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

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

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

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

ADDRESSES: You may submit comments, identified by Docket No. R-1547 and RIN 7100 AE-58 by any of the following methods:

. Agency Web site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.aspx.

. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

. Email: [email protected]. Include the docket number and RIN number in the subject line of the message.

. Fax: (202) 452-3819 or (202) 452-3102.

. Mail: Robert deV. Frierson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551.

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

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Background

B. Risks Associated With Physical Commodity Activities

C. Limitations on Physical Commodity Activities

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

II. Description of Proposed Rule

A. Scope of Permissible Physical Commodity Activities

1. Level of Complementary Commodity Activities Permitted

2. Clarification of Prohibitions on Certain Operations

B. Risk-Based Capital Requirements for Covered Physical Commodities

1. Overview

2. Calculation of Exposure Amount for Covered Physical Commodities

3. Impact Analysis of Proposed Capital Requirements

C. The Scope of Permitted Complementary Commodity Activities

1. Background

a. Physical Commodity Trading

b. Energy Management Services and Energy Tolling

2. Reconsideration of the Approval of Energy Management and Tolling as Complementary Activities

3. Conformance Period

E. Reclassification of Copper as an Industrial Metal

F. New Financial Reporting Data on Physical Commodity Activities

1. General

2. Schedule HC-W

3. Schedule HC-R Modifications

4. Public Disclosure

III. Regulatory Analysis

A. Regulatory Flexibility Act Analysis

B. Paperwork Reduction Act

C. Solicitation of Comments on Use of Plain Language

I. Introduction

A. Background

Bank holding companies (BHCs) and their subsidiaries engage in certain types of physical commodity activities under a variety of authorities. Pursuant to the Bank Holding Company Act (BHC Act), BHCs may engage in activities that are "so closely related to banking as to be a proper incident thereto." /1/ This authority allows BHCs to buy, sell, or hold precious metals, such as gold, silver, platinum, and palladium; participate as a principal in cash-settled derivative contracts based on commodities; and trade in commodity derivatives that allow for physical settlement under certain circumstances.

/1/ See 12 U.S.C. 1843(c)(8). In addition, national banks owned by BHCs may engage in certain limited types of physical commodity activities pursuant to authority granted under the National Bank Act. State-chartered banks also may be authorized to engage in the same activities under state statutes. END FOOTNOTE

In the Gramm-Leach-Bliley Act (GLB Act) enacted in 1999, Congress expanded the activities in which a BHC may engage. /2/ The GLB Act permits BHCs that are well capitalized and well managed to elect to become financial holding companies (FHCs) and engage in a broader range of activities than permitted for BHCs that are not FHCs. Three provisions of the GLB Act permit FHCs to conduct a broader range of physical commodity activities and investments than are otherwise permitted for BHCs. First, the GLB Act permits FHCs to engage in any activity that the Board (in its sole discretion) determines is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. /3/ Pursuant to this authority, the Board has authorized certain FHCs to engage in physical commodity trading as well as energy management services and energy tolling. The GLB Act also added a grandfather provision that permits certain FHCs to continue to engage in a broad range of physical commodity activities. /4/ Finally, the GLB Act authorizes FHCs to make merchant banking investments in any type of nonfinancial company, including a company engaged in activities involving physical commodities. /5/

/2/ Public Law 106-102, 113 Stat. 1338 (1999). END FOOTNOTE

/3/ See Gramm-Leach-Bliley Act SEC 103, 12 U.S.C. 1843(k)(1)(B). END FOOTNOTE

/4/ 12 U.S.C. 1843(o). END FOOTNOTE

/5/ 12 U.S.C. 1843(k)(4)(H). END FOOTNOTE

B. Risks Associated With Physical Commodity Activities

There are a number of potential legal, reputational and financial risks associated with the conduct of physical commodity trading activities. Over the past decade, monetary damages associated with an environmental catastrophe involving physical commodities have ranged from hundreds of millions to tens of billions of dollars. These damages can exceed the market value of the physical commodity involved in the catastrophic event, and can exceed the committed capital and insurance policies of the organization. Certain federal environmental laws, including the Oil Pollution Act of 1990 (OPA), /6/ the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), /7/ and the Clean Water Act (CWA), /8/ generally impose liability on owners and operators of facilities and vessels for the release of physical commodities, such as oil, distillate fuel oil, jet fuel, liquefied petroleum gas, gasoline, fertilizer, natural gas, and propylene. /9/ Consequently, a company that directly owns an oil tanker or petroleum refinery that releases crude oil in a navigable waterway or adjoining shoreline in the United States may be liable for removal costs and damages for that release under the OPA. /10/

/6/ See 33 U.S.C. 2701-02. END FOOTNOTE

/7/ See 42 U.S.C. 9607. END FOOTNOTE

/8/ See 33 U.S.C. 1321. In general, liability under the OPA, CWA, and CERCLA is subject to limited defenses, including releases caused by an act of God. See, e.g., 33 U.S.C. 2703; 42 U.S.C. 9607. END FOOTNOTE

/9/ See 33 U.S.C. 1321, 2701 (defining "oil"), 42 U.S.C. 7412, 9601 (defining "hazardous air pollutant" and "hazardous substance," respectively). END FOOTNOTE

/10/ See 33 U.S.C. 2702. The OPA generally limits liability for spills from facilities to $350,000,000 and liability from spills from vessels to the greater of $1,900 per gross ton or $22,000,000. Id. at 2704. However, the OPA liability cap will not apply if the party engaged in certain types of misconduct (e.g., willful misconduct, gross negligence, violation of Federal safety regulation, failure to report incident). Id. END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Notice of proposed rulemaking.

CFR Part: "12 CFR Parts 217 and 225"

Citation: "81 FR 67220"

Document Number: " RIN 7100 AE-58"

Federal Register Page Number: "67220"

"Proposed Rules"