FR4201_20160613_omb

Supporting Statement for the
Risk-Based Capital Guidelines: Market Risk
(FR 4201; OMB No. 7100-0314)
Summary
The Board of Governors of the Federal Reserve System (Board), under delegated
authority from the Office of Management and Budget (OMB), proposes to extend for three years,
without revision, the mandatory Risk-Based Capital Guidelines: Market Risk (FR 4201; OMB
No. 7100-0314). The Paperwork Reduction Act (PRA) classifies reporting, recordkeeping, or
disclosure requirements of a regulation as an information collection. 1
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The market risk rule is an important component of the Board’s regulatory capital
framework (12 C.F.R. part 217; Regulation Q) that instructs banks to require banking
organizations to measure and hold capital to cover their exposure to market risk. 2 On July 2,
2013, the Board adopted a revised regulatory capital framework, including the market risk rule,
which was expanded to include certain savings and loan holding companies. 3
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The market risk rule contains requirements subject to the PRA. The reporting,
recordkeeping, and disclosure requirements are found in sections 12 C.F.R. 217.203-217.210,
and 217.212 (all references to sections hereinafter are from 12 C.F.R. part 217). These
requirements enhance risk sensitivity and introduce requirements for public disclosure of certain
qualitative and quantitative information about a financial institution’s market risk. The Board’s
total annual burden for this information collection is estimated to be 54,992 hours for the 28
banking organizations (22 bank holding companies and 6 state member banks) it supervises that
are deemed respondents for purposes of the PRA. There are no required reporting forms
associated with this information collection.
Background and Justification
The market risk rule is an integral part of the Board’s regulatory capital framework. The
collection of information permits the Board to monitor the market risk profile of banking
organizations that it regulates that have significant market risk and evaluate the impact and
competitive implications of the market risk rule on those banking organizations 4 and the industry
as a whole. The collection of information provides the most current statistical data available to
identify areas of market risk on which to focus for onsite and offsite examinations and allows the
Board to assess and monitor the levels and components of each reporting institution’s risk-based
capital requirements for market risk and the adequacy of the institution’s capital under the
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See 44 U.S.C. § 3501 et seq.
See 61 FR 47358 (September 6, 1996).
3
The Board issued this rule jointly with the OCC on October 11, 2013 (78 FR 62018), and the FDIC issued a
substantially identical interim final rule on September 10, 2013 (78 FR 55340). In April 2014, the FDIC adopted the
interim final rule as a final rule with no substantive changes. See 79 FR 20754 (April 14, 2014). On December 18,
2013, the Board adopted revisions, including related to timely quantitative and qualitative disclosures, to the market
risk rule to align it with other elements of the revised capital framework. See 78 FR 76521 (December 18, 2013).
4
For purposes of this notice, banking organizations include bank holding companies, savings and loan holding
companies, and state member banks that are subject to the market risk rule.
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market risk rule. Finally, the collection of information contained in the market risk rule is
necessary to ensure capital adequacy of banking organizations according to their level of market
risk and assists the Board in implementing and validating the market risk framework.
Description of Information Collection
The market risk rule applies to any banking organization with aggregate trading assets
and trading liabilities equal to (1) 10 percent or more of quarter-end total assets or (2) $1 billion
or more. 5 The Board may apply the market risk rule to any banking organization if the Board
deems it necessary or appropriate because of the level of market risk of the banking organization
or to ensure safe and sound banking practices. 6 Also, the Board may exclude a banking
organization that meets the threshold criteria from the rule if the Board determines that the
exclusion is appropriate based on the level of market risk of the banking organization or to
ensure safe and sound banking practices. 7 The market risk rule includes certain reporting,
recordkeeping, and disclosure requirements. These requirements are described in sections 203
through 210 and 212. Details of the information collection requirements of each section are
provided below.
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Reporting Requirements
Prior Approvals (Sections 208 and 209). Section 208(a) requires banking organizations
to obtain prior approvals for models measuring incremental risk. With the prior approval of the
Board, a banking organization may choose to include portfolios of equity positions in its
incremental risk model, provided that it consistently includes such equity positions in a manner
that is consistent with how the banking organization internally measures and manages the
incremental risk of such positions at the portfolio level.
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Section 209(a) requires a banking organization to obtain prior approval of the Board prior
to using the method specified in that section to measure comprehensive risk for one or more
portfolios of correlation trading positions.
Recordkeeping Requirements
Policies and Procedures (Sections 203 and 206). Section 203(a)(1) requires clearly
defined policies and procedures for determining which trading assets and trading liabilities are
trading positions and which trading positions are correlation trading positions. These policies
and procedures must take into account (1) the extent to which a position, or a hedge of its
material risks, can be marked-to-market daily by reference to a two-way market and (2) possible
impairments to the liquidity of a position or its hedge.
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Section 203(b)(1) requires clearly defined policies and procedures for actively managing
all covered positions, and at a minimum, these policies and procedures must require (1) marking
positions to market or to model on a daily basis, (2) daily assessment of the banking
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6
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See 12 C.F.R. 217.201(b)(1).
See 12 C.F.R. 217.201(b)(2).
See 12 C.F.R. 217.201(b)(3).

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organization’s ability to hedge position and portfolio risks, and of the extent of market liquidity,
(3) establishment and daily monitoring of limits on positions by a risk control unit independent
of the trading business unit, (4) daily monitoring by senior management of (1) to (3)
hereinabove, (5) at least annual reassessment of established limits on positions by senior
management, and (6) at least annual assessments by qualified personnel of the quality of market
inputs to the valuation process, the soundness of key assumptions, the reliability of parameter
estimation in pricing models, and the stability and accuracy of model calibration under
alternative market scenarios.
Section 206(b)(3) requires a banking organization to have policies and procedures that
describe how the banking organization determines the period of significant financial stress used
to calculate its stressed VaR-based measure under this section and must be able to provide
empirical support for the period used. The banking organization must obtain the prior approval
of the Board for, and notify the Board if the banking organization makes any material changes to,
these policies and procedures. The policies and procedures must address (1) how the banking
organization links the period of significant financial stress used to calculate the stressed VaRbased measure to the composition and directional bias of its current portfolio and (2) the banking
organization’s process for selecting, reviewing, and updating the period of significant financial
stress used to calculate the stressed VaR-based measure and for monitoring the appropriateness
of the period to the banking organization’s current portfolio.
Trading and Hedging Strategy (Section 203). Section 203(a)(2) requires clearly
defined trading and hedging strategies for trading positions approved by senior management of
the banking organization. The trading strategy must articulate the expected holding period of,
and the market risk associated with, each portfolio of trading positions. The hedging strategy
must articulate for each portfolio of trading positions the level of market risk the banking
organization is willing to accept and must detail the instruments, techniques, and strategies the
banking organization will use to hedge the risk of the portfolio.
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Internal Models (Sections 203, 205, and 207). Sections 203(c)(4) through 203(c)(10)
require the annual review of internal models and include certain requirements that the models
must meet. The banking organization must periodically, but no less frequently than annually,
review its internal models in light of developments in financial markets and modeling
technologies, and enhance those models as appropriate to ensure that they continue to meet the
Board’s standards for model approval and employ risk measurement methodologies that are most
appropriate for the banking organization’s covered positions. The banking organization must
incorporate its internal models into its risk management process and integrate the internal models
used for calculating its VaR-based measure into its daily risk management process. The level of
sophistication of a banking organization’s internal models must be commensurate with the
complexity and amount of its covered positions. A banking organization’s internal models may
use any of the generally accepted approaches, including but not limited to variance-covariance
models, historical simulations, or Monte Carlo simulations, to measure market risk. The banking
organization’s internal models must properly measure all of the material risks in the covered
positions to which they are applied. The banking organization’s internal models must
conservatively assess the risks arising from less liquid positions and positions with limited price
transparency under realistic market scenarios. The banking organization must have a rigorous
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and well-defined process for re-estimating, re-evaluating, and updating its internal models to
ensure continued applicability and relevance. If a banking organization uses internal models to
measure specific risk, the internal models must also satisfy the requirements in paragraph (b)(1)
of section 207 of the rule.
Section 203(d)(4) requires at least an annual report to the banking organization’s board of
directors on the effectiveness of controls supporting the banking organization’s market risk
measurement systems, including the activities of the business trading units and of the
independent risk control unit, compliance with policies and procedures, and the calculation of the
banking organization’s measure for market risk.
Section 205(a)(5) requires the banking organization to demonstrate to the satisfaction of
the Board the appropriateness of any proxies used to capture the risks of the banking
organization’s actual positions for which such proxies are used.
Section 207(b)(1) requires either the use of internal models or the standard method set
forth in section 205 to measure the specific risk of each of its portfolios of specified covered
positions. If a banking organization uses internal models to measure the specific risk of a
portfolio of covered positions, the internal models must (1) explain the historical price variation
in the portfolio, (2) be responsive to changes in market conditions, (3) be robust to an adverse
environment, including signaling rising risk in an adverse environment, and (4) capture all
material components of specific risk for the covered positions in the portfolio. Specifically, the
internal models must (1) capture event risk and idiosyncratic risk and (2) capture and
demonstrate sensitivity to material differences between positions that are similar but not identical
and to changes in portfolio composition and concentrations.
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Backtesting and Stress Testing (Sections 204, 205, and 209). Section 204(b) requires a
banking organization to compare each of its most recent 250 business days’ trading losses
(excluding fees, commissions, reserves, net interest income, and intraday trading) with the
corresponding daily VaR-based measures. Once each quarter, the banking organization must
identify the number of exceptions (that is, the number of business days for which the actual daily
net trading loss, if any, exceeds the corresponding daily VaR-based measure) that have occurred
over the preceding 250 business days. A banking organization must use a multiplication factor
that corresponds to the number of exceptions identified to determine its VaR-based capital
requirement and its stressed VaR-based capital requirement for market risk until it obtains the
next quarter’s backtesting results, unless the Board notifies the banking organization in writing
that a different adjustment or other action is appropriate.
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Section 205(c) requires a banking organization to divide its portfolio into a number of
significant subportfolios approved by the Board for subportfolio backtesting purposes. These
subportfolios must be sufficient to allow the banking organization and the Board to assess the
adequacy of the VaR model at the risk factor level; the Board will evaluate the appropriateness
of these subportfolios relative to the value and composition of the banking organization’s
covered positions. The banking organization must retain and make available to the Board the
following information for each subportfolio for each business day over the previous two years
(500 business days), with no more than a 60-day lag: (1) a daily VaR-based measure for the

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subportfolio calibrated to a one-tail, 99.0 percent confidence level; (2) the daily profit or loss for
the subportfolio (that is, the net change in price of the positions held in the portfolio at the end of
the previous business day); and (3) the probability of observing a profit that is less than, or a loss
that is greater than, the amount projected for each day.
Section 209(c) requires that a banking organization must at least weekly apply specific,
supervisory stress scenarios to its portfolio of correlation trading positions that capture changes
in (1) default rates, (2) recovery rates, (3) credit spreads, (4) correlations of underlying
exposures, and (5) correlations of a correlation trading position and its hedge. A banking
organization must retain and make available to the Board the results of the supervisory stress
testing, including comparisons with the capital requirements generated by the banking
organization’s comprehensive risk model. A banking organization must report to the Board
promptly any instances where the stress tests indicate any material deficiencies in the
comprehensive risk model.
Securitizations (Section 210). Section 210(f) requires that a banking organization
demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a
securitization position that would materially affect the performance of the position. The banking
organization’s analysis must be commensurate with the complexity of the securitization position
and the materiality of the position in relation to capital. To support the demonstration of its
comprehensive understanding, for each securitization position a banking organization must (1)
conduct and document an analysis of the risk characteristics of a securitization position prior to
acquiring the position, considering (a) structural features of the securitization that would
materially impact the performance of the position, (b) relevant information regarding the
performance of the underlying credit exposure(s), (c) relevant market data of the securitization,
and (d) for resecuritization positions, performance information on the underlying securitization
exposures; and (2) on an on-going basis (no less frequently than quarterly), evaluate, review, and
update as appropriate the analysis required above for each securitization position.
Disclosure Policy (Section 212). Section 212(b) requires that the banking organization
must have a formal disclosure policy approved by the board of directors that addresses the
banking organization’s approach for determining the market risk disclosures. The policy must
address the associated internal controls and disclosure controls and procedures. The board of
directors and senior management must ensure that appropriate verification of the disclosures
takes place and that effective internal controls and disclosure controls and procedures are
maintained. One or more senior officers of the banking organization must attest that the
disclosures meet the requirements of the rule and the board of directors and senior management
are responsible for establishing and maintaining an effective internal control structure over
financial reporting, including the disclosures required by this section.
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Disclosure Requirements
Disclosures (Section 212). Section 212(c) requires certain quantitative disclosures be
made public each calendar quarter. For each material portfolio of covered positions, the banking
organization must publicly disclose the following at least quarterly: (1) the high, low, and mean
VaR-based measures over the reporting period and the VaR-based measure at period-end, (2) the

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high, low, and mean stressed VaR-based measures over the reporting period and the stressed
VaR-based measure at period-end, (3) the high, low, and mean incremental risk capital
requirements over the reporting period and the incremental risk capital requirement at periodend, (4) the high, low, and mean comprehensive risk capital requirements over the reporting
period and the comprehensive risk capital requirement at period-end, with the period-end
requirement broken down into appropriate risk classifications, (5) separate measures for interest
rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk
used to calculate the VaR-based measure, and (6) a comparison of VaR-based estimates with
actual gains or losses experienced by the bank, with an analysis of important outliers. The
banking organization must also disclose the following at least quarterly: (1) the aggregate
amount of on-balance sheet and off-balance sheet securitization positions by exposure type and
(2) the aggregate amount of correlation trading positions.
Section 212(d) requires the following qualitative disclosures annually, with any
significant changes disclosed in the interim: (1) the composition of material portfolios of
covered positions, (2) the banking organization’s valuation policies, procedures, and
methodologies for covered positions including, for securitization positions, the methods and key
assumptions used for valuing such positions, any significant changes since the last reporting
period, and the impact of such change, (3) the characteristics of the internal models used for
purposes of the market risk rule, (4) a description of the approaches used for validating and
evaluating the accuracy of internal models and modeling processes for purposes of the market
risk rule, (5) for each market risk category (that is, interest rate risk, credit spread risk, equity
price risk, foreign exchange risk, and commodity price risk), a description of the stress tests
applied to the positions subject to the factor, (6) the results of the comparison of the banking
organization’s internal estimates for purposes of the market risk rule with actual outcomes during
a sample period not used in model development, (7) the soundness standard on which the
banking organization’s internal capital adequacy assessment under the market risk rule is based,
including a description of the methodologies used to achieve a capital adequacy assessment that
is consistent with the soundness standard, (8) a description of the banking organization’s
processes for monitoring changes in the credit and market risk of securitization positions,
including how those processes differ for resecuritization positions, and (9) a description of the
banking organization’s policy governing the use of credit risk mitigation to mitigate the risks of
securitization and resecuritization positions.
Time Schedule for Information Collection
This information collection contains reporting, recordkeeping, and disclosure
requirements, as mentioned above. The creation of policies and procedures, a trading and
hedging strategy, internal models, and a disclosure policy are mandatory one-time recordkeeping
requirements, with mandatory updates that are on-occasion. The remaining recordkeeping
requirements are quarterly, annually, and on-occasion. The prior written approvals are all
required on-occasion. The disclosures are required quarterly, annually, and on-occasion.

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Legal Status
The Board’s Legal Division has determined that 12 U.S.C. §§ 324 (for banks), 1844(c)
(for bank holding companies), and 1467a(b)(2)(A) (for savings and loan holding companies)
authorize the Board to require the information collection. The information collections in the
FR 4201 are mandatory.
Information collected pursuant to the reporting requirements of the FR 4201 (specifically,
information related to seeking regulatory approval for the use of certain incremental and
comprehensive risk models and methodologies under sections 217.208 and 217.209) is exempt
from disclosure pursuant to exemption (b)(8) of the Freedom of Information Act (FOIA) (5
U.S.C § 552(b)(8)), and exemption (b)(4) of FOIA (5 U.S.C. § 552(b)(4)). Exemption (b)(8)
applies because the reported information is contained in or related to examination reports.
Exemption (b)(4) applies because the information provided to obtain regulatory approval of the
incremental or comprehensive risk models is confidential business information the release of
which could cause substantial competitive harm to the reporting company. The recordkeeping
requirements of the FR 4201 require banking organizations to maintain documentation regarding
certain policies and procedures, trading and hedging strategies, and internal models. These
documents would remain on the premises of the banking organizations and accordingly would
not generally be subject to a FOIA request. To the extent these documents are provided to the
regulators, they would be exempt under exemption (b)(8), and may be exempt under exemption
(b)(4). Exemption (b)(4) protects from disclosure “trade secrets and commercial or financial
information obtained from a person and privileged or confidential.” The disclosure requirements
of the FR 4201 do not raise any confidentiality issues because they require banking organizations
to make certain information public.
Consultation Outside the Agency
On February 23, 2016, the Board published a notice in the Federal Register (81 FR 8958)
requesting public comment for 60 days on the extension, without revision, of the FR 4201. The
comment period for this notice expired on April 25, 2016. The Board did not receive any
comments. On May 26, 2016, the Board published a final notice in the Federal Register
(81 FR 33534).
Estimate of Respondent Burden
The total annual burden for the FR 4201 is estimated to be 54,992 hours. The Board
estimates that it will take each of the current 28 respondents 96 hours to create its policies and
procedures, 16 hours to define its trading and hedging strategy, 128 hours to specify what the
internal models must include, and 40 hours to develop a disclosure policy. Most of the burden
associated with these parts of the information collection occurred during the first year of
implementation for those banking organizations subject to the rule at the time or once a banking
organization meets the qualification criteria.
The Board estimates each respondent will take 16 hours per quarter to complete the
backtesting required under section 204(b) and 104 hours annually to complete the backtesting

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and stress testing under sections 205(c) and 209(c). The Board also estimates the securitizations
analysis will take each respondent 120 hours per quarter. In addition, the Board estimates
respondents will take 960 hours to submit prior written approvals annually. Finally, the Board
estimates the quantitative disclosures will take respondents 16 hours per quarter and the
qualitative disclosures will take respondents 12 hours per year. Note that all of these estimates
represent an average across all respondents and represent the incremental burden above and
beyond any usual and customary business requirements. These reporting, recordkeeping, and
disclosure requirements represent less than 1 percent of the total Federal Reserve System
paperwork burden.
Number of
respondents 8

Annual
frequency

Estimated
average hours
per response

Estimated
annual burden
hours

28

1

960

26,880

Policies and Procedures

28

1

96

2,688

Trading and Hedging Strategy

28

1

16

448

Internal Models

28

1

128

3,584

Section 204(b)

28

4

16

1,792

Sections 205(c) and 209(c)

28

1

104

2,912

Securitizations

28

4

120

13,440

Disclosure Policy

28

1

40

1,120

Quantitative

28

4

16

1,792

Qualitative

28

1

12

FR 4201

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1B

2B

Reporting
Prior Written Approvals
Recordkeeping

Backtesting and Stress Testing

Disclosure

Total

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336

54,992

The total annual cost to the public for this information collection is estimated to be $2,922,825. 9
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Of these respondents, none are small entities as defined by the Small Business Administration (i.e., entities with
less than $550 million in total assets) www.sba.gov/contracting/getting-started-contractor/make-sure-you-meet-sbasize-standards/table-small-business-size-standards.
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Total cost to the public was estimated using the following formula: percent of staff time, multiplied by annual
burden hours, multiplied by hourly rates (30% Office & Administrative Support at $17, 45% Financial Managers at
$65, 15% Lawyers at $66, and 10% Chief Executives at $89). Hourly rates for each occupational group are the
(rounded) mean hourly wages from the Bureau of Labor and Statistics (BLS), Occupational Employment and Wages
May 2015, published March 30, 2016 www.bls.gov/news.release/ocwage.t01.htm. Occupations are defined using
the BLS Occupational Classification System, www.bls.gov/soc/.

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Sensitive Questions
This collection of information contains no questions of a sensitive nature, as defined by
OMB guidelines.
Estimate of Cost to the Federal Reserve System
The cost to the Federal Reserve System is negligible.

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