On December 21, 2011 the Office of the Comptroller of the
Currency ("OCC"), Board of Governors of the Federal Reserve System ("Board"),
and Federal Deposit Insurance Corporation ("FDIC") (collectively, the
"agencies") proposed rules on market risk capital (the "December Proposal"). The
primary purpose of the December Proposal is to incorporate into the current
market risk rules new creditworthiness standards to be used in riskweighting certain
debt and securitization positions without relying on credit ratings. Comments
on the December Proposal are due by February 3, 2012.
The December Proposal substantially modifies an earlier
proposal from January 2011 ("the January Proposal"). The January Proposal was
an effort to bring the U.S. market risk capital rules in line with Basel II.5 Broadly,
this proposal sought to modify the scope of the market risk capital rules to
better reflect appropriate levels of risk, reduce procyclicality in market risk
capital requirements, and increase transparency through enhanced disclosures.
Section 939A of the Dodd-Frank Wall Street Reform and
Consumer Protection Act effectively prohibits the use of credit ratings in
assessing the creditworthiness of a security or money market instrument.6 Basel
II, however, relies on credit ratings in risk-weighting certain debt and
securitization positions. Accordingly, the January Proposal did not include the
Basel II approach to risk-weighting and, as a kind of placeholder, made no
change to the treatment of these positions under the current market risk
capital standards. The December Proposal provides an alternative approach
(absent the credit ratings) for risk-weighting the certain traded debt and securitization
positions that the January Proposal left unresolved.
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