Texas Register, Volume 37, Number 35, Pages 6819-7008, August 31, 2012 Page: 6,838
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final amended rule as expeditiously as possible, and may adjust
the compliance date if necessary.
Although Section 611 of Dodd-Frank only requires states to take
derivative transactions into consideration for lending limits pur-
poses, the department has recommended incorporating credit
exposures arising from both derivative transactions and securi-
ties financing transactions in the proposed amendments for three
reasons. First, as a safety and soundness measure, the signif-
icant credit exposure that can arise from a securities financing
transaction should be measured, monitored and limited. Sec-
ond, the department has recommended that new limits be mod-
eled on the OCC approach under Section 610 of Dodd-Frank
(which limits both derivative and securities financing transac-
tions), to take advantage of the deeper capital markets expertise
of the OCC and to discourage the potential for regulatory arbi-
trage (converting from national bank to state bank) based on a
perception of weaker state regulation. Finally, the limits on a na-
tional bank's ability to engage in securities financing transactions
may in any event be indirectly applicable to state banks through
application of Section 24 of the Federal Deposit Insurance Act
(12 U.S.C. 1831 a) (prohibiting state banks from engaging in ac-
tivities as principal that national banks cannot engage in, except
under certain conditions).
The effective date for Section 611 of Dodd-Frank is January 21,
2013. In recognition that the OCC interim final rule may be
amended prior to that date, the department has recommended
that action by the commission to adopt this proposal be delayed
until the commission meets on December 14, 2012. If possible,
the department may amend the rules prior to adoption to incor-
porate amendments similar to the OCC, if such amendments fur-
ther streamline its rule and reduce regulatory burden while still
accomplishing the objectives imposed by Dodd-Frank.
DESCRIPTION OF THE PROPOSED RULES
Proposed new 12.12, relating to credit exposure arising from
derivative and securities financing transactions, is the central
provision in this proposal. Proposed 12.12 is modeled on 12
C.F.R. 32.9, the new OCC regulation relating to credit exposure
arising from derivative and securities financing transactions. All
other proposed changes with one minor exception are designed
to conform other rules in Chapter 12, Subchapter A, to proposed
12.12. Finally, the explanation of the way the proposed amend-
ments would work is largely drawn from the OCC explanation
published at 77 FR 37265 (June 21, 2012).
Definitions pertaining to Chapter 12, Subchapter A, are con-
tained in 12.2. For purposes of proposed 12.2, the existing
definition of borrower must be amended and ten new definitions
must be added. In order to arrange this large number of defini-
tions in alphabetical order, existing 12.2 is proposed for repeal
in connection with the proposal of new 12.2. However, six of
the definitions in proposed 12.2 are unchanged from existing
The definition of "borrower" in proposed new 12.2(1) is ex-
panded to include a party to whom the bank has credit exposure
arising from a derivative transaction or a securities financing
transaction. Proposed new 12.2(5) and (14) add definitions of
"derivative transaction" and "securities financing transaction,"
mirroring the definitions added to federal law by Section 610 of
Dodd-Frank or by the OCC in revised 12 C.F.R. 32.2. To further
implement detailed aspects of these definitions and proposed
new 12.12, new definitions are added for "credit derivative,"
"effective margining arrangement," "eligible credit derivative,"
"eligible protection provider," "qualifying central counterparty,"
and "qualifying master netting agreement," similar to how these
terms are defined in federal regulations. These terms are used
in proposed new 12.12.
Section 12.3 is also a definitional section limited to articulating
what is included and what is not included in "loans or extensions
of credit" for purposes of the lending limit. The proposed amend-
ment to 12.3 would add new 12.3(a)(10) to include any credit
exposure arising from a derivative transaction or a securities
financing transaction. Existing 12.3(a)(10) would be renum-
bered as 12.3(a)(11). Further, proposed new 12.3(b)(6) would
add intraday credit exposures arising from a derivative transac-
tion or securities financing transaction as an additional excep-
tion to the lending limits for state banks. This exception will help
minimize the impact of the lending limit on the payment and set-
tlement of financial transactions and is consistent with the cur-
rent application of state bank lending limits to certain transac-
tions. For example, existing 12.3(b)(4) and (5) provide that an
intraday overdraft and a sale of Federal funds with a maturity
of one day or less are not subject to the lending limit. Existing
12.3(b)(6) is proposed to be renumbered as 12.3(b)(7).
Unrelated to derivative or securities financing transactions, the
proposal would also amend 12.3(b)(3)(A) to clarify that a rela-
tively recent change in generally accepted accounting principles
by Financial Accounting Standards No. 166 does not affect lend-
ing limit calculations pertaining to the use of participation agree-
Section 12.6 relates to transactions not subject to lending limits.
The proposed amendment to 12.6 would add new subsection
(i) to except from the lending limit credit exposures arising from
securities financing transactions in which the securities being fi-
nanced are certain government securities, specifically those se-
curities in which a state bank may invest without limit pursuant to
Finance Code, 34.101(d). These transactions typically involve
less risk because of the quality and marketability of the securi-
ties employed. This exception may reduce regulatory burden for
smaller state banks because it is relatively uncommon for these
banks to engage in a securities financing transaction involving
securities other than the referenced government securities.
Section 12.10 relates to nonconforming loans. The proposed
amendment would add new 12.10(a)(5) to provide that a credit
exposure arising from a derivative transaction or securities
financing transaction and determined by the internal model
method will not be considered a violation of the lending limit
and will be treated as nonconforming if the extension of credit
was within the bank's legal lending limit at execution and is no
longer in conformity because the exposure has increased since
execution. (Credit exposure is always static or decreasing under
non-model methods, as discussed in connection with proposed
new 12.12.) The proposal would renumber the remaining
paragraph in subsection (a) and also make a conforming change
to subsection (b).
Proposed new 12.12 would set forth the methodology for cal-
culating the credit exposure arising from a derivative transaction
or a securities financing transaction entered into by a state bank
for purposes of determining the bank's lending limit. Proposed
subsection (b) addresses derivative transactions and proposed
subsection (c) addresses securities financing transactions, as
described in the following paragraphs.
37 TexReg 6838 August 31, 2012 Texas Register
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Texas. Secretary of State. Texas Register, Volume 37, Number 35, Pages 6819-7008, August 31, 2012, periodical, August 31, 2012; Austin, Texas. (texashistory.unt.edu/ark:/67531/metapth253227/m1/20/: accessed June 28, 2017), University of North Texas Libraries, The Portal to Texas History, texashistory.unt.edu; crediting UNT Libraries Government Documents Department.