A final rule amending the market risk capital rules that apply to banking organizations engaging in substantial trading activity was published in the Federal Register on Aug. 30 and will go into effect on New Year's Day.

The revisions – developed by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation – broaden the scope of these rules to “better capture the risks inherent in trading positions” and improve sensitivity to risks that were not adequately captured by current methodologies, such as the default and migration risks associated with less liquid products.

In a joint statement, regulators said that for the institutions subject to the market risk capital rules these revisions will "significantly increase the risk-based capital allocated to market risk"

The market risk rule generally applies to national banks for which the gross sum of the bank's trading assets and liabilities is equal to either 10 percent or more of the bank's total assets, or at least $1 billion. Bank regulators may also apply the market risk rule to a national bank if it is deemed it necessary for “safe and sound banking practices.”

The final rule incorporates: a revised definition of “trading position” that excludes trading assets and liabilities not held for the purpose of short-term resale or to lock in arbitrage profits; a stressed value-at-risk measure, in which the calibration of the model reflects a period of significant financial stress; a new capital charge for default risk and migration risk; a substantially revised treatment of positions that comprise the correlation trading portfolio; alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rule; and revised requirements for regulatory back testing.

Also published in the Federal Register on Thursday, triggering a public comment process, were proposed revisions and replacements to capital rules via three notices of proposed rulemaking.

In a joint statement, bank regulators said the proposed rules were published as separate NPRs to illustrate their “distinct objectives” and  a better understanding of the various aspects of the proposed overall capital framework, including which aspects of the rules apply to which institutions.

Comments on all three NPRs are due by Oct. 22.

With the first NPR, “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions” (Basel III NPR), the agencies propose revising  their risk-based and leverage capital requirements consistent with agreements reached by the Basel Committee on Banking Supervision (Basel III). The Basel III NPR applies to all national banks and federal savings associations. It  proposes a new common equity tier 1 minimum capital requirement, a higher minimum tier 1 capital requirement, and, for banks subject to the advanced approaches capital rules, a supplementary leverage ratio that incorporates off-balance-sheet exposures.

Additionally, consistent with Basel III, the agencies propose applying limits on a bank's capital distributions and “certain discretionary bonus payments” if the bank does not hold a specified “buffer” of common equity tier 1 capital in addition to minimum risk-based capital requirements.

The revisions are consistent with Dodd–Frank Act requirements to establish minimum risk-based and leverage capital requirements.

The second NPR, “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements” (Standardized Approach NPR), would revise and harmonize rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years.  Revisions include incorporating aspects of the Basel II standardized framework and alternatives to credit ratings, consistent with section 939A of he Dodd–Frank Act. The revisions also include methods for determining risk-weighted assets for residential mortgages, securitization exposures, and counterparty credit risk.

The Standardized Approach NPR introduces disclosure requirements that would apply to U.S. bank holding companies with $50 billion or more in total assets.

The third NPR, “Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule” (Advanced Approaches and Market Risk NPR), revises the advanced approaches risk-based capital rules consistent with Basel III and other changes to the Basel Committee's capital standards. Regulators also want to expand the scope of the market risk rule to apply it to federal and state savings associations and savings and loan holding companies with “significant trading activity.” Generally, the rules would continue to apply to national banks and FSAs with $250 billion or more in consolidated assets or $10 billion or more in foreign exposure.