned to a risk factor value that represents a riskier characteristic than the one found in the segment's synthetic loans, while a multiplier value below 1.0 would be assigned to a risk factor value that represents a less risky characteristic than the one found in the segment's synthetic loans. Finally, the risk multipliers would be multiplicative, so each single-family whole loan and guarantee in a loan segment would receive a risk multiplier for every risk factor pertinent to that loan segment, even if the risk multiplier is 1.0 (implying no change to the base credit risk capital requirement for that risk factor). The total combined risk factor for a single-family whole loan or guarantee would be, in general, the product of all individual risk multipliers pertinent to the appropriate loan segment.
There are two general types of single-family risk factors in the proposed rule for which risk multipliers are applied: Risk factors determined at origination and risk factors that change as a loan seasons, or ages.
Risk factors determined at origination include common characteristics such as loan purpose, occupancy type, and property type. The impacts of this type of risk factor on single-family mortgage performance and credit losses are well understood and commonly used in mortgage pricing and underwriting. Many of these risk factors can be quantified and applied in a straightforward manner using risk multipliers as indicated in Table 14. The full set of single-family risk factors determined at origination for which the proposed rule requires risk multipliers is:
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Risk factors that change dynamically and are updated as a loan seasons include characteristics such as loan age, loan size, current credit score, and delinquency or modification history. While not important for underwriting or original loan pricing, these risk factors are strongly associated with probability of default and/or loss given default, and are therefore important in estimating capital requirements. The full set of dynamic single-family risk factors for which the proposed rule requires risk multipliers is:
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Not all risk multipliers would apply to every loan segment, because the multipliers were estimated separately for each single-family loan segment. In cases where a risk factor did not influence the estimated credit risk of whole loans and guarantees in a loan segment, or a risk factor did not apply
In the proposed rule, single-family risk multipliers would adjust base credit risk capital requirements in a multiplicative manner. Consequently, and as a result of the simple and straightforward structure of the proposed multiplier framework, certain combinations of risk factors may result in over-capitalizing certain types of single-family whole loans and guarantees. This could occur in part because the risk factors for which multipliers would be applied are not independent. Single-family whole loans and guarantees with a MTMLTV greater than 95 percent were particularly vulnerable to this phenomenon. Thus, the proposed rule would implement a multiplier cap of 3.0 for the product of risk multipliers for single-family whole loans and guarantees with a MTMLTV greater than 95 percent. Based on FHFA empirical analysis, less than 3 percent of loans with a MTMLTV greater than 95 percent would be affected by the cap.
Loan-level credit enhancements are credit guarantees on individual loans. The Enterprises primarily use loan-level credit enhancements to satisfy the credit enhancement requirement of their charter acts. The Enterprises' charter acts require single-family mortgage loans with an unpaid principal balance exceeding 80 percent of the value of the property to have one of three forms of credit enhancement. The credit enhancement requirement can be satisfied through: The seller retaining a participation of at least 10 percent in the mortgage (participation agreement); the seller agreeing to repurchase or replace the mortgage in the event the mortgage is in default (repurchase or replacement agreements; recourse and indemnification agreements); or a guarantee or insurance on the unpaid principal balance which is in excess of 80 percent LTV (guarantee or insurance). The third form, mortgage insurance, is the most common form of charter-required credit enhancement.
The proposed rule would require the Enterprises to calculate net credit risk capital requirements by reducing the gross credit risk capital requirement on single-family loans to reflect the benefits from loan-level credit enhancements. Similar to the use of multipliers to adjust the base credit risk capital requirement for various risk factors, the proposed rule would use multipliers (“CE multipliers”) to reduce the gross credit risk capital requirement for the benefit from loan-level credit enhancements. CE multipliers would take values of less than or equal to 1.0 to reflect a reduction in the gross credit risk capital requirement. For example, a CE multiplier of 0.65 on a single-family loan would imply that an Enterprise is responsible for 65 percent of the credit risk of the loan and that the counterparty providing the credit enhancement is responsible for the remaining 35 percent of the credit risk. A higher CE multiplier would imply an Enterprise is taking a greater share of the losses and a lower CE multiplier would imply the counterparty is taking a greater share of the losses.
Participation agreements are rarely utilized by the Enterprises and for reasons of simplicity, the proposed rule would not assign any benefit for these agreements (a CE multiplier of 1.0).
Repurchase, replacement, recourse, and indemnification agreements may be unlimited or limited. Unlimited agreements provide full coverage for the life of the loan, while limited agreements provide partial coverage or have a limited duration. In the proposed rule, a counterparty would be responsible for all credit risk in the presence of an unlimited agreement, and the loan would be assigned a CE multiplier of zero. For limited agreements, the proposed rule would require the Enterprises to use the single-family CRT techniques described section II.C.4.b to determine the appropriate benefit from the limited agreement.
Mortgage insurance (MI) is an insurance policy where an insurance company covers a portion of the loss if a borrower defaults on a single-family mortgage loan. In the proposed rule, the benefit from MI would vary based on a number of MI coverage and loan characteristics, including (i) whether MI is cancellable or non-cancellable, (ii) whether MI is charter-coverage or guide-coverage, and (iii) loan characteristics, including original LTV, loan age, amortization term, and loan performance segment.
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The proposed rule would use the following set of tables to present the CE multipliers for loans with MI. These tables take into consideration the MI factors that were discussed above.
The first table contains proposed CE multipliers for non-cancellable MI coverage. This table would be used for all loan segments, except the NPL loan segment. The table differentiates multipliers by type of coverage (charter and guide), original LTV, amortization term, and coverage percent.
The proposed rule would have three tables for cancellable MI. The first cancellable MI table contains proposed CE multipliers for the new originations loan segment, the performing seasoned loans segment, and the non-modified RPL loan segment. The table differentiates multipliers by type of coverage (charter-level and guide-level), original LTV, coverage percent, amortization term, and loan age.
The second cancellable MI table contains proposed CE multipliers for the modified RPL loan segment for loans with 30-year post-modification amortization. The table differentiates multipliers by type of coverage (charter and guide), original LTV, coverage percent, amortization term, and loan age.
The third cancellable MI table contains proposed CE multipliers for the modified RPL loan segment for loans with 40-year post-modification amortization. The table differentiates multipliers by type of coverage (charter-level and guide-level), original LTV, coverage percent, and loan age.
The final MI table contains proposed CE multipliers for the NPL loan segment. MI on delinquent loans cannot be cancelled; therefore, there is no differentiation between cancellable and non-cancellable MI for the NPL loan segment. The table differentiates multipliers by type of coverage (charter-level and guide-level), original LTV, amortization term, and coverage percent.
The proposed CE multipliers reflect the average of the Enterprises' estimates. The Enterprises, however, would not necessarily apply the CE multipliers in isolation, but would first adjust the multipliers to account for the probability that a counterparty may not fully meet its payment obligations. The following section describes the proposed approach for adjusting CE multipliers for counterparty risk.
Sharing loss with counterparties exposes the Enterprises to counterparty credit risk. To account for this exposure, the proposed rule would reduce the recognized benefits from credit enhancements to incorporate the risk that counterparties are unable to meet claim obligations. For this reason, the proposed rule would establish a counterparty haircut multiplier (CP multiplier) to the CE benefit. The CP haircut multiplier would take values from zero to one. A value of zero, the smallest haircut, would imply a counterparty will fully meet its claim obligations, while a value of one, the largest haircut, would imply a counterparty will not meet its claim obligations. A value between zero and one would imply a counterparty will meet a portion of its claim obligations.
The CP haircut multiplier would depend on a number of factors that reflect counterparty credit risk. The two main factors are the creditworthiness of the counterparty and the counterparty's level of concentration in mortgage credit risk. The proposed rule would require the Enterprises to assign a counterparty rating using the rating scheme provided in Table 20. In assigning a rating, the Enterprises would assign the counterparty rating that most closely aligns to the assessment of the counterparty from its internal counterparty risk framework. Similarly, the proposed rule would require the Enterprises to utilize their counterparty risk management frameworks to assign each counterparty a rating of “not high” or “high” to reflect the counterparty's concentration in mortgage credit risk.
During the most recent financial crisis, three out of seven mortgage insurance companies were placed in run-off by their state regulators, and payments on the Enterprises' claims were deferred by the state regulators. This posed a serious counterparty risk and financial losses for the Enterprises. More generally, the crisis highlighted that counterparty risk can be amplified when the counterparty's credit exposure is highly correlated with the Enterprises' credit exposure. This amplification of counterparty risk due to the correlation between counterparties' credit exposures is referred to as wrong-way risk. Counterparties whose main lines of business are highly concentrated in mortgage credit risk have a higher probability to default on payment obligations when the mortgage
To calculate the CP haircut, the proposed rule would use a modified version of the Basel Advanced Internal Ratings Based (IRB) approach. The modified version leverages the IRB approach to account for the creditworthiness of the counterparty but makes changes to reflect the level of mortgage credit risk concentration. The Basel IRB framework provides the ability to differentiate haircuts between counterparties with different levels of risk. The proposed rule would augment the IRB approach to capture risk across counterparties. In this way, the proposed adjustment would help capture wrong-way risk between the Enterprises and their counterparties.
In particular, the proposed approach calculates the counterparty haircut by multiplying stress loss given default by the probability of default and a maturity adjustment for the asset:
The following table highlights the parameterization of the proposed approach.
From the parameters table, stress loss given default (LGD) is calibrated to 45 percent according to the historic average stress severity rates. The maturity adjustment is calibrated to 5 years for 30-year products and to 3.5 years for 15- to 20-year products to approximately reflect the average life of the assets. The expected probability of default (PD) is calculated using a historical 1-year PD matrix for all financial institutions.
As mentioned earlier, counterparties with a lower concentration of mortgage credit risk and therefore a lower potential for wrong-way risk would be afforded a lower haircut relative to the counterparties with higher concentrations of mortgage credit risk. This difference is captured through the asset valuation correlation multiplier, AVCM. An AVCM of 1.75 is assigned to counterparties with high exposure to mortgage credit risk and 1.25 is assigned to diversified counterparties. The parameters of the Basel IRB formula, including the AVCM, were augmented to best fit the internal counterparty credit risk haircuts developed by the Enterprises. This method of accounting for wrong-way risk is transparent and parsimonious.
The NPL loan segment represents a different level of counterparty risk relative to the performing loans segment. Unlike performing loans, the Enterprises expect to submit claims for non-preforming loans in the near future. The proposed rule would reduce Basel's effective maturity from 5 (or 3.5 for 15/20Yr) to 1.5 for all loans in the NPL loan segment. The reduced effective maturity would lower counterparty haircuts on loans in the NPL loan segment.
The proposed rule would use the following look-up table to determine the counterparty risk haircut multiplier.
The proposed rule would use the following formula to calculate the net credit risk capital requirement for single-family whole loans and guarantees with loan-level credit enhancement, taking into account the credit enhancement benefit adjusted for the counterparty haircut:
For single-family whole loans and guarantees without loan-level credit enhancements, the net credit risk capital requirement would equal the gross credit risk capital requirement.
There is no credit risk capital requirement in the proposed rule for single-family mortgage-backed securities (MBS) held in portfolio that were issued and guaranteed by an Enterprise or Ginnie Mae, and collateralized mortgage obligations (CMOs) held in portfolio that are collateralized by Enterprise or Ginnie Mae whole loans or securities. Ginnie Mae securities are backed by the U.S. government and therefore do not have credit risk. For MBS and CMOs issued by an Enterprise and later purchased by the same Enterprise for its portfolio, the credit risk is already reflected in the credit risk capital requirement on the underlying single-family whole loans and guarantees (section II.C.4.a). For MBS and CMOs held by an Enterprise that were issued by the other Enterprise, there is counterparty risk. However, these holdings are typically small and, for reasons of simplicity, the proposed rule does not include a capital requirement for this exposure.
This section corresponds to Proposed Rule §§ 1240.14 through 1240.16.
The Enterprises systematically reduce the credit risk on their single-family books of business by transferring and sharing risk beyond loan-level credit enhancements through single-family credit risk transfers (CRTs). These CRTs include capital markets and insurance/reinsurance transactions, among others. In the proposed rule, single-family capital relief for the Enterprises would be equal to the reduction in credit risk capital from transferring all or part of a credit risk exposure that remains after considering loan-level credit enhancements. For a given single-family CRT, the proposed rule would restrict capital relief to be no greater than total net credit risk capital requirements on all single-family whole loans and guarantees underlying the CRT (or belonging to the reference pool underlying the CRT). Therefore, the single-family operational risk capital requirement and the single-family going-concern buffer would not contribute to capital relief.
The proposed rule would require the Enterprises to calculate capital relief on every CRT. If a CRT has multiple pool groups, the requirement would apply separately to each pool group. The proposed rule would then require each Enterprise to calculate total capital relief as the sum of capital relief across all its CRTs, including across all pool groups.
This section provides (i) a background on single-family CRTs, (ii) types of single-family CRTs offered by the Enterprises, (iii) the proposed rule's approach for CRT capital relief, (iv) alternative approaches considered, and (v) estimated effects of the proposed rule's approach.
CRT transactions provide credit protection beyond that provided by loan-level credit enhancements. CRTs can be viewed as the Enterprise paying a portion of the guarantee fee as a cost of transferring credit risk to private sector investors. To date, single-family
The Enterprises have developed a variety of single-family CRTs. The types of transactions include structured debt issuances known as Structured Agency Credit Risk (STACR) for Freddie Mac and Connecticut Avenue Securities (CAS) for Fannie Mae, insurance/reinsurance transactions, front-end lender risk sharing transactions, and senior-subordinate securities.
The STACR and CAS securities account for the majority of single-family CRTs to date. These securities are issued as Enterprise debt and do not constitute the sale of mortgage loans or their cash flows. Instead, STACR and CAS are considered to be synthetic notes or derivatives because their cash flows track to the credit risk performance of a notional reference pool of mortgage loans. For the STACR and CAS transactions, the Enterprises receive the proceeds of the note issuance at the time of sale to investors. The Enterprises pay interest to investors on a monthly basis and allocate principal to investors based on the repayment and credit performance of the loans in the underlying reference pool. Investors ultimately receive a return of their principal, less any covered credit losses. The debt transactions are fully collateralized since investors pay for the notes in full. Thus, the Enterprises do not bear any counterparty credit risk on debt transactions.
Insurance or reinsurance transactions that are over and above loan-level mortgage insurance are considered CRTs. To date, the insurance and reinsurance CRTs have focused primarily on pool-level insurance transactions. In contrast to loan-level insurance structures such as MI, pool-level insurance covers an entire pool of hundreds or thousands of loans. Pool insurance transactions are typically structured with an aggregated loss amount. The Enterprises, as policy holders, typically retain some portion (or all) of the first loss. The cost of pool-level insurance is generally paid by the Enterprise, not the lender or borrower. In general, because the insurance transactions are partly collateralized the Enterprises may bear some counterparty credit risk.
Reinsurance companies have been the primary provider of pool-level insurance for the Enterprises' CRTs.
Front-end (or upfront) lender risk sharing transactions include various methods of CRT where an originating lender or aggregator retains a portion of the credit risk associated with the loans that they sell to or service for the Enterprises. In this case, the credit risk sharing arrangement is entered into prior to the lender delivering the loans to the Enterprise. In exchange, the lender is compensated for the risk. In these transactions, the Enterprises bear some counterparty credit risk. However, the Enterprise typically requires some form of collateral or other arrangement to offset the counterparty risk inherent in the front-end transaction. Front-end lender risk sharing transactions are generally described as lender recourse or indemnification arrangements, or collateralized recourse. One benefit of the lender recourse or indemnification structure in which the credit risk is retained by the lender is that it aligns the interest of the lender and servicer with the credit risk purchaser and the Enterprise.
In a senior-subordinate (senior-sub) securitization, the Enterprise sells a pool of mortgages to a trust that securitizes cash flows from the pool into several tranches of bonds, similar to private label security transactions. A tranche refers to all securitization exposures associated with a securitization that have the same seniority. The subordinated bonds, also called mezzanine and first-loss bonds, provide the credit protection for the senior bond. Unlike STACR and CAS, the bonds created in a senior-sub transaction are mortgage-backed securities, not synthetic securities. In addition, unlike typical MBS issued by the Enterprises, only the senior tranche is credit-guaranteed by the Enterprise.
The proposed rule would require that the Enterprises calculate capital relief using a step-by-step approach. To identify capital relief, the proposed rule would combine credit risk capital and expected losses on the underlying single-family whole loans and guarantees, tranche structure, ownership, timing of coverage, and counterparty credit risk. In general, the proposed rule would require five steps when calculating capital relief.
In the first step, the Enterprises would distribute credit risk capital on the underlying single-family whole loans and guarantees to the tranches of the CRT independent of tranche ownership, while controlling for expected losses, such that the riskiest, most junior tranches would be allocated capital before the most senior tranches. Under the proposed approach, an Enterprise would hold the same level of capital if the Enterprise held every tranche of its risk transfer vehicle or held the underlying assets in portfolio. The total credit risk capital across all tranches of the CRT would equal credit risk capital on the underlying single-family whole loans and guarantees.
In the second step, the Enterprises would calculate capital relief accounting for tranche ownership. The proposed approach would provide the Enterprises capital relief from transferring all or part of a credit risk exposure. For each tranche or exposure, the Enterprises would identify the portion of the tranche owned by private investors or covered by a loss sharing agreement. Then, in general, the Enterprises would calculate the capital relief as the product of the credit risk
However, this initial calculation of capital relief must be adjusted to account for loss timing and counterparty credit risk. In particular, CRT coverage can expire before the underlying loans mature. Also, loss sharing agreements may be subject to counterparty credit risk. Capital relief afforded by credit risk transfers would be overstated absent such an adjustment.
Therefore in the third step, for each tranche, capital relief would be lowered by a loss timing factor that accounts for the timing of coverage. The loss timing factor would address the mismatch between lifetime single-family losses on the whole loans and guarantees underlying the CRT and the term of coverage on the CRT.
In the fourth step, for loss sharing agreements, the Enterprises would apply haircuts to previously calculated capital relief to adjust for counterparty credit risk. In particular, the Enterprises would consider the credit worthiness of each counterparty when assessing the contribution of loss sharing arrangements such that the capital relief is lower for less credit worthy counterparties. At the same time, in the proposed approach, collateral posted by a counterparty would be considered when determining the counterparty credit risk, as posted collateral would at least partially offset the effect of the counterparty exposure.
Lastly, the Enterprises would calculate total capital relief by adding up capital relief for each tranche in the CRT. Further, in the event that the CRT has multiple pool groups, then the proposed rule would calculate each group's capital relief separately.
Overall, the proposed approach would afford relatively higher levels of capital relief to the riskier, more junior tranches of a CRT that are the first to absorb unexpected losses, and relatively low levels of capital relief to the most senior tranches. The proposed approach would also afford greater capital relief for transactions that provide coverage (i) on a higher percentage of unexpected losses, (ii) for a longer period of time, and (iii) with lower levels of counterparty credit risk.
For comparison, the proposed approach is analogous to the Simplified Supervisory Formula Approach (“SSFA”) under the banking regulators' capital rules applicable to banks, savings associations, and their holding companies.
The proposed rule would require each Enterprise to calculate capital relief using a five-step approach. The following example provides an illustration of the five steps. Consider the following inputs from an illustrative CRT (see Figure 1):
• $1,000 million in UPB of performing 30-year fixed rate single-family whole loans and guarantees with original LTVs greater than 60 percent and less than or equal to 80 percent;
• CRT coverage term of 10 years;
• Three tranches—B, M1, and A—where tranche B attaches at 0 bps and detaches at 50 bps, tranche M1 attaches at 50 bps and detaches at 450 bps, and tranche A attaches at 450 bps and detaches at 10,000 bps;
• Tranches B and A are retained by the Enterprise, and ownership of tranche M1 is split between capital markets (60 percent), a reinsurer (35 percent), and the Enterprise (5 percent);
• An aggregate net credit risk capital requirement on the single-family whole loans and guarantees underlying the CRT of 275 bps;
• Aggregate expected losses on the single-family whole loans and guarantees underlying the CRT of 25 bps; and
• The reinsurer posts $2.8 million in collateral, has a counterparty financial strength rating of 3, and does not have a high level of mortgage concentration risk.
In the first step, the Enterprises would distribute the aggregate net credit risk capital to the tranches of the CRT independent of tranche ownership, while controlling for aggregate expected losses. For the illustrative CRT, the Enterprise would allocate aggregate net credit risk capital and expected losses to the riskiest, most junior tranche (tranche B) before the mezzanine tranche (tranche M1) and the most senior tranche (tranche A).
For the illustrative CRT, the Enterprise would allocate aggregate net credit risk capital and expected losses such that the riskiest, most junior tranche (tranche B) would receive its allocation before the mezzanine tranche (tranche M1) and the most senior tranche (tranche A). In particular, the Enterprise would first distribute aggregate expected losses (25 bps) and 25 bps of aggregate net credit risk capital to tranche B. The Enterprise would then distribute the remaining aggregate credit risk capital (250 bps) to tranche M1. As tranche A's attachment point exceeds the sum of aggregate expected losses and aggregate net credit risk capital, the Enterprise would not allocate net credit risk capital to tranche A.
In the second step, the Enterprises would calculate capital relief accounting for tranche ownership. This approach would provide the Enterprise capital relief from transferring all or part of a credit risk exposure. For the illustrative CRT, the Enterprise would only receive capital relief from 95 percent of tranche M1 since the Enterprise retains all of tranches A and B and retains only 5 percent of tranche M1. The Enterprise would calculate the capital relief on tranche M1 as the product of the allocated aggregate net credit risk capital (250 bps) and sum of the portion of the tranche owned by private investors (60 percent) and covered by a reinsurer (35 percent). Thus, the Enterprise would calculate initial capital relief of 237.5 bps or the product of 250 bps and 95 percent.
However, this initial calculation of capital relief must be adjusted to account for loss timing and counterparty credit risk. Therefore, in the third step the proposed rule lowers initial capital relief by a loss timing factor that accounts for the timing of coverage. The loss timing factor addresses the mismatch between lifetime losses on the 30-year fixed-rate single-family whole loans and guarantees underlying the illustrative CRT and the CRT's coverage of 10 years. The loss timing factor for the illustrative CRT with 10 years of coverage and backed by 30-year fixed-rate single-family whole loans and guarantees with original LTVs greater than 60 percent and less than or equal to 80 percent is 88 percent. Therefore, the Enterprise would lower the capital relief to 209 bps by multiplying together the loss timing factor (88 percent) and initial capital relief (237.5 bps).
In the fourth step, the Enterprise would apply haircuts to previously calculated capital relief to adjust for counterparty credit risk from the reinsurance arrangement. In practice, the Enterprise would identify the reinsurer's uncollateralized exposure and apply a haircut. For the illustrative CRT, the Enterprise would first determine the reinsurer's uncollateralized exposure by subtracting the reinsurer's collateral amount ($2.8 million) from the reinsurer's exposure as follows:
The Enterprise would then consider the credit worthiness of the reinsurer and apply a haircut. For the illustrative CRT, the reinsurer has a counterparty financial strength rating of 3 and does not have a high level of mortgage
Lastly, the Enterprise would calculate total capital relief by adding up capital relief for each tranche in the CRT and reducing capital relief by any counterparty credit risk capital. For the illustrative CRT, the Enterprise would calculate total capital relief at 206.5 bps or capital relief after adjusting for ownership and loss timing (209 bps) less counterparty credit risk (2.5 bps).
A seasoned single-family CRT differs from when it was newly-issued due to the changing risk profile on the whole loans and guarantees underlying the CRT. Therefore, under the proposed rule, the Enterprises would be required to re-calculate capital relief on their seasoned single-family CRT transactions with each submission of capital results.
For each seasoned single-family CRT, the proposed rule would require the Enterprises to update the data elements originally considered. In particular, the proposed rule would require the Enterprises to update credit risk capital and expected losses on the underlying whole loans and guarantees, tranche structure, ownership, and counterparty credit risk.
The rate at which principal on a CRT's underlying loans is paid down (principal paydowns) affects the allocation of credit losses between the Enterprises and investors/reinsurers. Principal paydowns include regularly scheduled principal payments and unscheduled principal prepayments. In general, a CRT's tranches are paid down in the order of their seniority outlined in the CRT's transaction documents. For tranches with shared ownership, principal paydowns are allocated on a pro-rata basis. As CRT analysts have noted, under certain conditions unusually fast prepayments can erode the credit protection provided by the CRT by paying down the subordinate tranches and leave the Enterprises more vulnerable to credit losses. In particular, unexpectedly high prepayments can compromise the protection afforded by CRTs and reduce the CRT's benefit or capital relief.
FHFA reviewed the effect on capital relief of applying stressful prepayment and loan delinquency projections to recent CRTs. FHFA concluded that deal features, specifically triggers, mitigate the effects of fast prepayments by diverting unscheduled principal prepayments to the Enterprise-held senior tranche. For example, a minimum credit enhancement trigger redirects prepayments to the senior tranche when the senior credit enhancement falls below a pre-specified threshold. Similarly, a delinquency trigger diverts prepayments when the average monthly delinquency balance (
In addition to triggers, FHFA considered three other possible approaches to address the impact of stressful CRT prepayments. First, FHFA considered whether it would be desirable to include language in the proposed rule requiring specific triggers in the Enterprises' CRT transactions. However, FHFA decided against such language because variations across transactions complicate the establishment of fixed triggers that could be prudently applied uniformly across deals. Further, mandating a fixed set of triggers could reduce innovation in managing principal paydowns. Moreover, FHFA has the authority to review CRT terms before issuance and therefore can ensure transactions include appropriate triggers. Second, FHFA considered using a simple multiplier to reduce the capital relief from CRTs. However, this would inadequately capture differences in collateral, subordination, and trigger structures between transactions. Finally, FHFA considered an approach that would define capital relief based on a weighted average of losses arising from averaging cash flows derived under multiple prepayment scenarios. However, FHFA decided that the complexity and opacity of this approach would be inconsistent with the overall goal of having simple and transparent credit risk capital requirements.
After considering these alternatives, FHFA believes that the proposed rule appropriately considers single-family CRT prepayments. However, FHFA is seeking public comment on CRT prepayments and is soliciting specific alternative approaches for addressing CRT prepayments in the proposed capital framework.
FHFA is soliciting comments on the capital relief treatment of single-family CRTs in the proposed rule. Providing capital relief for the Enterprises' credit risk transfer transactions is an aspect of the proposed rule that has received much consideration.
Credit risk transfer transactions reduce risk to taxpayers. Providing capital relief for CRTs, no matter what form the CRTs take, gives the Enterprises an incentive to transfer credit risk to third parties to reduce the risk the Enterprises pose to taxpayers. The Enterprises design their credit risk transfer transactions to protect against the risk that an investor might not have the funds to cover agreed-upon credit losses—often referred to as reimbursement risk—when such losses occur. The Enterprises use a number of different approaches to transfer credit risk, including transaction structures that are fully funded upfront and, therefore, have no reimbursement risk, and other transactions that require investors to partially or fully collateralize the investment to provide the Enterprises with assurance of available funds in the future. In addition, the credit risk protection provided by investors on fully funded CRT transactions is solely dedicated to absorbing credit risk and cannot be redirected for other uses. The Enterprises target loans that have the highest relative credit risk for CRT transactions, thereby providing a significant amount of credit risk protection.
While CRT transactions are designed to provide credit risk protection for the
In addition to the remaining reimbursement risk of certain CRT transactions, there is also the risk that loan prepayments could reduce the amount of credit risk protection able to be provided by investors. As discussed above, the Enterprises work to mitigate this prepayment risk by incorporating deal triggers into CRT transactions, but there remains risk that these triggers will not act as intended during a credit event. Additionally, the Enterprises' single-family CRTs have not been tested in a period of market stress because the programs started in 2013 and have expanded in a period of strong house price appreciation. Lastly, U.S. bank regulators have not given banks capital relief for credit risk transfers as FHFA has proposed to do in this rule for the Enterprises.
This section corresponds to Proposed Rule §§ 1240.17 through 1240.18.
Single-family whole loans held in the Enterprises' portfolios have market risk from changes in value due to movements in interest rates and credit spreads. As the Enterprises currently hedge interest rate risk at the portfolio level, the market risk capital requirements in the proposed rule focus on spread risk.
The proposed rule would determine market risk capital requirements for single-family whole loans using both single point estimates and the Enterprises' internal models.
The proposed rule would require an Enterprise to calculate market risk capital on single-family re-performing and non-performing whole loans using a single point estimate approach. The primary risk on these loans is credit risk and, in general, borrowers in these categories tend to have limited refinancing opportunities due to recent or current delinquencies. Therefore, re-performing and non-performing loans are relatively insensitive to prepayment risk, and FHFA believes the market risk profile of these loans would be sufficiently represented by a single point capital requirement.
The proposed rule would assign a single point estimate of 4.75 percent of the market value of assets for re-performing and non-performing whole loans. This proposal reflects the average of the Enterprises' internal model estimates.
The proposed rule would require an Enterprise to calculate market risk capital on single-family new originations and performing seasoned whole loans using the internal models approach.
In general, the complexity of the market risk profile on newly originated and performing seasoned whole loans is amplified due to high prepayment sensitivity. In particular, prepayment risk on performing whole loans may vary significantly across amortization terms, vintages, and mortgage rates. The high prepayment sensitivity might suggest that more simplified approaches, such as the single point estimate approach, would not capture key risk drivers. Also, spread shocks may vary across a variety of single-family loan characteristics. Thus, the spread duration approach, which relies on a constant spread shock, may not capture key single-family market movements. An internal models approach, however, would allow the Enterprises to differentiate market risk across multiple risk characteristics such as amortization term, vintage, and mortgage rates. Further, the Enterprises could account for important market risk factors, such as updated spread shocks, to reflect market changes.
Enterprise and Ginnie Mae single-family MBS and CMOs held in the Enterprises' portfolios have market risk stemming from changes in value due to movements in interest rates and credit spreads. As discussed in Section II.C.4.c with regard to the market risk capital requirements for single-family whole loans, the Enterprises currently hedge interest rate risk at the portfolio level, and therefore the market risk capital requirements in the proposed rule focus on spread risk. In the proposed rule, the market risk capital requirement for Enterprise and Ginnie Mae single-family MBS and CMOs would be determined using the internal models approach and the Enterprises' internal models for market risk.
In general, the complexity of the market risk profile on single-family MBS and CMOs is amplified due to high prepayment sensitivity of the underlying collateral. Further, CMOs can often contain complex features and structures that alter prepayments across different tranches based on the CMO's structure. As a result, within this category of assets, spread durations may vary significantly across mortgage products, amortization terms, vintages and mortgage rates and tranches. The use of an Enterprise's internal models to calculate market risk capital requirements would allow the Enterprise to account for important market risk factors that affect spreads and spread durations.
Notably, capital results that rely on internal model calculations can be opaque and result in different capital requirements across Enterprises for the same or similar exposures. Hence, the proposed rule would rely on an Enterprise's internal models solely only when the market risk complexity is sufficiently high that using a single point estimate or spread duration approach would inadequately represent the exposure's underlying single-family market risk. Further, internal models used in the determination of market risk capital requirements will be subject to ongoing supervisory review. Finally, an Enterprise's model risk management is subject to FHFA's 2013-07 Advisory Bulletin.
This section corresponds to Proposed Rule §§ 1240.19 through 1240.20.
As described in section II.C.2 above, the proposed rule would establish an operational risk capital requirement of 8 basis points for all assets. For single-family whole loans and guarantees, and Enterprise and Ginnie Mae single-family MBS and CMOs, the operational risk capital requirement would be 8 basis points of the unpaid principal balance of assets with credit risk or 8 basis points of the market value of assets with market risk.
This section corresponds to Proposed Rule §§ 1240.21 through 1240.22.
As described in section II.C.3 above, the proposed rule would establish a going-concern buffer of 75 basis points for all assets. For single-family whole loans and guarantees, and Enterprise and Ginnie Mae single-family MBS and CMOs, the going-concern buffer would be 75 basis points of the unpaid principal balance of assets with credit risk or 75 basis points of the market value of assets with market risk.
This section corresponds to Proposed Rule §§ 1240.24 through 1240.29.
The Enterprises have exposure to residential private-label securities (PLS) in that they hold PLS in portfolio as investments and guarantee PLS that have been re-securitized by an Enterprise (PLS wraps). The proposed rule would establish risk-based capital requirements for the credit risk associated with private-label securities, including PLS wraps, and the market risk associated with private-label securities with market risk exposure. The risk-based capital requirement for PLS and PLS wraps would also include a risk-invariant operational risk capital requirement and a going-concern buffer.
The proposed rule would use the SSFA methodology to determine the credit risk capital requirement for private-label securities with credit risk exposure in a manner based upon how banks use the SSFA to determine the capital requirements for securitized assets. For each private-label security, the proposed rule would set forth a minimum risk-based capital requirement as provided in the SSFA methodology, which would be adjusted based upon SSFA methodology to account for the performance of the underlying collateral and the level of subordination. The SSFA formulas would impose high capital requirements on subordinated risky tranches of a securitization relative to more senior positions that are less subject to credit losses.
Defining the PLS capital requirements using the SSFA methodology provides two advantages. First, the SSFA is a relatively simple and transparent approach to calculate private-label securities capital requirements. Second, using the SSFA methodology would create consistency in capital calculations between the Enterprises and private industry, as the banking agencies apply the SSFA to banking institutions subject to their jurisdiction. While there are shortcomings associated with using the SSFA methodology, the relatively high data demands associated with alternative loan-level approaches, along with the Enterprises' relatively limited amount of PLS holdings, lead
Because PLS wraps do not expose the Enterprises to market risk, PLS wraps would have a zero market risk capital requirement. For each private-label security with market risk exposure, the proposed rule would define market risk capital only with respect to spread risk, namely a loss in value of an asset relative to a risk free or funding benchmark due to changes in perceptions of performance or liquidity. Absent hedging, changes in interest rates would also have a direct effect on the value of private label securities. However, the Enterprises make extensive use of callable debt and derivatives to hedge interest rate risk. Therefore, in the proposed rule, market risk would affect the capital requirements for private-label securities only through changes in spreads.
In particular, the market risk capital requirement for PLS would be defined as the product of a change in the spread of the private-label security (spread shock) and the sensitivity of a private-label security's expected price to changes in the private-label security's spread (spread duration). The constant spread shock would be set at 265 basis points, reflecting estimates provided to FHFA by the Enterprises, while the Enterprises would use their own internal approaches to estimate the spread duration for each PLS in order to account for variation in spread durations across private-label securities. Finally, the product of the PLS market risk capital requirement in basis points and the market value of a private-label security would yield the PLS market risk capital requirement in dollars. Internal models used in the determination of market risk capital requirements would be subject to ongoing supervisory review.
As described in section II.C.2 above, the proposed rule would require the Enterprises to hold an operational risk capital requirement of 8 bps for all assets. For private label securities, the operational risk capital requirement would be 8 bps of the securities' market value.
As described in section II.C.3 above, the proposed rule would require the Enterprises to hold a going-concern buffer of 75 bps for all assets. For private label securities, the going-concern buffer would be 75 bps of the securities' market value.
This section corresponds to Proposed Rule §§ 1240.31 through 1240.45.
The proposed rule would establish risk-based capital requirements for the Enterprises' multifamily businesses. It is important to specify separate multifamily capital requirements in order to capture the unique nature of the multifamily lending business and its particular risk drivers. A typical multifamily loan, including those packaged together into mortgage-backed securities (MBS), is roughly $10 million, requires a 10-year balloon payment, and includes a 30-year amortization period. In addition, multifamily loans finance the acquisition and operation of commercial property collateral, as opposed to single-family dwellings. Multifamily properties are typically apartment buildings owned by real estate investors who rent the apartment units expecting to realize a profit after paying property operating and financing expenses.
The proposed rule would apply to multifamily whole loans, guarantees, and related securities held for investment. Multifamily whole loans are those that the Enterprises keep in their portfolios after acquisition. Multifamily guarantees are guarantees provided by the Enterprises of the timely receipt of payments to investors in mortgage-backed securities that have been issued by the Enterprises or other security issuers and are backed by previously acquired multifamily whole loans. Except in cases where the Enterprises transfer credit risk to third-party private investors, the Enterprises retain the credit risk from whole loans and guarantees. The Enterprises also retain market risk on whole loans held in portfolio and loans that they retain but intend to sell at a later date.
To implement the proposed capital requirements, the Enterprises would use a set of multifamily grids and risk multipliers to calculate credit risk capital, as well as a collection of straightforward formulas to calculate market risk capital, operational risk capital, and a going-concern buffer.
The proposed rule would first establish a framework through which the Enterprises would determine their gross multifamily credit risk capital requirements. The proposed methodology is simple and transparent, relying on a set of look-up tables (grids and risk multipliers) that take into account several important loan characteristics including debt-service-coverage ratio (DSCR), loan-to-value ratio (LTV), payment performance, loan term, interest-only (IO), loan size, and special products, among others.
The proposed grid and multiplier framework is consistent with existing financial regulatory regimes and would thereby facilitate comparison and examination of the Enterprises' risk-based capital requirements. FHFA believes that this straightforward and transparent approach, as opposed to one involving a complex set of credit models and econometric equations, would provide sufficient risk differentiation across the Enterprises' different types of multifamily business exposures without placing an undue compliance burden on the Enterprises.
The proposed rule would then provide a mechanism for the Enterprises to calculate multifamily capital relief by reducing gross credit risk capital requirements based on the amount of loss shared or risk transferred to other parties. The proposed CRT calculation would include a capital requirement for multifamily counterparty credit risk stemming from contractual arrangements with lenders, re-insurers, and other counterparties with which the Enterprises engage. In doing so, the rule would account for differences in the Enterprises' multifamily business models.
The proposed rule would establish market risk capital requirements for multifamily whole loans using the spread duration approach. For multifamily securities held for investment, the parameters would apply to two asset types: Whole loans and Enterprise—and Ginnie Mae-issued mortgage-backed securities (MBS).
In addition, the proposed rule would establish an operational risk capital requirement for the Enterprises' multifamily businesses that is invariant to risk. The proposed rule would base the operational risk capital requirement on the Basel Basic Indicator Approach, which accounts for gross income and assets by product line.
Lastly, the proposed rule would establish a going-concern buffer for the Enterprises' multifamily businesses that is invariant to risk. The purpose of the going-concern buffer is to allow the Enterprises, in this case as it pertains to their multifamily businesses, to remain as functioning entities during and after a period of severe financial distress.
The proposed rule would apply to both Enterprises equally. However, when appropriate, the proposed rule would account for differences in the Enterprises' multifamily business models. These differences are evident, for example, when considering certain elements of the proposed rule related to credit risk transfer.
As of late 2017, Fannie Mae's multifamily business relied on the Delegated Underwriting and Servicing (DUS) program. The DUS program is a loss-sharing program that seeks to facilitate the implementation of common underwriting and servicing guidelines across a defined group of multifamily lenders. The number of multifamily lenders in the DUS program has historically ranged between 25 and 30 since the program's inception in the late 1980s. Fannie Mae typically transfers about one-third of the credit risk to those lenders, while retaining the remaining two-thirds of the credit risk plus the counterparty risk associated with the DUS lender business relationship. The proportion of risk transferred to the lender may be more or less than one-third under a modified version of the typical DUS loss-sharing agreement.
In contrast, as of late 2017, Freddie Mac's multifamily model focused almost exclusively on structured, multi-class securitizations. While Freddie Mac has a number of securitization programs for multifamily loans, the most heavily used program is the K-Deal program. Under the K-Deal program, which started in 2009, Freddie Mac sells a portion of unguaranteed bonds (mezzanine and subordinate), generally 10 to 15 percent, to private market participants. These sales typically result in a transfer of a very high percentage of, if not all of, the credit risk. Freddie Mac generally assumes credit and market risk during the period between loan acquisition and securitization. In addition, after securitization, Freddie Mac generally retains a portion of the credit risk through ownership or guarantee of senior K-Deal tranches.
Despite these differences in the Enterprises' multifamily business models, the proposed rule would accommodate both Enterprises' current lending practices, and would not preclude them from adopting a version of one another's lending practices in the future. Specifically, the proposed rule would explicitly include variations in the estimation of required credit risk capital under each Enterprise's risk transfer approach, but would not limit an Enterprise to a particular approach.
The proposed rule would establish risk-based capital requirements for the Enterprises' multifamily businesses, including their whole loans and guarantees and securities held for investment. Using the proposed capital requirements, the Enterprises would calculate the minimum amount of funds needed to support their multifamily operations under stressed economic conditions, as discussed briefly above and in detail below. The proposed multifamily capital requirements would comprise the following components: Credit risk capital, including adjustments for credit risk transfers; market risk capital; operational risk capital; and a going-concern buffer. Each component is discussed individually below.
This section corresponds to Proposed Rule §§ 1240.31 through 1240.36.
The proposed rule would establish credit risk capital requirements for the Enterprises' multifamily whole loans and guarantees. The multifamily credit risk capital requirements would be determined by the minimum funding necessary to cover the difference between estimated lifetime stress losses in severely adverse economic conditions and expected losses. For the purpose of the proposed rule, the multifamily-specific stress scenario involves two parameters:
• Net Operating Income (NOI), where NOI represents Gross Potential Income (gross rents) net of vacancy and operating expenses, and
• Property values.
Adverse economic conditions are generally accompanied by either a decrease in expected property revenue or an increase in perceived risk in the multifamily asset class, or both. A decrease in expected occupancy would lead to a decline in income generated by the property, or a lower NOI, while an increase in perceived risk would lead to an increase in the capitalization rate used to discount the NOI when assessing property value. A capitalization rate, or cap rate, is defined as NOI divided by property value, so if NOI is held constant, an increase in the cap rate is directly related to a decrease in property values. For the purpose of the proposed rule, the multifamily-specific stress scenario assumes an NOI decline of 15 percent and a property value decline of 35 percent. This stress scenario is consistent with market conditions observed during the recent financial crisis, views from third-party market participants and data vendors, and assumptions behind the Dodd-Frank Act Stress Test (DFAST) severely adverse scenario. The estimated differences between stress losses in a severely adverse scenario and expected losses are reflected in the multifamily credit risk capital grids discussed below.
Under the proposed rule, the Enterprises would calculate credit risk capital for multifamily whole loans and guarantees by completing the following simplified steps:
(1) Determine gross multifamily credit risk capital through the use of multifamily-specific credit risk capital grids;
(2) Adjust gross multifamily credit risk capital for additional risk characteristics using a set of multifamily-specific risk multipliers; and
(3) Determine net multifamily credit risk capital by adjusting gross multifamily credit risk capital for credit risk transfers.
The proposed rule would require the Enterprises to determine base multifamily credit risk capital using a set of two look-up tables, or grids—one for each multifamily segment. Accordingly, for the purpose of the proposed rule, the Enterprises would divide their multifamily whole loans and guarantees into two segments by interest rate contract: One segment for whole loans and guarantees with fixed rate mortgages (FRMs), and one segment for whole loans and guarantees with adjustable rate mortgages (ARMs). Multifamily whole loans that have both a fixed rate period and an adjustable rate period, also known as hybrid loans, would be classified and treated as a multifamily FRM during the fixed rate period, and classified and treated as a multifamily ARM during the adjustable rate period.
Each segment would have a unique two-dimensional multifamily credit risk capital grid which the Enterprises would use to determine base credit risk capital for each whole loan and guarantee before applying subsequent credit risk multipliers, discussed in the next section. The dimensions of the multifamily credit risk capital grids would be ranges based on two important underlying multifamily loan characteristics: Debt-service-coverage ratio (DSCR) and loan-to-value ratio (LTV). These two risk factors are crucial for forecasting the future performance of loans on commercial real estate properties, including multifamily properties. DSCR is the ratio of property Net Operating Income (NOI) to the loan payment. A DSCR greater than 1.0 indicates that the property generates sufficient funds to cover the loan obligation, while the opposite is true for a DSCR less than 1.0. LTV, in turn, is the ratio of loan amount to property value. In commercial real estate financing, a DSCR of 1.25 and an LTV of 80 percent represent common and reasonable standards for underwriting and performance evaluation purposes.
In the proposed rule, the multifamily credit risk capital grids were populated using model estimates from both Enterprises, averaged to determine the capital requirement associated with each cell in the multifamily credit risk capital grids. To derive the estimates, the Enterprises were asked to run their multifamily credit models using the multifamily-specific stress scenario described above and a synthetic loan with a baseline risk profile with respect to risk factors other than DSCR and LTV. Specifically, the proposed FRM credit risk capital grid was populated using loss estimates (stress losses minus expected losses) for a multifamily loan with varying DSCR and LTV combinations and the following risk characteristics: $10 million loan amount, 10-year balloon with a 30-year amortization period, non-interest-only, not a special product, and never been delinquent or modified. Similarly, the proposed ARM credit risk capital grid was populated using loss estimates (stress losses minus expected losses) for a multifamily loan with varying DSCR and LTV combinations and the following risk characteristics: 3 percent origination interest rate, $10 million loan amount, 10-year balloon with a 30-year amortization period, non-interest-only, not a special product, and never been delinquent or modified. Thus, each cell of the proposed FRM (ARM) credit risk capital grid represents the average estimated difference, in basis points, between stress losses and expected losses for synthetic FRM (ARM) loans described above with a DSCR and LTV in the tabulated ranges. This capital requirement, in basis points, would be applied to the unpaid principal balance (UPB) of each multifamily whole loan and guarantee held by the Enterprises with exposure to credit risk.
The proposed rule would require that the Enterprises use the multifamily credit risk capital grids in their regulatory capital calculations for both newly acquired multifamily whole loans and guarantees, as well as seasoned multifamily whole loans and guarantees. A newly acquired multifamily whole loan or guarantee is a whole loan or guarantee originated within the prior 5 months, while a seasoned multifamily whole loan or guarantee is a whole loan or guarantee originated more than 5 months ago. For newly acquired whole loans and guarantees, the proposed rule would require the Enterprises to use DSCRs and LTVs determined at acquisition to calculate capital requirements using the multifamily credit risk capital grids. For seasoned whole loans and guarantees, the proposed rule would require the Enterprises to use DSCRs and LTVs updated as of the relevant capital calculation date, also known as the mark-to-market DSCR (MTMDSCR) and mark-to-market LTV (MTMLTV), to calculate capital requirements using the multifamily credit risk capital grids.
The proposed multifamily credit risk capital grids for the FRM and ARM loan segments are presented in Tables 26 and 27, respectively:
The proposed multifamily credit risk capital grids provide for a straightforward determination of multifamily credit risk capital that is easy to interpret. In both multifamily credit risk capital grids, the credit risk capital requirement would increase as DSCR decreases (moving toward the top of a grid) and as LTV increases (moving toward the right of the grid). Thus, the Enterprises would generally be required to hold more capital for a multifamily whole loan or guarantee with a low DSCR and a high LTV (the upper-right corner of each grid) than for a multifamily whole loan or guarantee with a high DSCR and a low LTV (the lower-left corner of each grid).
The risk factor breakpoints and ranges represented in the multifamily credit risk capital grids were chosen following internal FHFA analysis and discussions with the Enterprises. After reviewing the distributions of the Enterprises' multifamily whole loan and guarantee unpaid principal balances (UPBs) across both dimensional risk factors (DSCR and LTV), FHFA concluded that the proposed breakpoints and ranges would combine to form sufficiently granular pairwise buckets without sacrificing simplicity or imposing an undue compliance burden on the Enterprises. Furthermore, for ease of interpretation and implementation, the proposed rule would contain one set of DSCR and LTV ranges for both newly acquired and seasoned whole loans and guarantees.
The proposed rule would require a unique treatment for interest-only (IO) loans. IO loans allow for payment of interest without any principal amortization during all or part of the loan term, creating increased amortization risk and additional leveraging incentives for the borrower. To partially capture these increased risks, the proposed rule would require the Enterprises to use the fully amortized payment to calculate DSCR (or MTMDSCR) during the IO period in order to calculate base capital requirements using one of the two multifamily credit risk capital grids. Specifically, the proposed rule would require the Enterprises to assign each multifamily IO loan into a multifamily loan segment, either FRM or ARM, and to calculate a base credit risk capital requirement for each IO whole loan and guarantee using the corresponding segment-specific multifamily credit risk capital grid, where the DSCR (in the case of a new acquisition) or the MTMDSCR (in the case of a seasoned loan) is based on the IO loan's fully amortized payment.
After the Enterprises calculate base credit risk capital requirements for multifamily whole loans and guarantees using the multifamily credit risk capital grids, the proposed rule would require the Enterprises to adjust these capital requirements to account for additional risk characteristics using a set of multifamily-specific risk multipliers. The proposed risk multipliers would refine multifamily base credit risk capital requirements for whole loans and guarantees that possess additional risk factors beyond those reflected in the dimensions of the multifamily credit risk capital grids, and would include considerations for both seasoned loans and new acquisitions. Accordingly, the Enterprises would apply these risk multipliers on top of the base credit risk capital requirements obtained from the multifamily credit risk capital grids. The proposed rule would include multipliers to capture variations in the following multifamily loan characteristics: Payment performance, interest-only, loan term, amortization term, loan size, and special products.
The proposed multifamily risk multipliers represent common characteristics that increase or decrease the riskiness of a particular multifamily whole loan or guarantee. The proposed rule would provide a mechanism through which multifamily credit risk capital requirements would be adjusted and refined up or down to reflect a more or less risky loan profile, respectively. FHFA believes that risk multipliers would provide for a simple and transparent characterization of the risks associated with different types of multifamily whole loans and guarantees, and an effective way of adjusting credit risk capital requirements for those risks. Although the specified risk characteristics are not exhaustive, they capture key commercial real estate loan performance drivers, and are common in commercial real estate loan underwriting and rating. Therefore, FHFA believes the use of risk multipliers in general, and the proposed multipliers in particular, would facilitate analysis of the Enterprises' multifamily credit risk capital requirements while mitigating concerns associated with compliance and complex implementation.
The proposed multifamily risk multipliers would capture variations in risk specific to individual whole loans and guarantees, and augment the base credit risk capital requirements. The numerical multipliers populating the multifamily risk multiplier table were determined using FHFA staff analysis and expertise, along with the Enterprises' contributions of model results and business expertise. Specifically, FHFA asked the Enterprises to run their multifamily credit models using the multifamily-specific stress scenario described above and synthetic loans with a baseline risk profile with respect to risk factors other than DSCR and LTV, in the same way the Enterprises populated the multifamily credit risk capital grids. However, FHFA then asked the Enterprises to vary the additional risk factors to estimate the risk factors' multiplicative effects on the Enterprises' loss estimates (stress losses minus expected losses). In general, the multiplier values estimated by the Enterprises were consistent with one another in magnitude and direction. Using judgement, FHFA combined the estimates to determine the final multifamily risk multiplier values.
The proposed rule would require that multifamily whole loans and guarantees with characteristics similar to, and within a certain range of, the risk characteristics of the synthetic loans underlying the multifamily credit risk capital grids would take a multiplier of 1.0. Risk factor values dissimilar to the characteristics of the synthetic loans would be assigned risk multiplier values greater than or less than 1.0, such that the total risk multiplier applied to a given multifamily whole loan or guarantee could be above 1.0, below 1.0, or 1.0, depending on how the risk factor values compare to the pertinent risk factor values in the synthetic loans. A multiplier value above 1.0 would be assigned to risk factor values that represent riskier loan characteristics, while a multiplier value below 1.0 would be assigned to risk factor values that represent less risky characteristics. For each multifamily whole loan and guarantee, the individual risk multipliers would be multiplicative, and their product would be applied to the gross credit risk capital requirements determined by the multifamily credit risk capital grids.
The proposed multifamily risk multiplier values are presented in Table 28:
Each multifamily risk factor represented in Table 28 can take multiple values, and each value or range of values has a risk multiplier associated with it. FHFA determined these values and ranges after analyzing the Enterprises' multifamily portfolios and the associated distributions of UPBs, and subsequent to significant discussions both internally and with the Enterprises. FHFA believes that the proposed values and ranges would provide an appropriate level of granularity in the risk multiplier framework, both within each risk factor and cumulatively across risk factors, to sufficiently capture the variations in observable risk given the Enterprises' multifamily businesses and without imposing an undue compliance or implementation burden on the Enterprises. The risk factors in the multifamily risk multiplier table are:
•
•
•
•
•
•
In the context of the proposed rule, multifamily whole loans and guarantees that are government-subsidized have financing that includes HUD or FHA subsidies. These subsidies could have value to an investor or to a renter, depending on the specific HUD or FHA program used, through their effect on the loan balance or on any tax credits related to the operation of the property supporting the loan. The benefits of these subsidies to investors and/or renters generally lead to property incomes that are less volatile than incomes associated with otherwise comparable whole loans and guarantees. Less volatile income broadly translates to lower risk, and as a result, government-subsidized whole loans and guarantees would be assigned a risk multiplier lower than 1.0.
Student housing loans provide financing for the operation of apartment buildings for college students. The rental periods for units in these properties often correspond with the institution's academic calendar, so the properties have a high annual turnover of occupants. Student renters, by and large, are not as careful with the use and maintenance of the rental units as more mature households. As a result, apartment buildings focusing on student housing customarily have more volatile occupancy and less predictable maintenance expenses. In the proposed rule, this would imply higher risk, which would lead to a risk multiplier greater than 1.0 for student housing whole loans and guarantees.
The third type of special product in the risk multiplier table would include loans issued to finance rehab/value-add/lease-up projects. In the context of the proposed rule, rehab and value-add projects are different types of renovations, where a rehab project is a like-for-like renovation and a value-add project is one that increases a property's value by adding a new feature to an existing property or converts one component of a property into a more marketable feature, such as converting unused storage units into a fitness center. A lease-up property is one that is recently constructed and still in the process of securing tenants for occupancy. Recently built properties, and those subject to improvements, typically require more intense marketing efforts in the early stages of property operation. It often takes longer for these properties to reach and stabilize at reasonable occupancy levels. In the proposed rule, this would elevate the property's risk, which would lead to a risk multiplier greater than 1.0 for whole loans and guarantees backing these properties.
Finally, supplemental loans, in the context of the proposed rule, are multifamily loans issued to a borrower for a property for which the borrower has previously received a loan. There can be more than one supplemental loan. These loans, by definition, increase loan balances, which would lead to higher LTVs and could lead to lower DSCRs, which could lead to higher risk. Therefore, the proposed rule would require the Enterprises to account for this potentially higher risk by recalculating DSCRs and LTVs for the original and supplemental loans using combined loan balances and income/payment information, and calculating the capital requirement for a supplemental loan as the marginal increase in total capital due to the addition of the supplemental loan. In practice, however, supplemental loans do not exist in a vacuum and the capital calculation for supplemental loans could be slightly more complicated than just described. For example, a higher loan balance due to a supplemental loan could push the total loan balance into a loan size bucket with a size multiplier smaller than it had before the supplemental was added, which could lower the overall credit risk capital requirement for the group of loans as a whole.
In the proposed rule, multifamily risk multipliers would adjust base credit risk capital requirements in a multiplicative manner. As a result, combinations of overlapping characteristics could potentially result in an extremely low risk assessment of certain multifamily whole loans and guarantees, which would arguably undermine the conservative approach to capital requirements FHFA aims to take in the proposed rule. Thus, in the proposed rule, the Enterprises would be required to impose a floor of 0.5 to any combined multifamily risk multiplier calculation. This floor would ensure that combinations of overlapping characteristics would not result in potentially dangerous risk assessments, which is important since the proposed multipliers themselves are designed to represent the average behavior of loans with the associated multiplier characteristics.
There is no credit risk capital requirement in the proposed rule for multifamily MBS held in portfolio that were issued and guaranteed by an Enterprise or Ginnie Mae or are collateralized by Enterprise or Ginnie Mae multifamily whole loans or securities. Ginnie Mae securities are backed by the U.S. government and therefore do not have credit risk. For MBS issued by an Enterprise and later purchased by the same Enterprise for its portfolio, the credit risk is already reflected in the credit risk capital requirement on the underlying multifamily whole loans and guarantees (Section II.C.7.a). For MBS held by an Enterprise that were issued by the other Enterprise, there is counterparty risk. However, these holdings are typically small and, for reasons of simplicity, the proposed rule does not include a capital requirement for this exposure.
This section corresponds to Proposed Rule §§ 1240.37 through 1240.38.
The Enterprises often seek to reduce the credit risk on their multifamily guarantee books of business by transferring and sharing risk through multifamily Credit Risk Transfers (CRTs). In the proposed rule, the Enterprises would be able to reduce their multifamily credit risk capital requirements by engaging in CRTs. In the context of the proposed rule, multifamily capital relief would be the reduction in required credit risk capital afforded to the Enterprises from transferring all or part of a credit risk exposure using a multifamily CRT transaction. To calculate capital relief, the proposed rule would require the Enterprises to use a formulaic approach that accounts for counterparty credit risk on each CRT.
To date, the Enterprises have generally utilized two broad types of CRTs for their multifamily books of business: Loss sharing and securitizations. Within these broad types, CRT transactions can have unique structures. The proposed approach is general enough to accommodate the variable nature of CRTs.
The first type of multifamily CRT transaction used by the Enterprises utilizes a loss sharing structure. In this type of CRT, which can be regarded as a front-end risk transfer with a vertical tranche, an Enterprise enters into a loss sharing agreement with a lender before the lender delivers the loan to the Enterprise. The Enterprise and lender share future losses according to a specified arrangement, commonly from the first dollar of loss, and in exchange the lender is compensated for the risk. For loss sharing CRT transactions, the proposed capital relief would be a proportional share of the gross credit risk capital requirements implied by the underlying multifamily whole loans and guarantees. However, because these transactions are not necessarily fully collateralized, loss sharing CRTs generally expose the Enterprises to counterparty credit risk. Therefore, the proposed rule would reduce capital relief to account for counterparty credit risk.
The second type of multifamily CRT transaction used by the Enterprises utilizes a multiclass securitization structure. In this type of CRT, an Enterprise sells a pool of loans to a trust that securitizes cash flows from the pool into several tranches of bonds. The subordinated bonds, also called mezzanine and first-loss bonds, are sold to market participants. These subordinated bonds provide credit protection for the senior bond, which is the only tranche that is credit-guaranteed by the Enterprises. For securitization CRT transactions, the proposed rule would require that the Enterprises calculate capital relief using a step-by-step approach. To identify capital relief, the proposed approach would combine credit risk capital and expected losses on the underlying whole loans and guarantees, tranche structure, and ownership.
Under the loss sharing and securitization umbrellas, the Enterprises have generally used two distinct models. Fannie Mae's multifamily business has relied heavily on its Delegated Underwriting and Servicing (DUS) program, a loss sharing CRT program. Freddie Mac's multifamily business, in turn, has focused almost exclusively on securitizations, predominately through its K-Deal program.
Under the DUS program, Fannie Mae typically transfers about one-third of the credit risk per deal under a pari-passu DUS arrangement. Fannie Mae retains the remaining two-thirds of the credit risk plus the counterparty credit risk associated with the DUS lender business relationship. To offset the counterparty credit risk, the program requires lenders to post a certain amount of collateral, primarily in the form of restricted liquidity, which Fannie Mae can access in the event of lender default. The collateral, which for the purposes of restricted liquidity is treated uniformly in the proposed rule, includes Treasury money market funds, Treasury securities, and Enterprise MBS, and is currently marked-to-market on a monthly basis by a custodian. Fannie Mae currently has agreements with 25 lenders to deliver multifamily loans that meet the criteria specified in the DUS underwriting and servicing guidelines.
Freddie Mac, on the other hand, typically transfers credit risk by tranching pools of multifamily loans and selling unguaranteed bonds (mezzanine and subordinate) to private market participants. These sales, which generally account for 10 to 15 percent of the underlying loans, typically result in a transfer of more than 80 percent of the credit risk, and often result in a transfer of close to 100 percent of the credit risk. Freddie Mac, however, does assume credit and market risk during the period between loan acquisition and securitization. In addition, after securitization, Freddie Mac retains a portion of the credit risk through ownership and/or guarantee of seniorK-Deal tranches.
Despite these differences in the Enterprises' multifamily business models, the proposed rule accommodates both Enterprises' lending practices.
In general, the proposed approach would require four steps when calculating capital relief. In the first step, the Enterprises would distribute credit risk capital on the underlying whole loans and guarantees to the tranches of the CRT independent of tranche ownership, while controlling for expected losses. In practice, the Enterprises would allocate credit risk capital such that the riskiest, most junior tranches would be allocated capital before the most senior tranches.
In the second step, the Enterprises would calculate capital relief accounting for tranche ownership. The proposed approach would provide the Enterprises with capital relief from transferring all or part of a credit risk exposure. For each tranche or exposure, the Enterprises would identify the portion of the tranche owned by private investors or covered by a loss sharing agreement. Then, in general, the Enterprises would calculate the capital relief as the product of the credit risk capital allocated to the exposure and the portion of the tranche owned by private investors or covered by a loss sharing agreement.
However, this initial calculation of capital relief must be adjusted to account for counterparty credit risk because loss sharing agreements may be subject to counterparty credit risk. Capital relief afforded by credit risk transfers would be overstated absent such an adjustment.
In the third step, for loss sharing agreements, the Enterprises would apply haircuts to previously calculated capital relief to adjust for counterparty credit risk. In particular, the Enterprises would consider the credit worthiness of each counterparty when assessing the contribution of loss sharing arrangements such that the capital relief is lower for less credit worthy counterparties. At the same time, in the proposed approach, collateral posted by a counterparty would be considered when determining the counterparty credit risk, as posted collateral would at least partially offset the effect of the counterparty exposure.
Lastly, the Enterprises would calculate total capital relief by adding up capital relief for each tranche in the CRT.
The proposed approach would afford relatively higher levels of capital relief to the riskier, more junior tranches of a CRT that are the first to absorb unexpected losses, and relatively low levels of capital relief to the most senior tranches. The approach would also afford greater capital relief for transactions that provide coverage: (i) On a higher percentage of unexpected losses, (ii) for a longer period of time, and (iii) with lower levels of counterparty credit risk.
The distinguishing feature of the loss sharing CRT approach is the addition of a counterparty. To calculate capital relief under the loss sharing approach, the proposed rule would require the Enterprises to conduct a counterparty risk analysis in which the Enterprises would calculate counterparty exposure as per the loss sharing agreement, consider applicable restricted liquidity rules, determine if the counterparty has posted collateral, and assess the uncollateralized exposure to apply a haircut.
In the proposed rule, the counterparty haircut would be calculated using a modified version of the Basel Advanced IRB approach that takes into account the creditworthiness of the counterparty. Echoing the single-family discussion from Section II.C.4.a of how counterparty risk is amplified due to the correlation between a counterparty's credit exposure and the Enterprises' credit exposure (concentration risk), the proposed rule would assign larger haircuts to multifamily counterparties with higher levels of concentration risk relative to diversified counterparties. The Enterprises would assess the level of multifamily mortgage risk concentration for each individual counterparty to determine whether the counterparty is well diversified or whether it has a high concentration risk, and counterparties with a lower concentration risk would be assigned a smaller counterparty haircut relative to counterparties with higher concentration risk. This difference is captured through the asset valuation correlation multiplier, AVCM. An AVCM of 1.75 would be assigned to counterparties with high concentration risk and an AVCM of 1.25 would be assigned to more well-diversified counterparties.
The proposed approach calculates the haircut by multiplying stress loss given default by stress probability of default and by a maturity adjustment for the asset. Along with the AVCM, other parameterization assumptions in the proposed rule include a stress LGD of 45 percent, a maturity adjustment calibrated to 5 years, a stringency level of 99.9 percent, and expected probabilities of default calculated using historical 1-year PD matrix for all financial institutions. The multifamily counterparty risk haircut multipliers are presented below in Table 29.
The Enterprises would select a counterparty haircut from Table 29 and would apply the haircut to the uncollateralized exposure in a CRT. Further, if in the case of lender failure an Enterprise has contractual control of the lender's guarantee fee revenue, then the uncollateralized exposure would also be adjusted for lender guarantee fee revenue associated with the multifamily loan guarantee fees. In this lender loss sharing case, lender revenue would generally reduce the Enterprises' required counterparty credit risk capital. In particular, under the DUS framework,
To calculate capital relief under the securitization approach, the proposed rule would require the Enterprises to analyze the levels of subordination involved in the securitization structure, and identify the portion of the tranches owned by private investors or covered by a loss sharing agreement. The Enterprises would then apply risk transfer calculations that resemble those used for the single-family CRT transactions, with minor changes to some of the required parameters.
The Enterprises may engage in other forms of CRT, which can be generally thought of as loss sharing with multiple tranches—vertical, horizontal, or both. These types of CRT could include back-end reinsurance coverage (
In general, the Enterprises would calculate the multifamily CRT capital relief as the product of the credit risk capital allocated to the exposure and the portion of the tranche owned by private investors or covered by a loss sharing agreement. The Enterprise would then adjust capital relief for counterparty credit risk, if applicable. The proposed approach implies that the CRT provides loss coverage through the entire duration of the loans subject to risk transfer. This includes the period at which a balloon payment, if the loan involves one, is due. If multifamily CRT coverage expires before the underlying loans mature, then capital relief afforded by the multifamily CRT may be overstated absent such a loss timing adjustment. However, because multifamily loans typically include a balloon payment, it is assumed that CRT coverage includes all potential losses including those associated with the borrower's failure to make the balloon payment.
In the proposed rule, the Enterprises would need to recalculate post-deal CRT capital on seasoned multifamily CRT transactions.
Fannie Mae's current risk transfer method (the DUS program) largely involves proportional front-end loss-sharing. In the proposed rule, for each group of loans that have been acquired through a loss-sharing transaction, including Fannie Mae's DUS program, the Enterprises would recalculate capital relief to reflect changes in restricted liquidity and counterparty exposure.
The majority of Freddie Mac's current risk transfer method involves structured securitizations through the K-deal program. Prepayment penalty structures, including defeasance, that prevent unpaid balances from changing significantly are often part of multifamily structured securitizations. These situations limit the effect of updating and recalculating the post-deal CRT capital. Nevertheless, in anticipation of future growth in multifamily CRT activities, the proposed rule would establish guidelines for post-deal CRT capital reporting.
In the proposed rule, for each group of loans remaining in a securitization CRT transaction, including those in Freddie Mac's K-deals, the Enterprises would recalculate capital relief by aggregating the updated loan-level capital requirements for each pool to determine how much capital is effectively transferred through the CRT at the time of the update. For each deal, the Enterprises would be required to update asset fundamentals that may affect the amount of expected or unexpected losses associated with the deal, as well as any potential changes in the deal's loan balances as a result of voluntary or involuntary terminations, including prepayments within or outside any applicable prepayment penalty period. In addition, for each tranche, the Enterprises would be required to update which parties are responsible for changes in a given tranche's exposure. A deal may involve different forms of credit enhancements in addition to the typical senior-subordinated structure (
This section corresponds to Proposed Rule §§ 1240.39 through 1240.40.
Multifamily whole loans held in the Enterprises' portfolios have market risk stemming from changes in value due to movements in interest rates and credit spreads. As the Enterprises currently hedge interest rate risk closely at the portfolio level, the market risk capital requirements in the proposed rule would focus on spread risk.
The proposed rule would require the Enterprises to calculate market risk capital requirements on fixed- and adjustable-rate multifamily whole loans using a spread duration approach, which relies, in part, on the Enterprises' internal models.
For the spread duration approach in the proposed rule, the Enterprises would calculate market risk capital as the product of a spread shock and spread duration. The proposed rule would include a specified spread shock and require an Enterprise to use its internal models to estimate spread durations.
Capital results that rely on internal model calculations can be opaque and
Notably, internal models used in the determination of multifamily market risk capital requirements would be subject to ongoing supervisory review. As an example, an Enterprise's model risk management is subject to FHFA's 2013-07 Advisory Bulletin.
The market risk capital requirement for the Enterprises' multifamily fixed- and adjustable-rate whole loans would be the product of a defined credit spread shock (15 bps) and the spread duration, calculated individually by the Enterprises using each Enterprise's internal models. For a given multifamily whole loan, the product of the spread shock and the spread duration would then be multiplied by the market value of the asset to compute the market risk capital requirement in dollars. The proposed 15 basis point spread duration assumes strong historical multifamily market performance, high multifamily whole loan liquidity, and low cash flow pricing sensitivity to changes in interest rate spreads.
Enterprise- and Ginnie Mae-guaranteed multifamily MBS held in the Enterprises' portfolios have market risk stemming from changes in value due to movements in interest rates and credit spreads. As discussed in Section II.C.6.c with regard to the market risk capital requirements for multifamily whole loans, the Enterprises currently hedge interest rate risk closely at the portfolio level, and therefore the market risk capital requirements in the proposed rule would focus on spread risk.
In the proposed rule, the market risk capital requirement for Enterprise- and Ginnie Mae-guaranteed multifamily MBS would be determined using a spread duration approach, which would rely, in part, on the Enterprises' internal models. For the spread duration approach in the proposed rule, the Enterprises would calculate market risk capital as the product of a spread shock and spread duration. The proposed rule would include a specific spread shock and require an Enterprise to use its internal models to estimate spread durations.
The use of internal models would allow the Enterprises to more frequently update spread durations to reflect market changes. However, capital results that rely on internal model calculations can be opaque and result in different capital requirements across Enterprises for the same or similar exposures. Hence, the proposed rule would partly rely on an Enterprise's internal models only when the market risk complexity is sufficiently high that using a single point estimate inadequately represents the exposure's underlying multifamily market risk.
Notably, internal models used in the determination of multifamily market risk capital requirements would be subject to ongoing supervisory review. As an example, an Enterprise's model risk management is subject to FHFA's 2013-07 Advisory Bulletin.
The market risk capital requirement for Enterprise- and Ginnie Mae-guaranteed multifamily MBS would be the product of a defined credit spread shock (100 bps) and the spread duration calculated individually by the Enterprises using each Enterprise's internal models. The proposed 100 basis point spread shock reflects a combination of the Enterprises' estimates, and is driven by the complexity of structured products relative to whole loans which could decrease liquidity and increase cash flow pricing sensitivity to changes in interest rate spreads.
This section corresponds to Proposed Rule §§ 1240.41 through 1240.42.
As described in section II.C.2 above, the proposed rule would establish an operational risk capital requirement of 8 basis points for all assets. For multifamily whole loans and guarantees, and Enterprise and Ginnie Mae multifamily MBS, the operational risk capital requirement would be 8 basis points of the unpaid principal balance of assets with credit risk or 8 bps of the market value of assets with market risk.
This section corresponds to Proposed Rule §§ 1240.43 through 1240.44.
As described in section II.C.3 above, the proposed rule would establish a going-concern buffer of 75 basis points for all assets. For multifamily whole loans and guarantees, and Enterprise and Ginnie Mae multifamily MBS, the going-concern buffer would be 75 basis points of the unpaid principal balance of assets with credit risk or 75 basis points of the market value of assets with market risk.
This section corresponds to Proposed Rule § 1240.46.
In the proposed rule, the capital requirement for multifamily commercial mortgage-backed securities (CMBS) held by the Enterprises that are not guaranteed by an Enterprise or by Ginnie Mae would be a single 200 basis point requirement that accounts for both credit and market risk. The 200 basis point requirement reflects a combination of the Enterprises' internal model estimates. FHFA chose this approach based on internal staff analysis and discussions with the Enterprises. FHFA believes this simple approach is justified given the small, and shrinking, non-Enterprise and non-Ginnie Mae CMBS portfolios held by the Enterprises.
As described in section II.C.2 above, the proposed would require the Enterprises to hold an operational risk capital requirement of 8 bps for all assets. For multifamily CMBS held by the Enterprises that were not issued by the Enterprises or by Ginnie Mae, the operational risk capital requirement would be 8 bps of the securities' market value.
As described in section II.C.3 above, the proposed rule uses a going-concern buffer of 75 bps for all assets. For multifamily CMBS held by the Enterprises that were not issued by the Enterprises or by Ginnie Mae, the going-concern buffer would be 75 bps of the securities' market value.
This section corresponds to Proposed Rule § 1240.47.
This section describes the proposed rule for certain assets and guarantees that are not covered by the Enterprises' core business activities. This section also describes the proposed rule for new products that are not covered in the proposed rule.
For assets with credit risk exposure, the proposed rule defines credit risk capital requirements. The proposed rule allows the Enterprises to use internal methodologies to calculate market risk capital requirements for other assets and guarantees.
The proposed rule would establish a risk-based capital requirement for deferred tax assets (DTAs) that would offset the DTAs included in core capital in a manner generally consistent to the Basel III treatment of DTAs. DTAs are recognized based on the expected future tax consequences related to existing temporary differences between the financial reporting and tax reporting of existing assets and liabilities given established tax rates. In general, DTAs are considered a component of capital because these assets are capable of absorbing and offsetting losses through the reduction to taxes. However, DTAs may provide minimal to no loss-absorbing capability during a period of stress as recoverability (via taxable income) may become uncertain.
In 2008, during the financial crisis, both Enterprises recognized a valuation allowance to reduce their DTAs to amounts that were more likely than not to be realized based on the facts that existed at the time and estimated future taxable income. A valuation allowance on DTAs is typically recognized when all or a portion of DTAs is unlikely to be realized considering projections of future taxable income. The recognition of the valuation allowances on DTAs resulted in non-cash charges to income and reductions to the Enterprises' net DTA balances (included in the retained earnings components of capital). Fannie Mae established a partial valuation allowance on DTAs of $30.8 billion in 2008, which was a major contributor to the overall capital reduction of $66.5 billion at Fannie Mae in 2008. Similarly, Freddie Mac established a partial valuation allowance on DTAs of $22.4 billion in 2008, which was also a major contributor to the overall capital reduction of $71.4 billion at Freddie Mac in 2008.
Other financial regulators recognize the limited loss absorbing capability of DTAs, and therefore limit the amount of DTAs that may be included in Common Equity Tier 1 (CET1) capital. Under Basel III guidance, certain DTAs are excluded from CET1, while other DTAs are included in CET1 capital up to a cap of 10 percent of CET1 capital. Most other DTAs are included in risk-weighted assets.
Given the Enterprises' experiences with DTAs during the financial crisis, FHFA would like to limit the amount of DTAs counted as capital, similar to the limitations of the other financial regulators. However, FHFA does not have the authority to change the statutory definition of core capital for the Enterprises. The proposed rule would instead adopt a modified version of the Basel III treatment whereby DTA amounts that would be deducted from CET1 under Basel are included in the risk-based capital requirement. The result of this modification would be to neutralize the impact of DTAs on Enterprise capital to the same degree that the Basel framework limits the amount of DTAs included in CET1. Similarly, DTA amounts included in risk weighted assets under Basel would also be included in the risk-based capital requirement. Specifically, the risk-based capital requirement for DTAs would be the sum of:
• 100 percent of DTAs that arise from net operating losses and tax credit carryforwards, net of any related valuation allowances and net of deferred tax liabilities (DTLs);
• 100 percent of DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of related valuation allowances and net of DTLs that exceed 10 percent of adjusted core capital;
• 20 percent (8 percent × 250 percent) of DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of related valuation allowances and net of DTLs that do not exceed 10 percent of adjusted core capital; and
• 8 percent of DTAs arising from temporary differences that could be realized through net operating loss carrybacks, net of related valuation allowances and net of DTLs.
The capital requirement for DTAs is highly sensitive to the amount of core capital held by an Enterprise. While the Enterprises currently have negative core capital, Table 33 below shows the impact of the proposed DTA treatment for the third and fourth quarters of 2017, assuming the Enterprises held core capital equal to the risk-based capital requirement (before DTAs), in order to show the DTA impact on a post-conservatorship basis. The fourth quarter impact is significantly lower due to the reduction in DTAs because of the Tax Cuts and Jobs Act of 2017.
Table 34 shows the impact of the proposed DTA treatment with the Enterprises' actual negative core capital in the third and fourth quarters of 2017.
Municipal debt is debt securities issued by states, local governments, or state agencies such as state housing finance agencies. As municipal debt generally has minimal default risk, the proposed rule would assign a zero credit risk capital requirement to municipal debt. The proposed rule would assign a market risk capital requirement of 760 bps, an operational risk capital requirement of 8 bps, and a going-concern buffer of 75 bps to municipal debt. The 760 basis point market risk capital requirement reflects a combination of the Enterprises' internal model estimates.
The proposed rule would use the single point estimate approach to market risk for a number of reasons. Municipal debt is a shrinking component of the Enterprises' portfolios. A more complicated approach would not be warranted, as it would not result in a material change to the Enterprises' overall capital position. Municipal debt has a simple market risk profile due to the absence of a prepayment option. Additionally, the credit spread for municipal debt is stable across maturities. The single point estimate for market risk capital represents the average of estimates from the Enterprises.
The proposed rule would not subject reverse mortgages and securities backed by reverse mortgages to a credit risk capital requirement due to Federal Housing Administration insurance on the mortgages. The proposed rule would assign a market risk capital requirement of 500 bps to reverse mortgages and 410 bps to reverse mortgage securities, an operational risk capital requirement of 8 bps to reverse mortgages and reverse mortgage securities, and a going-concern buffer of 75 bps to reverse mortgages and reverse mortgage securities. The 500 and 410 basis point market risk capital requirements reflect Fannie Mae's internal model estimates since Freddie Mac did not own reverse mortgages.
The rationale for applying the single point estimate approach to market risk for reverse mortgages and reverse mortgage securities is that (i) these assets are a shrinking component of the Enterprises' portfolios and (ii) these assets have low and stable market risk resulting from low prepayment sensitivity. In particular, for reverse mortgages, refinance is rare and not driven by changes in interest rates. As a result, market value on reverse mortgages and reverse mortgage securities is relatively insensitive to prepayment.
Cash and cash equivalents are highly liquid investment securities that have a maturity at the date of acquisition of three months or less and are readily convertible to known amounts of cash. The proposed rule would assign a zero credit risk capital requirement and a zero market risk capital requirement to cash and cash equivalents as they are not subject to default and market risks. Further, cash and cash equivalents would receive a zero operational risk capital requirement and a zero going-concern buffer.
The proposed rule would include a credit risk capital requirement for single-family rentals. Single-family rentals are multiple income-producing single-family units owned by an investor for the purpose of renting them and deriving a profit from their operation. The concept of single-family rentals has been traditionally associated with individual-investor single-family units, which are usually covered under the single-family framework and include either single or two-to-four unit assets. However, the single-family rental market also includes investors that own portfolios of more than ten units, and sometimes up to thousands of units across different cities. The Enterprises have explored and have already executed deals on this type of assets.
Although this type of multi-unit ownership cannot be defined as a typical multifamily investment, the income-producing nature would allow the Enterprises to evaluate them as a traditional multifamily investment for the purpose of estimating capital. To do so would require the Enterprises to calculate a DSCR and LTV on the portfolio of single-family rentals, which is a relatively simple calculation once income and values for every property are available. The proposed rule would require the Enterprises to calculate DSCR and LTV in this manner for this type of single-family rental deals, and to subsequently calculate base credit risk capital requirements using the appropriate multifamily FRM or ARM base credit risk capital grid.
This section corresponds to Proposed Rule § 1240.48.
Given the continuing evolution and innovation in the financial markets, FHFA recognizes that the Enterprises could continue to develop and purchase new products and engage in other new activities.
The proposed rule would require an Enterprise to provide written notice of an Unassigned Activity, which includes any asset, guarantee, off-balance sheet guarantee, or activity for which the proposed rule does not have an explicit risk-based capital treatment. An Enterprise must provide a proposed capital treatment along with sufficient information about the Unassigned Activity for FHFA to understand the risks and benefits of the activity. The proposed rule would require FHFA to analyze the Unassigned Activity and to provide the Enterprise with written notice of the appropriate capital treatment. If FHFA does not provide the Enterprise with written notice of a treatment in time for the Enterprise to prepare its quarterly capital report, the proposed rule would require an Enterprise to use its proposed capital treatment to determine an interim capital requirement. FHFA will monitor the Enterprises' activities and when appropriate propose amendments to this regulation addressing the treatment of activities that do not have an explicit risk-based capital treatment.
Given the dynamics of the marketplace and the Enterprises' business, it is not possible to construct a regulation that specifies a detailed treatment for every new type of instrument or capture every new type of risk that might emerge from quarter to quarter. It will not always be possible for FHFA to analyze and determine an appropriate treatment for a new asset or activity in time for an Enterprise to file its capital report, either due to the timing of the notice from the Enterprise or due to the complexity of the new product or activity. The proposed rule strikes a balance between accuracy and timeliness by requiring FHFA to determine the appropriate long-term treatment of an Unassigned Activity, while allowing the Enterprises to use their internal models on an interim basis.
This section corresponds to Proposed Rule § 1240.50.
The proposed rule includes two alternative minimum leverage capital requirement proposals for public comment. Under the first approach, the Enterprises would be required to hold capital equal to 2.5 percent of total assets (as determined in accordance with GAAP) and off-balance sheet guarantees related to securitization activities, regardless of the risk characteristics of the assets and guarantees or how they are held on the Enterprises' balance sheets (the “2.5 percent alternative”). Under the second approach, the Enterprises would be required to hold capital equal to 1.5 percent of trust assets and 4 percent of non-trust assets (the “bifurcated alternative”), where trust assets are defined as Fannie Mae mortgage-backed securities or Freddie Mac participation certificates held by third parties and off-balance sheet guarantees related to securitization activities, and non-trust assets are defined as total assets as determined in accordance with GAAP plus off-balance sheet guarantees related to securitization activities minus trust assets. The Enterprises' retained portfolios would be included in non-trust assets.
The considerations for the two alternative approaches to the minimum leverage capital requirement in the proposed rule are discussed below, followed by a more detailed discussion of each alternative. FHFA seeks feedback from commenters on both alternatives to the minimum leverage capital requirement.
Establishing an updated minimum leverage capital requirement is an important component of the proposed regulatory capital requirements for the Enterprises. While FHFA believes that the proposed risk-based capital requirements included in this rulemaking reflect a detailed and robust assessment of risk to Fannie Mae and Freddie Mac, FHFA also believes that it is appropriate and prudent to establish a backstop to guard against the potential that the risk-based requirements underestimate the risk of an Enterprises' assets. The Safety and Soundness Act authorizes FHFA to set a higher leverage ratio than the minimum required by the statute, and this proposed rule, under either of the proposed alternatives, would do so.
In considering both the need for and the structure of an updated minimum leverage capital requirement, FHFA has taken into consideration how to best set the minimum leverage requirement as a backstop to the proposed risk-based capital framework. These considerations include the model risk associated with any risk-based measure, the pro-cyclicality of using mark-to-market LTV ratios in the proposed risk-based capital requirement, the funding risks of the Enterprises' business, and the impact of having a leverage ratio serve as the
First, because risk-based capital requirements are subject to a number of assumptions and can change over time, a minimum leverage requirement can serve as a backstop in the event that risk-based requirements become too low. As discussed earlier, risk-based capital frameworks depend on models and, thus, are subject to the risk that the applicable model will underestimate or fail to address a developing risk. In particular, new activities, given their lack of historical performance data, are subject to significant uncertainty. As a result, any models that assess new activities may under-predict risk.
Second, a leverage requirement can serve as a backstop because the proposed risk-based capital requirements are pro-cyclical, while a leverage requirement is risk-invariant. Because the proposed risk-based requirements use mark-to-market LTVs for loans held or guaranteed by the Enterprises in determining capital requirements, as home prices appreciate and LTVs consequently fall, the Enterprises would be allowed to release capital. In this context, a minimum leverage capital requirement could mitigate the amount of capital released as risk-based capital levels fell below the applicable leverage requirement. The housing market can be highly cyclical and downturns are often preceded by rapid and unsustainable home price appreciation, resulting in the potential for the Enterprises to release capital ahead of a downturn when their access to the capital markets may be constrained.
In addition to the two minimum capital requirement alternatives included in this proposed rule, FHFA also has the authority to temporarily increase the Enterprises' leverage requirements through order or regulation to address pro-cyclical or other concerns about the Enterprises' capital levels. It is also important to note that, separate from the leverage requirement proposals discussed in this section, FHFA's authority to address pro-cyclicality concerns also includes tools on the risk-based capital requirements proposed in this rule. Specifically, as is discussed in section II.F, FHFA could make upward adjustments by regulation or order to the risk-based capital requirements under the provisions of the Safety and Soundness Act to take into account changing economic conditions, such as rising house prices and asset levels, and to adjust the risk-based capital requirements for specified products or activities.
Third, ensuring a sufficient minimum leverage capital requirement could also address the funding risks of the Enterprises' business activities. Both in the single-family and multifamily mortgage-backed security guarantee business lines, investors provide the Enterprises a stable source of funding that is match-funded with the mortgage assets that Fannie Mae and Freddie Mac purchase and hold in trust accounts. While these mortgage assets are reflected on the balance sheets of the Enterprises and represent the vast majority of their assets, the funding for these assets has already been provided and cannot be withdrawn during times of market stress.
As discussed previously, this stable funding for trust assets is in contrast to the banking deposits and short-term debt that banks rely on, which could become unavailable during a stress event and force a rapid and disorderly sale of assets into a declining market. While the securitization process does not transfer credit risk from the Enterprises, Fannie Mae and Freddie Mac also currently engage in significant credit risk transfer transactions that transfer a substantial portion of credit risk to private investors. As a result of both their securitization funding and credit risk transfer practices, the risk profile of Enterprise assets held in trusts differs markedly from mortgage assets held by depository institutions.
In contrast, however, the Enterprises' retained portfolio assets do pose funding risk to Fannie Mae and Freddie Mac. These retained portfolio assets must be funded in much the same way that bank assets are generally funded, through the issuance of debt. During conservatorship, Enterprise retained portfolio asset levels have declined considerably since the financial crisis, and the majority of the Enterprises' recent portfolio asset purchases support their core credit guarantee business, in particular the purchase of mortgages via their respective cash windows for aggregation purposes and the repurchase of mortgages out of securitizations for purposes of loss mitigation. The amount of Enterprise legacy assets held for investment has been reduced significantly during conservatorship. The reduction of the Enterprises' retained portfolios is required by limits imposed by the PSPAs and also furthers the conservatorship objectives of reforming the Enterprises' business models and reducing their volume of non-credit-guarantee-related investments and illiquid assets.
Fourth, in setting the minimum leverage capital requirement as a backstop capital measure, FHFA is also considering the potential adverse impact of having the leverage requirement exceed the risk-based requirement and become the binding capital constraint for the Enterprises. Because a leverage requirement is designed to be risk-insensitive, a binding leverage requirement could influence Enterprise decision-making in ways that encourage risk-taking. For instance, during periods of rising home prices, leverage requirements could exceed risk-based capital requirements and this could reduce an Enterprise's economic incentive to differentiate among the relative riskiness of different mortgages. A binding leverage requirement could also reduce an Enterprise's incentive to enter into credit risk transfer transactions.
The two alternatives included in this proposed rule offer different methodologies for establishing the Enterprises' minimum leverage capital requirement, and these methodologies reflect different considerations and trade-offs in weighing the factors discussed above. FHFA requests feedback on how best to balance the benefits of a leverage requirement that would serve as a backstop to the proposed risk-based capital requirements and therefore mitigate the risk that risk-based requirements would be insufficient, with the downsides of a leverage requirement that could influence how the Enterprises evaluate risk.
In the proposed rule, each minimum leverage capital alternative would be applied to total assets as determined in accordance with GAAP and off-balance sheet guarantees related to securitization activities. This would differ from the approach used by commercial banks that are subject to multiple leverage ratio requirements, some of which exclude off-balance sheet items from the asset base. For both the 2.5 percent alternative and the bifurcated alternative, FHFA believes it is appropriate, and generally consistent with the Safety and Soundness Act's capital requirements and the Supplementary Leverage Ratio for banks, to include off-balance sheet guarantees as part of the minimum leverage capital requirement to ensure that these risks are capitalized.
Consistent with the treatment in bank capital regulations and the Safety and Soundness Act, FHFA includes cash and cash equivalents in the asset base for both the 2.5 percent alternative and the bifurcated alternative for the minimum leverage capital requirement.
FHFA's first proposed alternative for a minimum leverage capital requirement would establish a single leverage requirement of 2.5 percent of total assets (as determined in accordance with GAAP) and off-balance sheet guarantees related to securitization activities, which is referred to here as the 2.5 percent alternative. This compares to the current minimum leverage capital requirement, set by statute, of 2.5 percent of retained portfolio assets, 0.45 percent of mortgage-backed securities outstanding to third parties, and 0.45 percent of other off-balance sheet obligations.
The 2.5 percent alternative would set the proposed threshold based on a number of analyses that are designed to supplement the total proposed risk-based capital framework in identifying the minimum capital that would be required to fund all of an Enterprise's assets through economic and credit cycles, and therefore minimize the probability that the Enterprises would again require public support. The proposed risk-based capital requirements are pro-cyclical in that the capital requirements decrease in favorable economic scenarios and increase in stress economic scenarios. In the absence of a credible minimum leverage capital requirement, an Enterprise could release or redeploy capital during favorable economic periods when the risk-based capital requirements are low, and could be unable to raise sufficient capital to meet increasing risk-based capital requirements in a subsequent stress scenario. In the 2.5 percent alternative, FHFA is proposing a minimum leverage capital requirement that would provide a substantial, risk-insensitive backstop to the total proposed risk-based capital requirements, including credit risk, market risk, operational risk, and the going-concern buffer.
If the proposed 2.5 percent alternative had been in place at the end of the third quarter of 2017, the combined minimum leverage capital requirement would have been $139.5 billion for the Enterprises. Fannie Mae's requirement would have been $83.8 billion based on total ending assets and guarantees of $3.4 trillion, and Freddie Mac's requirement would have been $55.6 billion based on total ending assets and guarantees of $2.2 trillion. Similarly, if the proposed risk-based capital requirements had been in place, Fannie Mae's risk-based capital requirement would have been $115 billion or 3.4 percent, including the going-concern buffer of 75 bps. Similarly, Freddie Mac's risk-based capital requirement would have been $66 billion or 3.0 percent, including the going-concern buffer of 75 bps. Therefore, in considering the proposed risk-based capital requirements, the 2.5 percent minimum leverage capital requirement alternative would represent a backstop to the Enterprises' total proposed risk-based capital requirement including a going-concern buffer.
If the capital requirements in the proposed rule were implemented today, both Enterprises' risk-based capital requirements would, by significant margins, be the binding constraint regardless of which proposed leverage requirement alternative was in place. However, should home prices continue to increase and benign unemployment trends continue, as has occurred over the past several years, and should the credit quality of the Enterprises' new acquisitions continue to remain at historically high levels, FHFA expects that the 2.5 percent alternative would become the binding capital constraint for one or both Enterprises in 2018 or 2019.
FHFA conducted five analyses that together support a risk-invariant minimum leverage capital requirement of 2.5 percent:
1. Adjusting the 4 percent bank leverage ratio for the relative risk of the Enterprises' business;
2. Determining the capital threshold for bank downgrades and adjusting the threshold for the relative risk of the Enterprises' business;
3. Determining the capital threshold for bank failures and adjusting the threshold for the relative risk of the Enterprises' business;
4. Analyzing the lifetime credit losses on the Enterprises' December 2007 books of business, with adjustments for loans the Enterprises no longer acquire and for credit risk transfers; and
5. Analyzing the CCF risk-based capital requirement on the Enterprises' September 2017 books of business, with adjustments for loans the Enterprises no longer acquire and for credit risk transfers.
In the first analysis, FHFA considered the requirements in place for commercial banks. Specifically, FHFA adjusted the commercial bank leverage ratio requirement to recognize the lower risk of the Enterprises' assets compared to risk of the average bank's assets, where risk is defined using Basel risk weights. This adjustment recognizes the Enterprises' concentration in residential mortgage assets, which under the Basel Accords are assigned a 50 percent risk weight.
Under the U.S. implementation of Basel III, U.S. financial regulators require that banks maintain a Tier 1 leverage ratio of 4 percent to be considered adequately capitalized. FHFA adjusted this ratio to take into account the Enterprises' lower risk-weighted asset density (risk-weighted assets divided by total assets) relative to the risk-weighted asset density of commercial banks.
Most of the Enterprises' assets are conforming residential mortgages, which have a 50 percent risk weight in the Basel standardized approach. In contrast, FHFA found that for the 34 bank holding companies subject to CCAR in 2017, the banks' assets had higher risk weights on average than the Enterprises' assets. FHFA calculated the average risk-weighted density as of the fourth quarter of 2016 for the 34 bank holding companies subject to CCAR. The analysis yielded an estimated overall risk-weighted asset density of 72 percent for the banks compared to 50
In the second analysis, FHFA estimated a minimum leverage capital requirement from empirical analyses of bank credit rating downgrades. The Agency reviewed capital levels for banks that experienced downgrades in credit ratings. FHFA found that the number of credit rating downgrades declined markedly for banks with Tier 1 common equity capital levels in excess of 5.5 percent of risk-weighted assets. The credit downgrades reflected a lack of market confidence that the banks could survive as going concerns, despite the banks still having positive levels of capital.
The bank credit rating downgrade analysis was based on 72 banks that had both ratings from Standard & Poor's and total assets over $5 billion during a ten-year study period. The Agency found that banks with a risk-based capital ratio below 5.5 percent had a notable increase in the occurrence of a two-notch or three-or-more-notch rating downgrade within 4 quarters. For example, 53.0 percent of the banks with less than 4 percent risk-based capital experienced a two-notch credit rating downgrade and 37.0 percent experienced a three-or-more-notch downgrade. High rates of credit rating downgrades were also observed for banks with risk-based capital ratios between 4.0 percent and 5.5 percent.
It was clear from the analysis of credit rating downgrades that considerably better outcomes for depository institutions were associated with a risk-based capital ratio above 5.5 percent. A 50 percent average risk weight for Enterprise assets as applied in the previous analysis of bank leverage ratios corresponds to a minimum leverage capital requirement of 2.8 percent for the Enterprises.
In the third analysis, FHFA estimated a minimum leverage capital requirement from empirical analyses of bank failures in a manner similar to the analysis for credit rating downgrades. The Agency reviewed capital levels for banks that experienced failures. FHFA found that the number of bank failures declined markedly for banks with Tier 1 common equity capital levels in excess of 5.5 percent of risk-weighted assets.
FHFA's bank failure analysis was based on 122 bank holding companies with assets of over $5 billion each. The Agency reviewed Tier 1 common equity capital ratios for each bank across a nearly 9-year study period (between the fourth quarter of 2004 and the first quarter of 2013). Banks with a risk-based capital ratio below 5.5 percent at the end of any quarter during the study period showed a marked increase in the rate of failure or government takeover. Almost half of the banks with a risk-based capital ratio below 4.0 percent failed. Less severe, but still high rates of failure were observed for banks with risk-based capital ratios between 4.0 percent and 5.5 percent.
Similar to the analysis of credit rating downgrades, FHFA found that considerably better outcomes in the bank failure data were associated with a risk-based capital ratio above 5.5 percent. A 50 percent average risk weight for Enterprise assets as applied in the previous analysis of bank leverage ratios corresponds to a minimum leverage capital requirement of 2.8 percent for the Enterprises.
In the fourth analysis, and as discussed above in section II.B, FHFA estimated the Enterprises' lifetime credit losses for the December 31, 2007 book of business, excluding loans that the Enterprises would no longer acquire according to their current acquisition criteria. FHFA also adjusted (
In the fifth and final analysis, and in order to establish a point of comparison using recent data, FHFA calculated risk-based capital requirements per the proposed rule for all loans held or guaranteed by the Enterprises as of June 30, 2017, excluding assets that the Enterprises no longer acquire. The level of the Enterprises' aggregate risk-based capital requirements as of June 30, 2017 provides a point-in-time benchmark for a minimum, non-risk-based capital backstop to the proposed risk-based capital requirements because of the recent long stretch of favorable economic conditions and several years of the Enterprises acquiring predominately high-credit quality loans. Specifically, as presented below in Figure 2, the FHFA U.S. Purchase-Only House Price Index reached an all-time high in the second quarter of 2017, the U.S. unemployment rate of 4.3% as of May 2017 was at its lowest level in 16 years, and as of June 2017, the average credit scores of the Enterprises' guarantee books of business were at all-time highs (approximately 745), and the average loan-to-value ratios (60 percent) were nearing lows last seen in 2006. The risk-based capital requirements as of June 30, 2017 could represent close to a cyclical low point for the proposed risk-based capital requirements, and would therefore be nearing the point at which a non-risk-based leverage requirement would provide a useful backstop to the risk-based requirements.
The analysis described above resulted in risk-based capital requirements net of CRT and excluding loans the Enterprises no longer acquire of $61 billion for Fannie Mae, or 2.3 percent of UPB, and $39 billion for Freddie Mac, or 2.4 percent of UPB.
The estimates derived from the Enterprises' 2007 results, 2017 data, current acquisition criteria, and the proposed risk-based capital requirements complement the prior bank-based estimates and further suggest a minimum capital leverage requirement for the Enterprises in the range of 2 percent to 3 percent. FHFA considered factors that would indicate an appropriate requirement more towards either side of the range. Selecting a lower requirement would recognize that the Enterprises have largely passed market risk onto mortgage-backed security investors, while the banks continue to hold large amounts of whole loans on their balance sheet. A lower requirement would also recognize that the Enterprises have more stable funding sources than banking deposits, which are callable. Selecting a higher requirement would recognize that the Enterprises pose a greater level of systemic risk than many of the banks. The Enterprises have an asset base that is less diversified than the banks, which can increase loss severity during periods of stress. After considering the relevant factors, FHFA selected the 2.5 percent mid-point of the range for this proposed minimum leverage capital requirement alternative, which aligns with the estimates derived from the analyses previously cited in this subsection.
As illustrated in Table 1 and Table 3, the statutory minimum capital requirement for the Enterprises was far too low during the recent financial crisis. In proposing the 2.5 percent alternative, FHFA considered the need for a leverage requirement to serve as a backstop to risk-based capital requirements, such as those in this proposed rulemaking, that would provide the Enterprises with sufficient capital to continue to operate effectively through all economic and credit cycles while simultaneously providing protection against the model risk inherent in risk-based capital standards, including the possibility that capital relief allocated to the Enterprises' risk transfer mechanisms is overestimated.
While model risk broadly covers errors and omissions in the design and implementation of models, one common manifestation of model risk is the high level of uncertainty around the performance of new products in a stress event given the lack of historical performance data on new products. This was made evident in the recent financial crisis when the risk-based capital rule then in place for the Enterprises did not adequately identify the risk in the Enterprises' assets, reinforcing the need for a leverage ratio to serve as a backstop for total risk-based capital requirements.
In addition, there are also non-economic risks that are typically not captured in a risk-based capital framework. For example, there is a mismatch with risk-based capital being
While an excessively high minimum leverage capital requirement could have adverse consequences on the Enterprises' economic incentives to conduct certain business transactions, the absence of a credible minimum leverage capital requirement could lead an Enterprise to release or redeploy capital during favorable economic periods when the risk-based capital requirements are low and could result in the Enterprise being unable to raise sufficient capital to meet increasing risk-based capital requirements in a subsequent stress scenario. The economic environment in which this rule is being proposed could indicate the approach of such an economic scenario, and could indicate a cyclical low in risk-based capital requirements in light of the large increase in home prices in recent years and the steep drop in national unemployment, combined with the historically high credit quality of recent Enterprise acquisitions. The 2.5 percent alternative could avoid a situation in which declining Enterprise capital levels affect their ability to raise capital and provide the market with a certain level of stability. This alternative would indicate a plan to maintain capital and demonstrate a commitment to safety and soundness, and present a market-facing statement of a significant baseline level of capital in good or bad market conditions.
The second minimum leverage capital requirement alternative included in this proposed rule, the bifurcated alternative, would establish different minimum leverage capital requirements for different Enterprise business segments, which would be applied to total assets (as determined in accordance with GAAP) and off-balance sheet guarantees related to securitization activities. Specifically, under the bifurcated alternative, the Enterprises would be required to hold 4 percent capital for non-trust assets and 1.5 percent capital for trust assets. This compares to the current minimum leverage capital requirement, set by statute, of 2.5 percent of retained portfolio assets, 0.45 percent of mortgage-backed securities outstanding to third parties, and 0.45 percent of other off-balance sheet obligations.
The bifurcated alternative proposes a minimum leverage capital requirement that would differentiate between the greater funding risks of the Enterprises' non-trust assets and the minimal funding risks of the Enterprises' trust assets, while also providing a backstop that is anchored to the proposed risk-based capital framework itself. The proposed approach of a minimum leverage capital requirement equal to 1.5 percent of trust assets would identify the risk-based capital requirements as the “primary” capital measure for the Enterprises because it was derived using empirical losses experienced during the recent financial crisis and reflects a refined approach to risk. This approach would result in a combined minimum leverage capital requirement that would more frequently fall below the risk-based capital requirements than the 2.5 percent alternative. As a result, as discussed below, the bifurcated alternative would be less likely to produce a binding leverage requirement that could negatively impact an Enterprises' marginal economic decision-making.
For the Enterprises' non-trust assets, the 4 percent requirement would be comparable to the 4 percent leverage requirement for commercial banks, because these assets face similar stability concerns that motivated the Basel Committee to adopt a leverage ratio on top of the Basel risk-based capital framework in the wake of the recent financial crisis.
Under the bifurcated alternative, as under the 2.5 percent alternative, FHFA would retain its authority to increase an Enterprise's leverage requirement by regulation or order if the Agency determined that capital levels had become too low—for example, because of pro-cyclical concerns during a housing bubble—and that it was appropriate to increase these levels. FHFA would also have the authority, as discussed below, to increase the risk-based capital requirements by regulation or order as determined to be appropriate, including as a result of pro-cyclical concerns.
Using the Agency's authority in this way would provide FHFA with the ability to increase capital requirements in the event it was deemed necessary without the negative consequences of a minimum leverage ratio that was the binding constraint, thus discouraging CRT transactions in the interim period. One downside of this authority, however, is that this flexibility could make it more challenging for the Enterprises to make capital allocation decisions as FHFA's use of this authority may be difficult to anticipate.
If the bifurcated minimum leverage capital requirement alternative had been in place at the end of the third quarter of 2017, the combined requirement for the Enterprises would have been $103 billion or 1.9 percent of assets. Of this, $72 billion would have been for trust assets and $32 billion would have been for non-trust assets. Fannie Mae's requirement would have been $60 billion based on total ending assets of $3.4 trillion, representing a 1.8 percent total minimum leverage requirement, with $44 billion of capital required for trust assets and $16 billion for non-trust assets. Freddie Mac's minimum leverage capital requirement would have been
If implemented today, both Enterprises' risk-based capital requirements would, by significant margins, be the binding constraints. Fannie Mae's risk-based capital requirement would have been $115 billion or 3.4 percent as of September 30, 2017, while Freddie Mac's risk-based capital requirement would have been $66 billion or 3.0 percent as of September 30, 2017.
The bifurcated alternative considers the relative funding risks of the Enterprises' trust assets compared to the Enterprises' non-trust assets, and includes different requirements for each of these categories. In developing the bifurcated alternative, FHFA considered how to design the leverage requirement so it would serve as a backstop for the risk-based capital requirements proposed in this rulemaking without adversely impacting the Enterprises' marginal economic decision-making. For the non-trust asset component of the bifurcated alternative, FHFA further considered its comparability to the bank leverage requirement. For the trust asset component of the bifurcated alternative, FHFA considered its comparability to the credit risk capital requirements in the proposed rule.
As discussed earlier, the Enterprises' assets can be distinguished between non-trust assets funded by debt and derivatives, which could be subject to deleveraging pressures, and MBS and participation certificate trust assets, which are not funded by the Enterprises or subject to such pressure, and consequently would have a lower leverage requirement under the bifurcated alternative. That distinction is also consistent with the distinction made in the Safety and Soundness Act minimum leverage ratios between on-balance sheet assets (under then-applicable accounting treatment) and off-balance sheet assets, with the latter having a much lower leverage ratio. While FHFA believes that both of the statutory leverage minimums are much too low to be safe and sound, the concept of different ratios for different aspects of the Enterprises' business could be implemented at higher levels as proposed under the bifurcated alternative. The relative funding and other risks of the Enterprises' trust assets and non-trust assets are described below.
For the Enterprises' credit guarantee business, the bifurcated minimum leverage capital requirement alternative would require less capital for mortgage assets held in trust accounts than for non-trust assets (including those held in the retained portfolio). This lower level reflects that both Fannie Mae and Freddie Mac purchase single-family and multifamily mortgages that they package into mortgage-backed securities and sell to investors, which substantially reduces the funding risk of purchasing these mortgage assets.
On the single-family side, the Enterprises operate nearly identical securitization models. Fannie Mae and Freddie Mac sell MBS to investors through either of two methods—first, where lenders provide loans to an Enterprise in exchange for mortgage-backed securities based on those same loans, or second where lenders sell loans to an Enterprise in exchange for cash. When purchasing loans through the second method, the Enterprise aggregates the loans, securitizes them, and then sells the resulting MBS to investors for cash. In both cases, the Enterprises guarantee the timely payment of principal and interest to MBS investors and charge a guarantee fee for doing so.
The single-family securitization process provides the Enterprises with a stable funding source that is match-funded with the mortgage assets they purchase. The securitizations are consolidated on the Enterprises' balance sheets, showing both the mortgage assets held in trust accounts as well as the payments owed to MBS investors. Investments in MBS cannot be withdrawn from existing securities during times of market stress, which differentiates them from the banking deposits and short-term debt relied upon by banks, which can leave banks in need of new funding at times when debt funding becomes harder and more expensive to obtain. In contrast, the Enterprises' stable funding reduces risk to the Enterprises during times of market stress and economic downturns.
In addition to transferring funding risk to investors, the Enterprises transfer other risks of single-family mortgages held in trust accounts in several ways. The securitization process itself results in transferring the interest rate and market risk of these mortgages to investors. In addition, because the securitization process does not transfer the credit risk of securitized single-family mortgages, the Enterprises have also developed credit risk transfer programs that transfer a substantial portion of the credit risk on these loans to private investors through separate CRT transactions. The credit risk of an individual loan is the same whether it is securitized or held as a whole loan in a retained portfolio, but the Enterprises' existing CRT programs currently focus on transferring credit risk on loans held in trust accounts.
The resulting risks the Enterprises must manage for single-family mortgage assets held in trust accounts differ substantially from the risks faced by the Enterprises and banks from the assets they hold in their retained portfolios—both when looking at the overall asset composition of banks and the relative risk of the mortgage assets held on bank balance sheets. Most of the Enterprises' assets are conforming residential mortgages, which have a 50 percent risk weight in the Basel standardized approach. When FHFA looked at the average risk weight for a group of large banks, as discussed earlier, it estimated an overall risk-weighted asset density of 72 percent for the banks compared to 50 percent for residential mortgages guaranteed by the Enterprises. In addition, banks hold a greater degree of risk for the whole residential mortgage loans on their balance sheets compared to Enterprise mortgage assets held in trust accounts. First, whole loans held on-balance sheet do not benefit from the match-funding securitization benefit of transferring interest rate and market risk to investors. Second, banks also do not have CRT programs comparable to the Enterprises to transfer the credit risk of these loans to other private actors.
With respect to the Enterprises' multifamily business lines, the Enterprises use different business models but both multifamily credit guarantee businesses involve securitizing the multifamily loans each company purchases and providing for credit risk sharing with the private sector. Fannie Mae primarily utilizes a loss-sharing model referred to as DUS (Delegated Underwriting and Servicing), and Freddie Mac predominately uses a structured mortgage-backed securities model referred to as K-deals.
Fannie Mae's DUS program delegates most underwriting of multifamily loans to a set of approved lenders. In general, the vast majority of multifamily loans purchased by Fannie Mae are individually securitized in a trust and sold to investors as MBS as opposed to held on Fannie Mae's balance sheet as whole loans. These lenders usually participate in loss-sharing agreements with Fannie Mae under which they agree to take on a pro rata share of losses. Nearly every multifamily loan purchased by Fannie Mae includes a loss-sharing agreement with the originating lender. The amount of loss borne by the lender varies based on their financial strength, but a majority of purchased loans include a significant portion of risk shared with the lender (between 25 and 33 percent of the unpaid principal balance). As with its single-family business line, Fannie Mae guarantees the timely payment of principal and interest on the multifamily MBS it issues.
Freddie Mac's principal multifamily model—referred to as K-deals—involves purchasing and aggregating multifamily loans and then securitizing those loans. Once the loans are aggregated, Freddie Mac sells a pool of them to a third party trust. The trust issues subordinated tranches of MBS, which are sold, without a guarantee, to investors. The subordinated tranches, in general, represent between 15 and 17 percent of underlying UPB of the mortgage pool and assume a first loss position in the securitization structure. The trust also issues senior tranches representing the balance of the mortgage pool, which are then purchased by Freddie Mac. Freddie Mac places the senior tranches of securities in a trust that issues pass-through certificates (K-certificates) that Freddie Mac guarantees and sells. This securitization structure transfers the vast majority of the underlying credit risk from these mortgages, as well as all the funding risk.
Despite the difference in executions, both Enterprises' multifamily models result in the same match-funding that exists for single-family securitizations, and, with the exception of Freddie Mac's K-deals, the senior tranches of which are reported as off-balance sheet guarantees, both the multifamily assets held in trust accounts and the liabilities owed to multifamily investors are reflected on the Enterprises' balance sheets. Like the Enterprises' single-family securitizations, the approach to securitizing and transferring credit risk on multifamily loans also distinguishes it from whole multifamily loans held on a bank's balance sheet.
The bifurcated minimum leverage capital requirement alternative would require more capital for the Enterprises' non-trust assets, including assets held in the Enterprises' retained portfolios, than for trust assets, which takes into consideration the higher risks the Enterprises must manage for these assets. Unlike their credit guarantee business, the Enterprises' retained portfolios expose the companies to leverage and funding risks for these assets, as well as interest rate, operational, and credit risk.
Prior to conservatorship, the Enterprises held large retained portfolios to generate investment returns. While in conservatorship, the Enterprises have substantially reduced their legacy asset levels but continue to hold assets in their retained portfolios for three purposes that support their credit guarantee business: (1) Purchasing loans to support single-family and multifamily loan aggregation for subsequent securitizations; (2) purchasing delinquent loans out of MBS and engaging in loss mitigation options with borrowers; and (3) supporting limited, approved affordable housing objectives where securitization is not yet a viable market option. Single-family loan aggregation may expose the Enterprises to credit, interest rate, and funding risk as Enterprises hold onto newly originated loans ahead of securitization. The Enterprises hold these loans on balance sheet for a limited period, generally no more than 90 days, in order to aggregate sufficient quantities before securitization. In addition, Freddie Mac's multifamily business includes a similar aggregation function, whereas Fannie Mae's multifamily MBS are primarily single loan securities and, thus, do not require significant portfolio capacity for loan aggregation.
The Enterprises have reduced their retained portfolios by a combined 60 percent since entering conservatorship, which has reduced their overall risk exposure but has not eliminated risk for the remaining assets held in their retained portfolios. These assets include some pre-conservatorship assets held on their books, such as PLS, although the Enterprises have disposed of the majority of these assets.
Both companies issue unsecured debt to fund their retained portfolios holdings, and this debt exposes the companies to funding risk for retained portfolio assets, which mortgage assets held in trust accounts do not have. In times of market stress or economic downturns, as debt matures the
The nature of the Enterprises' retained portfolios makes these assets more comparable to the risks banks have from assets held on their balance sheets. In addition to having more funding risk, the Enterprises must also manage interest rate, operational, and credit risk for the mortgage assets held in their retained portfolio, which is like the risks managed by banks for whole mortgage loans.
By specifying a higher leverage requirement for non-trust assets under the bifurcated alternative, the minimum leverage capital requirement would significantly increase in the event the Enterprises' grew their retained portfolio in the future, as could occur during a downturn if the Enterprises purchased significant numbers of newly delinquent loans out of mortgage-backed securities in order to mitigate losses and facilitate loss mitigation options for borrowers. Conversely, under the bifurcated alternative, the minimum leverage capital requirement for the Enterprises could decline in the future as the Enterprises continue to dispose of legacy retained portfolio assets and to sell or re-securitize seriously delinquent or re-performing loans.
The bifurcated alternative seeks to calibrate the minimum leverage requirement so that it provides a backstop to the proposed risk-based capital requirements, but with less likelihood that it becomes the binding capital constraint for the Enterprises. The bifurcated alternative identifies the proposed risk-based capital requirements as the primary or benchmark capital measure for the Enterprises. Such an approach would rely on the view that the proposed risk-based capital requirements included in this rulemaking are a detailed and robust assessment of risk to Fannie Mae and Freddie Mac and that the purpose of the minimum leverage capital requirement would be to serve as a backstop to guard against the potential that the risk-based requirements would underestimate the risk of an Enterprises' assets, due to model risk or pro-cyclicality for example.
As detailed earlier, the risk-based capital portion of the proposed rule provides a granular assessment of credit risk specific to different mortgage loan categories, as well as market risk and operational risk components. The proposed risk-based requirements are, in part, modeled on empirical losses experienced by the Enterprises as a result of the recent severe financial crisis over the full life of the loans. The capital required for the Enterprises would be required and in place at the date of loan acquisition and would not take into account any revenues from guarantee fees that they will earn. On top of these risk-based components, the proposed rule includes a risk-insensitive going-concern buffer as part of the risk-based capital requirements to ensure that an Enterprise could continue to write new business for what is projected to be a year or two following a period of market stress or a severe economic downturn.
The leverage requirements under the proposed bifurcated alternative also take into consideration the potential impacts that a binding minimum leverage requirement could have on an Enterprise's economic incentives to conduct—or not conduct—certain business transactions. This impact on business transactions could be felt across an Enterprises' business, including which mortgage loans to purchase for securitization, whether to buy or sell particular assets for their retained portfolios, whether to engage in CRT transactions and which transactions to engage in, and what liquidity positions to hold for periods of market stress. The economic incentives created by a binding leverage ratio could increase the overall risk profile of an Enterprises' book of business relative to its current operations. As a result, while a binding minimum leverage requirement would result in higher Enterprise capital levels, such a requirement would not necessarily make an Enterprise more safe and sound.
More specifically, under a binding minimum leverage requirement, an Enterprise could have reduced economic incentives to differentiate among the relative riskiness of different mortgage loans purchased for securitization. For example, under a scenario where the total risk-based capital requirement was 2.5 percent and the minimum leverage requirement was 4 percent, an Enterprise would have an economic incentive to increase the risk-level of its aggregate loan purchases up to the 4 percent level since the Enterprise would be required to hold 4 percent capital regardless of the riskiness of its assets. This could encourage an Enterprise to purchase loans with multiple risk layers—such as loans with higher LTVs, adjustable rates, and investor owned properties—in order to earn enough of a return to be commensurate with the capital requirement. Conversely, under this hypothetical, an Enterprise would have a disincentive to purchase lower-risk loans—such as loans with lower LTVs and 15-year terms—because they would make it more difficult to earn a sufficient return relative to the binding capital requirement. Taken together, these economic incentives could lead an Enterprise to purchase more loans with multiple risk-layering features that could, in turn, result in a higher risk composition of assets. By contrast, under the proposed risk-based capital rule, whenever the Enterprise purchases or guarantees a riskier asset, its required capital would automatically increase. If the minimum leverage requirement were the binding capital constraint and did not distinguish between retained portfolio and trust assets, an Enterprise would also have an economic incentive to increase the risk of assets held or reduce holding of low-risk assets in their retained portfolio until the risk-based capital requirement increases to the level of the minimum leverage requirement.
A binding minimum leverage ratio could also have an impact on the Enterprises' incentives to conduct credit risk transfer transactions. In this proposed rule, an Enterprise would receive capital relief for CRT transactions under the risk-based capital framework but not the minimum leverage requirement. As a result, a minimum leverage ratio that is set too high could lead to a capital requirement that exceeds the post-CRT risk-based capital requirement. An example helps illustrate this dynamic. If an Enterprise transferred credit risk to private investors through fully-funded STACR or CAS transactions with no counterparty exposure, an Enterprise's pre-CRT risk-based capital requirement would be reduced to account for the credit risk transferred for these loans. For example, a pre-CRT risk-based requirement of 4.5 percent could be reduced to a post-CRT risk-based requirement of 2 percent. However, a minimum leverage requirement that is set at 4 percent would become the binding capital requirement, because it would not be reduced by the equivalent amount of credit risk transferred through CRT transactions.
Under this example, a minimum leverage requirement of 4 percent would likely result in an Enterprise declining to conduct these CRT transactions because the Enterprise would need to pay for credit risk protection twice—
As illustrated by this example, it is important to consider how a minimum leverage requirement and the proposed risk-based capital requirements would interact with one another, and what the resulting effect would be on the Enterprises' incentives to conduct CRT transactions or other risk reducing transactions. As conservator of the Enterprises, FHFA has required Fannie Mae and Freddie Mac to develop CRT programs that transfer a meaningful amount of credit risk to private investors in an economically sensible manner. FHFA believes that these programs are an effective way to reduce risk to the Enterprises and, therefore, to taxpayers. Enterprise CRT transactions effectively transfer credit risk to the private sector, and, for many transactions, do so in a way that is fully funded up-front, without counterparty risk. In other CRT transactions, the Enterprises require that the transactions be partially collateralized to mitigate counterparty risk. If capital requirements caused the Enterprises to reduce the amount of CRT transactions they conducted, this could result in a greater concentration of credit risk with the Enterprises and could be counter to FHFA's overall objective of reducing credit risk to the Enterprises and taxpayers.
The total leverage requirement under the proposed bifurcated alternative would be the result of blending the 4 percent requirement for non-trust assets and the 1.5 percent requirement for trust assets. While the bifurcated alternative would provide an overall minimum leverage capital requirement that would almost certainly be less than the 2.5 percent alternative, it could also provide a backstop to guard against Enterprise capital becoming too low. The requirements included in the bifurcated alternative are intended to limit the instances in which the minimum leverage capital requirement would serve as the Enterprises' binding capital constraint and, as a result, limit the negative impacts of a binding leverage requirement.
The proposed leverage requirements under the bifurcated alternative would produce a total leverage requirement that is calibrated to provide a significant backstop to the post-CRT credit risk capital component of the proposed risk-based capital requirements for both single-family and multifamily whole loans and guarantees currently on the Enterprises' balance sheets. For Fannie Mae, the bifurcated alternative would produce a 1.8 percent minimum leverage requirement as of September 30, 2017. The total leverage requirement of 1.8 percent compares to a total risk-based capital requirement of 3.4 percent as currently calculated under the proposed rule, which includes credit risk, operational risk, market risk, and the going-concern buffer, and 2.7 percent excluding the going-concern buffer. In making a comparison specifically with the credit risk component of the proposed risk-based capital framework, the 1.8 percent total leverage requirement compares to a 1.8 percent post-CRT net credit risk capital requirement. As a result, the 1.8 percent leverage level would reach 100 percent of Fannie Mae's proposed post-CRT net credit risk capital requirement for the third quarter of 2017.
For Freddie Mac, the proposed leverage requirements under the bifurcated alternative would produce a 1.9 percent minimum leverage requirement as of September 30, 2017. The total leverage requirement of 1.9 percent compares to a total risk-based capital requirement of 3.0 percent as currently calculated under the proposed rule, which includes credit risk, operational risk, market risk, and the going-concern buffer, and 2.3 percent excluding the going-concern buffer. In making a comparison specifically with the credit risk component of the proposed risk-based capital framework, the 1.9 percent total leverage requirement compares to a 1.4 percent post-CRT net credit risk capital requirement. As a result, the 1.9 percent leverage level would reach 135 percent of Freddie Mac's proposed post-CRT net credit risk capital requirement for the third quarter of 2017.
As noted earlier, under the bifurcated alternative the proposed 4 percent leverage requirement for the Enterprises' non-trust assets, which include the retained portfolios, would be comparable to the leverage requirement for depository institutions. This approach would align the riskiest part of the Enterprises' business, the part that is most comparable with the funding risk of depository institutions, with the leverage requirement established by other federal financial regulators.
Because cash and cash equivalents are components of the retained portfolio, the bifurcated alternative would include cash and cash equivalents in the asset base for the 4 percent minimum leverage capital requirement. While cash and cash equivalents are highly liquid investment securities, they remain subject to funding risk in much the same way as other Enterprise portfolio assets, although because of their liquidity deleveraging with respect to them would not create the same downward pressure on asset values as for other types of assets.
The bifurcated alternative includes a 1.5 percent leverage requirement for trust assets.
The 1.5 percent requirement for trust assets under the proposed bifurcated alternative could provide a significant backstop when compared to the credit risk capital requirements for Enterprise trust assets under the proposed risk-based capital requirements. In this comparison, FHFA has defined trust assets to include new single-family acquisitions, performing single-family seasoned loans, and all multifamily loans held in trust accounts. Trust assets exclude re-performing single-family loans and non-performing single-family loans that are now held by the Enterprises in their retained portfolios, and these assets would have a 4 percent minimum leverage requirement under the bifurcated alternative.
For Fannie Mae, the proposed 1.5 percent leverage requirement for trust assets would compare to a 1.3 percent
While this bifurcated minimum leverage capital requirement alternative could provide a significant backstop for the capital necessary to withstand credit losses in a severe stress scenario, the proposed risk-based capital requirements would in most circumstances remain the binding capital constraint for the Enterprises even after accounting for CRT. This is because the post-CRT net credit risk capital requirement is only one component of the total risk-based capital framework proposed in this rulemaking, which also has components for market risk, operational risk, and a going-concern buffer.
Considering the Enterprises' current use of CRT, a 1.5 percent minimum leverage requirement for trust assets could provide additional protection during a period of rapid appreciation in home prices beyond the protection provided by the proposed credit risk capital requirements, and could be a sufficient backstop for potential shortcomings of the proposed credit risk capital requirements such as mis-estimations of stress losses. Should FHFA determine that the leverage requirement is insufficient to address rapid and unsustainable home price appreciation, FHFA could also use its authority, described above, to adjust by order or regulation either the risk-based capital requirement, the leverage requirement, or both.
This section corresponds to Proposed Rule § 1240.1(a).
The Safety and Soundness Act includes definitions of core capital and total capital. FHFA does not have the authority to change those definitions in the proposed rule, in contrast to the banking regulators who have greater definitional flexibility under their statutes. Therefore, the proposed rule uses the statutory definitions of core capital and total capital for the Enterprises.
Using the statutory definitions, core capital means the sum of the following (as determined in accordance with GAAP): (i) The par or stated value of outstanding common stock; (ii) the par or stated value of outstanding perpetual, noncumulative preferred stock; (iii) paid-in capital; and (iv) retained earnings.
The statutory definition of core capital for the Enterprises does not reflect any specific considerations for deferred tax assets (DTAs). DTAs are recognized based on the expected future tax consequences related to existing temporary differences between the financial reporting and tax reporting of existing assets and liabilities given established tax rates. In general, DTAs are considered a component of capital because these assets are capable of absorbing and offsetting losses through the reduction to taxes. However, DTAs may provide minimal to no loss-absorbing capability during a period of stress as recoverability (via taxable income) may become uncertain.
In 2008, during the financial crisis, both Enterprises concluded that the realization of existing DTAs was uncertain based on estimated future taxable income. Accordingly, both Enterprises established partial valuation allowances on DTAs. A valuation allowance on DTAs is typically established when all or a portion of DTAs is unlikely to be realized considering projections of future taxable income, resulting in a non-cash charge to income and a reduction to the retained earnings component of capital. Fannie Mae established a partial valuation allowance on DTAs of $30.8 billion in 2008, which was a major contributor to the overall capital reduction of $66.5 billion at Fannie Mae in 2008. Similarly, Freddie Mac established a partial valuation allowance on DTAs of $22.4 billion in 2008, which was also a major contributor to the overall capital reduction of $71.4 billion at Freddie Mac in 2008.
Other financial regulators recognize the limited loss absorbing capability of DTAs, and therefore limit the amount of DTAs that may be included in CET1 capital. Under Basel III guidance, federally regulated bank holding companies are subject to threshold
Basel III capital rules also include accumulated other comprehensive income (AOCI) in the determination of regulatory Tier 1 capital. For the Enterprises, the statutory definition of core capital does not include AOCI. Generally, AOCI primarily consists of unrealized gains and losses on available-for-sale securities, which are measured at fair value on the Enterprises' consolidated balance sheets. Consequently, AOCI can be positive or negative depending on the prevailing market conditions for the Enterprises' available-for-sale securities. For example, at the end of 2008, AOCI at Fannie Mae and Freddie Mac was negative $7.7 billion and negative $26.4 billion, respectively. As a result, by excluding AOCI from core capital, an Enterprise may be adequately capitalized for regulatory purposes, but insolvent under GAAP.
Total capital, using the statutory definition, means the sum of the following: (1) Core capital of an Enterprise; (2) a general allowance for foreclosure losses, which (i) shall include an allowance for portfolio mortgage losses, non-reimbursable foreclosure costs on government claims, and an allowance for liabilities reflected on the balance sheet for the Enterprise for estimated foreclosure losses on mortgage-backed securities; and (ii) shall not include any reserves of the Enterprise made or held against specific assets; and (3) any other amounts from sources of funds available to absorb losses incurred by the Enterprise, that the Director by regulation determines are appropriate to include in determining total capital.
FHFA has additional existing regulatory flexibility so that capital requirements can be adjusted by order to address periods of heightened risk. While the proposed risk-based and leverage capital requirements may be amended by subsequent regulation, revising them would generally require soliciting and incorporating public input and would likely be time-intensive. This process would make it difficult for the capital requirements to quickly address new developments and anticipate rapidly emerging risks. The current provisions authorizing FHFA to adjust both risk-based and minimum leverage capital requirements allow FHFA to respond more quickly to market and business developments and require greater retention of capital when circumstances warrant it. This additional flexibility also mitigates the pro-cyclicality of risk-based capital standards.
Risk-based capital requirements may fail to adequately capture the risks facing an institution. For example, any capital framework that depends on models to assign risk-weights will be subject to model estimation error risk. In addition, such an approach may not adequately account for the risk related to a new asset or product. As discussed earlier, new or previously unassigned activities would be given an interim risk-weighting under the proposed risk-based capital requirements. The lack of historical performance data for new products increases the risk that an interim risk-weight assessment may prove inadequate and that this risk would be compounded by growth of the new product.
Risk-based capital requirements are sensitive to changes in house prices because risk weights are tied to LTV ratios. During periods of rapid house price appreciation, risk-based capital requirements for the Enterprises will fall as LTVs fall. As the experience from the most recent financial crisis reflects, housing downturns are often preceded by rapid house price appreciation. This means that the risk-based capital requirements, considered in isolation, can be pro-cyclical and can lead to the shedding of loss-absorbing capital ahead of a period of sustained credit losses.
HERA anticipated the need for flexibility in developing capital standards and granted FHFA discretion to make capital adjustments for both risk-based capital requirements and leverage requirements in order to maintain the safety and soundness of the Enterprises. In 2011, FHFA promulgated regulations describing how FHFA could implement a temporary increase through order in the leverage requirements under HERA.
This authority provides FHFA with the flexibility to adjust leverage requirements in an overheating mortgage market when risk-based capital requirements may otherwise lead to the shedding of loss-absorbing capital. This authority also provides FHFA with the flexibility, using the leverage ratio, to address the potential inadequacy of capital requirements for new products and it provides FHFA with a way to mitigate a latent modeling error on an interim basis while risk-based capital requirements are being corrected.
FHFA also possesses statutory flexibility with respect to the risk-based capital requirements themselves. While the authority to increase minimum leverage capital requirements can mitigate some of the pro-cyclicality and other issues inherent in a model-based set of standards, it can only do so indirectly by requiring more capital to be held across all asset classes to which the leverage requirement applies. For this reason, FHFA wishes to highlight its statutory authority to adjust the risk-based capital requirements for particular asset classes directly during periods of heightened risk, when the risk-based capital requirements might otherwise be inadequate. Elaborating on the earlier example, sustained single-family house
Authority to adjust the minimum leverage capital requirement can address this risk as well, but does so in a less targeted way. Relying on the minimal leverage capital adjustment exclusively may lead to raising Enterprise-wide capital requirements when a more narrow adjustment would suffice from a safety and soundness perspective. This overly-broad approach may lead to skewed Enterprise decision-making as the leverage requirement becomes greater and approaches becoming the binding capital allocation restraint. This concern is discussed in greater detail in the section II.D.
FHFA's existing authority to adjust risk-based capital requirements comes from the Safety and Soundness Act. Section 1362(e) provides FHFA with authority to implement additional capital requirements with respect to any product or activity by the Enterprises “as the Director considers appropriate to ensure that the regulated entity operates in a safe and sound manner with sufficient capital and reserves to support the risks that arise in the operations and management of the regulated entity.”
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501
The Regulatory Flexibility Act (5 U.S.C. 601
Federal home loan banks, Reporting and recordkeeping requirements.
Capital, Credit, Enterprise, Investments, Reporting and recordkeeping requirements.
Banks, banking, Capital classification, Mortgages, Organization and functions (Government agencies), Risk-based capital, Securities.
For the reasons stated in the preamble, under the authority of 12 U.S.C. 4511, 4513, 4514, 4526 and 4612, FHFA proposes to amend chapters XII and XVII, of title 12 of the Code of Federal Regulations as follows:
12 U.S.C. 4516.
12 U.S.C. 4511, 4513, 4514, 4526, 4612.
(a) The definitions in this section are used to define terms for purposes of this part.
(i) Core capital is the sum of (as determined in accordance with generally accepted accounting principles (GAAP))
(A) The par or stated value of outstanding common stock;
(B) The par or stated value of outstanding perpetual, noncumulative preferred stock;
(C) Paid-in capital; and
(D) Retained earnings.
(ii) Core capital does not include any amounts the Enterprise could be required to pay, at the option of investors, to retire capital instruments.
(i) The core capital of an Enterprise.
(ii) A general allowance for foreclosure losses, which:
(A) Shall include an allowance for portfolio mortgage losses, nonreimbursable foreclosure costs on government claims, and an allowance for liabilities reflected on the balance sheet for the Enterprise for estimated foreclosure losses on mortgage backed securities; and
(B) Shall not include any reserves of the Enterprise made or held against specific assets.
(iii) Any other amounts from sources of funds available to absorb losses incurred by the Enterprise, that the Director by regulation determines are appropriate to include in determining total capital.
(b) The abbreviations in this paragraph are used as short forms for terms used in calculations in this part.
(a) The board of directors of each Enterprise is responsible for overseeing that the Enterprise maintains capital at a level that is sufficient to ensure the continued financial viability of the Enterprise and that equals or exceeds the capital requirements contained in this part.
(b) Nothing in this part permits or requires an Enterprise to engage in any activity that would otherwise be inconsistent with its Charter Act or the Safety and Soundness Act, 12 U.S.C. 4501
(a)
(1) The minimum capital requirement as calculated as of the end of each quarter.
(2) The risk-based capital requirement as calculated as of the end of each quarter.
(b)
(c)
(d)
(e)
Each Enterprise shall maintain at all times total capital in an amount at least equal to the sum of the risk-based capital requirements for:
(a) Single-family whole loans, guarantees, and related securities as provided in §§ 1240.5 through 1240.23;
(b) Private-label securities (PLS) as provided in §§ 1240.24 through 1240.29;
(c) Multifamily loans, guarantees, and related securities as provided in §§ 1240.30 through 1240.45;
(d) Non-Enterprise and non-Ginnie Mae Commercial Mortgage Backed Securities (CMBS) as provided in § 1240.46;
(e) Other assets and exposures as provided in § 1240.47; and
(f) Unassigned activities as provided in § 1240.48.
The risk-based capital requirement for single-family whole loans, guarantees, and related securities is the cumulative total of the following capital requirements:
(a) A credit risk capital requirement as provided in §§ 1240.6 through 1240.16;
(b) A market risk capital requirement for single-family whole loans and securities having market exposure as provided in §§ 1240.17 through 1240.18;
(c) An operational risk capital requirement as provided in §§ 1240.19 through 1240.20; and
(d) A going-concern buffer requirement as provided in §§ 1240.21 through 1240.22.
(a) The methodology for calculating the credit risk capital requirement for single-family whole loans and guarantees uses tables to determine the base credit risk capital requirement, risk factor multipliers to adjust the base credit risk capital requirement for risk factor variations not captured in the base credit risk requirement, credit enhancement multipliers to reduce the capital requirement due to the presence of loan-level credit enhancement, and reductions in credit enhancement benefits due to counterparty risk. The methodology also provides for a reduction in the credit risk capital requirement for single-family whole loans and guarantees subject to credit risk transfer (CRT) transactions.
(b) The steps for calculating the credit risk capital requirement for single-family whole loans and guarantees are as follows:
(1) Identify the loan data needed for the calculation of the single-family whole loans and guarantees credit risk capital requirement.
(2) Assign each loan to a single-family loan segment, as specified in § 1240.7.
(3) Determine the base credit risk capital requirement using the assigned single-family loan segment, as specified in § 1240.8.
(4) Determine the loan's total combined risk multiplier using the assigned single-family loan segment and risk factor multipliers, as specified in § 1240.9.
(5) Determine the loan's gross credit risk capital requirement using the total combined risk multiplier and the base capital, as specified in § 1240.10.
(6) Determine the reduction of capital from the gross credit risk capital requirement due to the presence of loan-level credit enhancement benefit, as specified in § 1240.11.
(7) Determine the reduction in loan-level credit enhancement benefit due to counterparty risk for the credit enhancement counterparty, as specified in § 1240.12.
(8) Determine the net credit risk capital requirement by reducing for the loan-level credit enhancement benefit due to counterparty risk for the credit enhancement counterparty, as specified in § 1240.13.
(9) Determine the aggregate net credit risk capital requirement for single-family whole loans and guarantees, as specified in § 1240.13.
(10) Determine the capital relief from single-family CRTs, as specified in §§ 1240.14 through 1240.16.
(c) The credit risk capital requirement applies to any Enterprise conventional single-family whole loan and guarantee with exposure to credit risk.
(d) Table 1 to part 1240 lists the data needed for the calculation of the single-family whole loans and guarantees credit risk capital requirement. Table 1 contains variable names, definitions, acceptable values, and treatments for missing or unacceptable values.
(e) Table 2 to part 1240 lists the data needed to determine the
(f) An Enterprise must have internally generated ratings for counterparties. The internally generated ratings must be converted into the counterparty ratings provided in Table 3 to part 1240. Table 3 provides the counterparty financial strength ratings and descriptions used in this part to determine
(g) Table 4 to part 1240 provides the data inputs supplied by FHFA needed for the calculation of the single-family whole loans and guarantees credit risk capital requirement.
(a) An Enterprise must assign each single-family whole loan and guarantee with exposure to credit risk to a single-family loan segment. The single-family loan segments are: New Origination Loan; Performing Seasoned Loan; Non-Modified Re-Performing Loan (RPL); Modified RPL; Non-Performing Loan (NPL).
(b) The definitions for the single-family loan segments are provided in Table 5 to part 1240.
(c) The process for assigning a loan to the appropriate single-family loan segment is presented in the decision tree shown in Figure 1 to part 1240.
An Enterprise must determine the base credit risk capital requirement in basis points (
(a) Single-family New Origination Loan
(b) Single-family Performing Seasoned Loan
(c) Single-family Non-Modified RPL
(d) Single-family Modified RPL
(e) Single-family NPL
(a) Risk multiplier values increase or decrease the credit risk capital requirement for single-family whole loans and guarantees based on a loan's assigned loan segment and risk characteristics. The Single-family Risk Multipliers are presented in Table 11 to part 1240.
(b) The steps for calculating the total combined risk multiplier (
(1) Determine the appropriate risk multipliers values from Table 11 based on the loan's characteristics and assigned loan segment.
(2) Apply the appropriate formula as set forth in paragraph (c) of this section to calculate the uncapped total combined risk multiplier (
(3) For high LTV loans, the combined risk multiplier is subject to a cap. For those loans, apply the calculation set forth in paragraph (d) of this section, to determine
(4) For loans not subject to the cap,
(c) The following loan characteristics risk multiplier calculations are to be used for each respective loan segment to determine the
(1) For each loan classified as a Single-family New Origination Loan determine the risk multiplier values associated with the relevant risk factors from Table 11 and apply the following formula to calculate
(2) For each loan classified as a Seasoned Performing Loan determine the risk multiplier values associated with the relevant risk factors from Table 11 and apply the following formula to calculate
(3) For each loan classified as a Non-Modified RPL determine the risk multiplier values associated with the relevant risk factors from Table 11 and apply the following formula to calculate
(4) For each loan classified as a Modified RPL determine the risk multiplier values associated with the relevant risk factors from Table 11 and apply the following formula to calculate
(5) For each loan classified as an NPL determine the risk multiplier values associated with the relevant risk factors from Table 11 and apply the following formula to calculate
(d)
(1) For high LTV loans, the combined risk multiplier is subject to a cap. If the OLTV for a loan classified as a New Origination Loan or the MTMLTV for a loan classified in any other loan segment is greater than 95%,
(2) If the OLTV for a loan classified as a New Origination Loan or the MTMLTV for a loan classified in any other loan segment is less than or equal to 95%, then
An Enterprise must determine the gross credit risk capital requirement in basis points (
(a) Loan-level credit enhancement comprises participation agreements, repurchase or replacement agreements, recourse and indemnification agreements and mortgage insurance.
(b) Loan-level credit enhancement reduces an Enterprise's gross credit risk capital requirement. Only loans covered by a loan-level credit enhancement as of the reporting date receives a loan-level credit enhancement benefit.
(c) An Enterprise must determine the credit enhancement multiplier (
(1) Table 12 to part 1240 shows
(2) Table 13 to part 1240 shows
(3) Table 14 to part 1240 shows
(4) Table 15 to part 1240 shows
(5) Table 16 to part 1240 shows
(d)
(1) If a loan is covered by MI and its OLTV is less than or equal to 80 percent, use the
(2) If a loan has an interest-only feature and its MI Cancellation Feature is set to Cancellable, treat the MI as non-cancellable when selecting the appropriate
(3) If a loan has an MI Coverage Percent between the MI Coverage Percentages for Charter-level Coverage and Guide-level Coverage, use linear interpolation to determine the
(4) If a loan has an MI Coverage Percent that is less than the MI Coverage Percent for Charter-Level Coverage, use linear interpolation between a hypothetical policy with zero coverage and a
(5) If a loan has an MI Coverage Percent that is greater than the Guide-level Coverage, set the
(e)
(f)
(g)
(h)
(i)
(a) The amount by which credit enhancement lowers the
(b) An Enterprise shall determine the
(a) The net credit risk capital requirement for a single-family whole loan and guarantee is the
(b) For a loan with loan-level credit enhancement, an Enterprise shall determine the net credit risk capital requirement in basis points (
(c) For a loan without loan-level credit enhancement, an Enterprise shall determine the net credit risk capital requirement in basis points (
(d) An Enterprise shall determine the net credit risk capital requirement in dollars (
(e) The aggregate net credit risk capital requirement for all single-family whole loans and guarantees (
(a) A single-family credit risk transfer (“single-family CRT”) is a credit risk transfer where the whole loans and guarantees underlying the CRT, or referenced by the CRT, are single-family whole loans and guarantees. Single-family CRTs may reduce
(b) The steps for calculating capital relief from a single-family CRT are as follows:
(1) Identify the single-family whole loans and guarantees underlying or referenced by the CRT.
(2) Calculate the aggregate net credit risk capital requirements and expected losses on the single-family whole loans and guarantees underlying or referenced by the CRT.
(3) Distribute the aggregate net credit risk capital requirements and expected losses across the tranches of the CRT so that relatively higher capital requirements are allocated to the more risky junior tranches that are the first to absorb losses, and relatively lower requirements are allocated to the more senior tranches.
(4) Identify capital relief, adjusting for an Enterprise's retained tranche interests.
(5) Adjust capital relief for loss timing and counterparty credit risk.
(6) Calculate total capital relief by adding up capital relief for each tranche in the CRT.
(a) To calculate capital relief from a single-family CRT, an Enterprise must have data that enables it to assign accurately the parameters described in paragraphs (b) and (c) of this section.
(1) Data used to assign the parameters must be the most currently available data. If the contracts governing the single-family CRT require payments on a monthly or quarterly basis, the data used to assign the parameters must be no more than 91 calendar days old.
(2) If an Enterprise does not have the data to assign the parameters described in paragraphs (b) and (c) of this section, then an Enterprise must treat the single-family CRT as if no capital relief had occurred.
(b) To calculate capital relief from a single-family CRT, an Enterprise must have accurate data on the following set of inputs:
(1)
(2)
(3)
(4)
(5)
(i) For single-family CRTs where the contractual terms of the single-family CRT indicate that the single-family CRT will not convey the counterparty credit risk associated with loan-level credit enhancement on the single-family whole loans and guarantees underlying the single-family CRT, then
(ii) For all other single-family CRTs,
(6)
(i) For single-family CRTs where the contractual terms of the single-family CRT indicate that the single-family CRT will not convey the counterparty credit risk associated with MI on the single-family whole loans and guarantees underlying the single-family CRT,
(ii) For all other single-family CRTs,
(7)
(8)
(9)
(10)
(11)
(ii) Using Table 18 to Part 1240, the Enterprises must calculate a single-family CRT loss timing factor (
(A) CRT's original closing date (or effective date) and the maturity date on the CRT;
(B) UPB share of single-family whole loans and guarantees in the pool group that have original amortization terms of less than or equal to 189 months (
(C) UPB share of single-family whole loans and guarantees in the pool group that have original amortization terms greater than 189 months and OLTVs of less than or equal to 80 percent (
(iii) An Enterprise must use the following method to calculate
(A) Calculate CRT months to maturity (
(
(
(
(
(B) If
(C) If
(12)
(c) An Enterprise must use the parameters described in paragraph (b) of this section to calculate CRT capital relief, by single-family CRT pool group, using the following steps:
(1) An Enterprise must distribute
(2) For each pool group and tranche in a single-family CRT, an Enterprise must use the following formulae to identify the capital relief from the capital markets (
(3) For loss sharing transactions, an Enterprise must determine the uncollateralized counterparty exposure
(i) For each pool group, tranche and counterparty, an Enterprise must use the following formula to calculate
(ii) For each pool group, tranche and counterparty, an Enterprise must determine
(4) For each pool group in the single-family CRT, an Enterprise must calculate aggregate capital relief (
(5) An Enterprise must calculate total capital relief in dollars for the entire single-family CRT (
To calculate total capital relief across all single-family CRTs (
(a) Each single-family whole loan with market risk exposure is subject to the single-family whole loan market risk capital requirement. There is no market risk exposure for single-family guarantees. The market risk capital requirement for a single-family whole loan is limited to spread risk.
(b) The single-family whole loan market risk capital requirement in dollars (
(1) The dollar amount of the
(2) The dollar amount of the
(c) The aggregate market risk capital requirement for all single-family whole loans (
(a) Enterprise- and Ginnie Mae-guaranteed single-family mortgage backed securities (MBSs) and collateralized mortgage obligations (CMOs) (collectively “
(b) The dollar amount of the
(c) The aggregate market risk capital requirement for
(a) Each single-family whole loan and guarantee is subject to an 8 basis point operational risk capital requirement (
(b) The dollar amount of the
(1) If the Enterprise holds only credit risk or both credit and market risk, the calculation is as follows:
(2) Otherwise, if the Enterprise holds only market risk the calculation is as follows:
(c) The aggregate operational risk capital requirement for all single-family whole loans and guarantees (
(a) Each
(b) The operational risk capital requirement for
(c) The aggregate operational risk capital requirement for all
(a) Each single-family whole loan and guarantee is subject to a 75 basis point going-concern buffer requirement (
(b) The dollar amount of the
(1) If the Enterprise holds only credit risk or both credit and market risk, the calculation is as follows:
(2) Otherwise, if the Enterprise holds only market risk the calculation is as follows:
(c) The aggregate going-concern buffer requirement for all single-family whole loans and guarantees (
(a) Each
(b) The going-concern buffer requirement for an
(c) The aggregate going-concern buffer requirement for all
(a) As provided in § 1240.5, the aggregate risk-based capital requirement for single-family whole loans, guarantees, and related securities is the cumulative total of: The aggregate net credit risk capital requirement; the aggregate market risk capital requirement for single-family whole loans and securities with market exposure; the aggregate operational risk capital requirement, and the aggregate going-concern buffer requirement, net of the total capital relief from single-family CRTs.
(b) The aggregate risk-based capital requirement for all single-family whole loans, guarantees, and related securities (
The risk-based capital requirement for a private-label security (PLS), including PLS wraps, is the cumulative total of the following capital requirements:
(a) A credit risk capital requirement as provided in § 1240.25;
(b) A market risk capital requirement as provided in § 1240.26;
(c) An operational risk capital requirement as provided in § 1240.27; and
(d) A going-concern buffer requirement as provided in § 1240.28.
(a) Each PLS to which an Enterprise has credit risk exposure is subject to a credit risk capital requirement.
(b) An Enterprise must calculate the credit risk capital requirement for a PLS by taking the following steps:
(1) Calculate the risk weight (
(2) Multiply the
(c) To determine the
(1) Excludes § 217.43(b)(2)(v)(A) through (B) of this title:
(2) Assigns the weighted-average total capital requirement of the underlying exposures K
(3) Assigns the supervisory calibration parameter p for a PLS wrap;
(4) Removes references to the nth to default credit derivatives; and
(5) Substitutes references to a bank with references to an Enterprise.
(d) To use
(e) To calculate the risk weight for a securitization exposure using
(1) K
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization to include collateral backing the PLS or PLS Wrap that meet any of the criteria as set forth in paragraphs (e)(2)(i) through (vi) of this section, to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more; or
(vi) Is in default.
(3) Parameter
(4) Parameter
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures. A PLS Wrap has a supervisory calibration parameter equal to the supervisory calibration parameter of the underlying PLS.
(f) K
(1) When the detachment point, parameter DTCH, for a securitization exposure is less than or equal to K
(2) When the attachment point, parameter ATCH, for a securitization exposure is greater than or equal to K
(3) When ATCH is less than K
(i) The weight assigned to 1,250 percent equals
(ii) The weight assigned to 1,250 percent times
(iii) The risk weight will be set equal to
(g)
(1) An Enterprise must define the following parameters:
(2) An Enterprise must calculate
(3) The risk weight for the exposure (expressed as a percent) is equal to:
(h) Determine the credit risk capital requirement for a PLS in bps (
(i) Determine the credit risk capital requirement for a PLS in dollar terms (
(a) Each PLS to which an Enterprise has market risk exposure is subject to a market risk capital requirement. The market risk capital requirement of a PLS wrap is zero as an Enterprise does not have market risk exposure to a PLS wrap.
(b) The
(c) The
(a) Each Enterprise PLS exposure is subject to an operational risk capital requirement.
(b) The operational risk capital requirement for a PLS in dollar terms (
(a) Each Enterprise PLS exposure is subject to a going-concern buffer requirement (
(b) The
(a) The
(b) The
The risk-based capital requirement for multifamily whole loans, guarantees, and related securities is the cumulative total of the following capital requirements:
(a) A credit risk capital requirement, as provided in §§ 1240.31 through 1240.38;
(b) A market risk capital requirement for multifamily whole loans and securities with market exposure, as provided in §§ 1240.39 through 1240.40;
(c) An operational risk capital requirement, as provided in §§ 1240.41 through 1240.42; and
(d) A going-concern buffer requirement, as provided in §§ 1240.43 through 1240.44.
(a) The methodology for calculating the credit risk capital requirement for a multifamily whole loan and guarantee uses tables to determine the base credit risk capital requirement and risk factor multipliers to adjust the base credit risk capital requirement for risk factor variations not captured in the base tables. The methodology also provides for a reduction in the credit risk capital requirement for multifamily whole loans and guarantees due to credit risk transfer transactions.
(b) The steps for calculating the credit risk capital requirement for multifamily whole loans and guarantees are as follows:
(1) Identify the loan data needed for the calculation of the multifamily whole loans and guarantees credit risk capital requirement.
(2) Assign each multifamily whole loan and guarantee into a multifamily loan segment, as specified in § 1240.32.
(3) Determine
(4) Determine
(5) Calculate
(6) Calculate
(7) Determine the capital relief from multifamily CRTs, as specified in §§ 1240.37 and 1240.38.
(c) The credit risk capital requirement applies to any Enterprise multifamily whole loan or guarantee with exposure to credit risk.
(d) Table 19 to part 1240 lists the loan data needed for the calculation of the multifamily whole loans and guarantees credit risk capital requirement. Table 19 contains variable names, definitions, acceptable values, and treatments for missing or unacceptable values.
(a) An Enterprise must assign each multifamily whole loan and guarantee in its portfolio with exposure to credit risk to a loan segment. Multifamily loan segments are determined based on the type of interest rate contract used in the whole loan or guarantee. The multifamily loan segments are: Multifamily Fixed Rate Mortgage (Multifamily FRM) and Multifamily Adjustable Rate Mortgage (Multifamily ARM).
(b) A multifamily whole loan and guarantee that has both a fixed rate period and an adjustable rate period, also known as a hybrid loan, should be classified and treated as a Multifamily FRM during the fixed rate period, and classified and treated as a Multifamily ARM during the adjustable rate period.
An Enterprise must determine
(a) Multifamily FRM
(b) Multifamily ARM
(a) Risk multipliers increase or decrease the credit risk capital requirement for multifamily whole loans and guarantees based on a multifamily loan's assigned loan segment and risk characteristics. The multifamily risk multipliers are presented in Table 22 to part 1240.
(b) The steps for calculating
(1) Determine the appropriate multifamily risk multipliers values from Table 22 based on the loan's characteristics and assigned loan segment.
(2) Apply the appropriate formula to calculate the combined risk multiplier,
(3) Calculate the
(c) The following risk multiplier calculations are to be used for each respective multifamily whole loan and guarantee with the described characteristics:
(1) For each multifamily whole loan and guarantee that is a new acquisition, determine the appropriate risk multiplier values from Table 22 and apply the following formula to calculate
(2) For each multifamily whole loan and guarantee classified as a seasoned loan, determine the appropriate risk multiplier values from Table 22 and apply the following formula to calculate
(3) For each multifamily whole loan and guarantee defined as a supplemental loan, an Enterprise must determine the additional capital required for that supplemental loan, or supplemental loans if there is more than one supplemental loan on a property. The steps for calculating the additional capital are as follows:
(i) An Enterprise must recalculate DSCRs and LTVs for the original and supplemental loans using combined loan balances and combined income/payment information.
(ii) Using the recalculated DSCR and LTV for each supplemental loan, use Table 20 for a multifamily FRM, or Table 21 for a multifamily ARM, to calculate the credit risk capital.
(iii) For each supplemental loan, using the combined loan balance of the original and the supplemental, apply the loan size risk multiplier specified in Table 22 for the factor Original Loan Size.
(iv) The capital for a supplemental loan must be calculated as the difference between the combined capital requirements for the original and all previous supplemental loans using the combined DSCR, LTV, and loan balance, and the capital requirement for the original loan plus other supplemental loans using the combined DSCR, LTV, and loan balance.
An Enterprise must determine
(a) An Enterprise must determine the net credit risk capital requirement for a multifamily whole loan and guarantee (
(b) An Enterprise shall determine the net credit risk capital requirement in dollars (
(c) The aggregate net credit risk capital requirement for all multifamily whole loans and guarantees (
A multifamily credit risk transfer (“multifamily CRT”) is a credit risk transfer where the underlying whole loans and guarantees backing the CRT, or referenced by the CRT, are multifamily whole loans and guarantees. A multifamily CRT may reduce required credit risk capital. The methodology for calculating the reduction, also known as capital relief, combines credit risk capital requirements and expected losses on the multifamily whole loans and guarantees underlying or referenced by the CRT, tranche structure, ownership, and counterparty credit risk. The methodology is provided in § 1240.38.
(a) To calculate capital relief for a multifamily CRT, an Enterprise must have data that enables it to assign accurately the parameters described in paragraphs (b) and (c) of this section.
(1) Data used to assign the parameters must be the most currently available data. If the contracts governing the multifamily CRT require payments on a monthly or quarterly basis, the data used to assign the relevant parameters must be no more than 91 calendar days old.
(2) If an Enterprise does not have the data to assign the parameters described in paragraphs (b) and (c) of this section, then an Enterprise must treat the multifamily CRT as if no capital relief had occurred.
(b) To calculate capital relief on a multifamily CRT, an Enterprise must have accurate data on the following parameters:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(c) For each multifamily CRT, an Enterprise must use the parameters described in paragraph (b) of this section to calculate multifamily CRT capital relief using one of the three following methods:
(1)
(i) An Enterprise must calculate the portion of capital associated with the lender's exposure (
(ii) An Enterprise must determine the uncollateralized counterparty exposure (
(iii) An Enterprise must determine counterparty credit risk in dollars (
(iv) An Enterprise must calculate total
(2)
(i) An Enterprise must distribute
(ii) For each tranche in a multifamily CRT, an Enterprise must use the following formula to identify the capital relief from securitization (
(iii) An Enterprise must calculate total
(3)
(i) An Enterprise must distribute
(ii) For each tranche in a multifamily CRT, an Enterprise must use the following formulae to identify the capital relief from multiple tranche loss sharing (
(iii) An Enterprise must determine the uncollateralized counterparty exposure (
(iv) An Enterprise must determine counterparty credit risk (
(v) An Enterprise must calculate total capital relief in dollars for the entire multiple tranche loss sharing multifamily CRT (
(d)
(a) Each multifamily whole loan with market risk exposure is subject to the multifamily whole loan market risk capital requirement. There is no market risk exposure for multifamily guarantees. The market risk capital requirement for a multifamily whole loan is limited to spread risk.
(b) The multifamily whole loan market risk capital requirement is defined as the product of the market value, a defined spread shock of 15 bps and
(c) The dollar amount of the
(d) The aggregate market risk capital requirement for all multifamily whole loans and guarantees (
(a) Each Enterprise and Ginnie Mae guaranteed multifamily MBS (
(b) The
(c) The aggregate market risk capital requirement for all
(a) Each multifamily whole loan and guarantee is subject to an 8 basis point operational risk capital requirement.
(b) The operational risk capital requirement in dollar terms (
(1) If the Enterprise holds only credit risk or both credit and market risk, the calculation is as follows:
(2) Otherwise, if the Enterprise holds only market risk the calculation is as follows:
(c) The aggregate operational risk capital requirement for all multifamily whole loans and guarantees (
(a) Each MFMBS is subject to an 8 basis point operational risk capital requirement.
(b) The operational risk capital requirement for MFMBS in dollar terms (
(c) The aggregate operational risk capital requirement for MFMBS (
(a) Each multifamily whole loan and guarantee is subject to a 75 basis point going-concern buffer requirement (
(b) The dollar amount of the
(1) If the Enterprise holds only credit risk or both credit and market risk, the calculation is as follows:
(2) Otherwise, if the Enterprise holds only market risk the calculation is as follows:
(c) The aggregate going-concern buffer requirement for all multifamily whole loans and guarantees (
(a) Each MFMBS is subject to a 75 basis point going-concern buffer requirement.
(b) The going-concern buffer requirement for MFMBS in dollar terms (
(c) The aggregate going-concern buffer requirement for all MFMBS (
The aggregate capital requirement for multifamily whole loans, guarantees and related securities is the cumulative total of: The aggregate net credit risk capital requirement; the aggregate market risk capital requirement; the aggregate operational risk capital requirement; the aggregate going-concern buffer requirement; net of the total capital relief from multifamily CRTs. The aggregate risk-based capital requirement for multifamily whole loans and guarantees (
(a) The risk-based capital requirement for a CMBS is the cumulative total of: A combined credit risk and market risk capital requirement, an operational risk capital requirement, and a going-concern buffer requirement.
(b) A CMBS is subject to 200 basis point combined credit and market risk capital requirement. The combined credit and market risk capital requirement for a CMBS in dollar terms (
(c) The aggregate combined credit and market risk capital requirement for CMBS (
(d) A CMBS is subject to an 8 basis point operational risk capital requirement. The operational risk capital requirement for CMBS in dollar terms (
(e) The aggregate operational risk capital requirement for CMBS (
(f) A CMBS is subject to a 75 basis point going-concern buffer requirement. The going-concern buffer requirement for CMBS in dollar terms (
(g) The aggregate going-concern buffer requirement for all CMBS (
(h) The total risk-based capital requirement for CMBS in dollar terms (
(a)
(b)
(1)(i) A Municipal Debt instrument is subject to a 760 basis point market risk capital requirement. The market risk capital requirement for a Municipal Debt instrument in dollar terms (
(ii) The aggregate market risk capital requirement for all Municipal Debt (
(2) Municipal debt is subject to an 8 basis point operational risk capital requirement. The operational risk capital requirement for municipal debt in dollar terms (
(3)(i) Municipal debt is subject to a 75 basis point going-concern buffer requirement. The going-concern buffer requirement for municipal debt in dollar terms (
(ii) The aggregate going-concern buffer requirement for all municipal debt (
(4) The total risk-based capital requirement for municipal debt in dollar terms (
(c)
(d)
(1) The dollar amount of the
(2) The dollar amount of the
(3) The aggregate market risk capital requirement for all reverse mortgage loans and securities (
(4)(i) Reverse mortgage loans and securities are subject to an 8 basis point operational risk capital requirement. The operational risk capital requirement for reverse mortgage loans and securities in dollar terms (
(ii) The aggregate operational risk capital requirement for reverse mortgage loans and securities (
(5)(i) Reverse mortgage loans and securities are subject to a 75 basis point going-concern buffer requirement. The going-concern buffer requirement for reverse mortgage loans and securities in dollar terms (
(ii) The aggregate going-concern buffer requirement for all reverse mortgage loans and securities (
(6) The total risk-based capital requirement for reverse mortgage loans and securities in dollar terms (
(e)
(a) For purposes of this part, an Unassigned Activity means any asset, guarantee, off-balance sheet guarantee, or activity for which this part does not have an explicit risk-based capital treatment. An Unassigned Activity must be assigned a capital requirement.
(b) The Director has the authority under 12 U.S.C. 4612(e) to treat as an Unassigned Activity any asset, guarantee, off-balance sheet guarantee or activity that exists as of the effective date of this part, or is not in existence as of the effective date of this part, which has:
(1) Characteristics or unusual features that create risks for an Enterprise that are not adequately reflected in the specified treatments in this part; or
(2) For which the specified treatment in this part no longer adequately reflects the risks to an Enterprise, either because of increased volume or because new information concerning those risks has become available.
(c) The methodology for determining the capital requirement for an Unassigned Activity includes the following steps:
(1) An Enterprise must provide a notification to FHFA of a proposal related to an Unassigned Activity as soon as possible, but in no event later than thirty days after the date on which the transaction closes or is settled. This obligation applies with respect to any activity for which this part does not otherwise specifically prescribe a risk-based capital requirement, or that FHFA has notified the Enterprise is an Unassigned Activity. The notification must include:
(i) A proposal for an appropriate capital treatment that will capture the credit and market risk of the Unassigned Activity; and
(ii) Narrative and data to explain the Unassigned Activity sufficient for FHFA to understand the risk profile of the Unassigned Activity.
(2) FHFA will review the notification and determine whether an existing treatment specified in this part captures the risks of the Unassigned Activity. If FHFA determines there is no effective existing treatment, FHFA will determine an appropriate treatment. FHFA will provide an Enterprise with an order specifying the risk-based capital treatment for the Unassigned Activity. If FHFA does not provide an Enterprise with an order specifying the risk-based capital treatment for the Unassigned Activity in time for the Enterprise to prepare its capital report, an Enterprise shall use its own proposed capital treatment, reflecting its assessment of the capital required in light of the various risks the activity presents, including an operational risk capital requirement and a going-concern buffer requirement.
(d) This part may be amended from time to time to provide for a risk-based capital requirement treatment for a specified Unassigned Activity.
(a) The calculation for the aggregate risk-based capital requirements for total capital (
(b)
Each Enterprise shall maintain at all times core capital in an amount at least equal to 2.5 percent of total assets and off-balance sheet guarantees related to securitization activities, or such higher amount as the Director may require pursuant to part 1225 of this chapter.
Each Enterprise shall maintain at all times core capital in an amount at least equal to 4% of non-trust assets and 1.5% of trust assets, or such higher amount as the Director may require pursuant to part 1225 of this chapter.
Office of the Comptroller of the Currency, Treasury (“OCC”); Board of Governors of the Federal Reserve System (“Board”); Federal Deposit Insurance Corporation (“FDIC”); Securities and Exchange Commission (“SEC”); and Commodity Futures Trading Commission (“CFTC”).
Notice of proposed rulemaking.
The OCC, Board, FDIC, SEC, and CFTC (individually, an “Agency,” and collectively, the “Agencies”) are requesting comment on a proposal that would amend the regulations implementing section 13 of the Bank Holding Company Act (BHC Act). Section 13 contains certain restrictions on the ability of a banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. The proposed amendments are intended to provide banking entities with clarity about what activities are prohibited and to improve supervision and implementation of section 13.
Comments must be received on or before September 17, 2018.
Interested parties are encouraged to submit written comments jointly to all of the Agencies. Commenters are encouraged to use the title “Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds” to facilitate the organization and distribution of comments among the Agencies. Commenters are also encouraged to identify the number of the specific question for comment to which they are responding. Comments should be directed to:
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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted on July 21, 2010.
Section 13 of the BHC Act generally prohibits banking entities from engaging as principal in trading for the purpose of selling financial instruments in the near term or otherwise with the intent to resell in order to profit from short-term price movements.
• Trading in U.S. government, agency, and municipal obligations;
• Underwriting and market-making-related activities;
• Risk-mitigating hedging activities;
• Trading on behalf of customers;
• Trading for the general account of insurance companies; and
• Foreign trading by non-U.S. banking entities.
Section 13 of the BHC Act also generally prohibits banking entities from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or private equity fund.
Under the statute, authority for developing and adopting regulations to implement the prohibitions and restrictions of section 13 of the BHC Act is divided among the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (individually, an “Agency,” and collectively, the “Agencies”).
The Agencies have now had several years of experience implementing the 2013 final rule and believe that supervision and implementation of the 2013 final rule can be substantially improved. The Agencies acknowledge concerns that some parts of the 2013 final rule may be unclear and potentially difficult to implement in practice. Based on experience since adoption of the 2013 final rule, the Agencies have identified opportunities, consistent with the statute, for improving the rule, including further tailoring its application based on the activities and risks of banking entities. Accordingly, the Agencies are issuing this proposal (the “proposal” or “proposed amendments”) to amend the 2013 final rule, in order to provide banking entities with greater clarity and certainty about what activities are prohibited and seek to improve effective allocation of compliance resources where possible. The Agencies also believe that the modifications proposed herein would improve the ability of the Agencies to examine for, and make supervisory assessments regarding, compliance relative to the statute and the implementing rules.
While section 13 of the BHC Act addresses certain risks related to proprietary trading and covered fund activities of banking entities, the Agencies note that the nature and business of banking entities involves other inherent risks, such as credit risk and general market risk. To that end, the Agencies have various tools, such as the regulatory capital rules of the Federal banking agencies and the comprehensive capital analysis and review framework of the Board, to require banking entities to manage the risks associated with their activities. The Agencies believe that the proposed changes to the 2013 final rule would be consistent with safety and soundness and enable banking entities to implement appropriate risk management policies in light of the risks associated with the activities in which banking entities are permitted to engage under section 13.
The Agencies also note that the Economic Growth, Regulatory Relief, and Consumer Protection Act,
Section 13 of the BHC Act requires that implementation of its provisions occur in several stages. The first stage in implementing section 13 of the BHC Act was a study by the Financial Stability Oversight Council (“FSOC”).
Following the FSOC study, and as required by section 13(b)(2) of the BHC Act, the Board, OCC, FDIC, and SEC in October 2011 invited the public to comment on a proposal implementing the requirements of section 13 of the BHC Act.
The Agencies are committed to revisiting and revising the rule as appropriate to improve its implementation. Since the adoption of the 2013 final rule, the Agencies have gained several years of experience implementing the 2013 final rule, and banking entities have had more than four years of experience implementing the 2013 final rule.
In particular, the Agencies have received various communications from the public and other sources since adoption of the 2013 final rule and over the course of its implementation. These communications include written comments from members of Congress; domestic and foreign banking entities and other financial services firms; trade groups representing banking, insurance, and other firms within the broader financial services industry; U.S. state and foreign governments; consumer and public interest groups; and individuals. The U.S. Department of the Treasury also issued reports in June 2017 and October 2017, which contained recommendations regarding section 13 of the BHC Act and the implementing regulations.
Furthermore, the Agencies have collected nearly four years of quantitative data required under Appendix A of the 2013 final rule. The data collected in connection with the 2013 final rule, compliance efforts by banking entities, and the Agencies' experience in reviewing trading and investment activity under the 2013 final rule, have provided valuable insights into the effectiveness of the 2013 final rule. These insights highlighted areas in which the 2013 final rule may have resulted in ambiguity, overbroad application, or unduly complex compliance routines. With this proposal, and based on experience gained over the past few years, the Agencies seek to simplify and tailor the implementing regulations, where possible, in order to increase efficiency, reduce excess demands on available compliance capacities at banking entities, and allow banking entities to more efficiently provide services to clients, consistent with the requirements of the statute.
Section 13(b)(2)(B)(ii) of the BHC Act directs the Agencies to “consult and coordinate” in developing and issuing the implementing regulations “for the purpose of assuring, to the extent possible, that such regulations are comparable and provide for consistent application and implementation of the applicable provisions of section 13 of the BHC Act to avoid providing advantages or imposing disadvantages to the companies affected . . . .”
The Agencies request comment on coordination generally and the following specific questions:
The proposal would adopt a revised risk-based approach that would rely on a set of clearly articulated standards for both prohibited and permitted activities and investments, consistent with the requirements of section 13 of the BHC Act. In formulating the proposal, the Agencies have attempted to simplify and tailor the 2013 final rule, as described further below, to allow banking entities to more efficiently provide services to clients.
The Agencies seek to address a number of targeted areas for potential revision in this proposal. First, the Agencies are proposing to tailor the application of the rule based on the size and scope of a banking entity's trading activities. In particular, the Agencies aim to further reduce compliance obligations for small and mid-sized firms that do not have large trading operations and therefore reduce costs and uncertainty faced by small and mid-size firms in complying with the final rule, relative to their amount of trading activity.
In addition to tailoring the application of the rule, the Agencies also seek to streamline and clarify for all banking entities certain definitions and requirements related to the proprietary trading prohibition and limitations on covered fund activities and investments. In particular, this proposal seeks to codify or otherwise addresses matters currently addressed by staff responses to Frequently Asked Questions (“FAQs”).
In tailoring these proposed changes to the 2013 final rule, the Agencies note the following statutory limitations to the permitted proprietary trading and covered fund activities,
As a matter of structure, the proposed amendments would maintain the 2013 final rule's division into four subparts, and would maintain a metrics appendix while removing the 2013 final rule's second appendix regarding enhanced minimum standards for compliance programs, as follows:
• Subpart A of the 2013 final rule, as amended by the proposal, would describe the authority, scope, purpose, and relationship to other authorities of the rule and define terms used commonly throughout the rule;
• Subpart B of the 2013 final rule, as amended by the proposal, would prohibit proprietary trading, define terms relevant to covered trading activity, establish exemptions from the prohibition on proprietary trading and limitations on those exemptions, and require certain banking entities to report certain information with respect to their trading activities;
• Subpart C of the 2013 final rule, as amended by the proposal, would prohibit or restrict acquisition or retention of an ownership interest in, and certain relationships with, a covered fund; define terms relevant to covered fund activities and investments; and establish exemptions from the restrictions on covered fund activities and investments and limitations on those exemptions; and
• Subpart D of the 2013 final rule, as amended by the proposal, would generally require banking entities with significant trading assets and liabilities to establish a compliance program regarding section 13 of the BHC Act and the rule, including written policies and procedures, internal controls, a management framework, independent testing of the compliance program, training, and recordkeeping; establish metrics reporting requirements for banking entities with significant trading assets and liabilities, pursuant to the Appendix; provide tailored compliance program requirements for banking entities without significant trading assets and liabilities, including a presumption of compliance for banking entities with limited trading assets and liabilities; and require certain larger
Given the complexities associated with the 2013 final rule, the Agencies request comment on the potential impact the proposal may have on banking entities and the activities in which they engage. The Agencies are interested in receiving comments regarding revisions described in the proposal relative to the 2013 final rule.
To better tailor the application of the rule, the proposal would establish three categories of banking entities based on their level of trading activity.
The second category would include banking entities with “moderate trading assets and liabilities,” defined as those banking entities that do not have significant trading assets and liabilities or limited trading assets and liabilities. Banking entities with moderate trading assets and liabilities are those entities that, together with their affiliates and subsidiaries, have trading assets and liabilities (excluding obligations of or guaranteed by the United States or any agency of the United States) less than $10 billion, but above the threshold described below for banking entities with limited trading assets and liabilities.
The third category includes banking entities with “limited trading assets and liabilities,” defined as those banking entities that have, together with their affiliates and subsidiaries, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) less than $1 billion. This $1 billion threshold would be based on the worldwide trading assets and liabilities of a banking entity and all of its affiliates. With respect to a foreign banking organization (“FBO”) and its subsidiaries, the $1 billion threshold would be based on worldwide consolidated trading assets and liabilities, and would not be limited to its combined U.S. operations.
The proposal would establish a presumption of compliance for all banking entities with limited trading assets and liabilities. Banking entities operating pursuant to this proposed presumption of compliance would have no obligation to demonstrate compliance with subparts B and C of the proposal on an ongoing basis. If, however, upon examination or audit, the relevant Agency determines that the banking entity has engaged in proprietary trading or covered fund activities that are prohibited under subpart B or subpart C, such Agency may exercise its authority to rebut the presumption of compliance and require the banking entity to comply with the requirements of the rule applicable to banking entities that have moderate trading assets and liabilities. The purpose of this presumption of compliance would be to further reduce compliance costs for small and mid-size banks that either do not engage in the types of activities subject to section 13 of the BHC Act or engage in such activities only on a limited scale.
The proposal also includes a reservation of authority that would allow an Agency to require a banking entity with limited or moderate trading assets and liabilities to apply any of the more extensive requirements that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities, if the Agency determines that the size or complexity of the banking entity's trading or investment activities, or the risk of evasion, warrants such treatment.
Subpart B of the 2013 final rule implements the statutory prohibition on proprietary trading and the various exemptions to this prohibition included in the statute. Section __.3 of the 2013 final rule contains the core prohibition on proprietary trading and defines a number of related terms. The proposal would make several changes to § __.3 of the 2013 final rule. Notably, the proposal would revise, in a manner consistent with the statute, the definition of “trading account” in order to increase clarity regarding the positions included in the definition.
In the 2013 final rule, the Agencies defined the statutory term “trading account” to include three prongs. The first prong includes any account that is used by a banking entity to purchase or sell one or more financial instruments principally for the purpose of short-term resale, benefitting from short-term price movements, realizing short-term arbitrage profits, or hedging another trading account position (the “short-term intent prong”).
In the experience of the Agencies, determining whether or not positions fall into the short-term intent prong of the trading account definition has often proved unclear and subjective, and, consequently, may result in ambiguity or added costs and delays. For this reason, the proposal would remove the short-term intent prong from the 2013 final rule's definition of trading account and eliminate the associated rebuttable presumption, and would also modify the definition of trading account as described below to include other accounts described in the statutory definition of “trading account.”
The remaining two prongs of the trading account definition in the 2013 final rule, the market risk capital prong and the dealer prong, generally would remain unchanged because, in the experience of the Agencies, interpretation of both prongs has been relatively straightforward and clear in practice for most banking entities. The proposal would, however, modify the market risk capital prong to cover the trading positions of FBOs subject to similar requirements in the applicable foreign jurisdiction. The Agencies are proposing this modification for FBOs to take into account the different frameworks and supervisors FBOs may have in their home countries. Specifically, the proposal would modify the market risk capital prong to apply to FBOs that are subject to capital requirements under a market risk framework established by their respective home country supervisors, provided the market risk framework is consistent with the market risk framework published by the Basel Committee on Banking Supervision, as amended. The Agencies expect that this standard, similar to the current market risk capital prong referencing the U.S. market risk capital rules, would include trading account activities of FBOs consistent with the statutory trading account requirements. The Agencies believe the proposed approach would be an appropriate interpretation of the statutory trading account definition. The Agencies likewise believe that application of the market risk capital prong to FBOs as described herein would be relatively straightforward and clear in practice.
In addition, the Agencies are proposing two changes related to the trading account definition that are intended to replace the short-term intent prong. These changes include: (i) The addition of an accounting prong and (ii) a presumption of compliance with the prohibition on proprietary trading for trading desks that are not subject to the market risk capital prong or the dealer prong, based on a prescribed profit and loss threshold. Under the proposed accounting prong, a trading desk that buys or sells a financial instrument (as defined in the 2013 final rule and unchanged by the proposal) that is recorded at fair value on a recurring basis under applicable accounting standards would be doing so for the “trading account” of the banking entity.
The proposed presumption of compliance, which would apply at the trading desk level, would provide that each trading desk that purchases or sells financial instruments for a trading account pursuant to the accounting prong may calculate the net gain or loss on the trading desk's portfolio of financial instruments each business day, reflecting realized and unrealized gains and losses since the previous business day, based on the banking entity's fair value for such financial instruments.
If the sum of the absolute values of the daily net gain and loss figures for the preceding 90-calendar-day period does not exceed $25 million, the activities of the trading desk would be presumed to be in compliance with the prohibition on proprietary trading, and the banking entity would have no obligation to demonstrate that such trading desk's activity complies with the rule on an ongoing basis. If this calculation exceeds the $25 million threshold, the banking entity would have to demonstrate compliance with section 13 of the BHC Act and the implementing regulations, as described in more detail below. The Agencies are also proposing to include a reservation of authority to address any positions that may be incorrectly scoped into or out of the definition.
Section __.3 of the 2013 final rule also details various exclusions from the definition of proprietary trading for certain purchases and sales of financial instruments that generally do not involve the requisite short-term trading intent under the statute. The proposal would make several changes to these exclusions. First, the proposal would clarify and expand the scope of the financial instruments covered in the liquidity management exclusion. Second, it would add an exclusion from the definition of proprietary trading for transactions made to correct errors made in connection with customer-driven or other permissible transactions.
Section __.4 of the 2013 final rule implements the statutory exemptions for underwriting and market making-related activities. The proposal would make several changes to this section intended to improve the practical application of these exemptions. In particular, the proposal would establish a presumption that trading within internally set risk limits satisfies the requirement that permitted underwriting and market making-related activities must be designed not to exceed the reasonably expected near-term demands of clients, customers, or counterparties (“RENTD”). The Agencies believe this presumption would allow for a clearer application of these exemptions, and would provide banking entities with more flexibility and certainty in conducting permissible underwriting and market making-related activities. In addition, the proposal would make the exemptions' compliance program requirements applicable only to banking entities with significant trading assets and liabilities.
The proposal would also modify the 2013 final rule's implementation of the statutory exemption for permitted risk-mitigating hedging activities in § __.5, by reducing restrictions on the eligibility of an activity to qualify as a
Section __.6(e) of the proposal would remove certain requirements of the 2013 final rule implementing the statutory exemption for trading by a foreign banking entity that occurs solely outside of the United States. In particular, the proposal would modify the requirement that any personnel of the banking entity or any of its affiliates that arrange, negotiate, or execute such purchase or sale not be located in the United States. It also would (1) remove the requirement that no financing for the banking entity's purchase or sale be provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any state, and (2) eliminate certain limitations on a foreign banking entity's ability to enter into transactions with a U.S. counterparty.
The proposal would retain the other requirements of § __.6(e) of the 2013 final rule, including the requirement that the banking entity engaging as principal in the purchase or sale (including relevant personnel) not be located in the United States or organized under the laws of the United States or of any State, that the banking entity not book a transaction to a U.S. affiliate or branch, and that the banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State. Taken as a whole, the proposed amendments to this exemption seek to reduce the impact of the 2013 final rule on foreign banking entities' operations outside of the United States by focusing on where the trading of these banking entities as principal occurs, where the trading decision is made, and whether the risk of the transaction is borne outside the United States.
Subpart C of the 2013 final rule implements the statutory prohibition on directly or indirectly acquiring and retaining an ownership interest in, or having certain relationships with, a covered fund, as well as the various exemptions to this prohibition included in the statute. Section __.10 of the 2013 final rule defines the scope of the prohibition on the acquisition and retention of ownership interests in, and certain relationships with, a covered fund, and provides the definition of “covered fund.” The Agencies request comment on a number of potential modifications to this section.
Section __.11(c) of the 2013 final rule outlines the requirements that apply when a banking entity engages in underwriting or market making-related activities with respect to a covered fund. The proposal would modify these requirements with respect to covered fund ownership interests for third-party covered funds to generally allow for the same types of activities as are permitted for other financial instruments. The proposal would also make changes to § __.13(a) of the 2013 final rule to expand a banking entity's ability to engage in hedging activities involving an ownership interest in a covered fund.
Subpart D of the 2013 final rule requires a banking entity engaged in covered trading activities or covered fund activities to develop and implement a program reasonably designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary trading activities and covered fund activities and investments set forth in section 13 of the BHC Act and the 2013 final rule.
As in the 2013 final rule, the proposal would provide that a banking entity that does not engage in proprietary trading activities (other than trading in U.S. government or agency obligations, obligations of specified government-sponsored entities, and state and municipal obligations) or covered fund activities and investments need only establish a compliance program prior to becoming engaged in such activities or making such investments. To further enhance compliance efficiencies, the proposal would reduce compliance requirements for most banking entities and expand tailoring of the requirements based on the banking entity categories previously described in this Supplementary Information section.
Under the proposal, a banking entity with significant trading assets and liabilities would be required to establish a six-pillar compliance programs commensurate with the size, scope, and complexity of its activities and business structure that meets six specific requirements already included in the 2013 final rule. These requirements include (1) written policies and procedures reasonably designed to document, describe, monitor and limit trading activities and covered fund activities and investments conducted by the banking entity; (2) a system of internal controls; (3) a management framework that, among other things, includes appropriate management review of trading limits, strategies, hedging activities, investments, incentive compensation and other matters identified in the rule or by management as requiring attention; (4) independent testing and audits; (5) training for certain personnel; and (6) recordkeeping requirements.
Under the proposal, a banking entity with moderate trading assets and liabilities would be required to include in its existing compliance policies and procedures appropriate references to the requirements of section 13 of the BHC Act and the implementing rules as appropriate given the activities, size,
The proposal would also include in subpart D the specifications for the presumption of compliance noted above that would apply for banking entities with limited trading assets and liabilities.
The proposal would eliminate Appendix B of the 2013 final rule, which specifies enhanced minimum standards for compliance programs of large banking entities and banking entities engaged in significant trading activities. The proposal would, however, maintain the 2013 final rule's CEO attestation requirement, and would apply it to all banking entities with significant trading assets and liabilities and moderate trading assets and liabilities.
As part of adopting the 2013 final rule, the Agencies committed to reviewing and assessing the quantitative measurements data (“metrics”) for their effectiveness in monitoring covered trading activities for compliance with section 13 of the BHC Act and the implementing regulations. Since that time and as part of implementing the 2013 final rule, the Agencies have reviewed the metrics submitted by the banking entities and considered whether all of the quantitative measurements are useful for all asset classes and markets, as well as for all of the trading activities subject to the metrics requirement, or whether modifications are appropriate.
In the proposal, the Agencies aim to better align the effectiveness of the metrics data with its associated value in monitoring compliance. To that end, the proposal would streamline the metrics reporting and recordkeeping requirements by tailoring the requirements based on a banking entity's size and level of trading activity, completely eliminating particular metrics based on experience working with the data, and adding a limited set of new metrics. The proposal also would provide certain firms with additional time to report metrics to the Agencies, beyond the current deadlines set forth in Appendix A of the 2013 final rule. The Agencies solicit comment regarding whether a single point of collection among the Agencies for metrics would be more effective.
As noted, the proposal would define three different categories of banking entities based on thresholds of trading assets and liabilities, in order to improve compliance efficiencies for all banking entities generally and further reduce compliance costs for firms that have little or no activity subject to the prohibitions and restrictions of section 13 of the BHC Act.
The first category would include any banking entity with significant trading assets and liabilities, defined under the proposal to mean a banking entity that, together with its affiliates and subsidiaries, has trading assets and liabilities (excluding trading assets and liabilities involving obligations of, or guaranteed by, the United States or any agency of the United States) the average gross sum of which (on a worldwide consolidated basis) over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10 billion.
The second category would include any banking entity with moderate trading assets and liabilities, defined as a banking entity that does not have significant trading assets and liabilities or limited trading assets and liabilities (described below). These banking entities, together with their affiliates and subsidiaries, generally have trading assets and liabilities (excluding obligations of or guaranteed by the United States or any agency of the United States) of $1 billion or more but less than $10 billion. As with the threshold described above for firms with significant trading assets and liabilities, the Agencies believe that the proposed threshold for firms with moderate trading assets and liabilities would appropriately cover a significant percentage of trading activities in the United States. The Agencies estimate that approximately 98 percent of the trading assets and liabilities in the U.S. banking system are currently held by those firms that would have trading assets and liabilities of $1 billion or more, including firms with both significant and moderate trading assets and liabilities. Relative to banking entities with significant trading assets and liabilities, banking entities with moderate trading assets and liabilities would be subject to reduced requirements and a tailored approach in light of their smaller portfolio of trading activity. For example, the proposal would require banking entities with moderate trading assets and liabilities to comply with a more tailored set of requirements under the underwriting, market-making, and risk-mitigating hedging exemptions, as compared to the requirements applicable to banking entities with significant trading assets and liabilities. In addition, these firms would be subject to a simplified compliance program requirement, which would allow the banking entity to comply with the applicable requirements by updating existing policies and procedures. The Agencies believe these changes could substantially reduce the costs of compliance for banking entities that do not have significant trading assets and liabilities.
The third category would include any banking entity with limited trading assets and liabilities, defined under the proposal to mean a banking entity that, together with its affiliates and subsidiaries, has trading assets and liabilities (excluding trading assets and liabilities involving obligations of, or guaranteed by, the United States or any agency of the United States) the average
The purpose of this proposed presumed compliance provision would be to significantly reduce compliance program obligations for small and mid-size banking entities that do not engage on a large scale in activities subject to the proposal. Based on data from the December 31, 2017, reporting period, all but approximately 40 top-tier banking entities would be eligible for presumed compliance.
The proposal would apply the 2013 final rule's CEO attestation requirement for all banking entities with significant or moderate trading assets and liabilities. Furthermore, all banking entities would remain subject to the covered fund provisions of the 2013 final rule, with some modifications described further below, including to the applicable compliance program requirements based on the trading assets and liabilities of the banking entity. As under the 2013 final rule, banking entities that do not engage in covered funds activities or proprietary trading would not be required to establish a compliance program unless or until prior to becoming engaged in such activities or making such investments.
The proposal also includes a reservation of authority that would allow an Agency to require a banking entity with limited or moderate trading assets and liabilities to apply any of the more extensive requirements that would otherwise apply if the banking entity had moderate or significant trading assets and liabilities, if the Agency determines that the size or complexity of the banking entity's trading or investment activities, or the risk of evasion, warrants such treatment.
The proposal seeks to tailor requirements based on a relatively simple, straightforward, and objective measure connected to the activities subject to section 13 of the BHC Act. Therefore, the Agencies are proposing thresholds that are based on the trading activities of a banking entity, and are considered on a consolidated basis with its affiliates and subsidiaries. In addition, many of the requirements that the proposal would apply on a tailored basis to banking entities based on these thresholds relate to the statutory prohibition on proprietary trading and the associated exemptions, such as for permitted underwriting, market making, and risk-mitigating hedging activities. In general, this approach would seek to apply requirements commensurate with the size and complexity of a banking entity's trading activities.
Under this approach, banking entities with the largest trading activity (banking entities with significant trading assets and liabilities) would be subject to the most extensive requirements. These firms are currently subject to reporting requirements under Appendix A of the 2013 final rule due to the fact that they engage in the most trading activity subject to section 13 of the BHC Act and the implementing regulations.
The Agencies request comment regarding all aspects of the proposed approach to tailoring application of the rule. In particular, the Agencies request comment on the following questions:
The 2013 final rule, consistent with section 13 of the BHC Act, defines the term “banking entity” to include: (i) Any insured depository institution; (ii) any company that controls an insured depository institution; (iii) any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978; and (iv) any affiliate or subsidiary of any entity described in clauses (i), (ii), or (iii).
Under the BHC Act, an entity is generally considered an affiliate of an insured depository institution, and therefore a banking entity itself, if it controls, is controlled by, or is under common control with an insured depository institution. Under the BHC Act, a company controls another company if: (i) The company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 percent or more of any class of voting securities of the company; (ii) the company controls in any manner the election of a majority of the directors of trustees of the other company; or (iii) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the company.
The 2013 final rule excludes covered funds and other types of entities from the definition of banking entity.
Since the adoption of the 2013 final rule, the Agencies have received a number of requests for guidance regarding instances in which certain funds that are excluded from the covered fund definition are considered banking entities. This situation may occur as a result of the sponsoring banking entity having control over the fund, as defined under the BHC Act. A banking entity sponsoring a U.S. registered investment company (“RIC”), a foreign public fund (“FPF”), or foreign excluded fund could be considered to control the fund by virtue of a 25 percent or greater investment in any class of voting securities during a seeding period or, for FPFs and foreign excluded funds, by virtue of corporate governance structures abroad such as where the fund's sponsor selects the majority of the fund's directors or trustees, or otherwise controls the fund for purposes of the BHC Act by contract or through a controlled corporate director.
In particular, following the adoption of the 2013 final rule, the staffs of the Agencies received numerous inquiries about this issue in connection with RICs and FPFs, which are excluded from the covered fund definition. The Agencies similarly received numerous inquiries regarding certain foreign funds offered and sold outside of the United States that are excluded from the covered fund definition with respect to a foreign banking entity (foreign excluded funds).
Sponsors of RICs, FPFs, and foreign excluded funds asserted that the treatment of these funds as banking entities would disrupt bona fide asset management activities involving funds that are not covered funds, which these sponsors argued would be inconsistent with section 13 of the BHC Act. These disruptions would arise because many funds' investment strategies involve proprietary trading prohibited by the 2013 final rule, and may also involve investments in covered funds. Sponsors of these funds further asserted that the permitted activities in the 2013 final rule also do not appear to be designed for funds, which by design invest in financial instruments for their own account. The 2013 final rule, for example, provides exemptions from the rule's proprietary trading restrictions for underwriting and market-making-related activities—exemptions for activities in which broker-dealers engage but that are not applicable to funds.
In addition, sponsors of RICs, FPFs, and foreign excluded funds asserted that restricting banking entities' bona fide investment management businesses in order to avoid treatment of their funds as banking entities would put bank-affiliated investment advisers at a competitive disadvantage relative to non-bank affiliated advisers engaged in the same activities without advancing the statutory purposes underlying section 13 of the BHC Act. Sponsors of FPFs and foreign excluded funds also have asserted that treating a foreign banking entity's foreign funds offered outside of the United States as banking entities themselves would be an inappropriate extraterritorial application of section 13 and the 2013 final rule and also unnecessary to reduce risks posed to banking entities and U.S. financial stability by proprietary trading activities and investments in or relationships with covered funds.
In response to these inquiries, the staffs of the Agencies issued responses to FAQs addressing the treatment of RICs and FPFs. The staffs observed in response to an FAQ that the preamble to the 2013 final rule recognized that a banking entity may own a significant portion of the shares of a RIC or FPF during a brief period during which the banking entity is testing the fund's investment strategy, establishing a track record of the fund's performance for marketing purposes, and attempting to distribute the fund's shares (the so-called “seeding period”).
The staffs also provided a response to an FAQ regarding FPFs.
Based on these considerations, the staffs stated that they would not advise that the activities and investments of an FPF that meet the requirements in § __.10(c)(1) and § __.12(b)(1) of the 2013 final rule be attributed to the banking entity for purposes of section 13 of the BHC Act or the 2013 final rule, where the banking entity, consistent with § __.12(b)(1) of the 2013 final rule, (i) does not own, control, or hold with the power to vote 25 percent or more of any class of voting shares of the FPF (after the seeding period), and (ii) provides investment advisory, commodity trading, advisory, administrative, and other services to the fund in compliance with applicable limitations in the relevant foreign jurisdiction. The staffs further stated that they would not advise that the FPF be deemed a banking entity under the 2013 final rule solely by virtue of its relationship with the sponsoring banking entity, where these same conditions are met.
With respect to foreign excluded funds, the Federal banking agencies released a policy statement on July 21, 2017 (the “policy statement”), in response to concerns expressed by a number of foreign banking entities, foreign government officials, and other market participants about the possible unintended consequences and extraterritorial impact of section 13 and the 2013 final rule for these funds, which are excluded from the definition of “covered fund” in the 2013 final rule.
To provide additional time, the policy statement provides that the Federal banking agencies would not propose to take action during the one-year period ending July 21, 2018, against a foreign banking entity
(1) Is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States;
(2) Would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;
(3) Would not otherwise be a banking entity except by virtue of the foreign banking entity's acquisition or retention of an ownership interest in, or sponsorship of, the entity;
(4) Is established and operated as part of a bona fide asset management business; and
(5) Is not operated in a manner that enables the foreign banking entity to evade the requirements of section 13 or implementing regulations.
The Agencies are continuing to consider the issues raised by the interaction between the 2013 final rule's definitions of the terms “banking entity” and “covered fund,” including the issues addressed by the Agencies' staffs and the Federal banking agencies discussed above. Accordingly, nothing in the proposal would modify the application of the staff FAQs discussed above, and the Agencies will not treat RICs or FPFs that meet the conditions included in the applicable staff FAQs as banking entities or attribute their activities and investments to the banking entity that sponsors the fund or otherwise may control the fund under the circumstances set forth in the FAQs. In addition, to accommodate the pendency of the proposal, for an additional period of one year until July 21, 2019, the Agencies will not treat qualifying foreign excluded funds that meet the conditions included in the policy statement discussed above as banking entities or attribute their activities and investments to the banking entity that sponsors the fund or otherwise may control the fund under the circumstances set forth in the policy statement. This additional time will allow the Agencies to benefit from public feedback in response to the requests for comment that follow. Specifically, the Agencies request comment on the following:
The proposed rule would add a definition of limited trading assets and liabilities. As described in greater detail in Part II.G above, limited trading assets and liabilities would be defined under the proposal as trading assets and liabilities (excluding trading assets and liabilities involving obligations of, or guaranteed by, the United States or any agency of the United States) the average gross sum of which (on a worldwide consolidated basis) over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, does not exceed $1 billion.
The proposed rule would add a definition of moderate trading assets and liabilities. As described in greater detail in Part II.G above, moderate trading assets and liabilities would be defined under the proposal as trading assets and liabilities that are not significant trading assets and liabilities or limited trading assets and liabilities.
The proposed rule would add a definition of significant trading assets and liabilities. As described in greater detail in Part II.G above, significant trading assets and liabilities would be defined under the proposal as trading assets and liabilities (excluding trading assets and liabilities involving obligations of, or guaranteed by, the United States or any agency of the United States) the average gross sum of which (on a worldwide consolidated basis) over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10 billion.
Section 13 of the BHC Act generally prohibits banking entities from engaging in proprietary trading.
The 2013 final rule, like the statute, defines proprietary trading as engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments.
The other two prongs of the 2013 final rule's definition of trading account are the “market risk capital prong” and the “dealer prong.” The “market risk capital prong” applies to the purchase or sale of financial instruments that are both market risk capital rule covered positions and trading positions.
The Agencies are proposing to revise the regulatory trading account definition to address concerns that the 2013 final rule's short-term intent prong requires banking entities and the Agencies to make subjective determinations with respect to each trade a banking entity conducts, and that the 60-day rebuttable presumption may scope in activities that do not involve the types of risks or transactions the statutory definition of proprietary trading appears to have been intended to cover. Specifically, the Agencies propose to retain the existing dealer prong and a modified version of the market risk capital prong, and to replace the 2013 final rule's short-term intent prong with a new third prong based on the accounting treatment of a position, in each case to implement the requirements of the statutory definition. The new prong would provide that “trading account” means any account used by a banking entity to purchase or sell one or more financial instruments that is recorded at fair value on a recurring basis under applicable accounting standards (the “accounting prong”). The Agencies also propose to eliminate the 60-day rebuttable presumption in the 2013 final rule.
The Agencies further propose to add a presumption of compliance with the prohibition on proprietary trading for trading desks that do not purchase or sell financial instruments subject to the market risk capital prong or the dealer prong and operate under a prescribed profit and loss threshold.
Under the proposed approach, “trading account” would continue to include any account used by a banking entity to (1) purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule, or (2) purchase or sell one or more financial instruments for any purpose, if the banking entity is licensed or registered, or required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, if the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such
The proposal's definition of “trading account” for purposes of section 13 of the BHC Act would replace the short-term intent prong in the 2013 final rule with a new prong based on accounting treatment, by reference to whether a financial instrument (as defined in the 2013 final rule and unchanged by the proposal) is recorded at fair value on a recurring basis under applicable accounting standards. Such instruments generally include, but are not limited to, derivatives, trading securities, and available-for-sale securities. For example, for a banking entity that uses GAAP, a security that is classified as “trading” under GAAP would be included in the proposal's definition of “trading account” under this approach because it is recorded at fair value. “Fair value” refers to a measurement basis of accounting, and is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The proposal's inclusion of this prong in the definition of “trading account” is intended to give greater certainty and clarity to banking entities about what financial instruments would be included in the trading account, because banking entities should know which instruments are recorded at fair value on
The Agencies propose to include a presumption of compliance with the proposed rule's proprietary trading prohibition based on an objective, quantitative measure of a trading desk's activities. This presumption of compliance would apply to a banking entity's individual trading desks rather than to the banking entity as a whole. As described below, a trading desk operating pursuant to the proposed presumption would not be obligated to demonstrate that the activities of the trading desk comply with subpart B on an ongoing basis. The proposed presumption would only be available for a trading desk's activities that may be within the trading account under the proposed accounting prong, for a trading desk that is not subject to the market risk capital prong or the dealer prong of the trading account definition. The replacement of the short-term intent prong with the accounting prong would represent a significant change from the 2013 final rule and could potentially apply to certain activities that were previously not within the regulatory definition of trading account. However, the presumption of compliance would limit the expansion of the definition of “trading account” to include—unless the presumption is rebutted—only the activities of a trading desk that engages in a greater than de minimis amount of activity (unless the presumption is rebutted).
The proposed presumption would not be available for trading desks that purchase or sell positions that are within the trading account under the market risk capital prong or the dealer prong. The Agencies are not proposing to extend the presumption of compliance with the prohibition on proprietary trading to activities of banking entities that are included under the market risk capital prong or the dealer prong because, based on their experience implementing the 2013 final rule, the Agencies believe that these two prongs are reasonably designed to include the appropriate trading activities. Banking entities subject to the market risk capital prong and the dealer prong have had several years of experience complying with the requirements of the 2013 final rule and experience with identifying these activities in other contexts. The Agencies believe that banking entities with activities that are covered by these prongs are able to conduct appropriate trading activities in an efficient manner pursuant to exclusions from the definition of proprietary trading or pursuant to the exemptions for permitted activities. The Agencies further note that the proposed revisions to the exemptions (described herein) are intended to facilitate the ability of banking entities subject to the market risk capital prong and the dealer prong to better engage in otherwise permitted activities such as market-making. Additionally, the Agencies note that the presumption of compliance with the prohibition on proprietary trading is optional for a banking entity. Accordingly, if a banking entity prefers to demonstrate ongoing compliance for activity captured by the accounting prong rather than calculating the threshold for presumed compliance described below, it may do so at its discretion.
Under the proposed compliance presumption, the activities of a trading desk of a banking entity that are not covered by the market risk capital prong or the dealer prong would be presumed to comply with the proposed rule's prohibition on proprietary trading if the activities do not exceed a specified quantitative threshold. The trading desk would remain subject to the prohibition, but unless the desk engages in a material level of trading activity (or the presumption of compliance is rebutted as described below), the desk would not be required to comply with the more extensive requirements that would otherwise apply under the proposal in order to demonstrate compliance. As described further below, the Agencies propose to use the absolute value of the trading desk's profit and loss (“absolute P&L”) on a 90-calendar-day rolling basis as the relevant quantitative measure for this threshold.
The proposed rule includes a threshold for the presumption of compliance based on absolute P&L because this measure tends to correlate with the scale and nature of a trading desk's trading activities.
In general, the proposed presumption of compliance would take the approach that a trading desk that consistently does not generate more than a threshold amount of absolute P&L does not engage in trading activities of a sufficient scale to warrant the costs associated with more extensive requirements of the rule to otherwise demonstrate compliance with the prohibition on proprietary trading. Such an approach is intended to reflect a view that the lesser activity of these trading desks does not justify the costs of an extensive ongoing compliance regime for those trading desks in order to ensure compliance with section 13 of the BHC Act and the implementing regulations.
Under the proposal, each trading desk that operates under the presumption of compliance with the prohibition on proprietary trading would be required to determine on a daily basis the absolute value of its net realized and unrealized
The Agencies propose to use the absolute value of a trading desk's daily P&L because absolute value would ensure that losses would be counted toward the measurement to the same extent as gains. Thus, a trading desk could not avoid triggering compliance by offsetting significant net gains on one day with significant net losses on another day. Measuring absolute P&L on a rolling basis would mean that the threshold could be triggered in any 90-calendar-day period.
This proposed trading-desk-level presumption of compliance with the prohibition on proprietary trading would be intended to allow banking entities to conduct ordinary banking activities without having to assess every individual trade for compliance with subpart B of the implementing regulations and, in particular, the proposed accounting prong.
As noted above, one advantage of using absolute P&L as the relevant measure of trading desk risk is that it would provide a relatively simple and objective measure that most banking entities are already equipped to calculate. For example, banking entities subject to the current metrics reporting requirements should already be equipped to calculate P&L on a daily basis. Other banking entities with significant trading activities likely currently calculate P&L on a daily basis for the purpose of monitoring their positions and risks. Moreover, a banking entity's methodology for calculating P&L is generally subject to internal and external audit requirements, managerial monitoring, and applicable public reporting requirements under the U.S. securities laws. Under the proposed approach, the Agencies would review banking entities' methodologies for calculating absolute P&L for purposes of the presumption of compliance with the prohibition on proprietary trading.
The specific threshold chosen aims to characterize trading desks not engaged in prohibited proprietary trading. Based on the metrics collected by the Agencies since issuance of the 2013 final rule, 90-calendar-day absolute P&L values below $25 million dollars are typically indicative of trading desks not engaged in prohibited proprietary trading. Under the proposal, the activities of a trading desk that exceeds the $25 million threshold would not presumptively comply with the prohibition on proprietary trading. If a trading desk operating pursuant to the proposed presumption of compliance with the prohibition on proprietary trading exceeded the $25 million threshold, the banking entity would be required to notify the appropriate Agency, demonstrate that the trading desk's purchases and sales of financial instruments comply with subpart B (
In addition, the proposed rule includes a reservation of authority (described further below) that would allow an Agency to designate any activity as a proprietary trading activity if the Agency determines on a case-by-case basis that the banking entity has engaged as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments under 12 U.S.C. 1851(h)(6).
As previously discussed, § __.3 of the 2013 final rule generally prohibits a banking entity from engaging in proprietary trading.
The 2013 final rule excludes from the definition of proprietary trading the purchase or sale of securities for the purpose of liquidity management in accordance with a documented liquidity management plan.
The Agencies propose to amend the exclusion for liquidity management activities to allow banking entities to use foreign exchange forwards and foreign exchange swaps, each as defined in the Commodity Exchange Act,
To streamline compliance for banking entities operating in foreign jurisdictions and using foreign exchange forwards, foreign exchange swaps, and cross-currency swaps for liquidity management purposes, the Agencies propose to expand the liquidity management exclusion to permit the
The inclusion of cross-currency swaps would be limited to swaps for which all payments are made in the currencies being exchanged, as opposed to cash-settled swaps, to limit the potential for these instruments to be used for proprietary trading that is not for liquidity management purposes. While foreign exchange forwards and foreign exchange swaps, as defined in the Commodity Exchange Act, are by definition limited to an exchange of the designated currencies, no similarly limited definition of the term “cross-currency swap” is available for this purpose. Cross-currency swaps generally are more flexible in their terms, may have longer durations, and may be used to achieve a greater variety of potential outcomes. Accordingly, out of concern that cross-currency swaps could be used for prohibited proprietary trading, the Agencies propose to limit the use of cross-currency swaps for purposes of the liquidity management exclusion to only those swaps for which the payments are made in the two currencies being exchanged.
The Agencies understand that, from time to time, a banking entity may erroneously execute a purchase or sale of a financial instrument in the course of conducting a permitted or excluded activity. For example, a trading error may occur when a banking entity is acting solely in its capacity as an agent, broker, or custodian pursuant to § __.3(d)(7) of the 2013 final rule, such as by trading the wrong financial instrument, buying or selling an incorrect amount of a financial instrument, or purchasing rather than selling a financial instrument (or vice versa). To correct such errors, a banking entity may need to engage in a subsequent transaction as principal to fulfill its obligation to deliver the customer's desired financial instrument position and to eliminate any principal exposure that the banking entity acquired in the course of its effort to deliver on the customer's original request. Under the 2013 final rule, banking entities have expressed concern that the initial trading error and any corrective transactions could, depending on the facts and circumstances involved, fall within the proprietary trading definition if the transaction is covered by any of the prongs of the trading account definition and is not otherwise excluded pursuant to a different provision of the rule.
Accordingly, the Agencies are proposing a new exclusion from the definition of proprietary trading for trading errors and subsequent correcting transactions because such transactions do not appear to be the type of transaction the statutory definition of “proprietary trading” was intended to cover. In particular, these transactions generally lack the intent described in the statutory definition of “trading account” to profit from short-term price movements. The proposed exclusion would be available for certain purchases or sales of one or more financial instruments by a banking entity if the purchase (or sale) is made in error in the course of conducting a permitted or excluded activity or is a subsequent transaction to correct such an error. The Agencies note that the availability of the proposed exclusion will depend on the facts and circumstances of the transactions. For example, the failure of a banking entity to make reasonable efforts to prevent errors from occurring—as indicated, for example, by the magnitude or frequency of errors, taking into account the size, activities, and risk profile of the banking entity—or to identify and correct trading errors in a timely and appropriate manner may indicate trading activity that is not truly an error and therefore inconsistent with the exclusion.
As an additional condition, once the banking entity identifies purchases made in error, it would be required to transfer the financial instrument to a separately-managed trade error account for disposition, as a further indication that the transaction reflects a bona fide error. The Agencies believe that this separately-managed trade error account should be monitored and managed by personnel independent from the traders who made the error and that banking entities should monitor and manage trade error corrections and trade error accounts. Doing so would help prevent personnel from using these accounts to evade the prohibition on proprietary trading, such as by retaining positions in error accounts to benefit from short-term price movements or by intentionally and incorrectly classifying transactions as error trades or as corrections of error trades in order to realize short term profits.
The Agencies are requesting comment on alternatives to the 2013 final rule's definition of “trading desk.” The trading desk definition is significant because compliance with the underwriting and market-making provisions is determined at the trading-desk level.
Under the 2013 final rule, “trading desk” is defined as “the smallest discrete unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking entity or an affiliate thereof.”
Accordingly, the Agencies are requesting comment on whether to revise the trading desk definition to align with the trading desk concept used for other purposes. The Agencies are seeking comment on a potential multi-factor trading desk definition based on the same criteria typically used to establish trading desks for other operational, management, and compliance purposes. For example, the Agencies could define a trading desk as a unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking entity or an affiliate thereof that is:
• Structured by the banking entity to establish efficient trading for a market sector;
• Organized to ensure appropriate setting, monitoring, and management review of the desk's trading and hedging limits, current and potential future loss exposures, strategies, and compensation incentives; and
• Characterized by a clearly-defined unit of personnel that typically:
○ Engages in coordinated trading activity with a unified approach to its key elements;
○ Operates subject to a common and calibrated set of risk metrics, risk levels, and joint trading limits;
○ Submits compliance reports and other information as a unit for monitoring by management; and
○ Books its trades together.
The Agencies believe that this potential approach to the definition of trading desk could be easier to monitor and for banking entities to apply. At the same time, however, any revised definition should not be so broad as to hinder the ability of the Agencies or the banking entities to detect prohibited proprietary trading.
Under the alternative approach on which the Agencies are requesting comment, a banking entity's trading desk designations would be subject to Agency review, as appropriate, through the examination process or otherwise. Such a definition would be intended to reduce the burdens on banking entities by aligning the regulation's trading desk concept with the organizational structure that firms already have in place for purposes of carrying out their ordinary course business activities. Specifically, to the extent the trading desk definition in the 2013 final rule has been interpreted to apply at too granular a level, the Agencies request comment as to whether such a definition would reduce compliance costs by clarifying that banking entities are not required to maintain policies and procedures and to collect and report information at a level of the organization identified solely for purposes of section 13 of the BHC Act and implementing regulations.
The Agencies propose to include a reservation of authority allowing an Agency to determine, on a case-by-case basis, that any purchase or sale of one or more financial instruments by a banking entity for which it is the primary financial regulatory agency either is or is not for the trading account as defined in section 13(h)(6) of the BHC Act.
The Agencies request comment as to whether such a reservation of authority would be necessary in connection with the proposed definition of trading account, which would focus on objective factors rather than on subjective intent.
The Agencies propose to administer this reservation of authority with appropriate notice and response procedures. In those circumstances where the primary financial regulatory agency of a banking entity determines that the purchase or sale of one or more financial instruments is for the trading account, the Agency would be required to provide written notice to the banking entity explaining why the purchase or sale is for the trading account. The Agency would also be required to provide the banking entity with a reasonable opportunity to provide a written response before the Agency reaches a final decision. Specifically, a banking entity would have 30 days to respond to the notice with any objections to the determination and any factors that the banking entity would have the Agency consider in reaching its final determination. The Agency could, in its discretion, extend the response period beyond 30 days for good cause. The Agency could also shorten the response period if the banking entity consents to a shorter response period or, if, in the opinion of the Agency, the activities or condition of the banking entity so requires, provided that the banking entity is informed promptly of the new response period. Failure to respond within the time period would amount to a waiver of any objections to the Agency's determination that a purchase or sale is for the trading account. After the close of banking entity's response period, the Agency would decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the Agency's determination that the purchase or sale is for the trading account. The banking entity would be notified of the decision in writing. The notice would include an explanation of the decision.
Section 13(d)(1)(B) of the BHC Act contains an exemption from the prohibition on proprietary trading for the purchase, sale, acquisition, or disposition of securities, derivatives, contracts of sale of a commodity for future delivery, and options on any of the foregoing in connection with underwriting activities, to the extent that such activities are designed not to exceed RENTD.
• The banking entity act as an “underwriter” for a “distribution” of securities and the trading desk's underwriting position be related to such distribution;
• The amount and types of securities in the trading desk's underwriting position be designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, and reasonable efforts be made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
• The banking entity has established and implements, maintains, and enforces an internal compliance program that is reasonably designed to
○ The products, instruments, or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
○ Limits for each trading desk, based on the nature and amount of the trading desk's underwriting activities, including the reasonably expected near term demands of clients, customers, or counterparties, on the amount, types, and risk of the trading desk's underwriting position, level of exposures to relevant risk factors arising from the trading desk's underwriting position, and period of time a security may be held;
○ Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
○ Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk's limit(s), and independent review of such demonstrable analysis and approval;
• The compensation arrangements of persons performing the banking entity's underwriting activities are designed not to reward or incentivize prohibited proprietary trading; and
• The banking entity is licensed or registered to engage in the activity described in the underwriting exemption in accordance with applicable law.
As the Agencies explained in the 2013 final rule, underwriters play an important role in facilitating issuers' access to funding, and thus underwriters are important to the capital formation process and economic growth.
In recognition of how the underwriting market functions, the Agencies adopted a comprehensive, multi-faceted approach in the 2013 final rule. In the several years since the adoption of the 2013 final rule, however, public commenters have observed that the significant compliance requirements in the regulation may unnecessarily constrain underwriting without a corresponding reduction in the type of trading activities that the rule was designed to prohibit.
As described in further detail below, the Agencies are proposing to tailor, streamline, and clarify the requirements that a banking entity must satisfy to avail itself of the underwriting exemption. In that regard, the Agencies are proposing to modify the underwriting exemption to clarify how a banking entity may measure and satisfy the statutory requirement that underwriting activity be designed not to exceed the reasonably expected near term demand of clients, customers, or counterparties. Specifically, the proposal would establish a presumption, available to banking entities both with and without significant trading assets and liabilities, that trading within internally set risk limits satisfies the statutory requirement that permitted underwriting activities must be designed not to exceed RENTD.
The Agencies also are proposing to tailor the underwriting exemption's compliance program requirements to the size, complexity, and type of activity conducted by the banking entity by making those requirements applicable only to banking entities with significant trading assets and liabilities. Based on feedback the Agencies have received, banking entities that do not have significant trading assets and liabilities can incur costs to establish, implement, maintain, and enforce the compliance program requirements in the 2013 final rule, notwithstanding the lower level of such banking entities' trading activities.
As described above, the statutory exemption for underwriting in section 13(d)(1)(B) of the BHC Act requires that such activities be designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties.
The Agencies' experience implementing the 2013 final rule has indicated that the approach the Agencies have taken to give effect to the statutory standard of reasonably expected near term demands of clients, customers, or counterparties may be overly broad and complex, and also may inhibit otherwise permissible underwriting activity. The Agencies have received feedback as part of implementing the rule that compliance with the factors in the rule can be complex and costly.
Instead of the approach for the underwriting exemption in the 2013 final rule, the Agencies are proposing to establish the articulation and use of internal risk limits as a key mechanism for conducting trading activity in accordance with the rule's underwriting exemption.
Under the proposal, all banking entities, regardless of their volume of trading assets and liabilities, would be able to voluntarily avail themselves of the presumption of compliance with the statutory RENTD requirement in section 13(d)(1)(B) of the BHC Act by establishing and complying with these internal risk limits. Specifically, the proposal would provide that a banking entity would establish internal risk limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's underwriting activities, on the:
(1) Amount, types, and risk of its underwriting position;
(2) Level of exposures to relevant risk factors arising from its underwriting position; and
(3) Period of time a security may be held.
Banking entities utilizing this presumption would be required to maintain internal policies and procedures for setting and reviewing desk-level risk limits in a manner consistent with the statute.
The proposal would require a banking entity to promptly report to the appropriate Agency when a trading desk exceeds or increases its internal risk limits. A banking entity would also be required to report to the appropriate Agency any temporary or permanent increase in an internal risk limit. In the case of both reporting requirements (
As noted, a banking entity would not be required to adhere to any specific, pre-defined requirements for the limit-setting process beyond the banking entity's own ongoing and internal assessment of the amount of activity that is required to conduct underwriting, including to reflect the banking entity's ongoing and internal assessment of the reasonably expected near term demands of clients, customers, or counterparties. The proposal would, however, provide that internal risk limits established by a banking entity shall be subject to review and oversight by the appropriate Agency on an ongoing basis. Any review of such limits would assess whether or not those limits are established based on the statutory standard—
Under the proposal, the presumption of compliance for permissible underwriting activities may be rebutted by the Agency if the Agency determines, based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not based on the trading desk's reasonably expected near term demands of clients, customers, or counterparties on an ongoing basis. The Agency would provide notice of any such determination to the banking entity in writing.
The Agencies request comment on the proposed addition of a presumption that conducting underwriting activities within internally set risk limits satisfies the requirement that permitted underwriting activities be designed not to exceed the reasonably expected near-term demands of clients, customers, or counterparties. In particular, the Agencies request comment on the following questions:
The underwriting exemption in the 2013 final rule requires that a banking entity establishes and implements, maintains, and enforces a compliance program, as required by subpart D, that is reasonably designed to ensure compliance with the requirements of the exemption. Such compliance program is required to include reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing: (i) The products, instruments, or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities; (ii) limits for each trading desk, based on the nature and amount of the trading desk's underwriting activities, including the reasonably expected near term demands of clients, customers, or counterparties, based on certain factors; (iii) internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and (iv) authorization procedures, including escalation procedures that require review and approval of any trade that would exceed one or more of a trading desk's limits, demonstrable analysis of the basis for any temporary or permanent increase to one or more of a trading desk's limits, and independent review (
Banking entities and others have stated that the compliance program requirements of the underwriting exemption are overly complex and burdensome. The Agencies generally believe the compliance program requirements play an important role in facilitating and monitoring a banking entity's compliance with the exemption. However, with the benefit of experience, the Agencies also believe those requirements can be appropriately tailored to the scope of the underwriting activities conducted by each banking entity.
Specifically, the Agencies are proposing a tiered approach to the underwriting exemption's compliance program requirements so as to make them commensurate with the size, scope, and complexity of the relevant banking entity's trading activities and business structure. Consistent with the
The proposed removal of the exemption's compliance program requirements for banking entities that do not have significant trading assets and liabilities would not relieve those banking entities of the obligation to comply with the prohibitions on proprietary trading, and the other requirements of the exemption for underwriting activities, as set forth in section 13 of the BHC Act and the 2013 final rule, both as currently written and as proposed to be amended. However, eliminating the compliance program requirements as a condition to being able to rely on the underwriting exemption should provide these banking entities that do not have significant trading assets and liabilities an appropriate amount of flexibility to tailor the means by which they seek to ensure compliance with the underlying requirements of the exemption for underwriting activities, and to allow them to structure their internal compliance measures in a way that takes into account the risk profile and underwriting activity of the particular trading desk. This proposed change would also be consistent with the proposed modifications to the general compliance program requirements for these banking entities under § __.20 of the 2013 final rule, discussed further below in this
The Agencies understand that banking entities that do not have significant trading assets and liabilities can incur significant costs to establish, implement, maintain, and enforce the compliance program requirements contained in the 2013 final rule. In some instances, those costs may be disproportionate to the banking entity's trading activity and risk. Accordingly, eliminating the compliance program requirements for banking entities that do not have significant trading assets and liabilities may reduce costs that are passed on to investors and increase capital formation without materially impacting the rule's ability to ensure that the objectives set forth in section 13 of the BHC Act are satisfied.
The Agencies request comment on the proposed revisions to the exemption for the underwriting activities compliance program requirement. In particular, the Agencies request comment on the following questions:
Section 13(d)(1)(B) of the BHC Act contains an exemption from the prohibition on proprietary trading for the purchase, sale, acquisition, or disposition of securities, derivatives, contracts of sale of a commodity for future delivery, and options on any of the foregoing in connection with market making-related activities, to the extent that such activities are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties.
• The trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
• The amount, types, and risks of the financial instruments in the trading desk's market maker inventory are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, as required by the statute and based on certain factors and analysis specified in the rule;
• The banking entity has established and implements, maintains, and enforces an internal compliance program that is reasonably designed to ensure its compliance with the market making exemption, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and assessing certain specified factors;
• To the extent that any required limit
• The compensation arrangements of persons performing market making-related activities are designed not to reward or incentivize prohibited proprietary trading; and
• The banking entity is licensed or registered to engage in market making-related activities in accordance with applicable law.
When adopting the 2013 final rule, the Agencies endeavored to balance two goals of section 13 of the BHC Act: To allow market making to take place, which is important to well-functioning and liquid markets as well as the economy, and simultaneously to prohibit proprietary trading unrelated to market making or other permitted activities, consistent with the statute.
As described in further detail below, the Agencies are proposing to tailor, streamline, and clarify the requirements that a banking entity must satisfy to avail itself of the market making exemption. Similar to the proposed underwriting exemption,
Based on feedback the Agencies have received, banking entities that do not have significant trading assets and liabilities can incur substantial costs to establish, implement, maintain, and enforce the compliance program requirements in the 2013 final rule, notwithstanding the lower level of such banking entities' trading activities.
As described above, the statutory exemption for market making-related activities in section 13(d)(1)(B) of the BHC Act requires that such activities be designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties.
The 2013 final rule provides two factors for assessing whether the amount, types, and risks of the financial instruments in the trading desk's market maker inventory are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties. Specifically, these factors are: (i) The liquidity, maturity, and depth of the market for the relevant type of financial instrument(s), and (ii) demonstrable analysis of historical customer demand, current inventory of financial instruments, and market and other factors regarding the amount, types, and risks of or associated with positions in financial instruments in which the trading desk makes a market, including through block trades. Under § __.4(b)(2)(iii)(C) of the 2013 final rule, a banking entity must account for these considerations when establishing risk and inventory limits for each trading desk.
The Agencies' experience implementing the 2013 final rule has indicated that the approach the Agencies have taken to give effect to the statutory standard of reasonably expected near term demands of clients, customers, or counterparties may be overly broad and complex, and also may inhibit otherwise permissible market making-related activity. In particular, the Agencies have received feedback as part of implementing the rule that compliance with the factors in the rule can be complex and costly.
Accordingly, the Agencies are seeking comment on a proposal to implement this key statutory factor in a manner designed to provide banking entities and the Agencies with greater certainty and clarity about what activity constitutes permissible market making pursuant to the exemption. The Agencies are proposing to establish the articulation and use of internal risk limits as a key mechanism for conducting trading activity in accordance with the rule's market making exemption.
Under the proposal, all banking entities, regardless of their volume of
(1) Amount, types, and risks of its market maker positions;
(2) Amount, types, and risks of the products, instruments, and exposures the trading desk may use for risk management purposes;
(3) Level of exposures to relevant risk factors arising from its financial exposure; and
(4) Period of time a financial instrument may be held.
Banking entities utilizing this presumption would be required to maintain internal policies and procedures for setting and reviewing desk-level risk limits in a manner consistent with the statute.
The proposal would require a banking entity to promptly report to the appropriate Agency when a trading desk exceeds or increases its internal risk limits. A banking entity would also be required to report to the appropriate Agency any temporary or permanent increase in an internal risk limit. In the case of both reporting requirements (
As noted, a banking entity would not be required to adhere to any specific, pre-defined requirements for the limit-setting process beyond the banking entity's own ongoing and internal assessment of the amount of activity that is required to conduct market making activity, including to reflect the banking entity's ongoing and internal assessment of the reasonably expected near term demands of clients, customers, or counterparties. The proposal would, however, provide that internal risk limits established by a banking entity shall be subject to review and oversight by the appropriate Agency on an ongoing basis. Any review of such limits would assess whether or not those limits are established based on the statutory standard—
Under the proposal, the presumption of compliance for permissible market making-related activities may be rebutted by the Agency if the Agency determines, based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not based on the trading desk's reasonably expected near term demands of clients, customers, or counterparties on an ongoing basis. The Agency would provide notice of any such determination to the banking entity in writing.
The following is an example of the presumption of compliance for permissible market making-related activities. A transport company customer may seek to hedge its long-term exposure to price fluctuations in fuel by asking a banking entity to create a structured ten-year fuel swap with a notional amount of $1 billion because there is no liquid market for this type of swap. A trading desk at the banking entity that makes a market in energy swaps may respond to this customer's hedging needs by executing a custom fuel swap with the customer. If the risk resulting from activities related to the transaction does not exceed the internal risk limits for the trading desk that makes a market in energy swaps, the banking entity shall be presumed to be engaged in permissible market making-related activity that is designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties. Moreover, if assuming the position would result in an exposure exceeding the trading desk's limits, the banking entity could increase the risk limit in accordance with its internal policies and procedures for reviewing and increasing risk limits so long as the increase was consistent with meeting the reasonably expected near term demands of clients, customers, and counterparties.
The Agencies request comment on the proposed addition of a presumption that trading within internally set risk limits satisfies the statutory requirement that permitted market making-related activities be designed not to exceed the reasonably expected near-term demands of clients, customers, or counterparties. In particular, the Agencies request comment on the following questions:
The market making exemption in the 2013 final rule requires that a banking entity establish and implement, maintain, and enforce a compliance program, as required by subpart D, that is reasonably designed to ensure compliance with the requirements of the exemption. Such a compliance program is required to include reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing: (i) The financial instruments each trading desk stands ready to purchase and sell in accordance with the exemption for market making-related activities; (ii) the actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C), the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and inventory; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective; (iii) limits for each trading desk, based on the nature and amount of the trading desk's market making activities, including the reasonably expected near term demands of clients, customers, or counterparties; (iv) internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and (v) authorization procedures, including escalation procedures that require review and approval of any trade that would exceed one or more of a trading desk's limits, demonstrable analysis of the basis for any temporary or permanent increase to one or more of a trading desk's limits, and independent review (
Banking entities and others have stated that the compliance program requirements of the market making exemption can be overly complex and burdensome. The Agencies generally believe the compliance program requirements play an important role in facilitating and monitoring a banking entity's compliance with the exemption. However, with the benefit of time and experience, the Agencies believe it is appropriate to tailor those requirements to the scope of the market making-related activities conducted by each banking entity.
Specifically, the Agencies are proposing a tiered approach to the market making exemption's compliance program requirements so as to make them commensurate with the size, scope, and complexity of the relevant banking entity's activities and business structure. Consistent with the 2013 final rule, a banking entity with significant trading assets and liabilities would continue to be required to establish, implement, maintain, and enforce a comprehensive internal compliance program as a condition for relying on the market making exemption. However, the Agencies propose to eliminate the exemption's compliance program requirements for banking entities that have moderate or limited trading assets and liabilities.
The proposed removal of the exemption's compliance program requirements for banking entities that do not have significant trading assets and liabilities would not relieve those banking entities of the obligation to comply with the prohibitions on proprietary trading, and the other requirements of the exemption for market making-related activities, as set forth in section 13 of the BHC Act and the 2013 final rule, both as currently written and as proposed to be amended. However, eliminating the compliance program requirements as a condition to being able to rely on the market making exemption should provide these banking entities that do not have significant trading assets and liabilities an appropriate amount of flexibility to tailor the means by which they seek to ensure compliance with the underlying requirements of the exemption for market making-related activities, and to allow them to structure their internal compliance measures in a way that takes into account the risk profile and market making activity of the particular trading desk.
As noted in the discussion pertaining to the underwriting exemption,
The Agencies request comment on the proposed revisions to the exemption for market making-related activities compliance program requirement. In particular, the Agencies request comment on the following questions:
The Agencies have received inquiries—typically from smaller banking entities that are not subject to the market risk capital rule and are not required to register as dealers—as to the treatment of certain swaps entered into with a customer in connection with a loan (“loan-related swap”).
In a loan-related swap transaction, a banking entity enters into a swap with a customer in connection with a customer's loan and contemporaneously offsets the swap with a third party. The swap with the loan customer is directly related to the terms of the customer's loan, such as a term loan, revolving credit facility, or other extension of credit. A common example of a loan-related swap begins with a banking entity offering a loan to a customer. The banking entity seeks to make a floating-rate loan to reduce interest rate risk, but the customer would prefer a fixed-rate loan. To achieve the desired result, the banking entity makes a floating-rate loan to the customer and contemporaneously or nearly contemporaneously enters into an interest rate swap with the same customer and an offsetting swap with another counterparty. As a result, the customer receives economics similar to a fixed-rate loan. The banking entity has offset its market risk associated with the customer-facing swap but retains counterparty risk from both swaps.
The inquiries received by the Agencies have asked whether the loan-related swap and the offsetting hedging swap would be permissible under the
The Agencies understand that a banking entity's decision to enter into loan-related swaps tends to be situational and dependent on changes in market conditions, as well as the interaction of a number of factors specific to the banking entity, such as the nature of the customer relationship. Under certain market conditions and with certain types of customers, the frequency and use of loan-related swaps may be infrequent, or the frequency may change over time as conditions change. It also may be the case that a banking entity, particularly smaller banking entities, may enter into a limited number of loan-related swaps in one quarter and then not execute another such swap for a year or more. Accordingly, for these swaps it may be appropriate to apply the market making exemption by focusing on the characteristics of the relevant market. For purposes of the exemption, the relevant market may be a market with minimal demand, such as a market with a customer base that demands, for example, only a few loan-related swaps in a year.
In addition, the Agencies note that a banking entity may also infrequently enter into loan-related swaps in both directions because of how those swaps are commonly used by market participants. For example, providing a floating to fixed swap is common in connection with a floating rate loan (as described in the example above), but the reverse (
The Agencies are also considering whether it would be appropriate to exclude loan-related swaps from the definition of proprietary trading for some banking entities or to permit the activity pursuant to an exemption from the prohibition on proprietary trading other than market making. For example, possible additions or alternatives could include a new exclusion in § __.3(d) or a new exemption in § __.6 pursuant to the Agencies' exemptive authority under section 13(d)(1)(J) of the BHC Act. In particular, the Agencies request comment regarding a specific option that would add an exclusion in § __.3(d), which would specify that “proprietary trading” under § __3 does not include the purchase or sale of related swaps by a banking entity in a transaction in which the banking entity purchases (or sells) a swap with a customer and contemporaneously sells (or purchases) an offsetting derivative in connection with a loan or open credit facility between the banking entity and the customer, if the rate, asset, liability or other notional item underlying the swap with the customer is, or is directly related to, a financial term of the loan or open credit facility with the customer (including, without limitation, the loan or open credit facility's duration, rate of interest, currency or currencies, or principal amount) and the offsetting swap is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks of the swap(s) with the customer.
In considering any of these alternatives, the Agencies request comment on what parameters would be appropriate for the exclusion or exemption and what conditions should be considered to address any concerns about whether such an exclusion or exemption could be too broad.
During implementation of the 2013 final rule, the Agencies received a number of inquiries regarding the circumstances under which banking entities could elect to comply with market making risk management provisions permitted in § __.4(b) or alternatively the risk-mitigating hedging requirements under § __.5. These inquiries generally related to whether a trading desk could treat an affiliated trading desk as a client, customer, or counterparty for purposes of the market making exemption's RENTD requirement; and whether, and under what circumstances, one trading desk could undertake market making risk management activities for one or more other trading desks.
Each trading desk engaging in a transaction with an affiliated trading desk that meets the definition of proprietary trading must rely on one of the exemptions of section 13 of the BHC Act and the 2013 final rule in order for the transaction to be permissible. In one example presented to the Agencies, one trading desk of a banking entity may make a market in a certain financial instrument (
The Agencies also request comment as to whether each desk should be permitted to treat swaps executed between the desks as permitted market making-related activities of one or both desks if the swap does not cause the relevant desk to exceed its applicable limits and if the swap is entered into and maintained in accordance with the compliance requirements applicable to the desk, without treating the affiliated desk as a client, customer, or counterparty for purposes of establishing or increasing its limits. This approach would be intended to maintain appropriate limits on proprietary trading by not permitting an expansion of a trading desk's market making limits based on internal transactions. At the same time, this approach would be intended to permit efficient internal risk management strategies within the limits established for each desk. The Agencies are also requesting comment on the circumstances in which an organizational unit of an affiliate (“affiliated unit”) of a trading desk engaged in market making-related activities in compliance with § __.4(b) (“market making desk”) would be permitted to enter into a transaction with the market making desk in reliance on the market making risk management exemption available to the market making desk. In this scenario, to effect such reliance the market making desk would direct the affiliated unit to execute a risk-mitigating transaction on the market making desk's behalf. If the affiliated unit does not independently satisfy the requirements of the market making exemption with respect to the transaction, it would be permitted to rely on the market making exemption available to the market making desk for the transaction if: (i) The affiliated unit acts in accordance with the market making desk's risk management policies and procedures established in accordance with § __.4(b)(2)(iii); and (ii) the resulting risk mitigating position is attributed to the market making desk's financial exposure (and not the affiliated unit's financial exposure) and is included in the market making desk's daily profit and loss calculation. If the affiliated unit establishes a risk-mitigating position for the market making desk on its own accord (
The Agencies request comment on the issues identified above. In particular, the Agencies request comment on the following questions:
Section 13(d)(1)(C) provides an exemption for risk-mitigating hedging activities that are designed to reduce the specific risks to a banking entity in connection with and related to individual or aggregated positions, contracts, or other holdings. Section _.5 of the 2013 final rule implements section 13(d)(1)(C) of the BHC Act.
Section __.5 of the 2013 final rule provides a multi-faceted approach to implementing the hedging exemption to ensure that hedging activity is designed to be risk-reducing and does not mask prohibited proprietary trading. Risk-mitigating hedging activities must comply with certain conditions for those activities to qualify for the exemption. Generally, a banking entity relying on the hedging exemption must have in place an appropriate internal
Section __.5(b)(1)(iii) of the 2013 final rule requires a correlation analysis as part of the broader analysis of whether a hedging position, technique, or strategy (1) may reasonably be expected to reduce or otherwise significantly mitigate the specific risks being hedged, and (2) demonstrably reduces or otherwise significantly mitigates the specific risks being hedged.
In adopting the 2013 final rule, the Agencies indicated that they expected the banking entity to undertake a correlation analysis that will provide a strong indication of whether a potential hedging position, strategy, or technique will or will not demonstrably reduce the risk it is designed to reduce. The nature and extent of the correlation analysis undertaken would be dependent on the facts and circumstances of the hedge and the underlying risks targeted. If sufficient correlation cannot be demonstrated, then the Agencies expected that such analysis would explain why not and also how the proposed hedging position, technique, or strategy was designed to reduce or significantly mitigate risk and how that reduction or mitigation can be demonstrated.
In the course of implementing § __.5 of the 2013 final rule, the Agencies have become aware of practical difficulties with the correlation analysis requirement. In particular, banking entities have communicated that the correlation analysis requirement can add delays, costs, and uncertainty, and have questioned the extent to which the required correlation analysis helps to ensure the accuracy of hedging activity or compliance with the requirements of section 13 of the BHC Act.
During implementation, the Agencies have observed that a banking entity may sometimes develop or modify its hedging activities as the risks it seeks to hedge are occurring, and the banking entity may not have enough time to undertake a complete correlation analysis before it needs to put the hedging transaction in place to fully hedge against the risks as they arise. In other cases, the hedging activity, while designed to reduce risk as required by the statute, may not be practical if delays or compliance costs resulting from undertaking a correlation analysis outweigh the benefits of performing the analysis. In addition, the extent to which two activities are correlated and will remain correlated into the future can vary significantly from one position, strategy, or technique to another. Assessing whether a particular hedge is sufficiently correlated to satisfy the correlation requirement of § __.5(b)(1)(iii) may be difficult, especially if that assessment must be justified after the hedge is entered into (when information that may not have been available earlier may become relevant). Given this uncertainty, banking entities may be hesitant to undertake a risk-mitigating hedge out of concern of inadvertently violating the regulation because the hedge did not satisfy one of the requirements.
Based on the implementation experience of the Agencies and public feedback, the Agencies are proposing to remove the correlation analysis requirement for risk-mitigating hedging activities. The Agencies anticipate that removing this correlation analysis requirement would avoid the uncertainties described above without significantly impacting the conditions that risk-mitigating hedging activities must meet in order to qualify for the exemption. The Agencies also note that section 13 of the BHC Act does not specifically require this correlation analysis. Instead, the statute only provides that a hedging position, technique, or strategy is permitted so long as it is “. . . designed to reduce the specific risks to the banking entity . . .”
Similarly, the requirement in § __.5(b)(2)(iv)(B) that a risk-mitigating hedging activity demonstrably reduces or otherwise significantly mitigates specific risks is not directly required by section 13(d)(1)(C) of the BHC Act. As noted above, the statute instead requires that the hedge be designed to reduce or otherwise significantly mitigate specific risks. The Agencies believe that this is effective for addressing the relevant risks.
In practice, it appears that the requirement to show that hedging activity demonstrably reduces or otherwise significantly mitigates a specific, identifiable risk that develops over time can be complex and could potentially reduce bona fide risk-mitigating hedging activity. The Agencies recognize that in some circumstances, it may be difficult for banking entities to know with sufficient certainty that a potential hedging activity being considered will continuously demonstrably reduce or significantly mitigate an identifiable risk after it is implemented. For example, unforeseeable changes in market conditions, event risk, sovereign risk, and other factors that cannot be known in advance could reduce or eliminate the otherwise intended hedging benefits. In these events, it would be very difficult, if not impossible, for a banking entity to comply with the continuous requirement to demonstrably reduce or significantly mitigate the identifiable risks. In such cases, a banking entity may determine not to enter into what would otherwise be an effective hedge of foreseeable risks out of concern that the banking entity may not be able to effectively comply with the continuing hedging or mitigation requirement if unforeseen risks occur. Therefore, the proposal would remove the “demonstrably reduces or otherwise significantly mitigates” specific risk requirement from § __.5(b)(1)(iv)(B).
Consistent with the proposed changes relating to the scope of the requirements for banking entities that do not have significant trading assets and liabilities, the Agencies have reassessed the requirements in § __.5(b) and § __.5(c) for banking entities that do not have significant trading assets and liabilities. For these firms, the Agencies are proposing to eliminate the requirements for a separate internal compliance program for risk-mitigating hedging under § __.5(b)(1); certain of the specific requirements of § __.5(b)(2); the limits on compensation arrangements for persons performing risk-mitigating activities in § __.5(b)(3); and the documentation requirements for those activities in § __.5(c). These requirements are overly burdensome and complex for banking entities with moderate trading assets and liabilities. In general, the Agencies expect that banking entities without significant trading assets and liabilities are less likely to engage in the types of trading activities and hedging strategies that would necessitate these additional compliance requirements.
Given these considerations, it appears that removing the requirements for banking entities that do not have significant trading assets and liabilities to comply with the requirements of § __.5(b) and § __.5(c) is unlikely to materially increase risks to the safety and soundness of the banking entity or U.S. financial stability. Therefore, the Agencies are proposing to eliminate and modify these requirements for banking entities that do not have significant trading assets and liabilities. In place of those requirements, new § __.5(b)(2) of the proposal would require that risk-mitigating hedging activities for those banking entities be: (i) At the inception of the hedging activity (including any adjustments), designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including the risks specifically enumerated in the proposal; and (ii) subject to ongoing recalibration, as appropriate, to ensure that the hedge remains designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks. The Agencies anticipate that these tailored requirements for banking entities without significant trading assets and liabilities would effectively implement the statutory requirement that the hedging transactions be designed to reduce specific risks the banking entity incurs. In connection with these proposed changes, the proposal also includes conforming changes to § __.5(b)(1) and § __.5(c) of the final 2013 rule to make the requirements of those sections applicable only to banking entities that have significant trading assets and liabilities.
Section __.5(c) of the 2013 final rule requires enhanced documentation for hedging activity conducted under the risk-mitigating hedging exemption if the hedging is not conducted by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings, the risks of which the hedging activity is designed to reduce.
The 2013 final rule also requires enhanced documentation for hedges established by the specific trading desk establishing or directly responsible for the underlying positions, contracts, or other holdings, the risks of which the hedge is designed to reduce, if the hedge is effected through a financial instrument, technique, or strategy that is not specifically identified in the trading desk's written policies and procedures as a product, instrument, exposure, technique, or strategy that the trading desk may use for hedging.
For banking entities that have significant trading assets and liabilities, the proposal would retain the enhanced documentation requirements for the hedging transactions identified in § __.5(c)(1) to permit evaluation of the activity. While this documentation requirement results in certain more extensive compliance efforts (as acknowledged by the Agencies when the 2013 final rule was adopted),
However, based on the Agencies' experience during the first several years of implementation of the 2013 final rule, it appears that many hedges established by one trading desk for other affiliated desks are often part of common hedging strategies that are used repetitively. In those instances, the regulatory purpose for the documentation requirements of § __.5(c) of the 2013 final rule, to permit subsequent evaluation of the hedging activity and prevent evasion, is much less relevant. In weighing the significantly reduced regulatory and supervisory relevance of additional documentation of common hedging trades against the complexity of complying with the enhanced documentation requirements, it appears that the documentation requirements are not necessary in those instances. Reducing the documentation requirement for common hedging activity undertaken in the normal course of business for the benefit of one or more other trading desks would also make beneficial risk-mitigating activity more efficient and potentially improve the timeliness of important risk-mitigating hedging activity, the effectiveness of which can be time sensitive.
Accordingly, the Agencies are proposing a new paragraph (c)(4) in § __.5 that would eliminate the enhanced documentation requirement for hedging activities that meets certain conditions. In excluding a trading desk's common hedging instruments from the enhanced documentation requirements in § __.5(c), the Agencies seek to distinguish those financial instruments that are commonly used for hedging activities and require the banking entity to have in place appropriate limits so that less common or unusual levels of hedging activity would still be subject to
The Agencies request comment on the proposed revisions to § __.5 regarding permitted risk-mitigating hedging activities. In particular, the Agencies request comment on the following questions:
Section 13(d)(1)(H) of the BHC Act
The 2013 final rule includes several conditions on the availability of the foreign trading exemption. Specifically, in addition to limiting the exemption to foreign banking entities where the purchase or sale is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act,
(i) The banking entity engaging as principal in the purchase or sale (including any personnel of the banking entity or its affiliate that arrange, negotiate, or execute such purchase or sale) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State;
(iv) No financing for the banking entity's purchase or sale is provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State;
(v) The purchase or sale is not conducted with or through any U.S. entity,
(A) A purchase or sale with the foreign operations of a U.S. entity, if no personnel of such U.S. entity that are located in the United States are involved in the arrangement, negotiation or execution of such purchase or sale.
The Agencies also exercised their authority under section 13(d)(1)(J)
(B) A purchase or sale with an unaffiliated market intermediary acting as principal, provided the purchase or sale is promptly cleared and settled through a clearing agency or derivatives clearing organization acting as a central counterparty; or
(C) A purchase or sale through an unaffiliated market intermediary, provided the purchase or sale is conducted anonymously (
The proposal would modify the requirements of the 2013 final rule relating to the foreign trading exemption in a number of ways. Specifically, the proposal would retain the first three requirements of the 2013 final rule, with a modification to the first requirement, and would remove the last two requirements of § __.6(e)(3). As a result, § __.6(e)(3), as modified by the proposal, would require that for a foreign banking entity to be eligible for this exemption:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
The proposal would maintain these three requirements in order to ensure that the banking entity (including any relevant personnel) that engages in the purchase or sale as principal or makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or any State. Furthermore, the proposal would retain the 2013 final rule's requirement that the purchase or sale, including any transaction arising from a related risk-mitigating hedging transaction, is not accounted for as principal at the U.S. operations of the foreign banking entity. The proposal would, however, modify the first requirement relative to the 2013 final rule, to replace the requirement that any personnel of the banking entity that arrange, negotiate, or execute such purchase or sale are not located in the United States with one that would restrict only the relevant personnel engaged in the banking entity's decision in the purchase or sale not located in the United States. Under the proposed approach, for purposes of section 13 of the BHC Act and the implementing regulations, the focus of the requirement would be on whether the banking entity that engages in the purchase or sale as principal (including any relevant personnel) is located in the United States. The purpose of this modification is to make clear that some limited involvement by U.S. personnel (
No financing for the banking entity's purchase or sale is provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State;
The purchase or sale is not conducted with or through any U.S. entity, other than:
A purchase or sale with the foreign operations of a U.S. entity, if no personnel of such U.S. entity that are located in the United States are involved in the arrangement, negotiation or execution of such purchase or sale.
A purchase or sale with an unaffiliated market intermediary acting as principal, provided the purchase or sale is promptly cleared and settled through a clearing agency or derivatives clearing organization acting as a central counterparty; or
A purchase or sale through an unaffiliated market intermediary, provided the purchase or sale is conducted anonymously (
Since the adoption of the 2013 final rule, foreign banking entities have communicated to the Agencies that these requirements have unduly limited their ability to make use of the statutory exemption for proprietary trading and have resulted in an impact on foreign banking entities' operations outside of the United States that these banking entities believe is broader than necessary to achieve compliance with the requirements of section 13 of the BHC Act. In response to these concerns, the Agencies are proposing to remove the financing prong and the counterparty prong, which would focus the key requirements of this exemption on the principal actions and risk of the transaction. In addition, the proposal would remove the financing prong to address concerns that the fungibility of financing has made this requirement difficult to apply in practice in certain circumstances to determine whether particular financing is tied to a
Similarly, foreign banking entities have communicated to the Agencies that the counterparty prong has been overly difficult and costly for banking entities to monitor, track, and comply with in practice. As a result, the Agencies are proposing to remove the requirement that any transaction with a U.S. counterparty be executed solely with the foreign operations of the U.S. counterparty (including the requirement that no personnel of the counterparty involved in the arrangement, negotiation, or execution may be located in the United States) or through an unaffiliated intermediary and an anonymous exchange in order to materially reduce the reported inefficiencies associated with rule compliance. In addition, market participants have indicated that this requirement has in practice led foreign banking entities to overly restrict the range of counterparties with which transactions can be conducted, as well as disproportionately burdened compliance resources associated with those transactions, including with respect to counterparties seeking to do business with the foreign banking entity in foreign jurisdictions.
As a result, the Agencies propose to remove the counterparty prong. The proposal would focus the requirements of the foreign trading exemption on the location of a foreign banking entity's decision to trade, action as principal, and principal risk of the purchase or sale. This proposed focus on the location of actions and risk as principal is intended to align with the statute's definition of “proprietary trading” as “engaging as principal for the trading account of the banking entity.”
Information provided by foreign banking entities has demonstrated that few trading desks of foreign banking entities have utilized the foreign trading exemption in practice. This information has raised concerns that the current requirements for the exemption may be overly restrictive of permitted activities. Accordingly, the proposal would modify the exemption under the 2013 final rule to make the requirements more workable, so that it may be available to foreign banking entities trading solely outside the United States.
The Agencies request comment as to whether the proposed modifications to the foreign trading exemption would result in disadvantages for U.S. banking entities competing with foreign banking entities. The statute contains an exemption to allow foreign banking entities to engage in trading activity that is solely outside the United States. The statute also contains a prohibition on proprietary trading for U.S. banking entities regardless of where their activity is conducted. The statute generally prohibits U.S. banking entities from engaging in proprietary trading because of the perceived risks of those activities to U.S. banking entities and the U.S. economy. The Agencies believe that this means that the prohibition on proprietary trading is intended make U.S. banking entities safer and stronger, and reduce risks to U.S. financial stability, and that the foreign operations of foreign banking entities should not be subject to the prohibition on proprietary trading for their activities overseas. The proposal would implement this distinction with respect to transactions that occur outside of the United States where the principal risk is booked outside of the United States and the actions and decisions as principal occur outside of the United States by foreign operations of foreign banking entities. Under the statute and the rulemaking framework, U.S. banking entities would be able to continue trading activities that are consistent with the statute and regulation, including permissible market-making, underwriting, and risk-mitigating hedging activities as well as other types of trading activities such as trading on behalf of customers. U.S. banking entities are permitted to engage in these trading activities as exemptions from the general prohibition on proprietary trading under the statute. Moreover, and consistent with the statute, the proposal seeks to streamline and reduce the requirements of several of these key exemptions to make them more workable and available in practice to all banking entities subject to section 13 of the BHC Act and the implementing regulations.
Consistent with the 2013 final rule, the exemption under the proposal would not exempt the U.S. or foreign operations of U.S. banking entities from having to comply with the restrictions and limitations of section 13 of the BHC Act. Thus, the U.S. and foreign operations of a U.S. banking entity that is engaged in permissible market making-related activities or other permitted activities may engage in those transactions with a foreign banking entity that is engaged in proprietary trading in accordance with the exemption under § __.6(e) of the 2013 final rule, so long as the U.S. banking entity complies with the requirements of § __.4(b), in the case of market making-related activities, or other relevant exemption applicable to the U.S. banking entity. The proposal, like the 2013 final rule, would not impose a duty on the foreign banking entity or the U.S. banking entity to ensure that its counterparty is conducting its activity in conformance with section 13 and the implementing regulations. Rather, that
The proposal's exemption for trading of foreign banking entities outside the United States could potentially give foreign banking entities a competitive advantage over U.S. banking entities with respect to permitted activities of U.S. banking entities because foreign banking entities could trade directly with U.S. counterparties without being subject to the limitations associated with the market-making or other exemptions under the rule. This competitive disparity in turn could create a significant potential for regulatory arbitrage. In this respect, the Agencies seek to mitigate this concern through other changes in the proposal; for example, U.S. banking entities would continue to be able to engage in all of the activities permitted under the 2013 final rule and the proposal, including the simplified and streamlined requirements for market-making and risk-mitigating hedging and other types of trading activities. The proposal's modifications therefore in general seek to balance concerns regarding competitive impact while mitigating the concern that an overly narrow approach to the foreign trading exemption may cause market bifurcations, reduce the efficiency and liquidity of markets, make the exemption overly restrictive to foreign banking entities, and harm U.S. market participants.
The Agencies request comment on the proposal's revised approach to implementing the foreign trading exemption. In particular, the Agencies request comment on the following questions:
As noted above and except as otherwise permitted, section 13(a)(1)(B) of the BHC Act generally prohibits a banking entity from acquiring or retaining any ownership interest in, or sponsoring, a covered fund.
In the 2013 final rule, the Agencies adopted a tailored definition of “covered fund” that covers issuers of the type that would be investment companies but for section 3(c)(1) or 3(c)(7) of the Investment Company Act
The Agencies request comment on whether the 2013 final rule's covered fund definition effectively implements the statute and is appropriately tailored to identify funds that engage in the investment activities contemplated by section 13. The Agencies also request comment on whether the definition has been inappropriately imprecise and, if so, whether that has led to any unintended results.
In considering whether to further tailor the covered fund definition, the Agencies seek comment in this section on the 2013 final rule's general approach to defining the term “covered fund” and the 2013 final rule's “base definition” of covered fund, that is, the definition as provided in § __.10(b) before applying the exclusions found in § __.10(c), as well as alternatives to this base definition.
As discussed above, the 2013 final rule contains exclusions from the base definition of “covered fund” that tailor the covered fund definition. The Agencies designed these exclusions to avoid any unintended results that might follow from a definition of “covered fund” that was inappropriately imprecise. In this section, the Agencies request comment on whether to modify certain existing exclusions from the covered fund definition. The Agencies also request comment on whether to provide new exclusions in order to more effectively tailor the definition. Finally, with respect to all of the potential modifications the Agencies discuss in this section, the Agencies seek comment as to the potential effect of the other changes the Agencies are proposing today to the covered fund provisions and on additional changes on which the Agencies seek comment. That is, would these proposed changes address in whole or in part any concerns about the breadth of the covered fund definition?
The 2013 final rule generally excludes from the definition of “covered fund” any issuer that is organized or established outside of the United States and the ownership interests of which are (i) authorized to be offered and sold to retail investors in the issuer's home jurisdiction and (ii) sold predominantly
The 2013 final rule places an additional condition on a U.S. banking entity's ability to rely on the FPF exclusion with respect to any FPF it sponsors.
In adopting the FPF exclusion, the Agencies' view was that it is appropriate to exclude these funds from the “covered fund” definition because they are sufficiently similar to U.S. RICs.
The Agencies request comment on all aspects of the FPF exclusion, including whether the exclusion is effective in identifying foreign funds that may be sufficiently similar to RICs and permitting U.S. banking entities and their foreign affiliates to carry on traditional asset management businesses outside of the United States, as the Agencies contemplated in adopting this exclusion. As reflected in the detailed questions that follow, the Agencies seek comment on a range of possible ways to modify this exclusion, including: (i) Whether the Agencies could simplify or omit certain of the exclusion's conditions—including those not applicable to excluded RICs—while still identifying funds that should be excluded and addressing the possibility for evasion through the Agencies' broad anti-evasion authority; (ii) whether the exclusion's conditions requiring a fund to be authorized for sale to retail investors in the issuer's home jurisdiction and sold predominantly in public offerings outside of the United States should be retained and, if so, whether the Agencies should modify or clarify these conditions; and (iii) whether the additional conditions for U.S. banking entities with respect to the FPFs they sponsor are appropriate. Specifically, in considering whether to further tailor the FPF exclusion, the Agencies seek comment below on the following:
Alternatively, would retaining specific provisions designed to address anti-evasion concerns, whether as they currently exist or modified, provide greater clarity as to the scope of foreign funds excluded from the definition and avoid uncertainty that could result from a less prescriptive exclusion?
If the Agencies were to make a modification like the one described immediately above, should the exclusion retain the reference to the issuer's “home” jurisdiction? For example, should the Agencies modify this condition to require that the fund be “authorized to offer and sell ownership interests to retail investors in the primary jurisdiction in which the issuer's ownership interests are offered and sold,” without any reference to the home jurisdiction? Would this modification be effective, or does the exclusion need to retain a reference to an issuer the ownership interests of which are authorized for sale to retail investors in the home jurisdiction, as well as the primary jurisdiction in which the issuer's ownership interests are offered and sold? Why? If the rule retained a reference to authorization in the fund's home jurisdiction, would this raise concerns if a fund were authorized to be sold to retail investors in the fund's home jurisdiction, but was not sold in that jurisdiction and instead was sold to institutions or other non-retail investors in a different jurisdiction in which the fund was not authorized to sell interests to retail investors or to make a public offering? Are there other formulations the Agencies should make to identify foreign funds that are authorized to offer and sell their ownership interests to retail investors? Which formulations and why?
If a fund is authorized to conduct a public offering in a non-U.S. jurisdiction, would the fund be subject to all of the regulatory requirements that apply in that jurisdiction for funds
Conversely, should the Agencies retain the requirement that an FPF actually conduct a public offering outside of the United States? Would a foreign fund that actually sells ownership interests in public offerings outside of the United States tend to provide greater information to the public or be subject to additional regulatory requirements than a fund that is authorized to conduct a public offering but offers and sells its ownership interests in non-public offerings?
The staffs observed that the 2013 final rule explicitly excludes from the covered fund definition an issuer that is formed and operated pursuant to a written plan to become a RIC or BDC in accordance with the banking entity's compliance program as described in § __.20(e)(3) of the 2013 final rule and that complies with the requirements of section 18 of the Investment Company Act. The staffs observed that the 2013 final rule does not include a parallel provision for an issuer that will become a foreign public fund. The staffs stated that they do not intend to advise the Agencies to treat as a covered fund under the 2013 final rule an issuer that is formed and operated pursuant to a written plan to become a qualifying foreign public fund. The staffs observed that any written plan would be expected to document the banking entity's determination that the seeding vehicle will become a foreign public fund, the period of time during which the seeding vehicle will operate as a seeding vehicle, the banking entity's plan to market the seeding vehicle to third-party investors and convert it into an FPF within the time period specified in § __.12(a)(2)(i)(B) of the 2013 final rule, and the banking entity's plan to operate the seeding vehicle in a manner consistent with the investment strategy, including leverage, of the seeding vehicle upon becoming a foreign public fund. Has the staffs' position facilitated consistent treatment for seeding vehicles that operate pursuant to a plan to become an FPF as that provided for seeding vehicles that operate pursuant to plans to become RICs or BDCs? Why or why not? Should the Agencies amend the 2013 final rule to implement this or a different approach for seeding vehicles that will become foreign public funds? What other approaches should the Agencies take and why? Should the Agencies amend the 2013 final rule to require seeding vehicles that operate pursuant to a written plan to become an FPF to include in such written plan the same or different types of documentation as the documentation required of seeding vehicles that operate pursuant to plans to become RICs or BDCs? If different types of documentation should be required of seeding vehicles that will become foreign public funds, why would those different types of documentation be appropriate? Would requiring those different types of documentation impose costs or burdens on the issuers that are greater or less than the costs and burdens imposed on issuers that will become RICs or BDCs?
Some families manage their wealth by establishing and acquiring ownership interests in “family wealth management vehicles.” Family wealth management vehicles take a variety of legal forms, including limited liability companies, limited partnerships, other pooled investment vehicles, and trusts. The structures in which these vehicles operate vary in complexity, ranging from simple standalone arrangements covering a single beneficiary to complex multi-tier structures intended to benefit multiple generations of family members. In some cases, these vehicles have been in existence for more than 100 years while in other cases, they are nascent entities with little to no operating history. The Agencies are aware of no set of consistent standards that govern the characteristics of family wealth management vehicles or the manner in which they operate.
Because family wealth management vehicles might hold assets that meet the definition of “investment securities”
Family wealth management vehicles also often maintain accounts and advisory arrangements with banking entities. These banking entities may provide a range of services to family wealth management vehicles, including investment advice, brokerage execution, financing, and clearance and settlement services. Family wealth management vehicles structured as trusts for the benefit of family members also often
Section __.14 of the 2013 final rule provides, in part, that no banking entity that serves, directly or indirectly, as the investment manager, investment adviser, commodity trading advisor, or sponsor to a covered fund, or that organizes and offers the fund under§ __.11 of the 2013 final rule, may enter into a transaction with the covered fund that would be a “covered transaction,” as defined in section 23A of the FR Act.
The Agencies are not proposing changes in the status of family wealth management vehicles in the proposal, but are seeking comment on their reliance on exclusions in the Investment Company Act, whether or not they should be excluded from the definition of covered fund, the role of banking entities with respect to family wealth management vehicles, and the potential implications of changes in their status under the 2013 final rule. In considering whether to address the status of family wealth management vehicles, the Agencies seek comment on the following:
As the Agencies stated in the preamble to the 2013 final rule, an alternative to the 2013 final rule's approach of defining a covered fund would be to reference fund characteristics. In the preamble to the 2013 final rule, the Agencies stated that a characteristics-based definition could be less effective than the approach taken in the 2013 final rule as a means to prohibit banking entities, either directly or indirectly, from engaging in the covered fund activities limited or proscribed by section 13.
As the Agencies consider whether to further tailor the covered fund definition, the Agencies invite commenters' views and request comment on whether it may be appropriate to exclude from the definition of “covered fund” entities that lack certain characteristics commonly associated with being a hedge fund or a private equity fund:
The Agencies, in tailoring the covered fund definition, noted that many joint ventures rely on section 3(c)(1) or 3(c)(7). Under the 2013 final rule, a joint venture is excluded from the covered fund definition if the joint venture (i) is between the banking entity or any of its affiliates and no more than 10 unaffiliated co-venturers; (ii) is in the business of engaging in activities that are permissible for the banking entity other than investing in securities for resale or other disposition; and (iii) is not, and does not hold itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities.
In 2015, the staffs of the Agencies provided a response to FAQs regarding the extent to which an excluded joint venture could invest in securities, consistent with the condition in the 2013 final rule that an excluded joint venture may not be an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities.
○ “[R]aise[s] money from investors primarily for the purpose of investing in securities for the benefit of one or more investors and sharing the income, gain or losses on securities acquired by that entity,” observing that “[t]he limitations in the joint venture exclusion are meant to ensure that the joint venture is not an investment vehicle and that the joint venture exclusion is not used as a means to evade the limitations in the BHC Act on investing in covered funds”;
○ “[R]aises money from a small number of investors primarily for the purpose of investing in securities, whether the securities are intended to be traded frequently, held for a longer duration, held to maturity, or held until the dissolution of the entity”; or
○ “[R]aises funds from investors primarily for the purpose of sharing in
The staffs also observed that, in addition to the conditions in the joint venture exclusion, as an initial matter, an entity seeking to rely on the exclusion must be a joint venture. The staffs observed that the basic elements of a joint venture are well recognized, including under state law, although the term is not defined in the 2013 final rule. The staffs also observed that although any determination of whether an arrangement is a joint venture will depend on the facts and circumstances, the staffs generally would not expect that a person that does not have some degree of control over the business of an entity would be considered to be participating in “a joint venture between a banking entity or any of its affiliates and one or more unaffiliated persons,” as specified in the 2013 final rule's joint venture exclusion.
The Agencies request comment on all aspects of the 2013 final rule's exclusion for joint ventures, including the extent to which the Agencies should modify the joint venture exclusion:
The 2013 final rule contains several provisions designed to address securitizations and to implement the rule of construction in section 13(g)(2) of the BHC Act, which provides that nothing in section 13 shall be construed to limit or restrict the ability of a banking entity to sell or securitize loans in a manner that is otherwise permitted by law. These provisions include the 2013 final rule's exclusions from the covered fund definition for loan securitizations, qualifying asset-backed commercial paper conduits, and qualifying covered bonds. The Agencies request comment on all aspects of the 2013 final rule's application to securitizations, including:
In this section the Agencies request comment on the 2013 final rule's application to certain types of issuers for which banking entities and others have expressed concern to one or more of the Agencies:
Section 13(d)(1)(B) of the BHC Act permits a banking entity to purchase and sell securities and other instruments described in 13(h)(4) in connection with certain underwriting or market making-related activities.
The banking entity conducts the activities in accordance with the requirements of the underwriting exemption in § __.4(a) of the 2013 final rule or market-making exemption in § __.4(b) of the 2013 final rule, respectively;
The banking entity includes the aggregate value of all ownership interests of the covered fund acquired or retained by the banking entity and its affiliates for purposes of the limitation on aggregate investments in covered funds (the “aggregate-fund limit”)
The banking entity includes any ownership interests that it acquires or retains for purposes of the limitation on investments in a single covered fund (the “per-fund limit”) if the banking entity (or an affiliate): (i) Acts as a sponsor, investment adviser, or commodity trading advisor to the covered fund; (ii) otherwise acquires and retains an ownership interest in the covered fund in reliance on the exemption for organizing and offering a covered fund in § __.11(a) of the 2013 final rule; (iii) acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act, or is acquiring and retaining an ownership interest in such covered fund in compliance with section 15G of that Act and the implementing regulations issued thereunder, each as permitted by§ __.11(b) of the 2013 final rule; or (iv) directly or indirectly, guarantees, assumes, or otherwise insures the obligations or performance of the covered fund or of any covered fund in which such fund invests.
The Agencies continue to believe that providing a separate provision relating to permitted underwriting and market making-related activities for ownership interests in covered funds is supported by section 13(d)(1)(B) of the BHC Act. The exemption for underwriting and market making-related activities under section 13(d)(1)(B), by its terms, is a statutorily permitted activity and exemption from the prohibitions in section 13(a), whether on proprietary trading or on covered fund activities. Applying the statutory exemption in this manner accommodates the capital raising activities of covered funds and other issuers in accordance with the underwriting and market making provisions under the statute.
The proposed amendments to § __.11(c) are intended to better achieve these objectives, consistent with the requirements of the statute and based on the experience of the Agencies following implementation of the 2013 final rule. Specifically, for a covered fund that the banking entity does not organize or offer pursuant to § __.11(a) or (b) of the 2013 final rule, the proposal would remove the requirement that the banking entity include for purposes of the aggregate fund limit and capital deduction the value of any ownership interests of the covered fund acquired or retained in accordance with the underwriting or market-making exemption. Under the proposed amendments, these limits, as well as the per fund limit, would only apply to a covered fund that the banking entity organizes or offers and in which the banking entity retains an ownership interest pursuant to § __.11(a) or (b) of the 2013 final rule. The Agencies seek with this change to more closely align the requirements for engaging in underwriting or market-making-related activities with respect to ownership interests in a covered fund with the requirements for engaging in these activities with respect to other financial instruments. The Agencies expect this change would reduce compliance costs for banking entities that engage in these activities without exposing banking entities to additional risks beyond those inherent in underwriting and market making-related activities involving otherwise similar financial instruments as permitted by the statute. This is because banking entities that engage in underwriting or market making-related activities with respect to covered funds would remain subject to the
The proposal would retain the requirements of the 2013 final rule associated with the per-fund limit, aggregate fund limit, and capital deduction where the banking entity engages in activity in reliance on§ __.11(a) or (b) with respect to a covered fund, consistent with the limitations of section 13(d)(1)(G)(iii) of the BHC Act that restrict a banking entity that relies on this exemption from acquiring or retaining an ownership interest in a covered fund beyond a de minimis investment amount.
In addition, the proposal would maintain the requirement that the underwriting or market-making-related activities be conducted in accordance with the requirements of § __.4(a) or § __4(b) of the 2013 final rule (as modified by the proposal), respectively. These requirements are designed specifically to address a banking entity's underwriting and market making-related activities and to permit holding exposures consistent with the reasonably expected near term demand of clients, customers and counterparties.
Section 13(d)(1)(C) of the BHC Act provides an exemption for certain risk-mitigating hedging activities.
In the 2011 proposal, the Agencies considered permitting a banking entity to acquire or retain an ownership interest in a covered fund as a hedge in a second context, in addition to hedging employee compensation arrangements. Specifically, the 2011 proposal included a provision that would have allowed a banking entity to acquire or retain an ownership interest in a covered fund as a risk-mitigating hedge when acting as an intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
Since the Agencies' adoption of the 2013 final rule, some market participants have argued that the 2013 final rule should be modified to permit a banking entity to acquire or retain an ownership interest in a covered fund as a risk-mitigating hedge when acting as an intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund. These market participants have urged that allowing banking entities to facilitate customer activity would be consistent with the intent of the statute. In the view of these market participants, permitting such activity would not be inconsistent with safety and soundness because it would be conducted consistent with the requirements of the 2013 final rule, as modified by the proposal, including the requirements
Accordingly, the Agencies are including this provision in the proposal and requesting comment below as to whether the 2013 final rule should be modified to permit this additional category of risk-mitigating hedging transactions.
As in the 2011 proposal, this proposal would allow a banking entity to acquire a covered fund interest as a hedge when acting as an intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund. The hedging of employee compensation arrangements involving covered fund interests would remain unchanged from the 2013 final rule. Moreover, a banking entity that seeks to use a covered fund interest to hedge on behalf of a customer would need to comply with all of the requirements of § __.13(a), which generally track the requirements of § __.5, as modified by this proposal.
In addition to those questions raised in connection with the proposed implementation of the risk-mitigating hedging exemption under § __.5 of the proposal, the Agencies request comment on the proposed implementation of that same exemption with respect to covered fund activities. In particular, the Agencies request comment on the following questions:
Section 13(d)(1)(I) of the BHC Act
The 2013 final rule establishes several conditions on the availability of the foreign fund exemption. Specifically, the 2013 final rule provides that an activity or investment occurs solely outside the United States for purposes of the foreign fund exemption only if:
• The banking entity acting as sponsor, or engaging as principal in the acquisition or retention of an ownership interest in the covered fund, is not itself, and is not controlled directly or indirectly by, a banking entity that is located in the United States or established under the laws of the United States or of any State;
• The banking entity (including relevant personnel) that makes the decision to acquire or retain the ownership interest or act as sponsor to the covered fund is not located in the
• The investment or sponsorship, including any transaction arising from risk-mitigating hedging related to an ownership interest, is not accounted for as principal directly or indirectly on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State; and
• No financing for the banking entity's ownership or sponsorship is provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State (the “financing prong”).
Much like the similar requirement under the exemption for permitted trading activities of a foreign banking entity, experience since adoption of the 2013 final rule has indicated that the financing prong has been difficult to comply with in practice. As a result, the proposal would remove the financing prong of the foreign fund exemption for the same reasons as described above for the trading outside of the United States exemption. This modification would streamline the requirements of this exemption with the intention of improving implementation of the statutory exemption. Although a U.S. branch or affiliate that extends financing for a covered fund investment solely outside of the United States could bear some risks—for example, if the U.S. branch of an affiliate provides a loan secured by a covered fund interest that then declines in value—the conditions to the foreign fund exemption, as modified by the proposal, are designed to require that the principal risks of covered fund investments and sponsorship by foreign banking entities permitted under the foreign fund exemption occur and remain solely outside of the United States. For example, the foreign fund exemption would continue to provide that the investment or sponsorship, including any transaction arising from risk-mitigating hedging related to an ownership interest, may not be accounted for as principal directly or indirectly on a consolidated basis by any U.S. branch or affiliate. One of the principal purposes of section 13 of the BHC Act appears to be to limit the risks that covered fund investments and activities may pose to the safety and soundness of U.S. banking entities and the U.S. financial system. A purpose of the foreign fund exemption appears to be to limit the extraterritorial application of section 13 as it applies to foreign banking entities subject to section 13. The modifications to these requirements under the proposal are intended to ensure that any foreign banking entity engaging in activity under the foreign fund exemption does so in a manner that ensures the risk and sponsorship of the activity or investment occurs and resides solely outside of the United States.
One of the restrictions of the exemption for covered fund activities conducted by foreign banking entities outside the United States is the restriction that no ownership interest in the covered fund may be offered for sale or sold to a resident of the United States.
After issuance of the 2013 final rule, foreign banking entities requested clarification from the Agencies regarding whether the marketing restriction applied only to the activities of a foreign banking entity that is seeking to rely on the foreign fund exemption or whether it applied more generally to the activities of any person offering for sale or selling ownership interests in the covered fund. Specifically, sponsors of covered funds and foreign banking entities asked how this condition would apply to a foreign banking entity that has made, or intends to make, an investment in a covered fund where the foreign banking entity (including its affiliates) does not sponsor, or serve, directly or indirectly, as the investment manager, investment adviser, commodity pool operator, or commodity trading advisor to the covered fund (a third-party covered fund).
After issuance of the 2013 final rule, the staffs of the Agencies issued guidance to address these issues, and the proposal would amend the 2013 final rule to clearly incorporate this guidance.
The purpose of this provision is to make clear that the marketing restriction applies to the activity of the foreign banking entity that is seeking to rely on the exemption (including its affiliates). The marketing restriction constrains the foreign banking entity in connection with its own activities with respect to covered funds rather than the activities of unaffiliated third parties, thereby requiring that the foreign banking entity seeking to rely on this exemption does not engage in an offering of ownership interests that targets residents of the United States. This view is consistent with limiting the extraterritorial application of section 13 to foreign banking entities while seeking to ensure that the risks of covered fund investments by foreign banking entities occur and remain solely outside of the United States. If the marketing restriction were applied to the activities of third parties, such as the sponsor of a third-party covered fund (rather than the foreign banking entity investing in a third-party covered fund), this exemption may not be available in certain circumstances where the risks and activities of a foreign banking entity with respect to its investment in the covered fund are solely outside the United States.
A foreign banking entity (including its affiliates) that seeks to rely on the foreign fund exemption must comply with all of the conditions to that exemption, including the marketing restriction. A foreign banking entity that participates in an offer or sale of covered fund interests to a resident of the United States thus cannot rely on the foreign fund exemption with respect to that covered fund. Further, where a banking entity sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator, or commodity trading advisor to a covered fund, that banking entity will be viewed as participating in an offer or sale by the covered fund of ownership interests in the covered fund, and therefore such foreign banking entity would not qualify for the foreign fund exemption for that covered fund if that covered fund offers or sells covered fund ownership interests to a resident of the United States. The Agencies request comment on the proposal's approach to implementing the foreign fund exemption. In particular, the Agencies request comment on the following questions:
Section 13(f) of the BHC Act generally prohibits a banking entity that, directly or indirectly, serves as investment manager, investment adviser, or sponsor to a covered fund (or that organizes and offers a covered fund pursuant to section 13(d)(1)(G) of the BHC Act) from entering into a transaction with such covered fund that would be a covered transaction as defined in section 23A of the FR Act.
Section 13(f) also provides an exemption for prime brokerage transactions between a banking entity and a covered fund in which a covered fund managed, sponsored, or advised by that banking entity has taken an ownership interest. In addition, section 13(f) subjects any transaction permitted under section 13(f) of the BHC Act (including a permitted prime brokerage transaction) between a banking entity and covered fund to section 23B of the FR Act.
In general, section 23B of the FR Act requires that the transaction be on market terms or on terms at least as favorable to the banking entity as a comparable transaction by the banking entity with an unaffiliated third party. Section __.14 of the 2013 final rule implemented these provisions.
Section 13(f) of the BHC Act provides an exemption from the prohibition on covered transactions with a covered fund for any prime brokerage transaction with a covered fund in which a covered fund managed, sponsored, or advised by a banking entity has taken an ownership interest (a “second-tier fund”). The statute by its terms permits a banking entity with a relationship to a covered fund described in section 13(f) of the BHC Act to engage in prime brokerage transactions (that are covered transactions) only with second-tier funds and does not extend to covered funds more generally. Neither the statute nor the proposal limits covered transactions between a banking entity and a covered fund for which the banking entity does not serve as investment manager, investment adviser, or sponsor (as defined in section 13 of the BHC Act) or have an interest in reliance on section 13(d)(1)(G) of the BHC Act. Under the statute, the exemption for prime brokerage transactions is available only so long as certain enumerated conditions are satisfied.
The staffs of the Agencies previously issued guidance explaining when a banking entity was required to provide this certification during the conformance period.
On March 29, 2017, the CFTC's Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued a letter to a futures commission merchant (“FCM”) stating that the DSIO would not recommend that an enforcement action against the FCM be initiated in connection with § __.14(a) of the 2013 final rule. The letter provides relief for futures, options, and swaps clearing services provided by a registered FCM to covered funds for which affiliates of the FCM are engaged in the services identified in § __.14(a) including, for example, investment management services.
The CFTC believes the relief provided to the FCM is warranted and would extend the relief from the requirements of § __.14(a) of the 2013 final rule to all FCMs performing futures, options, and swaps clearing services. Providing such clearing services to customers of affiliates does not appear to be the type of relationship that was intended to be limited under section 13(f) of the BHCA. The provision of futures, options, and swaps clearing services by an FCM is a facilitation service that the CFTC believes would not give rise to a relationship that might evade the prohibition against acquiring or retaining an interest in or sponsoring a covered fund. An FCM earns clearing fees and is not in a position to profit from any gain or loss that the customer may have on its cleared futures, options, or swaps positions. The other Agencies do not object to the relief provided to the FCMs as described above.
The Agencies request comment on all aspects of the proposal's approach to implementing the limitations on certain relationships with covered funds. In particular, the Agencies request comment on the following questions:
Section __.20 of the 2013 final rule contains compliance program and metrics collection and reporting requirements. These requirements are tailored based on banking entity size and complexity of activity. The 2013 final rule was intended to focus the most significant compliance obligations on the largest and most complex organizations, while minimizing the economic impact on small banking entities.
Specifically, the Agencies propose to apply the compliance program requirement to banking entities as follows:
• Banking entities with significant trading assets and liabilities. Banking entities with significant trading assets and liabilities would be subject to the six-pillar compliance program requirement (currently set forth in § __.20(b) of the 2013 final rule), the metrics reporting requirements (§ __.20(d) of the 2013 final rule), the covered fund documentation requirements (§ __.20(e) of the 2013 final rule), and the CEO attestation requirement (currently in Appendix B of the 2013 final rule).
• Banking entities with moderate trading assets and liabilities. Banking entities with moderate trading assets and liabilities would be required to establish the simplified compliance program (currently described in § __.20(f)(2) of the 2013 final rule), and comply with the CEO attestation requirement (currently in Appendix B of the 2013 final rule).
• Banking entities with limited trading assets and liabilities. Banking entities with limited trading assets and liabilities would be presumed to be in compliance with the proposal and would have no obligation to demonstrate compliance with subpart B and subpart C of the implementing regulations on an ongoing basis. These banking entities would not be required to demonstrate compliance with the rule unless and until the appropriate Agency, based upon a review of the banking entity's activities, determines that the banking entity must establish the simplified compliance program (currently described in §§ __.20(b) or __.20(f)(2) of the 2013 final rule).
Section __.20(b) of the 2013 final rule specifies six elements that each compliance program required under that section must at a minimum contain.
The six elements specified in § __.20(b) are:
• Written policies and procedures reasonably designed to document, describe, monitor and limit trading activities and covered fund activities and investments conducted by the banking entity to ensure that all activities and investments that are subject to section 13 of the BHC Act and the rule comply with section 13 of the BHC Act and the 2013 final rule;
• A system of internal controls reasonably designed to monitor compliance with section 13 of the BHC Act and the rule and to prevent the occurrence of activities or investments that are prohibited by section 13 of the BHC Act and the 2013 final rule;
• A management framework that clearly delineates responsibility and accountability for compliance with section 13 of the BHC Act and the 2013 final rule and includes appropriate management review of trading limits, strategies, hedging activities, investments, incentive compensation and other matters identified in the rule or by management as requiring attention;
• Independent testing and audit of the effectiveness of the compliance program conducted periodically by qualified personnel of the banking entity or by a qualified outside party;
• Training for trading personnel and managers, as well as other appropriate personnel, to effectively implement and enforce the compliance program; and
• Records sufficient to demonstrate compliance with section 13 of the BHC Act and the 2013 final rule, which a banking entity must promptly provide to the relevant Agency upon request and retain for a period of no less than 5 years.
Under the 2013 final rule, these six elements must be part of the compliance program of each banking entity with total consolidated assets greater than $10 billion that engages in covered trading activities and investments subject to section 13 of the BHC Act and the implementing regulations.
The Agencies are proposing to apply the six-pillar compliance program requirements only to banking entities with significant trading assets and liabilities. The Agencies preliminarily believe these banking entities are engaged in activities at a scale that warrants the costs of establishing the compliance program elements described in §§ __.20(b) and __.20(e) of the 2013 final rule. Accordingly, the Agencies believe it is appropriate to require banking entities with significant trading assets and liabilities to maintain a six-pillar compliance program to ensure that banking entities' activities are conducted in compliance with section 13 of the BHC Act and the implementing regulations.
As described further in the “Enhanced Minimum Standards for Compliance Programs” below, the Agencies are proposing to eliminate the current enhanced compliance program requirements found in Appendix B of the 2013 final rule. The Agencies believe that the six-pillar compliance program requirements (currently in § __.20(b) of the 2013 final rule) can be appropriately tailored to the size and activities of each banking entity that is subject to these requirements. The proposed approach would afford banking entities flexibility to integrate the § __.20 compliance program requirements into other compliance programs of the banking entity, which may reduce complexity for banking entities currently subject to the enhanced compliance program requirements.
The 2013 final rule includes a requirement, currently included in Appendix B, that a banking entity CEO must review and annually attest in writing to the appropriate Agency that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the compliance program established pursuant to Appendix B and § __.20 of the 2013 final rule in a manner reasonably designed to achieve compliance with section 13 of the BHC Act and the implementing regulations.
Currently, § __.20(e) of the 2013 final rule requires banking entities with greater than $10 billion in total consolidated assets to maintain additional documentation related to covered funds as part of their compliance program. The Agencies are proposing to apply the covered fund documentation requirements only to banking entities with significant trading assets and liabilities. The Agencies do not believe that these additional documentation requirements are necessary for banking entities without significant trading assets and liabilities because the Agencies expect that their covered funds activities may generally be smaller in scale and less complex than banking entities with significant trading assets and liabilities. Accordingly, the Agencies believe these banking entities' activities are unlikely to justify the costs associated with complying with these documentation requirements. Furthermore, the Agencies expect they would be able to examine and supervise these banking entities' compliance with the covered fund prohibition without requiring such additional documentation as part of the banking entities' compliance program.
The 2013 final rule provides that a banking entity with total consolidated assets of $10 billion or less as measured on December 31 of the previous two years that engages in covered activities or investments pursuant to subpart B or subpart C of the 2013 final rule (other than trading activities permitted under § __.6(a) of the 2013 final rule) may satisfy the compliance program requirements by including in its existing compliance policies and procedures references to the requirements of section 13 of the BHC Act and subpart D of the implementing regulations and adjustments as appropriate given the activities, size, scope, and complexity of the banking entity.
The Agencies propose to extend availability of this simplified compliance program to all banking entities with moderate trading assets and liabilities. The Agencies believe that streamlining the compliance program requirements for banking entities with moderate trading assets and liabilities is appropriate. The scale and nature of the activities and investments in which these banking entities are engaged may not justify the additional costs associated with establishing the compliance program elements under §§ __.20(b) and (e) of the 2013 final rule and may be appropriately examined and supervised through an appropriately tailored simplified compliance program. Consistent with the compliance program requirements for banking entities with significant trading assets and liabilities, the Agencies note that banking entities with moderate trading assets and liabilities would be able to incorporate their simplified compliance program as part of any existing compliance policies and procedures and tailor their compliance program to the size and nature of their activities.
The proposal would include a presumption of compliance for certain banking entities with limited trading assets and liabilities. Under the proposal, a banking entity that, together with its affiliates and subsidiaries on a worldwide basis, has trading assets and liabilities (excluding obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1 billion, would be presumed to be in compliance with the proposal. Banking entities meeting these conditions would have no obligation to demonstrate compliance with subpart B and subpart C of the implementing regulations on an ongoing basis. The Agencies believe, based on experience implementing and supervising compliance with the 2013 final rule, that these banking entities are generally engaged in traditional banking activities. The Agencies do not believe it is necessary to require banking entities with limited trading assets and liabilities to demonstrate compliance with the prohibitions of section 13 of the BHC Act by establishing a compliance program, given the limited scale of their trading operations. Further, the Agencies believe that the limited trading assets and liabilities of the banking entities qualifying for the presumption of compliance are unlikely to warrant the costs of establishing a compliance program under § __.20.
A banking entity that meets the proposed criteria for the presumption of compliance would be subject to the statutory prohibitions of section 13 of the BHC Act and the implementing regulations on an ongoing basis. The Agencies would not expect a banking entity that meets the proposed criteria for the presumption of compliance to demonstrate compliance with the proposal in conjunction with the Agencies' normal supervisory and examination processes. However, the appropriate Agency may exercise its authority to treat the banking entity as if it does not have limited trading assets and liabilities if, upon review of the banking entity's activities, the relevant Agency determines that the banking entity has engaged in proprietary trading or covered fund activities that are otherwise prohibited under subpart B or subpart C. A banking entity would be expected to remediate any impermissible activity upon being notified of such determination by the Agency. A banking entity would be required to remediate the impermissible activity within a period of time deemed appropriate by the relevant Agency.
The Agencies believe this presumption of compliance for certain banking entities with limited trading assets and liabilities would allow flexibility for these banking entities to operate under their existing internal policies and procedures. The Agencies generally expect these banking entities, in the ordinary course of business, to develop and adhere to internal policies and procedures that promote prudent risk management practices.
Irrespective of whether a banking entity has engaged in activities in violation of subpart B or C of this proposal, the relevant Agency retains its authority to require a banking entity to apply the compliance program requirements that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities if the relevant Agency determines that the size or complexity of the banking entities trading or investment activities, or the risk of evasion, does not warrant a presumption of compliance.
Section __. 20(c) of the 2013 final rule requires certain banking entities to establish, maintain and enforce an enhanced compliance program that includes the requirements and standards. Appendix B of the 2013 final rule specifies the enhanced minimum standards applicable to the compliance programs of large banking entities and banking entities engaged in significant trading activities. Section I.a of Appendix B provides that the enhanced compliance program must:
• Be reasonably designed to identify, document, monitor, and report the covered trading and covered fund activities and investments of the banking entity; identify, monitor and promptly address the risks of these covered activities and investments and potential areas of noncompliance; and prevent activities or investments prohibited by, or that do not comply with, section 13 of the BHC Act and the 2013 final rule;
• Establish and enforce appropriate limits on the covered activities and investments of the banking entity, including limits on the size, scope, complexity, and risks of the individual activities or investments consistent with the requirements of section 13 of the BHC Act and the 2013 final rule;
• Subject the effectiveness of the compliance program to periodic independent review and testing, and ensure that the entity's internal audit, corporate compliance and internal control functions involved in review and testing are effective and independent;
• Make senior management, and others as appropriate, accountable for the effective implementation of the compliance program, and ensure that the board of directors and CEO (or equivalent) of the banking entity review the effectiveness of the compliance program; and
• Facilitate supervision and examination by the Agencies of the banking entity's covered trading and covered fund activities and investments.
The Agencies continue to believe that banking entities with significant trading assets and liabilities should have detailed and comprehensive programs for ensuring compliance with the requirements of section 13 of the BHC Act. The Agencies recognize, however, that many banking entities have found implementing certain aspects of the enhanced compliance program requirements of Appendix B to be inefficient, duplicative of, and in some instances inconsistent with, their existing compliance regimes and risk management programs.
While recognizing the need to establish and maintain an appropriate compliance program, the Agencies also believe that banking entities should be provided discretion to tailor their compliance programs to the structure and activities of their organizations. The flexibility to build on compliance regimes that already exist at banking entities, including risk limits, risk management systems, board-level governance protocols, and the level at which compliance is monitored, may reduce the costs and complexity of compliance while also enabling a robust compliance mechanism for section 13 of the BHC Act. After carefully considering the overall effects of the enhanced compliance program standards in the context of existing banking entity compliance frameworks, the Agencies are proposing certain modifications to limit the implementation, operational or other complexities associated with the compliance program requirements set forth in § __.20.
The Agencies believe that many of the compliance requirements of the current
A banking entity that does not have significant trading assets and liabilities under the proposal, but which is currently subject to Appendix B under the 2013 final rule, would be permitted to satisfy its compliance requirements in the proposal by including in its existing compliance policies and procedures appropriate references to the requirements of section 13 of the BHC Act as appropriate given the activities, size, scope, and complexity of the banking entity.
Section II.a of Appendix B of the 2013 final rule generally requires a banking entity subject to the Appendix, in addition to the requirements of § __.20, to: (1) Have written policies and procedures governing each trading desk; (2) include a comprehensive description of the risk management program for the trading activity of the banking entity; (3) implement and enforce limits and internal controls for each trading desk that are reasonably designed to ensure that trading activity is conducted in conformance with section 13 of the BHC Act and subpart B and with the banking entity's policies and procedures; (4) establish, maintain and enforce policies and procedures regarding the use of risk-mitigating hedging instruments and strategies; (5) perform robust analysis and quantitative measurement of its trading activities that is reasonably designed to ensure that the trading activity of each trading desk is consistent with the banking entity's compliance program, monitor and assist in the identification of potential and actual prohibited proprietary trading activity, and prevent the occurrence of prohibited proprietary trading; (6) identify the activities of each trading desk that will be conducted in reliance on the exemptions contained in §§ __.4 through __.6; and (7) be reasonably designed and established to effectively monitor and identify for further analysis any proprietary trading activity that may indicate potential violations of section 13 of the BHC Act and subpart B and to prevent violations of section 13 of the BHC Act and subpart B.
These requirements of Appendix B in the 2013 final rule reflect the Agencies' expectation that banking organizations with significant trading activities adopt compliance regimes that, among other things, take into account the size and complexity of the banking entity's activities and structure of its business. However, the Agencies recognize that operationalizing the prescriptive requirements of Appendix B may limit the ability of banking entities to adapt their existing risk management frameworks for purposes of compliance with the 2013 final rule. Therefore, based on experience since the adoption of the 2013 final rule, the Agencies believe that a banking entity currently subject to Appendix B requirements under the 2013 final rule should be permitted to implement an appropriately robust compliance program by tailoring the requirements of § __.20 to the type, size, scope, and complexity of its activities and business structure. The Agencies are therefore proposing to eliminate the requirements of section II.a of Appendix B in order to reduce the operational complexities associated with the compliance requirements of the 2013 final rule. As described above, the Agencies believe that the compliance program requirements in §§ __.20 can be appropriately scaled (pursuant to § __.20(a)) to the size, scope, and complexity of each banking entity and should afford banking entities flexibility to integrate their § __.20 compliance program into their other compliance programs.
The Agencies believe that, under the proposal, compliance programs that satisfy § __.20 and that are appropriately tailored to the size, scope, and complexity of the banking entity's activities, would be effective in meeting the objectives underlying the enhanced requirements set forth in Appendix B of the 2013 final rule with respect to proprietary trading activities. Furthermore, affording banking entities the flexibility to adapt their existing risk management frameworks to satisfy the requirements of § __.20 would reduce the complexity of compliance with section 13 of the BHC Act and the implementing regulations.
The enhanced minimum standards in section II.b of Appendix B of the 2013 final rule prescribe the establishment, maintenance and enforcement of a compliance program that includes written policies and procedures that are appropriate for the type, size, complexity, and risks of the covered fund and related activities conducted and investments made, by a banking entity. In addition to the requirements of § __.20, § II.b of Appendix B requires that compliance programs be designed to: (1) Include appropriate management review and independent testing for identifying and documenting covered funds in which the banking entity invests, or that each unit within the banking entity's organization sponsors or organizes and offers, and covered funds in which each such unit invests; (2) identify, document, and map each unit within the organization that is permitted to acquire or hold an interest in any covered fund or sponsor any covered fund; (3) explain the banking entity's strategy for monitoring, mitigating, or prohibiting conflicts of interest, transactions or covered fund activities and investments that may
The 2013 final rule subjects certain banking entities to the enhanced minimum compliance standards of Appendix B to reflect the Agencies' expectation that banking entities with significant covered fund activities or investments adopt sophisticated compliance regimes. However, the Agencies recognize that operationalizing these requirements may restrict the flexibility of banking entities to adapt their existing risk management frameworks for purposes of compliance with the 2013 final rule. The Agencies believe that a banking entity with significant trading assets and liabilities or moderate trading assets and liabilities currently subject to Appendix B requirements could effectively implement an appropriately robust compliance program by tailoring the requirements of § __.20 to the type, size, scope, and complexity of its covered fund activities and business structure. Accordingly, the Agencies propose to eliminate the requirements of § II.b of Appendix B to the 2013 final rule.
Under the proposal, a banking entity with significant trading assets and liabilities or with moderate trading assets and liabilities would satisfy the compliance program requirements by appropriately scaling the compliance program requirements in § __.20. A banking entity with significant trading assets and liabilities would also be required to adopt the covered fund documentation requirements in § __.20(e) of the proposal.
The Agencies believe that, under the proposal, compliance programs that satisfy the foregoing requirements and that are appropriately tailored to the size, scope, and complexity of the banking entity's activities, would be effective in meeting the objectives underlying the enhanced requirements set forth in Appendix B of the 2013 final rule with respect to covered fund investments and activities. Furthermore, affording banking entities the flexibility to adapt their existing risk management frameworks to satisfy the § __.20 compliance program requirements would reduce the complexity of compliance with section 13 of the BHC Act.
Appendix B of the 2013 final rule contains a CEO attestation requirement as part of the enhanced minimum standards for compliance programs as a means to ensure that a strong governance framework is implemented with respect to compliance with section 13 of the BHC Act. This provision requires a banking entity's CEO to review and annually attest in writing to the appropriate Agency that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the compliance program established pursuant to Appendix B and § __.20 of the 2013 final rule in a manner reasonably designed to achieve compliance with section 13 of the BHC Act and the 2013 final rule. Appendix B of the 2013 final rule also specifies that in the case of the U.S. operations of a foreign banking entity, including a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States.
Consistent with the Agencies' proposal to remove the specific, enhanced minimum standards included in Appendix B of the 2013 final rule, the Agencies propose to incorporate the CEO attestation requirement within § __.20(c) so that it will to apply to banking entities with significant trading assets and liabilities and banking entities with moderate trading assets and liabilities. Further, the Agencies propose that the CEO attestation requirement in § __.20(c) specify that in the case of the U.S. operations of a foreign banking entity, including a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States.
Preserving the CEO attestation requirement and incorporating it within the proposal underscores the importance of CEO engagement within the overall compliance framework for banking entities with significant trading assets and liabilities and for banking entities with moderate trading assets and liabilities. The Agencies believe that the CEO attestation requirement may reinforce the importance of creating and communicating an appropriate “tone at the top,” setting an appropriate culture of compliance, and establishing
The Agencies believe that incorporating the CEO attestation requirement into proposed § __.20(c) could help to ensure that the compliance program established pursuant to that section is reasonably designed to achieve compliance with section 13 of the BHC Act and the implementing regulations, while the removal of the specific, enhanced minimum standards in Appendix B will afford a banking entity considerable flexibility to satisfy the elements of § __.20 in a manner that it determines to be most appropriate given its existing compliance regimes, organizational structure, and activities.
After careful consideration, the Agencies propose to eliminate the specific enhanced minimum standards for independent testing prescribed in Appendix B, section IV of the 2013 final rule and permit banking entities with significant trading assets and liabilities to satisfy the compliance program requirements by meeting the independent testing requirements outlined in § __.20(b)(4) of the proposal. Section __.20(b)(4) of the proposal specifies that the contents of the compliance program shall include independent testing and audit of the effectiveness of the compliance program conducted periodically by qualified personnel of the banking entity or by a qualified outside party. As with all elements of the required compliance program under proposed § __.20(b), independent testing should be designed and implemented in a manner that is appropriate for the type, size, scope, and complexity of activities and business structure of the banking entity. Section __.20(b)(4) allows for a tailored approach to ensure that the effectiveness of the compliance program is subject to an objective review with appropriate frequency and depth. Under the proposal, a banking entity with moderate trading assets and liabilities would be permitted to incorporate independent testing into its existing compliance programs as appropriate given the activities, size, scope, and complexity of the banking entity.
After careful consideration, the Agencies propose to eliminate the training element of the enhanced compliance program of Appendix B, section V of the 2013 final rule and permit banking entities to satisfy compliance program requirements by meeting the training requirements outlined in § __.20(b)(5) of the proposal. Section __.20(b)(5) specifies that the contents of the compliance program shall include training for trading personnel and managers, as well as other appropriate personnel, to effectively implement and enforce the compliance program. As with all elements of the required compliance program under § __.20(b), the Agencies expect the training regimen to be designed and implemented in a manner that is appropriate for the type, size, scope, and complexity of activities and business structure of the banking entity. Under the proposal, a banking entity with moderate trading assets and liabilities would be permitted to incorporate training into its existing compliance programs as appropriate given the activities, size, scope and complexity of the banking entity.
Appendix B, section VI of the 2013 final rule requires banking entities to create and retain records sufficient to demonstrate compliance and support the operations and effectiveness of the compliance program. After careful consideration, the Agencies believe that the enhanced minimum standards under Appendix B, section VI can be replaced by the requirements prescribed in § __.20(b)(6) of the proposal. Section __.20(b)(6) of the proposal specifies that the banking entity must establish records sufficient to demonstrate compliance with section 13 of the BHC Act and subpart D and promptly provide to the relevant Agency upon request and retain such records for no less than 5 years or for such longer period as required by the relevant Agency. As with all elements of the required compliance program under § __.20(b), the Agencies expect the record keeping requirement to be designed and implemented in a manner that is appropriate for the type, size, scope, and complexity of activity and business structure of the banking entity. A banking entity with moderate trading assets and liabilities would be permitted to incorporate recordkeeping into its existing compliance programs as appropriate given the activities, size, scope, and complexity of the banking entity.
The following table provides a summary of the proposed changes to the compliance program requirements:
As provided in the preamble to the 2013 final rule, the Agencies have assessed the metrics data for its effectiveness in monitoring covered trading activities for compliance with section 13 of the BHC Act and for its costs.
• Limit the applicability of certain metrics only to market making and underwriting desks.
• Replace the Customer-Facing Trade Ratio with a new Transaction Volumes metric to more precisely cover types of trading desk transactions with counterparties.
• Replace Inventory Turnover with a new Positions metric, which measures the value of all securities and derivatives positions.
• Remove the requirement to separately report values that can be easily calculated from other quantitative measurements already reported.
• Streamline and make consistent value calculations for different product types, using both notional value and market value to facilitate better comparison of metrics across trading desks and banking entities.
• Eliminate inventory aging data for derivatives because aging, as applied to derivatives, does not appear to provide a meaningful indicator of potential impermissible trading activity or excessive risk-taking.
• Require banking entities to provide qualitative information specifying for each trading desk the types of financial instruments traded, the types of covered trading activity the desk conducts, and the legal entities into which the trading desk books trades.
• Require a Narrative Statement describing changes in calculation methods, trading desk structure, or trading desk strategies.
• Remove the paragraphs labeled “General Calculation Guidance” from the regulation. The Instructions generally would provide calculation guidance.
• Remove the requirement that banking entities establish and report limits on Stressed Value-at-Risk at the trading desk-level because trading desks do not typically use such limits to manage and control risk-taking.
• Require banking entities to provide descriptive information about their reported metrics, including information uniquely identifying and describing certain risk measurements and information identifying the relationships of these measurements within a trading desk and across trading desks.
• Require electronic submission of the Trading Desk Information, Quantitative Measurements Identifying Information, and each applicable quantitative measurement in accordance with the XML Schema specified and published on each Agency's website.
Taken together, these changes—particularly limiting the applicability of certain metrics requirements only to trading desks engaged in certain types of covered trading activity—are designed to reduce compliance-related inefficiencies relative to the 2013 final rule. The proposed amendments to Appendix A of the 2013 final rule should allow collection of data that permits the Agencies to better monitor compliance with section 13 of the BHC Act.
Paragraph I.c of Appendix A of the 2013 final rule provides that the quantitative measurements that are required to be reported under the rule are not intended to serve as a dispositive tool for identifying permissible or impermissible activities. The Agencies propose to expand paragraph I.c of Appendix A of the 2013 final rule to cover all information that must be furnished pursuant to the appendix, rather than only to the quantitative measurements themselves.
The Agencies propose to remove paragraph I.d. in Appendix A of the 2013 final rule, which provides for an initial review by the Agencies of the metrics data and revision of the collection requirement as appropriate. The Agencies have conducted this preliminary evaluation of the effectiveness of the quantitative measurements collected to date and are proposing modifications to Appendix A of the 2013 final rule where appropriate. The Agencies are, however, requesting comment on whether the rule should provide for a subsequent Agency review within a fixed period of time after adoption to consider whether further changes are warranted. The Agencies further note that they continue to monitor and review the effectiveness of the data as part of their ongoing oversight of the banking entities and will continue to do so should the proposed changes to Appendix A be adopted.
The Agencies are proposing a clarifying change to the definition of “covered trading activity.” The Agencies are proposing to add the phrase “in its covered trading activity” to clarify that the term “covered trading activity,” as used in the proposed appendix, may include trading conducted under §§ __.3(e), __.6(c), __.6(d), or __.6(e) of the proposal. The proposed change would simply clarify that banking entities would have the discretion (but not the obligation) to report metrics with respect to a broader range of activities.
In addition, the proposal defines two additional terms for purposes of the appendix, “applicability” and “trading day,” that were not defined in the 2013 final rule. In particular, the proposal provides:
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“Applicability” is defined in this proposal to clarify when certain metrics are required to be reported for specific trading desks. As described further below, this proposal would make several metrics applicable only to desks engaged in market making or underwriting.
The Agencies are proposing to create a definition of “trading day” to clarify the meaning of a term that is used throughout Appendix A of the 2013 final rule. Appendix A provides that the calculation period for each quantitative measurement is one trading day. The proposal would make clear that a banking entity would be required to calculate each metric for each calendar day on which a trading desk is open for trading.
The Agencies request comments on the definitions in this proposal, including comments on the following questions:
The Agencies are proposing several modifications to paragraph III.a of Appendix A of the 2013 final rule. The Agencies are proposing to remove the Inventory Turnover and Customer-Facing Trade Ratio metrics and replace them with the Positions and Transaction Volumes quantitative measurements, respectively. In addition, as discussed below, the proposal provides that the Inventory Aging metric would only apply to securities, and would not apply to derivatives or securities that also meet the 2013 final rule's definition of a derivative.
The Agencies are proposing to add new paragraph III.b to Appendix A to require banking entities to report certain descriptive information regarding each trading desk engaged in covered trading activity:
Under paragraph III.b. of the proposed Appendix, the banking entity would be required to provide the trading desk name and trading desk identifier for each desk engaged in covered trading activities. While this proposed requirement may affect the banking entity's overall reporting obligations, this identifying information should enable the Agencies to track a banking entity's trading desk structure over time, which the Agencies believe will help identify situations when a significant data change is the result of a structural change and assist the Agencies' ability to monitor patterns in the quantitative measurements. The Agencies also believe that the proposed qualitative information, including the items identified in the sections below, potentially could provide the Agencies with enough contextual basis to facilitate the examination and supervisory processes. Such context also could potentially lessen the need for Agency follow-up in when a red flag is identified.
The trading desk name must be the name of the trading desk used internally by the banking entity. The trading desk identifier is a unique identification label that should be permanently assigned to a desk by the banking entity. A trading desk at a banking entity may not have the same trading desk identifier as another desk at that banking entity. The trading desk identifier that is assigned to each desk should remain the same for each submission of quantitative measurements. In the event a banking entity restructures its operations and merges two or more trading desks, the banking entity should assign a new trading desk identifier to the merged desk (
Proposed paragraph III.b. would require a banking entity to identify each type of covered trading activity that the trading desk conducts. As previously discussed, the proposal defines “covered trading activity,” in part, as trading conducted by a trading desk under §§ __.4, __.5, __.6(a), or __.6(b).
The proposed definition of “covered trading activity” also provides that a banking entity may include in its covered trading activity trading conducted under §§ __.3(e), __.6(c), __.6(d), or __.6(e). If a trading desk relies on any of the exclusions discussed in § __.3(e) or the permitted activity exemptions discussed in §§ __.6(c) through __.6(e) and the banking entity includes such activity as “covered trading activity” for the desk under the proposed Appendix, the banking entity would need to identify these activity types (
While this proposed requirement may impact a firm's overall reporting obligations, the Agencies believe the identification of each desk's covered trading activity will help the relevant Agency establish the appropriate scope of examination of such activity and assist with identifying the relevant exemptions or exclusions for a particular trading desk, which in turn enables an evaluation of a desk's reported data in the context of those exemptions or exclusions.
Proposed paragraph III.b. would require a banking entity to provide a description of each trading desk engaged in covered trading activities. Specifically, the banking entity would be required to provide a brief description of the trading desk's general strategy (
Proposed paragraph III.b. would require a banking entity to provide descriptive information regarding the financial instruments and other products traded by each desk engaged in covered trading activities. Under the proposal, a banking entity would be required to prepare a list identifying all the types of financial instruments purchased and sold by the trading desk.
The proposal also addresses “excluded products” traded by desks engaged in covered trading activities. The definition of the term “financial instrument” in the 2013 final rule does not include loans, spot commodities, and spot foreign exchange or currency (collectively, “excluded products”).
In recognition that a banking entity may include excluded products in its quantitative measurements, proposed paragraph III.b. would require a banking entity to indicate whether each trading desk engaged in covered trading activities is including excluded products in its quantitative measurements. If excluded products are included in a trading desk's metrics, the banking entity would have to identify the specific products that are included.
This information should enable the Agencies to better understand the scope of covered trading activities, and thus help in identifying the profile of particular covered trading activities of a banking entity and its individual trading desks. Such identification is necessary to establish the appropriate frequency and scope of examination by the relevant Agency of such activity, evaluate whether a banking entity's covered trading activity is consistent with the 2013 final rule, and assess the risks associated with the activity.
As discussed in the preamble to the 2013 final rule, the Agencies recognize that a trading desk may book positions into a single legal entity or into multiple affiliated legal entities.
The Agencies are proposing to require each banking entity to specify any applicable entity type for each legal entity that serves as a booking entity for
The proposal also requires that a banking entity identify entity types that are not otherwise enumerated in the proposed Appendix, including a subsidiary of a legal entity that is listed where the subsidiary itself is not included in the list. For example, the Agencies understand that a trading desk may book some or all of its positions into a legal entity that is incorporated under foreign law. In this situation, the banking entity should provide a brief description of the entity (
In order to facilitate metrics reporting, paragraph III.b. of the proposed Appendix requires a banking entity to indicate whether each calendar date is a trading day or not a trading day for each trading desk engaged in covered trading activities. The Agencies believe that this information would assist banking entities and the Agencies in monitoring covered trading activities. Specifically, the identification of trading days and non-trading days will allow the Agencies to understand why metrics may not be reported on a particular day for a particular trading desk. In addition, the Agencies expect that this information would improve consistency in metrics reports by requiring banking entities to determine whether metrics are, or are not, required to be reported for each calendar day.
In recognition that a banking entity may report quantitative measurements for a trading desk engaged in covered trading activities in a currency other than U.S. dollars, paragraph III.b. of the proposed Appendix requires a banking entity to specify the currency used by that trading desk as well as the conversion rate to U.S. dollars. Under the proposal, the banking entity would be required to provide the currency reported on a monthly basis and the currency conversion rate for each trading day. The Agencies believe this information would assist banking entities and the Agencies in monitoring covered trading activities by facilitating the identification of quantitative measurements reported in a currency other than U.S. dollars and the conversion of such measurements to U.S. dollars. The ability to convert a banking entity's reported quantitative measurements into one consistent currency enhances the ability of the Agencies to evaluate the metrics and facilitates cross-desk comparisons.
The Agencies are proposing to add new paragraph III.c. to the proposed Appendix to require banking entities to prepare and report descriptive information regarding their quantitative measurements. This information would have to be reported collectively for all relevant trading desks. For example, a banking entity would report one Risk and Position Limits Information Schedule, rather than separate Risk and Position Limits Information Schedules for each of those trading desks.
The proposed Risk and Position Limits Information Schedule requires banking entities to provide detailed information regarding each limit reported in the Risk and Position Limits and Usage quantitative measurement, including the unique identification label for the limit, the limit name, limit description, whether the limit is intraday or end-of-day, the unit of measurement for the limit, whether the limit measures risk on a net or gross basis, and the type of limit. The unique identification label for the limit should be a character string identifier that remains consistent across all trading desks and reporting periods. When reporting the type of limit, the banking entity would identify which of the following categories best describes the limit: Value-at-Risk, position limit, sensitivity limit, stress scenario, or other. If “other” is reported, the banking entity would provide a brief description of the type of limit. The Agencies believe this more detailed limit information would enable the Agencies to better understand how banking entities assess and address risks associated with their covered trading activities.
The proposed Risk Factor Sensitivities Information Schedule requires banking entities to provide detailed information regarding each risk factor sensitivity reported in the Risk Factor Sensitivities quantitative measurement, including the unique identification label for the risk factor sensitivity, the name of the risk factor sensitivity, a description of the risk factor sensitivity, and the risk factor sensitivity's risk factor change unit. The unique identification label for the risk factor sensitivity should be a character string identifier that remains consistent across all trading desks and reporting periods. The risk factor change unit is the measurement unit of the risk factor change that impacts the trading desk's portfolio value.
The proposed Risk Factor Attribution Information Schedule requires banking entities to provide detailed information regarding each attribution of existing position profit and loss to risk factor reported in the Comprehensive Profit and Loss Attribution quantitative measurement, including the unique identification label for each risk factor or other factor attribution, the name of the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor's change unit. The unique identification label for the risk factor or other factor attribution should be a character string identifier that remains consistent across all trading desks and reporting periods. The factor change unit is the measurement unit of the risk factor or other factor change that impacts the trading desk's portfolio value.
The Agencies recognize that risk factor sensitivities that are reported in the Risk Factor Sensitivities quantitative measurement frequently relate to, or are associated with, risk and position limits that are reported in the Risk and Position Limits and Usage metric. In recognition of the relationship between risk and position limits and associated risk factor sensitivities, the Agencies propose an amendment to Appendix A of the 2013 final rule that would require banking entities to prepare a Limit/Sensitivity Cross-Reference Schedule. Specifically, banking entities would be required to cross-reference, by unique identification label, a limit reported in the Risk and Position Limits Information Schedule to any associated risk factor sensitivity reported in the Risk Factor Sensitivities Information Schedule.
Highlighting the relationship between limits and risk factor sensitivities should provide a broader picture of a
The Agencies note that the specific risk factors and other factors that are reported in the Comprehensive Profit and Loss Attribution quantitative measurement may relate to the risk factor sensitivities reported in the Risk Factor Sensitivities metric. As a result, the Agencies are proposing an amendment to Appendix A of the 2013 final rule that would require banking entities to prepare a Risk Factor Sensitivity/Attribution Cross-Reference Schedule. Specifically, banking entities would be required to cross-reference, by unique identification label, a risk factor sensitivity reported in the Risk Factor Sensitivities Information Schedule to any associated risk factor attribution reported in the Risk Factor Attribution Information Schedule. This proposed cross-reference schedule is intended to clarify the relationship between risk factors that serve as sensitivities and the profit and loss that is attributed to those risk factors. In conjunction with the Limit/Sensitivity Cross-Reference Schedule, the Risk Factor Sensitivity/Attribution Cross-Reference Schedule should assist the Agencies in understanding the broader scope, type, and profile of a banking entity's covered trading activities and assessing associated risks, and facilitate the relevant Agency's efforts in monitoring those covered trading activities. For example, the proposed Risk Factor Sensitivity/Attribution Cross-Reference Schedule should help the Agencies compare the variables that a banking entity has identified as significant sources of its trading desks' profitability and risk for purposes of the Risk Factor Sensitivities metric to the factor(s) that account for actual changes in the banking entity's trading desk-level profit and loss, as reported in the Comprehensive Profit and Loss Attribution metric. This comparison will allow the Agencies to evaluate whether a banking entity has identified risk factors in the Risk Factor Sensitivities metric of a trading desk that help explain the trading desk's profit and loss.
The proposed paragraph III.d. requires a banking entity to submit a Narrative Statement in a separate electronic document to the relevant Agency that describes any changes in calculation methods used for its quantitative measurements and to indicate when this change occurred. In addition, a banking entity would have to prepare and submit a Narrative Statement when there are any changes in the banking entity's trading desk structure (
Under the proposal, the banking entity would have to report in a Narrative Statement any other information the banking entity views as relevant for assessing the information schedules or quantitative measurements, such as a further description of calculation methods that the banking entity is using. In addition, a banking entity would have to explain its inability to report a particular quantitative measurement in the Narrative Statement. A banking entity also would have to provide notice in its Narrative Statement if a trading desk changes its approach to including or
If a banking entity does not have any information to report in a Narrative Statement, the banking entity would have to submit an electronic document stating that it does not have any information to report in a Narrative Statement.
The 2013 final rule established a reporting schedule in § __.20 that required banking entities with $50 billion or more in trading assets and liabilities to report the information required by Appendix A of the 2013 final rule within 10 days of the end of each calendar month. The Agencies are proposing to adjust this reporting schedule to extend the time to be within 20 days of the end of each calendar month.
Appendix A of the 2013 final rule did not specify a format in which metrics should be reported. As a technical matter, banking entities may currently report quantitative measurements to the relevant Agency using various formats and conventions. After consultation with staffs of the Agencies, the reporting banking entities submitted their quantitative measurement data electronically in a pipe-delimited flat file format. However, this flat file format has proved to be unwieldy and its syntactical requirements have been unclear. There has been no easy way for banking entities to validate that their data files are in the correct format before submitting them, and so banking entities have often needed to resubmit their quantitative measurements to address formatting issues.
To make the formatting requirements for the data submissions clearer, and to help ensure the quality and consistency of data submissions across banking entities, the Agencies are proposing to require that the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement be reported in accordance with an XML Schema to be specified and published on the relevant Agency's website.
Under paragraph III.c. of Appendix A of the 2013 final rule, a banking entity's reported quantitative measurements are subject to the record retention requirements provided in the appendix. Under the proposal, this provision would be in paragraph III.f. of the appendix. The Agencies propose to expand this provision to include the Narrative Statement, the Trading Desk Information, and the Quantitative Measurements Identifying Information in the appendix's record retention requirements.
Section IV of Appendix A of the 2013 final rule sets forth the individual quantitative measurements required by the appendix. The Agencies are proposing to add an “Applicability” paragraph to each quantitative measurement that identifies the trading desks for which a banking entity would be required to calculate and report a particular metric based on the type of covered trading activity conducted by the desk. In addition, the Agencies are proposing to remove the “General Calculation Guidance” paragraphs that appear in section IV of Appendix A of the 2013 final rule for each quantitative measurement. Content of these General Calculation Guidance paragraphs would instead generally be addressed in the Instructions.
The Agencies are proposing to remove references to Stressed Value-at-Risk (Stressed VaR) in the Risk and Position Limits and Usage metric. Eliminating the requirement to report desk-level limits for Stressed VaR should reduce reporting obligations for banking entities without reducing the Agencies' ability to monitor proprietary trading.
The proposal clarifies in new “Applicability” paragraph IV.a.1.iv. that, as in the 2013 final rule, the Risk and Position Limits and Usage metric applies to all trading desks engaged in covered trading activities. For each trading desk, the proposal requires that a banking entity report the unique identification label for each limit as listed in the Risk and Position Limits Information Schedule, the limit size (distinguishing between the upper bound and lower bound of the limit, where applicable), and the value of usage of the limit.
Unlike the 2013 final rule, the proposal requires a banking entity to report the limit size of both the upper bound and the lower bound of a limit if a trading desk has both an upper and lower limit. The Agencies understand that, based on a review of the collected data and discussions with banking entities, trading desks may have upper and lower limits. An upper limit means the value of risk cannot go above the limit, while a lower limit means the value of risk cannot go below the limit. This proposed amendment is intended to help identify when a trading desk has both an upper limit and a lower limit and avoid incomplete or unclear reporting under these circumstances. In addition, receipt of information about upper and lower limits, where applicable, should allow the Agencies to better evaluate the constraints that a banking entity places on the risks of a trading desk. For example, if a trading desk has both upper and lower limits but only one such limit is reported, the Agencies would not have complete information about the desk's limits or the usage of such limits, including potential limit breaches that may warrant further review.
The proposal also clarifies the 2013 final rule's requirement to separately report a trading desk's usage of its limit. As noted above, usage is the value of the trading desk's risk or positions that are accounted for by the current activity of the desk. The value of the usage generally should be reported as of the end of the day for limits that are accounted for at the end of the day; conversely, banking entities generally should report the maximum value of the usage for limits accounted for intraday.
The proposed “Applicability” paragraph IV.a.2.iv. provides that, as in the 2013 final rule, the Risk Factor Sensitivities metric applies to all trading desks engaged in covered trading activities. Under the proposal, a banking entity would have to report for each trading desk the unique identification label associated with each risk factor sensitivity of the desk, the magnitude of the change in the risk factor, and the aggregate change in value across all positions of the desk given the change in risk factor.
The proposed unique identification label should allow the Agencies to efficiently obtain the descriptive information for the Risk Factor Sensitivity that is separately reported in the Risk Factor Sensitivities Information Schedule.
The proposal modifies the description of Stressed VaR to align its calculation with that of Value-at-Risk and removes the General Calculation Guidance. A new “Applicability” paragraph IV.a.3.iv. provides that Stressed VaR is not required to be reported for trading desks whose covered trading activity is conducted exclusively to hedge products excluded from the definition of financial instrument in § __.3(d)(2) of the proposal. The Agencies believe that limiting the applicability of the Stressed VaR metric in this manner may reduce burden without impacting the ability of the Agencies to monitor for prohibited proprietary trading. In particular, the Agencies believe that applying Stressed VaR to trading desks whose covered trading activity is conducted exclusively to hedge excluded products does not provide meaningful information about whether the trading desk is engaged in proprietary trading. For example, when Stressed VaR is applied to hedges of loans held-to-maturity on a trading desk, Stressed VaR is unlikely to provide an accurate indication of the risk taken on that desk. Thus, the Agencies are providing that Stressed VaR need not be reported under these circumstances.
It is unnecessary for banking entities to calculate and report volatility of comprehensive profit and loss because the measurement can be calculated from the profit and loss amounts reported under the Comprehensive Profit and Loss Attribution metric. Thus, the proposed Appendix would remove this requirement.
With respect to the profit and loss attribution to individual risk factors and other factors, the Agencies are proposing to add to the proposed Appendix a new paragraph IV.b.1.B. Under the proposal, a banking entity would be required to provide, for one or more factors that explain the preponderance of the profit or loss changes due to risk factor changes, a unique identification label for the factor and the profit or loss due to the factor change. The proposal requires a banking entity to report a unique identification label for the factor so the Agencies can efficiently obtain the descriptive information regarding the factor that is separately reported in the Risk Factor Attribution Information Schedule.
A new “Applicability” paragraph IV.b.1.iv provides that, as in the 2013 final rule, the Comprehensive Profit and Loss Attribution metric applies to all trading desks engaged in covered trading activities.
Paragraph IV.c.1. of Appendix A of the 2013 final rule requires banking entities to calculate and report Inventory Turnover. This metric is required to be calculated on a daily basis for 30-day, 60-day, and 90-day calculation periods. The Agencies are proposing to replace the Inventory Turnover metric with the daily data underlying that metric, rather than proposing specific calculation periods, because the Agencies may choose to use different inventory turnover calculation periods depending on the particular trading desk or covered trading activity under review. The proposal replaces Inventory Turnover with the daily Positions quantitative measurement. In conjunction with the proposed Transaction Volumes metric (discussed below), the proposed Positions metric would provide the Agencies with flexibility to calculate inventory turnover ratios over any period of time, including a single trading day.
Based on an evaluation of the information collected pursuant to the Inventory Turnover quantitative measurement, the Agencies are proposing to limit the scope of applicability of the Positions metric to trading desks that rely on § __.4(a) or § __.4(b) to conduct underwriting activity or market making-related activity, respectively. As a result, a trading desk that does not rely on § __.4(a) or § __.4(b) would not be subject to the proposed Positions metric.
The proposal provides that banking entities subject to the appendix would have to separately report the market value of all long securities positions, the market value of all short securities positions, the market value of all derivatives receivables, the market value of all derivatives payables, the notional value of all derivatives receivables, and the notional value of all derivatives payables.
Finally, the proposal addresses the classification of securities and derivatives for purposes of the proposed Positions quantitative measurement. The Agencies recognize that the 2013 final rule's definition of “security” and “derivative” overlap.
Paragraph IV.c.3. of Appendix A of the 2013 final rule requires banking entities to calculate and report a Customer-Facing Trade Ratio comparing transactions involving a counterparty that is a customer of the trading desk to transactions with a counterparty that is not a customer of the desk. Appendix A of the 2013 final rule requires the Customer-Facing Trade Ratio to be computed by measuring trades on both a trade count basis and value basis. In addition, Appendix A of the 2013 final rule provides that the term “customer” for purposes of the Customer-Facing Trade Ratio is defined in the same manner as the terms “client, customer, and counterparty” used in § __.4(b) of the 2013 final rule describing the permitted activity exemption for market making-related activities. This metric is required to be calculated on a daily basis for 30-day, 60-day, and 90-day calculation periods.
While the Customer-Facing Trade Ratio may provide directionally useful information in some circumstances regarding the extent to which trades are conducted with customers, the Agencies are proposing to replace this metric with the daily Transaction Volumes quantitative measurement, set out in paragraph IV.c.2. of the proposed Appendix, for two reasons. First, the information provided by the Customer-Facing Trade Ratio metric has not been sufficiently granular to permit the Agencies to effectively assess the extent to which a trading desk's covered trading activities are focused on servicing customer demand. Reviewing and analyzing data representing trading activity that occurs over a single trading day should be more effective. The proposed Transaction Volumes metric will provide the Agencies with flexibility to calculate customer-facing trade ratios over any period of time, including a single trading day. This will assist banking entities and the Agencies in monitoring covered trading activities. The Agencies are proposing to replace the Customer-Facing Trade Ratio with the daily data underlying that metric rather than proposing a daily calculation period for the Customer-Facing Trade Ratio because the Agencies may choose to use different customer-facing trade ratio calculation periods depending on the particular trading desk or covered trading activity under review.
Second, based on a review of the collected data, the Agencies recognize that the current Customer-Facing Trade Ratio metric does not provide meaningful information when a trading desk only conducts customer-facing trading activity. The numerator of the ratio represents transactions with counterparties that are customers, while the denominator represents transactions with counterparties that are not customers. If a trading desk only trades with customers, it will not be able to calculate this ratio because the denominator will be zero. The proposed Transaction Volumes metric enables the analysis of customer-facing activity using more meaningful and appropriate calculations.
The proposed Transaction Volumes metric measures the number and value
As described above, the Agencies have evaluated the data collected under Appendix A of the 2013 final rule to determine whether certain quantitative measurements should be tailored to specific covered trading activities. The Customer-Facing Trade Ratio metric has primarily been used to assist in the evaluation of a trading desk's customer-facing activity, which is a relevant consideration for desks engaged in underwriting or market making-related activity under § __.4 of the 2013 final rule. Such analysis is less relevant to, for example, desks that use only the risk-mitigating hedging exemption under § __.5 of the 2013 final rule. Based on an evaluation of the information collected under the Customer-Facing Trade Ratio, the Agencies are proposing to limit the applicability of the proposed Transaction Volumes metric.
Specifically, the proposal provides that a banking entity would be required to calculate and report the proposed Transaction Volumes metric for all trading desks that rely on § __.4(a) or § __.4(b) to conduct underwriting activity or market making-related activity, respectively. This means that a trading desk that does not rely on § __.4(a) or § __.4(b) would not be subject to the proposed Transaction Volumes metric.
This metric should provide meaningful information regarding the extent to which a trading desk facilitates demand for each category of counterparty. While the Agencies recognize that the requirement to provide additional granularity may require banking entities to expend additional compliance resources, the Agencies believe the information would enhance compliance efficiencies. In particular, by requiring transactions to be separated into these four categories, the information collected under this metric will facilitate better classification of internal trades, and thus, will assist banking entities and the Agencies in evaluating whether the covered trading activities of desks engaged in underwriting or market making-related activities are consistent with the final rule's requirements governing those activities. For example, the Agencies believe that this metric could be helpful in evaluating the extent to which a market making desk routinely stands ready to purchase and sell financial instruments related to its financial exposure, as well as the extent to which a trading desk engaged in underwriting or market making-related activity facilitates customer demand in accordance with the reasonably expected near term demand requirements under the relevant exemption.
The definition of the term “customer” that is used for purposes of this quantitative measurement depends on the type of covered trading activity a desk conducts. For a trading desk engaged in market making-related activity pursuant to § __.4(b) of the 2013 final rule, the desk must construe the term “customer” in the same manner as the terms “client, customer, and counterparty” used for purposes of the market-making exemption under the 2013 final rule. For a trading desk engaged in underwriting activity pursuant to § __.4(a) of the 2013 final rule, the desk must construe the term “customer” in the same manner as the terms “client, customer, and counterparty” used for purposes of the underwriting exemption under the final rule.
Similar to the proposed Positions metric, the proposed Transaction Volumes metric addresses the classification of securities and derivatives for purposes of the proposed Transaction Volumes quantitative measurement. The proposed Transaction Volumes metric requires banking entities to separately report the value and number of securities and derivatives transactions conducted by a trading desk with the four categories of counterparties described above. To avoid double-counting financial instruments, the proposed Transaction Volumes metric would require banking entities subject to the appendix to not include in the Transaction Volumes calculation for “securities” those securities that are also “derivatives,” as those terms are defined under the 2013 final rule.
The Agencies have evaluated whether the Inventory Aging metric is useful for all financial instruments, as well as for all covered trading activities. Based on this evaluation and a review of the data collected under this quantitative measurement, the Agencies understand that, with respect to derivatives, Inventory Aging is not easily calculated and does not provide useful risk or customer-facing activity information. Thus, the Agencies are proposing several modifications to the Inventory Aging metric.
First, the scope of the proposed Securities Inventory Aging metric, set forth in proposed paragraph IV.c.3., would be limited to a trading desk's securities positions. Under the proposal, banking entities subject to the Appendix would be required to measure and report the age profile of a trading desk's securities positions through a security-asset aging schedule and a security liability-aging schedule. The proposed Securities Inventory Aging metric would not require banking entities to prepare an aging schedule for derivatives or include in its securities aging schedules those “securities” that are also “derivatives,” as those terms are defined under the 2013 final rule.
Second, the Agencies are proposing to limit the applicability of the Securities Inventory Aging metric to trading desks that engage in specific covered trading activities. Consistent with the proposed Positions and Transaction Volumes metrics, the proposal provides that a banking entity would be required to calculate and report the Securities Inventory Aging metric for all trading desks that rely on § __.4(a) or § __.4(b) to conduct underwriting activity or market making-related activity, respectively. This means that a trading desk that does not rely on § __.4(a) or § __.4(b) would not be subject to the proposed Securities Inventory Aging metric.
Finally, the proposal would require a banking entity to calculate and report the Securities Inventory Aging metric according to a specific set of age ranges. Specifically, banking entities would have to calculate and report the market value of security assets and security liabilities over the following holding periods: 0-30 calendar days; 31-60 calendar days; 61-90 calendar days; 91-180 calendar days; 181-360 calendar days; and greater than 360 calendar days.
The Agencies request comment on the costs and benefits of the proposal's revised approach under revisions to Appendix A of the 2013 final rule. In particular, the Agencies request comment on the following questions:
The Agencies are proposing a number of changes to the 2013 final rule that are intended to reduce the costs of compliance while continuing the rule's effectiveness in limiting prohibited activities. In what follows, the key proposed changes to the regulation that are expected to have a material impact on the costs of implementing the regulation are discussed as is the rationale for expecting a material reduction in the costs associated with compliance. The Agencies seek broad comment from the public on any and all aspects of the proposed changes to the regulation and the extent to which these changes will reduce compliance costs and improve the effectiveness of the implementing regulations. The Agencies also seek comment on whether there are any additional ways to reduce compliance costs while effectively implementing the statute. Finally, commenters are encouraged to provide the Agencies with any specific data or information that could be useful for quantifying the reductions or increases in costs associated with the proposed changes.
A key proposed change to the rule relates to the treatment of banking entities with limited trading activities, which under the 2013 final rule can face compliance costs that are disproportionately high relative to the amount of trading activity typically undertaken and the amount of risk the activities of these firms that are subject to section 13 pose to financial stability. More specifically, the Agencies are proposing to identify those banking entities with total consolidated trading assets and liabilities (excluding trading assets and liabilities involving obligations of, or guaranteed by, the United States or any agency of the United States) the average gross sum of which (on a worldwide consolidated basis) over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1 billion. These banking entities with limited trading assets and liabilities would be subject to a presumption of compliance under the proposal, while remaining subject to the rule's prohibitions in subparts B and C. The relevant Agency may rebut the presumption of compliance by providing written notice to the banking entity that it has determined that one or more of the banking entity's activities violates the prohibitions under subparts B or C.
The Agencies expect that this presumption would materially reduce the costs associated with complying with the rule for two reasons. First, as a result of presumed compliance, these banking entities would not be required to demonstrate compliance with many of the rule's specific requirements on an ongoing basis. As a specific example, entities with limited trading assets and liabilities would not be required to comply with the documentation requirements associated with the hedging exemption. Additionally, these entities would not be required to specify and maintain trading risk limits to comply with the rule's market making exemption. As a result, this proposed change is expected to meaningfully reduce the costs associated with rule compliance for smaller banking entities that do not engage in the types of trading the rule seeks to address.
Second, these banking entities would not be subject to the express requirement to maintain a compliance program pursuant to § __.20 under the proposal to demonstrate compliance with the rule. The presumption would be rebuttable, so firms may need to maintain a certain level of resources to respond to supervisory requests for information in the event that the Agencies exercise their authority to rebut the presumption of compliance for any activity that they determine to violate prohibitions under subparts B and C. The amount of resources required for such purposes is expected to be significantly smaller than the
The Agencies are also proposing two changes related to the 2013 final rule's definition of “trading account” that are expected to simplify the analysis associated with determining whether or not a banking entity's purchase or sale of a financial instrument is for the trading account, and thereby are expected to reduce the costs associated with complying with the rule. Specifically, the Agencies are proposing to add an accounting prong to the definition of “trading account” and to remove the short-term intent prong and the 60-day rebuttable presumption. The Agencies expect that the removal of the short-term intent prong will substantially reduce the costs of complying with the rule.
In the case of the short-term intent prong and the 60-day rebuttable presumption, the Agencies' experience with implementing the 2013 final rule strongly suggests that application of the short-term intent prong resulted in a variety of analyses to determine if a financial position was taken with the “intent” of generating short-term profits, or benefitting from short-term price movements. Assessing intent is qualitative and can be subject to significant interpretation. Accordingly, experience suggests that banking entities engage in a number of lengthy analyses to determine whether or not a financial position needs to be included in the trading account, and that these analyses may not always result in a clear indication.
In the case of the 60-day rebuttable presumption, the Agencies' experience suggests that the 60-day rebuttable presumption may be an overly inclusive instrument to determine whether a financial instrument is in the trading account. Many financial positions are scoped into the trading account automatically due to the 60-day presumption, and banking entities routinely conduct detailed and lengthy assessments of transactions to document that these positions should not be included in the trading account. However, experience indicates that there is no clear set of analyses that may be conducted to rebut the presumption and a clear standard for successfully rebutting the presumption has been difficult to establish in practice. Accordingly, the Agencies expect that removing the 60-day rebuttable presumption would materially reduce the costs associated with complying with the rule and determining whether a financial instrument is in the trading account.
The Agencies expect that this proposal would reduce the costs of rule compliance since banking entities are already familiar with accounting standards and use these standards to classify financial instruments on a regular basis to satisfy reporting and related requirements. The Agencies would expect that no new compliance costs would result from using accounting concepts that are already familiar to banking entities for purposes of identifying activity in the trading account.
The Agencies are also proposing to include a presumption of compliance for trading desks, the positions of which are included in the trading account due to the accounting prong, so long as the profit and loss of the desk does not exceed a certain threshold. Specifically, the trading activity conducted by a trading desk is presumed to be in compliance with the prohibition on proprietary trading if (i) none of the financial instruments of the desk are included in the trading account pursuant to the market risk capital prong, (ii) none of the financial instruments of the desk are booked in a dealer, swap dealer, or security-based swap dealer, and (iii) the sum over the preceding 90-calendar-day period of the absolute values of the daily net realized and unrealized gains and losses of the desk's portfolio of financial instruments does not exceed $25 million. Banking entities and supervisors will only need to consider cases in which the size of trading activity exceeds the $25 million threshold for these desks. Moreover, this analysis draws on profit and loss metrics that banking entities already regularly maintain and consequently would not be expected to contribute to any increased regulatory costs.
The Agencies recognize that implementing the new definition of “trading account” and the presumption of compliance would result in some amount of compliance costs. However, the Agencies expect that the compliance costs associated with this new definition and presumption of compliance would be significantly less than the compliance costs of either the short-term intent prong or the 60-day rebuttable presumption. As noted above, the new trading account definition ties to accounting concepts that are already familiar to banking entities. Similarly, the new presumption of compliance ties to profit and loss metrics that banking entities already maintain. As such, the Agencies expect that the new trading account definition and the presumption of compliance would materially reduce the costs of rule compliance relative to the 2013 final rule's existing requirements.
As described in section 1(d)(3) of this Supplementary Information, the Agencies are proposing a specific alternative to allow banking entities to define trading desks in a manner consistent with their own internal business unit organization. The Agencies request comment regarding the relative costs and benefits of this possible alternative.
A key statutory exemption from the prohibition on proprietary trading is the exemption for underwriting. The 2013 final rule contains a number of complex requirements that are intended to ensure that banking entities comply with the underwriting exemption and that proprietary trading activity is not conducted under the guise of underwriting. Since adoption of the 2013 final rule, banking entities have communicated to the Agencies that complying with all of the 2013 final rule's underwriting requirements can be difficult and costly relative to the underlying activities. In particular, banking entities have communicated that they believe they must engage in a number of complex and intensive analyses to gain comfort that their underwriting activities meets all of the 2013 final rule's requirements. Moreover, banking entities have communicated that they find the requirements of the 2013 final rule ambiguous to apply in practice and do not provide sufficiently bright-line conditions under which trading activity can clearly be classified as permissible underwriting.
The Agencies are proposing to establish the articulation and use of internal risk limits as a key mechanism for conducting trading activity in accordance with the underwriting exemption. These risk limits would be established by the banking entity at the trading desk level and designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties. The proposed risk limits would not be required to be based on any specific or mandated analysis. Rather, a banking entity would be permitted to establish the risk limits according to its own internal analyses and processes around conducting its underwriting activities. Banking entities would be expected to maintain internal policies and procedures for setting and reviewing desk-level risk limits in a manner consistent with the applicable statutory factor. A banking entity's risk limits would be subject to general supervisory review and oversight, but the limit-setting process would not be required to adhere to specific, pre-defined requirements beyond adherence to the banking entity's own ongoing and internal assessment of the reasonably expected near-term demands of clients, customers, or counterparties. So long as a banking entity maintains an ongoing and consistent process for setting such limits in accordance with the proposal, then the Agencies anticipate that trading activity conducted within the limits would generally be presumed to be underwriting.
The Agencies expect that the proposed reliance on risk limits to satisfy the underwriting exemption will materially reduce the costs of complying with the final rule's underwriting exemption. In particular, the limit-setting process is intended to leverage a banking entity's existing internal risk management and capital allocation processes, and would not be required to conform to any specific or pre-defined requirements other than being set in accordance with RENTD. The Agencies expect that reliance on risk limits would therefore align with the firm's internal policies and procedures for conducting underwriting in a manner consistent with the requirements of section 13 of the BHC Act. Accordingly, the Agencies expect that this proposed approach would generally be more efficient and less costly than the practices required by the 2013 final rule as they rely to a greater extent on the banking entity's own internal policies, procedures, and processes.
Another key statutory exemption from the prohibition on proprietary trading is the exemption for market making. The 2013 final rule contains a number of complex requirements that are intended to ensure that proprietary trading activity is not conducted under the guise of market making. Since adoption of the 2013 final rule, banking entities have communicated that complying with all of the 2013 final rule's market making requirements can be difficult and costly. In particular, banking entities have communicated that they believe they must engage in a number of complex and intensive analyses to gain comfort that their bona fide market making activity meets all of the 2013 final rule's requirements. Moreover, banking entities have communicated that they view the requirements of the 2013 final rule as ambiguous and not providing sufficiently bright-line conditions under which trading activity can clearly be classified as permissible market making.
The Agencies are proposing to establish the articulation and use of internal risk limits as the key mechanism for conducting trading activity in accordance with the rule's exemption for market making-related activities. These risk limits would be established by the banking entity at the trading desk level and be designed not to exceed the reasonably expected near
The Agencies expect that the proposed reliance on internal risk limits to satisfy the statutory requirement that market making-related activities be designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties would materially reduce the costs of complying with the 2013 final rule's market making exemption. In particular, the limit-setting process would be intended to leverage a banking entity's existing internal risk management and capital allocation processes and would not be required to conform to specific or pre-defined requirements. The Agencies expect that reliance on risk limits would therefore align with the firm's internal policies and procedures for conducting market making in a manner consistent with the requirements of section 13 of the BHC Act. Accordingly, the agencies expect that this proposed approach would generally be more efficient and less costly than the practices required by the 2013 final rule as they rely to a greater extent on the banking entity's own internal policies, procedures, and processes.
The Agencies are also proposing to further tailor the requirements for banking entities with moderate trading activities and liabilities. In particular, the compliance program requirements that are part of the market making exemption would not apply to these firms.
The agencies are proposing a number of changes to the requirements of the 2013 final rule's exemption for risk-mitigating hedging activities that are expected to reduce the costs associated with complying with the final rule's requirements.
First, for banking entities with significant trading assets and liabilities, the 2013 final rule's requirement in the risk mitigating hedging exemption to conduct a correlation analysis would be removed. Since adoption of the 2013 final rule, banking entities have communicated that this requirement has in practice been unclear and often not useful in determining whether or not a given transaction provides meaningful hedging benefits. The Agencies expect that the proposed removal of this requirement from the final rule would materially reduce the costs of rule compliance since larger banking entities would not be required to conduct a specific analysis that is currently required under the 2013 final rule.
Second, for these banking entities with significant trading assets and liabilities, the Agencies are proposing that the requirement that the hedging transaction “demonstrably reduce (or otherwise significantly mitigate)” risk be removed. Banking entities have communicated that these requirements can be unclear and these banking entities must often engage in a number of complex and time-intensive analyses to assess whether these standards have been met. Moreover, the above hedging standards have not aligned well with banking entities' internal processes for assessing the economic value of a hedging transaction. Accordingly, the Agencies expect that eliminating these requirements would materially reduce the costs associated with complying with the requirements of the rule's hedging exemption.
Third, for banking entities with moderate trading assets and liabilities, the Agencies are proposing to remove all of the hedging requirements under the 2013 final rule except for the requirement that the transaction be designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks in connection with and related to one or more identified positions and that the hedging activity be recalibrated to maintain compliance with the rule. The Agencies expect this proposed change to materially reduce the costs of rule compliance since no additional documentation or prescribed analyses would be required beyond a banking entity's already existing practices and whatever analyses are required to ascertain that the remaining factors are satisfied, consistent with the statute. In light of Agency experience with the hedging requirements of the 2013 final rule, the Agencies expect that this proposed change would result in a material reduction in the costs associated with complying with the rule's hedging requirements.
The Agencies are proposing to eliminate a number of requirements related to the foreign trading exemption. These proposed changes are intended to respond to concerns raised by FBOs subject to the 2013 final rule that they find its foreign trading exemption to be difficult to comply with in practice.
The Agencies are proposing to modify the requirement of this exemption that personnel of the banking entity who arrange, negotiate, or execute a purchase or sale must be outside the United States and to eliminate the requirements that: (1) No financing be provided by a U.S. affiliate or branch, and (2) a transaction with a U.S. counterparty must be executed through an unaffiliated intermediary and an anonymous exchange.
The Agencies expect that the modification and removal of these requirements would materially reduce the compliance costs associated with the foreign trading exemption.
In addition, banking entities have communicated that the requirement that any transaction with a U.S. counterparty be executed without involvement of U.S. personnel of the counterparty or through an unaffiliated intermediary and an anonymous exchange may in some cases significantly reduce the range of counterparties with which transactions can be conducted as well as increase the cost of those transactions, including with respect to counterparties seeking to do business with a foreign banking entity in foreign jurisdictions. Therefore, the Agencies also expect that removing this requirement would materially reduce the costs associated with rule compliance.
The Agencies are proposing to make a number of changes to the metrics reporting requirements that are intended to improve the effectiveness of the metrics. On the whole, these changes are also expected to reduce the compliance costs associated with the metrics reporting requirements. In particular, the Agencies are proposing to add qualitative information schedules that would improve the Agencies' ability to understand and analyze the quantitative measurements. The Agencies are also proposing to remove certain metrics, such as inventory aging for derivatives and stressed value-at-risk for risk mitigating hedging desks, that based on experience with implementing the 2013 final rule, are not effective for identifying whether a banking entity's trading activity is consistent with the requirements of the 2013 final rule. In addition, the Agencies are proposing to switch to a standard XML format for the metrics data file. The Agencies expect this to improve consistency and data quality by both clarifying the format specification and making it possible to check the validity of data files against a published template using generally available software. Finally, the Agencies are proposing to make a number of changes to the technical calculation guidance for a number of metrics that should make the required calculations clearer and less complicated.
The Agencies are also proposing to provide certain banking entities that must report metrics with additional time to report metrics. Specifically, the firms with $50 billion in trading assets and liabilities would have 20 days instead of 10 days to report metrics to the Agencies. This change is expected to reduce compliance costs as the additional time would allow the required workflow to be conducted under less time pressure and with greater efficiency and accuracy.
The Agencies are proposing to modify certain requirements regarding the ability of banking entities to engage in underwriting and market-making of third-party covered funds that would remove some of the restrictions on activities with respect to covered fund interests. The Agencies expect that this proposed change would reduce the costs of compliance with the 2013 final rule's requirements. In particular, the 2013 final rule places a number of restrictions on underwriting and market-making of covered fund interests that banking entities have indicated are costly to comply with and view as unduly limiting activity that is otherwise consistent with bona fide underwriting and market-making activity that would be allowed with respect to any other type of financial instrument, consistent with the statutory factors defining these activities.
The Agencies are proposing several changes to the required compliance program requirements that are expected to materially reduce the costs associated with complying with the rule's requirements. Specifically, banking entities with significant trading assets and liabilities would only need to maintain a standard six-pillar compliance program (
In the case of banking entities with moderate trading assets and liabilities, these banking entities would only be required to maintain the simplified compliance program that is described in the 2013 final rule. Namely, these entities would only be required to update their existing compliance policies and procedures and would not be required to maintain a standard six-pillar compliance program as is required under the 2013 final rule. Since the simplified compliance program is much less intensive and costly to implement than the standard six-pillar compliance program, the Agencies expect that this proposed change would materially reduce the costs associated with complying with the 2013 final rule's compliance program requirements for these smaller banking entities.
The above discussion outlines the Agencies' views on the most significant sources of cost reduction that arise from this proposal. At the same time, the Agencies are aware that there may be other aspects of the proposal that commenters view as either decreasing or increasing costs associated with the 2013 final rule. Accordingly, the Agencies seek broad comment on any other aspects of the proposal that would either increase or decrease the costs associated with the rule. Commenters are encouraged to be specific and to provide any data or information that would help demonstrate their views as well as potential ways to mitigate costs.
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1338, 1471, 12 U.S.C. 4809), requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Federal banking agencies have sought to present the proposal in a simple and straightforward manner, and invite your comments on how to make this proposal easier to understand.
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Certain provisions of the proposed rule contain “collection of information” requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of the PRA, the agencies 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 agencies reviewed the proposed rule and determined that the proposed rule revises certain reporting and recordkeeping requirements that have been previously cleared under various OMB control numbers. The agencies are proposing to extend for three years, with revision, these information collections. The information collection requirements contained in this joint notice of proposed rulemaking have been submitted by the OCC and FDIC to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing regulations (5 CFR 1320). The Board reviewed the proposed rule under the authority delegated to the Board by OMB. The Board will submit information collection burden estimates to OMB and the submission will include burden for Federal Reserve-supervised institutions, as well as burden for OCC-, FDIC-, SEC-, and CFTC-supervised institutions under a holding company. The OCC and the FDIC will take burden for banking entities that are not under a holding company.
Comments are invited on:
a. Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;
b. The accuracy of the estimates of the burden of the 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 notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the
Section 619 of the Dodd-Frank Act added section 13 to the BHC Act, which generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exemptions. The exemptions allow certain types of permissible trading activities such as underwriting, market making, and risk-mitigating hedging, among others. Each agency issued a common final rule implementing section 619 that became effective on April 1, 2014. Section __.20(d) and Appendix A of the final rule require certain of the largest banking entities to report to the appropriate agency certain quantitative measurements.
The proposed rule contains requirements subject to the PRA and the changes relative to the current final rule are discussed herein. The new and modified reporting requirements are
Section __.3(c) would require that under the revised short-term prong, certain banking entities to report to the appropriate agency when a trading desk exceeds $25 million in absolute values of the daily net realized and unrealized gain and loss over the preceding 90 day period if the banking entity chooses to perform this calculation for a trading desk in order to meet the presumption of compliance. The agencies estimate that the new reporting requirement would be collected twice a year with an average hour per response of 1 hour.
Section __.3(g) would require that notice and response procedures be followed under the reservation of authority provision. The agencies estimate that the new reporting requirement would be collected once a year with an average hours per response of 2 hours.
Sections __.4(a)(8)(iii) and __.4(b)(6)(iii) would require that banking entities report to the appropriate agency when their internal risk limits under the RENTD framework for market-making and underwriting have been exceeded. These reporting requirements would be included in the section __.20(d) reporting requirements.
Section __.20(d) would be modified by extending the reporting period for banking entities with $50 billion or more in trading assets and liabilities from within 10 days of the end of each calendar month to 20 days of the end of each calendar month. The agencies estimate that the current average hours per response would decrease by 14 hours (decrease 40 hours for initial set-up).
Sections __.3(c)(2), __.3(g)(2), __.4(a)(8)(iv), __.4(b)(6)(iv), and __.20(g)(3) would set forth proposed notice and response procedures that an agency would follow when exercising its reservation of authority to modify what is in or out of the trading account. These reporting requirements would be included in the section __.3(c) reporting requirements for section __.3(c)(2); the section __.3(g) reporting requirements for section __.3(g)(2); and the section __.20(d) reporting requirements for section __.4(a)(8)(iv), __.4(b)(6)(iv), and __.20(g)(3).
Section __.5(c) would be modified by reducing the requirements for banking entities that do not have significant trading assets and liabilities and eliminating documentation requirements for certain hedging activities. The agencies estimate that the current average hours per response would decrease by 20 hours (decrease 10 hours for initial set-up).
Section __.20(b) would be modified by limiting the requirement only to banking entities with significant trading assets and liabilities. The agencies estimate that the current average hour per response would not change.
Section __.20(c) would be modified by limiting the CEO attestation requirement to a banking entity that has significant trading assets and liabilities or moderate trading assets and liabilities. The agencies estimate that the current average hours per response would decrease by 1,100 hours (decrease 3,300 hours for initial set-up).
Section __.20(d) would be modified by extending the time period for reporting for banking entities with $50 billion or more in trading assets and liabilities from within 10 days of the end of each calendar month to 20 days of the end of each calendar month. The agencies estimate that the current average hours per response would decrease by 3 hours.
Section __.20(e) would be modified by limiting the requirement to banking entities with significant trading assets and liabilities. The agencies estimate that the current average hours per response would not change.
Section __.20(f)(2) would be modified by limiting the requirement to banking entities with moderate trading assets and liabilities. The agencies estimate that the current average hours per response would not change.
The Instructions for Preparing and Submitting Quantitative Measurement Information, Technical Specifications Guidance, and XML Schema are available for review on each agency's public website:
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Reporting
Section __.3(c)—1 hour for an average of 2 times per year.
Section __.3(g)—2 hours.
Section __.12(e)—20 hours (Initial set-up 50 hours) for an average of 10 times per year.
Section __.20(d)—41 hours (Initial set-up 125 hours) for quarterly and monthly filers.
Recordkeeping
Section __.3(e)(3)—1 hour (Initial set-up 3 hours).
Section __.4(b)(3)(i)(A)—2 hours for quarterly filers.
Section __.5(c)—80 hours (Initial setup 40 hours).
Section __.11(a)(2)—10 hours.
Section __.20(b)—265 hours (Initial set-up 795 hours).
Section __.20(c)—100 hours (Initial set-up 300 hours).
Section __.20(d) (entities with $50 billion or more in trading assets and liabilities)—13 hours.
Section __.20(d) (entities with at least $10 billion and less than $50 billion in trading assets and liabilities)—10 hours.
Section __.20(e)—200 hours.
Section __.20(f)(1)—8 hours.
Section __.20(f)(2)—40 hours (Initial set-up 100 hours).
Section __.11(a)(8)(i)—0.1 hours for an average of 26 times per year.
• OCC-supervised institutions,
• FDIC-supervised institutions,
• Banking entities for which the CFTC is the primary financial regulatory agency, as defined in section 2(12)(C) of the Dodd-Frank Act, and
• Banking entities for which the SEC is the primary financial regulatory agency, as defined in section 2(12)(B) of the Dodd-Frank Act.
The Regulatory Flexibility Act (“RFA”)
The Board has considered the potential impact of the proposed rule on small entities in accordance with the RFA. Based on the Board's analysis, and for the reasons stated below, the Board believes that this proposed rule will not have a significant economic impact on a substantial of number of small entities. Nevertheless, the Board is publishing and inviting comment on this initial regulatory flexibility analysis. A final regulatory flexibility analysis will be conducted after comments received during the public comment period have been considered.
The Board welcomes comment on all aspects of its analysis. In particular, the Board requests that commenters describe the nature of any impact on small entities and provide empirical data to illustrate and support the extent of the impact.
As discussed in the
As discussed above, the Agencies' objective in proposing this rule is to reduce the compliance costs for all banking entities and, in particular, to tailor the rule based on the size of the banking entity and the complexity of its trading operations. The Agencies are explicitly authorized under section 13(b)(2) of the BHC Act to adopt rules implementing section 13.
The Board's proposal would apply to state-chartered banks that are members of the Federal Reserve System (state member banks), bank holding companies, foreign banking organizations, and nonbank financial companies supervised by the Board (collectively, “Board-regulated banking entities”). However, the Board notes that the Economic Growth, Regulatory Relief, and Consumer Protection Act,
The proposal would reduce reporting, recordkeeping, and other compliance requirements for small entities. First, banking entities with consolidated gross trading assets and liabilities below $10 billion would be subject to reduced requirements and a tailored approach in light of their significantly smaller and less complex trading activities. Second, in order to further reduce compliance requirements for small and mid-sized banking entities, the Agencies have proposed a rebuttable presumption of compliance for firms that do not have consolidated gross trading assets and liabilities in excess of $1 billion. All Board-regulated banking entities that meet the SBA definition of small entities (
As discussed in the
Without this presumption of compliance, these banking entities would generally be required to comply with the rule's applicable substantive requirements to demonstrate compliance with the rule. As a result, this proposed change is expected to meaningfully reduce the costs associated with rule compliance for small banking entities. The presumption would be rebuttable, so a banking entity would need to maintain a certain level of resources to respond to supervisory requests for information in the event that the presumption of compliance is rebutted; however, the Agencies would not expect these banking entities to maintain anything other than what they would normally maintain in the ordinary course. The amount of resources required for such purposes is expected to be significantly smaller than the amount of resources that would be required to maintain and execute ongoing compliance with the 2013 final rule's requirements.
The Board has not identified any federal statutes or regulations that would duplicate, overlap, or conflict with the proposed revisions.
The Board believes the proposed amendments to the 2013 final rule will not have a significant economic impact on small banking entities supervised by the Board and therefore believes that there are no significant alternatives to the proposal that would reduce the economic impact on small banking entities supervised by the Board.
The RFA, requires an agency, in connection with a proposed rule, to prepare an Initial Regulatory Flexibility Analysis describing the impact of the proposed rule on small entities, or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. For purposes of the RFA, the SBA defines small entities as those with $550 million or less in assets for commercial banks and savings institutions, and $38.5 million or less in assets for trust companies.
The OCC currently supervises approximately 886 small entities.
The RFA, generally requires an agency, in connection with a proposed rule, to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities.
The Agencies are issuing this proposal to amend the 2013 final rule in order to provide banking entities with additional certainty and reduce compliance obligations and costs where possible. The Agencies acknowledge that many small banking entities have found certain aspects of the 2013 final rule to be complex or difficult to apply in practice.
The Agencies are proposing to tailor the application of the 2013 final rule based on a banking entity's risk profile and the size and scope of its trading activities. Second, the Agencies aim to further streamline compliance obligations, particularly for entities without large trading operations. Third, the agencies seek to streamline and refine certain definitions and requirements related to the proprietary trading prohibition and limitations on covered fund activities and investments. Please refer to Section II: Overview of Proposal, for further information.
The FDIC has not identified any likely duplication, overlap, and/or potential conflict between the proposed rule and any other federal rule.
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was enacted, which, among other things, amends section 13 of the BHC Act. As a result, section 13 excludes from the definition of banking entity any institution that, together with their affiliates and subsidiaries, has: (1) Total assets of $10 billion or less, and (2) trading assets and liabilities that comprise 5 percent or less of total assets. This excludes every FDIC-supervised small entity from the statutory definition of banking entity, except those that are controlled by a company that is not excluded. The SBA has defined “small entities” to include banking organizations with total assets less than or equal to $550 million.
The FDIC supervises 3,597 depository institutions,
The potential benefits of this proposed rule consist of any reduction in the regulatory costs borne by covered entities. The potential costs of this rule consist of any reduction in the efficacy of the objectives in the existing regulatory framework. As explained in the following sections, certain of these potential costs and benefits are difficult to quantify.
By reducing the reporting requirements of the 2013 final rule, there is a chance that the Agencies would fail to recognize prohibited proprietary trading, resulting in additional risk of loss to an institution, the Deposit Insurance Fund (DIF), the financial sector, and the economy. The FDIC believes the potential costs associated with these risks are minimal. First, the reporting metrics that would be removed or replaced by the proposed rule have contributed little as indicators of risk, and there would be no cost associated with replacing them. Second, the banking entities that would be relieved from compliance requirements under section __.20 of the proposed rule are primarily small entities that conduct limited to no trading activity, and which are therefore excluded from Section 13 by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The FDIC would maintain its ability to recognize and respond to potential risks of prohibited activity by these small entities through off-site monitoring of Call Reports as well as periodic on-site examinations. The proposed rule has no additional or transition costs because the new reporting metrics in the proposed rule consist of data that covered entities already collect in the course of business and for regulatory compliance.
The potential benefits of the proposed rule can be expressed in terms of the potential reduction in the costs of compliance incurred by small, FDIC-supervised affected banking entities under the proposed rule. These benefits cannot be quantified because covered institutions do not collect data and report to the FDIC the precise burden relating to parts of the 2013 final rule. Nevertheless, supervisory experience and feedback received from FDIC-supervised banking entities have demonstrated that these burdens exist. The proposed rule clarifies many requirements and definitions that are expected to enable banking entities to more efficiently and effectively comply with the rule, thus providing benefits to those entities.
The primary alternative to the proposed rule is to maintain the status quo under the 2013 final rule. As discussed above, however, the proposed rule implements the statutory requirements, but is expected to provide more certainty and result in lower costs.
The proposed rule also seeks public comment on alternative regulatory approaches that would reduce the compliance burden of the 2013 final rule without reducing its effectiveness in eliminating the moral hazard of proprietary trading.
Section 13, as amended, exempts almost all of the FDIC-supervised small institutions from compliance with the Volcker Rule. The proposed rule provides benefits to the remaining five FDIC-supervised small institutions with parent companies subject to the rule. Therefore, the FDIC certifies that this proposed rule will not have a significant economic impact on a substantial number of FDIC-supervised small entities.
The FDIC invites comments on all aspects of the supporting information provided in this RFA section. In particular, would this rule have any significant effect on small entities that the FDIC has not identified? If the proposed rule is implemented, how many hours of burden would small institutions save?
Pursuant to 5 U.S.C. 605(b), the SEC hereby certifies that the proposed amendments to the 2013 final rule would not, if adopted, have a significant economic impact on a substantial number of small entities.
As discussed in the
The proposed revisions would generally apply to banking entities, including certain SEC-registered entities. These entities include bank-affiliated SEC-registered broker-dealers, investment advisers, and security-based swap dealers. Based on information in filings submitted by these entities, the SEC preliminarily believes that there are no banking entity registered investment advisers
The SEC encourages written comments regarding this certification. Specifically, the SEC solicits comment as to whether the proposed amendments could have an impact on small entities that has not been considered. Commenters should describe the nature of any impact on small entities and provide empirical data to support the extent of such impact.
Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the proposed amendments to the 2013 final rule would not, if adopted, have a significant economic impact on a substantial number of small entities for which the CFTC is the primary financial regulatory agency.
As discussed in this
The proposed revisions would generally apply to banking entities, including certain CFTC-registered entities. These entities include bank-affiliated CFTC-registered swap dealers, FCMs, commodity trading advisors and commodity pool operators.
In the context of the proposed revisions to the 2013 final rule, the CFTC believes it is unlikely that a substantial number of the commodity trading advisors that are potentially affected are small entities for purposes of the RFA. In this regard, the CFTC notes that only commodity trading advisors that are registered with the CFTC are covered by the 2013 final rule, and generally those that are registered have larger businesses. Similarly, the 2013 final rule applies to only those commodity trading advisors that are affiliated with banks, which the CFTC expects are larger businesses. The CFTC requests that commenters address in particular whether any of these commodity trading advisors, or other CFTC registrants covered by the proposed revisions to the 2013 final rule, are small entities for purposes of the RFA.
Because the CFTC believes that there are not a substantial number of registered, banking entity-affiliated commodity trading advisors that are small entities for purposes of the RFA, and the other CFTC registrants that may be affected by the proposed revisions have been determined not to be small entities, the CFTC believes that the proposed revisions to the 2013 final rule would not, if adopted, have a significant economic impact on a substantial number of small entities for which the CFTC is the primary financial regulatory agency.
The CFTC encourages written comments regarding this certification. Specifically, the CFTC solicits comment as to whether the proposed amendments could have a direct impact on small entities that were not considered. Commenters should describe the nature of any impact on small entities and provide empirical data to support the extent of such impact.
The OCC analyzed the proposed rule under the factors set forth in the
The OCC has determined this proposed rule is likely to result in the expenditure by the private sector of approximately $11.6 million in the first year. Therefore, the OCC concludes that implementation of the proposed rule would not result in an expenditure of $100 million or more annually by state, local, and tribal governments, or by the private sector.
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,”
Section 13 of the BHC Act generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with covered funds, subject to certain exemptions. Under the BHC Act, “banking entities” include insured depository institutions, any company that controls an insured depository institution or that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978, and their affiliates and subsidiaries.
We recognize that compliance with SBSD registration requirements is not yet required and that there are currently no registered SBSDs. However, the SEC has previously estimated that as many as 50 entities may potentially register as security-based swap dealers and that as many as 16 of these entities may already be SEC-registered broker-dealers.
For the purposes of this economic analysis, the term “dealer” generally refers to SEC-registered broker-dealers and SBSDs.
Throughout this economic analysis, “we” refers only to the SEC and not the other Agencies, except where otherwise indicated.
The Agencies issued final regulations implementing section 13 of the BHC Act in December 2013, with an initial effective date of April 1, 2014.
In implementing section 13 of the BHC Act, the Agencies sought to increase the safety and soundness of banking entities, promote financial stability, and reduce conflicts of interest between banking entities and their customers.
Section 13 of the BHC Act also provides a number of statutory exemptions to the general prohibitions on proprietary trading and covered funds activities. For example, the statute exempts from the proprietary trading restrictions certain underwriting, market making, and risk-mitigating hedging activities, as well as certain trading activities outside of the United States.
Certain aspects of the rule may have resulted in a complex and costly compliance regime that is unduly restrictive and burdensome on some affected banking entities, particularly smaller firms that do not qualify for the simplified compliance and reporting regime. The Agencies also recognize that distinguishing between permissible and prohibited activities may be complex and costly for some firms. Moreover, the 2013 final rule may have included in its scope some groups of market participants that do not necessarily engage in the activities or pose the risks that section 13 of the BHC Act intended to address. For example, the 2013 final rule's definition of the term “covered fund” is broad and, as a result, may include funds that do not engage in the investment activities contemplated by section 13 of the BHC Act. As another example, foreign banking entities' ability to trade financial instruments in the United States may have been significantly limited despite the foreign trading exemption in the 2013 final rule.
The amendments to the 2013 final rule proposed in this release include those that influence the scope of permitted activities for all or a subset of banking entities and covered funds, and those that simplify, tailor, or eliminate the application of certain aspects of the rule to reduce compliance and reporting burdens.
Some of the proposed amendments affect the scope of permitted activities (
Other proposed amendments reduce compliance program, reporting, and documentation requirements for some entities. While these amendments are designed to reduce the compliance burdens of regulated entities, they may also reduce the efficacy of regulatory oversight, internal compliance, and supervision. Amendments and changes on which the Agencies are requesting comment that decrease (or increase) compliance program and reporting requirements tip the balance of economic tradeoffs toward (or away from) competition, trading activity, and capital formation on the one hand, and against (or in favor of) regulatory and internal oversight on the other. However, as discussed below, some of the changes need not reduce the efficacy of the Agencies' regulatory oversight. Further, under the proposal, banking entities (other than banking entities with limited trading assets and liabilities for which the proposed presumption of compliance has not been rebutted) would still be required to develop and provide for the continued administration of a compliance program reasonably designed to ensure and monitor compliance with the prohibitions and restrictions set forth in section 13 of the BHC Act and the 2013 final rule, as it is proposed to be amended.
Where possible, we have attempted to quantify the costs and benefits expected to result from the proposed amendments. In many cases, however, the SEC is unable to quantify these potential economic effects. Some of the primary economic effects, such as the effect on incentives that may give rise to conflicts of interest in various regulated entities and the efficacy of regulatory oversight under various compliance regimes, are inherently difficult to quantify. Moreover, some of the benefits of the 2013 final rule's definitions and prohibitions that are being amended here, for example potential benefits for resilience during a crisis, are less readily observable under strong economic conditions. Lastly, because of overlapping implementation periods of various post-crisis regulations affecting the same group of SEC registrants, the long implementation timeline of the 2013 final rule, and the fact that many market participants changed their behavior in anticipation of future changes in regulation, it is difficult to quantify the net economic effects of the individual amendments to rule provisions proposed here.
In some instances, we lack the information or data necessary to provide reasonable estimates for the economic effects of the proposed amendments. For example, we lack information and data on the volume of trading activity that does not occur because of uncertainty about how to demonstrate that underwriting or market-making activities satisfy the RENTD requirement; the extent to which internally-set risk limits capture expected customer demand; how accurately correlation analysis reflects underlying exposures of banking entities with, and without, significant trading assets and liabilities in normal times and in times of market stress; the feasibility and costs of reorganization that may enable some U.S. banking entities to become foreign banking entities for the purposes of relying on the foreign trading exemption; how market participants may choose to
In addition, the broader economic effects of the proposed amendments, such as those related to efficiency, competition, and capital formation, are difficult to quantify with any degree of certainty. The proposed amendments tailor, remove, or alter the scope of requirements in the 2013 final rule. Thus, some of the methodological challenges in analyzing market effects of these amendments are somewhat similar to those that arise when analyzing the effects of the 2013 final rule. As we have noted elsewhere, analysis of the effects of the implementation of the 2013 final rule is confounded by, among others, macroeconomic factors, other policy interventions, post-crisis changes to market participants' risk aversion and return expectations, and technological advancements unrelated to regulations. Because of the extended timeline of implementation of section 13 of the BHC Act and the overlap of the 2013 final rule period with other post-crisis changes affecting the same group of SEC registrants, typical quantitative methods that might otherwise enable causal attribution and quantification of the effects of section 13 of the BHC Act and the 2013 final rule on measures of capital formation, liquidity, and informational or allocative efficiency are not available. Where existing research has sought to test causal effects and to measure them quantitatively, the presence, direction, and magnitude of the effects are sensitive to econometric methodology, measurement, choice of market, and the time period studied.
In addition, the existing securities markets—including market participants, their business models, market structure, etc.—differ in significant ways from the securities markets that existed prior to the 2013 final rule's implementation. For example, the role of dealers in intermediating trading activity has changed in important ways, including: Bank-dealer capital commitment declined while non-bank dealer capital commitment increased; electronic trading in some securities markets became more prominent; the profitability of trading after the financial crisis may have decreased significantly; and the introduction of alternative credit markets may have contributed to liquidity fragmentation across markets.
The SEC continues to recognize that post-crisis financial reforms in general, and the 2013 final rule in particular, impose costs on certain groups of market participants. Since the rule became effective, new estimates regarding compliance burdens and new information about the various effects of the final rule have become available. The passage of time has also enabled an assessment of the value of individual requirements that enable SEC oversight, such as the requirement to report certain quantitative metrics, relative to compliance burdens. This and other information and considerations inform the SEC's economic analysis.
From the outset, we note that this analysis is limited to areas within the scope of the SEC's function as the primary securities markets regulator in the United States. In particular, the SEC's economic analysis is focused on the potential effects of the proposed amendments on SEC registrants, the functioning and efficiency of the securities markets, and capital formation. Specifically, this economic analysis generally concerns entities subject to the 2013 final rule for which the SEC is the primary financial regulatory agency, including SEC-registered broker-dealers, SBSDs, and RIAs.
In the context of this economic analysis, the economic costs and benefits, and the impact of the proposed amendments on efficiency, competition, and capital formation, are considered relative to a baseline that includes the 2013 final rule and recent legislative amendments as applicable and current practices aimed at compliance with these regulations.
To assess the economic impact of the proposed rule, we are using as our baseline the legal and regulatory framework as it exists at the time of this release. Thus, the regulatory baseline for our economic analysis includes section 13 of the BHC Act as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act and the 2013 final rule. Further, our baseline accounts for the fact that since the adoption of the 2013 final rule, the staffs of the Agencies have provided FAQ responses related to the regulatory obligations of banking entities, including SEC-regulated entities that are also banking entities under the 2013 final rule, which likely influenced these entities' means of compliance with the 2013 final rule.
Three major areas of the 2013 final rule—proprietary trading restrictions, covered fund restrictions, and compliance requirements—are relevant to establishing an economic baseline. First, with respect to proprietary trading restrictions, the features of the existing regulatory framework relevant to the baseline of this economic analysis
Second, with respect to the restrictions on covered funds, the features of the existing regulatory framework under the 2013 final rule relevant to the baseline include the definition of the term “covered fund;” restrictions on a banking entity's relationships with covered funds; and restrictions on underwriting, market making, and hedging with covered funds.
Third, with respect to compliance, relevant requirements include the 2013 final rule's compliance program requirements, including those under § __.20 and Appendix B, as well as recordkeeping and reporting of metrics under Appendix A.
The 2013 final rule differentiates banking entities on the basis of certain monetary thresholds, including the size of consolidated trading assets and liabilities of their parent company. More specifically, U.S. banking entities that have, together with affiliates and subsidiaries, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which (on a worldwide consolidated basis) over the previous consecutive four quarters, as measured as of the last day of each of the four prior calendar quarters, equals $10 billion or more are currently subject to reporting requirements of Appendix A of the 2013 final rule. Entities below this threshold do not need to comply with Appendix A. Additionally, banking entities with total consolidated assets of $10 billion or less as reported on December 31 of the previous 2 calendar years that engage in covered activities qualify for the simplified compliance regime, and banking entities that have $50 billion or more in total consolidated assets and banking entities with over $10 billion in consolidated trading assets and liabilities are currently subject to the requirement to adopt an enhanced compliance program pursuant to Appendix B.
In the sections that follow we discuss rule provisions currently in effect, how each proposed amendment changes regulatory requirements, and the anticipated costs and benefits of the proposed amendments.
The SEC-regulated entities directly affected by the proposed amendments include broker-dealers, security-based swap dealers, and investment advisers.
Under the 2013 final rule, some of the largest SEC-regulated broker-dealers are banking entities. Table 1 reports the number, total assets, and holdings of broker-dealers by the broker-dealer's bank affiliation.
While the 3,658 domestic broker-dealers that are not affiliated with holding companies greatly outnumber the 138 banking entity broker-dealers subject to the 2013 final rule, these banking entity broker-dealers dominate non-banking entity broker-dealers in terms of total assets (74% of total broker-dealer assets) and aggregate holdings (72% of total broker-dealer holdings).
Some
The proposed
Importantly, capital and other substantive requirements for SBSDs under Title VII of the Dodd-Frank Act have not yet been adopted. We recognize that firms may choose to move security-based swap trading activity into (or out of) an affiliated bank or an affiliated broker-dealer instead of registering as a standalone SBSD, if bank or broker-dealer capital and other regulatory requirements are less (or more) costly than those that may be imposed on SBSDs under Title VII. As a result, the above figures may overestimate or underestimate the number of SBSDs that are not broker-dealers and that may become SEC-registered entities that would be affected by the proposed amendments. Quantitative cost estimates are provided separately for affected broker-dealers and potential SBSDs.
In this section, we focus on RIAs advising private funds. Using Form ADV data, Table 3 reports the number of RIAs advising private funds by fund type, as those types are defined in Form ADV. Table 4 reports the number and gross assets of private funds advised by RIAs and separately reports these statistics for banking entity RIAs. As can be seen from Table 3, the two largest categories of private funds advised by RIAs are hedge funds and private equity funds.
Banking entity RIAs advise a total of 4,250 private funds with approximately $2 trillion in gross assets. Using Form ADV data, we observe that banking entity RIAs' gross private fund assets under management is concentrated in hedge funds and private equity funds. We estimate on the basis of this data that banking entity RIAs advise 947 hedge funds with approximately $616 billion in gross assets and 1,282 private equity funds with approximately $350 billion in assets. While banking entity RIAs are subject to all of section 13's restrictions, because RIAs do not typically engage in proprietary trading, we preliminarily believe that they will not be impacted by the proposed amendments related to proprietary trading.
Based on SEC filings and public data, we estimate that, as of January 2018, there were approximately 15,500 RICs
The proposal categorizes banking entities into three groups on the basis of the size of their trading activity: (1) Banking entities with significant trading assets and liabilities, (2) banking entities with moderate trading assets and liabilities, and (3) banking entities with limited trading assets and liabilities. Banking entities with significant trading assets and liabilities are defined as those that have, together with affiliates and subsidiaries, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equaling or exceeding $10 billion.
We further refer to SEC-registered broker-dealer, investment adviser, and SBSD affiliates of banking entities with significant trading assets and liabilities as “Group A” entities, to affiliates of banking entities with moderate trading assets and liabilities as “Group B” entities, and to affiliates of banking entities with limited trading assets and liabilities as “Group C” entities.
Under the proposed amendments, Group A entities would be required to comply with a streamlined but comprehensive version of the 2013 final rule's compliance program requirements, as discussed below. Group B entities would be subject to reduced requirements and an even more tailored approach in light of their smaller and less complex trading activities. The burdens are further reduced for Group C entities, for which the proposed rule establishes presumed compliance, which can be rebutted by the Agencies. We discuss the economic effects of each of the substantive amendments on these groups of entities in the sections that follow.
This economic analysis is focused on the expected economic effects of the proposed amendments on SEC registrants. Table 2 in the economic baseline quantifies broker-dealer activity by gross trading assets and liabilities of banking entities they are affiliated with. We estimate that there are approximately 89 broker-dealers affiliated with firms that have less than $10 billion in consolidated trading assets and liabilities (Group B and Group C broker-dealers). Group B and Group C broker-dealers account for approximately 7% of assets and 5% (or 3% on the basis on the alternative measure of holdings) of total bank broker-dealer holdings.
The primary effects of the proposed amendments for SEC registrants are reduced compliance burdens for Group B and Group C entities, as discussed in more detail in later sections. To the extent that the compliance costs of Group B and Group C entities are currently passed along to customers and counterparties, some of the cost reductions for these entities associated with the proposed amendments may flow through to counterparties and clients in the form of reduced transaction costs or a greater willingness to engage in activity, including intermediation that facilitates risk-sharing.
The proposed $10 billion threshold would leave firms with moderate trading assets and liabilities with reduced compliance program requirements and more tailored supervision. The proposed $1 billion threshold would leave firms with limited trading assets and liabilities presumed compliant with all proprietary trading and covered fund activity prohibitions. We note that, from above, Group B and Group C broker-dealers currently account for only 3% to 5% of total bank broker-dealer holdings. To the extent that holdings reflect risk exposure resulting from trading activity, current trading activity by Group B and Group C entities may represent lower risks than the risks posed by covered trading of Group A entities.
We recognize that some Group B and Group C entities that currently exhibit low levels of trading activity because of the costs of compliance may respond to the proposed amendments by increasing their trading assets and liabilities while still remaining under the $10 billion and $1 billion thresholds at the holding company level. Increases in aggregate risk-taking by Group B and Group C entities may be magnified if trading activity becomes more highly correlated among such entities, or dampened if trading activity becomes less correlated among such entities. Since it is difficult to estimate the number of Group B and Group C entities that may increase their risk-taking and the degree to which their trading activity would be correlated, the implications of this effect for aggregate risk-taking and capital market activity are unclear.
Such shifts in risk-taking may have two competing effects. On the one hand, if Group B and Group C entities are able to bear risk at a lower cost than their customers, increased risk-taking could promote secondary market trading activity and capital formation in primary markets, and increase access to capital for issuers. On the other hand, depending on the risk-taking incentives of Group B and Group C firms, increased risk-taking may result in increased moral hazard and market fragility, could exacerbate conflicts of interest between banking entities and their customers, and could ultimately negatively impact issuers and investors. However, we note that the proposed amendments are focused on tailoring the compliance regime based on the amount of covered activity engaged in by each banking entity, and all banking entities would still be subject to the prohibitions related to such covered activities. Thus, the magnitude of increased moral hazard, market fragility, and the severity of conflicts of interest effects may be attenuated.
In response to the proposed amendments, trading activity that was once consolidated within a small number of unaffiliated banking entities may become fragmented among a larger number of unaffiliated banking entities that each “manage down” their trading books under the $10 billion and $1 billion trading asset and liability thresholds to enjoy reduced hedging compliance and documentation requirements and a less costly compliance and reporting regime described in sections V.D.3.c, V.D.3.d, and V.D.3.i. The extent to which banking entities may seek to manage down their trading books will likely depend on the size and complexity of each banking entity's trading activities and organizational structure, along with those of its affiliated entities, as well as forms of potential restructuring and the magnitude of expected compliance savings from such restructuring relative to the cost of restructuring. We anticipate that the incentives to manage the trading book under the $10 billion and $1 billion thresholds may be strongest for those holding companies that are just above the thresholds. Such management of the trading book may reduce the size of trading activity of some banking entities and reduce the number of banking entities subject to more stringent hedging, compliance, and reporting requirements. At the same time, to the degree that the proposed amendments incentivize banking entities to have smaller trading books, they may mitigate moral hazard and reduce market impacts from the failure of a given banking entity.
The 2013 final rule currently imposes compliance burdens that may be particularly significant for smaller market participants. Moreover, such compliance burdens may be passed along to counterparties and customers in the form of higher costs, reduced capital formation, or a reduced willingness to transact. For example, one commenter estimated that the funding cost for an average non-financial firm may have increased by as much as $30 million after the 2013 final
On one hand, as a result of the proposed amendments, Group B and Group C entities might enjoy a competitive advantage relative to similarly situated Group A and Group B entities respectively. As noted, firms that are close to the $10 billion threshold may actively manage their trading book to avoid triggering stricter requirements, and some firms above the threshold may seek to manage down the trading activity to qualify for streamlined treatment under the proposed amendments. As a result, the proposed amendments may result in greater competition between Group B and Group A entities around the $10 billion threshold, and similarly, between Group B and Group C entities around the $1 billion threshold. On the other hand, to the extent that Group B and Group C entities increase risk-taking as they compete with Group A and Group B entities, respectively, investors may demand additional compensation for bearing financial risk. A higher required rate of return and higher cost of capital could therefore offset potential competitive advantages for Group B and Group C entities.
We recognize that cost savings to Group B and Group C entities related to the reduced hedging documentation requirements and compliance requirements described in sections V.D.3.d and V.D.3.i may be partially or fully passed along to clients and counterparties. To the extent that hedging documentation and compliance requirements for Group B and Group C entities are currently resulting in a reduced willingness to make markets or underwrite placements, the proposed amendments may facilitate trading activity and risk-sharing, as well as capital formation and reduced costs of access to capital. Crucially, the proposed amendments do not eliminate substantive prohibitions under the 2013 final rule but create a simplified compliance regime for entities affiliated with firms without significant trading assets and liabilities. Thus, the 2013 final rule's restrictions on proprietary trading and covered funds activities will continue to apply to all affected entities, including Group B and Group C entities.
The Agencies could have taken alternative approaches. For example, the proposed rule could have used other values for thresholds for total consolidated trading assets and liabilities in the definition of entities with significant trading assets and liabilities. As noted in the discussion of the economic baseline, using different thresholds would affect the scope of application of the hedging documentation, compliance program and metrics-reporting requirements by changing the number and size of affected dealers. For instance, using a $1 billion or a $5 billion threshold in a definition of significant trading assets and liabilities would scope a larger number of entities into Group A, as compared to the proposed $10 billion threshold, thereby subjecting a larger share of the dealer and investment adviser industries to six-pillar compliance obligations. However, we continue to recognize that trading activity is heavily concentrated in the right tail of the distribution, and using a lower threshold would not significantly increase the volume of trading assets and liabilities scoped into the Group A regime. For example, Table 2 shows that 65 broker-dealers affiliated with banking entities that have less than $5 billion in consolidated trading assets and liabilities and are subject to section 13 of the BHC Act as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act account for only 2.5% of bank-affiliated broker-dealer assets and between 1.7% and 1% of holdings. Alternatively, 42 broker-dealer affiliates of firms that have less than $1 billion in consolidated trading assets and liabilities and are subject to section 13 of the BHC Act account for only 2% of bank-affiliated broker-dealer assets and 1% of holdings. At the same time, with a lower threshold, more banking entities would face higher compliance burdens and related costs.
The Agencies also could have proposed a percentage-based threshold for determining whether a banking entity has significant trading assets and liabilities. For example, the proposed amendment could have relied exclusively on threshold where banking entities are considered to be entities with significant trading assets and liabilities if the firm's total consolidated trading assets and liabilities are above a certain percentage (for example, 10% or 25%) of the firm's total consolidated assets. Under this alternative, a greater number of entities may benefit from lower compliance costs and a streamlined regime for Group B entities. However, under this approach, even firms in the extreme right tail of the trading asset distribution could be considered without significant trading assets and liabilities if they are also in the extreme right tail of the total assets distribution. Thus, without placing an additional limit on total assets within such regime, entities with the largest trading books may be scoped into the Group B regime if they also have a sufficiently large amount of total consolidated assets, while entities with significantly smaller trading books could be categorized as Group A entities if they have fewer assets overall.
Alternatively, the Agencies could have relied on a threshold based on total assets. However, a threshold based on total assets may not be as meaningful as a threshold based on trading assets and liabilities being proposed here when considered in the context of section 13 of the BHC Act. A threshold based on total assets would scope in entities based merely on their balance sheet size, even though they may have little or no trading activity, notwithstanding the fact that the moral hazard and conflicts of interest that section 13 of the BHC Act are intended to address are more likely to arise out of such trading activity (and not necessarily from the banking entity size, as measured by total consolidated assets). However, it is possible that losses on small trading portfolios can be amplified through their effect on non-trading assets held by a firm. To that extent, a threshold based on total assets may be useful in potentially capturing both direct and indirect losses that originate from trading activity of a holding company.
The Agencies also could have based the thresholds on the level of total revenues from permitted trading activities. To the extent that revenues could be a proxy for the structure of a banking entity's business and the focus of its operations, this alternative may apply more stringent compliance requirements to those entities profiting the most from covered activities. However, revenues from trading activity fluctuate over time, rising during economic booms and deteriorating during crises and liquidity freezes. As a result, under the alternative, a banking entity that is scoped in the regulatory regime during normal times may be scoped out during the time of market stress due to a decrease in the revenues from permitted activities. That is, under such alternative, the weakest compliance regime may be applied to banking entities with the largest trading books in times of acute market stress, when the performance of trading desks is deteriorating and the underlying
Finally, the Agencies could have excluded from the definition of entities with significant trading assets and liabilities those entities that may be affiliated with a firm with over $10 billion in consolidated trading assets and liabilities but that are operated separately and independently from its affiliates and that have total trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) under $10 billion. We do not have data on the number of dealers that are operated “separately and independently” from affiliated entities with significant trading assets and liabilities. However, as shown in Table 5, this alternative could decrease the scope of application of the Group A regime.
This
Under the 2013 final rule, proprietary trading is defined as engaging as principal for the “trading account” of a banking entity.
We recognize the possibility that some market participants may engage in transaction activity that does not trigger a dealer registration requirement. Under the baseline, such activity would be scoped into the “trading account” definition by the short-term prong and the rebuttable presumption by virtue of the fact that most transactions by a dealer are likely to be indicative of short-term intent as noted in the 2013 final rule.
To the extent that the proposed amendments increase (or decrease) the scope of trading activity that falls under the proprietary trading prohibitions of the 2013 final rule, the amendments would increase (or decrease) the economic costs, benefits, and tradeoffs outlined in section V.D.1. However, we preliminarily believe that the largest share of dealing activity subject to SEC oversight is already captured by the registered dealer prong and that the
The Agencies also propose to include a reservation of authority allowing for determination, on a case-by-case basis, with appropriate notice and response procedures, that any purchase or sale of one or more financial instruments by a banking entity for which it is the primary financial regulatory agency either “is” or “is not” for the trading account. While the Agencies recognize that the use of objective factors to define proprietary trading is intended to provide bright lines that simplify compliance, the Agencies also recognize that this approach may, in some circumstances, produce results that are either underinclusive or overinclusive with respect to the definition of proprietary trading. The proposed reservation of authority may add uncertainty for banking entities about whether a particular transaction could be deemed as a proprietary trade by the regulating agency, which may affect the banking entity's decision to engage in transactions that are currently not included in the definition of the trading account. As discussed in section V.B,
The Agencies could have taken the approach of excluding specific trading activities from the scope of the proprietary trading prohibitions. For example, the Agencies could exclude transactions in derivatives on government securities, transactions in foreign sovereign debt and derivatives on foreign sovereign debt, and transactions executed by SEC-registered dealers on behalf of their asset management customers.
The 2013 final rule exempts all trading in domestic government obligations and trading in foreign government obligations under certain conditions; however, derivatives referencing such obligations-including derivatives portfolios that can replicate the payoffs and risks of such government obligations-are not exempted. Therefore, existing requirements reduce the flexibility of banking entities to engage in asset-liability management and treat two groups of financial instruments that have similar risks and payoffs differently. Excluding derivatives transactions on government obligations from the trading account definition could reduce costs to market participants and provide greater flexibility in their asset-liability management. This alternative could also result in increased volume of trading in markets for derivatives on government obligations, such as Treasury futures. We recognize, nonetheless, that derivatives portfolios that reference an obligation, including Treasuries, can be structured to magnify the economic exposure to fluctuations in the price of the reference obligation. Moreover, derivatives transactions involve counterparty credit risk not present in transactions in reference obligations themselves. Since the alternative would exclude all derivatives transactions on government obligations, and not just those that are intended to mitigate risk, this alternative could permit banking entities to increase their exposure to counterparty, interest rate, and liquidity risk.
In addition, the current registered dealer prong does not condition the trading account definition for registered dealers on the length of the holding period. This is because, as noted in the 2013 final rule, positions held by a registered dealer in connection with its dealing activity are generally held for sale to customers upon request or otherwise support the firm's trading activities (
Under this alternative, dealers affiliated with banking entities would be able to amass large trading positions at the “near-term definition” boundary (
We also note that the temporal thresholds necessary to implement such a “short-term” trading alternative would be difficult to quantify and may have to vary by product, asset class, and aggregate market conditions, among other factors. For instance, the markets for large cap equities and investment grade corporate bonds have different structures, types of participants, latency of trading, and liquidity levels. Therefore, an appropriate horizon for “short-term” positions will likely vary across these markets. Similarly, the ability to transact quickly differs under strong macroeconomic conditions and in times of stress. A meaningful implementation of this alternative would likely require calibrating and recalibrating complex thresholds to exempt non-near-term proprietary trading and so could introduce additional uncertainty and increase the compliance burdens on SEC-regulated banking entities.
The definition of “trading desk” is an important component of the implementation of the 2013 final rule in that certain requirements, such as those applicable to the underwriting and market-making exemptions, and the metrics-reporting requirements apply at the level of the trading desk. Under the current requirements, a trading desk is defined as the smallest discrete unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking
At the same time, some market participants have noted that the trading desk designation under the 2013 final rule may be unduly burdensome and costly and may have engendered inefficient fragmentation of trading activity. For example, some market participants report an average of 95 trading desks engaged in permitted activities.
The Agencies are requesting comment on whether the trading desk definition should be amended to refer to a less granular “business unit” or a “unit designed to establish efficient trading for a market sector.” This approach would allow a trading desk to be defined on the basis of the same criteria that are used to establish trading desks for other operational, management, and compliance purposes, which typically depend on the type of trading activity, asset class, product line offered, and individual banking entity structure and internal compliance policies and procedures. For example, the Agencies could define the trading desk as a unit of organization of a banking entity that engages in purchasing or selling of financial instruments for the trading account of the banking entity or an affiliate thereof that is structured by a banking entity to establish efficient trading for a market sector, organized to ensure appropriate setting, monitoring, and review of trading and hedging limits, and characterized by a clearly defined unit of personnel. This would provide banking entities greater flexibility in determining their own optimal organizational structure and allow banking entities organized with various degrees of complexity to reflect their organizational structure in the trading desk definition. This alternative could reduce operational costs from fragmentation of trading activity and compliance program requirements, as well as enable more streamlined metrics reporting.
On the other hand, under this alternative, a banking entity may be able to aggregate impermissible proprietary trading with permissible activity (
Liquidity management serves an important purpose in ensuring banking entities have sufficient resources to meet their short-term operational needs. Under the 2013 final rule, certain activities related to liquidity management are excluded from the scope of the proprietary trading prohibition under some conditions.
The Agencies recognize that the liquidity management exclusion may be narrow and that the trading account definition may scope in routine asset-liability management and commercial-banking related activities that trigger the rebuttable presumption or the market-risk capital prong. Accordingly, the Agencies are proposing to expand the liquidity management exclusion. Specifically, the proposed amendments would broaden the liquidity management exclusion such that it would apply not only to securities, but also to foreign exchange forwards and foreign exchange swaps (as defined in the Commodity Exchange Act), and to physically settled cross-currency swaps.
Under the proposed amendment, SEC-regulated banking entities would face lower burdens and enjoy greater flexibility in currency-risk management as part of their overall liquidity management plans. To the degree that the 2013 final rule may be restricting liquidity-risk management by banking entities, and to the extent that these effects impact their trading activity, the proposed amendment could facilitate more efficient risk management, greater secondary market activity, and more capital formation in primary markets. However, in the absence of other conditions governing reliance on the liquidity management exclusion, this flexibility may also lead to currency derivatives exposures, including potentially very large exposures, being scoped out of the trading account definition and the ensuing substantive prohibitions of the 2013 final rule. In addition, some entities may seek to rely on this exclusion while engaging in speculative currency trading, which may increase their risk-taking and moral hazard and reduce the effectiveness of regulatory oversight. While the proposed amendment broadens the set of instruments that banking entities may use to manage liquidity, the proposed reservation of authority would provide the Agencies with the ability to determine whether a particular purchase or sale of a financial instrument by a banking entity either is or is not for the trading account.
The 2013 final rule excludes from the proprietary trading prohibition certain “clearing activities” by banking entities that are members of clearing agencies, derivatives clearing organizations, or designated financial market utilities. Specifically, such clearing activities are defined to include, among others, any purchase or sale necessary to correct error trades made by, or on behalf of, customers with respect to customer transactions that are cleared, provided the purchase or sale is conducted in accordance with certain regulations, rules, or procedures. However, the current exclusion for error trades is applicable only to clearing members with respect to cleared customer transactions.
The proposed amendments would exclude trading errors and subsequent correcting transactions from the definition of proprietary trading. The
Since correcting
Underwriting and market making are customer-oriented financial services that are essential to capital formation and market liquidity, and the risks and profit sources related to these activities are distinct from those related to impermissible proprietary trading. Therefore, the 2013 final rule contains exemptions for underwriting and market making-related activities.
Under the 2013 final rule, all banking entities with covered activities must satisfy five requirements with respect to their underwriting activities to qualify for the underwriting exemption.
Under the current baseline, all banking entities with covered activities must satisfy six requirements with respect to their market-making activities to qualify for the market-making exemption.
We also note that, under the baseline, an organizational unit or a trading desk of another banking entity that has consolidated trading assets and liabilities of $50 billion or more is generally not considered a client, customer, or counterparty for the purposes of the RENTD requirement.
The Agencies understand that current compliance with the RENTD
While some research suggests the decline in dealer inventories is attributable to the 2013 final rule (
Under the proposal, Group A and Group B entities with covered activities would be presumed compliant with the RENTD requirements of the underwriting and market-making exemptions if the banking entity establishes and implements, maintains, and enforces internally set risk limits. These risk limits would be subject to regulatory review and oversight on an ongoing basis, which would include an assessment of whether the limits are designed not to exceed RENTD. For Group A entities, these limits are required to be established within the entity's compliance program. Under the proposed amendment, Group B entities would not be required to establish a separate compliance program for underwriting and market-making requirements, including the risk limits for RENTD. However, in order to be presumed compliant with the underwriting and market-making exemptions, Group B entities must establish and comply with the RENTD limits. We note that Group B entities seeking to rely on the presumption of compliance would still be required to comply with the RENTD requirements, even though they would not be required to design a specific underwriting or market-making compliance program. Under the proposed amendments, Group C banking entities would be presumed compliant with requirements of subpart B and subpart C of the rule, including with respect to the reliance on the underwriting and market-making exemptions, without reference to their internal RENTD limits. In addition, under the proposal, Group A entities relying on internal risk limits for market-making RENTD requirements must promptly reduce the risk exposure when the risk limit is exceeded.
The proposed amendments may provide SEC-registered banking entities with more flexibility and certainty in conducting permissible underwriting and market making-related activities. The proposed presumption allows the reliance on internally-set risk limits in accordance with a banking entity's risk management function that may already be used to meet other regulatory requirements, such as obligations under the SEC and FINRA capital and liquidity rules,
The proposed regulatory oversight of the internally-set risk limits may result in new compliance burdens for SEC registrants, potentially offsetting the cost-reducing effects of other proposed amendments to the compliance with the underwriting and market-making exemptions. However, if banking entities are permitted to rely on internal risk limits to meet the RENTD requirement, Agency oversight of internal risk limits for the purposes of compliance with the proposed rule may help support the benefits and costs of the substantive prohibitions of section 13 of the BHC Act. Additionally, the costs of the prompt notice requirement for exceeding the risk limits will depend on a given entity's trading activity and on its design of internal risk limits, which are likely to reflect, among other factors, the entity's respective business model, organizational structure, profitability and volume of trading activity. As a result, we cannot estimate these costs with any degree of certainty.
The overall economic effect of these amendments will depend on the amount and profitability of economic activity that currently does not occur because of the uncertainty surrounding the RENTD requirement compared to the potential costs of establishing and maintaining internal risk limits, and uncertainty related to validation that these limits would meet the requirements under the proposed amendments. We do not have data on the volume of trading activity that does not occur because of uncertainty and costs surrounding the RENTD requirement, or data on the profitability of such trading activity for banking entities. To the best of our knowledge, no such data is publicly available.
To the extent that internal risk limits may be designed to exceed the actual RENTD, introducing the proposed presumption may also increase risk-taking by banking entity dealers. As a result, under the proposed amendments, some entities may be able to maintain positions that are larger than RENTD and, thus, increase their risk-taking. This type of activity could increase moral hazard and reduce the economic effects of section 13 of the BHC Act and the implementing rules. However, to
We note that the proposed amendments tailor regulatory relief for smaller banking entities for both the underwriting and market-making exemptions. More specifically, the threshold for the reduced requirements is based on trading assets and liabilities for both exemptions. We also recognize that the nature, profit sources, and risks of underwriting and market-making activities differ. For example, underwriting may involve pricing, book building, and placement of securities with investors, whereas market making centers on intermediation of trading activity.
In that regard, the Agencies could have proposed an approach, under which underwriting and market-making requirements are tailored to banking entities on the basis of different thresholds. For example, the Agencies could have instead relied on the trading assets and liabilities threshold for market-making compliance (as proposed), but applied a different threshold for underwriting compliance, on the basis of the volume or profitability of past underwriting activity. This alternative would have tailored the compliance requirements for SEC-regulated banking entities with respect to underwriting activities. However, the volume and profitability of underwriting activity is highly cyclical and is likely to decline in weak macroeconomic conditions. As a result, under the alternative, SEC-regulated banking entities would face lower compliance obligations with respect to underwriting activity during times of economic stress when covered trading activity related to underwriting may pose the highest risk of loss.
As discussed above, these proposed amendments may reduce the costs of relying on the underwriting and market-making exemptions, which may facilitate the activities related to these exemptions. The evolution in market structure in some asset classes (
Because of the methodological challenges described earlier in this analysis, we cannot quantify potential effects of the 2013 final rule in general, and the RENTD, underwriting, and market-making provisions of the 2013 final rule in particular, on capital formation and market liquidity. We also recognize that these provisions may not be currently affecting all securities markets, asset classes, and products uniformly. If, because of uncertainty and the costs of relying on market-making and hedging exemptions, dealers are limiting their market-making and hedging activity in certain products, the proposed amendments may facilitate market making. Because secondary market liquidity can influence the willingness to invest in primary markets, and access to these markets can enable market participants to mitigate undesirable risk exposures, the amendments may increase trading activity and capital formation in some segments of the market.
While the statute and the 2013 final rule, including as proposed to be amended, prohibit banking entities from engaging in proprietary trading, some trading desks may attempt to use certain elements of the proposed RENTD amendments to circumvent those restrictions. This may reduce the economic benefits and costs of the 2013 final rule outlined in section V.D.1. We continue to recognize that proprietary trading by banking entities may give rise to moral hazard, economic inefficiency because of implicitly subsidized risk-taking, and market fragility, and may increase conflicts of interest between banking entities and their customers. An analysis of the effects of the 2013 final rule in general, and the specific amendments being proposed here in particular, on moral hazard, risk-taking, systemic risk, and conflicts of interest described above, faces the same methodological challenges discussed in section V.D.1. and in this section. In addition, existing qualitative analysis and quantitative estimates of moral hazard, risk-taking incentives resulting from deposit insurance and implicit bailout guarantees, and systemic risk implications of proprietary trading, centers on banking entities that are not SEC registrants.
• A large proportion of the variation in bank market-to-book ratios over time may be due to changes in the value of government guarantees.
• Moral hazard resulting from idiosyncratic and targeted bailouts may make the economy significantly more exposed to financial crises, while moral hazard effects may be limited if bailouts are systemic and broad based.
• Deposit insurance and financial safety nets increased bank risk-taking and measures of systemic fragility in the run-up to the global financial crisis. However, during the crisis itself, deposit insurance reduced bank risk and systemic stability.
• Short-term capital market funding may increase bank fragility.
• Implicit bailout guarantees for the financial sector as a whole are priced in spreads on index put
• Other research used CDS data to measure the value of government bailouts to bondholders and stockholders of large financial firms during the global financial crisis.
Where the proposed amendments increase the scope of permissible activities or decrease the risk of detection of proprietary trading, their impact on informational efficiency stems from a balance of two effects. On the one hand, where banking entities' proprietary trading strategies are based on superior analysis and prediction models, their reduced ability to trade on such information may make securities markets less informationally efficient. While such proprietary trading strategies can be executed by broker-dealers unaffiliated with banking entities and unaffected by the prohibitions on proprietary trading, their ability to do so may be constrained by their limited access to capital and a lack of scale needed to profit from such strategies. On the other hand, if superior information is obtained by an entity from its customer-facing activities and as a result of conflicts of interest, proprietary trading may make customers less willing to transact with banks or participate in securities markets.
The Agencies are requesting comment on the treatment of swaps entered into with a customer in connection with a loan provided to the customer. Specifically, loan-related swaps are transactions between a banking entity and a loan customer that are directly related to the terms of the customer's loan. The Agencies understand that such swaps may be considered financial instruments triggering proprietary trading prohibitions of the 2013 final rule. As a result, a banking entity would need to rely on an applicable exclusion from the definition of proprietary trading or an exemption in the implementing regulations in order for this activity to be permissible.
Accordingly, the Agencies are requesting comment on whether loan-related swaps should be permitted under the market-making exemption if the banking entity stands ready to make a market in both directions whenever a customer makes an appropriate request, but in practice primarily makes a market in the swaps only in one direction. The Agencies are also requesting comment on whether it would be appropriate to exclude loan-related swaps from the definition of proprietary trading for some banking entities or to permit the activity pursuant to an exemption from the prohibition on proprietary trading other than market making.
Addressing the treatment of loan-related swaps may benefit banking entities that are currently unsure as to their ability to engage in loan-related swaps pursuant to the existing market-making exemption. Legal certainty in this space may increase the willingness of banking entities to accommodate customer demand for such loans and increase certainty that such activity would not trigger the proprietary trading prohibition. To the degree that the back-to-back offsetting purchases and sales of derivatives are not immediate, and to the extent that such transactions are not cleared and involve counterparty risk, this may also increase risk-taking by banking entities. To the extent that the proposed guidance was to increase the scope of permissible proprietary trading activity, such activity would implicate the economic tradeoffs of the proprietary trading prohibitions of the 2013 final rule discussed in section V.D.1.
Under the baseline, certain risk-mitigating hedging activities may be exempt from the restriction on proprietary trading under the risk-mitigating hedging exemption. To make use of this exemption, the 2013 final rule requires all banking entities to comply with a comprehensive and multi-faceted set of requirements, including: (1) The establishment and implementation, and maintenance of an internal compliance program; (2) satisfaction of various criteria for hedging activities; and (3) the existence of compensation arrangements for persons performing risk-mitigating hedging activities that are designed not to reward or incentivize prohibited proprietary trading. In addition, certain activities under the hedging exemption are subject to documentation requirements.
Specifically, 2013 final rule requires that a banking entity seeking to rely on the risk-mitigating hedging exemption must establish, implement, maintain, and enforce an internal compliance program that is reasonably designed to ensure compliance with the requirements of the rule. Such a compliance program must include reasonably designed written policies and procedures regarding the positions, techniques, and strategies that may be used for hedging, including documentation indicating what positions, contracts, or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts, or other holdings. The compliance program also must provide for internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures. In addition, the 2013 final rule requires that all banking entities, as part of their compliance program, must conduct analysis, including correlation analysis, and independent testing designed to ensure that the positions, techniques, and strategies that may be used for hedging are designed to reduce or otherwise significantly mitigate and demonstrably reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged.
The 2013 final rule does not require a banking entity to prove correlation mathematically—rather, the nature and extent of the correlation analysis should be dependent on the facts and circumstances of the hedge and the underlying risks targeted. Moreover, if correlation cannot be demonstrated, the analysis needs to state the reason and explain how the proposed hedging position, technique, or strategy is designed to reduce or significantly mitigate risk and how that reduction or mitigation can be demonstrated without correlation.
To qualify for the risk-mitigating hedging exemption, the hedging activity, both at inception and at the time of any adjustment to the hedging activity, must be designed to reduce or otherwise significantly mitigate and demonstrably reduce or significantly mitigate one or more specific identifiable risks.
Finally, the 2013 final rule requires banking entities to document and retain information related to the purchase or sale of hedging instruments that are either (1) established by a trading desk that is different from the trading desk establishing or responsible for the risks being hedged; (2) established by the specific trading desk establishing or responsible for the risks being hedged but that are effected through means not specifically identified in the trading desks written policies and procedures; or (3) established to hedge aggregate positions across two or more trading desks.
As discussed elsewhere in this Supplementary Information, the Agencies recognize that, in some circumstances, it may be difficult to know with sufficient certainty whether a potential hedging activity will continue to demonstrably reduce or significantly mitigate an identifiable risk after it is implemented. Unforeseeable changes in market conditions and other factors could reduce or eliminate the intended risk-mitigating impact of the hedging activity, making it difficult for a banking entity to comply with the continuous requirement that the hedging activity demonstrably reduce or significantly mitigate specific, identifiable risks. In such cases, a banking entity may choose not to enter into a hedge out of concern that it may not be able to effectively comply with the continuing requirement to demonstrate risk mitigation.
We also recognize that SEC-regulated entities may engage in both static and dynamic hedging at the portfolio (and not at the transaction) level and monitor and reevaluate aggregate portfolio risk exposures on an ongoing basis, rather than the risk exposure of individual transactions. Dynamic hedging may be particularly common among dealers with large derivative portfolios, especially when the values of these portfolios are nonlinear functions of the prices of the underlying assets (
As discussed elsewhere in this Supplementary Information, the Agencies recognize that hedging is an essential tool for risk mitigation and can enhance a banking entity's provision of client-facing services, such as market making and underwriting, as well as facilitate financial stability. In recognition of the role that this activity plays as part of a banking entity's overall operations, the Agencies have proposed a number of changes that are intended to streamline and clarify the current exemption for risk-mitigating hedging activities.
The first proposed amendment concerns the “demonstrability” requirement of the risk-mitigating hedging exemption. Specifically, the Agencies propose to eliminate the requirement that the risk-mitigating hedging activity must demonstrably reduce or otherwise significantly mitigate one or more specific identifiable risks at the inception of the hedge. Additionally, the demonstrability requirement would also be removed from the requirement to continually review, monitor, and manage the banking entity's existing hedging activity. We also note that banking entities would continue to be subject to the requirement that the risk-mitigating hedging activity be designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, as well as to the requirement that the hedging activity be subject to continuing review, monitoring and management by the banking entity to confirm that such activity is designed to reduce or otherwise significantly mitigate the specific, identifiable risks that develop over time from the risk-mitigating hedging.
The removal of the demonstrability requirement is expected to benefit banking entity dealers, as it would decrease uncertainty about the ability to rely on the risk-mitigating hedging exemption and may reduce the compliance costs of engaging in permitted hedging activities. While this aspect of the proposal may alleviate compliance burdens related to risk management and potentially facilitate greater trading activity and liquidity provision by bank-affiliated dealers, it could also enable dealers to accumulate large proprietary positions through adjustments (or lack thereof) to otherwise permissible hedging portfolios. Therefore, we recognize that the proposed amendment could increase moral hazard risks related to proprietary trading by allowing dealers to take positions that are economically equivalent to positions they could have taken in the absence of the 2013 final rule.
The second proposed amendment to the risk-mitigating hedging exemption is the removal of the requirement to perform the correlation analysis. The Agencies recognize that a correlation analysis based on returns may be prohibitively complex for some asset classes, and that a correlation coefficient may not always serve as a meaningful or predictive risk metric. While we recognize that, in some instances, correlation analysis of past returns may be helpful in evaluating whether a hedging transaction was effective in offsetting the risks intended to be mitigated, correlation analysis may not be an effective tool for such evaluation in other instances. For example, correlation across assets and asset classes evolves over time and may exhibit jumps at times of idiosyncratic or systematic stress. Additionally, the hedging activity, even if properly designed to reduce risk, may not be practicable if costly delays or compliance complexities result from a requirement to undertake a correlation analysis. Thus, the removal of the correlation analysis requirement may provide dealers with greater flexibility in selecting and executing risk-
The third proposed amendment simplifies the requirements of the risk-mitigating hedging exemption for Group B banking entities (
As discussed elsewhere in this Supplementary Information, the Agencies recognize that banking entities without significant trading assets and liabilities are less likely to engage in large and/or complicated trading activities and hedging strategies. We continue to recognize that compliance with the 2013 final rule may impose disproportionate costs on banking entities without significant trading assets and liabilities. Therefore, the proposed amendment would benefit Group B and Group C entities, as it would reduce the costs of relying on the hedging exemption and, thus, engaging in hedging activities. To the extent that the removal of these requirements may reduce the costs of risk-mitigating hedging activity, Group B and Group C entities may increase their intermediation activity while also growing their trading assets and liabilities.
The fourth proposed amendment reduces documentation requirements for Group A entities. In particular, the proposal removes the documentation requirements for some financial instruments used for hedging. More specifically, the instrument would not be subject to the documentation requirement if: (1) It is identified on a written list of pre-approved financial instruments commonly used by the trading desk for the specific type of hedging activity; and (2) at the time the financial instrument is purchased or sold the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The SEC lacks information or data that would allow us to quantify the magnitude of the expected cost reductions, as the prevalence of hedging activities depends on each registrant's organizational structure, business model, and complexity of risk exposures. However, the SEC preliminarily believes that the flexibility to choose between providing documentation regarding risk-mitigating hedging transactions and establishing hedging limits for pre-approved instruments may be beneficial for Group A entities, as it will allow these entities to tailor their compliance regime to their specific organizational structure and existing policies and procedures. Finally, in section V.B, the Agencies estimate burden reductions per firm from the proposed amendments. The proposed amendments to § __.5(c) will result in ongoing cost savings estimated at $203,191 for SEC-registered broker-dealers.
The proposed hedging amendment eliminates all hedging-specific compliance program requirements including correlation analysis, documentation requirements, and some hedging activity requirements for Group B entities. The proposed amendments eliminate only some of the compliance program requirements for Group A entities and provide a documentation requirement exemption for some hedging activity of these entities. Since the fixed costs of relying on such exemptions may be more significant for entities with smaller trading books, the proposed hedging amendment may permit Group B entities just below the $10 billion threshold to more effectively compete with Group A entities just above the threshold.
The proposed hedging amendments may also impact the volume of hedging activity and capital formation. To the extent that some registrants currently experience significant compliance costs related to the hedging exemption, these costs may constrain the amount of risk-mitigating hedging they currently engage in. The ability to hedge underlying risks at a low cost can facilitate the willingness of SEC-regulated entities to commit capital and take on underlying risk exposures. Because the proposed amendments would reduce costs of relying on the hedging exemption, these entities may become more incentivized to engage in risk-mitigating hedging activity, which may in turn contribute to greater capital formation.
Under the 2013 final rule, a foreign banking entity that has a branch, agency, or subsidiary located in the United States (and is not itself located in the United States) is subject to the
As discussed elsewhere in this Supplementary Information, the Agencies recognize that foreign banking entities seeking to rely on the exemption for trading outside the United States face a complex set of compliance requirements that may result in implementation inefficiencies. In particular, the application of the financing prong may be challenging because of the fungibility of some forms of financing. In addition, the Agencies recognize that satisfying the counterparty prong is burdensome for foreign banking entities and may have led some foreign banking entities to reduce the range of counterparties with which they engage in trading activity.
The proposed amendments remove the financing and counterparty prongs.
Under the proposed rule, financing for the transaction relying on the foreign trading exemption can be provided by U.S. branches or affiliates of foreign banking entities, including SEC-registered dealers. Foreign banking entities may benefit from the proposed amendments and enjoy greater flexibility in financing their transaction activity. However, some of the economic exposure and risks of proprietary trading by foreign banking entities would flow not just to the foreign banking entities, but to U.S.-located entities financing the transactions,
In addition, the proposed amendment removes the counterparty prong and its corresponding clearing and anonymous exchange requirements. Currently, a foreign banking entity may transact with or through U.S. counterparties if the trades are conducted anonymously on an exchange (for trades executed by a counterparty acting as an agent) and cleared and settled through a clearing agency or derivatives clearing organization acting as a central counterparty (for trades executed by a counterparty acting as either an agent or principal). As a result, the proposed amendments would make it easier for foreign banking entities to transact with or through U.S. counterparties. To the extent that foreign banking entities are currently passing along compliance burdens to their U.S. counterparties, or are unwilling to intermediate or engage in certain transactions with or through U.S. counterparties, the proposed amendments may reduce transaction costs for U.S. counterparties and may increase the volume of trading activity between U.S. counterparties and foreign banking entities.
We note that, even when a foreign banking entity engages in proprietary trading through a U.S. dealer, the principal risk of the foreign banking entities' position is consolidated to the foreign banking entity. While such trades expose the counterparty to risks related to the transaction, such risks born by U.S. counterparties likely depend on both the identity of the counterparty and the nature of the instrument and terms of trading position. Moreover, concerns about moral hazard and the volume of risk-taking by U.S. banking entities may be less relevant for foreign banking entities. The current requirement that foreign banking entities transact with U.S. counterparties through unaffiliated dealers steers trading business to unaffiliated U.S. dealers but does not necessarily reduce moral hazard in the U.S. financial system.
The proposed amendments would likely narrow the scope of transaction activity and banking entities to which the substantive prohibitions of the 2013 final rule apply. As a result, the amendments may reduce the effects on efficiency, competition, and capital formation of the implementing rules currently in place. The proposed amendments reflect consideration of the potentially inefficient restructuring undergone by foreign banking entities after the 2013 final rule came into effect and enhanced access to securities markets by U.S. market participants on the one hand,
Allowing foreign banking entities to be financed by U.S.-dealer affiliates and to transact with U.S. counterparties off exchange and without clearing the trades, may reduce costs of non-U.S. banking entities' activity in the United States and with U.S. counterparties. These costs may currently represent barriers to entry for foreign banking entities that contemplate engaging in trading and other transaction activity using a U.S. affiliate's financing and trading with U.S. counterparties off exchange. To that extent, the proposed amendments may provide incentives for foreign banking entities that currently receive financing from non-U.S. affiliates to move financing to U.S. dealer affiliates, and incentives for foreign banking entities that currently transact through or with U.S. counterparties via anonymous exchanges and clearing agencies to
The proposed amendments may increase market entry as they will decrease the need for foreign banking entities to rely only on a narrow set of unaffiliated market intermediaries for the purposes of avoiding the compliance costs associated with the 2013 final rule. Additionally, the proposed amendments may increase operational efficiency of trading activity by foreign banking entities in the United States, which may decrease costs to market participants and may increase the level of market participation by U.S-dealer affiliates of foreign banking entities.
The proposed amendments would also affect competition among banking entities. These amendments may introduce competitive disparities between U.S. and foreign banking entities. Under the proposed amendments, foreign banking entities would enjoy a greater degree of flexibility in financing proprietary trading and transacting through or with U.S. counterparties. At the same time, U.S. banking entities would not be able to engage in proprietary trading and would be subject to the substantive prohibitions of section 13 of the BHC Act. To the extent that banking entities at the holding company level may be able to reorganize and move their business to a foreign jurisdiction, some U.S. banking entity holding companies may exit from the U.S. regulatory regime. However, under sections 4(c)(9) and 4(c)(13) of the Banking Act, domestic entities would have to conduct the majority of their business outside the United States to become eligible for the exemption. In addition, certain changes in control of banks and bank holding companies require supervisory approval. Hence, the feasibility and magnitude of such regulatory arbitrage remain unclear.
To the extent that foreign banking entities currently engage in cleared and anonymous transactions through or with U.S. counterparties because of the existing counterparty prong but would have chosen not to do so otherwise, the proposed approach may reduce the amount of cleared transactions and the trading volume in anonymous markets. This may reduce opportunities for risk-sharing among market participants and increase idiosyncratic counterparty risk born by U.S. and foreign counterparties.
At the same time, the proposed amendments may increase the availability of liquidity and reduce transaction costs for market participants seeking to trade in U.S. securities markets. To the extent that non-U.S. banking entities will face lower costs of transacting with U.S. counterparties, it may become easier for U.S. banking entities or customers to find a transaction counterparty that would be willing to engage in, for instance, hedging transactions. To that extent, U.S. market participants accessing securities markets to hedge financial and commercial risks may increase their hedging activity and assume a more efficient amount of risk. The potential consequences of relocation of non-U.S. banking entity activity to the United States on liquidity and risk sharing would be most concentrated in those asset classes and market segments where activity is most constrained by current requirements.
The regulatory baseline against which we are assessing proposed amendments includes requirements for banking entities with consolidated trading assets and liabilities above $10 billion to record and report certain quantitative measurements for each trading desk engaged in covered trading.
Specifically, the quantitative measurements reported under the baseline were intended to assist banking entities and the SEC in achieving the following: A better understanding of the scope, type, and profile of covered trading activities; identification of covered trading activities that warrant further review or examination by the banking entity to verify compliance with the rule's proprietary trading restrictions; evaluation of whether the covered trading activities of trading desks engaged in permitted activities are consistent with the provisions of the permitted activity exemptions; evaluation of whether the covered trading activities of trading desks that are engaged in permitted trading activities (
Under the regulatory baseline, dealers affiliated with banking entities that have less than $10 billion in consolidated trading assets and liabilities are not subject to the 2013 final rule's metrics reporting and recordkeeping requirements. Group A entities (
Currently, Group A entities affiliated with banking entities that have less than $50 billion in consolidated trading assets and liabilities are required to report metrics for each quarter within 30 days of the end of that quarter. In contrast, Group A entities affiliated with banking entities with total trading assets and liabilities equal to or above $50 billion are required to report metrics more frequently—each month within 10 days of the end of that month.
We understand that the current metrics reporting and recordkeeping requirements may involve large compliance costs. For instance, the
The proposed amendments streamline the metrics reporting and recordkeeping requirements, eliminating or adding particular metrics on the basis of regulatory experience with the data and providing some entities with additional reporting time. Broadly, metrics reporting provides information for regulatory oversight and supervision but presents compliance burdens for registrants. The balance of these effects turns on the value of different metrics in evaluating covered trading activity for compliance with the rule, as well as their usefulness for risk assessment and general supervision. We discuss these effects with respect to each proposed amendment in the sections that follow.
In section V.B, the Agencies estimate that extending the reporting period for banking entities with $50 billion or more in trading assets and liabilities from10 days to 20 days after the end of each calendar month may decrease the initial setup cost by $85,399 and ongoing annual reporting cost by $358,677 for broker-dealers, as well as initial setup cost decrease of up to $100,123 and ongoing reporting costs decrease of up to $420,517 for SBSDs that choose to register with the SEC.
The proposed amendments generate both costs (from new reporting requirements) and savings (from limitations to the scope of certain metrics and reduced analytical burden). To the extent that the costs of compliance with the existing metrics requirements have a significant fixed cost component and may be sunk, the potential cost savings of the proposed amendments may be reduced. The SEC recognizes that while these amendments will reduce the aggregate metrics reporting and recordkeeping burden across all types of banking entities, the allocation of these costs and benefits may differ across banking entity types. For example, one of the proposed amendments replaces the Inventory Turnover and Customer-Facing Trade Ratio metrics with Positions and Transaction Volumes metrics, and limits the scope of these metrics to trading desks engaged in market-making and underwriting activities. Because SEC-registered dealers are routinely engaged in market-making and underwriting activities, we preliminarily expect that a greater share of the costs associated with the Positions and Transaction Volumes metrics, such as the costs associated with tagging intra-company and inter-affiliate transactions for purposes of the Transaction Volumes metric, may fall on SEC-regulated entities, while a greater share of the savings, such as the savings associated with the elimination of this reporting requirement for desks engaged solely in risk-mitigating hedging activities, may be allocated to non-SEC-regulated banking entities.
The SEC preliminarily believes reporters will need to modify existing systems to comply with the proposed amendments.
Although the substance and content of systems associated with reporting transaction-level information to swap data repositories and derivatives counterparties would be different from the substance and content of systems associated with reporting quantitative measurements of covered trading activity, the costs associated with the proposed amendments, like the costs associated with the referenced security-based swap rules, would entail gathering and maintaining transaction-level information, and planning, coding, testing, and installing relevant system modifications.
The primary systems-related costs of approximately $120,000 to $130,000, estimated at the level of the reporter, will come from: (i) Personnel costs associated with preparing the written Narrative Statement for a single reporter that is not already providing this information ($11,000); (ii) costs related to providing data in relation to the Positions and Transaction Volumes metrics that is more granular than is
The SEC further considered how to assess the costs of the proposed rule for SEC-regulated banking entities. The metrics costs are generally estimated at the holding company level for 17 reporters.
We considered an alternative approach to estimating costs of the proposed metrics amendments—specifically, doing so at the trading desk level. We anticipate that individual trading desks and their personnel may not be directly involved in complying with the full scope of the proposed amendments. For example, the Quantitative Measurements Identifying Information and the Narrative Statement must be prepared and reported collectively for all relevant trading desks. We also expect that trading desks within the same holding company could share systems to implement many of the proposed amendments to the quantitative measurements. Thus, a cost estimate at the trading desk level may not be an accurate proxy of the costs of the proposed amendments to SEC-regulated banking entities. Hence, such an analytical approach is likely to overestimate the total cost savings of the proposed amendments to SEC-regulated entities.
The proposed amendments replace the Inventory Aging metric with a Securities Inventory Aging metric and eliminate the Inventory Aging metric for derivatives. In addition, the proposed amendments remove the requirement to establish and report limits on Stressed Value-at-Risk (VaR) at the trading desk level, replace the Customer-Facing Trade Ratio metric with a new Transaction Volumes metric, replace Inventory Turnover with a new Positions metric (reflecting both securities and derivatives positions), streamline valuation of metrics calculations for comparability, limit certain metrics to market-making and underwriting desks, modify instructions for metrics reporting, including with respect to profit and loss attribution, and remove metrics that can be calculated from other reported measurements.
In general, the key economic tradeoff from metrics reporting is between compliance burdens, which may be particularly significant for smaller Group A entities, and the amount and usefulness of information provided for regulatory oversight of the 2013 final rule, as well as for general supervision and oversight. The proposed limitation of certain metrics to market-making and underwriting desks, elimination of the inventory aging metric, and removal of the Stressed VaR risk limit requirements may reduce burdens related to reporting and recordkeeping for Group A entities. As proprietary trading activity is inherently difficult to distinguish from permitted market making, risk-mitigating hedging, or underwriting activity, certain metrics may provide additional information that is useful for regulatory oversight. However, eliminating inventory turnover and Stressed VaR metrics should not reduce the benefits of metrics reporting, as, these metrics do not enable a clear identification of prohibited proprietary trading or exempt market-making, risk-mitigating hedging, or underwriting activities.
The proposed amendments replace the Inventory Turnover metric with the Positions quantitative measurement and replace the Customer-Facing Trade Ratio metric with the Transaction Volumes quantitative measurement. The Inventory Turnover and Customer-Facing Trade Ratio metrics are ratios that measure the turnover of a trading desk's inventory and compare the transactions involving customers and non-customers of the trading desk, respectively. The proposed Positions and Transaction Volumes metrics would provide information about risk exposure and trading activity at a more granular level. Specifically, the proposed rule requires that banking entities provide the relevant Agency with the underlying data used to calculate the ratios for each trading day, rather than providing more aggregated data over 30-, 60-, and 90-day calculation periods. By providing more granular data, the proposed Positions metric, in conjunction with the proposed Transaction Volumes metric, is expected to provide the SEC with the flexibility to calculate inventory turnover ratios and customer-facing trade ratios over any period of time, including a single trading day, allowing the use of the calculation method we find most effective for monitoring and understanding trading activity.
In addition, the new Positions and Transaction Volumes metrics will distinguish between securities and derivatives positions, unlike the Inventory Turnover and Customer-Facing Trade Ratio metrics. The proposed Positions and Transaction Volumes metrics would require a banking entity to separately report the value of securities positions and the value of derivatives positions. While the current Inventory Turnover and Customer-Facing Trade Ratio metrics require banking entities to use different methodologies for valuing securities positions and derivatives positions because of differences between these asset classes, these metrics currently require banking entities to aggregate
In addition to requiring separate reporting of the value of securities positions and the value of derivatives positions, the proposed rule would also streamline valuation method requirements for different product types. We understand that certain valuation methodologies currently required by the Inventory Turnover and the Customer-Facing Trade Ratio metrics may not be otherwise used by banking entities (
Moreover, the valuation methods required under the proposed rule are intended to be more consistent with our understanding of how banking entities value securities and derivatives positions in other contexts, such as internal monitoring or external reporting purposes, which may allow them to leverage existing systems and reduce ongoing costs relatively to the costs of current reporting requirements. While a banking entity may incur one-time costs in modifying how it values certain positions for purposes of metrics reporting, we do not expect such systems costs to be significant, particularly if the banking entity is able to use the systems it currently has in place for purposes of metrics reporting to value positions consistent with the proposed rule.
Notably, the SEC does not anticipate that requiring banking entities to provide more granular data in the Positions and Transaction Volumes metrics will significantly alter the costs associated with the current Inventory Turnover and Customer-Facing Trade Ratio metrics. The Positions and Transaction Volumes metrics are based on the same underlying data regarding the trading activity of a trading desk as the Inventory Turnover and Customer-Facing Trade Ratio metrics, so we expect that banking entities already keep records of these data and have systems in place that collect these data. However, the SEC anticipates that reporting more granular information in the Positions and Transaction Volumes metrics may result in costs of $24,480.
Similar to the Customer-Facing Trade Ratio, the proposed Transaction Volumes metric would require banking entities to identify the value and the number of transactions a trading desk conducts with customers and non-customers. However, the proposed Transaction Volumes metric would add two additional categories of counterparties to capture the value and number of internal transactions a trading desk conducts. These include transactions booked within the same banking entity (intra-company) and those booked with an affiliated banking entity (inter-affiliate). These additional categories of information should facilitate better classification of internal transactions, which may assist the SEC in evaluating whether the trading desk's activities are consistent with the requirements of the exemptions for underwriting or market making-related activity. The SEC estimates that modifying the current requirements of the Customer-Facing Trade Ratio to require SEC-regulated banking entities to further categorize trading desk transactions may impose additional systems costs related to tagging internal transactions and maintaining associated records valued at $21,420.
In addition, we anticipate that the proposed Positions and Transaction Volumes metrics may reduce costs compared to the current reporting requirements by limiting the scope of trading desks that must provide the position- and trade-based data that is currently required by the Inventory Turnover and Customer-Facing Trade Ratio metrics. Under the 2013 final rule, banking entities are required to calculate and report the Inventory Turnover and the Customer-Facing Trade Ratio metrics for all trading desks engaged in covered trading activity. The proposal would limit the scope of trading desks for which a banking entity would be required to calculate and report the Positions and Transaction Volumes metrics to only those trading desks engaged in market making-related activity or underwriting activity. As noted above, we do not expect SEC-regulated banking entities to realize the same amount of cost savings as other banking entities would with respect to this aspect of the proposed rule, since SEC-regulated banking entities are the entities that typically engage in market making-related and underwriting activities.
The proposed amendments require banking entities to provide additional information. Specifically, the proposal requires entities to provide: (1) Desk level qualitative information about the types of financial instruments the desk uses and covered trading activity the desk conducts, and about the legal entities into which the trading desk books trades; (2) a narrative describing changes in calculation methods, trading desk structure, or trading desk strategies; (3) descriptive information about reported metrics, including information uniquely identifying and describing risk measurements and identifying the relationships of these measurements within a trading desk and across trading desks.
As recognized in Appendix A of the 2013 final rule, the effectiveness of particular quantitative measurements may differ depending on the profile of a particular trading desk, including the types of instruments traded and trading activities and strategies.
The Agencies are also proposing to require banking entities to provide a Narrative Statement that describes any changes in calculation methods used, a description of and reasons for changes in the trading desk structure or trading desk strategies, and when any such change occurred. The Narrative Statement must also include any information the banking entity views as
The SEC anticipates that the proposed Trading Desk Information and Narrative Statement may enhance the efficiency of data review by regulators. Having access to both quantitative data and qualitative information for trading desks in each submission may allow the SEC to consider the specifics of each trading desk's activities during the reporting period, which may facilitate our ability to monitor patterns in the quantitative measurements.
We note that all the SEC-regulated entities that currently report Appendix A metrics are also currently providing certain elements of the proposed Trading Desk Information to the SEC. Therefore, we preliminarily believe that the costs of gathering the relevant Trading Desk Information as well as the benefits of this requirement may be de minimis.
The costs associated with preparing the Narrative Statement will depend on the extent to which a banking entity modifies its calculation methods, makes changes to a trading desk's structure or trading strategies, or otherwise has additional information that it views as relevant for assessing the information reported. Preparation of a Narrative Statement is expected to be a more manual process involving a written description of pertinent issues. However, all but one SEC reporter already provides a narrative with every submission. Thus, the proposed Narrative Statement requirement is expected to result in ongoing personnel and monitoring costs of only $1,980.
The Agencies are proposing to require banking entities to report a Risk and Position Limits Information Schedule, a Risk Factor Sensitivities Information Schedule, a Risk Factor Attribution Schedule, a Limit/Sensitivity Cross-Reference Schedule, and a Risk Factor Sensitivity/Attribution Cross-Reference Schedule. This additional information may improve our understanding of how reported limits and risk factors relate to each other for one or more trading desks, both within the same reporting period and across reporting periods. The SEC preliminarily believes that, while these new reporting elements may increase compliance costs for banking entities, the information contained in the reports may allow for more meaningful interpretation of quantitative metrics data.
Banking entities will incur certain initial implementation costs to develop these schedules of information, including costs associated with developing unique identifiers for all limits, risk factor sensitivities, and risk factor or other factor attributions used by the banking entity and brief descriptions of all such limits, sensitivities, and factors. This will include personnel costs to prepare the descriptions and systems costs to collect and maintain the relevant information for each schedule. The SEC estimates initial implementation costs associated with the proposed Quantitative Measurements Identifying Information at $79,560.
The Agencies are proposing to require banking entities to submit the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement in accordance with the XML Schema specified and published on the relevant Agency's website.
Reporting metrics and other information in XML allows data to be
The XML Schema would also incorporate certain validations to help ensure consistent formatting among all reports—in other words, it would help ensure data quality. The validations are restrictions placed on the formatting for each data element so that data is presented comparably. Requiring banking entities to report using the XML Schema may help ensure timely access to the data in a format that is already consistent and comparable for automated machine-processing and analysis. However, these validations are not designed to ensure the underlying accuracy of the data. Any reports provided by banking entities under the proposed requirement would have to comply with these validations that are incorporated within the XML Schema; otherwise the reports would not be considered to have been provided using the XML Schema specified and published on the SEC's website.
Specifying the format in which banking entities must report information may help the Agencies ensure that we receive consistently comparable information in an efficient manner across banking entities. The costs associated with providing XML data lie in the specialized software or services required to make the submission and the time required to map the required data elements to the requisite taxonomy. In addition to enhanced viewing, manipulation, and analysis, the benefits associated with providing XML data lie in the enhanced validation tools that minimize the likelihood that data are reported with errors. Therefore, subsequent reporting periods may require fewer resources, relative to both initial reporting periods and the current reporting process.
We expect that the requirement to submit the Narrative Statement electronically will result in minimal information systems costs, as banking entities already have systems in place to submit information to the SEC electronically. However, the SEC recognizes that, as a result of the proposed amendments, banking entities will be required to establish and implement systems in accordance with the XML Schema that will result in one-time costs
The proposed changes also extend the time to report metrics for different groups of filers. Because processes enabling reporting under tight deadlines may generally be costlier, we anticipate that the amended reporting requirements may marginally reduce compliance costs, particularly for filers with less sophisticated data and trading infrastructure. In addition, the amendments may result in fewer resubmissions by filers. To a limited extent, the proposed amendment may reduce the timeliness of data received from dealers, making supervision less agile. However, the SEC will continue to have access to quantitative metrics and related information through the standard examination and review process and existing recordkeeping requirements.
Under the proposed amendments, Group A entities would incur lower costs of compliance with metrics-reporting requirements. To the extent that these compliance burdens may be significant for some Group A entities, and since Group B entities are not subject to any metrics requirements, smaller Group A entities around the threshold may become more competitive with Group B entities. Since metrics are reported only to the Agencies and are not publicly disseminated, this amendment does not change the scope of information available to investors. As such, we do not anticipate effects on informational efficiency to be significant. To the extent that some Group A entities are currently experiencing significant metrics-reporting costs and partially or fully passing them along to customers in the form of reduced access to capital or higher cost of capital, the proposed amendments may reduce costs of and increase access to capital. However, as estimated cost savings from the proposed amendments are small, we do not anticipate a substantial increase in access to capital as a result of the proposed amendments to metrics reporting requirements.
The Agencies could have taken alternative approaches. First, the Agencies could keep the metrics being reported unchanged but increase or decrease the trading activity thresholds used to determine metrics recordkeeping and reporting by filers and the frequency of such reporting. For instance, the $10 billion trading activity threshold for quarterly reporting could be replaced by the $25 billion threshold. As shown in Table 2, we estimate that this alternative would affect 12 bank-
In addition, the Agencies could have proposed eliminating the VaR requirement. Both VaR and Stressed VaR are based on firm-wide activity, and VaR limits may not be routinely used by banking entities to manage and control risk-taking activities at the desk level. The alternative would remove from Appendix A the requirement for VaR limits because such limits may not be meaningful at the trading desk level. This alternative may reduce the burden of reporting and compliance costs without necessarily reducing the effectiveness of regulatory oversight by the SEC.
The Agencies have also considered eliminating all quantitative metrics recordkeeping and reporting requirements under Appendix A of the 2013 final rule. This alternative would reduce the amount of data produced and transmitted to the Agencies. Appendix A metrics enable regulators to have a more complete picture of risk-taking and profit and loss attribution for supervised entities. However, the metric reporting regime is costly, and banking entities currently subject to the 2013 final rule and SEC oversight are also subject to other compliance and reporting requirements unrelated to the 2013 final rule, as well as the standard examination and review process. It is not clear that the Appendix A metrics are superior to internal quantitative risk measurements or other data (such as metrics in the FOCUS reports) reported by SEC registered broker-dealers in describing risk exposures and profitability of various activities by SEC registrants. Crucially, Appendix A metrics, such as VaR, dealer inventory, transaction volume, and profit and loss attribution, do not delineate a prohibited proprietary trade and a permitted market making, underwriting or hedging trade, particularly when executed in highly illiquid products and times of stress. Moreover, reporters' flexibility in defining the metrics may reduce their comparability. We recognize that while Appendix A metrics do not allow a clear identification of proprietary trading by SEC registrants, they may be used to flag risks and enhance general supervision, as well as demonstrate prudent risk management.
Section 13 of the BHC Act generally prohibits banking entities from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with covered funds, subject to certain exemptions.
As discussed in greater detail below, the primary economic tradeoff posed by the proposed amendments to the covered fund provisions and other potential changes to these provisions on which the Agencies seek comment is the tradeoff between enhanced competition and capital formation in covered funds and the potential moral hazard and related financial risks posed by fund investments. To the extent that the current covered fund provisions limit fund formation, the proposed amendments and other amendments on which the Agencies seek comment could reduce long-term compliance costs and increase revenues for banking entities, and, as a result, increase capital formation. We are currently not aware of any information or data about the extent to which the covered fund provisions of the 2013 final rule are inhibiting capital formation in funds. Therefore, the bulk of the analysis below is necessarily qualitative.
The definition of “covered fund” impacts the scope of the substantive prohibitions on banking entities' acquiring or retaining an ownership interest in, sponsoring, and having certain relationships with covered funds. The covered fund provisions of the 2013 final rule may reduce the ability and incentives of banking entities to bail out affiliated funds to mitigate reputational risk; limit conflicts of interest with clients, customers, and counterparties; and reduce the ability of banking entities to engage in proprietary trading indirectly through funds. The 2013 final rule defines covered funds as issuers that would be investment companies but for section 3(c)(1) or 3(c)(7) of the Investment Company Act and then excludes specific types of entities from the definition. The definition also includes certain commodity pools as well as certain foreign funds, but only with respect to a U.S. banking entity that sponsors or invests in the foreign fund. Funds that rely on the exclusions in sections 3(c)(1) or 3(c)(7) of the Investment Company Act are covered funds unless an exemption from the covered fund definition is available; generally, funds that rely on other exclusions in the Investment Company Act, such as real estate and mortgage funds that rely on the exclusion in section 3(c)(5)(C), are not covered funds under the 2013 final rule.
The broad definition of covered funds above encompasses many different types of vehicles, and the 2013 final rule excludes some of them from the definition of a covered fund.
The Agencies are requesting comment on potential modifications to the covered fund definition. For instance, with respect to the foreign public funds exclusion, the Agencies are requesting comment as to whether to remove the condition that, for a foreign public fund sponsored by a U.S. banking entity, the fund's ownership interests are sold predominantly to persons other than the sponsoring banking entity, affiliates of the issuer and the sponsoring banking entity, and employees and directors of such entities. As another example, the Agencies are requesting comment as to whether to revise the exclusion to focus on the qualification of the fund in foreign jurisdictions and markets as eligible for retail sales, without including requirements related to the manner in which the fund's interests are sold, or to tailor the exclusion's use of the defined term “distribution” to address instances in which a fund's ownership interests generally are sold to retail investors in secondary market transactions, as with foreign exchange-traded funds. The Agencies are also requesting comment on excluding other funds, such as family wealth vehicles, from the scope of the covered fund definition. The Agencies are requesting comment on modifying the loan securitization exclusion to permit limited holdings of debt securities and synthetic instruments in addition to loans. As a final example, the Agencies are requesting comment on revising the covered fund definition to provide an exclusion focused on the characteristics of an entity rather than only whether it would be an investment company but for section 3(c)(1) or 3(c)(7) of the Investment Company Act or would otherwise come within the covered fund base definition.
Broadly, such modifications to the existing covered fund definition and additional exclusions would reduce the number and types of funds that are impacted by the 2013 final rule. Hence, these alternatives may decrease both the economic benefits and the economic costs of the 2013 final rule's covered fund provisions, as discussed further below.
Form ADV data is not always sufficiently granular to allow us to estimate the number of funds and fund advisers affected by the different modifications to the covered fund definition on which the Agencies are seeking comment. However, Table 3 and Table 4 in the economic baseline quantify the number and asset size of private funds advised by banking entity RIAs by the type of private fund they advise, as those fund types are defined in Form ADV. These fund types include hedge funds, private equity funds, real estate funds, securitized asset funds, venture capital funds, liquidity, and other private funds.
The Agencies are requesting comment on whether to tailor the covered funds definition by using a characteristics-based exclusion. For instance, the Agencies are requesting comment on whether the covered fund definition should exclude funds that are not hedge funds or private equity funds, as defined in Form PF. This would exclude other types of funds from the covered fund definition (such as venture capital, real estate, securitized asset, liquidity, and all other private funds, as those terms are defined in Form PF).
Using Form ADV data, we preliminarily estimate that approximately 173 banking entity RIAs advise hedge funds and 90 banking entity RIAs advise private equity funds.
As noted elsewhere in this Supplementary Information, the covered fund provisions of the 2013 final rule may limit the ability of banking entities to engage in trading through covered funds in circumvention of the proprietary trading prohibition, reduce bank incentives to bailout their covered funds, and mitigate conflicts of interest between banking entities and its clients, customers, or counterparties. However, the covered fund definition in the implementing rules is broad, and some have argued that the rules currently in place may limit the ability of banking entities to conduct traditional asset management activities and to promote capital formation. The Agencies recognize that the covered fund provisions of the implementing rules, as currently in effect, may impose significant costs on some entities. The Agencies also understand that the breadth of the covered fund definition requires market participants to review hundreds of thousands of issuers, and potentially more, to determine if the issuers are covered funds as defined in the 2013 final rule. We understand that this has included a review of hundreds of thousands of CUSIPs issued by common types of securitizations for covered fund status.
The potential modifications to the covered fund definition on which the Agencies are seeking comment would reduce further the scope of funds that need to be analyzed for covered fund status or would simplify this analysis and would enable banking entities to own, sponsor, and have relationships with certain groups of funds that are currently defined as a covered fund. Accordingly, these potential modifications may reduce costs of banking entity ownership, sponsorship, and transactions with certain private funds, may promote greater capital formation in, and competition among such funds, and may improve access to capital for issuers of underlying debt or equity. They may also benefit banking entity dealers through higher profits or more underwriting business. Reducing the covered fund restrictions by further tailoring the covered fund definition may encourage more launches of funds that are excluded from the definition, increasing capital formation and, possibly, competition in those types of funds. If competition increases the quality of funds available to investors or reduces the fees they are charged, investors in funds may benefit.
We do not observe the amount of capital formation in different types of covered funds or underlying equity and debt securities that does not occur because of the 2013 final rule. Because of the prolonged and overlapping implementation timeline of various
Under the baseline, as described above, the 2013 final rule provides for market-making and hedging exemptions to the prohibition on proprietary trading. However, the 2013 final rule places tighter restrictions on the amount of underwriting, market making, and hedging a banking entity can engage in when those transactions involve covered funds. For underwriting and market-making transactions in covered funds, if the banking entity sponsors or advises a covered fund, or acts in any of the other capacities specified in § __.11(c)(2) of the 2013 final rule, then any ownership interests acquired or retained by the banking entity and its affiliates in connection with underwriting and market making-related activities for that particular covered fund must be included in the per-fund and aggregate covered fund investment limits in § __.12 of the 2013 final rule and subject to the capital deduction provided in § __.12(d) of the 2013 final rule.
The increased requirements imposed on SEC-registered dealers' transactions in covered funds relative to other securities mean that a dealer may not be able to make markets in a covered fund or may be limited in its ability to do so, even if the dealer may be able to make markets in the underlying securities owned by the covered fund or securities that are otherwise similar to the covered fund. The Agencies' proposed changes would provide banking entities greater flexibility in underwriting and market making in covered fund interests. Specifically, as discussed elsewhere in this Supplementary Information, for a covered fund that the banking entity does not organize or offer pursuant to § __.11(a) or (b) of the 2013 final rule, the proposal would remove the requirement that the banking entity include, for purposes of the aggregate fund limits and capital deduction, the value of any ownership interests of the covered fund acquired or retained in connection with underwriting or market making-related activities. Under the proposed amendments, these limits, as well as the per fund limit, would only apply to a covered fund that the banking entity organizes or offers and in which the banking entity retains an ownership interest pursuant to § __.11(a) or (b) of the 2013 final rule.
The proposed amendment aligns the requirements for underwriting and market making with respect to ownership interests in covered funds that the banking entity does not organize or offer, with requirements for engaging in these activities with respect to other financial instruments. We understand that the 2013 final rule's restrictions on underwriting and making-related activities involving covered funds impose costs on banking entities and may constrain their underwriting and market making in covered funds. Under the proposed amendments, banking entities would be able to engage in potentially profitable market making and underwriting in covered funds they do not organize or offer without the per-fund and aggregate limits and capital deductions. SEC-registered banking entities are expected to benefit from this amendment to the extent they profit from underwriting and market-making activities in such covered funds. In addition, these benefits may, at least partially, flow through to funds and fund investors. Specifically, banking entities may become more willing and able to underwrite and make markets in covered funds, and provide investors with more readily available economic exposure to the returns and risks of certain covered funds.
We recognize that ownership interests in covered funds expose owners to the risks related to covered funds. It is possible that covered fund ownership interests acquired or retained by a banking entity acting as an underwriter or engaged in market making-related activities may lead to losses for banking entities. However, we recognize that the risks of market making or underwriting of covered funds are substantively similar to the risks of market making or underwriting of otherwise comparable securities. Therefore, the same general tradeoffs discussed in section V.D.3.c of this Supplementary Information between potential benefits for capital formation and liquidity and potential costs related to moral hazard and market fragility apply to banking entities' underwriting and market-making activities involving covered funds and other types of securities.
Banking entities are also currently unable to retain ownership interests in covered funds as part of routine risk-mitigating hedging. These restrictions may currently be limiting banking entities' ability to hedge the risks of fund-linked derivatives through shares of covered funds referenced by fund-linked products. The Agencies recognized that, as a result of this approach, banking entities may no longer be able to participate in offering certain customer facilitating products relating to covered funds. The Agencies recognized that increased use of ownership interests in covered funds could result in exposure to greater risk.
The proposal expands the scope of permissible risk-mitigating hedging with covered funds. Specifically, under the proposal, in addition to being able to
The proposal is likely to benefit banking entities and their customers, as well as advisers of covered funds. The proposed amendments increase the ability of banking entities to facilitate customer-facing transactions while hedging their own risk exposure. As a result, this amendment may increase banking entity intermediation and provide customers with easier access to the risks and returns of covered funds. To the degree that banking entities' investments in covered funds to hedge customer-facing transactions may facilitate their engagement in customer-facing trades, customers of banking entities may benefit from greater availability of financial instruments providing exposure to covered funds and related intermediation. Access to covered funds may be particularly valuable when private capital plays an increasingly important role in U.S. capital markets and firm financing.
We also recognize that the proposed amendments may increase risks to banking entities. For instance, when a banking entity enters into a transaction with a customer that provides exposure to the profits and losses of a covered fund to a customer, even when such exposure is hedged, the banking entity may suffer losses if a customer fails to perform and fund investments are illiquid and decline in value. However, such counterparty default risk is present in any principal transaction in illiquid financial instruments, including when facilitating customer trades in the securities in which covered funds invest, as well as in market-making and underwriting activities. We note that, under the proposal, risk-mitigating hedging transactions involving covered funds would be conducted consistent with the requirements of the 2013 final rule, as modified by the proposal, including the requirements with respect to risk-mitigating hedging transactions. For example, such exposures would be subject to required risk limits and policies and procedures and would have to be appropriately monitored and risk managed. Therefore, it is not clear that hedging or customer facilitation in covered funds would pose a greater risk to banking entities than hedging or customer facilitation in similar securities that is permissible under the 2013 final rule.
An alternative would be to provide greater flexibility for underwriting, market making, and risk-mitigating hedging transactions involving covered fund interests. Specifically, the Agencies could consider eliminating the per-fund limit, aggregate fund limit, and capital deduction for a banking entity acting as an underwriter or engaged in market making-related activities with respect to a covered fund that the banking entity organizes and offers. The Agencies also could have proposed amending the 2013 final rule to provide that, in addition to the proposed amendment, banking entities should be permitted to acquire or retain ownership interests in covered funds as risk-mitigating hedging transactions where the acquisition or retention meets the requirements of § __.5 of the 2013 final rule, as modified by the proposal. If the Agencies made all of these changes, this would provide dealers the same level of flexibility in underwriting, making markets in, or hedging with, covered funds as applied to these activities with respect to all other types of financial instruments, including the underlying financial instruments owned by the same covered funds.
Compliance with current rules for covered funds imposes costs on banking entities. To the extent that, under the baseline, such costs prevent dealer subsidiaries of banking entities from making markets in or underwriting certain financial instruments, the alternative would enable them to engage in potentially profitable market making in, underwriting, and hedging with, covered funds. Banking entity dealers could benefit from this alternative, to the extent they profit from underwriting and market-making activities in covered funds and to the extent that investing in covered funds to hedge a banking entity's exposure in transactions such as total return swaps reduce their risk profile.
The benefits of this alternative may also flow through to funds, investors, and customers. Under the alternative, banking entities would enjoy greater flexibility in transacting in covered funds with customers and in hedging banking entities' exposure with covered funds. As a result, banking entities may become more willing and able to underwrite and market products linked to covered funds and to provide customers with an economic interest in the profits and losses of covered funds. This may increase investor access to the returns and risks of private funds, which may be particularly valuable when issuers are increasingly relying on private capital and delaying public offerings. Finally, the increased ability of banking entities to transact in covered funds under the alternative may increase market quality for covered funds that are traded.
We continue to recognize that transactions in covered funds—including transactions with customers, and holdings of ownership interests in covered funds related to underwriting, market making, or hedging activities—necessarily involve the risk of losses. However, the risks of market making, underwriting, or hedging by banking entities of financial instruments underlying the covered fund, or financial instruments or securities that are otherwise similar to covered funds, are substantively similar. Therefore, the same tradeoffs discussed in section V.D.3.c in this
Under the baseline, banking entities are limited in the types of transactions they are able to engage in with covered funds with which they have certain relationships. Banking entities that serve in certain capacities with respect to a covered fund, such as the fund's investment manager, adviser, or sponsor, are prohibited from engaging in
The Agencies request comments on whether the Agencies should amend § __.14 of the 2013 final rule to incorporate the exemptions under section 23A of the FR Act and the Board's Regulation W, such as intraday extensions of credit that facilitate settlement.
These changes would increase banking entities' ability to engage in custody, clearing, and other transactions with their covered funds and benefit banking entities that are currently unable to engage in otherwise profitable or efficient activities with covered funds they own or advise. Moreover, this could enhance operational efficiency and reduce costs incurred by covered funds, which are currently unable to rely on their affiliated banking entity for custody, clearing, and other transactions. Conversely, to the extent that this approach increases transactions between a banking entity and related covered funds, banking entities could incur any risks associated with these transactions, recognizing that the transactions would be subject to the limitations in section 23A of the FR Act and the Board's Regulation W, as well as § __.14(b) of the 2013 final rule and other applicable laws.
Under the 2013 final rule, foreign banking entities can acquire or retain an ownership interest in, or act as sponsor to, a covered fund, so long as those activities and investments occur solely outside the United States, no ownership interest in such fund is offered for sale or sold to a resident of the United States (the “marketing restriction”), and certain other conditions are met. An activity or investment occurs solely outside of the United States if (1) the banking entity is not itself, and is not controlled directly or indirectly by, a banking entity that is located in the United States or established under the laws of the United States or of any state; (2) the banking entity (and relevant personnel) that makes the decision to acquire or retain the ownership interest or act as sponsor to the covered fund is not located in the United States or organized under the laws of the United States or of any state; (3) the investment or sponsorship, including any risk-mitigating hedging transaction related to an ownership interest, is not accounted for as principal by any U.S. branch or affiliate; and (4) no financing is provided, directly or indirectly, by any U.S. branch or affiliate. In addition, the staffs of the Agencies issued FAQs concerning the requirement that no ownership interest in such fund is offered for sale or sold to a resident of the United States.
The proposed amendments remove the financing prong of the foreign funds exemption and codify the FAQs regarding marketing of foreign funds to U.S. residents.
Foreign banking entities may benefit from the proposed amendments and enjoy greater flexibility in financing their covered fund activity. Allowing foreign banking entities to obtain financing of covered fund transactions from U.S.-dealer affiliates may reduce costs of foreign banking entity activity in covered funds. The amendment may decrease the need for foreign banking entities to rely on foreign dealer affiliates solely for the purposes of avoiding the compliance costs and prohibitions of the 2013 final rule. This may increase operational efficiency of covered fund activity by foreign banking entities. To the extent that costs of compliance with the foreign fund exemption may currently represent barriers to entry for foreign banking entities' covered fund activities, the proposed amendment may increase foreign banking entities' sponsorship and financing of covered funds.
The economic exposure and risks of foreign banking entities' covered funds activities may be incurred not just by the foreign banking entities, but by U.S. entities financing the covered fund ownership interests,
Competitive effects of this amendment may differ from the proposed amendment regarding trading activity outside of the United States. Under the proposed amendment to the foreign fund exemption, foreign banking entities will enjoy a greater degree of flexibility and potentially lower costs of financing covered fund transactions outside of the United States. Because the 2013 final rule's exemption for covered funds activities solely outside of the United States is available only to foreign banking entities, the proposed amendments may reduce costs for some foreign banking entities but need not affect the competitive standing of U.S. banking entities relative to foreign banking entities with respect to covered funds activities in the United States.
As discussed elsewhere in this Supplementary Information, staffs of the Agencies have responded to questions raised regarding the potential treatment of RICs as banking entities as a result of a sponsor's seed investment, as well as issues related to FPFs and foreign excluded funds. The Agencies are continuing to consider the issues raised by the interaction between the 2013 final rule's definitions of the terms “banking entity” and “covered fund,” including the issues addressed by the Agencies' staffs and the Federal banking agencies discussed above. Accordingly, the Agencies have made clear that nothing in the proposal would modify the application of the staffs' FAQs discussed above, and the Agencies will not treat RICs or FPFs that meet the conditions included in the applicable staff FAQs as banking entities or attribute their activities and investments to the banking entity that sponsors the fund or otherwise may control the fund under the circumstances set forth in the FAQs. In addition, to accommodate the pendency of the proposal, for an additional period of one year until July 21, 2019, the Agencies will not treat qualifying foreign excluded funds that meet the conditions included in the policy statement discussed above as banking entities or attribute their activities and investments to the banking entity that sponsors the fund or otherwise may control the fund under the circumstances set forth in the policy statement. This section focuses on the seeding of RICs, because they are registered with the SEC (and applies to BDCs as well, which are regulated by the SEC). To the extent that the same considerations generally apply to the seeding of FPFs, the analysis below may be relevant for the seeding of these funds as well.
The FAQ issued by the staffs related to seeding RICs and FPFs observed that the preamble to the 2013 final rule recognized that a banking entity may own a significant portion of the shares of a RIC or FPF during a brief period during which the banking entity is testing the fund's investment strategy, establishing a track record of the fund's performance for marketing purposes, and attempting to distribute the fund's shares. The FAQ recognizes that the length of a seeding period can vary and therefore provides an example of 3 years, the maximum period of time that could be permitted under certain conditions for seeding a covered fund under the 2013 final rule, without setting any maximum prescribed period for a RIC or FPF seeding period. The Agencies are seeking comment on whether this guidance has been effective, including questions as to whether the Agencies should specify a maximum period of time for a seeding period or, conversely, whether the current approach of not prescribing a fixed period of time for a seeding period is more effective in providing flexibility for funds that may need more time to develop a track record without having to specify a particular time period that will be appropriate for all funds.
The SEC understands that RICs (and FPFs) commonly require some time to establish a performance track necessary to market the fund effectively to third-party investors. Some funds will need a 3-year performance track record, and sometimes longer, to be distributed through certain intermediaries or to attract sufficient investor interest. For example, the SEC understands that some funds might need a 5-year track record to be distributed effectively.
On the one hand, providing a fixed period of time beyond which a seeding period for a RIC cannot extend would provide banking entities with greater certainty, which may incentivize banking entities to form new funds. On the other hand, the current approach of not prescribing a fixed period of time for a seeding period for a RIC may provide flexibility for funds that need more time to develop a track record. This approach would recognize that banking entities may be able to quickly reduce a seed investment in some RICs but not in others. However, the lack of certainty about the length of permissible seeding period could disincentivize a banking entity from sponsoring a RIC.
Another potential approach, on which the Agencies seek comment, would be to specify a fixed period of time for a seeding period while also permitting a banking entity to hold an investment beyond this fixed period if the banking entity complies with additional conditions, such as documentation of the business need for the sponsor's continued investment. This may provide benefits by providing more certainty to banking entities, while providing for the ability to exceed a fixed seeding period in appropriate circumstances.
In addition, longer seeding periods for RICs and FPFs extend the period of time during which a banking entity may be subject to the risks associated with the seed investment. We note, however, that RICs are subject to all of the requirements under the Investment Company Act, and the exclusion for FPFs is designed to identify foreign funds that are sufficiently similar to RICs such that it is appropriate to exclude these foreign funds from the covered fund definition. Therefore, although section 13 and the 2013 final rule under certain conditions permit a seeding period of up to 3 years for covered funds (which are not subject to substantive SEC regulation and are the target of section 13's restrictions), longer seeding periods for RICs and FPFs may not raise the same concerns.
The 2013 final rule emphasized the importance of a strong compliance program and sought to tailor the compliance program to the size of banking entities and the size of their trading activity. The Agencies believed it was necessary to balance compliance burdens posed on smaller banking entities with specificity and rigor necessary for large and complex banking organizations facing high compliance risks. As a result, the current compliance regime is progressively
Under the 2013 final rule, all banking entities with covered activities must develop and maintain a compliance program that is reasonably designed to ensure and monitor compliance with section 13 of the BHC Act and the implementing regulations. The terms, scope, and detail of the compliance program depend on the types, size, scope, and complexity of activities and business structure of the banking entity.
All other banking entities with covered activities are, at a minimum, required to implement a six-pillar compliance program. The six pillars include: (1) Written policies and procedures reasonably designed to document, describe, monitor and limit proprietary trading and covered fund activities and investments for compliance; (2) a system of internal controls reasonably designed to monitor compliance; (3) a management framework that clearly delineates responsibility and accountability for compliance, including management review of trading limits, strategies, hedging activities, investments, and incentive compensation; (4) independent testing and audit of the effectiveness of the compliance program; (5) training for personnel to effectively implement and enforce the compliance program; and (6) recordkeeping sufficient to demonstrate compliance.
In addition, under the 2013 final rule, banking entities with covered activities that do not qualify as those with modest activity (total consolidated assets in excess of $10 billion) and that either are subject to the reporting requirements of Appendix A or have more than $50 billion in gross consolidated total assets are required to comply with the enhanced minimum standards for compliance programs that are specified in Appendix B of the 2013 final rule.
As described in greater detail elsewhere in the Supplementary Information, Appendix B requires the compliance program to (1) be reasonably designed to supervise the permitted trading and covered fund activities and investments, identify and monitor the risks of those activities and potential areas of noncompliance, and prevent prohibited activities and investments; (2) establish and enforce appropriate limits on the covered activities and investments, including limits on the size, scope, complexity, and risks of the individual activities or investments consistent with the requirements of section 13 of the BHC Act and the 2013 final rule; (3) subject the compliance program to periodic independent review and testing and ensure the entity's internal audit, compliance, and internal control functions are effective and independent; (4) make senior management and others accountable for the effective implementation of the compliance program, and ensure that the chief executive officer and board of directors review the program; and (5) facilitate supervision and examination by the Agencies.
Additionally, under the 2013 final rule, any banking entity that has more than $10 billion in total consolidated assets as reported in the previous 2 calendar years shall maintain additional records in relation to covered funds. In particular, a banking entity must document the exclusions or exemptions relied on by each fund sponsored by the banking entity (including all subsidiaries and affiliates) in determining that such fund is not a covered fund, including documentation that supports such determination; for each seeding vehicle that will become a registered investment company or SEC-regulated business development company, a written plan documenting the banking entity's determination that the seeding vehicle will become a registered investment company or SEC-regulated business development company, the period of time during which the vehicle will operate as a seeding vehicle, and the banking entity's plan to market the vehicle to third-party investors and convert it into a registered investment company or SEC-regulated business development company within the time period specified.
The Agencies recognize that the scope and breadth of the compliance obligations impose significant costs on banking entities, which may be particularly impactful for smaller entities. For example, some commenters estimate that banking entities may have added as many as 2,500 pages of policies, procedures, mandates, and controls per institution for the purposes of compliance with the 2013 final rule, which need to be monitored and updated on an ongoing basis.
The current compliance regime and related burdens may reduce the profitability of covered activities by dealers and investment advisers affiliated with banking entities and may be passed along to customers or clients in the form of reduced provision of services or higher service costs. Moreover, the Agencies recognize that the extensive compliance program under the 2013 final rule may detract resources of banking entities and their compliance departments and supervisors from other routine compliance matters, risk management, and supervision. Finally, prescriptive compliance requirements may not optimally reflect the organizational structures, governance mechanisms, or risk management practices of complex, innovative, and global banking entities.
The proposed amendments are expected to lower compliance burdens in two ways. First, the proposed amendments increase flexibility in complying with the 2013 final rule for banking entities without significant trading assets and liabilities, which may reduce compliance costs for these entities. Second, the proposed amendments streamline the compliance program for large banking entities. To the extent that current requirements are duplicative and maintaining both an enhanced compliance program and regular compliance systems is
First, Group C entities would be subject to presumed compliance with proprietary trading and covered fund prohibitions. Specifically, the rebuttable presumption of compliance would apply to all holding companies with less than $1 billion in combined total of consolidated trading assets and trading liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States). We preliminarily estimate that approximately 42 broker-dealers would be able to avail themselves of the rebuttable presumption and would not have to apply the 2013 final rule's compliance program requirements. The presumed compliance standard proposed for Group C entities may benefit entities with very low levels of trading activity by providing additional compliance flexibility. While this may increase the risks of non-compliance, the proposed amendments do not waive the proprietary trading and covered fund prohibitions of the 2013 final rule for such entities.
Second, the threshold for a simplified compliance program would be based on a banking entity's consolidated trading assets and liabilities instead of its total assets. The Agencies recognize that existing compliance program requirements may burden entities that engage in little covered trading activity but have larger total assets. The proposed amendment may reduce costs for banking entities that have more than $10 billion in total assets but do not have significant trading activity. Since the volume of consolidated trading assets and liabilities is likely less than the size of the firm's balance sheet, this amendment would scope in more holding companies—and consequently SEC-registered dealers and investment advisers affiliated with them—into the simplified compliance program regime.
Third, under the proposed amendments covered fund recordkeeping requirements apply to banking entities with significant trading assets and liabilities, rather than to banking entities with over $10 billion in total assets. As discussed above, the Agencies expect that the covered funds activities of banking entities without significant trading assets and liabilities may generally be smaller in scale and less complex than those of banking entities with significant trading assets and liabilities. Thus, the value of additional documentation requirements for banking entities without significant trading assets and liabilities may be lower. The proposal reflects these considerations and may reduce the costs associated with these covered funds recordkeeping requirements by reducing the number of banking entities subject to these requirements.
Fourth, with an exception for the CEO attestation, the requirements in Appendix B of the 2013 final rule would be removed. The Agencies understand that compliance with Appendix B required entities to develop and administer an enhanced compliance program that may not be tailored to the business model or risks of specific institutions. Further, some banking entities have established as many as 500 controls related to Appendix B obligations, some of which may be duplicating existing policies and procedures designed as part of prudential safety and soundness.
Finally, the proposed amendment would require all Group A and Group B entities to comply with the CEO attestation requirement. Under the 2013 final rule, banking entities with $50 billion or more in total consolidated assets, banking entities with over $10 billion in consolidated trading assets and liabilities, and those banking entities that an Agency has notified in writing are subject to the CEO attestation requirement.
As an alternative, the Agencies could have proposed amending the 2013 final rule by requiring CEO attestations for all Group A entities only if they have over $50 billion in total assets; removing the CEO attestation requirement; or allowing other senior officers, such as the chief compliance officer (CCO), to provide the requisite attestation for some or all affected banking entities. The Agencies recognize that the CEO attestation process is costly and that some banking entities may spend more than 1,700 hours on the CEO attestation process and that the elimination of this requirement may reduce time dedicated towards the compliance program by as much as 10%.
The Agencies also recognize that CEO attestation may be costly for foreign banking entities. For example, one foreign firm reported that it organizes and manages a global controls sub-certification process that takes 6 months to complete and involves over 400 staff (including over 260 outside the United States) in order for the CEO to sign and deliver the annual attestation.
As can be seen from section V.B, the Agencies do not estimate any recordkeeping or reporting burden reductions related to compliance requirements in § __.20(b) of the final rule. The proposed removal of Appendix B requirements will result in ongoing annual cost savings estimated as $8,098,200 for registered broker-dealers and as up to $2,753,388 for entities that may choose to register as SBSDs.
Under the proposed amendments, both Group A and Group B entities will enjoy reduced compliance program requirements and Group C will be presumed compliant with prohibitions of sections B and C of the proposed rule. To the extent that compliance program requirements for Group B entities are less costly, Group A entities close to the threshold may choose to manage down their trading book such that they would qualify for the simplified compliance program, resulting in more competition among entities that are close to the threshold. Similarly, the proposed amendment may incentivize Group B entities close to the threshold to rebalance their trading book and qualify for the presumed compliance treatment of Group C entities. Such management of the trading book may reduce the risk of each individual banking entity and may decrease moral hazard addressed by the 2013 final rule. We note that entities are likely to weigh potential cost savings related to lighter compliance requirements for Group B and Group C entities against the costs of reducing trading activity below the $10 billion and $1 billion thresholds. Therefore, this competition effect may be particularly significant for Group A entities that are close to the $10 billion threshold and for Group B entities that are close to the $1 billion threshold.
Since the compliance requirements do not impact the scope of information available to investors, we do not anticipate effects on informational efficiency to be significant. To the extent that some dealers are experiencing large compliance costs and partially or fully passing them along to customers in the form of reduced access to capital or higher cost of capital, the amendment may reduce costs of and increase access to capital.
The SEC is requesting comment regarding the economic analysis set forth here. To the extent possible, the SEC requests that market participants and other commenters provide supporting data and analysis with respect to the benefits, costs, and effects on competition, efficiency, and capital formation of adopting the proposed amendments or any reasonable alternatives. In addition, the SEC asks commenters to consider the following questions:
Banks, Banking, Compensation, Credit, Derivatives, Government securities, Insurance, Investments, National banks, Penalties, Reporting and recordkeeping requirements, Risk, Risk retention, Securities, Trusts and trustees.
Administrative practice and procedure, Banks, Banking, Conflict of interests, Credit, Foreign banking, Government securities, Holding companies, Insurance, Insurance companies, Investments, Penalties, Reporting and recordkeeping requirements, Securities, State nonmember banks, State savings associations, Trusts and trustees
Banks, Banking, Capital, Compensation, Conflicts of interest, Credit, Derivatives, Government securities, Insurance, Insurance companies, Investments, Penalties, Reporting and recordkeeping requirements, Risk, Risk retention, Securities, Trusts and trustees
Banks, Banking, Compensation, Credit, Derivatives, Federal branches and agencies, Federal savings associations, Government securities, Hedge funds, Insurance, Investments, National banks, Penalties, Proprietary trading, Reporting and recordkeeping requirements, Risk, Risk retention, Securities, Swap dealers, Trusts and trustees, Volcker rule.
Banks, Brokers, Dealers, Investment advisers, Recordkeeping, Reporting, Securities.
For the reasons stated in the Common Preamble, the Office of the Comptroller of the Currency proposes to amend chapter I of Title 12, Code of Federal Regulations as follows:
7 U.S.C. 27
Unless otherwise specified, for purposes of this part:
(a)
(b)
(c)
(d)
(i) Any insured depository institution;
(ii) Any company that controls an insured depository institution;
(iii) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(iv) Any affiliate or subsidiary of any entity described in paragraphs (d)(1)(i), (ii), or (iii) of this section.
(2) Banking entity does not include:
(i) A covered fund that is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section;
(ii) A portfolio company held under the authority contained in section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H), (I)), or any portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), so long as the portfolio company or portfolio concern is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section; or
(iii) The FDIC acting in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(e)
(f)
(g)
(h)
(i)
(i) Any swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));
(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for deferred shipment or delivery that is intended to be physically settled;
(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25));
(iv) Any agreement, contract, or transaction in foreign currency described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(C)(i));
(v) Any agreement, contract, or transaction in a commodity other than foreign currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
(vi) Any transaction authorized under section 19 of the Commodity Exchange Act (7 U.S.C. 23(a) or (b));
(2) A derivative does not include:
(i) Any consumer, commercial, or other agreement, contract, or transaction that the CFTC and SEC have further defined by joint regulation, interpretation, guidance, or other action as not within the definition of swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)); or
(ii) Any identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(1) The banking entity has, together with its affiliates and subsidiaries on a worldwide consolidated basis, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1,000,000,000; and
(2) The OCC has not determined pursuant to § 44.20(g) or (h) of this part that the banking entity should not be treated as having limited trading assets and liabilities.
(u)
(v)
(w)
(x)
(y)
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)
(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10,000,000,000; or
(ii) The OCC has determined pursuant to § 44.20(h) of this part that the banking entity should be treated as having significant trading assets and liabilities.
(2) With respect to a banking entity other than a banking entity described in paragraph (3), trading assets and liabilities for purposes of this paragraph (ff) means trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (ff) means the trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
(ii) For purposes of paragraph (ff)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(gg)
(hh)
(ii)
(jj)
The revisions and additions read as follows:
(b)
(1)(i) Purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule; or
(ii) With respect to a banking entity that is not, and is not controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or any State, purchase or sell one or more financial instruments that are subject to capital requirements under a market risk framework established by the home-country supervisor that is consistent with the market risk framework published by the Basel Committee on Banking Supervision, as amended from time to time.
(2) Purchase or sell one or more financial instruments for any purpose, if the banking entity:
(i) Is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or
(ii) Is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business; or
(3) Purchase or sell one or more financial instruments, with respect to a financial instrument that is recorded at fair value on a recurring basis under applicable accounting standards.
(c)
(ii) If the sum of the absolute values of the daily net gain and loss figures determined in accordance with paragraph (c)(1)(i) of this section for the preceding 90-calendar-day period does not exceed $25 million, the activities of the trading desk shall be presumed to be in compliance with the prohibition in paragraph (a) of this section.
(2) The OCC may rebut the presumption of compliance in paragraph (c)(1)(ii) of this section by providing written notice to the banking entity that the OCC has determined that one or more of the banking entity's activities violates the prohibitions under subpart B.
(3) If a trading desk operating pursuant to paragraph (c)(1)(ii) of this section exceeds the $25 million threshold in that paragraph at any point, the banking entity shall, in accordance with any policies and procedures adopted by the OCC:
(i) Promptly notify the OCC;
(ii) Demonstrate that the trading desk's purchases and sales of financial instruments comply with subpart B; and
(iii) Demonstrate, with respect to the trading desk, how the banking entity will maintain compliance with subpart B on an ongoing basis.
(e) * * *
(3) Any purchase or sale of a security, foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or physically-settled cross-currency swap, by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity that, with respect to such financial instruments:
(i) Specifically contemplates and authorizes the particular financial instruments to be used for liquidity management purposes, the amount, types, and risks of these financial instruments that are consistent with liquidity management, and the liquidity circumstances in which the particular financial instruments may or must be used;
(ii) Requires that any purchase or sale of financial instruments contemplated and authorized by the plan be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for liquidity management purposes be highly liquid and limited to financial instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements;
(iv) Limits any financial instruments purchased or sold for liquidity management purposes, together with any other instruments purchased or sold for such purposes, to an amount that is consistent with the banking entity's near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan;
(v) Includes written policies and procedures, internal controls, analysis, and independent testing to ensure that the purchase and sale of financial instruments that are not permitted under §§ 44.6(a) or (b) of this subpart are for the purpose of liquidity management and in accordance with the liquidity management plan described in paragraph (e)(3) of this section; and
(vi) Is consistent with the OCC's supervisory requirements, guidance, and expectations regarding liquidity management;
(10) Any purchase (or sale) of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or excluded activity or is a subsequent transaction to correct such an error, and the erroneously purchased (or sold) financial instrument is promptly transferred to a separately-managed trade error account for disposition.
(f) * * *
(5)
(g)
(2)
(ii)
(B) Failure to respond within 30 days or such other time period as may be specified by the OCC shall constitute a waiver of any objections to the OCC's determination.
(iii) After the close of banking entity's response period, the OCC will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the OCC's determination that the purchase or sale of one or more financial instruments is for the trading account. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
The revisions and additions read as follows:
(a) * * *
(2)
(i) The banking entity is acting as an underwriter for a distribution of securities and the trading desk's underwriting position is related to such distribution;
(ii) (A) The amount and type of the securities in the trading desk's underwriting position are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant type of security, and
(B) Reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (a) of this section, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing:
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
(B) Limits for each trading desk, in accordance with paragraph (a)(8)(i) of this section;
(C) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(D) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk's limit(s), and independent review of such demonstrable analysis and approval;
(iv) The compensation arrangements of persons performing the activities described in this paragraph (a) are designed not to reward or incentivize prohibited proprietary trading; and
(v) The banking entity is licensed or registered to engage in the activity described in this paragraph (a) in accordance with applicable law.
(8)
(B) The presumption described in paragraph (8)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's underwriting activities, on the:
(
(
(
(ii)
(iii)
(iv)
(b) * * *
(2)
(i) The trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout
(ii) The trading desk's market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, based on the liquidity, maturity, and depth of the market for the relevant types of financial instrument(s).
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (b) of this section, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with paragraph (b)(2)(i) of this section;
(B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C) of this section; the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance with paragraph (b)(6)(i) of this section;
(D) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(E) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis that the basis for any temporary or permanent increase to a trading desk's limit(s) is consistent with the requirements of this paragraph (b), and independent review of such demonstrable analysis and approval;
(iv) In the case of a banking entity with significant trading assets and liabilities, to the extent that any limit identified pursuant to paragraph (b)(2)(iii)(C) of this section is exceeded, the trading desk takes action to bring the trading desk into compliance with the limits as promptly as possible after the limit is exceeded;
(v) The compensation arrangements of persons performing the activities described in this paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in activity described in this paragraph (b) in accordance with applicable law.
(3) * * *
(i) A trading desk or other organizational unit of another banking entity is not a client, customer, or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more as measured in accordance with the methodology described in definition of “significant trading assets and liabilities” contained in § 44.2 of this part, unless:
(6)
(i)
(A) A banking entity shall be presumed to meet the requirements of paragraph (b)(2)(ii) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits described in paragraph (b)(6)(i)(B) and does not exceed such limits.
(B) The presumption described in paragraph (6)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's market making-related activities, on the:
(
(
(
(
(ii)
(iii)
(iv)
(b)
(1) The risk-mitigating hedging activities of a banking entity that has significant trading assets and liabilities are permitted under paragraph (a) of this section only if:
(i) The banking entity has established and implements, maintains and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures regarding the positions, techniques and strategies that may be used for hedging, including documentation indicating what positions, contracts or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts or other holdings;
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(C) The conduct of analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance with the written policies, procedures, and
(B) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review, monitoring and management by the banking entity that:
(
(
(
(iii) The compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that does not have significant trading assets and liabilities are permitted under paragraph (a) of this section only if the risk-mitigating hedging activity:
(i) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof; and
(ii) Is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(2) of this section and is not prohibited proprietary trading.
(c) * * * (1) A banking entity that has significant trading assets and liabilities must comply with the requirements of paragraphs (c)(2) and (3) of this section, unless the requirements of paragraph (c)(4) of this section are met, with respect to any purchase or sale of financial instruments made in reliance on this section for risk-mitigating hedging purposes that is:
(4) The requirements of paragraphs (c)(2) and (3) of this section do not apply to the purchase or sale of a financial instrument described in paragraph (c)(1) of this section if:
(i) The financial instrument purchased or sold is identified on a written list of pre-approved financial instruments that are commonly used by the trading desk for the specific type of hedging activity for which the financial instrument is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The hedging limits shall be appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken by the trading desk;
(B) Financial instruments purchased and sold for hedging activities by the trading desk; and
(C) Levels and duration of the risk exposures being hedged.
(e) * * *
(3) A purchase or sale by a banking entity is permitted for purposes of this paragraph (e) if:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(c)
(1) Those activities are conducted in accordance with the requirements of § 44.4(a) or § 44.4(b) of subpart B, respectively; and
(2) With respect to any banking entity (or any affiliate thereof) that: Acts as a sponsor, investment adviser or commodity trading advisor to a particular covered fund or otherwise acquires and retains an ownership interest in such covered fund in reliance on paragraph (a) of this section; or acquires and retains an ownership interest in such covered fund and is
(a)
(i) A compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
(2)
(i) The banking entity has established and implements, maintains and enforces an internal compliance program in accordance with subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures; and
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(ii) The acquisition or retention of the ownership interest:
(A) Is made in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedge, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising:
(
(
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section; and
(D) Is subject to continuing review, monitoring and management by the banking entity.
(iii) With respect to risk-mitigating hedging activity conducted pursuant to paragraph (a)(1)(i), the compensation arrangement relates solely to the covered fund in which the banking entity or any affiliate has acquired an ownership interest pursuant to paragraph (a)(1)(i) and such compensation arrangement provides that any losses incurred by the banking entity on such ownership interest will be offset by corresponding decreases in amounts payable under such compensation arrangement.
(b) * * *
(3) An ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of paragraph (b)(1)(iii) of this section only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. If the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of this paragraph (b)(3) to participate in any offer or sale by the covered fund of ownership interests in the covered fund.
(a) * * *
(2) * * *
(ii) * * *
(B) The chief executive officer (or equivalent officer) of the banking entity certifies in writing annually no later than March 31 to the OCC (with a duty to update the certification if the information in the certification materially changes) that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and
The revisions read as follows:
(a)
(b)
(c)
(1) The CEO of a banking entity described in paragraph (2) must, based on a review by the CEO of the banking entity, attest in writing to the OCC, each year no later than March 31, that the banking entity has in place processes
(2) The requirements of paragraph (c)(1) apply to a banking entity if:
(i) The banking entity does not have limited trading assets and liabilities; or
(ii) The OCC notifies the banking entity in writing that it must satisfy the requirements contained in paragraph (c)(1).
(d)
(i) The banking entity has significant trading assets and liabilities; or
(ii) The OCC notifies the banking entity in writing that it must satisfy the reporting requirements contained in the Appendix.
(2) Frequency of reporting: Unless the OCC notifies the banking entity in writing that it must report on a different basis, a banking entity with $50 billion or more in trading assets and liabilities (as calculated in accordance with the methodology described in the definition of “significant trading assets and liabilities” contained in § 44.2 of this part of this part) shall report the information required by the Appendix for each calendar month within 20 days of the end of each calendar month. Any other banking entity subject to the Appendix shall report the information required by the Appendix for each calendar quarter within 30 days of the end of that calendar quarter unless the OCC notifies the banking entity in writing that it must report on a different basis.
(e)
(f) * * *
(2)
(g)
(1)
(2)
(ii) Notice and Response Procedures. (A) Notice. The OCC will notify the banking entity in writing of any determination pursuant to paragraph (g)(2)(i) of this section to rebut the presumption described in this paragraph (g) and will provide an explanation of the determination.
(B) Response. (
(
(C) After the close of banking entity's response period, the OCC will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the OCC's determination that banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
(h)
a. This appendix sets forth reporting and recordkeeping requirements that certain banking entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart B (“proprietary trading restrictions”). Pursuant to § 44.20(d), this appendix applies to a banking entity that, together with its affiliates and subsidiaries, has significant trading assets and liabilities. These entities are required to (i) furnish periodic reports to the OCC regarding a variety of quantitative measurements of their covered trading activities, which vary depending on the scope and size of covered trading activities, and (ii) create and maintain records documenting the preparation and content of these reports. The requirements of this appendix must be incorporated into the banking entity's internal compliance program under § 44.20.
b. The purpose of this appendix is to assist banking entities and the OCC in:
(i) Better understanding and evaluating the scope, type, and profile of the banking entity's covered trading activities;
(ii) Monitoring the banking entity's covered trading activities;
(iii) Identifying covered trading activities that warrant further review or examination by the banking entity to verify compliance with the proprietary trading restrictions;
(iv) Evaluating whether the covered trading activities of trading desks engaged in market making-related activities subject to § 44.4(b) are consistent with the requirements governing permitted market making-related activities;
(v) Evaluating whether the covered trading activities of trading desks that are engaged in permitted trading activity subject to §§ 44.4, 44.5, or 44.6(a)-(b) (
(vi) Identifying the profile of particular covered trading activities of the banking entity, and the individual trading desks of the banking entity, to help establish the appropriate frequency and scope of examination by the OCC of such activities; and
(vii) Assessing and addressing the risks associated with the banking entity's covered trading activities.
c. Information that must be furnished pursuant to this appendix is
d. In addition to the quantitative measurements required in this appendix, a banking entity may need to develop and implement other quantitative measurements in order to effectively monitor its covered trading activities for compliance with section 13 of the BHC Act and this part and to have an effective compliance program, as required by § 44.20. The effectiveness of particular quantitative measurements may differ based on the profile of the banking entity's businesses in general and, more specifically, of the particular trading desk, including types of instruments traded, trading activities and strategies, and history and experience (
e. On an ongoing basis, banking entities must carefully monitor, review, and evaluate all furnished quantitative measurements, as well as any others that they choose to utilize in order to maintain compliance with section 13 of the BHC Act and this part. All measurement results that indicate a heightened risk of impermissible proprietary trading, including with respect to otherwise-permitted activities under §§ 44.4 through 44.6(a)-(b), or that result in a material exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking entity for review, further analysis, explanation to the OCC, and remediation, where appropriate. The quantitative measurements discussed in this appendix should be helpful to banking entities in identifying and managing the risks related to their covered trading activities.
The terms used in this appendix have the same meanings as set forth in §§ 44.2 and 44.3. In addition, for purposes of this appendix, the following definitions apply:
1.
i. Risk and Position Limits and Usage;
ii. Risk Factor Sensitivities;
iii. Value-at-Risk and Stressed Value-at-Risk;
iv Comprehensive Profit and Loss Attribution;
v. Positions;
vi. Transaction Volumes; and
vii. Securities Inventory Aging.
2.
3.
4.
5.
1. Each banking entity must provide descriptive information regarding each trading desk engaged in covered trading activities, including:
i. Name of the trading desk used internally by the banking entity and a unique identification label for the trading desk;
ii. Identification of each type of covered trading activity in which the trading desk is engaged;
iii. Brief description of the general strategy of the trading desk;
iv. A list of the types of financial instruments and other products purchased and sold by the trading desk; an indication of which of these are the main financial instruments or products purchased and sold by the trading desk; and, for trading desks engaged in market making-related activities under § 44.4(b), specification of whether each type of financial instrument is included in market-maker positions or not included in market-maker positions. In addition, indicate whether the trading desk is including in its quantitative measurements products excluded from the definition of “financial instrument” under § 44.3(d)(2) and, if so, identify such products;
v. Identification by complete name of each legal entity that serves as a booking entity for covered trading activities conducted by the trading desk; and indication of which of the identified legal entities are the main booking entities for covered trading activities of the trading desk;
vi. For each legal entity that serves as a booking entity for covered trading activities, specification of any of the following applicable entity types for that legal entity:
A. National bank, Federal branch or Federal agency of a foreign bank, Federal savings association, Federal savings bank;
B. State nonmember bank, foreign bank having an insured branch, State savings association;
C. U.S.-registered broker-dealer, U.S.-registered security-based swap dealer, U.S.-registered major security-based swap participant;
D. Swap dealer, major swap participant, derivatives clearing organization, futures commission merchant, commodity pool operator, commodity trading advisor, introducing broker, floor trader, retail foreign exchange dealer;
E. State member bank;
F. Bank holding company, savings and loan holding company;
G. Foreign banking organization as defined in 12 CFR 211.21(o);
H. Uninsured State-licensed branch or agency of a foreign bank; or
I. Other entity type not listed above, including a subsidiary of a legal entity described above where the subsidiary itself is not an entity type listed above;
vii. Indication of whether each calendar date is a trading day or not a trading day for the trading desk; and
viii. Currency reported and daily currency conversion rate.
1. Each banking entity must provide the following information regarding the quantitative measurements:
i. A Risk and Position Limits Information Schedule that provides identifying and descriptive information for each limit
ii. A Risk Factor Sensitivities Information Schedule that provides identifying and descriptive information for each risk factor sensitivity reported pursuant to the Risk Factor Sensitivities quantitative measurement, including the name of the sensitivity, a unique identification label for the sensitivity, a description of the sensitivity, and the sensitivity's risk factor change unit;
iii. A Risk Factor Attribution Information Schedule that provides identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution quantitative measurement, including the name of the risk factor or other factor, a unique identification label for the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor's change unit;
iv. A Limit/Sensitivity Cross-Reference Schedule that cross-references, by unique identification label, limits identified in the Risk and Position Limits Information Schedule to associated risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule; and
v. A Risk Factor Sensitivity/Attribution Cross-Reference Schedule that cross-references, by unique identification label, risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule to associated risk factor attributions identified in the Risk Factor Attribution Information Schedule.
1. Each banking entity made subject to this appendix by § 44.20 must submit in a separate electronic document a Narrative Statement to the OCC describing any changes in calculation methods used, a description of and reasons for changes in the banking entity's trading desk structure or trading desk strategies, and when any such change occurred. The Narrative Statement must include any information the banking entity views as relevant for assessing the information reported, such as further description of calculation methods used.
2. If a banking entity does not have any information to report in a Narrative Statement, the banking entity must submit an electronic document stating that it does not have any information to report in a Narrative Statement.
A banking entity must calculate any applicable quantitative measurement for each trading day. A banking entity must report the Narrative Statement, the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement electronically to the OCC on the reporting schedule established in § 44.20 unless otherwise requested by the OCC. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement to the OCC in accordance with the XML Schema specified and published on the OCC's website.
A banking entity must, for any quantitative measurement furnished to the OCC pursuant to this appendix and § 44.20(d), create and maintain records documenting the preparation and content of these reports, as well as such information as is necessary to permit the OCC to verify the accuracy of such reports, for a period of five years from the end of the calendar year for which the measurement was taken. A banking entity must retain the Narrative Statement, the Trading Desk Information, and the Quantitative Measurements Identifying Information for a period of five years from the end of the calendar year for which the information was reported to the OCC.
i.
A. A banking entity must provide the following information for each limit reported pursuant to this quantitative measurement: The unique identification label for the limit reported in the Risk and Position Limits Information Schedule, the limit size (distinguishing between an upper and a lower limit), and the value of usage of the limit.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
A. The comprehensive profit and loss associated with existing positions must reflect changes in the value of these positions on the applicable day.
The comprehensive profit and loss from existing positions must be further attributed, as applicable, to changes in (i) the specific risk factors and other factors that are monitored and managed as part of the trading desk's overall risk management policies and procedures; and (ii) any other applicable elements, such as cash flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from existing positions to specific risk factors and other factors, a banking entity must provide the following information for the factors that explain the preponderance of the profit or loss changes due to risk factor changes: The unique identification label for the risk factor or other factor listed in the Risk Factor Attribution Information Schedule, and the profit or loss due to the risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions must reflect commissions and fee income or expense and market gains or losses associated with transactions executed on the applicable day. New positions include purchases and sales of financial instruments and other assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and loss from new positions may be reported in the aggregate and does not need to be further attributed to specific sources.
D. The portion of comprehensive profit and loss that cannot be specifically attributed to known sources must be allocated to a residual category identified as an unexplained portion of the comprehensive profit and loss. Significant unexplained profit and loss must be escalated for further investigation and analysis.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
For the reasons set forth in the Common Preamble the Board proposes to amend chapter II of title 12 of the Code of Federal Regulations as follows:
12 U.S.C. 1851, 12 U.S.C. 221
Unless otherwise specified, for purposes of this part:
(a)
(b)
(c)
(d)
(i) Any insured depository institution;
(ii) Any company that controls an insured depository institution;
(iii) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(iv) Any affiliate or subsidiary of any entity described in paragraphs (d)(1)(i), (ii), or (iii) of this section.
(2) Banking entity does not include:
(i) A covered fund that is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section;
(ii) A portfolio company held under the authority contained in section
(iii) The FDIC acting in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(e)
(f)
(g)
(h)
(i)
(i) Any swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));
(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for deferred shipment or delivery that is intended to be physically settled;
(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25));
(iv) Any agreement, contract, or transaction in foreign currency described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(C)(i));
(v) Any agreement, contract, or transaction in a commodity other than foreign currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
(vi) Any transaction authorized under section 19 of the Commodity Exchange Act (7 U.S.C. 23(a) or (b));
(2) A derivative does not include:
(i) Any consumer, commercial, or other agreement, contract, or transaction that the CFTC and SEC have further defined by joint regulation, interpretation, guidance, or other action as not within the definition of swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)); or
(ii) Any identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(1) The banking entity has, together with its affiliates and subsidiaries on a worldwide consolidated basis, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1,000,000,000; and
(2) The Board has not determined pursuant to § 248.20(g) or (h) of this part that the banking entity should not be treated as having limited trading assets and liabilities.
(u)
(v)
(w)
(x)
(y)
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)
(1)
(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10,000,000,000; or
(ii) The Board has determined pursuant to § 248.20(h) of this part that the banking entity should be treated as having significant trading assets and liabilities.
(2) With respect to a banking entity other than a banking entity described in paragraph (3), trading assets and liabilities for purposes of this paragraph (ff) means trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (ff) means the trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
(ii) For purposes of paragraph (ff)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(gg)
(hh)
(ii)
(jj)
The revisions and additions read as follows:
(b)
(1)(i) Purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule; or
(ii) With respect to a banking entity that is not, and is not controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or any State, purchase or sell one or more financial instruments that are subject to capital requirements under a market risk framework established by the home-country supervisor that is consistent with the market risk framework published by the Basel Committee on Banking Supervision, as amended from time to time.
(2) Purchase or sell one or more financial instruments for any purpose, if the banking entity:
(i) Is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or
(ii) Is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business; or
(3) Purchase or sell one or more financial instruments, with respect to a financial instrument that is recorded at fair value on a recurring basis under applicable accounting standards.
(c)
(ii) If the sum of the absolute values of the daily net gain and loss figures determined in accordance with paragraph (c)(1)(i) of this section for the preceding 90-calendar-day period does not exceed $25 million, the activities of the trading desk shall be presumed to be in compliance with the prohibition in paragraph (a) of this section.
(2) The Board may rebut the presumption of compliance in paragraph (c)(1)(ii) of this section by providing written notice to the banking entity that the Board has determined that one or more of the banking entity's activities violates the prohibitions under subpart B.
(3) If a trading desk operating pursuant to paragraph (c)(1)(ii) of this section exceeds the $25 million threshold in that paragraph at any point, the banking entity shall, in accordance
(i) Promptly notify the Board;
(ii) Demonstrate that the trading desk's purchases and sales of financial instruments comply with subpart B; and
(iii) Demonstrate, with respect to the trading desk, how the banking entity will maintain compliance with subpart B on an ongoing basis.
(e) * * *
(3) Any purchase or sale of a security, foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or physically-settled cross-currency swap, by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity that, with respect to such financial instruments:
(i) Specifically contemplates and authorizes the particular financial instruments to be used for liquidity management purposes, the amount, types, and risks of these financial instruments that are consistent with liquidity management, and the liquidity circumstances in which the particular financial instruments may or must be used;
(ii) Requires that any purchase or sale of financial instruments contemplated and authorized by the plan be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for liquidity management purposes be highly liquid and limited to financial instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements;
(iv) Limits any financial instruments purchased or sold for liquidity management purposes, together with any other instruments purchased or sold for such purposes, to an amount that is consistent with the banking entity's near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan;
(v) Includes written policies and procedures, internal controls, analysis, and independent testing to ensure that the purchase and sale of financial instruments that are not permitted under §§ 248.6(a) or (b) of this subpart are for the purpose of liquidity management and in accordance with the liquidity management plan described in paragraph (e)(3) of this section; and
(vi) Is consistent with the Board's supervisory requirements, guidance, and expectations regarding liquidity management;
(10) Any purchase (or sale) of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or excluded activity or is a subsequent transaction to correct such an error, and the erroneously purchased (or sold) financial instrument is promptly transferred to a separately-managed trade error account for disposition.
(f) * * *
(5)
(g)
(2) Notice and Response Procedures.
(i) Notice. When the Board determines that the purchase or sale of one or more financial instruments is for the trading account under paragraph (g)(1) of this section, the Board will notify the banking entity in writing of the determination and provide an explanation of the determination.
(ii) Response.
(A) The banking entity may respond to any or all items in the notice. The response should include any matters that the banking entity would have the Boardconsider in deciding whether the purchase or sale is for the trading account. The response must be in writing and delivered to the designated Board official within 30 days after the date on which the banking entity received the notice. The Board may shorten the time period when, in the opinion of the Board, the activities or condition of the banking entity so requires, provided that the banking entity is informed promptly of the new time period, or with the consent of the banking entity. In its discretion, the Board may extend the time period for good cause.
(B) Failure to respond within 30 days or such other time period as may be specified by the Board shall constitute a waiver of any objections to the Board's determination.
(iii) After the close of banking entity's response period, the Board will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the Board's determination that the purchase or sale of one or more financial instruments is for the trading account. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
The revisions and additions read as follows:
(a) * * *
(2)
(i) The banking entity is acting as an underwriter for a distribution of securities and the trading desk's underwriting position is related to such distribution;
(ii)(A) The amount and type of the securities in the trading desk's underwriting position are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant type of security, and (B) reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
(B) Limits for each trading desk, in accordance with paragraph (a)(8)(i) of this section;
(C) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(D) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk's limit(s), and independent review of such demonstrable analysis and approval;
(iv) The compensation arrangements of persons performing the activities described in this paragraph (a) are designed not to reward or incentivize prohibited proprietary trading; and
(v) The banking entity is licensed or registered to engage in the activity described in this paragraph (a) in accordance with applicable law.
(8)
(B) The presumption described in paragraph (8)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's underwriting activities, on the:
(
(
(
(ii)
(iii)
(iv)
(b) * * *
(2)
(i) The trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
(ii) The trading desk's market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, based on the liquidity, maturity, and depth of the market for the relevant types of financial instrument(s).
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (b) of this section, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with paragraph (b)(2)(i) of this section;
(B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C) of this section; the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance with paragraph (b)(6)(i) of this section;
(D) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(E) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis that the basis for any temporary or permanent increase to a trading desk's limit(s) is consistent with the requirements of this paragraph (b), and independent review of such demonstrable analysis and approval;
(iv) In the case of a banking entity with significant trading assets and liabilities, to the extent that any limit identified pursuant to paragraph (b)(2)(iii)(C) of this section is exceeded, the trading desk takes action to bring the trading desk into compliance with the limits as promptly as possible after the limit is exceeded;
(v) The compensation arrangements of persons performing the activities described in this paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in activity described in this paragraph (b) in accordance with applicable law.
(3) * * *
(i) A trading desk or other organizational unit of another banking entity is not a client, customer, or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more as measured in accordance with the methodology described in definition of “significant trading assets and liabilities” contained in § 248.2 of this part, unless:
(6)
(i)
(A) A banking entity shall be presumed to meet the requirements of paragraph (b)(2)(ii) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits described in paragraph (b)(6)(i)(B) and does not exceed such limits.
(B) The presumption described in paragraph (6)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's market making-related activities, on the:
(
(
(
(
(ii)
(iii)
(iv)
(b)
(1) The risk-mitigating hedging activities of a banking entity that has significant trading assets and liabilities are permitted under paragraph (a) of this section only if:
(i) The banking entity has established and implements, maintains and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures regarding the positions, techniques and strategies that may be used for hedging, including documentation indicating what positions, contracts or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts or other holdings;
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(C) The conduct of analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review, monitoring and management by the banking entity that:
(
(
(
(iii) The compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that does not have significant trading assets and liabilities are permitted under paragraph (a) of this section only if the risk-mitigating hedging activity:
(i) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof; and
(ii) Is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(2) of this section and is not prohibited proprietary trading.
(c) * * * (1) A banking entity that has significant trading assets and liabilities must comply with the requirements of paragraphs (c)(2) and (3) of this section, unless the requirements of paragraph (c)(4) of this section are met, with respect to any purchase or sale of financial instruments made in reliance
(4) The requirements of paragraphs (c)(2) and (3) of this section do not apply to the purchase or sale of a financial instrument described in paragraph (c)(1) of this section if:
(i) The financial instrument purchased or sold is identified on a written list of pre-approved financial instruments that are commonly used by the trading desk for the specific type of hedging activity for which the financial instrument is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The hedging limits shall be appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken by the trading desk;
(B) Financial instruments purchased and sold for hedging activities by the trading desk; and
(C) Levels and duration of the risk exposures being hedged.
(e) * * *
(3) A purchase or sale by a banking entity is permitted for purposes of this paragraph (e) if:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(c) Underwriting and market making in ownership interests of a covered fund. The prohibition contained in § 248.10(a) of this subpart does not apply to a banking entity's underwriting activities or market making-related activities involving a covered fund so long as:
(1) Those activities are conducted in accordance with the requirements of § 248.4(a) or § 248.4(b) of subpart B, respectively; and
(2) With respect to any banking entity (or any affiliate thereof) that: Acts as a sponsor, investment adviser or commodity trading advisor to a particular covered fund or otherwise acquires and retains an ownership interest in such covered fund in reliance on paragraph (a) of this section; or acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is acquiring and retaining an ownership interest in such covered fund in compliance with section 15G of that Act (15 U.S.C. 78o-11) and the implementing regulations issued thereunder each as permitted by paragraph (b) of this section, then in each such case any ownership interests acquired or retained by the banking entity and its affiliates in connection with underwriting and market making related activities for that particular covered fund are included in the calculation of ownership interests permitted to be held by the banking entity and its affiliates under the limitations of § 248.12(a)(2)(ii); § 248.12(a)(2)(iii), and § 248.12(d) of this subpart.
(a) Permitted risk-mitigating hedging activities. (1) The prohibition contained in § 248.10(a) of this subpart does not apply with respect to an ownership interest in a covered fund acquired or retained by a banking entity that is designed to reduce or otherwise significantly mitigate the specific, identifiable risks to the banking entity in connection with:
(i) A compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
(2) Requirements. The risk-mitigating hedging activities of a banking entity are permitted under this paragraph (a) only if:
(i) The banking entity has established and implements, maintains and enforces an internal compliance program in accordance with subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures; and
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(ii) The acquisition or retention of the ownership interest:
(A) Is made in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedge, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising (1) out of a transaction conducted solely to accommodate a specific customer request with respect to the covered fund
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section; and
(D) Is subject to continuing review, monitoring and management by the banking entity.
(iii) With respect to risk-mitigating hedging activity conducted pursuant to paragraph (a)(1)(i), the compensation arrangement relates solely to the covered fund in which the banking entity or any affiliate has acquired an ownership interest pursuant to paragraph (a)(1)(i) and such compensation arrangement provides that any losses incurred by the banking entity on such ownership interest will be offset by corresponding decreases in amounts payable under such compensation arrangement.
(b) * * *
(3) An ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of paragraph (b)(1)(iii) of this section only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. If the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of this paragraph (b)(3) to participate in any offer or sale by the covered fund of ownership interests in the covered fund.
(a) * * *
(2) * * *
(ii) * * *
(B) The chief executive officer (or equivalent officer) of the banking entity certifies in writing annually no later than March 31 to the Board (with a duty to update the certification if the information in the certification materially changes) that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and
The revisions are as follows:
(a) Program requirement. Each banking entity (other than a banking entity with limited trading assets and liabilities) shall develop and provide for the continued administration of a compliance program reasonably designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary trading and covered fund activities and investments set forth in section 13 of the BHC Act and this part. The terms, scope, and detail of the compliance program shall be appropriate for the types, size, scope, and complexity of activities and business structure of the banking entity.
(b) Banking entities with significant trading assets and liabilities. With respect to a banking entity with significant trading assets and liabilities, the compliance program required by paragraph (a) of this section, at a minimum, shall include:
(c)
(2) The requirements of paragraph (c)(1) of this section apply to a banking entity if:
(i) The banking entity does not have limited trading assets and liabilities; or
(ii) The Board notifies the banking entity in writing that it must satisfy the requirements contained in paragraph (c)(1) of this section.
(d)
(i) The banking entity has significant trading assets and liabilities; or
(ii) The Board notifies the banking entity in writing that it must satisfy the reporting requirements contained in the Appendix.
(2)
(e) Additional documentation for covered funds. A banking entity with significant trading assets and liabilities shall maintain records that include:
(f) * * *
(2) Banking entities with moderate trading assets and liabilities. A banking entity with moderate trading assets and liabilities may satisfy the requirements of this section by including in its existing compliance policies and procedures appropriate references to the requirements of section 13 of the BHC Act and this part and adjustments as appropriate given the activities, size, scope, and complexity of the banking entity.
(g) Rebuttable presumption of compliance for banking entities with limited trading assets and liabilities.
(1) Rebuttable presumption. Except as otherwise provided in this paragraph, a banking entity with limited trading assets and liabilities shall be presumed to be compliant with subpart B and subpart C and shall have no obligation to demonstrate compliance with this part on an ongoing basis.
(2)
(ii) Notice and Response Procedures.
(A)
(B)
(
(C) After the close of banking entity's response period, the Board will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the Board's determination that banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
(h) Reservation of authority. Notwithstanding any other provision of this part, the Board retains its authority to require a banking entity without significant trading assets and liabilities to apply any requirements of this part that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities if the Board determines that the size or complexity of the banking entity's trading or investment activities, or the risk of evasion of subpart B or subpart C, does not warrant a presumption of compliance under paragraph (g) of this section or treatment as a banking entity with moderate trading assets and liabilities, as applicable.
a. This appendix sets forth reporting and recordkeeping requirements that certain banking entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart B (“proprietary trading restrictions”). Pursuant to § 248.20(d), this appendix applies to a banking entity that, together with its affiliates and subsidiaries, has significant trading assets and liabilities. These entities are required to (i) furnish periodic reports to the Board regarding a variety of quantitative measurements of their covered trading activities, which vary depending on the scope and size of covered trading activities, and (ii) create and maintain records documenting the preparation and content of these reports. The requirements of this appendix must be incorporated into the banking entity's internal compliance program under § 248.20.
b. The purpose of this appendix is to assist banking entities and the Board in:
(i) Better understanding and evaluating the scope, type, and profile of the banking entity's covered trading activities;
(ii) Monitoring the banking entity's covered trading activities;
(iii) Identifying covered trading activities that warrant further review or examination by the banking entity to verify compliance with the proprietary trading restrictions;
(iv) Evaluating whether the covered trading activities of trading desks engaged in market making-related activities subject to § 248.4(b) are consistent with the requirements governing permitted market making-related activities;
(v) Evaluating whether the covered trading activities of trading desks that are engaged in permitted trading activity subject to §§ 248.4; 248.5, or 248.6(a)-(b) (
(vi) Identifying the profile of particular covered trading activities of the banking entity, and the individual trading desks of the banking entity, to help establish the appropriate frequency and scope of examination by the Board of such activities; and
(vii) Assessing and addressing the risks associated with the banking entity's covered trading activities.
c. Information that must be furnished pursuant to this appendix is
d. In addition to the quantitative measurements required in this appendix, a banking entity may need to develop and implement other quantitative measurements in order to effectively monitor its covered trading activities for compliance with section 13 of the BHC Act and this part and to have an effective compliance program, as required by § 248.20. The effectiveness of particular quantitative measurements may differ based on the profile of the banking entity's businesses in general and, more specifically, of the particular trading desk, including types of instruments traded, trading activities and strategies, and history and experience (
e. On an ongoing basis, banking entities must carefully monitor, review, and evaluate all furnished quantitative measurements, as well as any others that they choose to utilize in order to maintain compliance with section 13 of the BHC Act and this part. All measurement results that indicate a heightened risk of impermissible proprietary trading, including with respect to otherwise-permitted activities under §§ 248.4 through 248.6(a)-(b), or that result in a material exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking entity for review, further analysis, explanation to the Board, and remediation, where appropriate. The quantitative measurements discussed in this appendix should be helpful to banking entities in identifying and managing the risks related to their covered trading activities.
The terms used in this appendix have the same meanings as set forth in §§ 248.2 and 248.3. In addition, for purposes of this appendix, the following definitions apply:
1.
i. Risk and Position Limits and Usage;
ii. Risk Factor Sensitivities;
iii. Value-at-Risk and Stressed Value-at-Risk;
iv. Comprehensive Profit and Loss Attribution;
v. Positions;
vi. Transaction Volumes; and
vii. Securities Inventory Aging.
2.
4.
5.
1. Each banking entity must provide descriptive information regarding each trading desk engaged in covered trading activities, including:
i. Name of the trading desk used internally by the banking entity and a unique identification label for the trading desk;
ii. Identification of each type of covered trading activity in which the trading desk is engaged;
iii. Brief description of the general strategy of the trading desk;
iv. A list of the types of financial instruments and other products purchased and sold by the trading desk; an indication of which of these are the main financial instruments or products purchased and sold by the trading desk; and, for trading desks engaged in market making-related activities under § 248.4(b), specification of whether each type of financial instrument is included in market-maker positions or not included in market-maker positions. In addition, indicate whether the trading desk is including in its quantitative measurements products excluded from the definition of “financial instrument” under § 248.3(d)(2) and, if so, identify such products;
v. Identification by complete name of each legal entity that serves as a booking entity for covered trading activities conducted by the trading desk; and indication of which of the identified legal entities are the main booking entities for covered trading activities of the trading desk;
vi. For each legal entity that serves as a booking entity for covered trading activities, specification of any of the following applicable entity types for that legal entity:
A. National bank, Federal branch or Federal agency of a foreign bank, Federal savings association, Federal savings bank;
B. State nonmember bank, foreign bank having an insured branch, State savings association;
C. U.S.-registered broker-dealer, U.S.-registered security-based swap dealer, U.S.-registered major security-based swap participant;
D. Swap dealer, major swap participant, derivatives clearing organization, futures commission merchant, commodity pool operator, commodity trading advisor, introducing broker, floor trader, retail foreign exchange dealer;
E. State member bank;
F. Bank holding company, savings and loan holding company;
G. Foreign banking organization as defined in 12 CFR 211.21(o);
H. Uninsured State-licensed branch or agency of a foreign bank; or
I. Other entity type not listed above, including a subsidiary of a legal entity described above where the subsidiary itself is not an entity type listed above;
2. Indication of whether each calendar date is a trading day or not a trading day for the trading desk; and
3. Currency reported and daily currency conversion rate.
1. Each banking entity must provide the following information regarding the quantitative measurements:
i. A Risk and Position Limits Information Schedule that provides identifying and descriptive information for each limit reported pursuant to the Risk and Position Limits and Usage quantitative measurement, including the name of the limit, a unique identification label for the limit, a description of the limit, whether the limit is intraday or end-of-day, the unit of measurement for the limit, whether the limit measures risk on a net or gross basis, and the type of limit;
ii. A Risk Factor Sensitivities Information Schedule that provides identifying and descriptive information for each risk factor sensitivity reported pursuant to the Risk Factor Sensitivities quantitative measurement, including the name of the sensitivity, a unique identification label for the sensitivity, a description of the sensitivity, and the sensitivity's risk factor change unit;
iii. A Risk Factor Attribution Information Schedule that provides identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution quantitative measurement, including the name of the risk factor or other factor, a unique identification label for the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor's change unit;
iv. A Limit/Sensitivity Cross-Reference Schedule that cross-references, by unique identification label, limits identified in the Risk and Position Limits Information Schedule to associated risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule; and
v. A Risk Factor Sensitivity/Attribution Cross-Reference Schedule that cross-references, by unique identification label, risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule to associated risk factor attributions identified in the Risk Factor Attribution Information Schedule.
Each banking entity made subject to this appendix by § 248.20 must submit in a separate electronic document a Narrative Statement to the Board describing any changes in calculation methods used, a description of and reasons for changes in the banking entity's trading desk structure or trading desk strategies, and when any such change occurred. The Narrative Statement must include any information the banking entity views as relevant for assessing the information reported, such as further description of calculation methods used.
If a banking entity does not have any information to report in a Narrative Statement, the banking entity must submit an electronic document stating that it does not have any information to report in a Narrative Statement.
A banking entity must calculate any applicable quantitative measurement for each trading day. A banking entity must report the Narrative Statement, the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement electronically to the Board on the reporting schedule established in § __.20 unless otherwise requested by the Board. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement to the Board in accordance with the XML Schema specified and published on the Board's website.
A banking entity must, for any quantitative measurement furnished to the Board pursuant to this appendix and § 248.20(d), create and maintain records documenting the preparation and content of these reports, as
i.
A. A banking entity must provide the following information for each limit reported pursuant to this quantitative measurement: The unique identification label for the limit reported in the Risk and Position Limits Information Schedule, the limit size (distinguishing between an upper and a lower limit), and the value of usage of the limit.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
A. The comprehensive profit and loss associated with existing positions must reflect changes in the value of these positions on the applicable day.
The comprehensive profit and loss from existing positions must be further attributed, as applicable, to changes in (i) the specific risk factors and other factors that are monitored and managed as part of the trading desk's overall risk management policies and procedures; and (ii) any other applicable elements, such as cash flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from existing positions to specific risk factors and other factors, a banking entity must provide the following information for the factors that explain the preponderance of the profit or loss changes due to risk factor changes: The unique identification label for the risk factor or other factor listed in the Risk Factor Attribution Information Schedule, and the profit or loss due to the risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions must reflect commissions and fee income or expense and market gains or losses associated with transactions executed on the applicable day. New positions include purchases and sales of financial instruments and other assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and loss from new positions may be reported in the aggregate and does not need to be further attributed to specific sources.
D. The portion of comprehensive profit and loss that cannot be specifically attributed to known sources must be allocated to a residual category identified as an unexplained portion of the comprehensive profit and loss. Significant unexplained profit and loss must be escalated for further investigation and analysis.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
For the reasons set forth in the Common Preamble, the Federal Deposit Insurance Corporation proposes to amend chapter III of Title 12, Code of Federal Regulations as follows:
12 U.S.C. 1851; 1811
Unless otherwise specified, for purposes of this part:
(a)
(b)
(c)
(d)
(i) Any insured depository institution;
(ii) Any company that controls an insured depository institution;
(iii) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(iv) Any affiliate or subsidiary of any entity described in paragraphs (d)(1)(i), (ii), or (iii) of this section.
(2) Banking entity does not include:
(i) A covered fund that is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section;
(ii) A portfolio company held under the authority contained in section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H), (I)), or any portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), so long as the portfolio company or portfolio concern is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section; or
(iii) The FDIC acting in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(e)
(f)
(g)
(h)
(i)
(i) Any swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));
(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for deferred shipment or delivery that is intended to be physically settled;
(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25));
(iv) Any agreement, contract, or transaction in foreign currency described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(C)(i));
(v) Any agreement, contract, or transaction in a commodity other than foreign currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
(vi) Any transaction authorized under section 19 of the Commodity Exchange Act (7 U.S.C. 23(a) or (b));
(2) A derivative does not include:
(i) Any consumer, commercial, or other agreement, contract, or transaction that the CFTC and SEC have further defined by joint regulation, interpretation, guidance, or other action as not within the definition of swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)); or
(ii) Any identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(1) The banking entity has, together with its affiliates and subsidiaries on a worldwide consolidated basis, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1,000,000,000; and
(2) The FDIC has not determined pursuant to § 351.20(g) or (h) of this part that the banking entity should not be treated as having limited trading assets and liabilities.
(u)
(v)
(w)
(x)
(y)
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)
(1)
(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10,000,000,000; or
(ii) The FDIC has determined pursuant to § 351.20(h) of this part that the banking entity should be treated as having significant trading assets and liabilities.
(2) With respect to a banking entity other than a banking entity described in paragraph (3), trading assets and liabilities for purposes of this paragraph (ff) means trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (ff) means the trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
(ii) For purposes of paragraph (ff)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(gg)
(hh)
(ii)
(jj)
The revisions and additions read as follows:
(b)
(1)(i) Purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule; or
(ii) With respect to a banking entity that is not, and is not controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or any State, purchase or sell one or more financial instruments that are subject to capital requirements under a market risk framework established by the home-country supervisor that is consistent with the market risk framework published by the Basel Committee on Banking Supervision, as amended from time to time.
(2) Purchase or sell one or more financial instruments for any purpose, if the banking entity:
(i) Is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or
(ii) Is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business; or
(3) Purchase or sell one or more financial instruments, with respect to a financial instrument that is recorded at fair value on a recurring basis under applicable accounting standards.
(c)
(ii) If the sum of the absolute values of the daily net gain and loss figures determined in accordance with paragraph (c)(1)(i) of this section for the preceding 90-calendar-day period does not exceed $25 million, the activities of the trading desk shall be presumed to be in compliance with the prohibition in paragraph (a) of this section.
(2) The FDIC may rebut the presumption of compliance in paragraph (c)(1)(ii) of this section by providing written notice to the banking entity that the FDIC has determined that one or more of the banking entity's activities violates the prohibitions under subpart B.
(3) If a trading desk operating pursuant to paragraph (c)(1)(ii) of this section exceeds the $25 million threshold in that paragraph at any point, the banking entity shall, in accordance with any policies and procedures adopted by the FDIC:
(i) Promptly notify the FDIC;
(ii) Demonstrate that the trading desk's purchases and sales of financial instruments comply with subpart B; and
(iii) Demonstrate, with respect to the trading desk, how the banking entity will maintain compliance with subpart B on an ongoing basis.
(e) * * *
(3) Any purchase or sale of a security, foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or physically-settled cross-currency swap, by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity that, with respect to such financial instruments:
(i) Specifically contemplates and authorizes the particular financial instruments to be used for liquidity management purposes, the amount, types, and risks of these financial instruments that are consistent with liquidity management, and the liquidity circumstances in which the particular financial instruments may or must be used;
(ii) Requires that any purchase or sale of financial instruments contemplated and authorized by the plan be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for liquidity management purposes be highly liquid and limited to financial instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements;
(iv) Limits any financial instruments purchased or sold for liquidity management purposes, together with any other instruments purchased or sold for such purposes, to an amount that is consistent with the banking entity's near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan;
(v) Includes written policies and procedures, internal controls, analysis, and independent testing to ensure that the purchase and sale of financial instruments that are not permitted under §§ 351.6(a) or (b) of this subpart are for the purpose of liquidity management and in accordance with the liquidity management plan described in paragraph (e)(3) of this section; and
(vi) Is consistent with the FDIC's supervisory requirements, guidance, and expectations regarding liquidity management;
(10) Any purchase (or sale) of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or excluded activity or is a subsequent
(f) * * *
(5) Cross-currency swap means a swap in which one party exchanges with another party principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed upon when the swap is entered into.
(g)
(2) Notice and Response Procedures.
(i) Notice. When the FDIC determines that the purchase or sale of one or more financial instruments is for the trading account under paragraph (g)(1) of this section, the [Agency] will notify the banking entity in writing of the determination and provide an explanation of the determination.
(ii) Response.
(A) The banking entity may respond to any or all items in the notice. The response should include any matters that the banking entity would have the FDIC consider in deciding whether the purchase or sale is for the trading account. The response must be in writing and delivered to the designated FDIC official within 30 days after the date on which the banking entity received the notice. The FDIC may shorten the time period when, in the opinion of the FDIC, the activities or condition of the banking entity so requires, provided that the banking entity is informed promptly of the new time period, or with the consent of the banking entity. In its discretion, the FDIC may extend the time period for good cause.
(B) Failure to respond within 30 days or such other time period as may be specified by the FDIC shall constitute a waiver of any objections to the FDIC's determination.
(iii) After the close of banking entity's response period, the FDIC will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the FDIC's determination that the purchase or sale of one or more financial instruments is for the trading account. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
The revisions and additions read as follows:
(a) * * *
(2)
(i) The banking entity is acting as an underwriter for a distribution of securities and the trading desk's underwriting position is related to such distribution;
(ii)(A) The amount and type of the securities in the trading desk's underwriting position are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant type of security, and
(B) reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (a) of this section, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing:
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
(B) Limits for each trading desk, in accordance with paragraph (a)(8)(i) of this section;
(C) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(D) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk's limit(s), and independent review of such demonstrable analysis and approval;
(iv) The compensation arrangements of persons performing the activities described in this paragraph (a) are designed not to reward or incentivize prohibited proprietary trading; and
(v) The banking entity is licensed or registered to engage in the activity described in this paragraph (a) in accordance with applicable law.
(8)
(i)
(A) A banking entity shall be presumed to meet the requirements of paragraph (a)(2)(ii)(A) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits described in paragraph (a)(8)(i)(B) and does not exceed such limits.
(B) The presumption described in paragraph (8)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's underwriting activities, on the:
(1) Amount, types, and risk of its underwriting position;
(2) Level of exposures to relevant risk factors arising from its underwriting position; and
(3) Period of time a security may be held.
(ii)
(iii)
(iv)
(b) * * *
(2)
(i) The trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
(ii) The trading desk's market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, based on the liquidity, maturity, and depth of the market for the relevant types of financial instrument(s).
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (b) of this section, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with paragraph (b)(2)(i) of this section;
(B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C) of this section; the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance with paragraph (b)(6)(i) of this section;
(D) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(E) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis that the basis for any temporary or permanent increase to a trading desk's limit(s) is consistent with the requirements of this paragraph (b), and independent review of such demonstrable analysis and approval;
(iv) In the case of a banking entity with significant trading assets and liabilities, to the extent that any limit identified pursuant to paragraph (b)(2)(iii)(C) of this section is exceeded, the trading desk takes action to bring the trading desk into compliance with the limits as promptly as possible after the limit is exceeded;
(v) The compensation arrangements of persons performing the activities described in this paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in activity described in paragraph (b) of this section in accordance with applicable law.
(3) * * *
(i) A trading desk or other organizational unit of another banking entity is not a client, customer, or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more as measured in accordance with the methodology described in definition of “
(6)
(B) The presumption described in paragraph (6)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's market making-related activities, on the:
(1) Amount, types, and risks of its market-maker positions;
(2) Amount, types, and risks of the products, instruments, and exposures the trading desk may use for risk management purposes;
(3) Level of exposures to relevant risk factors arising from its financial exposure; and
(4) Period of time a financial instrument may be held.
(ii)
(iii)
(iv)
(b)
(i) The banking entity has established and implements, maintains and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures regarding the positions, techniques and strategies that
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(C) The conduct of analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review, monitoring and management by the banking entity that:
(
(
(
(iii) The compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that does not have significant trading assets and liabilities are permitted under paragraph (a) of this section only if the risk-mitigating hedging activity:
(i) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof; and
(ii) Is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(2) of this section and is not prohibited proprietary trading.
(c) * * * (1) A banking entity that has significant trading assets and liabilities must comply with the requirements of paragraphs (c)(2) and (3) of this section, unless the requirements of paragraph (c)(4) of this section are met, with respect to any purchase or sale of financial instruments made in reliance on this section for risk-mitigating hedging purposes that is:
(4) The requirements of paragraphs (c)(2) and (3) of this section do not apply to the purchase or sale of a financial instrument described in paragraph (c)(1) of this section if:
(i) The financial instrument purchased or sold is identified on a written list of pre-approved financial instruments that are commonly used by the trading desk for the specific type of hedging activity for which the financial instrument is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The hedging limits shall be appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken by the trading desk;
(B) Financial instruments purchased and sold for hedging activities by the trading desk; and
(C) Levels and duration of the risk exposures being hedged.
(e) * * *
(3) A purchase or sale by a banking entity is permitted for purposes of this paragraph (e) if:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(c)
(1) Those activities are conducted in accordance with the requirements of § 351.4(a) or § 351.4(b) of subpart B, respectively; and
(2) With respect to any banking entity (or any affiliate thereof) that: Acts as a sponsor, investment adviser or commodity trading advisor to a particular covered fund or otherwise acquires and retains an ownership interest in such covered fund in reliance on paragraph (a) of this section; or acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is acquiring and retaining an ownership interest in such covered fund in compliance with section 15G of that Act (15 U.S.C. 78o-11) and the implementing regulations issued thereunder each as permitted by paragraph (b) of this section, then in each such case any ownership interests acquired or retained by the banking entity and its affiliates in connection with underwriting and market making related activities for that particular covered fund are included in the calculation of ownership interests permitted to be held by the banking entity and its affiliates under the limitations of § 351.12(a)(2)(ii); § 351.12(a)(2)(iii), and § 351.12(d) of this subpart.
(a)
(i) A compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
(2)
(i) The banking entity has established and implements, maintains and enforces an internal compliance program in accordance with subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures; and
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(ii) The acquisition or retention of the ownership interest:
(A) Is made in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedge, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising:
(
(
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section; and
(D) Is subject to continuing review, monitoring and management by the banking entity.
(iii) With respect to risk-mitigating hedging activity conducted pursuant to paragraph (a)(1)(i), the compensation arrangement relates solely to the covered fund in which the banking entity or any affiliate has acquired an ownership interest pursuant to paragraph (a)(1)(i) and such compensation arrangement provides that any losses incurred by the banking entity on such ownership interest will be offset by corresponding decreases in amounts payable under such compensation arrangement.
(b) * * *
(3) An ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of paragraph (b)(1)(iii) of this section only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. If the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of this paragraph (b)(3) to participate in any offer or sale by the covered fund of ownership interests in the covered fund.
(a) * * *
(2) * * *
(ii) * * *
(B) The chief executive officer (or equivalent officer) of the banking entity certifies in writing annually no later than March 31 to the FDIC (with a duty to update the certification if the information in the certification materially changes) that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and
The revisions read as follows:
(a)
(b)
(c)
(1) The CEO of a banking entity described in paragraph (2) must, based on a review by the CEO of the banking entity, attest in writing to the FDIC, each year no later than March 31, that the banking entity has in place processes reasonably designed to achieve compliance with section 13 of the BHC Act and this part. In the case of a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States.
(2) The requirements of paragraph (c)(1) apply to a banking entity if:
(i) The banking entity does not have limited trading assets and liabilities; or
(ii) The FDIC notifies the banking entity in writing that it must satisfy the requirements contained in paragraph (c)(1).
(d)
(i) The banking entity has significant trading assets and liabilities; or
(ii) The FDIC notifies the banking entity in writing that it must satisfy the reporting requirements contained in the Appendix.
(2) Frequency of reporting: Unless the FDIC notifies the banking entity in writing that it must report on a different basis, a banking entity with $50 billion or more in trading assets and liabilities (as calculated in accordance with the methodology described in the definition of “significant trading assets and liabilities” contained in § 351.2 of this part of this part) shall report the information required by the Appendix for each calendar month within 20 days of the end of each calendar month. Any other banking entity subject to the Appendix shall report the information required by the Appendix for each calendar quarter within 30 days of the end of that calendar quarter unless the FDIC notifies the banking entity in writing that it must report on a different basis.
(e)
(f) * * *
(2)
(g)
(1)
(2)
(i) If upon examination or audit, the FDIC determines that the banking entity has engaged in proprietary trading or covered fund activities that are otherwise prohibited under subpart B or subpart C, the FDIC may require the banking entity to be treated under this part as if it did not have limited trading assets and liabilities.
(ii) Notice and Response Procedures.
(A) Notice. The FDIC will notify the banking entity in writing of any determination pursuant to paragraph (g)(2)(i) of this section to rebut the presumption described in this paragraph (g) and will provide an explanation of the determination.
(B) Response.
(
(
(C) After the close of banking entity's response period, the FDIC will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the FDIC's determination that banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
(h)
a. This appendix sets forth reporting and recordkeeping requirements that certain banking entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart B (“proprietary trading restrictions”). Pursuant to § 351.20(d), this appendix applies to a banking entity that, together with its affiliates and subsidiaries,
b. The purpose of this appendix is to assist banking entities and the FDIC in:
(i) Better understanding and evaluating the scope, type, and profile of the banking entity's covered trading activities;
(ii) Monitoring the banking entity's covered trading activities;
(iii) Identifying covered trading activities that warrant further review or examination by the banking entity to verify compliance with the proprietary trading restrictions;
(iv) Evaluating whether the covered trading activities of trading desks engaged in market making-related activities subject to § 351.4(b) are consistent with the requirements governing permitted market making-related activities;
(v) Evaluating whether the covered trading activities of trading desks that are engaged in permitted trading activity subject to §§ 351.4, 351.5, or 351.6(a)-(b) (
(vi) Identifying the profile of particular covered trading activities of the banking entity, and the individual trading desks of the banking entity, to help establish the appropriate frequency and scope of examination by the FDIC of such activities; and
(vii) Assessing and addressing the risks associated with the banking entity's covered trading activities.
c. Information that must be furnished pursuant to this appendix is not intended to serve as a dispositive tool for the identification of permissible or impermissible activities.
d. In addition to the quantitative measurements required in this appendix, a banking entity may need to develop and implement other quantitative measurements in order to effectively monitor its covered trading activities for compliance with section 13 of the BHC Act and this part and to have an effective compliance program, as required by § 351.20. The effectiveness of particular quantitative measurements may differ based on the profile of the banking entity's businesses in general and, more specifically, of the particular trading desk, including types of instruments traded, trading activities and strategies, and history and experience (
e. On an ongoing basis, banking entities must carefully monitor, review, and evaluate all furnished quantitative measurements, as well as any others that they choose to utilize in order to maintain compliance with section 13 of the BHC Act and this part. All measurement results that indicate a heightened risk of impermissible proprietary trading, including with respect to otherwise-permitted activities under §§ 351.4 through 351.6(a)-(b), or that result in a material exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking entity for review, further analysis, explanation to the FDIC, and remediation, where appropriate. The quantitative measurements discussed in this appendix should be helpful to banking entities in identifying and managing the risks related to their covered trading activities.
The terms used in this appendix have the same meanings as set forth in §§ 351.2 and 351.3. In addition, for purposes of this appendix, the following definitions apply:
1.
i. Risk and Position Limits and Usage;
ii. Risk Factor Sensitivities;
iii. Value-at-Risk and Stressed Value-at-Risk;
iv. Comprehensive Profit and Loss Attribution;
v. Positions;
vi. Transaction Volumes; and
vii. Securities Inventory Aging.
2.
3.
4.
5.
Each banking entity must provide descriptive information regarding each trading desk engaged in covered trading activities, including:
1. Name of the trading desk used internally by the banking entity and a unique identification label for the trading desk;
2. Identification of each type of covered trading activity in which the trading desk is engaged;
3. Brief description of the general strategy of the trading desk;
4. A list of the types of financial instruments and other products purchased and sold by the trading desk; an indication of which of these are the main financial instruments or products purchased and sold by the trading desk; and, for trading desks engaged in market making-related activities under § 351.4(b), specification of whether each type of financial instrument is included in market-maker positions or not included in market-maker positions. In addition, indicate whether the trading desk is including in its quantitative measurements products excluded from the definition of “financial instrument” under § 351.3(d)(2) and, if so, identify such products;
5. Identification by complete name of each legal entity that serves as a booking entity for covered trading activities conducted by the trading desk; and indication of which of the identified legal entities are the main booking entities for covered trading activities of the trading desk;
6. For each legal entity that serves as a booking entity for covered trading activities, specification of any of the following applicable entity types for that legal entity:
i. National bank, Federal branch or Federal agency of a foreign bank, Federal savings association, Federal savings bank;
ii. State nonmember bank, foreign bank having an insured branch, State savings association;
iii. U.S.-registered broker-dealer, U.S.-registered security-based swap dealer, U.S.-registered major security-based swap participant;
iv. Swap dealer, major swap participant, derivatives clearing organization, futures commission merchant, commodity pool operator, commodity trading advisor, introducing broker, floor trader, retail foreign exchange dealer;
v. State member bank;
vi. Bank holding company, savings and loan holding company;
vii. Foreign banking organization as defined in 12 CFR 211.21(o);
viii. Uninsured State-licensed branch or agency of a foreign bank; or
ix. Other entity type not listed above, including a subsidiary of a legal entity described above where the subsidiary itself is not an entity type listed above;
7. Indication of whether each calendar date is a trading day or not a trading day for the trading desk; and
8. Currency reported and daily currency conversion rate.
Each banking entity must provide the following information regarding the quantitative measurements:
1. A Risk and Position Limits Information Schedule that provides identifying and descriptive information for each limit reported pursuant to the Risk and Position Limits and Usage quantitative measurement, including the name of the limit, a unique identification label for the limit, a description of the limit, whether the limit is intraday or end-of-day, the unit of measurement for the limit, whether the limit measures risk on a net or gross basis, and the type of limit;
2. A Risk Factor Sensitivities Information Schedule that provides identifying and descriptive information for each risk factor sensitivity reported pursuant to the Risk Factor Sensitivities quantitative measurement, including the name of the sensitivity, a unique identification label for the sensitivity, a description of the sensitivity, and the sensitivity's risk factor change unit;
3. A Risk Factor Attribution Information Schedule that provides identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution quantitative measurement, including the name of the risk factor or other factor, a unique identification label for the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor's change unit;
4. A Limit/Sensitivity Cross-Reference Schedule that cross-references, by unique identification label, limits identified in the Risk and Position Limits Information Schedule to associated risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule; and
5. A Risk Factor Sensitivity/Attribution Cross-Reference Schedule that cross-references, by unique identification label, risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule to associated risk factor attributions identified in the Risk Factor Attribution Information Schedule.
Each banking entity made subject to this appendix by § 351.20 must submit in a separate electronic document a Narrative Statement to the FDIC describing any changes in calculation methods used, a description of and reasons for changes in the banking entity's trading desk structure or trading desk strategies, and when any such change occurred. The Narrative Statement must include any information the banking entity views as relevant for assessing the information reported, such as further description of calculation methods used.
If a banking entity does not have any information to report in a Narrative Statement, the banking entity must submit an electronic document stating that it does not have any information to report in a Narrative Statement.
A banking entity must calculate any applicable quantitative measurement for each trading day. A banking entity must report the Narrative Statement, the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement electronically to the FDIC on the reporting schedule established in § 351.20 unless otherwise requested by the FDIC. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement to the FDIC in accordance with the XML Schema specified and published on the FDIC's website.
A banking entity must, for any quantitative measurement furnished to the FDIC pursuant to this appendix and § 351.20(d), create and maintain records documenting the preparation and content of these reports, as well as such information as is necessary to permit the FDIC to verify the accuracy of such reports, for a period of five years from the end of the calendar year for which the measurement was taken. A banking entity must retain the Narrative Statement, the Trading Desk Information, and the Quantitative Measurements Identifying Information for a period of five years from the end of the calendar year for which the information was reported to the FDIC.
i.
A. A banking entity must provide the following information for each limit reported pursuant to this quantitative measurement: The unique identification label for the limit reported in the Risk and Position Limits Information Schedule, the limit size (distinguishing between an upper and a lower limit), and the value of usage of the limit.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
A. The comprehensive profit and loss associated with existing positions must reflect changes in the value of these positions on the applicable day.
The comprehensive profit and loss from existing positions must be further attributed, as applicable, to changes in (i) the specific risk factors and other factors that are monitored and managed as part of the trading desk's overall risk management policies and procedures; and (ii) any other applicable elements, such as cash flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from existing positions to specific risk factors and other factors, a banking entity must provide the following information for the factors that explain the preponderance of the profit or loss changes due to risk factor changes: The unique identification label for the risk factor or other factor listed in the Risk Factor Attribution Information Schedule, and the profit or loss due to the risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions must reflect commissions and fee income or expense and market gains or losses associated with transactions executed on the applicable day. New positions include purchases and sales of financial instruments and other assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and loss from new positions may be reported in the aggregate and does not need to be further attributed to specific sources.
D. The portion of comprehensive profit and loss that cannot be specifically attributed to known sources must be allocated to a residual category identified as an unexplained portion of the comprehensive profit and loss. Significant unexplained profit and loss must be escalated for further investigation and analysis.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
For the reasons set forth in the Common Preamble, the Securities and Exchange Commission proposes to amend Part 255 to chapter II of Title 17 of the Code of Federal Regulations as follows:
12 U.S.C. 1851
Unless otherwise specified, for purposes of this part:
(a)
(b)
(c)
(d)
(i) Any insured depository institution;
(ii) Any company that controls an insured depository institution;
(iii) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(iv) Any affiliate or subsidiary of any entity described in paragraphs (d)(1)(i), (ii), or (iii) of this section.
(2) Banking entity does not include:
(i) A covered fund that is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section;
(ii) A portfolio company held under the authority contained in section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H), (I)), or any portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), so long as the portfolio company or portfolio concern is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section; or
(iii) The FDIC acting in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(e)
(f)
(g)
(h)
(i)
(i) Any swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));
(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for deferred shipment or delivery that is intended to be physically settled;
(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25));
(iv) Any agreement, contract, or transaction in foreign currency described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(C)(i));
(v) Any agreement, contract, or transaction in a commodity other than foreign currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
(vi) Any transaction authorized under section 19 of the Commodity Exchange Act (7 U.S.C. 23(a) or (b));
(2) A derivative does not include:
(i) Any consumer, commercial, or other agreement, contract, or transaction that the CFTC and SEC have further defined by joint regulation, interpretation, guidance, or other action as not within the definition of swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)); or
(ii) Any identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(1) The banking entity has, together with its affiliates and subsidiaries on a worldwide consolidated basis, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1,000,000,000; and
(2) The SEC has not determined pursuant to § 255.20(g) or (h) of this part that the banking entity should not be treated as having limited trading assets and liabilities.
(u)
(v)
(w)
(x)
(y)
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)
(1)
(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10,000,000,000; or
(ii) The SEC has determined pursuant to § 255.20(h) of this part that the banking entity should be treated as having significant trading assets and liabilities.
(2) With respect to a banking entity other than a banking entity described in paragraph (3), trading assets and liabilities for purposes of this paragraph (ff) means trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (ff) means the trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
(ii) For purposes of paragraph (ff)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(gg)
(hh)
(ii)
(jj)
The revisions and additions read as follows:
(b)
(1)(i) Purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule; or
(ii) With respect to a banking entity that is not, and is not controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or any State, purchase or sell one or more financial instruments that are subject to capital requirements under a market risk framework established by the home-country supervisor that is consistent with the market risk framework published by the Basel Committee on Banking Supervision, as amended from time to time.
(2) Purchase or sell one or more financial instruments for any purpose, if the banking entity:
(i) Is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or
(ii) Is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business; or
(3) Purchase or sell one or more financial instruments, with respect to a financial instrument that is recorded at fair value on a recurring basis under applicable accounting standards.
(c)
(ii) If the sum of the absolute values of the daily net gain and loss figures determined in accordance with paragraph (c)(1)(i) of this section for the preceding 90-calendar-day period does not exceed $25 million, the activities of the trading desk shall be presumed to be in compliance with the prohibition in paragraph (a) of this section.
(2) The SEC may rebut the presumption of compliance in paragraph (c)(1)(ii) of this section by providing written notice to the banking entity that the SEC has determined that one or more of the banking entity's activities violates the prohibitions under subpart B.
(3) If a trading desk operating pursuant to paragraph (c)(1)(ii) of this section exceeds the $25 million threshold in that paragraph at any point, the banking entity shall, in accordance with any policies and procedures adopted by the SEC:
(i) Promptly notify the SEC;
(ii) Demonstrate that the trading desk's purchases and sales of financial instruments comply with subpart B; and
(iii) Demonstrate, with respect to the trading desk, how the banking entity will maintain compliance with subpart B on an ongoing basis.
(e) * * *
(3) Any purchase or sale of a security, foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or physically-settled cross-currency swap, by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity that, with respect to such financial instruments:
(i) Specifically contemplates and authorizes the particular financial instruments to be used for liquidity management purposes, the amount, types, and risks of these financial instruments that are consistent with liquidity management, and the liquidity circumstances in which the particular financial instruments may or must be used;
(ii) Requires that any purchase or sale of financial instruments contemplated and authorized by the plan be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for liquidity management purposes be highly liquid and limited to financial instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements;
(iv) Limits any financial instruments purchased or sold for liquidity management purposes, together with any other instruments purchased or sold for such purposes, to an amount that is consistent with the banking entity's near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan;
(v) Includes written policies and procedures, internal controls, analysis, and independent testing to ensure that the purchase and sale of financial instruments that are not permitted under §§ 255.6(a) or (b) of this subpart are for the purpose of liquidity management and in accordance with the liquidity management plan described in paragraph (e)(3) of this section; and
(vi) Is consistent with the SEC's supervisory requirements, guidance, and expectations regarding liquidity management;
(10) Any purchase (or sale) of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or excluded activity or is a subsequent transaction to correct such an error, and the erroneously purchased (or sold) financial instrument is promptly transferred to a separately-managed trade error account for disposition.
(f) * * *
(5)
(g)
(2)
(ii)
(B) Failure to respond within 30 days or such other time period as may be specified by the SEC shall constitute a waiver of any objections to the SEC's determination.
(iii) After the close of banking entity's response period, the SEC will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the SEC's determination that the purchase or sale of one or more financial instruments is for the trading account. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
The revisions and additions read as follows:
(a) * * *
(2)
(i) The banking entity is acting as an underwriter for a distribution of
(ii) (A) The amount and type of the securities in the trading desk's underwriting position are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant type of security, and (B) reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (a) of this section, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing:
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
(B) Limits for each trading desk, in accordance with paragraph (a)(8)(i) of this section;
(C) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(D) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk's limit(s), and independent review of such demonstrable analysis and approval;
(iv) The compensation arrangements of persons performing the activities described in this paragraph (a) are designed not to reward or incentivize prohibited proprietary trading; and
(v) The banking entity is licensed or registered to engage in the activity described in this paragraph (a) in accordance with applicable law.
(8)
(i)
(A) A banking entity shall be presumed to meet the requirements of paragraph (a)(2)(ii)(A) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits described in paragraph (a)(8)(i)(B) and does not exceed such limits.
(B) The presumption described in paragraph (8)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's underwriting activities, on the:
(
(
(
(ii)
(iii)
(iv)
(b) * * *
(2)
(i) The trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
(ii) The trading desk's market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, based on the liquidity, maturity, and depth of the market for the relevant types of financial instrument(s).
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (b) of this section, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with paragraph (b)(2)(i) of this section;
(B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C) of this section; the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance with paragraph (b)(6)(i) of this section;
(D) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(E) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis that the basis for any temporary or permanent increase to a trading desk's limit(s) is consistent with the requirements of this paragraph (b), and independent review of such demonstrable analysis and approval;
(iv) In the case of a banking entity with significant trading assets and liabilities, to the extent that any limit identified pursuant to paragraph (b)(2)(iii)(C) of this section is exceeded, the trading desk takes action to bring the trading desk into compliance with the
(v) The compensation arrangements of persons performing the activities described in this paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in activity described in this paragraph (b) in accordance with applicable law.
(3) * * *
(i) A trading desk or other organizational unit of another banking entity is not a client, customer, or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more as measured in accordance with the methodology described in definition of “significant trading assets and liabilities” contained in § 255.2 of this part, unless:
(6)
(i)
(A) A banking entity shall be presumed to meet the requirements of paragraph (b)(2)(ii) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits described in paragraph (b)(6)(i)(B) and does not exceed such limits.
(B) The presumption described in paragraph (6)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's market making-related activities, on the:
(
(
(
(
(ii)
(iii)
(iv)
(b)
(1) The risk-mitigating hedging activities of a banking entity that has significant trading assets and liabilities are permitted under paragraph (a) of this section only if:
(i) The banking entity has established and implements, maintains and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures regarding the positions, techniques and strategies that may be used for hedging, including documentation indicating what positions, contracts or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts or other holdings;
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(C) The conduct of analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review, monitoring and management by the banking entity that:
(
(
(
(iii) The compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that does not have significant trading assets and liabilities are permitted under paragraph (a) of this section only if the risk-mitigating hedging activity:
(i) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to
(ii) Is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(2) of this section and is not prohibited proprietary trading.
(c) * * * (1) A banking entity that has significant trading assets and liabilities must comply with the requirements of paragraphs (c)(2) and (3) of this section, unless the requirements of paragraph (c)(4) of this section are met, with respect to any purchase or sale of financial instruments made in reliance on this section for risk-mitigating hedging purposes that is:
(4) The requirements of paragraphs (c)(2) and (3) of this section do not apply to the purchase or sale of a financial instrument described in paragraph (c)(1) of this section if:
(i) The financial instrument purchased or sold is identified on a written list of pre-approved financial instruments that are commonly used by the trading desk for the specific type of hedging activity for which the financial instrument is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The hedging limits shall be appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken by the trading desk;
(B) Financial instruments purchased and sold for hedging activities by the trading desk; and
(C) Levels and duration of the risk exposures being hedged.
(e) * * *
(3) A purchase or sale by a banking entity is permitted for purposes of this paragraph (e) if:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(c)
(1) Those activities are conducted in accordance with the requirements of § 255.4(a) or § 255.4(b) of subpart B, respectively; and
(2) With respect to any banking entity (or any affiliate thereof) that: Acts as a sponsor, investment adviser or commodity trading advisor to a particular covered fund or otherwise acquires and retains an ownership interest in such covered fund in reliance on paragraph (a) of this section; or acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78
(a)
(i) A compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
(2)
(i) The banking entity has established and implements, maintains and enforces an internal compliance program in accordance with subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures; and
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(ii) The acquisition or retention of the ownership interest:
(A) Is made in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedge, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising (1) out of a transaction conducted solely to accommodate a specific customer request with respect to the covered fund or (2) in connection with the compensation arrangement with the employee that directly provides investment advisory, commodity trading advisory, or other services to the covered fund;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section; and
(D) Is subject to continuing review, monitoring and management by the banking entity.
(iii) With respect to risk-mitigating hedging activity conducted pursuant to paragraph (a)(1)(i), the compensation arrangement relates solely to the covered fund in which the banking entity or any affiliate has acquired an ownership interest pursuant to paragraph (a)(1)(i) and such compensation arrangement provides that any losses incurred by the banking entity on such ownership interest will be offset by corresponding decreases in amounts payable under such compensation arrangement.
(b) * * *
(3) An ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of paragraph (b)(1)(iii) of this section only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. If the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of this paragraph (b)(3) to participate in any offer or sale by the covered fund of ownership interests in the covered fund.
(a) * * *
(2) * * *
(ii) * * *
(B) The chief executive officer (or equivalent officer) of the banking entity certifies in writing annually no later than March 31 to the SEC (with a duty to update the certification if the information in the certification materially changes) that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and
The revisions read as follows:
(a)
(b)
(c)
(1) The CEO of a banking entity described in paragraph (2) must, based on a review by the CEO of the banking entity, attest in writing to the SEC, each year no later than March 31, that the banking entity has in place processes reasonably designed to achieve compliance with section 13 of the BHC Act and this part. In the case of a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States.
(2) The requirements of paragraph (c)(1) apply to a banking entity if:
(i) The banking entity does not have limited trading assets and liabilities; or
(ii) The SEC notifies the banking entity in writing that it must satisfy the requirements contained in paragraph (c)(1).
(d)
(i) The banking entity has significant trading assets and liabilities; or
(ii) The SEC notifies the banking entity in writing that it must satisfy the reporting requirements contained in the Appendix.
(2) Frequency of reporting: Unless the SEC notifies the banking entity in writing that it must report on a different basis, a banking entity with $50 billion or more in trading assets and liabilities (as calculated in accordance with the methodology described in the definition of “significant trading assets and liabilities” contained in § 255.2 of this part) shall report the information required by the Appendix for each calendar month within 20 days of the end of each calendar month. Any other banking entity subject to the Appendix shall report the information required by the Appendix for each calendar quarter within 30 days of the end of that calendar quarter unless the SEC notifies the banking entity in writing that it must report on a different basis.
(e)
(f) * * *
(2)
(g)
(1)
(2)
(i) If upon examination or audit, the SEC determines that the banking entity has engaged in proprietary trading or covered fund activities that are otherwise prohibited under subpart B or subpart C, the SEC may require the banking entity to be treated under this part as if it did not have limited trading assets and liabilities.
(ii) Notice and Response Procedures.
(A) Notice. The SEC will notify the banking entity in writing of any determination pursuant to paragraph (g)(2)(i) of this section to rebut the presumption described in this paragraph (g) and will provide an explanation of the determination.
(B) Response.
(I) The banking entity may respond to any or all items in the notice described in paragraph (g)(2)(ii)(A) of this section. The response should include any matters that the banking entity would have the SEC consider in deciding whether the banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The response must be in writing and delivered to the designated SEC official within 30 days after the date on which the banking entity received the notice. The SEC may shorten the time period when, in the opinion of the SEC, the activities or condition of the banking entity so requires, provided that the banking entity is informed promptly of the new time period, or with the consent of the banking entity. In its discretion, the SEC may extend the time period for good cause.
(II) Failure to respond within 30 days or such other time period as may be specified by the SEC shall constitute a waiver of any objections to the SEC's determination.
(C) After the close of banking entity's response period, the SEC will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the SEC's determination that banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
(h)
a. This appendix sets forth reporting and recordkeeping requirements that certain banking entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart B (“proprietary trading restrictions”). Pursuant to § 255.20(d), this appendix applies to a banking entity that, together with its affiliates and subsidiaries, has significant trading assets and liabilities. These entities are required to (i) furnish periodic reports to the SEC regarding a variety of quantitative measurements of their covered trading activities, which vary depending on the scope and size of covered trading activities, and (ii) create and maintain records documenting the preparation and content of these reports. The requirements of this appendix must be incorporated into the banking entity's internal compliance program under § 255.20.
b. The purpose of this appendix is to assist banking entities and the SEC in:
(i) Better understanding and evaluating the scope, type, and profile of the banking entity's covered trading activities;
(ii) Monitoring the banking entity's covered trading activities;
(iii) Identifying covered trading activities that warrant further review or examination by the banking entity to verify compliance with the proprietary trading restrictions;
(iv) Evaluating whether the covered trading activities of trading desks engaged in market making-related activities subject to § 255.4(b) are consistent with the requirements governing permitted market making-related activities;
(v) Evaluating whether the covered trading activities of trading desks that are engaged in permitted trading activity subject to §§ 255.4, 255.5, or 255.6(a)-(b) (
(vi) Identifying the profile of particular covered trading activities of the banking entity, and the individual trading desks of the banking entity, to help establish the appropriate frequency and scope of examination by the SEC of such activities; and
(vii) Assessing and addressing the risks associated with the banking entity's covered trading activities.
c. Information that must be furnished pursuant to this appendix is
d. In addition to the quantitative measurements required in this appendix, a banking entity may need to develop and implement other quantitative measurements in order to effectively monitor its covered trading activities for compliance with section 13 of the BHC Act and this part and to have an effective compliance program, as required by § 255.20. The effectiveness of particular quantitative measurements may differ based on the profile of the banking entity's businesses in general and, more specifically, of the particular trading desk, including types of instruments traded, trading activities and strategies, and history and experience (
e. On an ongoing basis, banking entities must carefully monitor, review, and evaluate all furnished quantitative measurements, as well as any others that they choose to utilize in order to maintain compliance with section 13 of the BHC Act and this part. All measurement results that indicate a heightened risk of impermissible proprietary trading, including with respect to otherwise-permitted activities under §§ 255.4 through 255.6(a)-(b), or that result in a material exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking entity for review, further analysis, explanation to the SEC, and remediation, where appropriate. The quantitative measurements discussed in this appendix should be helpful to banking entities in identifying and managing the risks related to their covered trading activities.
The terms used in this appendix have the same meanings as set forth in §§ 255.2 and 255.3. In addition, for purposes of this appendix, the following definitions apply:
1.
i. Risk and Position Limits and Usage;
ii. Risk Factor Sensitivities;
iii. Value-at-Risk and Stressed Value-at-Risk;
iv. Comprehensive Profit and Loss Attribution;
v. Positions;
vi. Transaction Volumes; and
vii. Securities Inventory Aging.
2.
3.
4.
5.
Each banking entity must provide descriptive information regarding each trading desk engaged in covered trading activities, including:
1. Name of the trading desk used internally by the banking entity and a unique identification label for the trading desk;
2. Identification of each type of covered trading activity in which the trading desk is engaged;
3. Brief description of the general strategy of the trading desk;
4. A list of the types of financial instruments and other products purchased and sold by the trading desk; an indication of which of these are the main financial instruments or products purchased and sold by the trading desk; and, for trading desks engaged in market making-related activities under § 255.4(b), specification of whether each type of financial instrument is included in market-maker positions or not included in market-maker positions. In addition, indicate whether the trading desk is including in its quantitative measurements products excluded from the definition of “financial instrument” under § 255.3(d)(2) and, if so, identify such products;
5. Identification by complete name of each legal entity that serves as a booking entity for covered trading activities conducted by the trading desk; and indication of which of the identified legal entities are the main booking entities for covered trading activities of the trading desk;
6. For each legal entity that serves as a booking entity for covered trading activities, specification of any of the following applicable entity types for that legal entity:
i. National bank, Federal branch or Federal agency of a foreign bank, Federal savings association, Federal savings bank;
ii. State nonmember bank, foreign bank having an insured branch, State savings association;
iii. U.S.-registered broker-dealer, U.S.-registered security-based swap dealer, U.S.-registered major security-based swap participant;
iv. Swap dealer, major swap participant, derivatives clearing organization, futures commission merchant, commodity pool operator, commodity trading advisor, introducing broker, floor trader, retail foreign exchange dealer;
v. State member bank;
vi. Bank holding company, savings and loan holding company;
vii. Foreign banking organization as defined in 12 CFR 211.21(o);
viii. Uninsured State-licensed branch or agency of a foreign bank; or
ix. Other entity type not listed above, including a subsidiary of a legal entity described above where the subsidiary itself is not an entity type listed above;
7. Indication of whether each calendar date is a trading day or not a trading day for the trading desk; and
8. Currency reported and daily currency conversion rate.
Each banking entity must provide the following information regarding the quantitative measurements:
1. A Risk and Position Limits Information Schedule that provides identifying and descriptive information for each limit reported pursuant to the Risk and Position Limits and Usage quantitative measurement, including the name of the limit, a unique identification label for the limit, a description of the limit, whether the limit is intraday or end-of-day, the unit of measurement for the limit, whether the limit measures risk on a net or gross basis, and the type of limit;
2. A Risk Factor Sensitivities Information Schedule that provides identifying and descriptive information for each risk factor sensitivity reported pursuant to the Risk Factor Sensitivities quantitative measurement, including the name of the sensitivity, a unique identification label for the sensitivity, a description of the sensitivity, and the sensitivity's risk factor change unit;
3. A Risk Factor Attribution Information Schedule that provides identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution quantitative measurement, including the name of the risk factor or other factor, a unique identification label for the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor's change unit;
4. A Limit/Sensitivity Cross-Reference Schedule that cross-references, by unique identification label, limits identified in the Risk and Position Limits Information Schedule to associated risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule; and
5. A Risk Factor Sensitivity/Attribution Cross-Reference Schedule that cross-references, by unique identification label, risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule to associated risk factor attributions identified in the Risk Factor Attribution Information Schedule.
Each banking entity made subject to this appendix by § 255.20 must submit in a separate electronic document a Narrative Statement to the SEC describing any changes in calculation methods used, a description of and reasons for changes in the banking entity's trading desk structure or trading desk strategies, and when any such change occurred. The Narrative Statement must include any information the banking entity views as relevant for assessing the information reported, such as further description of calculation methods used.
If a banking entity does not have any information to report in a Narrative Statement, the banking entity must submit an electronic document stating that it does not have any information to report in a Narrative Statement.
A banking entity must calculate any applicable quantitative measurement for each trading day. A banking entity must report the Narrative Statement, the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement electronically to the SEC on the reporting schedule established in § 255.20 unless otherwise requested by the SEC. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement to the SEC in accordance with the XML Schema specified and published on the SEC's website.
A banking entity must, for any quantitative measurement furnished to the SEC pursuant to this appendix and § 255.20(d), create and maintain records documenting the preparation and content of these reports, as well as such information as is necessary to permit the SEC to verify the accuracy of such reports, for a period of five years from the end of the calendar year for which the measurement was taken. A banking entity must retain the Narrative Statement, the Trading Desk Information, and the Quantitative Measurements Identifying Information for a period of five years from the end of the calendar year for which the information was reported to the SEC.
i.
A. A banking entity must provide the following information for each limit reported pursuant to this quantitative measurement: The unique identification label for the limit reported in the Risk and Position Limits Information Schedule, the limit size (distinguishing between an upper and a lower limit), and the value of usage of the limit.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
A. The comprehensive profit and loss associated with existing positions must reflect changes in the value of these positions on the applicable day.
The comprehensive profit and loss from existing positions must be further attributed, as applicable, to changes in (i) the specific risk factors and other factors that are monitored and managed as part of the trading desk's overall risk management policies and procedures; and (ii) any other applicable elements, such as cash flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from existing positions to specific risk factors and other factors, a banking entity must provide the following information for the factors that explain the preponderance of the profit or loss changes due to risk factor changes: The unique identification label for the risk factor or other factor listed in the Risk Factor Attribution Information Schedule, and the profit or loss due to the risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions must reflect commissions and fee income or expense and market gains or losses associated with transactions executed on the applicable day. New positions include purchases and sales of financial instruments and other assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and loss from new positions may be reported in the aggregate and does not need to be further attributed to specific sources.
D. The portion of comprehensive profit and loss that cannot be specifically attributed to known sources must be allocated to a residual category identified as an unexplained portion of the comprehensive profit and loss. Significant unexplained profit and loss must be escalated for further investigation and analysis.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
For the reasons set forth in the Common Preamble, the Commodity Futures Trading Commission proposes to amend Part 75 to chapter I of Title 17 of the Code of Federal Regulations as follows:
12 U.S.C. 1851.
Unless otherwise specified, for purposes of this part:
(a)
(b)
(c)
(d)
(i) Any insured depository institution;
(ii) Any company that controls an insured depository institution;
(iii) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(iv) Any affiliate or subsidiary of any entity described in paragraphs (d)(1)(i), (ii), or (iii) of this section.
(2) Banking entity does not include:
(i) A covered fund that is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section;
(ii) A portfolio company held under the authority contained in section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H), (I)), or any portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), so long as the portfolio company or portfolio concern is not itself a banking entity under paragraphs (d)(1)(i), (ii), or (iii) of this section; or
(iii) The FDIC acting in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(e)
(f)
(g)
(h)
(i)
(i) Any swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));
(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for deferred shipment or delivery that is intended to be physically settled;
(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25));
(iv) Any agreement, contract, or transaction in foreign currency described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(C)(i));
(v) Any agreement, contract, or transaction in a commodity other than foreign currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
(vi) Any transaction authorized under section 19 of the Commodity Exchange Act (7 U.S.C. 23(a) or (b));
(2) A derivative does not include:
(i) Any consumer, commercial, or other agreement, contract, or transaction that the CFTC and SEC have further defined by joint regulation, interpretation, guidance, or other action as not within the definition of swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)); or
(ii) Any identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(1) The banking entity has, together with its affiliates and subsidiaries on a worldwide consolidated basis, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1,000,000,000; and
(2) The Commission has not determined pursuant to § 75.20(g) or (h) of this part that the banking entity should not be treated as having limited trading assets and liabilities.
(u)
(v)
(w)
(x)
(y)
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)
(1)
(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $10,000,000,000; or
(ii) The Commission has determined pursuant to § 75.20(h) of this part that the banking entity should be treated as having significant trading assets and liabilities.
(2) With respect to a banking entity other than a banking entity described in paragraph (3), trading assets and liabilities for purposes of this paragraph (ff) means trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (ff) means the trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
(ii) For purposes of paragraph (ff)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not
(gg)
(hh)
(ii)
(jj)
The revisions and additions read as follows:
(b)
(1)(i) Purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule; or
(ii) With respect to a banking entity that is not, and is not controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or any State, purchase or sell one or more financial instruments that are subject to capital requirements under a market risk framework established by the home-country supervisor that is consistent with the market risk framework published by the Basel Committee on Banking Supervision, as amended from time to time.
(2) Purchase or sell one or more financial instruments for any purpose, if the banking entity:
(i) Is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or
(ii) Is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business; or
(3) Purchase or sell one or more financial instruments, with respect to a financial instrument that is recorded at fair value on a recurring basis under applicable accounting standards.
(c)
(ii) If the sum of the absolute values of the daily net gain and loss figures determined in accordance with paragraph (c)(1)(i) of this section for the preceding 90-calendar-day period does not exceed $25 million, the activities of the trading desk shall be presumed to be in compliance with the prohibition in paragraph (a) of this section.
(2) The Commission may rebut the presumption of compliance in paragraph (c)(1)(ii) of this section by providing written notice to the banking entity that the Commission has determined that one or more of the banking entity's activities violates the prohibitions under subpart B.
(3) If a trading desk operating pursuant to paragraph (c)(1)(ii) of this section exceeds the $25 million threshold in that paragraph at any point, the banking entity shall, in accordance with any policies and procedures adopted by the Commission:
(i) Promptly notify the Commission;
(ii) Demonstrate that the trading desk's purchases and sales of financial instruments comply with subpart B; and
(iii) Demonstrate, with respect to the trading desk, how the banking entity will maintain compliance with subpart B on an ongoing basis.
(e) * * *
(3) Any purchase or sale of a security, foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or physically-settled cross-currency swap, by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity that, with respect to such financial instruments:
(i) Specifically contemplates and authorizes the particular financial instruments to be used for liquidity management purposes, the amount, types, and risks of these financial instruments that are consistent with liquidity management, and the liquidity circumstances in which the particular financial instruments may or must be used;
(ii) Requires that any purchase or sale of financial instruments contemplated and authorized by the plan be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for liquidity management purposes be highly liquid and limited to financial instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements;
(iv) Limits any financial instruments purchased or sold for liquidity management purposes, together with any other instruments purchased or sold for such purposes, to an amount that is consistent with the banking entity's near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan;
(v) Includes written policies and procedures, internal controls, analysis, and independent testing to ensure that the purchase and sale of financial instruments that are not permitted under §§ 75.6(a) or (b) of this subpart are for the purpose of liquidity management and in accordance with the liquidity management plan described in paragraph (e)(3) of this section; and
(vi) Is consistent with the Commission's supervisory requirements, guidance, and
(10) Any purchase (or sale) of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or excluded activity or is a subsequent transaction to correct such an error, and the erroneously purchased (or sold) financial instrument is promptly transferred to a separately-managed trade error account for disposition.
(f) * * *
(5)
(g)
(2)
(ii)
(B) Failure to respond within 30 days or such other time period as may be specified by the Commission shall constitute a waiver of any objections to the Commission's determination.
(iii) After the close of banking entity's response period, the Commission will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the Commission's determination that the purchase or sale of one or more financial instruments is for the trading account. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
The revisions and additions to read as follows:
(a) * * *
(2)
(i) The banking entity is acting as an underwriter for a distribution of securities and the trading desk's underwriting position is related to such distribution;
(ii)(A) The amount and type of the securities in the trading desk's underwriting position are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant type of security, and (B) reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (a) of this section, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing:
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
(B) Limits for each trading desk, in accordance with paragraph (a)(8)(i) of this section;
(C) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(D) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk's limit(s), and independent review of such demonstrable analysis and approval;
(iv) The compensation arrangements of persons performing the activities described in this paragraph (a) are designed not to reward or incentivize prohibited proprietary trading; and
(v) The banking entity is licensed or registered to engage in the activity described in this paragraph (a) in accordance with applicable law.
(8)
(i)
(A) A banking entity shall be presumed to meet the requirements of paragraph (a)(2)(ii)(A) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits described in paragraph (a)(8)(i)(B) and does not exceed such limits.
(B) The presumption described in paragraph (8)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's underwriting activities, on the:
(
(
(
(ii)
(iii)
(iv)
(b) * * *
(2)
(i) The trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
(ii) The trading desk's market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, based on the liquidity, maturity, and depth of the market for the relevant types of financial instrument(s).
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of paragraph (b) of this section, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with paragraph (b)(2)(i) of this section;
(B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C) of this section; the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance with paragraph (b)(6)(i) of this section;
(D) Internal controls and ongoing monitoring and analysis of each trading desk's compliance with its limits; and
(E) Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk's limit(s), demonstrable analysis that the basis for any temporary or permanent increase to a trading desk's limit(s) is consistent with the requirements of this paragraph (b), and independent review of such demonstrable analysis and approval;
(iv) In the case of a banking entity with significant trading assets and liabilities, to the extent that any limit identified pursuant to paragraph (b)(2)(iii)(C) of this section is exceeded, the trading desk takes action to bring the trading desk into compliance with the limits as promptly as possible after the limit is exceeded;
(v) The compensation arrangements of persons performing the activities described in this paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in activity described in this paragraph (b) in accordance with applicable law.
(3) * * *
(i) A trading desk or other organizational unit of another banking entity is not a client, customer, or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more as measured in accordance with the methodology described in definition of “significant trading assets and liabilities” contained in § 75.2 of this part, unless:
(6)
(B) The presumption described in paragraph (6)(i)(A) of this section shall be available with respect to limits for each trading desk that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk's market making-related activities, on the:
(
(
(
(
(ii)
(iii)
(iv)
(b)
(i) The banking entity has established and implements, maintains and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures regarding the positions, techniques and strategies that may be used for hedging, including documentation indicating what positions, contracts or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts or other holdings;
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(C) The conduct of analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review, monitoring and management by the banking entity that:
(
(
(
(iii) The compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that does not have significant trading assets and liabilities are permitted under paragraph (a) of this section only if the risk-mitigating hedging activity:
(i) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof; and
(ii) Is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(2) of this section and is not prohibited proprietary trading.
(c) * * * (1) A banking entity that has significant trading assets and liabilities must comply with the requirements of paragraphs (c)(2) and (3) of this section, unless the requirements of paragraph (c)(4) of this section are met, with respect to any purchase or sale of financial instruments made in reliance on this section for risk-mitigating hedging purposes that is:
(4) The requirements of paragraphs (c)(2) and (3) of this section do not apply to the purchase or sale of a financial instrument described in paragraph (c)(1) of this section if:
(i) The financial instrument purchased or sold is identified on a written list of pre-approved financial instruments that are commonly used by the trading desk for the specific type of hedging activity for which the financial instrument is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The hedging limits shall be appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken by the trading desk;
(B) Financial instruments purchased and sold for hedging activities by the trading desk; and
(C) Levels and duration of the risk exposures being hedged.
(e) * * *
(3) A purchase or sale by a banking entity is permitted for purposes of this paragraph (e) if:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(c)
(1) Those activities are conducted in accordance with the requirements of § 75.4(a) or § 75.4(b) of subpart B, respectively; and
(2) With respect to any banking entity (or any affiliate thereof) that: Acts as a sponsor, investment adviser or commodity trading advisor to a particular covered fund or otherwise acquires and retains an ownership interest in such covered fund in reliance on paragraph (a) of this section; or acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78
(a)
(i) A compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
(2)
(i) The banking entity has established and implements, maintains and enforces an internal compliance program in accordance with subpart D of this part that is reasonably designed to ensure the banking entity's compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures; and
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(ii) The acquisition or retention of the ownership interest:
(A) Is made in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedge, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising (1) out of a transaction conducted solely to accommodate a specific customer request with respect to the covered fund or (2) in connection with the compensation arrangement with the employee that directly provides investment advisory, commodity trading advisory, or other services to the covered fund;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section; and
(D) Is subject to continuing review, monitoring and management by the banking entity.
(iii) With respect to risk-mitigating hedging activity conducted pursuant to paragraph (a)(1)(i), the compensation arrangement relates solely to the covered fund in which the banking entity or any affiliate has acquired an ownership interest pursuant to paragraph (a)(1)(i) and such compensation arrangement provides that any losses incurred by the banking entity on such ownership interest will be offset by corresponding decreases in amounts payable under such compensation arrangement.
(b) * * *
(3) An ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of paragraph (b)(1)(iii) of this section only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. If the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of this paragraph (b)(3) to participate in any offer or sale by the covered fund of ownership interests in the covered fund.
(a) * * *
(2) * * *
(ii) * * *
(B) The chief executive officer (or equivalent officer) of the banking entity certifies in writing annually no later than March 31 to the Commission (with a duty to update the certification if the information in the certification materially changes) that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and
The revisions amd additions to read as follows:
(a)
(b)
(c)
(1) The CEO of a banking entity described in paragraph (2) must, based on a review by the CEO of the banking entity, attest in writing to the Commission, each year no later than March 31, that the banking entity has in place processes reasonably designed to achieve compliance with section 13 of the BHC Act and this part. In the case of a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States.
(2) The requirements of paragraph (c)(1) apply to a banking entity if:
(i) The banking entity does not have limited trading assets and liabilities; or
(ii) The Commission notifies the banking entity in writing that it must satisfy the requirements contained in paragraph (c)(1).
(d)
(i) The banking entity has significant trading assets and liabilities; or
(ii) The Commission notifies the banking entity in writing that it must satisfy the reporting requirements contained in the Appendix.
(2) Frequency of reporting: Unless the Commission notifies the banking entity in writing that it must report on a different basis, a banking entity with $50 billion or more in trading assets and liabilities (as calculated in accordance with the methodology described in the definition of “significant trading assets and liabilities” contained in § 75.2 of this part of this part) shall report the information required by the Appendix for each calendar month within 20 days of the end of each calendar month. Any other banking entity subject to the Appendix shall report the information required by the Appendix for each calendar quarter within 30 days of the end of that calendar quarter unless the Commission notifies the banking entity in writing that it must report on a different basis.
(e)
(f) * * *
(2)
(g)
(1)
(2)
(i) If upon examination or audit, the Commission determines that the banking entity has engaged in proprietary trading or covered fund activities that are otherwise prohibited under subpart B or subpart C, the Commission may require the banking entity to be treated under this part as if it did not have limited trading assets and liabilities.
(ii) Notice and Response Procedures.
(A) Notice. The Commission will notify the banking entity in writing of any determination pursuant to paragraph (g)(2)(i) of this section to rebut the presumption described in this paragraph (g) and will provide an explanation of the determination.
(B) Response.
(I) The banking entity may respond to any or all items in the notice described in paragraph (g)(2)(ii)(A) of this section. The response should include any matters that the banking entity would have the Commission consider in deciding whether the banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The response must be in writing and delivered to the designated Commission official within 30 days after the date on which the banking entity received the notice. The Commission may shorten the time period when, in the opinion of the Commission, the activities or condition of the banking entity so requires, provided that the banking entity is informed promptly of the new time period, or with the consent of the banking entity. In its discretion, the Commission may extend the time period for good cause.
(II) Failure to respond within 30 days or such other time period as may be specified by the Commission shall constitute a waiver of any objections to the Commission's determination.
(C) After the close of banking entity's response period, the Commission will decide, based on a review of the banking entity's response and other information concerning the banking entity, whether to maintain the Commission's determination that banking entity has engaged in proprietary trading or covered fund activities prohibited under subpart B or subpart C. The banking entity will be notified of the decision in writing. The notice will include an explanation of the decision.
(h)
a. This appendix sets forth reporting and recordkeeping requirements that certain banking entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart B (“proprietary trading restrictions”). Pursuant to § 75.20(d), this appendix applies to a banking entity that, together with its affiliates and subsidiaries, has significant trading assets and liabilities.
b. The purpose of this appendix is to assist banking entities and the Commission in:
(i) Better understanding and evaluating the scope, type, and profile of the banking entity's covered trading activities;
(ii) Monitoring the banking entity's covered trading activities;
(iii) Identifying covered trading activities that warrant further review or examination by the banking entity to verify compliance with the proprietary trading restrictions;
(iv) Evaluating whether the covered trading activities of trading desks engaged in market making-related activities subject to § 75.4(b) are consistent with the requirements governing permitted market making-related activities;
(v) Evaluating whether the covered trading activities of trading desks that are engaged in permitted trading activity subject to §§ 75.4, 75.5, or 75.6(a)-(b) (
(vi) Identifying the profile of particular covered trading activities of the banking entity, and the individual trading desks of the banking entity, to help establish the appropriate frequency and scope of examination by the Commission of such activities; and
(vii) Assessing and addressing the risks associated with the banking entity's covered trading activities.
c. Information that must be furnished pursuant to this appendix is
d. In addition to the quantitative measurements required in this appendix, a banking entity may need to develop and implement other quantitative measurements in order to effectively monitor its covered trading activities for compliance with section 13 of the BHC Act and this part and to have an effective compliance program, as required by § 75.20. The effectiveness of particular quantitative measurements may differ based on the profile of the banking entity's businesses in general and, more specifically, of the particular trading desk, including types of instruments traded, trading activities and strategies, and history and experience (
e. On an ongoing basis, banking entities must carefully monitor, review, and evaluate all furnished quantitative measurements, as well as any others that they choose to utilize in order to maintain compliance with section 13 of the BHC Act and this part. All measurement results that indicate a heightened risk of impermissible proprietary trading, including with respect to otherwise-permitted activities under §§ 75.4 through 75.6(a)-(b), or that result in a material exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking entity for review, further analysis, explanation to the Commission, and remediation, where appropriate. The quantitative measurements discussed in this appendix should be helpful to banking entities in identifying and managing the risks related to their covered trading activities.
The terms used in this appendix have the same meanings as set forth in §§ 75.2 and 75.3. In addition, for purposes of this appendix, the following definitions apply:
1.
i. Risk and Position Limits and Usage;
ii. Risk Factor Sensitivities;
iii. Value-at-Risk and Stressed Value-at-Risk;
iv. Comprehensive Profit and Loss Attribution;
v. Positions;
vi. Transaction Volumes; and
vii. Securities Inventory Aging.
2.
3.
4.
5.
1. Each banking entity must provide descriptive information regarding each trading desk engaged in covered trading activities, including:
i. Name of the trading desk used internally by the banking entity and a unique identification label for the trading desk;
ii. Identification of each type of covered trading activity in which the trading desk is engaged;
iii. Brief description of the general strategy of the trading desk;
iv. A list of the types of financial instruments and other products purchased and sold by the trading desk; an indication of which of these are the main financial instruments or products purchased and sold by the trading desk; and, for trading desks engaged in market making-related activities under § 75.4(b), specification of whether each type of financial instrument is included in market-maker positions or not included in market-maker positions. In addition, indicate whether the trading desk is including in its quantitative measurements products excluded from the definition of “financial instrument” under § 75.3(d)(2) and, if so, identify such products;
v. Identification by complete name of each legal entity that serves as a booking entity for covered trading activities conducted by the trading desk; and indication of which of the identified legal entities are the main booking entities for covered trading activities of the trading desk;
vii. For each legal entity that serves as a booking entity for covered trading activities, specification of any of the following applicable entity types for that legal entity:
A. National bank, Federal branch or Federal agency of a foreign bank, Federal savings association, Federal savings bank;
B. State nonmember bank, foreign bank having an insured branch, State savings association;
C. U.S.-registered broker-dealer, U.S.-registered security-based swap dealer, U.S.-
D. Swap dealer, major swap participant, derivatives clearing organization, futures commission merchant, commodity pool operator, commodity trading advisor, introducing broker, floor trader, retail foreign exchange dealer;
E. State member bank;
F. Bank holding company, savings and loan holding company;
G. Foreign banking organization as defined in 12 CFR 211.21(o);
H. Uninsured State-licensed branch or agency of a foreign bank; or
I. Other entity type not listed above, including a subsidiary of a legal entity described above where the subsidiary itself is not an entity type listed above;
2. Indication of whether each calendar date is a trading day or not a trading day for the trading desk; and
3. Currency reported and daily currency conversion rate.
Each banking entity must provide the following information regarding the quantitative measurements:
1. A Risk and Position Limits Information Schedule that provides identifying and descriptive information for each limit reported pursuant to the Risk and Position Limits and Usage quantitative measurement, including the name of the limit, a unique identification label for the limit, a description of the limit, whether the limit is intraday or end-of-day, the unit of measurement for the limit, whether the limit measures risk on a net or gross basis, and the type of limit;
2. A Risk Factor Sensitivities Information Schedule that provides identifying and descriptive information for each risk factor sensitivity reported pursuant to the Risk Factor Sensitivities quantitative measurement, including the name of the sensitivity, a unique identification label for the sensitivity, a description of the sensitivity, and the sensitivity's risk factor change unit;
3. A Risk Factor Attribution Information Schedule that provides identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution quantitative measurement, including the name of the risk factor or other factor, a unique identification label for the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor's change unit;
4. A Limit/Sensitivity Cross-Reference Schedule that cross-references, by unique identification label, limits identified in the Risk and Position Limits Information Schedule to associated risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule; and
5. A Risk Factor Sensitivity/Attribution Cross-Reference Schedule that cross-references, by unique identification label, risk factor sensitivities identified in the Risk Factor Sensitivities Information Schedule to associated risk factor attributions identified in the Risk Factor Attribution Information Schedule.
Each banking entity made subject to this appendix by § 75.20 must submit in a separate electronic document a Narrative Statement to the Commission describing any changes in calculation methods used, a description of and reasons for changes in the banking entity's trading desk structure or trading desk strategies, and when any such change occurred. The Narrative Statement must include any information the banking entity views as relevant for assessing the information reported, such as further description of calculation methods used. If a banking entity does not have any information to report in a Narrative Statement, the banking entity must submit an electronic document stating that it does not have any information to report in a Narrative Statement.
A banking entity must calculate any applicable quantitative measurement for each trading day. A banking entity must report the Narrative Statement, the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement electronically to the Commission on the reporting schedule established in § 75.20 unless otherwise requested by the Commission. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement to the Commission in accordance with the XML Schema specified and published on the Commission's website.
A banking entity must, for any quantitative measurement furnished to the Commission pursuant to this appendix and § 75.20(d), create and maintain records documenting the preparation and content of these reports, as well as such information as is necessary to permit the Commission to verify the accuracy of such reports, for a period of five years from the end of the calendar year for which the measurement was taken. A banking entity must retain the Narrative Statement, the Trading Desk Information, and the Quantitative Measurements Identifying Information for a period of five years from the end of the calendar year for which the information was reported to the Commission.
i.
A. A banking entity must provide the following information for each limit reported pursuant to this quantitative measurement: the unique identification label for the limit reported in the Risk and Position Limits Information Schedule, the limit size (distinguishing between an upper and a lower limit), and the value of usage of the limit.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
A. The comprehensive profit and loss associated with existing positions must reflect changes in the value of these positions on the applicable day. The comprehensive profit and loss from existing positions must be further attributed, as applicable, to changes in (i) the specific risk factors and other factors that are monitored and managed as part of the trading desk's overall risk management policies and procedures; and (ii) any other applicable elements, such as cash flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from existing positions to specific risk factors and other factors, a banking entity must provide the following information for the factors that explain the preponderance of the profit or loss changes due to risk factor changes: the unique identification label for the risk factor or other factor listed in the Risk Factor Attribution Information Schedule, and the profit or loss due to the risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions must reflect commissions and fee income or expense and market gains or losses associated with transactions executed on the applicable day. New positions include purchases and sales of financial instruments and other assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and loss from new positions may be reported in the aggregate and does not need to be further attributed to specific sources.
D. The portion of comprehensive profit and loss that cannot be specifically attributed to known sources must be allocated to a residual category identified as an unexplained portion of the comprehensive profit and loss. Significant unexplained profit and loss must be escalated for further investigation and analysis.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
i.
ii.
iii.
iv.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
By the Securities and Exchange Commission.
Office of the United States Trade Representative.
Request for comments and notice of public hearing.
On June 20, 2018 (83 FR 28710), the U.S. Trade Representative (Trade Representative) provided notice of an initial action in the Section 301 investigation of the acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation. The initial action was the imposition of an additional 25 percent
To be assured of consideration, you must submit comments and responses in accordance with the following schedule:
USTR strongly prefers electronic submissions made through the Federal eRulemaking Portal:
For questions about the ongoing investigation or proposed action, contact Arthur Tsao, Assistant General Counsel, or Justin Hoffmann, Director of Industrial Goods, at (202) 395-5725. For questions on customs classification of products identified in the Annex to this notice, contact
On August 18, 2017, USTR initiated an investigation into certain acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation (82 FR 40213).
In a notice published on April 6, 2018 (83 FR 14906), the Trade Representative announced a determination that the acts, policies, and practices of the Government of China covered in the investigation are unreasonable or discriminatory and burden or restrict U.S. commerce. The April 6 notice also invited public comment on a proposed action in the investigation, in the form of an additional 25 percent
The public comment process included two opportunities for the submission of written comments, and the opportunity to participate in a public hearing. USTR received thousands of submissions, and held a 3 day public hearing with more than 100 witnesses. The public versions of submissions and a transcript of the hearing are available on
USTR and the interagency Section 301 Committee carefully reviewed the public comments and the testimony from the public hearing. USTR and the Section 301 Committee also carefully reviewed the extent to which the tariff subheadings in the April 6, 2018 notice include products containing industrially significant technology, including technologies and products related to China's “Made in China 2025” industrial policy program.
Based on this review process, the Trade Representative determined to take an initial action in the investigation, and to consider an additional proposed action. The Trade Representative announced the determination on June 15, 2018, and published a notice on June 20, 2018 (83 FR 28710). The Trade Representative narrowed the proposed list in the April 6 notice to 818 tariff subheadings, with an approximate annual trade value of $34 billion. This initial action became effective on July 6, 2018. The additional proposed action is an additional
The Government of China has chosen to respond to the initial U.S. action in the investigation by imposing retaliatory tariffs on U.S. goods, instead of addressing U.S. concerns with the unfair practices found in the investigation. On Friday, June 15, 2018, the day that the Trade Representative announced the initial action in the investigation, China issued a statement saying that it was imposing equivalent tariff measures on U.S. goods.
On Saturday, June 16, 2018, the Government of China specified that it would impose an additional 25 percent tariff on U.S. goods with a value of $50 billion (State Council Customs Tariff Commission 2018 Public Notice No. 5). China's announcement sets out two lists. The first list contains 545 tariff subheadings that supposedly corresponds to the initial U.S. $34 billion action, and had an effective date of July 6, 2018. The second list contains 114 tariff subheadings that supposedly corresponds to the additional proposed
On Monday, June 18, 2018, the President issued a statement in response to China's announcement that it was imposing retaliatory tariffs on U.S. goods.
On July 6, 2018, the day the initial $34 billion action in the investigation became effective, the Government of China confirmed that it is going forward with the new tariffs it announced on June 16. China also has not changed the acts, policies, and practices identified in the investigation.
Section 301(b) of the Trade Act of 1974, as amended (Trade Act) provides that “the Trade Representative shall take all appropriate and feasible action authorized under [Section 301(c)], subject to the specific direction, if any, of the President regarding any such action . . . to obtain the elimination of [the] act, policy, or practice” covered in the investigation. Section 307 of the Trade Act provides that “The Trade Representative may modify or terminate any action, subject to the specific direction, if any, of the President with respect to such action, that is being taken under [Section 301] if . . . such action is being taken under section 301(b) of this title and is no longer appropriate.” In light of China's response to the $50 billion action announced in the investigation and its refusal to change its acts, policies, and practices, it has become apparent that U.S. action at this level is not sufficient to obtain the elimination of China's acts, policies, and practices covered in the investigation. Accordingly, the Trade Representative is proposing to modify the action in this investigation by maintaining the original $34 billion action and the proposed $16 billion action, and by taking a further, supplemental action. The Trade Representative proposes an additional 10 percent
Modification of the action in this investigation by taking a supplemental $200 billion action is appropriate in light of the statutory goal of obtaining the elimination of the acts, policies, and practices covered in the investigation. China has shown that it will not respond to action at a $50 billion level by addressing U.S. concerns with China's acts, policies, and practices involving technology transfer, intellectual property, and innovation. Rather, China is responding to action at a $50 billion level by imposing retaliatory duties.
Supplemental action at a $200 billion level is in accord with the President's direction. In addition, action at this level is appropriate in light of the level of China's announced retaliatory action ($50 billion) and the level of Chinese goods imported into the United States ($505 billion in 2017). China's retaliatory action covers a substantial percentage of U.S. goods exported to China ($130 billion in 2017). In order to enhance effectiveness, the level of the U.S. supplemental action must cover a substantial percentage of Chinese imports.
In developing the list of tariff subheadings included in this proposed supplemental action, trade analysts considered products from across all sectors of the Chinese economy. The tariff subheadings considered by the analysts included subheadings that commenters suggested for inclusion in response to the April 6 notice. The selection process took account of likely impacts on U.S. consumers, and involved the removal of subheadings identified by analysts as likely to cause disruptions to the U.S. economy, as well as tariff lines subject to legal or administrative constraints.
To ensure the effectiveness of the action, any merchandise subject to the increased tariffs admitted into a U.S. foreign trade zone on or after the effective date of the increased tariffs, except those eligible for admission under “domestic status” as defined in 19 CFR 146.43, would have to be admitted as “privileged foreign status” as defined in 19 CFR 146.41, and would be subject upon entry for consumption to the additional duty.
In accordance with section 304(b) of the Trade Act (19 U.S.C. 2414(b)), USTR invites comments from interested persons with respect to the proposed supplemental action to be taken in the investigation. To be assured of consideration, you must submit written comments by August 17, 2018, and post-hearing rebuttal comments by August 30, 2018.
USTR requests comments with respect to any aspect of the proposed supplemental action, including:
• The specific tariff subheadings to be subject to increased duties, including whether the subheadings listed in the Annex should be retained or removed, or whether subheadings not currently on the list should be added.
• The level of the increase, if any, in the rate of duty.
• The appropriate aggregate level of trade to be covered by additional duties.
In commenting on the inclusion or removal of particular tariff subheadings listed in the Annex, USTR requests that commenters address specifically whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of China's acts, policies, and practices, and whether maintaining or imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-size businesses and consumers.
The Section 301 Committee will convene a public hearing in the main hearing room of the U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436, beginning at 9:30 a.m. on August 20, 2018. You must submit requests to appear at the hearing by July 27, 2018. The request to appear must include a summary of testimony, and may be accompanied by a pre-hearing submission. Remarks at the hearing may be no longer than five minutes to allow for possible questions from the Section 301 Committee.
All requests to appear at the hearing must be in English and sent electronically via
All submissions must be in English and sent electronically via
The
File names should reflect the name of the person or entity submitting the comments. Please do not attach separate cover letters to electronic submissions; rather, include any information that might appear in a cover letter in the comments themselves. Similarly, to the extent possible, please include any exhibits, annexes, or other attachments in the same file as the comment itself, rather than submitting them as separate files.
For any comments submitted electronically that contain business confidential information, the file name of the business confidential version should begin with the characters “BC”. Any page containing business confidential information must be clearly marked “BUSINESS CONFIDENTIAL” on the top of that page and the submission should clearly indicate, via brackets, highlighting, or other means, the specific information that is business confidential. If you request business confidential treatment, you must certify in writing that disclosure of the information would endanger trade secrets or profitability, and that the information would not customarily be released to the public. Filers of submissions containing business confidential information also must submit a public version of their comments. The file name of the public version should begin with the character “P”. The “BC” and “P” should be followed by the name of the person or entity submitting the comments or rebuttal comments. If these procedures are not sufficient to protect business confidential information or otherwise protect business interests, please contact the USTR Tech Transfer Section 301 line at (202) 395-5725 to discuss whether alternative arrangements are possible.
USTR will post submissions in the docket for public inspection, except business confidential information. You can view submissions on the
Environmental Protection Agency (EPA).
Final rule.
The Environmental Protection Agency (EPA) is approving a revision to Kentucky's State Implementation Plan (SIP) pertaining to the “good neighbor” provision of the Clean Air Act (CAA or Act) for the 2008 8-hour ozone National Ambient Air Quality Standard (NAAQS). Kentucky submitted a draft version of this SIP revision for parallel processing by EPA on February 28, 2018, and submitted a final version that contained no substantive changes on May 10, 2018. The good neighbor provision requires each state's implementation plan to address the interstate transport of air pollution in amounts that contribute significantly to nonattainment, or interfere with maintenance, of a NAAQS in any other state. In this action, EPA is approving Kentucky's submission demonstrating that no additional emission reductions are necessary to address the good neighbor provision for the 2008 ozone NAAQS beyond those required by the Cross-State Air Pollution Rule Update (CSAPR Update) federal implementation plan (FIP). Accordingly, EPA is approving Kentucky's submission because it partially addresses the requirements of the good neighbor provision for the 2008 ozone NAAQS, and it resolves any obligation remaining under the good neighbor provision after promulgation of the CSAPR Update FIP. The approval of Kentucky's SIP submission and the CSAPR Update FIP, together, fully address the requirements of the good neighbor provision for the 2008 ozone NAAQS for Kentucky. EPA is approving this action because it is consistent with the CAA.
This rule is effective August 16, 2018.
EPA has established a docket for this action under Docket Identification No. EPA-R04-OAR-2018-0142. All documents in the docket are listed on the
Ashten Bailey, Air Regulatory Management Section, Air Planning and Implementation Branch, Air, Pesticides and Toxics Management Division, Region 4, U.S. Environmental Protection Agency, 61 Forsyth Street SW, Atlanta, Georgia 30303-8960. Ms. Bailey can be reached by telephone at (404) 562-9164 or via electronic mail at
On March 27, 2008 (73 FR 16436), EPA promulgated an ozone NAAQS that revised the levels of the primary and secondary 8-hour ozone standards from 0.08 parts per million (ppm) to 0.075 ppm or 75 parts per billion (ppb). Pursuant to CAA section 110(a)(1), within three years after promulgation of a new or revised NAAQS (or shorter, if EPA prescribes), states must submit SIPs that meet the applicable requirements of section 110(a)(2). EPA has historically referred to these SIP submissions made for the purpose of satisfying the requirements of sections 110(a)(1) and 110(a)(2) as “infrastructure SIP” submissions. One of the structural requirements of section 110(a)(2) is section 110(a)(2)(D)(i), also known as the “good neighbor” provision, which generally requires SIPs to contain adequate provisions to prohibit in-state emissions activities from having certain adverse air quality effects on downwind states due to interstate transport of air pollution. There are four sub-elements, or “prongs,” within section 110(a)(2)(D)(i) of the CAA. CAA section 110(a)(2)(D)(i)(I), addressing two of these four prongs, requires SIPs to include provisions prohibiting any source or other type of emissions activity in one state from emitting any air pollutant in amounts that will contribute significantly to nonattainment, or interfere with maintenance, of the NAAQS in another state. The two provisions of this section are referred to as prong 1 (significant contribution to nonattainment) and prong 2 (interference with maintenance). This action addresses only prongs 1 and 2 of section 110(a)(2)(D)(i).
On July 17, 2012, Kentucky submitted a SIP submission to EPA, addressing a number of the CAA requirements for the 2008 8-hour ozone NAAQS infrastructure SIPs. With respect to the interstate transport requirements of 110(a)(2)(D)(i)(I), EPA disapproved the submission (78 FR 14681 (March 7, 2013), effective April 8, 2013) because the SIP had relied on Kentucky's participation in the Clean Air Interstate Rule (CAIR), which did not address the 2008 ozone NAAQS and had been remanded by the D.C. Circuit. In October 2016, EPA promulgated the CSAPR Update to address the requirements of CAA section 110(a)(2)(D)(i)(I) concerning interstate transport of air pollution for the 2008 ozone NAAQS.
On October 27, 2017, EPA issued a memorandum (October 2017 Transport Memo)
On February 28, 2018, Kentucky submitted a draft SIP revision to EPA for parallel processing that reviewed air quality modeling and data files that EPA disseminated in the October 2017 Transport Memo. The draft SIP revision indicated that the air quality problems at monitors to which Kentucky remained linked after implementation of the CSAPR Update would be resolved by 2023. Kentucky's draft SIP submission agreed with the October 2017 Transport Memo's preliminary projections and provided information intended to demonstrate that reliance on the modeling to evaluate its remaining good neighbor obligation is appropriate. The draft submission also contained air quality modeling conducted by Alpine Geophysics, LLC (Alpine) that concluded that none of the nonattainment and maintenance receptors identified in the CSAPR Update are predicted to be in nonattainment or have issues with maintenance of the 2008 ozone NAAQS in 2023. Additionally, Kentucky cited information related to emissions trends—such as reductions in ozone precursor emissions and controls on Kentucky sources—as further evidence that, after implementation of all on-the-books measures, including those promulgated in the CSAPR Update FIPs, emissions from the Commonwealth will no longer contribute significantly to nonattainment or interfere with maintenance of the 2008 8-hour ozone NAAQS in any other state.
In a notice of proposed rulemaking (NPRM) published on April 18, 2018 (83 FR 17123), EPA proposed to approve Kentucky's February 28, 2018 draft SIP submission. In the NPRM, EPA explained that it was basing its proposal to approve Kentucky's February 28, 2018 draft SIP submission on a finding that 2023 is a reasonable analytic year for evaluating ozone transport problems with respect to the 2008 ozone NAAQS and that interstate ozone transport air quality modeling projections for 2023 indicate that Kentucky is not expected to significantly contribute to nonattainment or interfere with maintenance of the 2008 ozone NAAQS in downwind states. As described in more detail in the NPRM, EPA based its evaluation on a four-step analytic framework by:
(1) Identifying downwind air quality problems relative to the 2008 ozone NAAQS considering air quality modeling projections to a future compliance year;
(2) Determining which upwind states are “linked” to these identified downwind air quality problems and thereby warrant further analysis to determine whether their emissions violate the good neighbor provision;
(3) For states linked to downwind air quality problems, identifying upwind emissions on a statewide basis that significantly contribute to nonattainment or interfere with maintenance of a standard; and
(4) For states that are found to have emissions that significantly contribute to nonattainment or interfere with maintenance of the NAAQS downwind, implementing the necessary emission reductions within the state.
EPA explained that its selection of 2023 was a reasonable analytic year for evaluating downwind air quality at step one of the framework, supported by an assessment of attainment dates for the 2008 ozone NAAQS and feasibility of implementing potential control strategies at both EGUs and non-EGUs to reduce NO
Based on these proposed findings and the information provided in Kentucky's February 28, 2018 SIP submittal, EPA proposed to determine that Kentucky's draft SIP submission demonstrates that emission activities from the Commonwealth will not contribute significantly to nonattainment or interfere with maintenance of the 2008 8-hour ozone NAAQS in any other state after implementation of all on-the-books measures, including the CSAPR Update. Comments on the NPRM were due on or before May 18, 2018. EPA received adverse comments on the proposed rulemaking, which are discussed below. Because Kentucky submitted the draft SIP revision for parallel processing, EPA's April 18, 2018 proposed rulemaking was contingent upon Kentucky providing a final SIP revision that was substantively the same as the draft SIP revision.
After considering the comments received on the NPRM, for the reasons described in the NPRM and in this action,
The Regional Administrator signed the proposed rule on April 9, 2018, and on April 12, 2018, EPA made a prepublication version of the proposal available on its website. The 30-day public comment period on the proposed rulemaking began on April 18, 2018, the day of publication of the proposal in the
An additional commenter expresses support for EPA to finalize approval of Kentucky's section 110(a)(2)(D)(i)(I) SIP submission and further states its support for Kentucky's reliance on EPA's modeling analysis. The commenter states that the EPA analysis released in the October 2017 Transport Memo was consistent with the four-step framework, and that it was not necessary to complete all four steps because no receptor in the eastern United States is expected to have problems attaining or maintaining the 2008 ozone NAAQS in 2023. The commenter states that 2023 is the modeling year used in EPA's modeling because that is the earliest year by which it is feasible to install controls across the CSAPR Update region and states its support of EPA's decision to evaluate the feasibility of installing controls on a regional basis rather than on a state-by-state or unit-by-unit basis. The commenter further states that EPA properly considered upcoming attainment dates and the need to consider future effects of local, state, and federal emission reduction requirements in order to avoid unlawfully mandating over-control. The commenter concludes that EPA's modeling analysis is reasonable and that EPA's approval is proper even without additional information from Kentucky. In support of its assertion that EPA should finalize its approval, the commenter notes that Kentucky also provides state-specific information to further demonstrate that reliance on EPA's modeling is appropriate in the context of this SIP and modeling performed by Alpine that is consistent with EPA's results.
To the extent that these comments are general statements stating opposition to EPA's action and are intended to incorporate other, specific comments made by commenters, EPA has addressed the specific concerns later in this preamble.
EPA also does not agree that the 2023 modeling is too uncertain or speculative as compared to current data. As discussed in more detail later, courts' rulings have deferred to EPA's reasonable reliance on modeling to inform its policy choices, notwithstanding that no model is perfect and there may be some level of discrepancy between modeled predictions what eventually occurs. Comments regarding the relationship between the future analytic year and the attainment date are also addressed later in this preamble.
The commenter further states that the CAA establishes attainment dates for the 2008 ozone NAAQS “as expeditiously as practicable” but no later than 3, 6, 9, 15, or 20 years—depending on area classification—after the designation. The commenter contends that, in
The commenter therefore asserts that section 110(a)(2)(D)(i)(I) does not allow Kentucky to wait until 2023 nor does it grant EPA discretion to extend compliance deadlines. The commenter contends that, by 2023, the harms the good neighbor provisions were intended to avoid will have already befallen downwind states. Accordingly, the commenter states that Kentucky must take immediate steps to offset past over-pollution. In a footnote, the commenter notes that prior legal precedent indicates that attainment dates are “central to the regulatory scheme,”
Another commenter points to 2015-2017 design values at monitors in the NJ-NY-CT nonattainment area that are above the standard at 83 ppb (the Stratford monitor) and 82 ppb (the Westport monitor). The commenter states that design values indicate that the area can expect to be reclassified as “serious” with an attainment deadline of July 2021, based on a 2020 design value. The commenter contends that the Kentucky SIP is deficient because it relies on a future year that does not adequately reflect the appropriate attainment year of the impacted nonattainment area. Because the moderate attainment deadline has passed, the commenter states that modeling for the next attainment date of July 2021 (based on 2020 design values) should be conducted.
The commenter asserts that downwind states significantly impacted by ozone pollution will be unable to meet attainment deadlines if good neighbor SIPs are not done prior to the attainment deadline of the downwind nonattainment areas. The commenter asserts the CAA recognizes this since the good neighbor provision is required to be addressed ahead of the attainment demonstration requirements for nonattainment areas. The commenter notes that Kentucky's significant contributions for the 2008 ozone NAAQS therefore should have been addressed by March 2011. The commenter states that 2023 is an inappropriate future year for modeling because it falls after both the July 2018 moderate classification deadline and the July 2021 serious classification deadline.
One commenter states that the tri-state New York City metropolitan area struggles to attain the 2008 ozone NAAQS, with 2017 design values up to 83 ppb, due in significant part to interstate transport of ozone precursors from upwind states like Kentucky. The commenter notes that NYDEC requested a reclassification of the area to “serious” nonattainment due to the inevitability of missing the moderate area attainment deadline. The commenter therefore asserts that the 2023 modeling year relied upon by EPA and Kentucky is well beyond—and fails to take into account—the attainment deadline for “serious” nonattainment areas.
The commenter further states that had EPA met its 2015 FIP deadline for Kentucky, it could have mandated controls that would be installed and operating in time to benefit New York's “serious” nonattainment deadline.
One commenter contends that EPA's proposed approval fails to account for New York's upcoming attainment deadlines for the 2008 ozone NAAQS. The commenter asserts that the New York metropolitan area has struggled to attain the 2008 ozone NAAQS, with 2017 design values of up to 83 ppb. The commenter asserts that EPA admitted the CSAPR Update was only a partial remedy for downwind states such as New York, and that additional reductions may be required from upwind states, including Kentucky. CSAPR Update modeling projected that New York would remain in nonattainment past its July 20, 2018 statutory attainment deadline. On November 10, 2017, NYDEC requested a reclassification to “serious” nonattainment, due to the inevitability of missing the July 20, 2018 moderate area attainment deadline, which the state attributed in large part to
The commenter asserts that 2023 modeling analysis takes no account of New York's current and likely new attainment deadlines, in direct conflict with settled law under the Act. To be fully compliant, the commenter believes a good neighbor SIP must eliminate significant contribution to downwind nonattainment or interference with maintenance by the deadlines for downwind areas to attain the NAAQS. EPA's proposed approval only discusses this deadline in its conclusion that emission reductions will not be achieved in time to meet it. The commenter asserts that EPA cannot approve a SIP that delays eliminating emissions that presently contribute to downwind nonattainment past New York's attainment deadlines.
One commenter challenges the future year selection of 2023 and states that it perpetuates Connecticut citizens' health and economic burdens. The commenter states that Connecticut faces a reclassification to serious nonattainment, has previously been reclassified to moderate, and has not met attainment due to “overwhelming” transport from upwind areas, including Kentucky.
First, to the extent the commenters suggest that the current measured design values may preclude EPA's reliance on modeled projections, EPA does not agree. As explained earlier in this action, EPA has reasonably interpreted the term “will” in the good neighbor provision as permitting states and EPA in implementing the good neighbor provision to evaluate downwind air quality problems, and the need for further upwind emission reductions, prospectively and coordinated with anticipated compliance timeframes.
EPA further disagrees that the D.C. Circuit's
While the commenters suggest that the court's reference to the phrase “consistent with the provisions of this subchapter”—
Similarly, the D.C. Circuit's decision in
Here, EPA has considered the downwind attainment dates for the 2008 ozone NAAQS, consistent with the court's holding in
As discussed in the NPRM and later in this action, EPA has also considered the timeframes that would likely be required for implementing further emissions reductions as expeditiously as practicable and concluded that additional control strategies at EGUs and non-EGUs could not be implemented by the July 2021 serious area attainment date, and certainly not by the 2020 ozone season immediately preceding that attainment date. This consideration of feasibility is consistent with the considerations affecting the statutory timeframes imposed on downwind nonattainment areas under section 181. Therefore, because new emissions controls for sources in upwind states cannot be implemented feasibly for several years, and at that later point in time air quality will likely be cleaner due to continued phase-in of existing regulatory programs, changing market conditions, and fleet turnover, it is reasonable for EPA to evaluate air quality (at step one of the four-step framework) in a future year that is aligned with feasible control installation timing in order to ensure that the upwind states continue to be linked to downwind air quality problems when any potential emissions reductions would be implemented and to ensure that such reductions do not over-control relative to the identified ozone problem.
The commenter contends that EPA should have acted in a timely manner when states failed to adopt good neighbor provisions, and contends that Kentucky should have tied its analysis of significant contribution to the air quality at the time designations were made. The commenter asserts that EPA should have coupled its analysis and remedy with marginal attainment dates, as the first deadline for which nonattainment areas had to attain the standard. The commenter notes that EPA aligned its modeling analysis and implementation of the CSAPR Update with the moderate area attainment dates in 2018. While the commenter acknowledges that EPA could not have tied implementation of the CSAPR Update to the 2015 marginal area attainment date which had already passed, the commenter contends EPA should have addressed the need for good neighbor reductions relative to marginal nonattainment by aligning contribution modeling analysis for those states to some timeframe prior to the marginal attainment deadline. Instead, EPA's process takes place after the attainment dates, at which point EPA concludes that Delaware and all other areas outside of California do not need reductions to attain and maintain the NAAQS.
The commenter states that technical feasibility has been specifically rejected as a basis for ignoring attainment deadlines in
The commenter further asserts that reliance on feasibility of implementing controls to justify delaying action or analysis until 2023 is foreclosed by
One commenter states that EPA should focus on achieving available emission reductions on or before the 2020 ozone season (the next applicable attainment date), rather than looking ahead to 2023. The commenter states that by focusing on the timeframes to install new controls, EPA has not conducted an analysis of reductions available in the near term to see if there are additional NO
Another commenter states that EPA's rationale for use of a 2023 modeling year rests on a speculative guess of the time required for two categories of cost-effective controls to be installed, starting from the date of its approval. The commenter contends that EPA cannot rely on the cost-effectiveness of EGU controls as the exclusive consideration in justifying a further five-year delay when a full remedy for Kentucky has already been unlawfully delayed for years. Even if EPA has a general duty to avoid over-control of upwind emissions, it cannot point to this duty to justify a strategy that postpones necessary controls. Rather, EPA should require these controls now, and then reevaluate them in a few years at the point when the purported over-control may actually occur.
To the extent that the commenters note that EPA chose an earlier analytic year in prior rulemakings, EPA notes that it has not done so in all rulemakings. In the NO
The commenter's citation to
Finally, the commenters misunderstand EPA's evaluation to the extent they suggest that EPA relied on the cost-effectiveness of controls for this action. EPA evaluated the feasibility of implementing various control options, without regard to cost, that had not previously been included in EPA's analysis of cost-effective controls in the CSAPR Update. EPA concluded that additional controls on either EGUs or non-EGUs—when considering multiple projects across multiple states and allowing for planning and permitting—would generally require four years or more to implement, which would lead to an implementation timeframe associated with the 2023 ozone season. Because the air quality modeling results for 2023 showed that air quality problems in the eastern U.S. would be resolved by 2023, EPA did not further evaluate the cost-effectiveness of the control options considered for the feasibility analysis.
One commenter states that EPA cannot rely on its analysis of alleged labor and materials shortages relating to installation of new controls at a “fleet” level. While EPA may prefer a regional approach, Congress did not establish a regional implementation plan requirement or mechanism, and EPA is not considering whether to approve a regional transport rule, nor a group of SIPs or FIPs. EPA is proposing to approve a single SIP from a single state and has not undertaken a study of the labor or materials market in Kentucky. Therefore, EPA's justification for allowing the delay of EGU controls for up to 48 months based on its speculative estimate of the time needed to install these controls on all sources within some unidentified region is arbitrary and capricious.
One commenter states EPA's approach to evaluating potential NO
One commenter states that guidance provided in an informational memorandum issued by EPA in January 2015
EPA further disagrees that this approach is inconsistent with EPA's prior rulemakings, like CSAPR, where the Agency implemented controls in multiple phases. In CSAPR, EPA evaluated downwind air quality and upwind state linkages based on 2012 air quality and contribution modeling. The commenter is correct that EPA then implemented two phases of emission budgets, with a first phase of reductions implemented beginning in 2012 and a second phase of reductions implemented beginning in 2014. However, in subsequent litigation, a number of the phase 2 ozone season NO
EPA does not agree that this approach is inconsistent with the scope of EPA's authority under section 110. The fact that EPA is, in this action, acting on a single SIP does not alter the regional nature of ozone pollution transport. As the Supreme Court noted, the good neighbor provision presents a “thorny causation problem” with respect to ozone pollution transport in light of the “collective and interwoven contributions of multiple upwind States,”
EPA also does not agree that the Agency's approach to evaluating interstate ozone transport under section
With respect to the request for a super-regional nonattainment area under section 107, EPA has consistently explained that such an approach is not consistent with the statutory language.
Finally, EPA does not agree that its conclusion that no additional emission reductions would be required of upwind states undermines its fleetwide analysis of labor and material shortages. EPA's analysis was based on the assumption that
Many of these materials, installation, and labor concerns are also relevant for non-EGU control technologies. Thus, the implementation of new EGU and non-EGU NO
Moreover, while EPA indicated that the CSAPR Update
Moreover, EPA's projections of EGU emission levels in Kentucky in 2023 also do not contradict EPA's conclusion that 48 months should be provided for the region-wide implementation of new NO
While CSAPR and CSAPR Update were implemented more quickly than the four years considered in this action, neither CSAPR nor CSAPR Update anticipated that sources would implement new post-combustion NO
EPA notes that it did evaluate post-combustion controls in CSAPR with respect to sulfur dioxide (SO
The commenter further contends that EPA has changed its regulatory position without reasonable explanation. In the CSAPR Update, EPA indicated that evaluating full interstate transport obligations is subject to an
One commenter states that with respect to non-EGU sources, EPA “has documented multiple cost-effective controls that can be implemented within one year” in the “Assessment of Non-EGU NO
Because EPA did not need to evaluate either the cost-effectiveness or NO
Thus, EPA's analysis is not a change in policy. In the CSAPR Update, EPA only stated it could not conclude, at that time, that additional reductions from NO
Finally, the commenter is correct that EPA included preliminary estimates of installation times for some non-EGU NO
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EPA's analysis in the Final Non-EGU TSD focused on potential control technologies within the range of costs considered in the final CSAPR Update for EGUs,
Among the control technologies that were evaluated in the Final Non-EGU TSD, EPA identified six categories of common control technologies available for different non-EGU emissions source categories.
Moreover, for those categories for which preliminary estimates were available, as noted in the Final Non-EGU TSD, the single unit installation time estimates provided do not account for additional important considerations in assessing the full amount of time needed for installation of NO
In summary, there is significant uncertainty regarding the implementation timeframes for various NO
Another commenter states that EPA's argument regarding installation of control devices on uncontrolled EGUs being unworkable (based on potential for delays due to shortages in qualified labor and material) ignores the potential for immediate reductions that can be had by optimizing existing EGU controls.
Moreover, the Agency believes that the resulting CSAPR Update emissions budgets are being appropriately implemented under the CSAPR NO
To the extent that EPA's NPRM could be interpreted as having invited comment on this issue, EPA further notes that, in the CSAPR Update the Agency reviewed fleet-wide, SCR-controlled coal units from 2009 to 2015 and calculated an average ozone season NO
EPA further notes that this rate was implemented as an upper limit, meaning that EPA did reflect units that had recently operated an a more efficient rate in the budget calculations. EPA considered the latest available data at the time of that rulemaking (
The commenter concludes that EPA's refusal to reconsider its cost-effectiveness threshold of $1,400 per ton of NO
One commenter states that the CSAPR Update failed to look at any short-term fixes, such as the operation of idled SNCR, that could now be benefiting downwind areas. The commenter notes that the CSAPR Update also ruled out restarting idled SNCR based on the conclusion that $3,400 per ton was not cost effective, despite the fact that New York and other downwind states commonly apply RACT at a cost threshold of $5,000 per ton and greater.
Another commenter states that the control costs of $1,400 per ton considered in the Kentucky SIP are too low and that EPA should require Kentucky to analyze all options available. The commenter states that Kentucky should not limit its control costs to those in the CSAPR Update since “EPA considered this rule a partial remedy.” The commenter provides as an example that “EPA identified an additional measure that could be undertaken immediately” in turning on existing idled SNCRs. The commenter states that EPA should also consider evaluating cost effectiveness of controls on an ozone season day rather than an annual basis, in order to address the need to lower emissions on high ozone days.
Similarly, to the extent the commenter suggests cost-effectiveness should be evaluated on particular days, rather than over the ozone season, this comment is not material to this action because EPA's analysis has concluded at step one of the four-step framework.
EPA did not reevaluate the feasibility of near-term control strategies in order to inform the selection of a future analytic year for this action because both the feasibility and cost-effectiveness of those control strategies were already fully evaluated in the CSAPR Update. Thus, EPA acknowledges that the operation of idled SNCR controls could physically be implemented more quickly than four years, but EPA already evaluated whether this control was cost-effective to implement relative to other near-term control strategies in the CSAPR Update and concluded that it was not.
To the extent the commenters suggest that EPA must select a higher cost threshold in order to “permit downwind states to meet their attainment deadlines,” the commenters misconstrue the requirements of the good neighbor provision and the applicable legal precedent. The good neighbor provision does not require upwind states to bring that downwind areas into attainment with the NAAQS. Rather, states are required to reduce emissions that “contribute significantly” to nonattainment in downwind areas. Once a state has eliminated its significant contribution to downwind nonattainment, it has met the requirements of the good neighbor provision, regardless of whether the downwind area has actually attained.
• SCR installations are typically less time-consuming than 39 months, noting that one of the resources EPA cites indicates 21 months is reasonable.
• SNCR takes less time, 10-13 months, to implement.
• EPA tacitly admits some projects could be completed prior to 2022 when it claims that SCR and SNCR should be “linked” at the fleet-level.
• The original CSAPR allowed less than three years for compliance with SO
• EPA's integrated planning model assumes SO
• Non-EGU controls are widely available on timeframes shorter than 48 months according to EPA's Final Non-EGU TSD. Although EPA insinuates this document questions the availability of non-EGU controls within 48 months, it lists many categories of non-EGU NO
• EPA did not exhaust readily available EGU control options. Kentucky could require 100 percent operation of already-installed control equipment or insist on optimized performance. Kentucky could discontinue use of “banked allowances” in the CSAPR Update. And CSAPR did not require any re-dispatch or shifting power generation from higher-emitting to lower-emitting plants, which is also feasible in the short term.
• EPA's arguments regarding the availability of steel and cranes are tenuous. EPA cites only two documents to support its assertion about crane shortages, only one of which even mentions a shortage. That article only indicates that developers need to book the cranes and operators several months in advance, which is not much of an obstacle.
Another commenter states that—based on its experience—EPA's estimated installation time frames for SCRs are too conservative (short), and provides a range of 28 to 60 months for installation of SCRs at one site.
EPA disagrees that the timeframe for implementation of SNCR and SCR at an individual unit necessarily indicates that the feasibility analysis is flawed. As an initial matter, there are differences between these control technologies with respect to the potential viability of achieving cost-effective regional NO
Moreover, the estimated 39 months and 10 to 13 months for implementation of SCR and SNCR, respectively, at an individual unit do not account for factors that would influence this timeframe across the fleet. Installing new SCR or SNCR controls for EGUs generally involves the same steps: Conducting an engineering review of the facility; advertising and awarding a procurement contract; obtaining a construction permit; installing the control technology; testing the control technology; and obtaining or modifying an operating permit.
Scheduled curtailment, or planned outage, for pollution control installation would be necessary to complete either SCR or SNCR projects. Given that peak demand and rule compliance would both fall in the ozone season, sources would likely try to schedule installation projects for the “shoulder” seasons (
In addition to the coordination of scheduled curtailment, an appropriate compliance timeframe should accommodate the additional coordination of labor and material supply necessary for any fleet-wide control installation efforts.
Moreover, NO
EPA disagrees with the commenter's assertion that these observations regarding crane and steel markets are tenuous and thus should not influence EPA's analysis. While this is not the sole reason for EPA's conclusion that 48 months would be necessary for region-wide control installation, EPA believes the market for labor and materials is a relevant factor to consider in light of reports from companies that supply the tower cranes that there is a shortage of both equipment and manpower. The crane index, along with quarterly construction costs reports, are metrics regularly used to evaluate construction activity by construction consultancies and can provide information useful to demonstrate the level of equipment demand.
The time lag observed between the planning phase and in-service date of SCR and SNCR operations in certain cases also illustrates that site-specific conditions sometimes lead to installation times of four years or longer. For instance, SCR projects for units at Ottumwa Generating Station (Iowa), Columbia Energy Center (Wisconsin), and Oakley Generating Station (California) were all in the planning phase in 2014. However, these projects have estimated in-service dates ranging between 2018 and 2021.
While individual unit-level SCR and SNCR projects can average 39 and 10 months, respectively, from bid to startup, a comprehensive and regional emissions reduction effort also requires more time to accommodate the labor, materials, and outage coordination for these two types of control strategies. Because these post-combustion control strategies share similar resource inputs and are part of regional emissions reduction programs rather than unit-specific technology mandates, the timeframes for one type are inherently linked to the other type. This means that SNCR projects cannot be put on an early schedule in light of their reduced construction timing without impacting the availability of resources for the manufacture and installation of SCRs and thus the potential start dates of those projects.
In short, given the market and regulatory circumstances in which EPA evaluated this effort, we determined that four years would be an expeditious timeframe to coordinate the planning and completion of any mitigation efforts that might be necessary in this instance. In regard to the commenter who noted a range of 28 to 60 months for SCR installation, EPA notes that a period of 48 months falls reasonably within that range, and is consistent with the region-wide evaluation of control feasibility that EPA has conducted in this action.
EPA notes that the commenters' assertions about assumptions in IPM regarding control installation timeframes are unfounded. Post-combustion control installation times are an exogenous assumption in EPA's power sector modeling—
Finally, EPA notes that the commenter is incorrect in asserting that the CSAPR Update failed to account for generation shifting. The CSAPR Update budgets accounted for generation shifting that was considered to be available at the $1,400 cost threshold and feasible to implement by the 2017 compliance timeframe.
Another commenter also states that EPA should require Kentucky to adopt targeted strategies for reducing emissions on “high emitting days.”
One commenter contends that compliance with a cap-and-trade program like the CSAPR Update is an
To the extent the commenter is raising concerns with the use of an allowance trading program to implement the emission reductions required by the CSAPR Update to address the 2008 ozone NAAQS, EPA considers it untimely for the commenter to raise such a challenge in this action. Those emission reductions were finalized in a separate rulemaking, and the appropriate venues to raise concerns over the adequacy for reduction implementation of the CSAPR allowance trading program, as compared to other measures such as short-term emission limits, were that rulemaking process and subsequent petitions for judicial review of that final rule. Thus, this issue is outside the scope of the present rulemaking. Similarly, as discussed earlier in this action, to the extent the commenter also disagrees with EPA's determinations regarding the optimization of SCR controls or the cost-effectiveness of SCNR controls in the CSAPR Update, those comments are also outside the scope of this action.
Nonetheless, EPA has examined the hourly NO
Moreover, even if it were appropriate to assess the merits of particular remedies as part of this action, EPA does not agree that an allowance trading program would be an inadequate means of implementing any additional statewide emission reductions that may have been necessary under a scenario where more reductions were required to fully address the good neighbor provision. Implementation mechanisms based on seasonal NO
Another commenter states that other measures should be undertaken to reduce Kentucky's impact on other states, including NO
One commenter recommends that any full remedy of a state's good neighbor obligations must require, at minimum, RACT on all major NO
One commenter also contends that Kentucky's SIP fails to satisfy section 110(a)(2)(A) because, even if reliance on 2023 were valid, it lacks any proposed enforceable limitations or compliance timelines.
One commenter states that Kentucky has not shown that the EPA-modeled shutdowns of E.W. Brown Generating Station and Elmer Smith plant will occur in a federally enforceable manner, and that therefore, EPA should not approve Kentucky's SIP since the modeling includes such reductions.
One commenter states that although EPA and Alpine modeling indicate all areas outside California will achieve attainment with the 2008 ozone NAAQS by 2023, some Connecticut monitors will “only barely” comply. Commenter states that Kentucky's reliance on the 2023 modeling should be accompanied by enforceable regulations that ensure the lower, modeled 2023 emissions are achieved, including the decrease in EGU emissions.
One commenter includes a table summarizing adjusted projected NO
One commenter contends that EPA's modeling relies on reductions that are not federally enforceable, and Kentucky failed to demonstrate that the emission reductions EPA relied on across the modeling domain are federally enforceable. The commenter contends that the upwind state good neighbor obligations cannot be deemed satisfied if large portions of their emissions inventory remain poorly controlled.
One commenter states that an approvable good neighbor SIP must include permanent and federally enforceable emissions reductions. The commenter contends that section 110 requires that a SIP (1) include enforceable emission limitations and other control measures, means, or techniques, (2) include a program to provide for the enforcement of the measures, and (3) provide adequate provisions prohibiting emissions activity within the state from emitting any air pollutant in amounts which will contribute significantly to nonattainment in or interfere with maintenance by any other state with respect to the NAAQS. EPA's four-step analysis also requires the adoption of “permanent and enforceable measures.”
The commenter states that compliance with the rates reflected in the 2023 modeling are not permanent or federally enforceable under the CSAPR Update or any other federal rule, including the assumption that most units will emit at 2016 levels and that 25 units will take additional emission reduction actions, including unit retirement, increased use of post-combustion controls, or addition of new combustion controls. The commenter contends these actions are therefore speculative and cannot be properly considered when determining if a state met its good neighbor obligations. Downwind states cannot rely on speculative reduction, and without federally enforceable limits, there is no guarantee that Maryland will maintain the 2008 ozone NAAQS. The commenter notes that Maryland's section 126(b) petition proposed specific language and NO
The good neighbor provision instructs EPA and states to apply its requirements “consistent with the provisions of” title I of the CAA. EPA is therefore interpreting the requirements of the good neighbor provision, and the elements of its four-step interstate transport framework, to apply in a manner consistent with the designation and planning requirements in title I that apply in downwind states.
For purposes of this analysis, EPA notes specific aspects of the title I designations process and attainment planning requirements for the ozone NAAQS that provide particularly relevant context for evaluating the consistency of EPA's approach to the good neighbor provision in upwind states. EPA notes that this discussion is not intended to suggest that the specific requirements of designations and attainment planning apply to upwind states pursuant to the good neighbor provision, but rather to explain why EPA's approach to interpreting the good neighbor approach is reasonable in light of relevant, comparable provisions found elsewhere in title I. In particular, these provisions demonstrate that EPA's approach is consistent with other relevant provisions of title I with respect to what data is considered in EPA's analysis and when states are required to implement enforceable measures.
First, areas are initially designated attainment or nonattainment for the ozone NAAQS based on actual measured ozone concentrations. CAA section 107(d) (noting that an area shall be designated attainment where it “meets” the NAAQS and nonattainment where it “does not meet” the NAAQS). Therefore, a designation of nonattainment does not in the first instance depend on what specific factors have influenced the measured ozone concentrations or whether such levels are due to enforceable emissions limits. If an area measures a violation of the relevant ozone NAAQS, then the area is designated nonattainment. In cases where the nonattainment area is classified moderate or higher, the responsible state is required to develop an attainment plan, which generally includes the application of various enforceable control measures to sources of emissions located in the nonattainment area, consistent with the requirements in Part D of title I of the Act.
Similarly, in determining the boundaries of an ozone nonattainment area, the CAA requires EPA to consider whether “nearby” areas “contribute” to ambient air quality in the area that does not meet the NAAQS.
EPA's historical approach to addressing the good neighbor provision via the four-step interstate transport framework, and the approach EPA continues to apply here, is consistent with these title I requirements. That is, in steps 1 and 2 of the framework, EPA evaluates whether there is a downwind air quality problem (either nonattainment or maintenance), and whether an upwind state impacts the downwind area such that it contributes to and is therefore “linked” to the area. EPA's determination at step one of the good neighbor analysis that it has not identified any downwind air quality problems to which an upwind state could contribute is analogous to EPA's determination in the designation analysis that an area should be designated attainment. Similarly, EPA's determination at step two of the good neighbor analysis that, while it has at step one identified downwind air quality problems, an upwind state does not sufficiently impact the downwind area such that the state is linked is analogous to EPA's determination in the designation analysis that a nearby area does not contribute to a NAAQS violation in another area. Thus, under the good neighbor provision, EPA determines at step one or two, as appropriate, that the upwind state will not significantly contribute to nonattainment or interfere with maintenance of the NAAQS in the downwind area.
EPA acknowledges that one distinction between the good neighbor and designation analyses: The good neighbor analysis relies on future year projections of emissions to calculate ozone concentrations and upwind state contributions, compared to the designation analysis's use of
EPA notes that there is a further distinction between the section 107(d) designations provision and the good neighbor provision in that the latter provision uses different terms to describe the threshold for determining whether emissions in an upwind state should be regulated (“contribute significantly”) as compared to the standard for evaluating the impact of nearby areas in the designations process (“contribute”).
Thus, at step three of the good neighbor analysis EPA evaluates additional factors, including cost and air-quality considerations, to determine whether emissions from a linked upwind state would violate the good neighbor provision (
For these reasons, EPA also does not agree that either section 110(a)(2)(A) or section 110(a)(2)(C) requires the state to include measures to make the projected emission limitations enforceable in order to address the good neighbor provision. Section 110(a)(2)(A) states that a SIP should “include enforceable emission limitations and other control measures, means, or techniques . . .
The commenter also cites efforts to weaken the Corporate Average Fuel Economy standards, which were anticipated to reduce annual light-duty highway vehicle emissions of NO
The commenter contends that these actions, if finalized, would ensure that the exceedingly narrow compliance margins assumed by its modeling in 2023 are not achieved. To the extent Kentucky stakes good neighbor compliance entirely on an unenforced and actively undercut prediction, the commenter claims its reliance is arbitrary and capricious.
Another commenter states that EPA's 2023 modeling fails to account for potential federal rule repeals and delays, such as those for: “glider” vehicles and engines (proposed November 2017); oil and gas CTG guidelines (March 2018); and the NSPS for the oil and gas sector. The commenter also states that relaxation or elimination of control requirements will result in increased ozone concentrations and that the 2023 design values are therefore an underestimate of actual levels that will occur. The commenter states that given EPA predicts a maximum design value of 75.9 ppb in 2023 at the Westport, Connecticut monitor, coupled with the fact that “Kentucky significantly contributes to this monitor,” the “unenforceable commitments” in Kentucky's SIP, and federal rule repeals and relaxations that EPA ignores, nonattainment can be expected to result at this monitor.
One commenter asserts that the 2023 modeling fails to account for the proposed weakening, repeal, and/or delay of numerous federal rules that directly impact ozone levels, including for glider vehicles, CTGs for oil and gas,
EPA's assumption of 0.075 lb/mmBtu for SCR retrofits is supported by historical data on emission rates for new SCR controlled units, is consistent with its prior engineering and technology assumptions, and is a conservative estimate of new SCR performance.
New SCR controlled units often perform equal to or better than older SCRs reflecting advancements in both technology and installation practices. New SCRs have regularly operated at or below EPA's assumed emission rate of 0.075 lb/mmbtu. For 12 coal units where SCR was installed and operating between 2014 and 2016, the average ozone season NO
Additionally, the 0.075 lb/mmBtu emission rate assumption for new SCRs is consistent with EPA's historical levels of assumed performance in its power sector modeling and consistent with the engineering assessment by Sargent and Lundy underpinning those performance assumptions.
As explained in the CSAPR Update, EPA evaluated SCR emission rates at existing units from 2009-2015 and found that the third lowest
Data from 2017, the first year of ozone season data that would be influenced by the CSAPR Update compliance requirements, is consistent with this assumption on a fleet-wide level. EPA began its engineering analysis to project 2023 EGU emissions with 2016 monitored and reported data. For the units with existing SCRs that were operating above 0.10 lb/mmBtu in 2016 (totaling 82,321 tons of emissions in that year), EPA assumed that SCRs would be optimized under a CSAPR Update scenario to 0.10 lb/mmBtu on average for 2023. This results in 2023 emissions estimates for these units being adjusted
EPA disagrees with the notion that EGU emissions will increase, rather than decrease, in future years of the CSAPR Update implementation, or that the market for allowances would have to price allowances much higher in order for emission reductions to continue. This is not borne out by historical precedent or any economic models. There are a variety of policy and market forces at work beyond CSAPR allowance prices that are anticipated to continue to drive generation to shift from higher emitting to lower emitting sources. As evidenced in prior EPA allowance trading programs, emissions from covered sources generally trend downwards (regardless of allowance price) as time extends further from the initial compliance year.
EPA recognizes that there are inherent uncertainties in modeling the future, but EPA believes that the model platform and inputs selected are well-supported and reasonable. The commenter did not provide information to suggest that there is an overall bias in the modeling-based projections. As it has for every air quality modeling exercise, EPA performed a model evaluation, as described in the Air Quality Modeling Technical Support Document for the final CSAPR Update, which compared ozone predictions for 2011 from the modeling platform to actual measured data from that year, in order to test how well the model characterized reality. The model evaluation indicates that the model's predictions corresponded closely to actual measured concentrations in terms of the magnitude, temporal fluctuations, and spatial differences for 8-hour daily maximum ozone.
EPA further disagrees with the commenter's assertion that EGU projections are too uncertain because natural gas fuel prices may be different than those underlying EPA's projections, resulting in greater coal-fired generation and consequently higher emissions. First, EPA notes that power plant emissions are a small portion (approximately 15 percent) of the 2023 eastern states total NO
Moreover, EPA believes its EGU projections are reasonable and conservative. In developing the 2023 EGU emissions projections, EPA relied on 2016 monitored and reported data and only made emissions adjustments to account for (1) control optimization expected in response to the CSAPR Update implementation beginning in 2017, and (2) any known (
EPA also does not agree with the commenter that gas prices are likely to be higher in future years. Average annual natural gas prices ranged from $2.52/mmBtu to $4.37/mmBtu between 2009 and 2016.
The reasonableness, conservativeness, and feasibility of EPA assumptions are illustrated by the first year of CSAPR compliance emission levels in 2017. Emissions in 2017 dropped (in just one year) by 21 percent from 2016 levels and were 7 percent below the CSAPR budget for the 22 affected states. EPA 2023 projections for the same set of states were 10 percent below the CSAPR budget, meaning in just one-year states have already achieved the majority of the EGU reduction anticipated by EPA and are well above pace to be at or below that level by 2023. For Kentucky specifically, ozone season NO
Another commenter states that EPA's modeling as well as modeling conducted by Alpine produce overly optimistic projection of future year ozone levels. The commenter includes a table that the commenter characterizes as indicating 2017 measured design values considerably higher than those projected at all Connecticut monitoring sites as well as indicating Kentucky contributions of greater than 1 percent at two Connecticut monitors after contributions are scaled relative to 2017 measured air quality levels. The commenter states that Kentucky's proposed SIP fails to address the underprediction of the modeling.
In addition, the CMAQ 2023 design values are consistent with both sets of CAMx-based 2023 projections at nearly
The CMAQ projections for these two sites are not only inconsistent with the CAMx modeling, but they are also inconsistent with the CMAQ modeling for other nearby sites in Connecticut, New York, and New Jersey. For example, based on the CMAQ modeling, ozone at the Susan Wagner site is projected to decline by only five percent between 2011 and 2023, whereas at a site in nearby Bayonne, New Jersey, ozone is projected to decline by 13 percent over this same period. Similarly, ozone at the Westport site is projected to decline by only three percent between 2011 and 2023 with CMAQ, but at other sites along the Connecticut coastline (
The second commenter contends that modeling by EPA and Alpine for 2023 is overly optimistic because EPA's modeled ozone design values for 2017 are higher than the preliminary 2017 design values for certain monitoring sites in Connecticut. The results of the air quality modeling performed by the OTC show that the results of the CAMx modeling by EPA and Alpine are consistent with the OTC's 2023 CAMx modeling results. Specifically, the EPA, Alpine, and OTC CAMx modeling all project that all sites identified by the commenter as having preliminary 2017 measured design values exceeding the 2008 NAAQS will be in compliance with that NAAQS by 2023. These CAMx results are also consistent with the OTC CMAQ modeling, except for one site in Westport, Connecticut, that CMAQ predicts will still violate the 2008 NAAQS in 2023. However, the CMAQ modeling for this site is inconsistent with other available modeling from EPA, the OTC, and Alpine, as described in the paragraph above.
In addition, the commenter compared the preliminary 2017 measured design values to EPA's projected 2017 average design values, but did not demonstrate that the modeling was generally biased. In particular, the commenter ignored EPA's projected maximum design values. The projected maximum design values are intended to represent future ozone concentrations when meteorological conditions are more favorable to ozone formation than the average. Comparing both the 2017 modeled average design values and maximum projected design values to the preliminary 2017 measured design values indicates that the projected maximum design values are, in most cases, closer in magnitude to the 2017 preliminary measured design values than the 2017 model-projected average design values listed in the comments.
Further, while the modeling-based projections may have understated observed design values at certain monitoring sites in Connecticut, this was not the case for other 2017 receptor sites in the Northeast Corridor. For example, at other receptor sites in the New York area in Suffolk and Richmond counties, New York, the measured 2017 design values were within 0.2 ppb of the model-predicted average design values. At the site in Philadelphia County, Pennsylvania the modeled 2017 maximum design value was 1.1 ppb lower than the corresponding measured value and at the site in Harford County, Maryland, the modeled value was higher, not lower, than the measured 2017 design value. It is not unreasonable that there may be some differences between the modeling-based projections for a future year in part because the meteorology of the future year cannot be known in advance. While EPA recognizes that there are uncertainties in the modeling, the results for the 2017 receptor sites in the Northeast do not, on balance, show a consistent bias.
Even though the preliminary 2017 measured design values at the eight sites identified by the commenter are still measuring violations of the 2008 NAAQS, it is entirely reasonable to project that these sites will be in attainment by 2023 as a result of the roughly 19 percent reduction in aggregate ozone season NO
Another commenter states that the CSAPR Update “clearly established” Kentucky's significant contribution to the Richmond County monitor, and disagrees with EPA's proposed amendment to reflect that the CSAPR Update provides a full remedy to Kentucky's transport obligation because in EPA's 2023 modeling “Kentucky is still shown to be significantly contributing to monitors” in the New York City metropolitan area, the area currently exceeds the NAAQS “by a significant margin,” and the area will likely continue to exceed the NAAQS in 2023 “once the issues with EPA's projection modeling are addressed.
Moreover, even if a downwind air quality problem had been identified, the fact that an upwind state would contribute at or above the 1 percent threshold to downwind nonattainment and maintenance receptors in step two of EPA's framework does not by itself indicate that the state would be considered to “contribute significantly” or “interfere with maintenance” of the NAAQS. The finding that a state's downwind impact would meet or exceed this threshold only indicates that further analysis is appropriate to determine whether any of the upwind state's emissions meet the statutory criteria of significantly contributing to nonattainment or interfering with maintenance. This further analysis in step three of EPA's four-step framework considers cost, technical feasibility and air quality factors to determine whether any emissions deemed to contribute to the downwind air quality problem must be controlled pursuant to the good neighbor provision.
Thus, the commenter is incorrect to assert that EPA's 2023 modeling shows that Kentucky significantly contributes to ozone levels in Delaware.
The commenter notes that Maryland has recently conducted modeling that shows that certain meteorological regimes will show very large contribution while other meteorological regimes show lower contribution. The commenter states that the days when Kentucky's contribution in the model is very high are generally the same type of days that Maryland expects will drive the attainment process, where peak days are used to calculate design values using measured, not modeled data. The commenter states that this can be resolved by requiring the largest emitters of ozone precursors, coal-fired EGUs with SCR and SNCR, to optimize those controls every day of the ozone season.
Nonetheless, EPA disagrees that its method for calculating contribution from upwind states to downwind receptors is inconsistent with how the states are required to demonstrate attainment of the ozone NAAQS. EPA's modeling guidance recommends that states calculate future year ozone projections based on 5-year weighted
The commenter notes that, in the final CSAPR Update, EPA explained that downwind air quality problems would remain after implementation, and that the rule was limited by EPA's focus on “immediately available reductions” that could be implemented by the 2017 ozone season. The commenter further states that EPA's October 2017 Transport Memo conceded that the CSAPR update only partially addressed the requirements of the good neighbor provision, noting in a footnote that the memo indicates continued nonattainment in Philadelphia, which is linked to Kentucky in the CSAPR Update.
The commenter contends that Kentucky has undertaken no independent analysis of whether any emission reductions that have occurred as a result of its implementation of the CSAPR Update have actually eliminated the Commonwealth's significant contribution to nonattainment or maintenance monitors in linked downwind states. Given Kentucky's largest downwind contribution was 10.8 ppb to ozone concentrations at a maintenance monitor in Ohio in 2017, the commenter asserts that it is highly improbable that the modest reductions in NO
Moreover, as explained earlier in this action, an impact in a downwind area above the 1 percent threshold does not necessarily indicate that an upwind state significantly contributes to nonattainment or interferes with maintenance of the NAAQS in a downwind state. The good neighbor provision first requires the identification of a downwind nonattainment or maintenance problem before emission reductions may be required, regardless of the upwind state impact on downwind ozone concentrations.
The commenter further contends that reliance on 2023 modeling is inappropriate because the attainment deadline for Harford County is July 2018, and Maryland must continue to maintain thereafter. The commenter states that EPA should have completed all steps of the four-step framework using a consistent base year since EPA's own modeling identified Kentucky as currently linked to the Harford County receptor. EPA should have identified the emissions reductions necessary to prevent Kentucky from significantly contributing to nonattainment or interfering with maintenance in Maryland, and required Kentucky to
However, as explained in the CSAPR Update, EPA could not conclude that the rule fully addressed CAA section 110(a)(2)(D)(i)(I) obligations for 21 of the 22 CSAPR Update states, including Kentucky. Specifically, EPA determined that downwind air quality problems would remain after implementation of the CSAPR Update, including at the Harford County monitor, and EPA could not conclude at that time whether additional EGU and non-EGU reductions implemented on a longer timeframe than 2017 would be feasible, necessary, and cost-effective to address states' good neighbor obligations for this NAAQS.
Given that any additional emission reductions, if necessary, would be implemented at some point after 2017, it is reasonable for Kentucky and EPA to evaluate air quality (at step one of the framework) in a future year that is aligned with feasible control installation timing in order to ensure that the upwind states continue to be linked to downwind air quality problems when any potential emissions reductions would be implemented and to ensure that such reductions do not over-control relative to the identified downwind ozone problem.
The commenter states that the CSAPR Update established Kentucky's significant contribution to the Richmond County monitor in 2017, which is part of the NYMA that measured nonattainment for the 2008 ozone NAAQS during 2017. The commenter contends that EPA's proposed approval provides no modeling or monitoring data showing that Kentucky's significant contribution to NYMA nonattainment has presently ceased or that it will cease at any time prior to 2023. Therefore, the commenter opposes the modification of EPA regulations to reflect that the CSAPR Update fully addresses Kentucky's transport obligation.
The commenter states that Kentucky's significant contribution to nonattainment and/or maintenance problems for New York under the 2008 ozone NAAQS are present nearly 10 years after EPA promulgated the NAAQS, seven years after the SIP was due, and five years after EPA's FIP was due. Yet Kentucky's SIP looks out another five years before concluding it is feasible for Kentucky to comply with its good neighbor obligations. EPA's 2023 modeling is 15 years after promulgation of the NAAQS and delays compliance without statutory authority, effectively permitting Kentucky's continuing violation of the good neighbor provision.
In order to determine whether Kentucky had any remaining emission reduction obligations with respect to the 2008 ozone NAAQS, additional analysis was necessary. EPA explained in the NPRM and earlier in this action why it was appropriate to evaluate air quality in a future analytic year to determine whether the Commonwealth would have any further emission reduction after implantation of the CSAPR Update and how the choice of a 2023 analytic year was consistent with legal precedent. Thus, EPA does not agree that its approval of Kentucky's SIP improperly delays compliance with the good neighbor provision for the 2008 ozone NAAQS.
Another commenter contends that EPA's proposed approval of the Kentucky SIP does not obviate its duty to issue a fully compliant FIP for Kentucky by the June 30, 2018 deadline in accordance with the court's order.
A further commenter states that states were required to submit SIPs addressing the good neighbor provision for the 2008 ozone NAAQS by March 2011, and that EPA disapproved Kentucky's SIP on March 4, 2013. This finding triggered EPA's mandatory duty under CAA section 110(c)(1) to promulgate a FIP for Kentucky within two years: By March 7, 2015. When EPA failed to act, Sierra Club and New York sued EPA in the United States District Court for the Northern District of California to require EPA to adopt a FIP addressing Kentucky's good neighbor obligations. The commenter notes that the Supreme
The commenter contends that the Kentucky SIP cannot be approved because it requires insufficient action to reduce Kentucky's significant contribution to nonattainment in the NY-NJ-CT multistate nonattainment area by the CAA's mandatory attainment deadlines of July 2018 (moderate areas) and July 2021 (serious areas). The commenter asserts that EPA's failure to propose a FIP by June 30, 2018, is another instance of EPA's failure to carry out its mandatory duty under section 110(c) with respect to Kentucky's transport obligations, and a clear violation of the District Court's order.
As to the requirements of the good neighbor provision for the 2008 ozone NAAQS, EPA has promulgated a FIP for Kentucky in the CSAPR Update. While EPA indicated that the CSAPR Update FIPs “
Moreover, to the extent the commenters contend that the court's citation to the Supreme Court's decision in
Although parallel processing expedites action on SIP submissions, it does not limit EPA's substantive review. EPA evaluates the draft submittal against the same approvability criteria as any other SIP submission, and the final submission must meet all of the necessary SIP completeness criteria, including the requirement that the submission contain a “[c]ompilation of public comments and the State's response thereto.”
EPA is not taking a rushed, unreasonable, or arbitrary and capricious action by using parallel processing to act on Kentucky's SIP submission. Kentucky submitted a
Moreover, EPA does not agree that the Agency has been forced to approve a deficient SIP based on the court-ordered deadline and the procedural requirements for the promulgation of a FIP. For the reasons explained in the NRPM and in this action, EPA finds that Kentucky's SIP submission, together with the CSAPR Update, fully satisfies the requirements of the good neighbor provision with respect to the 2008 ozone NAAQS. However, had EPA determined that it could not finalize approval of Kentucky's SIP and would instead need to promulgate a FIP, EPA would have filed an appropriate motion with the district court requesting an extension of the court-ordered deadline.
The commenter continues that EPA's failure is forcing downwind states to attempt to address Kentucky's and other upwind states' contributions to ozone concentrations via other, resource-intensive CAA mechanisms. The commenter cites a recent petition submitted by Maryland under CAA section 126 identifying three coal-fired units in Kentucky to which EPA has to date failed to respond. The commenter also cites a petition submitted pursuant to CAA section 176A to expand the OTR, which EPA denied. The commenter claims it is arbitrary and capricious for EPA to point to separate CAA provisions as an excuse for inaction on the ozone transport problem, and to reverse itself without confronting its prior position.
Another commenter states that New York's recent submittal of a section 126 petition to EPA buttresses Connecticut's claims and that notes that such petition names stationary sources in Kentucky as “interfer[ing] with attainment” of the New York-New Jersey-Connecticut nonattainment area. The commenter states that EPA has referred to section 126 petitions as one of the tools available to states seeking attainment with the ozone NAAQS, yet they would not be required if upwind states and EPA satisfied their obligations in a timely matter.
While EPA is concluding in this action that Kentucky has no remaining good neighbor obligation with respect to the 2008 ozone NAAQS after implementation of the CSAPR Update, EPA disagrees that this action necessarily forecloses all further good neighbor activities with respect to that NAAQS. This action does not address remaining good neighbor obligations for any other states, and EPA will address any such obligations in a separate rulemaking. Moreover, the commenters acknowledge and EPA agrees that section 126 provides a process for states to bring claims to the Agency if the petitioning state can present information demonstrating that sources in upwind states will have impacts on downwind air quality in violation of the good neighbor provision. However, the right to submit such petitions does not
For the reasons discussed above, EPA is taking final action to approve Kentucky's May 10, 2018, SIP submission and find that Kentucky is not required to make any further reductions, beyond those required by the CSAPR Update, to address its statutory obligation under CAA section 110(a)(2)(D)(i)(I) for the 2008 ozone NAAQS. EPA's final approval of Kentucky's submission means that Kentucky's obligations under 110(a)(2)(D)(i)(I) are fully addressed through the combination of the CSAPR Update FIP and the SIP demonstration showing that no further reductions are necessary. EPA is also amending the regulatory text at 40 CFR 52.940(b)(2) to reflect that the CSAPR Update represents a full remedy with respect to Kentucky's transport obligation for the 2008 ozone NAAQS.
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations.
• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
The SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it impose substantial direct costs on tribal governments or preempt tribal law.
The Congressional Review Act, 5 U.S.C. 801
Under section 307(b)(1) of the Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by September 17, 2018. Under section 307(b)(2) of the Act, the requirements of this final action may not be challenged later in civil or criminal proceedings for enforcement.
Environmental protection, Administrative practice and procedure, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Ozone, Reporting and recordkeeping requirements.
42 U.S.C. 7401
40 CFR part 52 is amended as follows:
42.U.S.C. 7401
(e) * * *
(b) * * *
(2) The owner and operator of each source and each unit located in the State of Kentucky and for which requirements are set forth under the CSAPR NO
U.S. Immigration and Customs Enforcement (ICE), Department of Homeland Security.
Notice of proposed rulemaking.
The Department of Homeland Security (DHS) proposes to adjust fees charged by the Student and Exchange Visitor Program (SEVP) to individuals and organizations. DHS proposes to raise the fee for Student and Exchange Visitor Information System (SEVIS) Form I-901, Fee Remittance for Certain F, J, and M Nonimmigrants, for nonimmigrants seeking to become academic (F visa) or vocational (M visa) students from $200 to $350. For most categories of individuals seeking to become exchange (J visa) visitors, DHS proposes to increase the fee from $180 to $220. For those seeking admission as J exchange visitors in the au pair, camp counselor, and summer work or travel program participant categories, DHS proposes to maintain the fee at $35. In addition to raising the student and exchange visitor fees, DHS proposes to increase the fee for submitting a school certification petition from $1,700 to $3,000. DHS proposes to maintain the fee for an initial school site visit at the current level of $655, but clarify that, with the effective date of the rule, DHS would exercise its current regulatory authority to charge the site visit fee not only when a certified school changes its physical location, but also when it adds a new physical location or campus. DHS proposes to establish and clarify two new fees: a $1,250 fee to submit a school recertification petition and a $675 fee to submit an appeal or motion following a denial or withdrawal of a school petition. Adjusting fees would ensure fee levels are sufficient to recover the full cost of activities of the program and would establish a fairer balance of the recovery of SEVP operational costs between beneficiary classes.
Send comments by September 17, 2018.
You may send comments, identified by Docket No. ICEB-2017-0003, to the Federal Docket Management System (FDMS), a government-wide, electronic docket management system, by any of the following methods:
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For additional instructions on sending comments, see the “Public Participation” heading of the
Sharon Snyder, Unit Chief, Student and Exchange Visitor Program; U.S. Immigration and Customs Enforcement, Department of Homeland Security; 500 12th Street SW, Washington, DC 20536; 703-603-3400,
DHS proposes to adjust its fee schedule for students and exchange visitors as well as for petitioning and certified schools. These fees are associated with SEVP and SEVIS. They were last adjusted in 2008.
SEVP, an ICE component, is funded entirely by fees charged to individual applicants and organizational petitioners. Fees collected from individuals and organizations are deposited into the Immigration Examinations Fee Account (IEFA) and used to fund the operational costs associated with SEVP and its management of SEVIS.
In accordance with the requirements and principles of the Chief Financial Officers Act of 1990, 31 U.S.C. 901-03 (CFO Act), and OMB Circular A-25, SEVP reviews its associated fees that are deposited into the IEFA biennially and, if necessary, proposes adjustments to ensure recovery of costs necessary to meet national security, customer service, and adjudicative processing goals. SEVP completed a biennial fee review for fiscal year (FY) 2016 and FY 2017 in 2017. The projected results indicate that current fee levels are insufficient to recover the full cost of current and planned program activities. Section 286(m) of the INA, 8 U.S.C. 1356(m), provides that DHS may set fees for adjudication and naturalization services at a level that would ensure recovery of the full costs of providing such services, including the costs of providing similar services without charge to asylum applicants and certain other immigrants. Additionally, section 641 of IIRIRA, 8 U.S.C. 1372, authorizes DHS to periodically revise fees that cover the cost of carrying out SEVP and maintenance of SEVIS. Pursuant to these laws, DHS proposes the adjustments contained in this rule.
SEVP calculates the totality of its fees to recover the full cost of its overall operations. Following its biennial fee review, SEVP anticipates that if it continues to operate at current fee levels, it will experience a shortfall of approximately $68.9 million beginning in 2019. At current fee levels, SEVP's current expenditures exceed current revenues, without any service upgrades. The deficit is covered by surplus revenue that was previously accumulated from 2009 to 2015. This surplus will be exhausted in FY 2019 even without any service upgrades. This projected shortfall poses a risk of degrading operations and services funded by fee revenue. The proposed fee increases would allow SEVP to cover the current deficit between revenue and expenditures plus make the necessary service upgrades. The proposed fee levels thus eliminate the risk of degrading operations, while also ensuring full cost recovery by providing fees for each specific benefit that will more adequately recover the cost associated with administering the benefit.
The proposed rule would adjust, institute, and clarify the application of fees pertaining to services SEVP provides to reflect existing and projected operating costs, program requirements, and continued planned program improvements, in the following manner:
• Increase the two types of individual student and exchange visitor application fees, specifically the F and M I-901 SEVIS fee from $200 to $350 and the full J-1 I-901 SEVIS fee from $180 to $220;
• Increase the SEVP school certification petition fee for initial certification from $1,700 to $3,000;
• Institute a stand-alone fee of $1,250 when a school files a petition for recertification of its existing SEVP certification;
• Revise regulations to ensure collection of a $675 fee to accompany the filing of a Form I-290B, Notice of Appeal or Motion, when a school appeals or files a motion to reconsider or reopen a denial or withdrawal of its SEVP certification; and
• Maintain the $655 fee for a site visit at its current level, but clarify that, with the effective date of the rule, SEVP would exercise its current regulatory authority to charge the site visit fee when a certified school changes its physical location or adds a new physical location or campus on its Form I-17, “Petition for Approval of School for Attendance by Nonimmigrant Student.”
In making these changes, the proposed rule would allow SEVP to fully fund activities and institute critical near-term program and system enhancements in a more equitable manner through a fairer balance of the recovery of SEVP operational costs between beneficiary classes. A summary of the current and future fee structures is provided in Table 1 below.
SEVP proposes to adjust fees to the amounts listed in Table 1.
SEVP expects to have a total annual increase in fees of $75.2 million in FY 2019 transferred from individuals and entities for the services they receive. Table 2 shows the summary of the total annual number of payments, incremental fee amounts, and total fees transferred in FY 2019. This increase in fees would allow SEVP to not only maintain its current level of service but also enhance SEVP's capability to support national security and counter immigration fraud through the continued development and implementation of critical system and programmatic enhancements. Enhancements to SEVIS, including the establishment of a student portal, will assist designated school officials (DSOs) in their regulatory obligation to provide accurate and timely information and will also rebalance this reporting requirement by providing students an automated means to update their information. Increased numbers of adjudication personnel will assist in reducing the processing times for initial petitions, updates, and recertifications, while enhanced vetting protocols will ensure that only those nonimmigrant students who are eligible to enter and remain in the country do so.
We encourage you to participate in this rulemaking by submitting comments and related materials. All comments received will be posted without change to
If you submit comments, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide reasons supporting each suggestion or recommendation. You may submit your comments and materials online or by mail, but please use only one of these means. We recommend that you include your name and a mailing address, an email address, or a phone number in the body of your document so that we can contact you if we have questions regarding your submission. ICE will file all comments sent to our docket address, as well as items sent to the address or email address listed in the
To submit your comments online, go to
We will consider all comments and materials received during the comment period and may change this proposed rule based on your comments. The docket is available for public inspection before and after the comment closing date.
To view comments, as well as documents mentioned in this preamble as being available in the docket, go to
Anyone can search the electronic form of comments received in any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an association, business, labor union, etc.). You may wish to consider limiting the amount of personal information that you provide in any voluntary public comment submission you make to DHS. DHS may withhold information from public viewing that it determines may affect the privacy of an individual or is offensive. For additional information, please read the Privacy and Security
IIRIRA (Pub. L. 104-208, div. C, 110 Stat. 3009-546 (1996)) established the requirement for the monitoring and reporting of the activities of foreign students and exchange visitors while they reside in the United States (U.S.). Section 641 of IIRIRA, 8 U.S.C. 1372, mandated that the Attorney General develop and conduct a program for the electronic collection of data by U.S.-approved (
In addition, President George W. Bush issued Homeland Security Presidential Directive 2 (HSPD-2) in October 2001, which requires DHS to conduct periodic, ongoing recertification of all schools certified to accept F or M students. Combating Terrorism Through Immigration Policies, Oct. 29, 2001, as amended by HSPD—5 (Management of Domestic Incidents, Feb. 28, 2003, Compilation of HSPDs (updated through Dec. 31, 2007), available at
The Homeland Security Act of 2002 created DHS, transferred a broad range of immigration authorities from the Attorney General and the Commissioner of Immigration and Naturalization to the Secretary of Homeland Security, and vested ICE with responsibility for administration of the electronic data collection system, also known as SEVIS.
SEVP is responsible for developing, maintaining, and improving SEVIS, which is an internet-based application that facilitates timely electronic reporting and monitoring of nonimmigrant students, exchange visitors, and their dependents in the United States. SEVIS enables schools and program sponsors to transmit electronic information to DHS and the Department of State (DoS) throughout a student's or exchange visitor's program in the United States. SEVIS is intended to improve customer service by streamlining the application and adjudication processes. Through continuing modernization efforts, it addresses issues in student and school system processes by providing information technology (IT) solutions and modifying business processes.
Schools and exchange visitor programs have been required to enter F, M, and J nonimmigrant data into SEVIS since August 1, 2003. As of April 1, 2017, SEVIS contained 1.4 million active F, M, and J student and exchange visitor records. Approximately 8,700 schools are SEVP-certified and approximately 1,500 exchange visitor programs are DoS-designated.
SEVIS enables DHS and DoS to efficiently administer their approval (
SEVIS shares information with other agencies' and components' systems—DoS, USCIS, CBP, Transportation Security Administration (TSA), and others—to better monitor the status of student or exchange visitors throughout their stays in the United States. This allows DHS to meet the aims of the USA PATRIOT Act.
The Secretary is specifically authorized to collect fees for SEVP from prospective F and M students and J exchange visitors, subject to certain limits for certain J-1 nonimmigrants. 8 U.S.C. 1372(e)(1). The Secretary is authorized to periodically revise those fees, with certain exceptions, to take into account changes in the overall cost of carrying out the program. IIRIRA section 641(e)(4)(A), (g)(2), 8 U.S.C. 1372(e)(4)(A), (g)(2). Similarly, section 286(m) of the INA authorizes the Secretary to collect fees for adjudication and naturalization services at a level that would ensure recovery of the full costs of providing such services, including the costs of providing similar services without charge to asylum applicants and certain other immigrants. Additionally, pursuant to INA section 286(m), the level that is set may include recovery of any additional costs associated with the administration of the fees themselves. Under this authority, user fees are employed not only for the benefit of the payer of the fee and any collateral benefit resulting to the public, but also to provide a benefit to certain others.
All fees collected under these authorities are deposited as offsetting receipts into the IEFA and are available to the Secretary until expended for authorized purposes.
As a general matter, in developing fees and fee rules, DHS looks to a range of governmental accounting provisions. OMB Circular A-25,
Section 31.5 of OMB Circular A-11, Preparation, Submission and Execution of the Budget, July 1, 2016, directs agencies to develop user charge estimates based on the full cost recovery policy set forth in OMB Circular A-25,
The Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 4: Managerial Cost Accounting Concepts and Standards for the Federal Government, July 31, 1995, updated June 2017, provides the standards for managerial cost accounting and full cost. SFFAS No. 4 defines “full cost” to include “direct and indirect costs that contribute to the output, regardless of funding sources.”
The Chief Financial Officers Act of 1990, 31 U.S.C. 901-903, requires each agency's Chief Financial Officer (CFO) to “review, on a biennial basis, the fees, royalties, rents and other charges imposed by the agency for services and things of value it provides, and make recommendations on revising those charges to reflect cost incurred by it in providing those services and things of value.” 31 U.S.C. 902(a)(8).
This proposed rule would eliminate the risk of a projected shortfall for SEVP operations and services funded by fee revenue. It proposes increased funding that supports continuing and new initiatives critical to improving the program and reflects the implementation of specific cost-allocation methods to segment program costs to the appropriate fee—F and M students, J exchange visitors, or schools.
Consistent with these authorities and sources, this proposed rule would ensure that SEVP recovers the full costs for the services it provides and maintains a projected level of service necessary to fulfill its mission. The proposed rule would do this in two ways. First, where possible, the proposed rule sets fees at levels sufficient to cover the full cost of the corresponding services and assigns these fees to those who are the primary beneficiaries. DHS works with OMB and generally follows OMB Circular A-25, which “establishes federal policy regarding fees assessed for Government services and for sale or use of Government goods or resources.”
This proposed rule would set fees at a level sufficient to fund the full cost of conducting the program and general operations for FY 2019.
In following OMB Circular A-25 to the extent appropriate, including its direction that fees should be set to recover the costs of an agency's services in their entirety and that full costs are determined based on the best available records of the agency, DHS accounts for the reality that costs of all SEVP operations cannot always be directly correlated to certain specific fees. DHS therefore applies the discretion provided in the above authorities, in taking the following actions: (1) Employing ABC to establish a model for assigning costs to specific benefit requests in a manner reasonably consistent with OMB Circular A-25; (2) distributing costs that are not attributed to or driven by specific adjudication services; and (3) making additional adjustments to effectuate specific policy objectives.
This proposed rule would amend the current fee structure governing the collection of fees from individuals by increasing the individual student and exchange visitor application fee (I-901 SEVIS fee). In addition, the rule proposes to amend the fee structure paid by schools by increasing the SEVP school certification petition costs for initial certification, instituting a fee to address school recertification costs for the ongoing recertification process, and
Fees were last adjusted in 2008. 73 FR 55683. Refined and expanded SEVP operations, SEVIS modifications, as well as inflation, have increased SEVP operating costs and are the basis for the proposed increases to the I-901 SEVIS fee and the school certification petition fee.
In the 2008 rulemaking that resulted in the most recent agency adjustment, “Adjusting Program Fees and Establishing Procedures for Out-of- Cycle Review and Recertification of Schools Certified by the Student and Exchange Visitor Program To Enroll F and/or M Nonimmigrant Students” (2008 Fee Rule), DHS outlined its rationale for a fee increase by identifying a set of organizational initiatives essential to its mission: Improving SEVIS functionality, improving oversight and enforcement, implementing recertification procedures, and developing school liaison activity. 73 FR 55683. SEVP, in accordance with its commitment to the goals prescribed in that rule, has implemented the following actions since then:
SEVP's original plan to roll out a comprehensive overhaul of SEVIS (known as SEVIS II) was replaced by an approach that focused on a series of smaller and more targeted SEVIS enhancements—now termed SEVIS Modernization. New technologies have become available since the comprehensive SEVIS overhaul was first envisioned. The use of these technologies enables SEVP to apply many of the functionalities that were planned for SEVIS II to the current system. At the same time, this approach eliminates potential risks and complications that result from migrating mass quantities of critical data from one system to the next, which would have been necessary if the SEVIS II approach had been fully implemented. Building on the experience, knowledge, and stakeholder feedback acquired during the planning process, SEVP has launched hundreds of smaller-scale SEVIS enhancements. These efforts have addressed the majority of national security vulnerabilities previously identified, by improving critical system functionalities that support data integrity in SEVIS, including establishing system functions that support standardization of student and exchange visitor name and address data entry. The enhancements have also improved system performance for end users. With the introduction of more detailed SEVIS event history and new abilities for DSOs to create student data reports, these enhancements enable action on multiple student records simultaneously.
As an example, SEVP, in collaboration with CBP, developed and implemented an admissibility indicator tool that links to real-time SEVIS data to assist CBP officers at ports of entry in determining whether F, M, and J nonimmigrants may enter the United States based on their SEVIS record status. Prior to the availability of the admissibility indicator, first-line CBP officers relied on paper documentation that the nonimmigrant student or exchange visitor presented. Today, the admissibility indicator gives CBP officers a quick assessment of the most pertinent and current SEVIS data that are necessary in determining whether nonimmigrant students, exchange visitors, and their dependents are eligible to enter the United States or require further investigation. As a result, CBP officers are able to use the admissibility indicator at points of inspection to quickly verify the information contained on the paper documentation that is also required for entry. This assists in reducing long wait times, aids with detecting and preventing visa fraud, and otherwise enhances compliance efforts and national security.
A dedicated compliance enforcement program that includes criminal investigative efforts is an integral part of ensuring the operational effectiveness of SEVP. By analyzing SEVIS data, SEVP identifies indicators of potential misuse or abuse of nonimmigrant status and provides leads to Counterterrorism and Criminal Exploitation Unit (CTCEU) law enforcement personnel for further investigation. At the time the 2008 Fee Rule was published, the Compliance Enforcement Unit (CEU), the predecessor of CTCEU, was not sufficiently staffed to address all leads generated from SEVIS. As a result, only the highest priority leads were investigated, which left open unaddressed vulnerabilities. With the increased I-901 SEVIS fee revenue, DHS has hired additional personnel and currently funds 234 Homeland Security Investigations (HSI) positions with primary responsibility for nonimmigrant violator investigations. The increased number of HSI personnel assigned to support CTCEU investigations has enabled more robust coordination between SEVP and CTCEU and has successfully reduced the exploitation of the laws and programs relating to nonimmigrant students and exchange visitors. An example of the result of such close and extensive cross-coordination was the conviction of the founder and president of Tri-Valley University (TVU) on 31 counts in March 2014, ranging from conspiracy to commit visa fraud and alien harboring to money laundering.
SEVP implemented the recertification procedure prescribed in the 2008 Fee Rule beginning with its first recertification cycle in 2010. Institutions that participated in the first cycle have been reviewed several times and will continue to undergo the recertification process every two years. Because there are thousands of schools, recertification is a rolling process allowing adjudicators to address issues with one school before moving on to the next.
Each school is notified 2 years to the month following the date of its last recertification or certification about its need to file for recertification in order to maintain its certification. From that date, the school has 180 days to file for recertification. 8 CFR 214.3(h)(2)(i). This cycle helps ensure that only schools that operate in accordance with the law remain certified by SEVP.
SEVP deployed the first group of field representatives in April 2014, followed by three additional groups later in 2014 and 2015, bringing the national total to 60 field representatives distributed among three geographically determined units. The field representatives serve as liaisons between SEVP and SEVP-certified schools that enroll F and M
In developing this proposed rule, SEVP reviewed its current and projected costs, identified goals for services, analyzed projected future workload, and allocated costs to specific services. In addition to the full SEVP operating costs described in the following sections, the proposed fees would fund the continuing efforts identified in the 2008 rule, now updated to reflect technological refinements and operational enhancements. These updated activities include SEVIS modernization and increases in adjudication support and investigatory and compliance personnel.
SEVIS is a web-based system that schools and program sponsors use to transmit information about their programs and participating F, M, and J nonimmigrants. It became fully operational in February of 2003, replacing a paper-based F, M, and J nonimmigrant process.
Since its inception, SEVIS has evolved well beyond its original purpose as a data collection tool. Today, approximately 35,000 officials from approved schools and program sponsors use SEVIS data to manage 1.4 million F, M, and J nonimmigrants and their dependents during their stays in the United States. SEVIS provides real-time administrative and enforcement information to DHS components, including CBP and USCIS, as well as DoS. SEVIS also receives information about F, M, and J nonimmigrant visa applications, entry and exit records, and benefit applications from these entities through various interfaces. This makes SEVIS a critical national security component and a primary resource for law enforcement and intelligence communities to extract the data necessary to conduct counterterrorism and counterintelligence threat analysis.
The threat of new forms of terrorism and other criminal activity exploiting the Nation's immigration laws continues to be a public safety and national security concern in the United States. As a result, there is an increasing need for sophisticated SEVIS data analysis to detect individuals who engage in immigration fraud or otherwise pose a risk to national security through willful misrepresentation. In addition, end users from schools and program sponsors have expressed concerns and provided feedback reflecting the necessity to create SEVIS functionalities that enable the accurate reporting of new and innovative educational program models. While SEVIS has been modified to meet the most critical needs through hundreds of upgrades and patches, including adding abilities for the system to preemptively address data input errors, system functionality concerns (due to time lags, system constraints, and other system design limitations) continue to affect all SEVIS users and necessitate continuous development of SEVIS design. In response, SEVP has begun an effort—known as SEVIS Modernization—that involves redesigning the entire system over time in prioritized increments. Continued Modernization will increase security by providing real-time, person-centric data. This data will reduce fraud and increase awareness by providing government officials with actionable intelligence with which to make decisions and initiate immigration actions. Informed decisions and efficient investigations allow for better management of F, M, and J nonimmigrant data and preventing high-risk individuals from entering the United States.
To address critical system limitations and improve the SEVIS user experience, SEVP has identified the following list of key SEVIS modernization priorities for continued funding through the increased I-901 SEVIS Fee revenue:
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This external SEVIS student portal will enable students to directly add or edit the required contact and employer information so that their SEVIS record would be updated in real time. This will reduce processing redundancies and lessen the potential for data entry errors by eliminating the need for the student to first report such information to the DSO who will then enter the reported data into SEVIS. The portal will also consequently reduce the workload of DSOs and make the reported data available to DHS sooner. With future expansion, the portal will address SEVIS vulnerabilities related to accurate monitoring of F, M, and J nonimmigrant status and location of nonimmigrant students and exchange visitors by closing national security vulnerabilities related to person-centric, paperless, people-matching capabilities. In establishing a portal for student use in this manner, DHS will encourage students to assume responsibility for maintaining their immigration status, reduce the system's reliance on paper-driven processes, and reinforce the operational premise and security advantages of “one person, one record.” Through use of a record-matching protocol, all SEVIS records will be collated and presented as a unified, person-centric statement of information and activity. These summaries will be available to all operational entities, including school officials, who will have access in the SEVIS record to the same up-to-date information, including all student history.
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Unlike government employees who need access to SEVIS to perform official functions, school and program officials have not had to meet uniform security requirements. Recently, SEVP began conducting national criminal background checks on designated school officials (DSOs). SEVP has vetted all DSOs at K-12 schools and, since May 2017, has vetted all newly designated DSOs, helping to ensure the safety of nonimmigrant students and exchange visitors and preserve the integrity of SEVIS data. SEVP is considering eventually extending this screening and security review to DSOs and ROs who were appointed prior to May 2017 and other school and program officials through regulatory action. SEVP will bear the upfront cost of this security review. When fully implemented, all individuals who require access to SEVIS will be vetted prior to being granted such access. DHS will complete the vetting adjudication for the RO or ARO and provide a copy of its decision to the DoS Bureau of Educational and Cultural Affairs.
This initiative will strengthen the mechanism for approving user access to SEVIS. DHS and DoS rely on PDSOs, DSOs, ROs, and AROs as key links in the process to mitigate potential threats to national security and ensure compliance with immigration law. DHS would require that anyone nominated to serve as a PDSO, DSO, RO, or ARO receive a favorable SEVIS Access Approval Process (SAAP) assessment prior to their appointment and subsequent approval for access to SEVIS.
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This planned modernization effort, with implementation during FY 2018-2021, is expected to greatly enhance the capability of DHS to identify and reduce national security threats; reduce the possibility for reporting errors by prospective and approved F, M, and J nonimmigrants, as well as their schools and programs; and better provide updated, correct, real-time information to academic, law enforcement, and other government users. SEVP projects that the cost for developing and deploying these SEVIS modifications is $53.19 million. SEVP would incur $13.15 million of that cost in FY 2018, $13.75 million in FY 2019, $13.14 million in FY 2020, and $13.15 million in FY 2021.
In 2008, DHS proposed to recertify all schools approved for attendance by F and M students every 2 years, pursuant to title V, section 502 of EBSVERA and HSPD-2, and established procedures for the review of each SEVP-certified school every 2 years, as well as out-of-cycle reviews whenever it determines that clarification or investigation of school performance or eligibility is necessary. Recertification is a determination of performance and compliance with required standards in the period since the previous certification. In this comprehensive review of an SEVP-certified school by an SEVP adjudicator, SEVP affirms that the school remains eligible and is complying with regulatory recordkeeping, retention, reporting, and other requirements.
Performance is monitored through SEVIS, DHS records, submissions from the school, and possible onsite reviews. If noncompliance is discovered, SEVP requires schools, as appropriate, to make corrections immediately. SEVP reviews the school's compliance with Federal law and regulations.
In recent years, the scope of work of SEVP adjudication has expanded to include administrative compliance enforcement, support of criminal investigations, and adjudication of school petitions, including certification petitions, recertification petitions, and updates to school information. As a result, SEVP adjudicators have experienced significant workload increases, which in turn have resulted in longer SEVP adjudication processing times of school petitions and student compliance issues.
Since initiating recertification, SEVP has determined that the current number of SEVP adjudication personnel is inadequate to meet the congressional requirement for recertifying or
Investigations of violations of immigration status, as well as criminal investigations of F and M students and J exchange visitors, are primarily coordinated by CTCEU. Information is received, collated, and analyzed from a number of DHS and other information sources, including SEVIS, to generate national security leads for field personnel and prevent terrorists and other criminals from exploiting the Nation's immigration system through fraud. In its continuing support of compliance efforts, SEVP seeks to fund activities in two key areas: Support for and integration of technological advances and surge support for critical incidents.
New technologies have enabled sophisticated methods of extracting and analyzing data. To make best use of these technology force multipliers, personnel would use the available technologies to develop investigative packages based on SEVIS research and use of other designated government computer systems, open source websites, and other pertinent information sources related to individual students, exchange visitors, and SEVP-certified schools. To the extent that adequate resources are allocated and employed for this purpose, increased support levels would reduce the vulnerability of the United States to terrorist attacks and reduce the potential for exploitation of certified schools and designated exchange visitor programs.
Through the fee adjustments proposed in this rule, SEVP would continue ensuring funding to enable a surge for investigatory efforts, including increased contract overtime or surge staffing, in advance of planned critical overstay enforcement operations. SEVP would also fund the surge of continuous and extended analytic support to HSI field operations in the event of a terrorist attack or during imminent threat situations. This direct operational support to field elements during heightened threat situations or in the aftermath of an attack would enable CTCEU to quickly assess subjects of investigative interest and to share information to further investigations with its law enforcement partners, ICE legal counsel, and the U.S. Attorney's Office. Such surge support has been used successfully and has proven critical in furthering investigative efforts and providing investigative focus in recent threat situations and terrorist attacks, including attacks in San Bernardino, California; Orlando, Florida; Columbus, Ohio; Baltimore, Maryland; New York; New Jersey; and Fort Lauderdale, Florida.
As previously noted, the proposed amended fees comply with statutory and regulatory requirements that SEVP review its fee structure every 2 years to ensure that the cost of the services provided are fully captured by fees assessed on those receiving the services. The new fees are an estimate of the current and projected costs of funding needed to continue enhancing SEVP's capability to achieve programmatic goals associated with its statutory mandate—supporting national security and countering immigration fraud through the continued development and implementation of critical system and programmatic enhancements. This proposed rule would establish the following fee structure detailed in Table 3.
The current fee structure includes the I-901 SEVIS fee, I-17 certification fee, and the site visit fee. The proposed rule would allow SEVP to fully fund activities and institute critical near-term program and system enhancements in a more equitable manner. The proposed fee structure would also include the addition of a recertification fee and a fee for filing a motion or appeal.
With this rule SEVP proposes to impose a fee for a Form I-290B,
The proposed rule would ensure the full recovery of SEVP operational costs in a manner that fairly allocates costs between beneficiary classes and would facilitate the development of activities designed to achieve defined program goals. For example, the proposed rule would continue funding for critical SEVIS modernization efforts and would incorporate the added cost of increased analytical support for investigative and enforcement operations into the I-901 SEVIS fee. The proposed fee schedule would also allow SEVP to fully fund additional SEVP adjudication personnel.
SEVP fees are paid by individuals and organizations. DHS certifies schools that enroll F and M students; recertifies schools with active certifications; conducts site visits; administers, maintains, and develops SEVIS; collects fees from prospective F and M students and J exchange visitors, as well as from schools; adjudicates motions and appeals in regard to certification petitions; undertakes investigatory initiatives; and provides overall guidance to schools about program enrollment and compliance, as well as the use of SEVIS. These activities are funded solely through the collection of fees.
The I-901 SEVIS fee, collected from students and exchange visitors, currently underwrites the operation of
The certification fee is paid by schools that petition for the authority to issue Certificates of Eligibility (COE), commonly referred to as Forms I-20, to prospective nonimmigrant students for the purpose of their applying for F or M visas and admission to the United States in those statuses. These monies fund the base internal cost for SEVP to process and adjudicate the initial school certification petition (Form I-17, “Petition for Approval of School for Attendance by Nonimmigrant Student”). The proposed recertification fee paid by schools to remain certified would fund the cost of adjudicating the recertification petition.
If SEVP finds that a petitioning or certified school does not meet regulatory standards, it will deny the affected school's Form I-17 or withdraw its SEVP certification. 8 CFR 214.4. When SEVP sends a school a notice of denial or withdrawal, the notice also includes reasons for the unfavorable decision(s), an explanation of the school's rights, and the applicable appeal and motion filing information and deadlines. In many cases, a school may file an appeal or motion to reopen and/or reconsider unfavorable decisions issued by SEVP by filing the Form I-290B, “Notice of Appeal or Motion,” pursuant to the process set forth in 8 CFR 103.3(a) or 103.5(a).
In proposing these regulatory changes for the I-290B filing fee, DHS would more fairly balance allocation of the recovery of SEVP operational costs among beneficiary classes. To date, the cost of adjudicating appeals and motions has never been placed directly upon the beneficiaries of those adjudications—the schools seeking to obtain or maintain SEVP-certification. The fee for filing the Form I-290B with SEVP is being proposed at a level that requires those who file the Form I-290B to pay for at least a portion of the operating expenses for DHS to adjudicate the I-290B, while preventing the fee from becoming cost prohibitive.
The site visit fee is currently paid by schools that petition for certification to issue Forms I-20 or by a certified school when it physically moves to a new location. DHS established this fee in the 2008 Fee Rule and with that rule codified SEVP's authority to charge the fee when a school changes its physical location or adds a new physical location or campus.
But SEVP is not currently collecting the fee when a certified school adds a new physical location or campus. SEVP intends to begin imposing the fee following the effective date of any final rule. The site visit fee would apply when a certified school updates its Form I-17 in SEVIS to indicate, pursuant to 8 CFR 214.3(h)(3)(ii), it is changing its physical location or adding a new physical location or campus. This revenue would assist in recovering the costs DHS incurs for site visits of these locations, including collecting evidence on school eligibility for certification, reviewing the facilities, and interviewing personnel nominated on the petition to become DSOs, including the person nominated to be the PDSO.
SEVP captured and allocated cost using an ABC approach to define full cost, outline the sources of SEVP cost, and define the fees. The ABC approach also provides detailed information on the cost and activities allocated to each fee.
SEVP used CostPerform ABC modeling software, Version 9.3 (0147), to determine the full cost associated with updating and maintaining SEVIS to collect and maintain information on F, M, and J nonimmigrants; certifying schools; overseeing school compliance; recertifying schools; adjudicating appeals; investigating suspected violations of immigration law and other potential threats to national security by F, M, or J nonimmigrants; providing outreach and education to users; and performing regulatory and policy analysis. SEVP also used the model to identify management and overhead costs associated with the program.
ABC is a business management methodology that links inputs (cost) and outputs (products and services) by quantifying how work is performed in an organization (activities). The ABC methodology allows fee-funded organizations to trace service costs and to calculate an appropriate fee for the service, based on the cost of activities associated with the services for which the fee is levied.
Using the ABC methodology, SEVP identified and defined the activities needed to support SEVP functions to include current and future initiatives. SEVP captured the full cost of
SEVP used an independent contractor and commercially available ABC software to compute the fees. The structure of the software was tailored to SEVP needs for continual and real-time fee review and cost management.
In building the ABC model, it was critical for SEVP to identify the sources and cost for all elements of the program. Consistent with instructive legislative and regulatory guidance, SEVP fees recoup the full cost of providing the agency's overall resources and services.
To the extent applicable, SEVP used the cost accounting concepts and standards recommended in the FASAB Handbook, Version 15, “Statement of Financial Accounting Standards Number 4, Managerial Cost Accounting Concepts and Standards for the Federal Government” (2016). FASAB Standard Number 4 sets the following five standards as fundamental elements of managerial cost accounting: (1) Accumulate and report cost of activities on a regular basis for management information purposes; (2) establish responsibility segments and match the cost of each segment with its outputs; (3) determine the full cost of government goods and services;
SEVP calculates projected fees using the full cost of operations, as defined by a regularly updated spend plan. The projected spend plans for FY 2019 and FY 2020 were used in calculation of SEVP's proposed fee structure. Tables 4 through 7 detail the full cost of SEVP operations, consistent with the spend plan, from various perspectives: By program category, by cost initiative, by fee type, and by activity.
The FY 2019 and FY 2020 budgets provide the cost basis for the fees. These budgets reflect the required revenue to sustain current initiatives. The revenue is also assessed to ensure a sufficient level of continued funding for program enhancements as discussed above, such as enhanced vetting and investigative analysis to support enforcement operations, SEVIS Modernization, and increased numbers of adjudication personnel. Finally, the past budgets provide the cost basis for adjusting annualized cost-of-living increases.
Determining the projected cost for continuation of current efforts involved routine budget projection processes. The budget establishes the current services of the program and projects the mandatory and cost-of-living adjustments necessary to maintain current services. The budget adjusts the services provided by SEVP to include enhancements that reflect program policy decisions. Table 4 reflects the FY 2017 final budget, the FY 2018 approved budget, and the FY 2019 and FY 2020 planned budget requests.
The total cost projection for FY 2019 is $186,612,000 and for FY 2020 is $188,405,000. Table 4 sets out the projected current services for SEVP and supporting CTCEU personnel in FY 2019 ($74.45 million) and FY 2020 ($74.45 million). These costs are direct extensions of the FY 2018 costs that are supported by the current fees. Table 5 summarizes the enhancements and other costs, which include investigative analysis to support enforcement operations, SEVIS Modernization, increased numbers of adjudication personnel, and annualized inflation.
The purpose of the ABC methodology is to trace costs to organizational elements, as well as identify all cost components associated with the services offered. For fee-based organizations such as SEVP, this allows the assignment of cost to one or more fees. SEVP defined five fee categories: The I-901 SEVIS fee, certification fee, recertification fee, fee for motions and appeals, and site visit fee.
Historically SEVP has only collected fees from students and exchange visitors—the I-901 fee—and from schools applying for certification, to include a separate site visit fee. In this analysis, SEVP considered the creation of additional fee categories for all the distinct services it provides in deciding how to apportion fees. For example, SEVP considered charging a separate I-901 SEVIS fee to F, M, and J dependents. SEVP also examined various tiered fee structures and considered assigning some specific costs to separate fees. The ABC fee model allowed SEVP to evaluate these scenarios. DHS opted for an updated fee structure that segments program cost to the appropriate fee—F and M students, J exchange visitors, or schools.
The proposed I-901 SEVIS fee would recover the systems cost for SEVIS, including the remainder of certification, recertification, site visits, as well as appeals and motions costs that are not covered by the respective proposed fees. The fee would be apportioned between three categories—full fee of $350 for F and M students, reduced fee of $220 for most J participants, and the further reduced fee of $35 for certain J program participants. Federal Government-sponsored J program participants are fee-exempt by law, so their costs will be funded by other fee payers. 8 U.S.C. 1372(e)(3).
The proposed school certification fee would recover a portion of the costs necessary to process initial school certifications. The proposed recertification fee would recover a portion of the cost to process school recertifications and a portion of SEVP administrative costs. The site visit fee would recover the full cost of performing the site visit for initial school certification and when a school changes its physical location or adds a new physical location or campus. The proposed fee for an appeal or motion would recover a portion of the cost to process an appeal or motion.
Table 6 shows the summary of SEVP FY 2019 and FY 2020 cost by source of cost.
Table 7 shows a more detailed cost breakdown. The numbers are shown in thousands, rather than millions, of dollars due to the level of detail. There are two levels for the costs: Process and activity. Costs are allocated from payroll, contracts, and other expenses to activities through activity surveys and volume based cost allocations. The full cost of operations from the spend plans is distributed to the activities that best describe the work being performed. Table 7 details these costs from an activity perspective. To simplify the presentation, the numbers are rounded to the nearest thousand. These numbers are not rounded in the cost model.
The cost model provides detailed cost information by activity and a summary cost for each, giving the aggregate fee cost by category. Next, SEVP projected the total number of fee payments of each type for FY 2019 and FY 2020 and determined the fee-recoverable budget. SEVP selected a forecasting approach to determine the total number of expected fee payments for each fee.
To calculate a fee amount for the I-901 SEVIS fee, SEVP estimated the number of fee payments expected in FY 2019 and FY 2020 for each of the three fee payment types: Reduced fee for J participants (excluding the additional cost for initial certification and recertification of SEVP-certified schools); full fee for J participants (excluding the additional cost for initial certification and recertification of SEVP-certified schools); and full fee for F and M students (including additional costs for certification, recertification, and appeals).
Calculations for each of the three fee payment types vary because each fee type is treated differently in federal statutes and regulations. Section 641 of IIRIRA exempts Federal Government-sponsored J-1 exchange visitors from the fee payment. All F and M nonimmigrant students are currently required to pay $200, and nonexempt J nonimmigrant exchange visitors currently must pay $180. 8 CFR 103.7(b)(1)(ii)(H); 214.13(a). Congress modified the statute in December of 2000 to establish a reduced fee of $35 for au pairs, camp counselors, or participants in a summer work travel program, demonstrating strong congressional intent that the fee remain at that level. Act of Dec. 21, 2000, Public Law 106-553, app. B, sec. 110, 114 Stat. 2762, 2762A-51, 2762A-68. IIRIRA also provided for revising the fee once the program to collect information was expanded to include information collection on all F, M, and J nonimmigrants. As a result, the I-901 fee was revised in 2008 under the provisions of IIRIRA to take into account the actual cost of carrying out the program.
SEVP determined the number of expected I-901 SEVIS fee payments in FY 2019 and FY 2020. SEVP calculated the I-901 SEVIS fee over a 2-year period to account for potential fluctuation in the forecast. SEVP used the change in the numbers of payments received to provide the trend data used to forecast I-901 SEVIS fee payments for each I-901 payment type separately. Table 8 reflects aggregate historical payment data for all three I-901 payment types.
As indicated in Table 8, the level of payments received varied greatly over the past 10 years. This high degree of variation in the historical data, combined with the variables affecting demand for visas, called for a forecasting methodology that would capture and account for deviations.
SEVP selected a statistical forecasting method that uses trends in historical data to forecast future payments. SEVP selected ARIMA, an autoregressive integrated moving average model to forecast payments. An ARIMA model is a statistical model that uses historical time series data to predict future trends and movements. A non-seasonal model incorporates two major components: Trend and moving average. The autoregressive portion of the model, or trend, states that past values have an effect on current or future values and that values are estimated based on the weighted sum of past values. The second component is moving average which helps to smooth out the time series to filter out extreme fluctuations or outliers. In some cases a third component is needed: Seasonality. Visa data from 2004 to the present shows extreme seasonality in the number of F, M, and J visas issued. Seasonality is factored into the model to account for the U.S. academic calendar.
SEVP evaluated alternative forecasting methods; however, SEVP rejected these methods due to inaccuracy and poor fit. SEVP's chosen model provided a conservative forecast that will allow SEVP to operate with stability. The fee payment forecast, reflected in Table 9, places a balanced mix of emphasis on recent and historical data and still contains sufficient data points to smooth out some variability in the underlying data.
SEVP uses historical data from FY 2012 to FY 2016 to find a 3-year moving average to forecast annual new initial certifications. SEVP predicts demand of approximately 426 initial certifications each year. SEVP assumes that the proposed higher fee will not deter schools from applying for certification.
The total fee category budget is taken directly from the FY 2019 and FY 2020 SEVP ABC model, reflected in Table 11.
School certification fees are calculated by dividing the fee-recoverable budget by the anticipated number of payments. This results in a fee-recoverable amount from schools of $4,580 each. To arrive at the proposed fee, rounding was applied to the result of the fee algorithm. This results in a certification fee of $4,600 per school. Setting the certification fee at the $4,600 figure, however, leads to an increase of the current school certification fee by $2,900, resulting in a certification fee over twice the current fee amount. School certification is integral to SEVP—F and M nonimmigrant students can only attend SEVP-certified schools. DHS is concerned that such an increase of the school certification fee would appear dramatic to schools seeking initial certification and could lead to fewer schools seeking initial certification, so DHS proposes to keep the fee increase at a level that will not discourage potential new schools from seeking certification. At the same time, DHS considers that initial certification bestows upon the school a valuable asset, the ability to enroll F and M nonimmigrant students, and an increased fee amount is reasonable as the initial certification process becomes more extensive through the SEVIS modernization and other technological developments. Weighing these concerns, DHS decided to subsidize the I-17 certification fee by increasing the payment by only $1,300 to $3,000. The remainder of the costs for I-17 certification is subsidized by the I-901 F and M SEVIS fee, which is addressed below.
To identify a fee level that would recover the full cost of recertification operations, SEVP determined the full cost of recertification (including level of effort and contract cost) and the approximate number of schools willing to recertify. Because schools are required to recertify every 2 years, SEVP anticipates that approximately one-half of its certified schools—roughly 4,373 schools per year, given the current certified school population of 8,746—would recertify.
To calculate an anticipated school recertification fee, DHS divides the fee-recoverable budget by the anticipated number of payments. This results in a fee-recoverable amount from schools of $6,000 each. To arrive at the proposed fee, rounding was applied to the result of the fee algorithm. This would result in a recertification fee of $6,000 per school. DHS desires to institute a recertification fee to more accurately assign the costs of recertification adjudication to those stakeholders who are directly requesting the adjudication—the SEVP-certified schools—particularly since the costs of recertification continue to increase as the recertification process becomes more robust. DHS considers, however, that a recertification fee instituted in this rule for the first time should not be set at a level that could discourage schools from seeking recertification. DHS also considers that the recertification amount should be less than the initial certification amount so that schools are encouraged to seek recertification instead of allowing their SEVP certification to be withdrawn and applying for initial certification anew at some later date. Withdrawal of SEVP-certification not only leads to the school losing a valuable asset, but also leads to complications for F and M nonimmigrant students enrolled in the withdrawn school, who are then forced to transfer schools, leave the United States, or risk facing immigration law penalties for violating the terms of their nonimmigrant status. Weighing all these factors, DHS proposes that the I-17 recertification fee be $1,250. DHS proposes to eliminate regulations that state that no fee is required for the school recertification process in order to recover part of this cost, as part of an effort to establish a more equitable distribution of costs and more sustainable level of cost recovery relative to services provided. The costs for I-17 recertification not recovered by the proposed fee would be subsidized by the I-901 F and M SEVIS fee. The explanation for shifting responsibility of the fee adjustment to the I-901 fee is included below.
Site visits consist of initial certification site visits, change of location visits, and new campus or location site visits. The anticipated workload for these site visits is 600 per year, or 1,200 visits over a 2-year period.
The current fee amount is $655 as established in the 2008 Fee Rule that codified SEVP's authority to charge the fee when a school changes its physical location or adds new physical location or campus. Following this rule's effective date, SEVP will collect the fee when a school adds a new physical location or campus. The site visit fee would apply when a certified school updates its Form I-17 in SEVIS to indicate, pursuant to 8 CFR 214.3(h)(3)(ii), an added physical location or campus. The site visit fee is based on level of effort for both SEVP staff and contracts that cover the cost of operations.
Determining the full cost of processing an appeal is essential to improving the fee structure. The fee for filing a motion or appeal is calculated by determining the workload of appeals and motions over the FY 2019 and FY 2020 periods. Over the past 2 years, SEVP has processed 54 appeals and motions annually. To maintain conservative estimates, SEVP anticipates that number will remain constant over the FY 2019 and FY 2020 periods.
Fees for motions or appeals are calculated by dividing the fee-recoverable budget by the anticipated number of payments over the FY 2019 and FY 2020 periods. This results in a fee-recoverable amount of $38,474 for each appeal. To arrive at the proposed final cost, rounding was applied to the result of the fee algorithm. This results in a cost for a motion or appeal of $38,500. SEVP believes that this fee, while justified, is too high to impose on the affected schools as the first fee to be established and collected for the subject appeals and motions, and that some accommodation should be made to keep the fee at a more reasonable amount. Instead, DHS proposes adding $4.76 to the Form I-901 F and M fees to counterbalance the unfunded costs of adjudicating appeals and motions. This will better ensure that cost is not a significant obstacle in pursuing an administrative appeal or motion. The Form I-290B fee when filed with SEVP would be set at $675, which is currently the same amount charged when the form is filed with USCIS.
Viewing the SEVP fee structure and affected parties comprehensively, DHS proposes to adjust each fee in its fee structure based not only on cost of services, but also on the desire to spread the impact of fee increases reasonably among the various beneficiaries of SEVP services. Despite the ABC calculations' determination of the actual cost of each service, which is represented by each fee, DHS has determined that using the I-901 revenue to subsidize the costs of the SEVP's other fees is an appropriate course of action for two reasons. First, the number of F and M students paying the I-901 fee is substantially larger than the number of entities paying each of the school certification-related fees, allowing for SEVP to lessen the impact of fee increases in the aggregate. Second, the subsidization is reasonable because individuals paying the I-901 fee necessarily benefit from the continued certification of schools for their enrollment and prompt and accurate adjudication of appeals.
DHS proposes to increase the I-901 SEVIS fee for F and M students from $200 to $350 and the full I-901 SEVIS fee for most J exchange visitors from $180 to $220. While these increases may seem large, these fees have been unchanged since 2008. 73 FR 55683 (Sept. 26, 2008). In 2008, the first time these fees had been updated since SEVP's inception in 2004, the I-901 SEVIS fee for F and M students increased from $100 to $200, and the full I-901 SEVIS fee for most J exchange visitors increased from $100 to $180.
DHS proposes to increase the initial certification fee from $1,700 to $3,000. This fee was originally set at $230, effective in 2002, prior to the reorganization of the Immigration and Naturalization Service (INS) to become part of DHS.
DHS proposes to establish a recertification fee at $1,250, maintain the site visit fee of $655, and set the I-290B fee at $675. The cost for SEVP recertification, site visits, and motions and appeals adjudication is determined by employing ABC principles, previously described in this document, balanced with SEVP's desire to prevent recertifications, site visits, appeals, and motions filings from becoming cost prohibitive. DHS is proposing a recertification fee and a Form I-290B fee for the first time, and SEVP believes that charging recertification and appeals fees sufficient to recover, on their own, the fee-recoverable amount for such services, may result in inordinately high fees from the perspective of entities who have regularly received the benefits of these SEVP services at no additional charge. Accordingly, DHS proposes to set these fees at amounts below the fee-recoverable cost. For the I-290B fee in particular, DHS proposes to set the amount at $675. DHS believes this amount is appropriate because it is less than both the fee for initial certification and the fee for recertification. Further, the amount $675 is already associated with the Form I-290B when filing it with USCIS. DHS believes $675 is a logical starting point, because this is the fee currently being charged by USCIS for motions and appeals. While the difference between the fee-recoverable amount (approximately $38,500) and the proposed fee of $675 is substantial, subsidizing this fee by driving the additional costs to the I-901 fee results in an increase of only $4.76 to F/M students paying that fee. The proposed program fee schedule for SEVP beginning in FY 2019 is shown in Table 15.
These proposed fee amounts, the cost model outputs, and cost reallocation amounts are shown in Table 16. The cost reallocation amounts are negative for the fees that are subsidized. The cost reallocation amounts that are positive are the amounts per fee that subsidize the other fee categories.
Table 17 reflects the break-even analysis based on the proposed fee schedule and the proportional fee volumes (rounded) required to generate sufficient revenue to offset projected program costs.
Executive Orders 12866 (“Regulatory Planning and Review”) and 13563 (“Improving Regulation and Regulatory Review”) direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health, and safety effects; distributive impacts; and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. Executive Order 13771 (“Reducing Regulation and Controlling Regulatory Costs”) directs agencies to reduce regulation and control regulatory costs and provides that “for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.”
The Office of Management and Budget (OMB) has designated this rule a “significant regulatory action,” although not economically significant under section 3(f) of Executive Order 12866. Accordingly, the rule has been reviewed by OMB. This proposed rule would impose transfer payments between the public and the government. Thus, this proposed rule is not expected to be subject to the requirements of Executive Order 13771. An initial regulatory analysis follows.
SEVP is a fee funded program within ICE that provides oversight of schools and nonimmigrant students in the F and M visa category. SEVP uses SEVIS to
The purpose of this proposed rule is to generate the necessary revenue to recover the full cost of the FY 2019 and FY 2020 budgets. SEVP is authorized to recover the full cost of all resources and services provided. The costs of SEVP activities have increased, and the fees collected no longer cover the costs. The fee increase is needed to meet long-term cash flow needs and achieve solvency.
SEVP projects an annual budget of $186.6 million in FY 2019 and $188.4 million in FY 2020. SEVP forecasts $121.6 million in revenue for FY 2019 and FY 2020 without a fee change. The implementation of this proposed rule would provide SEVP with additional fee revenue of $75.2 million in FY 2019 and $73.5 million in FY 2020. If DHS does not adjust the current fees to recover the costs of processing the enrollment of F and M students, certification and recertification of schools, processing relating to J exchange visitors, appeals, and site visits, it will be forced to make reductions in oversight, security, and service as compared to current projections.
To determine the full cost associated with SEVP and the management of SEVIS, SEVP used ABC methodology. ABC first identifies activities in an organization and then assigns the cost of each activity according to the resources they consume. SEVP identified the following as its primary activities: Collecting and retaining information on F, M, and J nonimmigrants; certifying schools; overseeing school compliance; recertifying schools; adjudicating appeals; investigating suspected violations of immigration law and other potential threats to national security by F, M, or J nonimmigrants; providing outreach and education to users; and performing regulatory and policy analysis. SEVP also recognizes management and overhead costs associated with the program.
SEVP proposes five fees paid by two source categories: Individuals will pay the I-901 SEVIS fee, and institutions will pay the I-17 certification fee, I-17 recertification fee, the fee for a motion or appeal, and the site visit fee. By tracing expenditures of the activities previously listed to the various fee categories, SEVP forecasted fee payments to determine the appropriate fee amount for each fee type proposed in this rule.
Table 18 presents an accounting statement summarizing the annualized transfer amounts and qualitative benefits of the proposed rule. This rule proposes that schools will pay a higher fee for initial SEVP certification and will incur a fee for recertification, a site visit when adding a new physical location or campus, and the filing of a motion or appeal. In addition, F and M students and J visitors will pay higher fees.
This proposed rule would amend the current fees for the individual student and exchange visitor application fee (I-901 SEVIS fee) and school certification petition for initial certification. It would maintain the current fee for site visits and extend it to any change of location or additional physical location or campus reported as an update by a certified school. It would also institute a new fee for school recertification petitions and the filing of appeals and motions by schools. The amended fee structure reflects existing and projected operating costs, program requirements, and planned program improvements.
The current I-901 SEVIS fees are based on a fee analysis performed when SEVP last increased the fees in 2008.
F nonimmigrants, as defined in INA section 101(a)(15)(F), 8 U.S.C. 1101(a)(15)(F), are foreign students who come to the United States to pursue a full course of academic study in SEVP-approved schools and their dependents. M nonimmigrants, as defined in INA section 101(a)(15)(M), 8 U.S.C.1101(a)(15)(M), are foreign nationals pursuing a full course of study at an SEVP-certified vocational or other recognized nonacademic program (other than language training programs) in the United States and their dependents. International F and M nonimmigrant students seeking temporary admission into the United States to attend a U.S. educational institution must pay the I-901 F and M SEVIS fee. SEVP proposes to increase the I-901 F and M SEVIS fee from $200 to $350.
From 2007 through 2017, SEVP received an average of 450,581 I-901 F and M SEVIS payments per year. Table 19 shows the volume of I-901 F and M SEVIS fee payments received and the annual average number of fee payments from 2007 to 2017. As previously discussed, SEVP has forecasted 418,393 I-901 F and M payments in FY 2019 and 407,933 FY 2020, respectively.
Table 20 illustrates the incremental increase DHS is proposing with this rule for the I-901 F and M fee. Individuals who submit a Form I-901 will pay an additional $150 under this proposed rule, which is a 75 percent increase.
SEVP estimates that the fee increase would result in an annual increase of transfer payment from students who submit an I-901 form to the government of approximately $62 million per year ($150 increase × 418,393 FY 2019 number of applicants = $62,758,950; $150 increase × 407,933 FY2020 number of applicants = $61,189,950).
DoS generally oversees the exchange visitor program, which includes nonimmigrants who are charged the full J SEVIS fee. J exchange visitors are nonimmigrant individuals approved to participate in an exchange visitor program in the United States and the spouse and dependents of the exchange visitors. This SEVIS fee is associated with J-1 nonimmigrants participating in a designated exchange visitor program. Certain other J-1 categories are subject to a reduced fee or are exempt from a fee in accordance with 8 U.S.C. 1372(e). SEVP and DoS have a memorandum of reimbursable agreement. DoS sends SEVP its actual expenditures, and SEVP reimburses them quarterly. Each year, SEVP and DoS review and update the memorandum. Table 21 displays the affected Exchange Visitor Program categories subject to the full SEVIS fee and the purpose of the visit.
SEVP receives an average of 151,958 I-901 Full J SEVIS payments per year (FYs 2007-2017). Table 22 displays the volume of Full I-901 J SEVIS fee payments received and the annual average number of fee payments. SEVP has forecasted 157,550 I-901 J-Full payments in FY 2019 and 153,611 in FY 2020.
The difference between the proposed and current fees for the I-901 J-Full applicants is $40, an increase of approximately 22 percent, as shown in Table 23.
The total increase in transfer payments from I-901 J-Full applicants to the government is expected to be $12,446,440 ($40 increase in fee × 157,550 FY 2019 and 153,611 FY 2020 forecasted number of applicants). The increase in J fees is meant to recover the full cost of J program operations for SEVP, which includes the reimbursement to DoS, SEVIS costs, and other adjudication services for J exchange visitors. For the purposes of calculating fees, SEVP isolates the costs specifically incurred by operating the J visa program. As it stands, the J visa program operates at a greater cost than the revenue that J visa fees bring to the program; therefore, SEVP proposes an increase to the J-Full visa to cover the $39.4 million full cost of operating the J visa program on an annual basis.
For a U.S. school to enroll F and M nonimmigrant students, it is required to be certified by SEVP. A school petitions for SEVP certification to enroll these students by completing and submitting Form I-17, “Petition for Approval of School for Attendance by Nonimmigrant Student,” online through SEVIS.
All SEVP-certified schools are required to go through the recertification process every 2 years to ensure they remain qualified for certification and adhere to all requirements according to the regulations.
From FY 2012 to 2016, there has been an annual average of 423 schools applying for SEVP certification. As previously discussed, DHS calculated the 3-year moving average to minimize the variation in forecasting the population data. The I-17 Initial certifications from FYs 2012 through 2016 are shown in Table 24.
SEVP uses the 3-year moving average to predict that there will be 426 initial certifications in both FY 2019 and FY 2020, respectively.
There are currently 8,746 SEVP-certified schools. DHS assumes that approximately half, or approximately 4,373 schools, will recertify each year, including the 1,728 schools with no active F or M students. DHS assumes that a school would prefer to recertify for a $1,250 fee instead of allowing certification to lapse and thereafter having to again pay the proposed initial certification fee of $3,000. The proposed initial certification fee is a 76 percent increase from the current fee.
The current fee to apply for initial certification is $1,700, which has not changed since 2008. SEVP does not currently charge a recertification fee; the proposed fee amount is $1,250. The I-17 initial certification and I-17 recertification incremental fees are shown in Table 25.
The annual increase in transfer payments from schools to the government from I-17 initial certifications is expected to be $553,800 ($1,300 increase in fee × 426 (FY 19 and FY 20 forecasted number of I-17 initial certifications)). The annual increase in transfer payments from schools to the government for I-17 recertification is expected to be $5,466,250 ($1,250 increase in fee × 4,373 (FY 2019 and FY 2020 forecasted number of recertifications)).
When a school is denied certification or recertification, the school receives a denial letter through certified mail. The denial letter explains the reason for the denial and the steps to appeal. The school can appeal by completing the Form I-290B, “Notice of Appeal or Motion,” within 30 days of receipt. This rule proposes that SEVP impose a filing fee of $675, which is also the fee currently charged by USCIS upon submission of the Form I-290B.
SEVP processed an average of 54 motions and appeals from schools annually from 2013 to 2016. DHS assumes that there will be the same number of appeals or motions filed in FY 2019 and FY 2020.
The total annual increase in transfer payments from schools to the government for filing a motion or appeal is expected to be $36,450 ($675 fee × 54 (FY 2019 and FY 2020 forecasted number of fee payments)).
As noted above, current regulations provide authority for SEVP to charge a site visit fee to schools that apply for initial certification or report a change of physical location, or addition of a physical location or campus. The site visit allows SEVP an opportunity to gather evidence on the school's eligibility, review school facilities, and interview personnel listed on the I-17 petition as a PDSO or DSO. SEVP currently collects the $655 fee when a school files a petition for certification to issue Forms I-20 or by a certified school when it physically moves to a new location. This proposed rule notifies the public that following completion of this rulemaking, SEVP plans to also collect the fee from any certified school that adds a physical location or campus, by updating its Form I-17 in SEVIS, consistent with the above authorities and the agency's longstanding interpretation.
SEVP performs 600 site visits annually. Of these 600 visits, 426 will be at schools that apply for initial certification and currently pay the $655 site visit fee. The remaining 174 site visits may include visits when a school adds a new physical location or campus. DHS proposes that the site visit fee amount, $655, remain the same.
The annual increase in transfer payments from schools to the government due to site visits is expected to be $113,970 ($655 fee × 174 (FY 2019 and FY 2020 forecasted number of site visits)).
SEVP expects to have a total increase in fees of $68.7 million per year, discounted at 7 percent, transferred from individuals and entities for the services they receive, to the government. Table 26 shows the summary of the total annual number of payments, incremental fee amounts, and total fees transferred.
SEVP examined several alternatives to the proposed fee structure, including no increase to any fee, only increasing the I-901 SEVIS fee and I-17 fee, and the unsubsidized results of the ABC model.
Without an increase in fees, SEVP will be unable to maintain the level of service for students and schools that it currently provides as well as the compliance and national security activities discussed above. SEVP considered the alternative of maintaining fees at the current level but with reduced services and increased
SEVP also considered raising only the I-901 and I-17 certification fees instead of including a new proposed fee for recertification and for filing a motion or appeal. If SEVP followed this scenario, the I-901 F and M fee would increase to $350 to cover the shortfall in revenue, but the I-17 Initial Certification fee would also increase to $4,200. This would triple the existing certification fee while allowing schools with zero foreign students to remain active SEVP schools that require SEVP effort for recertification. SEVP rejected this fee structure as it would continue to add workload to SEVP's recertification branch. Without any disincentive to recertify, the list of schools recertifying would likely continue to grow. The proposed fees, however, would establish a more equitable distribution of costs and a more sustainable level of cost recovery relative to the services provided.
SEVP also considered the unsubsidized results of the ABC model as an alternative, which allocated the I-901 F and M fee, school certification fees, and the fee to file an appeal or motion as shown in Table 27.
SEVP rejected this alternative for several reasons. Most conspicuously, the fee to file a motion or appeal filed on the USCIS-managed Form I-290B has been set at $675. Since a fee of $38,475 would be significantly higher than any other SEVP fee it may improperly discourage schools from filing a motion or appeal. Similarly, SEVP rejected the alternative to set the recertification fee at the ABC model output amount of $6,000. A recertification fee higher than the initial certification fee would discourage schools from seeking recertification. SEVP instead proposes to set the recertification fee at a level is less than the initial certification fee. When schools can maintain their certification, F and M nonimmigrant students enrolled in the withdrawn school avoid complications such as being forced to transfer schools, leave the United States, or risk facing immigration law penalties for violating the terms of their nonimmigrant status.
SEVP also rejected the initial certification fee of $4,600 because it finds that an increase of almost three times the current fee of $1,700 is excessive. In the fee development, DHS balanced the challenge of minimizing the costs to schools and students while recovering funding to support SEVP services. The population of I-901 F and M students relative to the population of I-17 schools allows for a minimal fee adjustment to be spread over the student population to reduce the cost burden on individual institutions seeking recertification.
The Regulatory Flexibility Act (RFA) at 5 U.S.C. 603 requires DHS to consider the economic impact its proposed rules will have on small entities. In accordance with the RFA, DHS has prepared an Initial Regulatory Flexibility Analysis (IRFA) that examines the impacts of the proposed rule on small entities. The term “small entities” encompasses small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of fewer than 50,000.
DHS requests information and data from the public that would assist in better understanding the impact of this proposed rule on small entities. DHS also seeks alternatives that will accomplish the same objectives and minimize the proposed rule's economic impact on small entities.
DHS proposes this rule to adjust current fees and introduce new fees to ensure that SEVP is able to recover the full costs of the management and support of its program activities. DHS's objectives and legal authority for this proposed rule are further discussed throughout this notice of proposed rulemaking (NPRM).
The objective of the proposed rule is to prevent an anticipated funding deficit in operating the SEVP. More specifically, this proposed rule would increase the SEVP funding stream by adjusting the I-901 F and M fee, I-901 J-Full fee, and I-17 Certification fee and instituting the I-17 Recertification fee and a fee for filing a motion or appeal. This proposed rule would also announce the collection of a site visit fee when an SEVP-certified school adds a new physical location or campus, at which it provides educational services to nonimmigrant students. The funding supports continuing operations and new initiatives critical to SEVP oversight of schools and the monitoring of nonimmigrant students in the F, M, and J visa classifications for national security purposes.
The legal basis for this proposed rule increasing the SEVP funding stream is grounded in the Homeland Security Act of 2002, which created DHS and imparted upon DHS the responsibility for SEVIS. DHS uses SEVIS to meet the monitoring and verification requirements under EBSVERA, Public Law 107-173, secs. 501-502, 116 Stat. 543, 560-63 (2002) (codified at 8 U.S.C. 1761-1762), and to conduct a recertification of schools every 2 years following the date of EBSVERA's enactment. The Secretary of Homeland Security is authorized to collect fees for SEVP from prospective F and M students and J exchange visitors. IIRIRA section 641(e)(1), as amended, 8 U.S.C. 1372(e)(1). Initially, fees for most groups of F, M, and J classes of prospective nonimmigrants were statutorily limited to not exceed $100, except in the case of the fee for special J visa categories—au pairs, camp counselors, and participants in summer work travel programs—which was set at $35 pursuant to 8 U.S.C. 1372(e)(4)(A). This fee level has been maintained consistent with Congressional intent. The Secretary is authorized to revise nonimmigrant fees on a periodic basis to account for changes in the cost of executing SEVP. IIRIRA section 641(g)(2), 8 U.S.C. 1372(g)(2). In addition, INA section 286(m), 8 U.S.C. 1356(m), provides that DHS may set fees “at a level that will ensure recovery of the full costs of providing [adjudication] services.”
This analysis does not apply to increases in the I-901 F and M fees because these fees are paid by individuals who are not, for purposes of the RFA, within the definition of small entities established by 5 U.S.C. 601(6). DHS believes that J fees are also paid by individuals and requests comment on this assumption.
As of May 2017, there were a total of 8,746 SEVP-certified schools that would be subject to the I-17 recertification fee, site visit fee, and fee to file a motion or an appeal. New schools applying for SEVP certification would be subject to the proposed I-17 initial certification fee. Of the 8,746 SEVP-certified schools, 2,013 have identified as public schools on their I-17 form. The remaining 6,733 schools have identified themselves on the Form I-17 as private for-profit, private nonprofit, or private unspecified entities.
Of the 2,013 SEVP-certified public schools, DHS conducted a random sample of 100
DHS conservatively assumes that all 1,507 private nonprofit schools certified by SEVP are small entities because they are not dominant in their fields. DHS also assumes that the 4,755 schools that are private unspecified are small entities. DHS requests comments on these assumptions.
To determine which of the remaining 471 private for-profit schools are considered a small entity, DHS references the Small Business Administration (SBA) size standards represented by business average annual receipts. Receipts are generally defined as a firm's total income or gross income. SBA's Table of Small Business Size Standards is matched to the North American Industry Classification System (NAICS) for industries.
DHS finds that the revenue of 332 of the 471 private, for-profit schools meet the SBA size standard of a small business according to their industry. DHS estimates each private school's annual receipts by multiplying the approximate annual cost of room, board, and tuition by the average annual number of total students, based on data provided by the schools on their Forms I-17. Every 2 years, as part of the recertification process, a school submits the approximate annual cost of room, board, and tuition per student and the average annual number of total students, both domestic and international. DHS acknowledges that this method to estimate receipts may be an incomplete account of a school's income, which may also include contributions from private individuals or other endowments. Since these data reflect a snapshot of all SEVP-certified schools as of May 24, 2017, DHS acknowledges there may be day-to-day changes in the status of a school's certification and that a school's revenue may differ from actual revenue due to a 2-year lag in school self-reporting before a school is required to recertify.
Given these assumptions, DHS estimates that 7,842 schools meet the SBA definition of a small entity. This is approximately 90 percent of the 8,746 of SEVP-certified schools included in this analysis.
Table 28 shows a summary by school type of the number of SEVP-certified schools and estimated small entities.
Table 29 provides a summary of the SEVP-certified schools by industry. The table also shows the NAICS industry description, the NAICS code, and the number of small and large schools by industry. Note that the number of small schools includes all nonprofits and unspecified private schools. Most industries with SEVP-certified schools consist of a majority of small schools.
Table 30 presents the type of schools with active F and M students and the percent of students enrolled in small schools. Most F and M students are enrolled at small schools. Of the 8,746 SEVP-certified schools, DHS identified 1,728 with no active F or M students and determined that 1,296 of these are considered small entities as defined by SBA. Note that although there are two SEVP-certified schools in the education support services industry (shown in Table 29), there are no active F and M students in these schools. DHS applies the results of the sample of SEVP-certified public schools to the number of students in SEVP-certified public schools (619,295) to estimate that the number of students in small SEVP-certified public schools is 383,963.
DHS estimated SEVP-certified public schools' revenue to examine the impact of the proposed fee adjustments on small public schools. The tuition provided by public schools in SEVIS may not represent a public school's total revenue because most of the U.S. students would generally not pay the tuition provided to attend public schools. Instead, DHS assumes that a public school's county or city's tax revenue is the best revenue source against which to assess the impact of the proposed fee adjustments. DHS collected local government revenue, expenditure, debt, and assets from the U.S. Census Bureau 2015 State and Local Government Survey
Table 31 displays the range of annual revenue by each school industry and for public schools, from the small school with the lowest revenue to the median revenue of all the small schools to the small school with the largest revenue. It also shows the average revenue of all the small schools in that industry. The Colleges, Universities, and Professional Schools industry has the widest range from maximum to minimum revenue due to the assumption that all private, unspecified schools are small entities, while the Educational Support Services industry that only has two schools included has the smallest range of maximum to minimum revenue for any one industry.
The proposed rule would increase and establish additional fees for educational institutions in support of SEVP operations. DHS estimates the annual impact to small schools based on the school cost of compliance as represented as a percentage of their annual revenue. Table 32 displays the proposed fees, the current fees, and the difference in these amounts. This analysis examines the impact that the proposed incremental fee for the Form I-17 certification and the proposed fees for recertification, site visits to add a new physical location or campus, and the filing of a motion or an appeal would have on small SEVP-certified schools.
A school files a petition and pays a certification fee to become eligible to issue the Form I-20, “Certificate of Eligibility for Nonimmigrant Student Status,” to prospective international students after admitting them for a course of study. Certification also authorizes the school to enroll international students after they enter the country on an F or M student visa. Schools must initially go through the vetting process for authorization by DHS to enroll F and/or M nonimmigrant students and pay the I-17 certification fee, which is currently $1,700 and proposed to increase to $3,000. The incremental fee is the difference between the proposed fee ($3,000) and current fee ($1,700), or $1,300. From 2012 to 2016, DHS processed 2,117 I-17 petitions and payments. Out of the 2,117 schools, 1,151, or 54 percent, were identified as meeting the SBA definition of a small school, or estimated to be a small public school based on the sample conducted, as illustrated in Table 33.
SEVP forecasted the total I-17 initial certifications in FY 2019 and FY 2020 to be 426 using the 3-year annual average of FY 2014 through 2016 initial certifications. Using that same methodology, 232 small schools applied for initial I-17 certification on average each year. DHS assumes the growth of small schools per industry seeking SEVP certification will remain constant in the future. DHS multiplied the annual average number of small schools applying for initial certification by the percent of small schools in each industry, as presented in Table 29. This calculation yields the number of small schools expected to petition for initial I-17 certification by industry. The results are presented in Table 34.
This analysis examines the impact the $1,300 incremental fee has on small schools that might seek initial certification after the final rule is effective. DHS assumes that the range of revenue of the small schools that will apply for certification is similar to the range of revenue of current SEVP-certified small schools and uses this range to show the potential impacts. Table 35 shows the impact as a percentage for the schools with the lowest annual revenue, median annual revenue, and largest annual revenue, as well as the average annual revenue for all schools in that industry. From these results, DHS does not expect the I-17 certification incremental fee to have an impact greater than 1 percent on the average small school annual revenue. However, there is an expected impact greater than 1 percent for some small schools with the lowest annual revenue in their industry. On average the estimated 194 small schools that apply for initial I-17 certification annually and pay an incremental fee of $1,300 will experience an impact of less than 1 percent of their estimated annual revenue.
SEVP-certified schools are required to file for recertification every 2 years to demonstrate that they have complied with all recordkeeping, retention, reporting, and other requirements when registering F and M students. There is currently no fee charged to schools for recertification, but this proposed rule establishes a new fee for that process.
To measure the impact on small schools, DHS first estimated the number of small schools that will recertify. DHS assumes 50 percent (4,373) of the total number of schools in this analysis (8,746) will recertify each year. DHS multiplies the recertification rate of 50 percent by the total number of small schools to generate the estimation that 3,921
DHS assumes that the total number of SEVP-certified schools will remain static as new schools become certified and other schools withdraw certification. DHS therefore assumes that the annual increase of total recertifications will be zero.
As previously discussed, DHS identified 1,296 SBA-defined small schools with no active F or M international students. DHS included these schools in this analysis and assumes they will opt to pay the recertification fee of $1,250 rather than reapplying for initial certification with a proposed fee of $3,000 at such time in the future that they enroll F or M students.
Table 36 illustrates the number of small schools that will recertify by industry and the I-17 recertification incremental fee impact as a percent of the small school's annual revenue. From these findings, of the 7,842 small schools expected to apply for recertification and pay the proposed fee of $1,250, 50 schools, or 0.6 percent, will experience an impact greater than 1 percent but less than 3 percent of the school's annual revenue. For the remaining schools, DHS does not expect the incremental fee to have an impact of greater than 1 percent.
Current regulations provide authority for SEVP to charge a site visit fee to schools that apply for initial certification or add a new physical location or campus. The site visit allows SEVP an opportunity to gather evidence on the school's eligibility, review school facilities, and interview personnel listed on the I-17 petition as a PDSO or DSO. SEVP currently collects the $655 fee when a school files a petition for certification to issue Forms I-20 or by a certified school when it physically moves to a new location. This proposed rule notifies the public that SEVP plans to collect the fee from any certified school that adds a new campus or physical location by updating its Form I-17 in SEVIS, consistent with 8 CFR 214.3(h)(3) and the agency's description when it established the fee in 2008 that such a fee could apply to such an initial event. 73 FR 55683, 55691.
SEVP performs 600 site visits annually. Of these site visits, 426 would be performed as part of the forecasted initial certifications, leaving the capacity for 174 site visits to be performed when a school adds a campus. In order to estimate the impact on a school's revenue of the proposed charging of the site visit fee for a new instructional campus, DHS assumes that any of the currently SEVP-certified schools could add a campus and require a site visit. Table 37 shows the proposed site visit fee impact on estimated annual revenue for all 7,842 small schools certified by SEVP and the type of school. Of the total 7,842 small schools, 7,827, or 99.8 percent, would have a site visit fee impact of less than or equal to 1 percent of their annual revenue. Twelve small schools, or 0.2 percent of small schools, would have an impact of greater than 1 percent but less than or equal to 2 percent of their annual revenue. Three small schools would have a site visit fee impact greater than 2 percent but less than 3 percent of their annual revenue.
When a school is denied certification or recertification, the school receives a denial letter through certified mail. The denial letter explains the reason for the denial and the steps to appeal. The school can appeal by completing the Form I-290B, “Notice of Appeal or Motion,” within 30 days of receipt. This rule proposes that SEVP impose a $675 filing fee for submission of the Form I-290B.
DHS processed 215 motions and appeals from schools from 2013 to 2016. Out of the 215 school motions and appeals, DHS determined that 74, or 34.4 percent, were filed by small schools. Among the 74 small schools, 4 had 2 appeals within the same year or over the 4-year period. During the 4-year period, there was an average of 19 appeals and motions filed by small schools annually.
DHS examined all 7,842 small schools to estimate the impact of the proposed appeal and motion fee on estimated annual revenue. The impact is calculated by dividing the fee to file a motion or appeal by the school's estimated annual revenue. Of the 7,842 SEVP-certified small schools, 7,826, or 99.8 percent, would experience an impact less than or equal to 1 percent of their estimated annual revenue were the school to file an appeal or motion. DHS estimates 13 small schools, or 0.2 percent, would realize an impact between 1 percent and 2 percent of their estimated annual revenue. In addition, three small schools, or 0.04 percent, would experience an impact greater than 2 percent but less than 3 percent of estimated annual revenue. Table 38 shows the number of small schools within the range of impact to each school's estimated annual revenue.
The potential total impact on small entities in any year can be determined by examining scenarios in which a school may pay more than one of the proposed adjustments in fees in the same year. DHS examines the following scenarios and determines that the impact on any small school's revenue is less than three percent on any school industry type: (1) A school appeals an initial certification or (2) a school appeals a recertification and adds a new location requiring a site visit.
A school may pay the initial certification fee and then it may appeal the results of the initial certification within the same year. DHS proposes that this would be an increase of $1,975 ($1,300 incremental fee for I-17 initial certification plus $675 fee for an appeal). More than 98 percent of schools would be impacted less than one percent in this scenario, as shown in Table 39. The impacts of this scenario would be greater than the impacts of scenario where a school appeals a recertification, which would add to $1,925 in increased fees ($1,250 I-17 recertification fee plus $675 for an appeal).
A school may seek recertification in the same year it adds a new physical location or campus that requires a site visit and then it may appeal the findings of a recertification. A recertification fee would not include a site visit to a new location. DHS proposes that this would be an increase of $2,580 ($1,250 I-17 recertification fee plus $655 for a site visit at a new location plus $675 for an appeal). Under this scenario, the impact on small schools' revenue would be less than one percent for all but 139 small schools. The impact on these 139 schools' revenues would be less than three percent as shown in Table 40.
DHS is unaware of any relevant Federal fee rule that may duplicate, overlap, or conflict with the proposed rule.
SEVP examined several alternatives to the proposed fee structure, including no increase to any fee, only increasing the I-901 SEVIS fee and I-17 fee, and not subsidizing the school fees with the I-901 F and M fees.
Without an increase in fees, SEVP will be unable to maintain the level of service for students and schools that it currently provides as well as the compliance and national security activities discussed above. SEVP considered the alternative of maintaining fees at the current level but with reduced services and increased processing times, but has decided that this would not be in the best interest of applicants and schools. SEVP seeks to minimize the impact on all parties, but in particular small entities. SEVP must pay for the expenses of maintaining and improving SEVIS and adjudicating schools in a timely manner. If SEVP followed this alternative scenario, there would be a shortfall of revenue to cover the expenses of over $65.4 million in FY 2019. SEVP rejected this alternative, as SEVP must pay for the expenses of
SEVP also considered only raising the I-901 and I-17 certification fees instead of including new proposed fees for recertification and for filing a motion or appeal. If SEVP followed this scenario, the I-901 F and M fee would increase to $350 to cover the shortfall in revenue, but the I-17 Initial Certification fee would also increase to $4,200. This would triple the existing certification fee while continuing to allow schools with no foreign students to remain active SEVP schools that require SEVP effort for recertification. SEVP rejected this fee structure as it would continue to add workload to SEVP's recertification branch. Without a disincentive to not recertify, the list of schools recertifying would never stop growing. SEVP rejected this alternative because the proposed fees would establish a more equitable distribution of costs and a more sustainable level of cost recovery relative to the services provided as compared to this alternative.
SEVP also considered the results of the ABC model as an alternative, which allocated the I-901 F and M fee, school certification fees, and the fee to file an appeal or motion as shown in Table 41.
SEVP rejected this alternative for several reasons. Setting the fee at $38,475 may discourage schools from filing a motion or appeal.
Similarly, SEVP rejected the alternative of setting the recertification fee at $6,000. A recertification fee higher than the initial certification fee would discourage schools from seeking recertification.
SEVP instead proposes to set the recertification fee at a level is less than the initial certification fee. When schools can maintain their certification, F and M nonimmigrant students enrolled in the withdrawn school avoid complications such as being forced to transfer schools, leave the United States, or risk facing immigration law penalties for violating the terms of their nonimmigrant status.
SEVP also rejected the initial certification fee of $4,600 because it finds that an increase of almost three times the current fee of $1,700 is excessive. In the fee development, DHS balanced the challenge of minimizing the costs to schools and students while recovering funding to support SEVP services. The population of I-901 F and M students relative to the population of I-17 schools allows for a minimal fee adjustment to be spread over the student population to reduce the cost burden on individual institutions seeking recertification. DHS requests comment on the impacts on small entities of the unsubsidized fee amounts, impacts on small entities of the proposed fee amounts, and other ways in which DHS could modify the proposed rule to reduce burdens for small entities or better ensure that the burdens on small entities, individuals, and others subject to the rule are appropriately distributed.
The Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, 109 Stat. 48 (codified at 2 U.S.C. 1501
This rulemaking is not a major rule, as defined by 5 U.S.C. 804, for purposes of congressional review of agency rulemaking pursuant to the Congressional Review Act, Public Law 104-121, sec. 251, 110 Stat. 868, 873 (codified at 5 U.S.C. 804). This rulemaking would not result in an annual effect on the economy of $100 million or more; a major increase in costs or prices; or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based companies to compete with foreign-based companies in domestic and export markets. If implemented as proposed, DHS will submit to Congress and the Comptroller General of the United States a report about the issuance of the final rule prior to its effective date, as required by 5 U.S.C. 801(a)(1).
Pursuant to Section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104-121, 110 Stat. 847, 858-59, DHS wants to assist small entities in understanding this proposed rule so that they can better evaluate its effects and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please consult ICE using the contact information provided in the
A rule has implications for federalism under Executive Order 13132, Federalism, if it has substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. DHS has analyzed this proposed rule under that Order and has determined that it does not have implications for federalism.
This proposed rule meets the applicable standards set forth in 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.
DHS has analyzed this proposed rule under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. DHS has determined that it is not a “significant energy action” under that order because it is a “significant regulatory action” under Executive Order 12866 but is not likely to have a significant adverse effect
The U.S. Department of Homeland Security Management Directive (MD) 023-01 Rev. 01 establishes procedures that DHS and its Components use to comply with the National Environmental Policy Act of 1969 (NEPA), Public Law 91-190, 83 Stat. 852 (codified at 42 U.S.C. 4321-4375), and the Council on Environmental Quality (CEQ) regulations for implementing NEPA, 40 CFR parts 1500 through 1508. CEQ regulations allow federal agencies to establish categories of actions that do not individually or cumulatively have a significant effect on the human environment and, therefore, do not require an Environmental Assessment or Environmental Impact Statement. 40 CFR 1508.4. The MD 023-01 Rev. 01 lists the Categorical Exclusions that DHS has found to have no such effect. MD 023-01 Rev. 01, Appendix A, Table 1.
For an action to be categorically excluded, MD 023-01 Rev. 01 requires the action to satisfy each of the following three conditions:
(1) The entire action clearly fits within one or more of the Categorical Exclusions.
(2) The action is not a piece of a larger action.
(3) No extraordinary circumstances exist that create the potential for a significant environmental effect. MD 023-01 Rev. 01 section V.B(1)-(3).
Where it may be unclear whether the action meets these conditions, MD 023-01 Rev. 01 requires the administrative record to reflect consideration of these conditions. MD 023-01 Rev. 01 section V.B.
DHS has analyzed this proposed rule under MD 023-01 Rev. 01. DHS has made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This proposed rule clearly fits within the Categorical Exclusion found in MD 023-01 Rev. 01, Appendix A, Table 1, number A3(a): “Promulgation of rules . . . of a strictly administrative or procedural nature”; and A3(d): “Promulgation of rules . . . that interpret or amend an existing regulation without changing its environmental effect.” This proposed rule is not part of a larger action. This proposed rule presents no extraordinary circumstances creating the potential for significant environmental effects. Therefore, this proposed rule is categorically excluded from further NEPA review.
All Departments are required to submit to OMB for review and approval any reporting or recordkeeping requirements inherent in a rule under the Paperwork Reduction Act of 1995, Public Law 104-13, 109 Stat. 163 (codified at 44 U.S.C. 3501
The changes to the certification and recertification fees, as well as the I-901 fees, would require changes to SEVIS and the I-901 software to reflect the updated fee amounts, as these systems generate the pertinent petition and application forms. DHS would submit a revision to OMB with respect to any changes to existing information collection approvals.
DHS's institution of the fee for a motion or appeal with regard to a denial of school certification or recertification, or a withdrawal of such certification, would not require a form amendment to reflect the charging of the fee. The instructions associated with the Form I-290B, which schools can currently use for such motions and appeals, contain information regarding the use associated with Form I-17 decisions and the $675 fee.
Administrative practice and procedure, Authority delegations (Government agencies), Freedom of Information, Immigration, Privacy, Reporting and recordkeeping requirements, Surety bonds.
Administrative practice and procedure, Aliens, Employment, Foreign officials, Health professions, Reporting and recordkeeping requirements, Students.
For the reasons set forth in the preamble, the Department of Homeland Security proposes to amend 8 CFR parts 103 and 214 of Chapter I of Title 8 of the Code of Federal Regulations as follows:
5 U.S.C. 301, 552, 552a; 8 U.S.C. 1101, 1103, 1304, 1356, 1365b; 31 U.S.C. 9701; Pub. L. 107-296, 116 Stat. 2135 (6 U.S.C. 1
(b) * * *
(1) * * *
(ii) * * *
(B) Petition for Approval of School for Attendance by Nonimmigrant Student (
(
(
(H) Fee Remittance for Certain F, J, and M Nonimmigrants (
(1) For F and M students: $350.
(2) For J-1 au pairs, camp counselors, and participants in a summer work or travel program: $35.
(3) For all other J exchange visitors (except those participating in a program sponsored by the Federal Government): $220.
(4) There is no Form I-901 fee for J exchange visitors in federally funded programs with a program identifier designation prefix that begins with G-1, G-2, G-3, or G-7.
(O)
6 U.S.C. 202, 236; 8 U.S.C. 1101, 1102, 1103, 1182, 1184, 1186a, 1187, 1221, 1281, 1282, 1301-1305, and 1372; section 643, Pub. L. 104-208, 110 Stat. 3009-708; Pub. L. 106-386, 114 Stat. 1477-1480; section 141 of the Compacts of Free Association with the Federated States of Micronesia and the Republic of the Marshall Islands, and with the Government of Palau, 48 U.S.C. 1901 note, and 1931 note, respectively, 48 U.S.C. 1806; 8 CFR part 2.
(h) * * *
(1) * * *
(2)
(a)
(h)
(a)
(1) An alien who applies for F-1 or F-3 status in order to enroll in a program of study at an SEVP-certified institution of higher education, as defined in section 101(a) of the Higher Education Act of 1965, as amended, or in a program of study at any other SEVP-certified academic or language training institution, including private elementary and secondary schools and public secondary schools, the amount of $350;
(2) An alien who applies for J-1 status in order to commence participation in an exchange visitor program designated by the Department of State (DoS), the amount of $210, with a reduced fee for certain exchange visitor categories as provided in paragraphs (b)(1) and (c) of this section; and
(3) An alien who applies for M-1 or M-3 status in order to enroll in a program of study at an SEVP-certified vocational educational institution, including a flight school, in the amount of $350.
Category | Regulatory Information | |
Collection | Federal Register | |
sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
Publisher | Office of the Federal Register, National Archives and Records Administration |