FR4201_20191001_omb

Supporting Statement for the
Market Risk Capital Rule
(FR 4201; OMB No. 7100-0314)
Summary
The Board of Governors of the Federal Reserve System (Board), under authority
delegated by the Office of Management and Budget (OMB), has extended for three years, with
revision, the collections of information associated with the Market Risk Capital Rule1 (FR 4201;
OMB No. 7100-0314). The market risk rule, which requires banking organizations to hold
capital to cover their exposure to market risk, is an important component of the Board’s
regulatory capital framework (12 CFR 217; Regulation Q). The respondents for this collection of
information are bank holding companies (BHCs), savings and loan holding companies (SLHCs),
intermediate holding companies, and state member banks that meet certain risk thresholds
described below. There are no required reporting forms associated with this information
collection (the FR 4201 designation is for internal purposes only).
The Board has revised the FR 4201 to include certain prior approvals that respondent
banking organizations must obtain under the market risk rule. The relevant reporting,
recordkeeping, and disclosure requirements are found in 12 CFR 217.203 through 217.210 and
217.212 (all references to sections hereinafter are from 12 CFR 217, subpart F). The current
estimated total annual burden for the FR 4201 is 70,704 hours. The adopted revisions resulted in
a decrease of 57,556 hours.
Background and Justification
The market risk rule was adopted in 1996 as an integral part of the Board’s revised
regulatory capital framework.2 The rule includes collections of information that permit the Board
to monitor the market risk profile of Board-regulated banking organizations that have significant
market risk and evaluate the impact of the market risk rule on those banking organizations3 and
the industry as a whole. The collections of information provide current statistical data identifying
market risk areas on which to focus onsite and offsite examinations. They also allow the Board
to assess the levels and components of each reporting institution’s risk-based capital
requirements for market risk and the adequacy of the institution’s capital under the market risk
rule. Finally, these collections of information ensure capital adequacy of banking organizations
according to their level of market risk and assist the Board in implementing and validating the
market risk framework.

The title of this collection was previously “Risk-Based Capital Guidelines: Market Risk”. The Board changed the
title to accurately reflect that this information collection is now a rule.
2
See 61 FR 47358 (September 6, 1996). The rule was subsequently amended in 2013 as part of the Board’s revised
regulatory capital requirements. See 78 FR 62018 (October 11, 2013). On December 18, 2013, the Board adopted
revisions, including related to timely quantitative and qualitative disclosures, to the market risk rule to align it with
other elements of the revised capital framework. See 78 FR 76521 (December 18, 2013).
3
For purposes of this supporting statement, banking organizations include bank holding companies, intermediate
holding companies, savings and loan holding companies, and state member banks that are subject to the market risk
rule.
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Description of Information Collection
The market risk rule applies to any banking organization with aggregate trading assets
and trading liabilities equal to (1) 10 percent or more of quarter-end total assets or (2) $1 billion
or more.4 The Board may exclude a banking organization that meets these thresholds if the Board
determines that the exclusion is appropriate based on the level of market risk of the banking
organization and is consistent with safe and sound banking practices.5 The Board may further
apply the market risk rule to any other banking organization if the Board deems it necessary or
appropriate because of the level of market risk of the banking organization or to ensure safe and
sound banking practices.6 Throughout this supporting statement, organizations that are subject to
the requirements of the market risk rule are referred to as “subject banking organizations.” The
market risk rule includes certain reporting, recordkeeping, and disclosure requirements in
sections 217.203 through 217.210 and section 217.212. Details of the information collection
requirements in each section are provided below.
Reporting Requirements
Sections 217.203(c)(1), .204(a)(2)(vi)(B), .206(b)(3), .208(a), and .209(a) - Prior
Approvals
Section 217.203(c)(1) requires subject banking organizations to obtain the prior written
approval of the Board before using any internal model to calculate its risk-based capital
requirements under subpart F.
Section 217.204(a)(2)(vi)(B) requires subject banking organizations to obtain the prior
written approval of the Board before including in its capital requirement for de minimis
exposures the capital requirement for any de minimis exposures using alternative techniques that
appropriately measure the market risk associated with those exposures.
Section 217.206(b)(3) requires subject banking organizations to obtain the prior approval
of the Board for, and notify the Board if the banking organization makes any material changes to,
the policies and procedures required by that section, which are described below.
Section 217.208(a) requires subject banking organizations that measure the specific risk
of a portfolio of debt positions using internal models to obtain the approval of the Board, prior to
including portfolios of equity positions in its incremental risk model.
Section 217.209(a) requires subject banking organizations to obtain prior approval of the
Board before using the method specified in that section to measure comprehensive risk for one or
more portfolios of correlation trading positions.

4

See 12 CFR 217.201(b)(1).
See 12 CFR 217.201(b)(3).
6
See 12 CFR 217.201(b)(2).
5

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Recordkeeping Requirements
Sections 217.203(a)(1), .203(b)(1), and .206(b)(3) - Policies and Procedures
Section 217.203(a)(1) requires subject banking organizations to have clearly defined
policies and procedures for determining which trading assets and trading liabilities are trading
positions and which trading positions are correlation trading positions. These policies and
procedures must take into account (1) the extent to which a position, or a federal of its material
risks, can be marked-to-market daily by reference to a two-way market and (2) possible
impairments to the liquidity of a position or its hedge.
Section 217.203(b)(1) requires subject banking organizations to have clearly defined
policies and procedures for actively managing all covered positions, and at a minimum, these
policies and procedures must require (1) marking positions to market or to model on a daily
basis, (2) daily assessment of the banking organization’s ability to hedge position and portfolio
risks, and of the extent of market liquidity, (3) establishment and daily monitoring of limits on
positions by a risk control unit independent of the trading business unit, (4) daily monitoring by
senior management of (1) to (3) hereinabove, (5) at least annual reassessment of established
limits on positions by senior management, and (6) at least annual assessments by qualified
personnel of the quality of market inputs to the valuation process, the soundness of key
assumptions, the reliability of parameter estimation in pricing models, and the stability and
accuracy of model calibration under alternative market scenarios.
Section 217.206(b)(3) requires subject banking organizations to have policies and
procedures that describe how the banking organization determines the period of significant
financial stress used to calculate its stressed Value-at-Risk (VaR)-based measure under this
section. The policies and procedures must address (1) how the banking organization links the
period of significant financial stress used to calculate the stressed VaR-based measure to the
composition and directional bias of its current portfolio and (2) the banking organization’s
process for selecting, reviewing, and updating the period of significant financial stress used to
calculate the stressed VaR-based measure and for monitoring the appropriateness of the period to
the banking organization’s current portfolio.
Section 217.203(a)(2) - Trading and Hedging Strategy
Section 217.203(a)(2) requires subject banking organizations to have clearly defined
trading and hedging strategies for trading positions. The trading strategy must be approved by
the organization’s senior management and must articulate the expected holding period of, and the
market risk associated with, each portfolio of trading positions. The hedging strategy must
articulate for each portfolio of trading positions the level of market risk the banking organization
is willing to accept and must detail the instruments, techniques, and strategies the banking
organization will use to hedge the risk of the portfolio.

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Section 217.205(c) - Backtesting
Section 217.205(c) requires a subject banking organization to divide its portfolio
exposures subject to the market risk rule into a number of significant subportfolios approved by
the Board for subportfolio backtesting purposes. The banking organization must retain and make
available to the Board the following information for each subportfolio for each business day over
the previous two years (500 business days), with no more than a 60-day lag: (1) a daily VaRbased measure for the subportfolio calibrated to a one-tail, 99.0 percent confidence level, (2) the
daily profit or loss for the subportfolio (that is, the net change in price of the positions held in the
portfolio at the end of the previous business day), and (3) the probability of observing a profit
that is less than, or a loss that is greater than, the amount projected for each day.
Section 217.209(c) - Stress Testing
Section 217.209(c) requires that a subject banking organization must at least weekly
apply specific, supervisory stress scenarios to its portfolio of correlation trading positions that
capture changes in (1) default rates, (2) recovery rates, (3) credit spreads, (4) correlations of
underlying exposures, and (5) correlations of a correlation trading position and its hedge. A
subject banking organization must retain and make available to the Board the results of the
supervisory stress testing, including comparisons with the capital requirements generated by the
banking organization’s comprehensive risk model. A subject banking organization must report to
the Board promptly any instances where the stress tests indicate any material deficiencies in the
comprehensive risk model.
Section 217.212(b) - Disclosure Policy
Section 217.212(b) requires that a subject banking organization must have a formal
disclosure policy that addresses the banking organization’s approach for determining the market
risk disclosures. The policy must be approved by the board of directors and must address the
associated internal controls and disclosure controls and procedures.
Disclosure Requirements
Section 217.212(c) - Quantitative
Section 217.212(c) requires certain public quantitative disclosures. For each material
portfolio of covered positions, the subject banking organization must publicly disclose the
following at least quarterly (1) the high, low, and mean VaR-based measures over the reporting
period and the VaR-based measure at period-end, (2) the high, low, and mean stressed VaRbased measures over the reporting period and the stressed VaR-based measure at period-end,
(3) the high, low, and mean incremental risk capital requirements over the reporting period and
the incremental risk capital requirement at period-end, (4) the high, low, and mean
comprehensive risk capital requirements over the reporting period and the comprehensive risk
capital requirement at period-end, with the period-end requirement broken down into appropriate
risk classifications, (5) separate measures for interest rate risk, credit spread risk, equity price
risk, foreign exchange risk, and commodity price risk used to calculate the VaR-based measure,

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and (6) a comparison of VaR-based estimates with actual gains or losses experienced by the
bank, with an analysis of important outliers. The banking organization must also publically
disclose the following at least quarterly (1) the aggregate amount of on-balance sheet and offbalance sheet securitization positions by exposure type and (2) the aggregate amount of
correlation trading positions.
Section 217.212(d) - Qualitative
Section 217.212(d) requires the following qualitative disclosures at least annually, with
any material changes disclosed in the interim (1) the composition of material portfolios of
covered positions, (2) the subject banking organization’s valuation policies, procedures, and
methodologies for covered positions including, for securitization positions, the methods and key
assumptions used for valuing such positions, any significant changes since the last reporting
period, and the impact of such change, (3) the characteristics of the internal models used for
purposes of the market risk rule, (4) a description of the approaches used for validating and
evaluating the accuracy of internal models and modeling processes for purposes of the market
risk rule, (5) for each market risk category (that is, interest rate risk, credit spread risk, equity
price risk, foreign exchange risk, and commodity price risk), a description of the stress tests
applied to the positions subject to the factor, (6) the results of the comparison of the banking
organization’s internal estimates for purposes of the market risk rule with actual outcomes during
a sample period not used in model development, (7) the soundness standard on which the
banking organization’s internal capital adequacy assessment under the market risk rule is based,
including a description of the methodologies used to achieve a capital adequacy assessment that
is consistent with the soundness standard, (8) a description of the banking organization’s
processes for monitoring changes in the credit and market risk of securitization positions,
including how those processes differ for resecuritization positions, and (9) a description of the
banking organization’s policy governing the use of credit risk mitigation to mitigate the risks of
securitization and resecuritization positions.
Adopted Revisions to the FR 4201
The Board has revised the collections of information associated with the market risk rule
to include the prior approvals a banking organization must obtain from the Board pursuant to
sections 217.203(c)(1) and 217.204(a)(2)(vi)(B) of Regulation Q. These revisions are intended to
accurately reflect the information collection requirements of the market risk rule.7
Time Schedule for Information Collection
This information collection contains reporting, recordkeeping, and disclosure
requirements, as mentioned above. The recordkeeping requirements are ongoing. The prior
written approvals are all required on occasion. The disclosures are required quarterly, annually,
and on occasion.

7

The Board also has deleted references, which appeared in the previous supporting statement for the FR 4201, to
certain provisions of the market risk rule that are not collections of information under the PRA.

5

Legal Status
The recordkeeping provisions of the Market Risk Capital Rule are authorized to be
collected from state member banks pursuant to sections 9(6) and 11 of the Federal Reserve Act
(12 U.S.C. §§ 324 and 248(a)); from BHCs pursuant to section 5(c) of the Bank Holding
Company Act of 1956 (BHC Act) (12 U.S.C. § 1844(c)) and, in some cases, section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. §
5365); from foreign banking organizations (FBOs) pursuant to section 8(a) of the International
Banking Act of 1978 (12 U.S.C. § 3106(a)) and section 165 of the Dodd-Frank Act; and from
SLHCs pursuant to sections 10(b)(2) and (g) of the Home Owners’ Loan Act (HOLA) (12 U.S.C.
§§ 1467a(b)(2) and (g)). Sections 9(6) and 11 of the Federal Reserve Act authorize the Board to
require state member banks to submit reports, as necessary. Section 5(c) of the BHC Act
authorizes the Board to require BHCs to submit reports to the Board regarding their financial
condition, and section 8(a) of the International Banking Act subjects FBOs to the provisions of
the BHC Act. Section 10 of HOLA authorizes the Board to collect reports from SLHCs. The
information collections under FR 4201 are mandatory.
The information collected through the FR 4201 is collected as part of the Board’s
supervisory process, and therefore is afforded confidential treatment pursuant to exemption 8 of
the Freedom of Information Act (FOIA) (5 U.S.C. § 552(b)(8)). In addition, individual
respondents may request that certain data be afforded confidential treatment pursuant to
exemption 4 of the FOIA, if the data has not previously been publically disclosed and the release
of the data would likely cause substantial harm to the competitive position of the respondent
(5 U.S.C. § 552(b)(4)). Determinations of confidentiality based on exemption 4 of the FOIA
would be made on a case-by-case basis.
Consultation Outside the Agency
The Board has consulted with the FDIC and OCC in confirming the burden estimates
listed.
Public Comments
On April 9, 2019, the Board published an initial notice in the Federal Register
(84 FR 14113) requesting public comment for 60 days on the extension, with revision, of the
FR 4201. The comment period for this notice expired on June 10, 2019. One public comment
was received but it was outside the scope of the Board’s review under the Paperwork Reduction
Act (PRA). On August 12, 2019, the Board published a final notice in the Federal Register
(84 FR 39843).
Estimate of Respondent Burden
As shown in the table below, the estimated total annual burden for the FR 4201 is 70,704
hours, and would decrease to 13,148 hours with the adopted revisions. The decrease in burden
results primarily from a decrease in the estimated number of respondents for the prior written
approvals required by sections 217.203, .204, .206, .208, and .209 of the market risk rule. The

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Board believes that few, if any, additional entities will request such prior approvals in the next
three years. Additionally, a number of provisions of the market risk rule that were previously
included as information collections in FR 4201 have been omitted from this proposal, as they are
not collections of information under the PRA. The burden tables below reflect these omissions.
These reporting, recordkeeping, and disclosure requirements represent less than 1 percent of the
Board’s total paperwork burden.
Estimated
number of
respondents8

FR 4201
Current
Reporting
Prior Written Approvals
Recordkeeping
Policies and Procedures
Training and Hedging Strategy
Internal Models
Backtesting and Stress Testing
Section 204(b)
Sections 205(c) and 209(c)
Securitizations
Disclosure Policy
Disclosure
Quantitative
Qualitative

Estimated
Annual
average hours
frequency
per response

36

1

960

34,560

36
36
36

1
1
1

96
16
128

3,456
576
4,608

36
36
36
36

4
1
4
1

16
104
120
40

2,304
3,744
17,280
1,440

36
36

4
1

16
12

2,304
432
70,704

1

1

1,088

1,088

37

1

96

3,552

37

1

16

592

37

1

96

3,552

Current Total
Proposed
Reporting
Sections 217.203(c)(1),
.204(a)(2)(vi)(B), .206(b)(3),
.208(a), and .209(a)
Prior Approvals
Recordkeeping
Sections 217.203(a)(1),
.203(b)(1), and .206(b)(3)
Policies and Procedures
Section 217.203(a)(2)
Trading and Hedging Strategy
Section 217.205(c)

Estimated
annual burden
hours

8

Of these respondents, none are considered small entities as defined by the Small Business Administration (i.e.,
entities with less than $550 million in total assets), https://www.sba.gov/document/support--table-size-standards.

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Backtesting
Section 217.209(c)
Stress Testing
Section 217.212(b)
Disclosure Policy
Disclosure
Section 217.212(c)
Quantitative
Section 217.212(d)
Qualitative
Proposed Total

6

1

12

72

37

1

40

1,480

37

4

16

2,368

37

1

12

444
13,148
(57,556)

Change

The current estimated total annual cost to the public for this information collection is
$4,072,550 and would decrease to $757,325 with the adopted revisions.9
Sensitive Questions
This collection of information contains no questions of a sensitive nature, as defined by
OMB guidelines.
Estimate of Cost to the Federal Reserve System
The estimated cost to the Federal Reserve System is negligible.

9

Total cost to the public was estimated using the following formula: percent of staff time, multiplied by annual
burden hours, multiplied by hourly rates (30% Office & Administrative Support at $19, 45% Financial Managers at
$71, 15% Lawyers at $69, and 10% Chief Executives at $96). Hourly rates for each occupational group are the
(rounded) mean hourly wages from the Bureau of Labor and Statistics (BLS), Occupational Employment and Wages
May 2018, published March 29, 2019, https://www.bls.gov/news.release/ocwage.t01.htm. Occupations are defined
using the BLS Occupational Classification System, https://www.bls.gov/soc/.

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