strategies presented by its covered fund activities and investments,
taking into account potential or actual exposure to:
    A. Assets whose values cannot be externally priced or, where
valuation is reliant on pricing models, whose model inputs cannot be
externally validated;
    B. Assets whose changes in values cannot be adequately mitigated
by effective hedging;
    C. New products with rapid growth, including those that do not
have a market history;
    D. Assets or strategies that include significant embedded
leverage;
    E. Assets or strategies that have demonstrated significant
historical volatility;
    F. Assets or strategies for which the application of capital and
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that expose the banking entity to large
and significant concentrations with respect to sectors, risk
factors, or counterparties;
    4. Description and documentation of covered fund activities and
investments. For each organizational unit engaged in covered fund
activities and investments, the banking entity's compliance program
must document:
    i. The covered fund activities and investments that the unit is
authorized to conduct;
    ii. The banking entity's plan for actively seeking unaffiliated
investors to ensure that any investment by the banking entity

conforms to the limits contained in Sec.  44.12 or registered in
compliance with the securities laws and thereby exempt from those
limits within the time periods allotted in Sec.  44.12; and
    iii. How it complies with the requirements of subpart C.
    5. Internal Controls. A banking entity must establish, maintain,
and enforce internal controls that are reasonably designed to ensure
that its covered fund activities or investments comply with the
requirements of section 13 of the BHC Act and this part and are
appropriate given the limits on risk established by the banking
entity. These written internal controls must be reasonably designed
and established to effectively monitor and identify for further
analysis any covered fund activity or investment that may indicate
potential violations of section 13 of the BHC Act or this part. The
internal controls must, at a minimum require:
    i. Monitoring and limiting the banking entity's individual and
aggregate investments in covered funds;
    ii. Monitoring the amount and timing of seed capital investments
for compliance with the limitations under subpart C (including but
not limited to the redemption, sale or disposition requirements) of
Sec.  44.12, and the effectiveness of efforts to seek unaffiliated
investors to ensure compliance with those limits;
    iii. Calculating the individual and aggregate levels of
ownership interests in one or more covered fund required by Sec.
44.12;
    iv. Attributing the appropriate instruments to the individual
and aggregate ownership interest calculations above;
    v. Making disclosures to prospective and actual investors in any
covered fund organized and offered or sponsored by the banking
entity, as provided under Sec.  44.11(a)(8);
    vi. Monitoring for and preventing any relationship or
transaction between the banking entity and a covered fund that is
prohibited under Sec.  44.14, including where the banking entity has
been designated as the sponsor, investment manager, investment
adviser, or commodity trading advisor to a covered fund by another
banking entity; and
    vii. Appropriate management review and supervision across legal
entities of the banking entity to ensure that services and products
provided by all affiliated entities comply with the limitation on
services and products contained in Sec.  44.14.
    6. Remediation of violations. The banking entity's compliance
program must be reasonably designed and established to effectively
monitor and identify for further analysis any covered fund activity
or investment that may indicate potential violations of section 13
of the BHC Act or this part and to prevent actual violations of
section 13 of the BHC Act and this part. The banking entity's
compliance program must describe procedures for identifying and
remedying violations of section 13 of the BHC Act and this part, and
must include, at a minimum, a requirement to promptly document,
address and remedy any violation of section 13 of the BHC Act or
this part, including Sec.  44.21, and document all proposed and
actual remediation efforts. The compliance program must include
specific written policies and procedures that are reasonably
designed to assess the extent to which any activity or investment
indicates that modification to the banking entity's compliance
program is warranted and to ensure that appropriate modifications
are implemented. The written policies and procedures must provide
for prompt notification to appropriate management, including senior
management and the board of directors, of any material weakness or
significant deficiencies in the design or implementation of the
compliance program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

    a. A banking entity must establish, maintain, and enforce a
governance and management framework to manage its business and
employees with a view to preventing violations of section 13 of the
BHC Act and this part. A banking entity must have an appropriate
management framework reasonably designed to ensure that: Appropriate
personnel are responsible and accountable for the effective
implementation and enforcement of the compliance program; a clear
reporting line with a chain of responsibility is delineated; and the
compliance program is reviewed periodically by senior management.
The board of directors (or equivalent governance body) and senior
management should have the appropriate authority and access to
personnel and information within the organizations as well as
appropriate resources to conduct their oversight activities
effectively.
    1. Corporate governance. The banking entity must adopt a written
compliance program approved by the board of directors, an
appropriate committee of the board, or equivalent governance body,
and senior management.
    2. Management procedures. The banking entity must establish,
maintain, and enforce a governance framework that is reasonably
designed to achieve compliance with section 13 of the BHC Act and
this part, which, at a minimum, provides for:
    i. The designation of appropriate senior management or committee
of senior management with authority to carry out the management
responsibilities of the banking entity for each trading desk and for
each organizational unit engaged in covered fund activities;
    ii. Written procedures addressing the management of the
activities of the banking entity that are reasonably designed to
achieve compliance with section 13 of the BHC Act and this part,
including:
    A. A description of the management system, including the titles,
qualifications, and locations of managers and the specific
responsibilities of each person with respect to the banking entity's
activities governed by section 13 of the BHC Act and this part; and
    B. Procedures for determining compensation arrangements for
traders engaged in underwriting or market making-related activities
under Sec.  44.4 or risk-mitigating hedging activities under Sec.
44.5 so that such compensation arrangements are designed not to
reward or incentivize prohibited proprietary trading and
appropriately balance risk and financial results in a manner that
does not encourage employees to expose the banking entity to
excessive or imprudent risk.
    3. Business line managers. Managers with responsibility for one
or more trading desks of the banking entity are accountable for the
effective implementation and enforcement of the compliance program
with respect to the applicable trading desk(s).
    4. Board of directors, or similar corporate body, and senior
management. The board of directors, or similar corporate body, and
senior management are responsible for setting and communicating an
appropriate culture of compliance with section 13 of the BHC Act and
this part and ensuring that appropriate policies regarding the
management of trading activities and covered fund activities or
investments are adopted to comply with section 13 of the BHC Act and
this part. The board of directors or similar corporate body (such as
a designated committee of the board or an equivalent governance
body) must ensure that senior management is fully capable,
qualified, and properly motivated to manage compliance with this
part in light of the organization's business activities and the
expectations of the board of directors. The board of directors or
similar corporate body must also ensure that senior management has
established appropriate incentives and adequate resources to support
compliance with this part, including the implementation of a
compliance program meeting the requirements of this appendix into
management goals and compensation structures across the banking
entity.
    5. Senior management. Senior management is responsible for
implementing and enforcing the approved compliance program. Senior
management must also ensure that effective corrective action is
taken when failures in compliance with section 13 of the BHC Act and
this part are identified. Senior management and control personnel
charged with overseeing compliance with section 13 of the BHC Act
and this part should review the compliance program for the banking
entity periodically and report to the board, or an appropriate
committee thereof, on the effectiveness of the compliance program
and compliance matters with a frequency appropriate to the size,
scope, and risk profile of the banking entity's trading activities
and covered fund activities or investments, which shall be at least
annually.
    6. CEO attestation. Based on a review by the CEO of the banking
entity, the CEO of the banking entity must, annually, attest in
writing to the OCC that the banking entity has in place processes to
establish, maintain, enforce, review, test and modify the compliance
program established under this Appendix and Sec.  44.20 of this part
in a manner reasonably designed to achieve compliance with section
13 of the BHC Act and this part. In the case of a U.S. branch or
agency of a foreign banking entity, the attestation may be provided
for the entire U.S. operations of the foreign banking entity by the
senior management officer of the United States operations of the
foreign banking entity who is located in the United States.

IV. Independent Testing

    a. Independent testing must occur with a frequency appropriate
to the size, scope, and risk profile of the banking entity's trading
and covered fund activities or investments, which shall be at least
annually. This independent testing must include an evaluation of:
    1. The overall adequacy and effectiveness of the banking
entity's compliance program, including an analysis of the extent to
which the program contains all the required elements of this
appendix;
    2. The effectiveness of the banking entity's internal controls,
including an analysis and documentation of instances in which such
internal controls have been breached, and how such breaches were
addressed and resolved; and
    3. The effectiveness of the banking entity's management
procedures.
    b. A banking entity must ensure that independent testing
regarding the effectiveness of the banking entity's compliance
program is conducted by a qualified independent party, such as the
banking entity's internal audit department, compliance personnel or
risk managers independent of the organizational unit being tested,
outside auditors, consultants, or other qualified independent
parties. A banking entity must promptly take appropriate action to
remedy any significant deficiencies or material weaknesses in its
compliance program and to terminate any violations of section 13 of
the BHC Act or this part.

V. Training

    Banking entities must provide adequate training to personnel and
managers of the banking entity engaged in activities or investments
governed by section 13 of the BHC Act or this part, as well as other
appropriate supervisory, risk, independent testing, and audit
personnel, in order to effectively implement and enforce the
compliance program. This training should occur with a frequency
appropriate to the size and the risk profile of the banking entity's
trading activities and covered fund activities or investments.

VI. Recordkeeping

    Banking entities must create and retain records sufficient to
demonstrate compliance and support the operations and effectiveness
of the compliance program. A banking entity must retain these
records for a period that is no less than 5 years or such longer
period as required by the OCC in a form that allows it to promptly
produce such records to the OCC on request.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

12 CFR Chapter II

Authority and Issuance

    For the reasons stated in the Common Preamble, the Board amends
chapter I of Title 12, Code of Federal Regulations as follows:

PART 248--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS (Regulation VV)

0
16. The authority citation for part 248 continues to read as follows:

    Authority:  12 U.S.C. 1851, 12 U.S.C. 221 et seq., 12 U.S.C.
1818, 12 U.S.C. 1841 et seq., and 12 U.S.C. 3103 et seq.

Subpart A--Authority and Definitions

0
17. Section 248.2 is revised to read as follows:

Sec.  248.2   Definitions.

    Unless otherwise specified, for purposes of this part:
    (a) Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
    (b) Bank holding company has the same meaning as in section 2 of
the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
    (c) Banking entity. (1) Except as provided in paragraph (c)(2) of
this section, banking entity means:
    (i) Any insured depository institution;
    (ii) Any company that controls an insured depository institution;
    (iii) Any company that is treated as a bank holding company for
purposes of section 8 of the International Banking Act of 1978 (12
U.S.C. 3106); and
    (iv) Any affiliate or subsidiary of any entity described in
paragraphs (c)(1)(i), (ii), or (iii) of this section.
    (2) Banking entity does not include:
    (i) A covered fund that is not itself a banking entity under
paragraph (c)(1)(i), (ii), or (iii) of this section;
    (ii) A portfolio company held under the authority contained in
section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H),
(I)), or any portfolio concern, as defined under 13 CFR 107.50, that is
controlled by a small business investment company, as defined in
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C.
662), so long as the portfolio company or portfolio concern is not
itself a banking entity under paragraph (c)(1)(i), (ii), or (iii) of
this section; or
    (iii) The FDIC acting in its corporate capacity or as conservator
or receiver under the Federal Deposit Insurance Act or Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    (d) Board means the Board of Governors of the Federal Reserve
System.
    (e) CFTC means the Commodity Futures Trading Commission.
    (f) Dealer has the same meaning as in section 3(a)(5) of the
Exchange Act (15 U.S.C. 78c(a)(5)).
    (g) Depository institution has the same meaning as in section 3(c)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (h) Derivative. (1) Except as provided in paragraph (h)(2) of this
section, derivative means:
    (i) Any swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded
commodity, for deferred shipment or delivery that is intended to be
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or
foreign exchange swap (as that term is defined in section 1a(25) of the
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other
than foreign currency described in section 2(c)(2)(D)(i) of the
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or
transaction that the CFTC and SEC have further defined by joint
regulation, interpretation, or other action as not within the
definition of swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b)
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)),
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (i) Employee includes a member of the immediate family of the
employee.
    (j) Exchange Act means the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).
    (k) Excluded commodity has the same meaning as in section 1a(19) of
the Commodity Exchange Act (7 U.S.C. 1a(19)).
    (l) FDIC means the Federal Deposit Insurance Corporation.
    (m) Federal banking agencies means the Board, the Office of the
Comptroller of the Currency, and the FDIC.

    (n) Foreign banking organization has the same meaning as in Sec.
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)), but does not
include a foreign bank, as defined in section 1(b)(7) of the
International Banking Act of 1978 (12 U.S.C. 3101(7)), that is
organized under the laws of the Commonwealth of Puerto Rico, Guam,
American Samoa, the United States Virgin Islands, or the Commonwealth
of the Northern Mariana Islands.
    (o) Foreign insurance regulator means the insurance commissioner,
or a similar official or agency, of any country other than the United
States that is engaged in the supervision of insurance companies under
foreign insurance law.
    (p) General account means all of the assets of an insurance company
except those allocated to one or more separate accounts.
    (q) Insurance company means a company that is organized as an
insurance company, primarily and predominantly engaged in writing
insurance or reinsuring risks underwritten by insurance companies,
subject to supervision as such by a state insurance regulator or a
foreign insurance regulator, and not operated for the purpose of
evading the provisions of section 13 of the BHC Act (12 U.S.C. 1851).
    (r) Insured depository institution has the same meaning as in
section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)),
but does not include:
    (1) An insured depository institution that is described in section
2(c)(2)(D) of the BHC Act (12 U.S.C. 1841(c)(2)(D)); or
    (2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
    (s) Limited trading assets and liabilities means with respect to a
banking entity that:
    (1)(i) The banking entity has, together with its affiliates and
subsidiaries, trading assets and liabilities (excluding trading assets
and liabilities attributable to trading activities permitted pursuant
to Sec.  248.6(a)(1) and (2) of subpart B) the average gross sum of
which over the previous consecutive four quarters, as measured as of
the last day of each of the four previous calendar quarters, is less
than $1 billion; and
    (ii) The Board has not determined pursuant to Sec.  248.20(g) or
(h) of this part that the banking entity should not be treated as
having limited trading assets and liabilities.
    (2) With respect to a banking entity other than a banking entity
described in paragraph (s)(3) of this section, trading assets and
liabilities for purposes of this paragraph (s) means trading assets and
liabilities (excluding trading assets and liabilities attributable to
trading activities permitted pursuant to Sec.  248.6(a)(1) and (2) of
subpart B) on a worldwide consolidated basis.
    (3)(i) With respect to a banking entity that is a foreign banking
organization or a subsidiary of a foreign banking organization, trading
assets and liabilities for purposes of this paragraph (s) means the
trading assets and liabilities (excluding trading assets and
liabilities attributable to trading activities permitted pursuant to
Sec.  248.6(a)(1) and (2) of subpart B) of the combined U.S. operations
of the top-tier foreign banking organization (including all
subsidiaries, affiliates, branches, and agencies of the foreign banking
organization operating, located, or organized in the United States).
    (ii) For purposes of paragraph (s)(3)(i) of this section, a U.S.
branch, agency, or subsidiary of a banking entity is located in the
United States; however, the foreign bank that operates or controls that
branch, agency, or subsidiary is not considered to be located in the
United States solely by virtue of operating or controlling the U.S.
branch, agency, or subsidiary. For purposes of paragraph (s)(3)(i) of
this section, all foreign operations of a U.S. agency, branch, or
subsidiary of a foreign banking organization are considered to be
located in the United States, including branches outside the United
States that are managed or controlled by a U.S. branch or agency of the
foreign banking organization, for purposes of calculating the banking
entity's U.S. trading assets and liabilities.
    (t) Loan means any loan, lease, extension of credit, or secured or
unsecured receivable that is not a security or derivative.
    (u) Moderate trading assets and liabilities means, with respect to
a banking entity, that the banking entity does not have significant
trading assets and liabilities or limited trading assets and
liabilities.
    (v) Primary financial regulatory agency has the same meaning as in
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5301(12)).
    (w) Purchase includes any contract to buy, purchase, or otherwise
acquire. For security futures products, purchase includes any contract,
agreement, or transaction for future delivery. With respect to a
commodity future, purchase includes any contract, agreement, or
transaction for future delivery. With respect to a derivative, purchase
includes the execution, termination (prior to its scheduled maturity
date), assignment, exchange, or similar transfer or conveyance of, or
extinguishing of rights or obligations under, a derivative, as the
context may require.
    (x) Qualifying foreign banking organization means a foreign banking
organization that qualifies as such under Sec.  211.23(a), (c) or (e)
of the Board's Regulation K (12 CFR 211.23(a), (c), or (e)).
    (y) SEC means the Securities and Exchange Commission.
    (z) Sale and sell each include any contract to sell or otherwise
dispose of. For security futures products, such terms include any
contract, agreement, or transaction for future delivery. With respect
to a commodity future, such terms include any contract, agreement, or
transaction for future delivery. With respect to a derivative, such
terms include the execution, termination (prior to its scheduled
maturity date), assignment, exchange, or similar transfer or conveyance
of, or extinguishing of rights or obligations under, a derivative, as
the context may require.
    (aa) Security has the meaning specified in section 3(a)(10) of the
Exchange Act (15 U.S.C. 78c(a)(10)).
    (bb) Security-based swap dealer has the same meaning as in section
3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)).
    (cc) Security future has the meaning specified in section 3(a)(55)
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (dd) Separate account means an account established and maintained
by an insurance company in connection with one or more insurance
contracts to hold assets that are legally segregated from the insurance
company's other assets, under which income, gains, and losses, whether
or not realized, from assets allocated to such account, are, in
accordance with the applicable contract, credited to or charged against
such account without regard to other income, gains, or losses of the
insurance company.
    (ee) Significant trading assets and liabilities means with respect
to a banking entity that:
    (1)(i) The banking entity has, together with its affiliates and
subsidiaries, trading assets and liabilities the average gross sum of
which over the previous consecutive four quarters, as measured as of
the last day of each of the four previous calendar quarters, equals or
exceeds $20 billion; or

    (ii) The Board has determined pursuant to Sec.  248.20(h) of this
part that the banking entity should be treated as having significant
trading assets and liabilities.
    (2) With respect to a banking entity, other than a banking entity
described in paragraph (ee)(3) of this section, trading assets and
liabilities for purposes of this paragraph (ee) means trading assets
and liabilities (excluding trading assets and liabilities attributable
to trading activities permitted pursuant to Sec.  248.6(a)(1) and (2)
of subpart B) on a worldwide consolidated basis.
    (3)(i) With respect to a banking entity that is a foreign banking
organization or a subsidiary of a foreign banking organization, trading
assets and liabilities for purposes of this paragraph (ee) means the
trading assets and liabilities (excluding trading assets and
liabilities attributable to trading activities permitted pursuant to
Sec.  248.6(a)(1) and (2) of subpart B) of the combined U.S. operations
of the top-tier foreign banking organization (including all
subsidiaries, affiliates, branches, and agencies of the foreign banking
organization operating, located, or organized in the United States as
well as branches outside the United States that are managed or
controlled by a branch or agency of the foreign banking entity
operating, located or organized in the United States).
    (ii) For purposes of paragraph (ee)(3)(i) of this section, a U.S.
branch, agency, or subsidiary of a banking entity is located in the
United States; however, the foreign bank that operates or controls that
branch, agency, or subsidiary is not considered to be located in the
United States solely by virtue of operating or controlling the U.S.
branch, agency, or subsidiary. For purposes of paragraph (ee)(3)(i) of
this section, all foreign operations of a U.S. agency, branch, or
subsidiary of a foreign banking organization are considered to be
located in the United States for purposes of calculating the banking
entity's U.S. trading assets and liabilities.
    (ff) State means any State, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, American Samoa, the United States
Virgin Islands, and the Commonwealth of the Northern Mariana Islands.
    (gg) Subsidiary has the same meaning as in section 2(d) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (hh) State insurance regulator means the insurance commissioner, or
a similar official or agency, of a State that is engaged in the
supervision of insurance companies under State insurance law.
    (ii) Swap dealer has the same meaning as in section 1(a)(49) of the
Commodity Exchange Act (7 U.S.C. 1a(49)).

Subpart B--Proprietary Trading

0
18. Section 248.3 is amended by:
0
a. Revising paragraphs (b) and (d)(3), (8), and (9);
0
b. Adding paragraphs (d)(10) through (13);
0
c. Redesignating paragraphs (e)(5) through (13) as paragraphs (e)(6)
through (14);
0
d. Adding new paragraph (e)(5); and
0
e. Revising newly redesignated paragraphs (e)(11), (12), and (14).
    The revisions and additions read as follows:

Sec.  248.3   Prohibition on proprietary trading.

* * * * *
    (b) Definition of trading account. (1) Trading account. Trading
account means:
    (i) Any account that is used by a banking entity to purchase or
sell one or more financial instruments principally for the purpose of
short-term resale, benefitting from actual or expected short-term price
movements, realizing short-term arbitrage profits, or hedging one or
more of the positions resulting from the purchases or sales of
financial instruments described in this paragraph;
    (ii) Any account that is used by a banking entity to purchase or
sell one or more financial instruments that are both market risk
capital rule covered positions and trading positions (or hedges of
other market risk capital rule covered positions), if the banking
entity, or any affiliate with which the banking entity is consolidated
for regulatory reporting purposes, calculates risk-based capital ratios
under the market risk capital rule; or
    (iii) Any account that is used by a banking entity to purchase or
sell one or more financial instruments, if the banking entity:
    (A) Is licensed or registered, or is required to be licensed or
registered, to engage in the business of a dealer, swap dealer, or
security-based swap dealer, to the extent the instrument is purchased
or sold in connection with the activities that require the banking
entity to be licensed or registered as such; or
    (B) Is engaged in the business of a dealer, swap dealer, or
security-based swap dealer outside of the United States, to the extent
the instrument is purchased or sold in connection with the activities
of such business.
    (2) Trading account application for certain banking entities. (i) A
banking entity that is subject to paragraph (b)(1)(ii) of this section
in determining the scope of its trading account is not subject to
paragraph (b)(1)(i) of this section.
    (ii) A banking entity that does not calculate risk-based capital
ratios under the market risk capital rule and is not a consolidated
affiliate for regulatory reporting purposes of a banking entity that
calculates risk based capital ratios under the market risk capital rule
may elect to apply paragraph (b)(1)(ii) of this section in determining
the scope of its trading account as if it were subject to that
paragraph. A banking entity that elects under this subsection to apply
paragraph (b)(1)(ii) of this section in determining the scope of its
trading account as if it were subject to that paragraph is not required
to apply paragraph (b)(1)(i) of this section.
    (3) Consistency of account election for certain banking entities.
(i) Any election or change to an election under paragraph (b)(2)(ii) of
this section must apply to the electing banking entity and all of its
wholly owned subsidiaries. The primary financial regulatory agency of a
banking entity that is affiliated with but is not a wholly owned
subsidiary of such electing banking entity may require that the banking
entity be subject to this uniform application requirement if the
primary financial regulatory agency determines that it is necessary to
prevent evasion of the requirements of this part after notice and
opportunity for response as provided in subpart D of this part.
    (ii) A banking entity that does not elect under paragraph
(b)(2)(ii) of this section to be subject to the trading account
definition in (b)(1)(ii) may continue to apply the trading account
definition in paragraph (b)(1)(i) of this section for one year from the
date on which it becomes, or becomes a consolidated affiliate for
regulatory reporting purposes with, a banking entity that calculates
risk-based capital ratios under the market risk capital rule.
    (4) Rebuttable presumption for certain purchases and sales. The
purchase (or sale) of a financial instrument by a banking entity shall
be presumed not to be for the trading account of the banking entity
under paragraph (b)(1)(i) of this section if the banking entity holds
the financial instrument for sixty days or longer and does not transfer
substantially all of the risk of the financial instrument within sixty
days of the purchase (or sale).
* * * * *
    (d) * * *
    (3) Any purchase or sale of a security, foreign exchange forward
(as that term

is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C.
1a(24)), foreign exchange swap (as that term is defined in section
1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or cross-
currency swap by a banking entity for the purpose of liquidity
management in accordance with a documented liquidity management plan of
the banking entity that:
    (i) Specifically contemplates and authorizes the particular
financial instruments to be used for liquidity management purposes, the
amount, types, and risks of these financial instruments that are
consistent with liquidity management, and the liquidity circumstances
in which the particular financial instruments may or must be used;
    (ii) Requires that any purchase or sale of financial instruments
contemplated and authorized by the plan be principally for the purpose
of managing the liquidity of the banking entity, and not for the
purpose of short-term resale, benefitting from actual or expected
short-term price movements, realizing short-term arbitrage profits, or
hedging a position taken for such short-term purposes;
    (iii) Requires that any financial instruments purchased or sold for
liquidity management purposes be highly liquid and limited to financial
instruments the market, credit, and other risks of which the banking
entity does not reasonably expect to give rise to appreciable profits
or losses as a result of short-term price movements;
    (iv) Limits any financial instruments purchased or sold for
liquidity management purposes, together with any other financial
instruments purchased or sold for such purposes, to an amount that is
consistent with the banking entity's near-term funding needs, including
deviations from normal operations of the banking entity or any
affiliate thereof, as estimated and documented pursuant to methods
specified in the plan;
    (v) Includes written policies and procedures, internal controls,
analysis, and independent testing to ensure that the purchase and sale
of financial instruments that are not permitted under Sec.  248.6(a) or
(b) of this subpart are for the purpose of liquidity management and in
accordance with the liquidity management plan described in this
paragraph (d)(3); and
    (vi) Is consistent with the Board's supervisory requirements
regarding liquidity management;
* * * * *
    (8) Any purchase or sale of one or more financial instruments by a
banking entity through a deferred compensation, stock-bonus, profit-
sharing, or pension plan of the banking entity that is established and
administered in accordance with the law of the United States or a
foreign sovereign, if the purchase or sale is made directly or
indirectly by the banking entity as trustee for the benefit of persons
who are or were employees of the banking entity;
    (9) Any purchase or sale of one or more financial instruments by a
banking entity in the ordinary course of collecting a debt previously
contracted in good faith, provided that the banking entity divests the
financial instrument as soon as practicable, and in no event may the
banking entity retain such instrument for longer than such period
permitted by the Board;
    (10) Any purchase or sale of one or more financial instruments that
was made in error by a banking entity in the course of conducting a
permitted or excluded activity or is a subsequent transaction to
correct such an error;
    (11) Contemporaneously entering into a customer-driven swap or
customer-driven security-based swap and a matched swap or security-
based swap if:
    (i) The banking entity retains no more than minimal price risk; and
    (ii) The banking entity is not a registered dealer, swap dealer, or
security-based swap dealer;
    (12) Any purchase or sale of one or more financial instruments that
the banking entity uses to hedge mortgage servicing rights or mortgage
servicing assets in accordance with a documented hedging strategy; or
    (13) Any purchase or sale of a financial instrument that does not
meet the definition of trading asset or trading liability under the
applicable reporting form for a banking entity as of January 1, 2020.
    (e) * * *
    (5) Cross-currency swap means a swap in which one party exchanges
with another party principal and interest rate payments in one currency
for principal and interest rate payments in another currency, and the
exchange of principal occurs on the date the swap is entered into, with
a reversal of the exchange of principal at a later date that is agreed
upon when the swap is entered into.
* * * * *
    (11) Market risk capital rule covered position and trading position
means a financial instrument that meets the criteria to be a covered
position and a trading position, as those terms are respectively
defined, without regard to whether the financial instrument is reported
as a covered position or trading position on any applicable regulatory
reporting forms:
    (i) In the case of a banking entity that is a bank holding company,
savings and loan holding company, or insured depository institution,
under the market risk capital rule that is applicable to the banking
entity; and
    (ii) In the case of a banking entity that is affiliated with a bank
holding company or savings and loan holding company, other than a
banking entity to which a market risk capital rule is applicable, under
the market risk capital rule that is applicable to the affiliated bank
holding company or savings and loan holding company.
    (12) Market risk capital rule means the market risk capital rule
that is contained in 12 CFR part 3 with respect to a banking entity for
which the OCC is the primary financial regulatory agency, 12 CFR part
217 with respect to a banking entity for which the Board is the primary
financial regulatory agency, or 12 CFR part 324 with respect to a
banking entity for which the FDIC is the primary financial regulatory
agency.
* * * * *
    (14) Trading desk means a unit of organization of a banking entity
that purchases or sells financial instruments for the trading account
of the banking entity or an affiliate thereof that is:
    (i)(A) Structured by the banking entity to implement a well-defined
business strategy;
    (B) Organized to ensure appropriate setting, monitoring, and
management review of the desk's trading and hedging limits, current and
potential future loss exposures, and strategies; and
    (C) Characterized by a clearly defined unit that:
    (1) Engages in coordinated trading activity with a unified approach
to its key elements;
    (2) Operates subject to a common and calibrated set of risk
metrics, risk levels, and joint trading limits;
    (3) Submits compliance reports and other information as a unit for
monitoring by management; and
    (4) Books its trades together; or
    (ii) For a banking entity that calculates risk-based capital ratios
under the market risk capital rule, or a consolidated affiliate for
regulatory reporting purposes of a banking entity that calculates risk-
based capital ratios under the market risk capital rule, established by
the banking entity or its affiliate for purposes of market risk capital
calculations under the market risk capital rule.

0
19. Section 248.4 is revised to read as follows:

Sec.  248.4   Permitted underwriting and market making-related
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities.
The prohibition contained in Sec.  248.3(a) does not apply to a banking
entity's underwriting activities conducted in accordance with this
paragraph (a).
    (2) Requirements. The underwriting activities of a banking entity
are permitted under paragraph (a)(1) of this section only if:
    (i) The banking entity is acting as an underwriter for a
distribution of securities and the trading desk's underwriting position
is related to such distribution;
    (ii)(A) The amount and type of the securities in the trading desk's
underwriting position are designed not to exceed the reasonably
expected near term demands of clients, customers, or counterparties,
taking into account the liquidity, maturity, and depth of the market
for the relevant types of securities; and
    (B) Reasonable efforts are made to sell or otherwise reduce the
underwriting position within a reasonable period, taking into account
the liquidity, maturity, and depth of the market for the relevant types
of securities;
    (iii) In the case of a banking entity with significant trading
assets and liabilities, the banking entity has established and
implements, maintains, and enforces an internal compliance program
required by subpart D of this part that is reasonably designed to
ensure the banking entity's compliance with the requirements of
paragraph (a) of this section, including reasonably designed written
policies and procedures, internal controls, analysis and independent
testing identifying and addressing:
    (A) The products, instruments or exposures each trading desk may
purchase, sell, or manage as part of its underwriting activities;
    (B) Limits for each trading desk, in accordance with paragraph
(a)(2)(ii)(A) of this section;
    (C) Written authorization procedures, including escalation
procedures that require review and approval of any trade that would
exceed a trading desk's limit(s), demonstrable analysis of the basis
for any temporary or permanent increase to a trading desk's limit(s),
and independent review of such demonstrable analysis and approval; and
    (D) Internal controls and ongoing monitoring and analysis of each
trading desk's compliance with its limits.
    (iv) A banking entity with significant trading assets and
liabilities may satisfy the requirements in paragraphs (a)(2)(iii)(B)
and (C) of this section by complying with the requirements set forth in
paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the
activities described in this paragraph (a) are designed not to reward
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in the
activity described in this paragraph (a) in accordance with applicable
law.
    (3) Definition of distribution. For purposes of this paragraph (a),
a distribution of securities means:
    (i) An offering of securities, whether or not subject to
registration under the Securities Act of 1933, that is distinguished
from ordinary trading transactions by the presence of special selling
efforts and selling methods; or
    (ii) An offering of securities made pursuant to an effective
registration statement under the Securities Act of 1933.
    (4) Definition of underwriter. For purposes of this paragraph (a),
underwriter means:
    (i) A person who has agreed with an issuer or selling security
holder to:
    (A) Purchase securities from the issuer or selling security holder
for distribution;
    (B) Engage in a distribution of securities for or on behalf of the
issuer or selling security holder; or
    (C) Manage a distribution of securities for or on behalf of the
issuer or selling security holder; or
    (ii) A person who has agreed to participate or is participating in
a distribution of such securities for or on behalf of the issuer or
selling security holder.
    (5) Definition of selling security holder. For purposes of this
paragraph (a), selling security holder means any person, other than an
issuer, on whose behalf a distribution is made.
    (6) Definition of underwriting position. For purposes of this
section, underwriting position means the long or short positions in one
or more securities held by a banking entity or its affiliate, and
managed by a particular trading desk, in connection with a particular
distribution of securities for which such banking entity or affiliate
is acting as an underwriter.
    (7) Definition of client, customer, and counterparty. For purposes
of this paragraph (a), the terms client, customer, and counterparty, on
a collective or individual basis, refer to market participants that may
transact with the banking entity in connection with a particular
distribution for which the banking entity is acting as underwriter.
    (b) Market making-related activities--(1) Permitted market making-
related activities. The prohibition contained in Sec.  248.3(a) does
not apply to a banking entity's market making-related activities
conducted in accordance with this paragraph (b).
    (2) Requirements. The market making-related activities of a banking
entity are permitted under paragraph (b)(1) of this section only if:
    (i) The trading desk that establishes and manages the financial
exposure, routinely stands ready to purchase and sell one or more types
of financial instruments related to its financial exposure, and is
willing and available to quote, purchase and sell, or otherwise enter
into long and short positions in those types of financial instruments
for its own account, in commercially reasonable amounts and throughout
market cycles on a basis appropriate for the liquidity, maturity, and
depth of the market for the relevant types of financial instruments;
    (ii) The trading desk's market-making related activities are
designed not to exceed, on an ongoing basis, the reasonably expected
near term demands of clients, customers, or counterparties, taking into
account the liquidity, maturity, and depth of the market for the
relevant types of financial instruments;
    (iii) In the case of a banking entity with significant trading
assets and liabilities, the banking entity has established and
implements, maintains, and enforces an internal compliance program
required by subpart D of this part that is reasonably designed to
ensure the banking entity's compliance with the requirements of this
paragraph (b), including reasonably designed written policies and
procedures, internal controls, analysis and independent testing
identifying and addressing:
    (A) The financial instruments each trading desk stands ready to
purchase and sell in accordance with paragraph (b)(2)(i) of this
section;
    (B) The actions the trading desk will take to demonstrably reduce
or otherwise significantly mitigate promptly the risks of its financial
exposure consistent with the limits required under paragraph
(b)(2)(iii)(C) of this section; the products, instruments, and
exposures each trading desk may use for risk management purposes; the
techniques and strategies each trading desk may use to manage the risks
of its market making-related activities and positions; and the process,
strategies, and personnel responsible for ensuring that the actions
taken by the trading

desk to mitigate these risks are and continue to be effective;
    (C) Limits for each trading desk, in accordance with paragraph
(b)(2)(ii) of this section;
    (D) Written authorization procedures, including escalation
procedures that require review and approval of any trade that would
exceed a trading desk's limit(s), demonstrable analysis of the basis
for any temporary or permanent increase to a trading desk's limit(s),
and independent review of such demonstrable analysis and approval; and
    (E) Internal controls and ongoing monitoring and analysis of each
trading desk's compliance with its limits.
    (iv) A banking entity with significant trading assets and
liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C)
and (D) of this section by complying with the requirements set forth in
paragraph (c) of this section.
    (v) The compensation arrangements of persons performing the
activities described in this paragraph (b) are designed not to reward
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in
activity described in this paragraph (b) in accordance with applicable
law.
    (3) Definition of client, customer, and counterparty. For purposes
of this paragraph (b), the terms client, customer, and counterparty, on
a collective or individual basis refer to market participants that make
use of the banking entity's market making-related services by obtaining
such services, responding to quotations, or entering into a continuing
relationship with respect to such services, provided that:
    (i) A trading desk or other organizational unit of another banking
entity is not a client, customer, or counterparty of the trading desk
if that other entity has trading assets and liabilities of $50 billion
or more as measured in accordance with the methodology described in
Sec.  248.2(ee) of this part, unless:
    (A) The trading desk documents how and why a particular trading
desk or other organizational unit of the entity should be treated as a
client, customer, or counterparty of the trading desk for purposes of
paragraph (b)(2) of this section; or
    (B) The purchase or sale by the trading desk is conducted
anonymously on an exchange or similar trading facility that permits
trading on behalf of a broad range of market participants.
    (ii) [Reserved]
    (4) Definition of financial exposure. For purposes of this section,
financial exposure means the aggregate risks of one or more financial
instruments and any associated loans, commodities, or foreign exchange
or currency, held by a banking entity or its affiliate and managed by a
particular trading desk as part of the trading desk's market making-
related activities.
    (5) Definition of market-maker positions. For the purposes of this
section, market-maker positions means all of the positions in the
financial instruments for which the trading desk stands ready to make a
market in accordance with paragraph (b)(2)(i) of this section, that are
managed by the trading desk, including the trading desk's open
positions or exposures arising from open transactions.
    (c) Rebuttable presumption of compliance--(1) Internal limits. (i)
A banking entity shall be presumed to meet the requirement in paragraph
(a)(2)(ii)(A) or (b)(2)(ii) of this section with respect to the
purchase or sale of a financial instrument if the banking entity has
established and implements, maintains, and enforces the internal limits
for the relevant trading desk as described in paragraph (c)(1)(ii) of
this section.
    (ii)(A) With respect to underwriting activities conducted pursuant
to paragraph (a) of this section, the presumption described in
paragraph (c)(1)(i) of this section shall be available to each trading
desk that establishes, implements, maintains, and enforces internal
limits that should take into account the liquidity, maturity, and depth
of the market for the relevant types of securities and are designed not
to exceed the reasonably expected near term demands of clients,
customers, or counterparties, based on the nature and amount of the
trading desk's underwriting activities, on the:
    (1) Amount, types, and risk of its underwriting position;
    (2) Level of exposures to relevant risk factors arising from its
underwriting position; and
    (3) Period of time a security may be held.
    (B) With respect to market making-related activities conducted
pursuant to paragraph (b) of this section, the presumption described in
paragraph (c)(1)(i) of this section shall be available to each trading
desk that establishes, implements, maintains, and enforces internal
limits that should take into account the liquidity, maturity, and depth
of the market for the relevant types of financial instruments and are
designed not to exceed the reasonably expected near term demands of
clients, customers, or counterparties, based on the nature and amount
of the trading desk's market-making related activities, that address
the:
    (1) Amount, types, and risks of its market-maker positions;
    (2) Amount, types, and risks of the products, instruments, and
exposures the trading desk may use for risk management purposes;
    (3) Level of exposures to relevant risk factors arising from its
financial exposure; and
    (4) Period of time a financial instrument may be held.
    (2) Supervisory review and oversight. The limits described in
paragraph (c)(1) of this section shall be subject to supervisory review
and oversight by the Board on an ongoing basis.
    (3) Limit breaches and increases. (i) With respect to any limit set
pursuant to paragraph (c)(1)(ii)(A) or (B) of this section, a banking
entity shall maintain and make available to the Board upon request
records regarding:
    (A) Any limit that is exceeded; and
    (B) Any temporary or permanent increase to any limit(s), in each
case in the form and manner as directed by the Board.
    (ii) In the event of a breach or increase of any limit set pursuant
to paragraph (c)(1)(ii)(A) or (B) of this section, the presumption
described in paragraph (c)(1)(i) of this section shall continue to be
available only if the banking entity:
    (A) Takes action as promptly as possible after a breach to bring
the trading desk into compliance; and
    (B) Follows established written authorization procedures, including
escalation procedures that require review and approval of any trade
that exceeds a trading desk's limit(s), demonstrable analysis of the
basis for any temporary or permanent increase to a trading desk's
limit(s), and independent review of such demonstrable analysis and
approval.
    (4) Rebutting the presumption. The presumption in paragraph
(c)(1)(i) of this section may be rebutted by the Board if the Board
determines, taking into account the liquidity, maturity, and depth of
the market for the relevant types of financial instruments and based on
all relevant facts and circumstances, that a trading desk is engaging
in activity that is not based on the reasonably expected near term
demands of clients, customers, or counterparties. The Board's rebuttal
of the presumption in paragraph (c)(1)(i) must be made in accordance
with the notice and response procedures in subpart D of this part.

0
20. Section 248.5 is amended by revising paragraphs (b) and (c)(1)
introductory text and adding paragraph (c)(4) to read as follows:

Sec.  248.5   Permitted risk-mitigating hedging activities.

* * * * *
    (b) Requirements. (1) The risk-mitigating hedging activities of a
banking entity that has significant trading assets and liabilities are
permitted under paragraph (a) of this section only if:
    (i) The banking entity has established and implements, maintains
and enforces an internal compliance program required by subpart D of
this part that is reasonably designed to ensure the banking entity's
compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures regarding
the positions, techniques and strategies that may be used for hedging,
including documentation indicating what positions, contracts or other
holdings a particular trading desk may use in its risk-mitigating
hedging activities, as well as position and aging limits with respect
to such positions, contracts or other holdings;
    (B) Internal controls and ongoing monitoring, management, and
authorization procedures, including relevant escalation procedures; and
    (C) The conduct of analysis and independent testing designed to
ensure that the positions, techniques and strategies that may be used
for hedging may reasonably be expected to reduce or otherwise
significantly mitigate the specific, identifiable risk(s) being hedged;
    (ii) The risk-mitigating hedging activity:
    (A) Is conducted in accordance with the written policies,
procedures, and internal controls required under this section;
    (B) At the inception of the hedging activity, including, without
limitation, any adjustments to the hedging activity, is designed to
reduce or otherwise significantly mitigate one or more specific,
identifiable risks, including market risk, counterparty or other credit
risk, currency or foreign exchange risk, interest rate risk, commodity
price risk, basis risk, or similar risks, arising in connection with
and related to identified positions, contracts, or other holdings of
the banking entity, based upon the facts and circumstances of the
identified underlying and hedging positions, contracts or other
holdings and the risks and liquidity thereof;
    (C) Does not give rise, at the inception of the hedge, to any
significant new or additional risk that is not itself hedged
contemporaneously in accordance with this section;
    (D) Is subject to continuing review, monitoring and management by
the banking entity that:
    (1) Is consistent with the written hedging policies and procedures
required under paragraph (b)(1)(i) of this section;
    (2) Is designed to reduce or otherwise significantly mitigate the
specific, identifiable risks that develop over time from the risk-
mitigating hedging activities undertaken under this section and the
underlying positions, contracts, and other holdings of the banking
entity, based upon the facts and circumstances of the underlying and
hedging positions, contracts and other holdings of the banking entity
and the risks and liquidity thereof; and
    (3) Requires ongoing recalibration of the hedging activity by the
banking entity to ensure that the hedging activity satisfies the
requirements set out in paragraph (b)(1)(ii) of this section and is not
prohibited proprietary trading; and
    (iii) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize
prohibited proprietary trading.
    (2) The risk-mitigating hedging activities of a banking entity that
does not have significant trading assets and liabilities are permitted
under paragraph (a) of this section only if the risk-mitigating hedging
activity:
    (i) At the inception of the hedging activity, including, without
limitation, any adjustments to the hedging activity, is designed to
reduce or otherwise significantly mitigate one or more specific,
identifiable risks, including market risk, counterparty or other credit
risk, currency or foreign exchange risk, interest rate risk, commodity
price risk, basis risk, or similar risks, arising in connection with
and related to identified positions, contracts, or other holdings of
the banking entity, based upon the facts and circumstances of the
identified underlying and hedging positions, contracts or other
holdings and the risks and liquidity thereof; and
    (ii) Is subject, as appropriate, to ongoing recalibration by the
banking entity to ensure that the hedging activity satisfies the
requirements set out in paragraph (b)(2) of this section and is not
prohibited proprietary trading.
    (c) * * *
    (1) A banking entity that has significant trading assets and
liabilities must comply with the requirements of paragraphs (c)(2) and
(3) of this section, unless the requirements of paragraph (c)(4) of
this section are met, with respect to any purchase or sale of financial
instruments made in reliance on this section for risk-mitigating
hedging purposes that is:
* * * * *
    (4) The requirements of paragraphs (c)(2) and (3) of this section
do not apply to the purchase or sale of a financial instrument
described in paragraph (c)(1) of this section if:
    (i) The financial instrument purchased or sold is identified on a
written list of pre-approved financial instruments that are commonly
used by the trading desk for the specific type of hedging activity for
which the financial instrument is being purchased or sold; and
    (ii) At the time the financial instrument is purchased or sold, the
hedging activity (including the purchase or sale of the financial
instrument) complies with written, pre-approved limits for the trading
desk purchasing or selling the financial instrument for hedging
activities undertaken for one or more other trading desks. The limits
shall be appropriate for the:
    (A) Size, types, and risks of the hedging activities commonly
undertaken by the trading desk;
    (B) Financial instruments purchased and sold for hedging activities
by the trading desk; and
    (C) Levels and duration of the risk exposures being hedged.

0
21. Section 248.6 is amended by revising paragraph (e)(3), removing
paragraphs (e)(4) and (6), and redesignating paragraph (e)(5) as
paragraph (e)(4).
    The revision reads as follows:

Sec.  248.6   Other permitted proprietary trading activities.

* * * * *
    (e) * * *
    (3) A purchase or sale by a banking entity is permitted for
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or
sale (including relevant personnel) is not located in the United States
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes
the decision to purchase or sell as principal is not located in the
United States or organized under the laws of the United States or of
any State; and
    (iii) The purchase or sale, including any transaction arising from
risk-mitigating hedging related to the instruments purchased or sold,
is not accounted for as principal directly or on a consolidated basis
by any branch or affiliate that is located in the United

States or organized under the laws of the United States or of any
State.
* * * * *

Subpart C--Covered Funds Activities and Investments

0
22. Section 248.10 is amended by revising paragraphs (c)(7)(ii) and
(c)(8)(i)(A) to read as follows:

Sec.  248.10   Prohibition on Acquiring or Retaining an Ownership
Interest in and Having Certain Relationships with a Covered Fund.

* * * * *
    (c) * * *
    (7) * * *
    (ii) Participates in the profits and losses of the separate account
other than in compliance with applicable requirements regarding bank
owned life insurance.
    (8) * * *
    (i) * * *
    (A) Loans as defined in Sec.  248.2(t) of subpart A;
* * * * *

0
23. Section 248.11 is amended by revising paragraph (c) to read as
follows:

Sec.  248.11   Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.

* * * * *
    (c) Underwriting and market making in ownership interests of a
covered fund. The prohibition contained in Sec.  248.10(a) does not
apply to a banking entity's underwriting activities or market making-
related activities involving a covered fund so long as:
    (1) Those activities are conducted in accordance with the
requirements of Sec.  248.4(a) or (b), respectively; and
    (2) With respect to any banking entity (or any affiliate thereof)
that: Acts as a sponsor, investment adviser or commodity trading
advisor to a particular covered fund or otherwise acquires and retains
an ownership interest in such covered fund in reliance on paragraph (a)
of this section; or acquires and retains an ownership interest in such
covered fund and is either a securitizer, as that term is used in
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is
acquiring and retaining an ownership interest in such covered fund in
compliance with section 15G of that Act (15 U.S.C.78o-11) and the
implementing regulations issued thereunder each as permitted by
paragraph (b) of this section, then in each such case any ownership
interests acquired or retained by the banking entity and its affiliates
in connection with underwriting and market making related activities
for that particular covered fund are included in the calculation of
ownership interests permitted to be held by the banking entity and its
affiliates under the limitations of Sec.  248.12(a)(2)(ii) and (iii)
and (d).

Sec.  248.12   [Amended]

0
24. Section 248.12 is amended by redesignating the second instance of
paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

0
25. Section 248.13 is amended by revising paragraphs (a), (b)(3) and
(4), and (c) to read as follows:

Sec.  248.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The
prohibition contained in Sec.  248.10(a) does not apply with respect to
an ownership interest in a covered fund acquired or retained by a
banking entity that is designed to reduce or otherwise significantly
mitigate the specific, identifiable risks to the banking entity in
connection with:
    (i) A compensation arrangement with an employee of the banking
entity or an affiliate thereof that directly provides investment
advisory, commodity trading advisory or other services to the covered
fund; or
    (ii) A position taken by the banking entity when acting as
intermediary on behalf of a customer that is not itself a banking
entity to facilitate the exposure by the customer to the profits and
losses of the covered fund.
    (2) Requirements. The risk-mitigating hedging activities of a
banking entity are permitted under this paragraph (a) only if:
    (i) The banking entity has established and implements, maintains
and enforces an internal compliance program in accordance with subpart
D of this part that is reasonably designed to ensure the banking
entity's compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures; and
    (B) Internal controls and ongoing monitoring, management, and
authorization procedures, including relevant escalation procedures; and
    (ii) The acquisition or retention of the ownership interest:
    (A) Is made in accordance with the written policies, procedures,
and internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or
otherwise significantly mitigate one or more specific, identifiable
risks arising:
    (1) Out of a transaction conducted solely to accommodate a specific
customer request with respect to the covered fund; or
    (2) In connection with the compensation arrangement with the
employee that directly provides investment advisory, commodity trading
advisory, or other services to the covered fund;
    (C) Does not give rise, at the inception of the hedge, to any
significant new or additional risk that is not itself hedged
contemporaneously in accordance with this section; and
    (D) Is subject to continuing review, monitoring and management by
the banking entity.
    (iii) With respect to risk-mitigating hedging activity conducted
pursuant to paragraph (a)(1)(i), the compensation arrangement relates
solely to the covered fund in which the banking entity or any affiliate
has acquired an ownership interest pursuant to paragraph (a)(1)(i) and
such compensation arrangement provides that any losses incurred by the
banking entity on such ownership interest will be offset by
corresponding decreases in amounts payable under such compensation
arrangement.
    (b) * * *
    (3) An ownership interest in a covered fund is not offered for sale
or sold to a resident of the United States for purposes of paragraph
(b)(1)(iii) of this section only if it is not sold and has not been
sold pursuant to an offering that targets residents of the United
States in which the banking entity or any affiliate of the banking
entity participates. If the banking entity or an affiliate sponsors or
serves, directly or indirectly, as the investment manager, investment
adviser, commodity pool operator or commodity trading advisor to a
covered fund, then the banking entity or affiliate will be deemed for
purposes of this paragraph (b)(3) to participate in any offer or sale
by the covered fund of ownership interests in the covered fund.
    (4) An activity or investment occurs solely outside of the United
States for purposes of paragraph (b)(1)(iv) of this section only if:
    (i) The banking entity acting as sponsor, or engaging as principal
in the acquisition or retention of an ownership interest in the covered
fund, is not itself, and is not controlled directly or indirectly by, a
banking entity that is located in the United States or organized under
the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes
the decision to acquire or retain the ownership interest or act as
sponsor to the covered fund is not located in the United States or
organized under the

laws of the United States or of any State; and
    (iii) The investment or sponsorship, including any transaction
arising from risk-mitigating hedging related to an ownership interest,
is not accounted for as principal directly or indirectly on a
consolidated basis by any branch or affiliate that is located in the
United States or organized under the laws of the United States or of
any State.
* * * * *
    (c) Permitted covered fund interests and activities by a regulated
insurance company. The prohibition contained in Sec.  248.10(a) of this
subpart does not apply to the acquisition or retention by an insurance
company, or an affiliate thereof, of any ownership interest in, or the
sponsorship of, a covered fund only if:
    (1) The insurance company or its affiliate acquires and retains the
ownership interest solely for the general account of the insurance
company or for one or more separate accounts established by the
insurance company;
    (2) The acquisition and retention of the ownership interest is
conducted in compliance with, and subject to, the insurance company
investment laws and regulations of the State or jurisdiction in which
such insurance company is domiciled; and
    (3) The appropriate Federal banking agencies, after consultation
with the Financial Stability Oversight Council and the relevant
insurance commissioners of the States and foreign jurisdictions, as
appropriate, have not jointly determined, after notice and comment,
that a particular law or regulation described in paragraph (c)(2) of
this section is insufficient to protect the safety and soundness of the
banking entity, or the financial stability of the United States.

0
26. Section 248.14 is amended by revising paragraph (a)(2)(ii)(B) to
read as follows:

Sec.  248.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (ii) * * *
    (B) The chief executive officer (or equivalent officer) of the
banking entity certifies in writing annually no later than March 31 to
the Board (with a duty to update the certification if the information
in the certification materially changes) that the banking entity does
not, directly or indirectly, guarantee, assume, or otherwise insure the
obligations or performance of the covered fund or of any covered fund
in which such covered fund invests; and
* * * * *

Subpart D--Compliance Program Requirement; Violations

0
27. Section 248.20 is amended by revising paragraphs (a), (b)
introductory text, (c), (d), (e) introductory text, and (f)(2) and
adding paragraphs (g), (h), and (i) to read as follows:

Sec.  248.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking
entity with limited trading assets and liabilities) shall develop and
provide for the continued administration of a compliance program
reasonably designed to ensure and monitor compliance with the
prohibitions and restrictions on proprietary trading and covered fund
activities and investments set forth in section 13 of the BHC Act and
this part. The terms, scope, and detail of the compliance program shall
be appropriate for the types, size, scope, and complexity of activities
and business structure of the banking entity.
    (b) Banking entities with significant trading assets and
liabilities. With respect to a banking entity with significant trading
assets and liabilities, the compliance program required by paragraph
(a) of this section, at a minimum, shall include:
* * * * *
    (c) CEO attestation. The CEO of a banking entity that has
significant trading assets and liabilities must, based on a review by
the CEO of the banking entity, attest in writing to the Board, each
year no later than March 31, that the banking entity has in place
processes to establish, maintain, enforce, review, test and modify the
compliance program required by paragraph (b) of this section in a
manner reasonably designed to achieve compliance with section 13 of the
BHC Act and this part. In the case of a U.S. branch or agency of a
foreign banking entity, the attestation may be provided for the entire
U.S. operations of the foreign banking entity by the senior management
officer of the U.S. operations of the foreign banking entity who is
located in the United States.
    (d) Reporting requirements under appendix A to this part. (1) A
banking entity engaged in proprietary trading activity permitted under
subpart B shall comply with the reporting requirements described in
appendix A to this part, if:
    (i) The banking entity has significant trading assets and
liabilities; or
    (ii) The Board notifies the banking entity in writing that it must
satisfy the reporting requirements contained in appendix A to this
part.
    (2) Frequency of reporting: Unless the Board notifies the banking
entity in writing that it must report on a different basis, a banking
entity subject to appendix A to this part shall report the information
required by appendix A for each quarter within 30 days of the end of
the quarter.
    (e) Additional documentation for covered funds. A banking entity
with significant trading assets and liabilities shall maintain records
that include:
* * * * *
    (f) * * *
    (2) Banking entities with moderate trading assets and liabilities.
A banking entity with moderate trading assets and liabilities may
satisfy the requirements of this section by including in its existing
compliance policies and procedures appropriate references to the
requirements of section 13 of the BHC Act and this part and adjustments
as appropriate given the activities, size, scope, and complexity of the
banking entity.
    (g) Rebuttable presumption of compliance for banking entities with
limited trading assets and liabilities--(1) Rebuttable presumption.
Except as otherwise provided in this paragraph, a banking entity with
limited trading assets and liabilities shall be presumed to be
compliant with subpart B and subpart C of this part and shall have no
obligation to demonstrate compliance with this part on an ongoing
basis.
    (2) Rebuttal of presumption. If upon examination or audit, the
Board determines that the banking entity has engaged in proprietary
trading or covered fund activities that are otherwise prohibited under
subpart B or subpart C of this part, the Board may require the banking
entity to be treated under this part as if it did not have limited
trading assets and liabilities. The Board's rebuttal of the presumption
in this paragraph must be made in accordance with the notice and
response procedures in paragraph (i) of this section.
    (h) Reservation of authority. Notwithstanding any other provision
of this part, the Board retains its authority to require a banking
entity without significant trading assets and liabilities to apply any
requirements of this part that would otherwise apply if the banking
entity had significant or moderate trading assets and liabilities if
the Board determines that the size or complexity of the banking
entity's trading or investment activities, or the risk of evasion of
subpart B or subpart C of this part, does not warrant a presumption of
compliance under paragraph (g) of this section or treatment

as a banking entity with moderate trading assets and liabilities, as
applicable. The Board's exercise of this reservation of authority must
be made in accordance with the notice and response procedures in
paragraph (i) of this section.
    (i) Notice and response procedures--(1) Notice. The Board will
notify the banking entity in writing of any determination requiring
notice under this part and will provide an explanation of the
determination.
    (2) Response. The banking entity may respond to any or all items in
the notice described in paragraph (i)(1) of this section. The response
should include any matters that the banking entity would have the Board
consider in deciding whether to make the determination. The response
must be in writing and delivered to the designated Board official
within 30 days after the date on which the banking entity received the
notice. The Board may shorten the time period when, in the opinion of
the Board, the activities or condition of the banking entity so
requires, provided that the banking entity is informed of the time
period at the time of notice, or with the consent of the banking
entity. In its discretion, the Board may extend the time period for
good cause.
    (3) Waiver. Failure to respond within 30 days or such other time
period as may be specified by the Board shall constitute a waiver of
any objections to the Board's determination.
    (4) Decision. The Board will notify the banking entity of the
decision in writing. The notice will include an explanation of the
decision.

0
28. Revise appendix A to part 248 to read as follows:

Appendix A to Part 248--Reporting and Recordkeeping Requirements for
Covered Trading Activities

I. Purpose

    a. This appendix sets forth reporting and recordkeeping
requirements that certain banking entities must satisfy in
connection with the restrictions on proprietary trading set forth in
subpart B (``proprietary trading restrictions''). Pursuant to Sec.
248.20(d), this appendix applies to a banking entity that, together
with its affiliates and subsidiaries, has significant trading assets
and liabilities. These entities are required to (i) furnish periodic
reports to the Board regarding a variety of quantitative
measurements of their covered trading activities, which vary
depending on the scope and size of covered trading activities, and
(ii) create and maintain records documenting the preparation and
content of these reports. The requirements of this appendix must be
incorporated into the banking entity's internal compliance program
under Sec.  248.20.
    b. The purpose of this appendix is to assist banking entities
and the Board in:
    (1) Better understanding and evaluating the scope, type, and
profile of the banking entity's covered trading activities;
    (2) Monitoring the banking entity's covered trading activities;
    (3) Identifying covered trading activities that warrant further
review or examination by the banking entity to verify compliance
with the proprietary trading restrictions;
    (4) Evaluating whether the covered trading activities of trading
desks engaged in market making-related activities subject to Sec.
248.4(b) are consistent with the requirements governing permitted
market making-related activities;
    (5) Evaluating whether the covered trading activities of trading
desks that are engaged in permitted trading activity subject to
Sec.  248.4, 248.5, or 248.6(a)-(b) (i.e., underwriting and market
making-related activity, risk-mitigating hedging, or trading in
certain government obligations) are consistent with the requirement
that such activity not result, directly or indirectly, in a material
exposure to high-risk assets or high-risk trading strategies;
    (6) Identifying the profile of particular covered trading
activities of the banking entity, and the individual trading desks
of the banking entity, to help establish the appropriate frequency
and scope of examination by Board of such activities; and
    (7) Assessing and addressing the risks associated with the
banking entity's covered trading activities.
    c. Information that must be furnished pursuant to this appendix
is not intended to serve as a dispositive tool for the
identification of permissible or impermissible activities.
    d. In addition to the quantitative measurements required in this
appendix, a banking entity may need to develop and implement other
quantitative measurements in order to effectively monitor its
covered trading activities for compliance with section 13 of the BHC
Act and this part and to have an effective compliance program, as
required by Sec.  248.20. The effectiveness of particular
quantitative measurements may differ based on the profile of the
banking entity's businesses in general and, more specifically, of
the particular trading desk, including types of instruments traded,
trading activities and strategies, and history and experience (e.g.,
whether the trading desk is an established, successful market maker
or a new entrant to a competitive market). In all cases, banking
entities must ensure that they have robust measures in place to
identify and monitor the risks taken in their trading activities, to
ensure that the activities are within risk tolerances established by
the banking entity, and to monitor and examine for compliance with
the proprietary trading restrictions in this part.
    e. On an ongoing basis, banking entities must carefully monitor,
review, and evaluate all furnished quantitative measurements, as
well as any others that they choose to utilize in order to maintain
compliance with section 13 of the BHC Act and this part. All
measurement results that indicate a heightened risk of impermissible
proprietary trading, including with respect to otherwise-permitted
activities under Sec.  248.4 through 248.6(a)-(b), or that result in
a material exposure to high-risk assets or high-risk trading
strategies, must be escalated within the banking entity for review,
further analysis, explanation to Board, and remediation, where
appropriate. The quantitative measurements discussed in this
appendix should be helpful to banking entities in identifying and
managing the risks related to their covered trading activities.

II. Definitions

    The terms used in this appendix have the same meanings as set
forth in Sec.  248.2 and Sec.  248.3. In addition, for purposes of
this appendix, the following definitions apply:
    Applicability identifies the trading desks for which a banking
entity is required to calculate and report a particular quantitative
measurement based on the type of covered trading activity conducted
by the trading desk.
    Calculation period means the period of time for which a
particular quantitative measurement must be calculated.
    Comprehensive profit and loss means the net profit or loss of a
trading desk's material sources of trading revenue over a specific
period of time, including, for example, any increase or decrease in
the market value of a trading desk's holdings, dividend income, and
interest income and expense.
    Covered trading activity means trading conducted by a trading
desk under Sec.  248.4, Sec.  248.5, Sec.  248.6(a), or Sec.
248.6(b). A banking entity may include in its covered trading
activity trading conducted under Sec.  248.3(d), Sec.  248.6(c),
Sec.  248.6(d) or Sec.  248.6(e).
    Measurement frequency means the frequency with which a
particular quantitative metric must be calculated and recorded.
    Trading day means a calendar day on which a trading desk is open
for trading.

III. Reporting and Recordkeeping

a. Scope of Required Reporting

    1. Quantitative measurements. Each banking entity made subject
to this appendix by Sec.  248.20 must furnish the following
quantitative measurements, as applicable, for each trading desk of
the banking entity engaged in covered trading activities and
calculate these quantitative measurements in accordance with this
appendix:
    i. Internal Limits and Usage;
    ii. Value-at-Risk;
    iii. Comprehensive Profit and Loss Attribution;
    iv. Positions; and
    v. Transaction Volumes.
    2. Trading desk information. Each banking entity made subject to
this appendix by Sec.  248.20 must provide certain descriptive
information, as further described in this appendix, regarding each
trading desk engaged in covered trading activities.
    3. Quantitative measurements identifying information. Each
banking entity made subject to this appendix by Sec.  248.20 must
provide certain identifying and descriptive information, as further
described in this appendix, regarding its quantitative measurements.

    4. Narrative statement. Each banking entity made subject to this
appendix by Sec.  248.20 may provide an optional narrative
statement, as further described in this appendix.
    5. File identifying information. Each banking entity made
subject to this appendix by Sec.  248.20 must provide file
identifying information in each submission to the Board pursuant to
this appendix, including the name of the banking entity, the RSSD ID
assigned to the top-tier banking entity by the Board, and
identification of the reporting period and creation date and time.

b. Trading Desk Information

    1. Each banking entity must provide descriptive information
regarding each trading desk engaged in covered trading activities,
including:
    i. Name of the trading desk used internally by the banking
entity and a unique identification label for the trading desk;
    ii. Identification of each type of covered trading activity in
which the trading desk is engaged;
    iii. Brief description of the general strategy of the trading
desk;
    v. A list identifying each Agency receiving the submission of
the trading desk;
    2. Indication of whether each calendar date is a trading day or
not a trading day for the trading desk; and
    3. Currency reported and daily currency conversion rate.

c. Quantitative Measurements Identifying Information

    Each banking entity must provide the following information
regarding the quantitative measurements:
    1. An Internal Limits Information Schedule that provides
identifying and descriptive information for each limit reported
pursuant to the Internal Limits and Usage quantitative measurement,
including the name of the limit, a unique identification label for
the limit, a description of the limit, the unit of measurement for
the limit, the type of limit, and identification of the
corresponding risk factor attribution in the particular case that
the limit type is a limit on a risk factor sensitivity and profit
and loss attribution to the same risk factor is reported; and
    2. A Risk Factor Attribution Information Schedule that provides
identifying and descriptive information for each risk factor
attribution reported pursuant to the Comprehensive Profit and Loss
Attribution quantitative measurement, including the name of the risk
factor or other factor, a unique identification label for the risk
factor or other factor, a description of the risk factor or other
factor, and the risk factor or other factor's change unit.

d. Narrative Statement

    Each banking entity made subject to this appendix by Sec.
248.20 may submit in a separate electronic document a Narrative
Statement to the Board with any information the banking entity views
as relevant for assessing the information reported. The Narrative
Statement may include further description of or changes to
calculation methods, identification of material events, description
of and reasons for changes in the banking entity's trading desk
structure or trading desk strategies, and when any such changes
occurred.

e. Frequency and Method of Required Calculation and Reporting

    A banking entity must calculate any applicable quantitative
measurement for each trading day. A banking entity must report the
Trading Desk Information, the Quantitative Measurements Identifying
Information, and each applicable quantitative measurement
electronically to the Board on the reporting schedule established in
Sec.  248.20 unless otherwise requested by the Board. A banking
entity must report the Trading Desk Information, the Quantitative
Measurements Identifying Information, and each applicable
quantitative measurement to the Board in accordance with the XML
Schema specified and published on the Board's website.

f. Recordkeeping

    A banking entity must, for any quantitative measurement
furnished to the Board pursuant to this appendix and Sec.
248.20(d), create and maintain records documenting the preparation
and content of these reports, as well as such information as is
necessary to permit the Board to verify the accuracy of such
reports, for a period of five years from the end of the calendar
year for which the measurement was taken. A banking entity must
retain the Narrative Statement, the Trading Desk Information, and
the Quantitative Measurements Identifying Information for a period
of five years from the end of the calendar year for which the
information was reported to the Board.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Internal Limits and Usage

    i. Description: For purposes of this appendix, Internal Limits
are the constraints that define the amount of risk and the positions
that a trading desk is permitted to take at a point in time, as
defined by the banking entity for a specific trading desk. Usage
represents the value of the trading desk's risk or positions that
are accounted for by the current activity of the desk. Internal
limits and their usage are key compliance and risk management tools
used to control and monitor risk taking and include, but are not
limited to, the limits set out in Sec. Sec.  248.4 and 248.5. A
trading desk's risk limits, commonly including a limit on ``Value-
at-Risk,'' are useful in the broader context of the trading desk's
overall activities, particularly for the market making activities
under Sec.  248.4(b) and hedging activity under Sec.  248.5.
Accordingly, the limits required under Sec. Sec.
248.4(b)(2)(iii)(C) and 248.5(b)(1)(i)(A) must meet the applicable
requirements under Sec. Sec.  248.4(b)(2)(iii)(C) and
248.5(b)(1)(i)(A) and also must include appropriate metrics for the
trading desk limits including, at a minimum, ``Value-at-Risk''
except to the extent the ``Value-at-Risk'' metric is demonstrably
ineffective for measuring and monitoring the risks of a trading desk
based on the types of positions traded by, and risk exposures of,
that desk.
    A. A banking entity must provide the following information for
each limit reported pursuant to this quantitative measurement: The
unique identification label for the limit reported in the Internal
Limits Information Schedule, the limit size (distinguishing between
an upper and a lower limit), and the value of usage of the limit.
    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks engaged in covered trading
activities.

2. Value-at-Risk

    i. Description: For purposes of this appendix, Value-at-Risk
(``VaR'') is the measurement of the risk of future financial loss in
the value of a trading desk's aggregated positions at the ninety-
nine percent confidence level over a one-day period, based on
current market conditions.
    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks engaged in covered trading
activities.

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution

    i. Description: For purposes of this appendix, Comprehensive
Profit and Loss Attribution is an analysis that attributes the daily
fluctuation in the value of a trading desk's positions to various
sources. First, the daily profit and loss of the aggregated
positions is divided into two categories: (i) Profit and loss
attributable to a trading desk's existing positions that were also
positions held by the trading desk as of the end of the prior day
(``existing positions''); and (ii) profit and loss attributable to
new positions resulting from the current day's trading activity
(``new positions'').
    A. The comprehensive profit and loss associated with existing
positions must reflect changes in the value of these positions on
the applicable day. The comprehensive profit and loss from existing
positions must be further attributed, as applicable, to (i) changes
in the specific risk factors and other factors that are monitored
and managed as part of the trading desk's overall risk management
policies and procedures; and (ii) any other applicable elements,
such as cash flows, carry, changes in reserves, and the correction,
cancellation, or exercise of a trade.
    B. For the attribution of comprehensive profit and loss from
existing positions to specific risk factors and other factors, a
banking entity must provide the following information for the
factors that explain the preponderance of the profit or loss changes
due to risk factor changes: The unique identification label for the
risk factor or other factor listed in the Risk Factor Attribution
Information Schedule, and the profit or loss due to the risk factor
or other factor change.
    C. The comprehensive profit and loss attributed to new positions
must reflect commissions and fee income or expense and market gains
or losses associated with transactions executed on the applicable
day. New positions include purchases and sales of financial
instruments and other assets/liabilities and negotiated amendments
to existing positions. The comprehensive profit and loss from new
positions may be reported in the aggregate and does not need to be
further attributed to specific sources.

    D. The portion of comprehensive profit and loss from existing
positions that is not attributed to changes in specific risk factors
and other factors must be allocated to a residual category.
Significant unexplained profit and loss must be escalated for
further investigation and analysis.
    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks engaged in covered trading
activities.
    c. Positions and Transaction Volumes Measurements

1. Positions

    i. Description: For purposes of this appendix, Positions is the
value of securities and derivatives positions managed by the trading
desk. For purposes of the Positions quantitative measurement, do not
include in the Positions calculation for ``securities'' those
securities that are also ``derivatives,'' as those terms are defined
under subpart A; instead, report those securities that are also
derivatives as ``derivatives.'' \1\ A banking entity must separately
report the trading desk's market value of long securities positions,
short securities positions, derivatives receivables, and derivatives
payables.
---------------------------------------------------------------------------

    \1\ See Sec.  248.2(h), (aa). For example, under this part, a
security-based swap is both a ``security'' and a ``derivative.'' For
purposes of the Positions quantitative measurement, security-based
swaps are reported as derivatives rather than securities.
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  248.4(a)
or Sec.  248.4(b) to conduct underwriting activity or market-making-
related activity, respectively.

2. Transaction Volumes

    i. Description: For purposes of this appendix, Transaction
Volumes measures three exclusive categories of covered trading
activity conducted by a trading desk. A banking entity is required
to report the value and number of security and derivative
transactions conducted by the trading desk with: (i) Customers,
excluding internal transactions; (ii) non-customers, excluding
internal transactions; and (iii) trading desks and other
organizational units where the transaction is booked into either the
same banking entity or an affiliated banking entity. For securities,
value means gross market value. For derivatives, value means gross
notional value. For purposes of calculating the Transaction Volumes
quantitative measurement, do not include in the Transaction Volumes
calculation for ``securities'' those securities that are also
``derivatives,'' as those terms are defined under subpart A;
instead, report those securities that are also derivatives as
``derivatives.'' \2\ Further, for purposes of the Transaction
Volumes quantitative measurement, a customer of a trading desk that
relies on Sec.  248.4(a) to conduct underwriting activity is a
market participant identified in Sec.  248.4(a)(7), and a customer
of a trading desk that relies on Sec.  248.4(b) to conduct market
making-related activity is a market participant identified in Sec.
248.4(b)(3).
---------------------------------------------------------------------------

    \2\ See Sec.  248.2(h), (aa).
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  248.4(a)
or Sec.  248.4(b) to conduct underwriting activity or market-making-
related activity, respectively.

Appendix B to Part 248 [Removed]

0
29. Appendix B to part 248 is removed.

0
30. Effective January 1, 2020, until December 31, 2020, appendix Z to
part 248 is added to read as follows:

Appendix Z to Part 248--Proprietary Trading and Certain Interests in
and Relationships With Covered Funds (Alternative Compliance)

    Note: The content of this appendix reproduces the regulation
implementing Section 13 of the Bank Holding Company Act as of
November 13, 2019.

Subpart A--Authority and Definitions

Sec.  248.1   Authority, purpose, scope, and relationship to other
authorities.

    (a) Authority. This part (Regulation VV) is issued by the Board
under section 13 of the Bank Holding Company Act of 1956, as amended
(12 U.S.C. 1851), as well as under the Federal Reserve Act, as amended
(12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance
Act, as amended (12 U.S.C. 1818); the Bank Holding Company Act of 1956,
as amended (12 U.S.C. 1841 et seq.); and the International Banking Act
of 1978, as amended (12 U.S.C. 3101 et seq.).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes
prohibitions and restrictions on proprietary trading and on investments
in or relationships with covered funds by certain banking entities,
including state member banks, bank holding companies, savings and loan
holding companies, other companies that control an insured depository
institution, foreign banking organizations, and certain subsidiaries
thereof. This part implements section 13 of the Bank Holding Company
Act by defining terms used in the statute and related terms,
establishing prohibitions and restrictions on proprietary trading and
on investments in or relationships with covered funds, and explaining
the statute's requirements.
    (c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to banking entities for which the Board is
authorized to issue regulations under section 13(b)(2) of the Bank
Holding Company Act (12 U.S.C. 1851(b)(2)) and take actions under
section 13(e) of that Act (12 U.S.C. 1851(e)). These include any state
bank that is a member of the Federal Reserve System, any company that
controls an insured depository institution (including a bank holding
company and savings and loan holding company), any company that is
treated as a bank holding company for purposes of section 8 of the
International Banking Act (12 U.S.C. 3106), and any subsidiary of the
foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC
is the primary financial regulatory agency (as defined in section 2(12)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (12 U.S.C. 5301(12)), but do not include such entities to the
extent they are not within the definition of banking entity in Sec.
248.2(c).
    (d) Relationship to other authorities. Except as otherwise provided
under section 13 of the BHC Act or this part, and notwithstanding any
other provision of law, the prohibitions and restrictions under section
13 of BHC Act and this part shall apply to the activities of a banking
entity, even if such activities are authorized for the banking entity
under other applicable provisions of law.
    (e) Preservation of authority. Nothing in this part limits in any
way the authority of the Board to impose on a banking entity identified
in paragraph (c) of this section additional requirements or
restrictions with respect to any activity, investment, or relationship
covered under section 13 of the Bank Holding Company Act or this part,
or additional penalties for violation of this part provided under any
other applicable provision of law.

Sec.  248.2   Definitions.

    Unless otherwise specified, for purposes of this part:
    (a) Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
    (b) Bank holding company has the same meaning as in section 2 of
the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
    (c) Banking entity. (1) Except as provided in paragraph (c)(2) of
this section, banking entity means:
    (i) Any insured depository institution;
    (ii) Any company that controls an insured depository institution;
    (iii) Any company that is treated as a bank holding company for
purposes of section 8 of the International Banking Act of 1978 (12
U.S.C. 3106); and
    (iv) Any affiliate or subsidiary of any entity described in
paragraphs (c)(1)(i), (ii), or (iii) of this section.
    (2) Banking entity does not include:

    (i) A covered fund that is not itself a banking entity under
paragraphs (c)(1)(i), (ii), or (iii) of this section;
    (ii) A portfolio company held under the authority contained in
section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H),
(I)), or any portfolio concern, as defined under 13 CFR 107.50, that is
controlled by a small business investment company, as defined in
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C.
662), so long as the portfolio company or portfolio concern is not
itself a banking entity under paragraphs (c)(1)(i), (ii), or (iii) of
this section; or
    (iii) The FDIC acting in its corporate capacity or as conservator
or receiver under the Federal Deposit Insurance Act or Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    (d) Board means the Board of Governors of the Federal Reserve
System.
    (e) CFTC means the Commodity Futures Trading Commission.
    (f) Dealer has the same meaning as in section 3(a)(5) of the
Exchange Act (15 U.S.C. 78c(a)(5)).
    (g) Depository institution has the same meaning as in section 3(c)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (h) Derivative. (1) Except as provided in paragraph (h)(2) of this
section, derivative means:
    (i) Any swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded
commodity, for deferred shipment or delivery that is intended to be
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or
foreign exchange swap (as that term is defined in section 1a(25) of the
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other
than foreign currency described in section 2(c)(2)(D)(i) of the
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or
transaction that the CFTC and SEC have further defined by joint
regulation, interpretation, guidance, or other action as not within the
definition of swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b)
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)),
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (i) Employee includes a member of the immediate family of the
employee.
    (j) Exchange Act means the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).
    (k) Excluded commodity has the same meaning as in section 1a(19) of
the Commodity Exchange Act (7 U.S.C. 1a(19)).
    (l) FDIC means the Federal Deposit Insurance Corporation.
    (m) Federal banking agencies means the Board, the Office of the
Comptroller of the Currency, and the FDIC.
    (n) Foreign banking organization has the same meaning as in section
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)), but does not
include a foreign bank, as defined in section 1(b)(7) of the
International Banking Act of 1978 (12 U.S.C. 3101(7)), that is
organized under the laws of the Commonwealth of Puerto Rico, Guam,
American Samoa, the United States Virgin Islands, or the Commonwealth
of the Northern Mariana Islands.
    (o) Foreign insurance regulator means the insurance commissioner,
or a similar official or agency, of any country other than the United
States that is engaged in the supervision of insurance companies under
foreign insurance law.
    (p) General account means all of the assets of an insurance company
except those allocated to one or more separate accounts.
    (q) Insurance company means a company that is organized as an
insurance company, primarily and predominantly engaged in writing
insurance or reinsuring risks underwritten by insurance companies,
subject to supervision as such by a state insurance regulator or a
foreign insurance regulator, and not operated for the purpose of
evading the provisions of section 13 of the BHC Act (12 U.S.C. 1851).
    (r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
    (1) An insured depository institution that is described in section
2(c)(2)(D) of the BHC Act (12 U.S.C. 1841(c)(2)(D)); or
    (2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
    (s) Loan means any loan, lease, extension of credit, or secured or
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5301(12)).
    (u) Purchase includes any contract to buy, purchase, or otherwise
acquire. For security futures products, purchase includes any contract,
agreement, or transaction for future delivery. With respect to a
commodity future, purchase includes any contract, agreement, or
transaction for future delivery. With respect to a derivative, purchase
includes the execution, termination (prior to its scheduled maturity
date), assignment, exchange, or similar transfer or conveyance of, or
extinguishing of rights or obligations under, a derivative, as the
context may require.
    (v) Qualifying foreign banking organization means a foreign banking
organization that qualifies as such under section 211.23(a), (c) or (e)
of the Board's Regulation K (12 CFR 211.23(a), (c), or (e)).
    (w) SEC means the Securities and Exchange Commission.
    (x) Sale and sell each include any contract to sell or otherwise
dispose of. For security futures products, such terms include any
contract, agreement, or transaction for future delivery. With respect
to a commodity future, such terms include any contract, agreement, or
transaction for future delivery. With respect to a derivative, such
terms include the execution, termination (prior to its scheduled
maturity date), assignment, exchange, or similar transfer or conveyance
of, or extinguishing of rights or obligations under, a derivative, as
the context may require.
    (y) Security has the meaning specified in section 3(a)(10) of the
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) Security-based swap dealer has the same meaning as in section
3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)).
    (aa) Security future has the meaning specified in section 3(a)(55)
of the Exchange Act (15 U.S.C. 78c(a)(55)).

    (bb) Separate account means an account established and maintained
by an insurance company in connection with one or more insurance
contracts to hold assets that are legally segregated from the insurance
company's other assets, under which income, gains, and losses, whether
or not realized, from assets allocated to such account, are, in
accordance with the applicable contract, credited to or charged against
such account without regard to other income, gains, or losses of the
insurance company.
    (cc) State means any State, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, American Samoa, the United States
Virgin Islands, and the Commonwealth of the Northern Mariana Islands.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) State insurance regulator means the insurance commissioner, or
a similar official or agency, of a State that is engaged in the
supervision of insurance companies under State insurance law.
    (ff) Swap dealer has the same meaning as in section 1(a)(49) of the
Commodity Exchange Act (7 U.S.C. 1a(49)).

Subpart B--Proprietary Trading

Sec.  248.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a
banking entity may not engage in proprietary trading. Proprietary
trading means engaging as principal for the trading account of the
banking entity in any purchase or sale of one or more financial
instruments.
    (b) Definition of trading account. (1) Trading account means any
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally
for the purpose of:
    (A) Short-term resale;
    (B) Benefitting from actual or expected short-term price movements;
    (C) Realizing short-term arbitrage profits; or
    (D) Hedging one or more positions resulting from the purchases or
sales of financial instruments described in paragraphs (b)(1)(i)(A),
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are
both market risk capital rule covered positions and trading positions
(or hedges of other market risk capital rule covered positions), if the
banking entity, or any affiliate of the banking entity, is an insured
depository institution, bank holding company, or savings and loan
holding company, and calculates risk-based capital ratios under the
market risk capital rule; or
    (iii) Purchase or sell one or more financial instruments for any
purpose, if the banking entity:
    (A) Is licensed or registered, or is required to be licensed or
registered, to engage in the business of a dealer, swap dealer, or
security-based swap dealer, to the extent the instrument is purchased
or sold in connection with the activities that require the banking
entity to be licensed or registered as such; or
    (B) Is engaged in the business of a dealer, swap dealer, or
security-based swap dealer outside of the United States, to the extent
the instrument is purchased or sold in connection with the activities
of such business.
    (2) Rebuttable presumption for certain purchases and sales. The
purchase (or sale) of a financial instrument by a banking entity shall
be presumed to be for the trading account of the banking entity under
paragraph (b)(1)(i) of this section if the banking entity holds the
financial instrument for fewer than sixty days or substantially
transfers the risk of the financial instrument within sixty days of the
purchase (or sale), unless the banking entity can demonstrate, based on
all relevant facts and circumstances, that the banking entity did not
purchase (or sell) the financial instrument principally for any of the
purposes described in paragraph (b)(1)(i) of this section.
    (c) Financial instrument. (1) Financial instrument means:
    (i) A security, including an option on a security;
    (ii) A derivative, including an option on a derivative; or
    (iii) A contract of sale of a commodity for future delivery, or
option on a contract of sale of a commodity for future delivery.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading. Proprietary trading does not include:
    (1) Any purchase or sale of one or more financial instruments by a
banking entity that arises under a repurchase or reverse repurchase
agreement pursuant to which the banking entity has simultaneously
agreed, in writing, to both purchase and sell a stated asset, at stated
prices, and on stated dates or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a
banking entity that arises under a transaction in which the banking
entity lends or borrows a security temporarily to or from another party
pursuant to a written securities lending agreement under which the
lender retains the economic interests of an owner of such security, and
has the right to terminate the transaction and to recall the loaned
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the
purpose of liquidity management in accordance with a documented
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular
securities to be used for liquidity management purposes, the amount,
types, and risks of these securities that are consistent with liquidity
management, and the liquidity circumstances in which the particular
securities may or must be used;
    (ii) Requires that any purchase or sale of securities contemplated
and authorized by the plan be principally for the purpose of managing
the liquidity of the banking entity, and not for the purpose of short-
term resale, benefitting from actual or expected short-term price
movements, realizing short-term arbitrage profits, or hedging a
position taken for such short-term purposes;
    (iii) Requires that any securities purchased or sold for liquidity
management purposes be highly liquid and limited to securities the
market, credit, and other risks of which the banking entity does not
reasonably expect to give rise to appreciable profits or losses as a
result of short-term price movements;
    (iv) Limits any securities purchased or sold for liquidity
management purposes, together with any other instruments purchased or
sold for such purposes, to an amount that is consistent with the
banking entity's near-term funding needs, including deviations from
normal operations of the banking entity or any affiliate thereof, as
estimated and documented pursuant to methods specified in the plan;
    (v) Includes written policies and procedures, internal controls,
analysis, and independent testing to ensure that the purchase and sale
of securities that are not permitted under Sec. Sec.  248.6(a) or (b)
of this subpart are for the purpose of liquidity management and in
accordance with the liquidity

management plan described in paragraph (d)(3) of this section; and
    (vi) Is consistent with The Board's supervisory requirements,
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a
banking entity that is a derivatives clearing organization or a
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a
member of a clearing agency, a member of a derivatives clearing
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery
obligation of the banking entity or its customers, including to prevent
or close out a failure to deliver, in connection with delivery,
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking
entity in connection with a judicial, administrative, self-regulatory
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a
banking entity that is acting solely as agent, broker, or custodian;
    (8) Any purchase or sale of one or more financial instruments by a
banking entity through a deferred compensation, stock-bonus, profit-
sharing, or pension plan of the banking entity that is established and
administered in accordance with the law of the United States or a
foreign sovereign, if the purchase or sale is made directly or
indirectly by the banking entity as trustee for the benefit of persons
who are or were employees of the banking entity; or
    (9) Any purchase or sale of one or more financial instruments by a
banking entity in the ordinary course of collecting a debt previously
contracted in good faith, provided that the banking entity divests the
financial instrument as soon as practicable, and in no event may the
banking entity retain such instrument for longer than such period
permitted by the Board.
    (e) Definition of other terms related to proprietary trading. For
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is
unaware of the identity of the other party(ies) to the purchase or
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does
not include any security;
    (4) Contract of sale of a commodity for future delivery means a
contract of sale (as that term is defined in section 1a(13) of the
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that
term is defined in section 1a(27) of the Commodity Exchange Act (7
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC
regulation, is exempt from the registration requirements under section
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to
CFTC regulation, is permitted to clear for a foreign board of trade
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any
designated contract market, swap execution facility, or foreign board
of trade registered with the CFTC, or, for purposes of securities or
security-based swaps, an exchange, as defined under section 3(a)(1) of
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap
execution facility, as defined under section 3(a)(77) of the Exchange
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives
clearing organization, a clearing agency, or a designated financial
market utility, any purchase or sale necessary to correct trading
errors made by or on behalf of a customer provided that such purchase
or sale is conducted in accordance with, for transactions cleared on a
derivatives clearing organization, the Commodity Exchange Act, CFTC
regulations, and the rules or procedures of the derivatives clearing
organization, or, for transactions cleared on a clearing agency, the
rules or procedures of the clearing agency, or, for transactions
cleared on a designated financial market utility that is neither a
derivatives clearing organization nor a clearing agency, the rules or
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the
management of a default or threatened imminent default of a customer
provided that such purchase or sale is conducted in accordance with,
for transactions cleared on a derivatives clearing organization, the
Commodity Exchange Act, CFTC regulations, and the rules or procedures
of the derivatives clearing organization, or, for transactions cleared
on a clearing agency, the rules or procedures of the clearing agency,
or, for transactions cleared on a designated financial market utility
that is neither a derivatives clearing organization nor a clearing
agency, the rules or procedures of the designated financial market
utility;
    (iii) Any purchase or sale in connection with and related to the
management of a default or threatened imminent default of a member of a
clearing agency, a member of a derivatives clearing organization, or a
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the
management of the default or threatened default of a clearing agency, a
derivatives clearing organization, or a designated financial market
utility; and
    (v) Any purchase or sale that is required by the rules or
procedures of a clearing agency, a derivatives clearing organization,
or a designated financial market utility to mitigate the risk to the
clearing agency, derivatives clearing organization, or designated
financial market utility that would result from the clearing by a
member of security-based swaps that reference the member or an
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).
    (10) Market risk capital rule covered position and trading position
means a financial instrument that is both a covered position and a
trading position, as those terms are respectively defined:
    (i) In the case of a banking entity that is a bank holding company,
savings and loan holding company, or insured depository institution,
under the market risk capital rule that is applicable to the banking
entity; and
    (ii) In the case of a banking entity that is affiliated with a bank
holding company or savings and loan holding company, other than a
banking entity to which a market risk capital rule is applicable, under
the market risk capital rule that is applicable to the affiliated

bank holding company or savings and loan holding company.
    (11) Market risk capital rule means the market risk capital rule
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct
obligation of or issued by, or an obligation guaranteed as to principal
or interest by, a State or any political subdivision thereof, or any
agency or instrumentality of a State or any political subdivision
thereof, or any municipal corporate instrumentality of one or more
States or political subdivisions thereof.
    (13) Trading desk means the smallest discrete unit of organization
of a banking entity that purchases or sells financial instruments for
the trading account of the banking entity or an affiliate thereof.

Sec.  248.4   Permitted underwriting and market making-related
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities.
The prohibition contained in Sec.  248.3(a) does not apply to a banking
entity's underwriting activities conducted in accordance with this
paragraph (a).
    (2) Requirements. The underwriting activities of a banking entity
are permitted under paragraph (a)(1) of this section only if:
    (i) The banking entity is acting as an underwriter for a
distribution of securities and the trading desk's underwriting position
is related to such distribution;
    (ii) The amount and type of the securities in the trading desk's
underwriting position are designed not to exceed the reasonably
expected near term demands of clients, customers, or counterparties,
and reasonable efforts are made to sell or otherwise reduce the
underwriting position within a reasonable period, taking into account
the liquidity, maturity, and depth of the market for the relevant type
of security;
    (iii) The banking entity has established and implements, maintains,
and enforces an internal compliance program required by subpart D of
this part that is reasonably designed to ensure the banking entity's
compliance with the requirements of paragraph (a) of this section,
including reasonably designed written policies and procedures, internal
controls, analysis and independent testing identifying and addressing:
    (A) The products, instruments or exposures each trading desk may
purchase, sell, or manage as part of its underwriting activities;
    (B) Limits for each trading desk, based on the nature and amount of
the trading desk's underwriting activities, including the reasonably
expected near term demands of clients, customers, or counterparties, on
the:
    (1) Amount, types, and risk of its underwriting position;