On June 7, 2012, the Federal Reserve Board (FRB) issued a final rule implementing changes to its market risk capital rules. Banking organizations with significant trading activities will be required to adjust their capital requirements to better account for the market risks of activities related to foreign exchange and commodities positions and certain trading assets and liabilities. The rule implements several revisions made by the Basel Committee on Banking Supervision (Basel Committee) to its market risk framework between 2005 and 2010 and are based on proposed rules issued by the FRB on January 11, 2011 and amended on December 29, 2011 (see Legal Update, Proposed Amendment to Market Risk Capital Rules Would Replace References to Credit Ratings).

The final rule is meant to:

Pursuant to the Dodd-Frank Act prohibition on regulatory reliance on credit rating agencies, the rule does not include those aspects of the Basel Committee's market risk framework that rely on credit ratings. Instead, it uses alternative standards of creditworthiness for determining specific risk capital requirements.

The rule, which was also approved by the FDIC, applies to bank holding companies and state-chartered banks that have aggregate trading assets and liabilities that are either at least:

Also on June 7, the FRB proposed to extend the application of the rules to thrift holding companies meeting the above thresholds. The Office of the Comptroller of the Currency is expected to finalize this rule shortly, which will extend its application to national banks that meet these thresholds.

Trading accounts covered by the rule (covered positions) include assets and liabilities held for any of the following purposes:

It also includes trading positions that hedge other trading positions, as well as most foreign exchange and commodity positions.

Banking institutions covered by the rule will be subject to:

One of the most significant differences between the proposed and final market risk capital rule deals with the methods for determining the capital requirements for securitization positions. Originally proposed to focus on cumulative losses, the final rule focuses on delinquent exposures.

Banks subject to the market risk capital rule will also be subject to the Volcker Rule once implemented. How these two sets of requirements will eventually interact will be of some practical significance.

The rule becomes effective on January 1, 2013.

For more information on this and other rules stemming from the Basel agreements, see Practice Notes, Basel III: an overview and Article, Basel III: Overview and Implementation in the US. For more information on the Volcker Rule, see Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule.