FR4201_20210426_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 information collections associated with the Market Risk Capital Rule (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 (Regulation Q; 12 CFR Part 217). The respondents for this
information collection are bank holding companies (BHCs), savings and loan holding companies
(SLHCs), intermediate holding companies (IHCs), and state member banks (SMBs) that meet
certain risk thresholds described below.
The Board revised the FR 4201 to account for two recordkeeping requirements that were
mistakenly omitted from the previous clearance of this information collection.
The current estimated total annual burden for the FR 4201 is 13,148 hours, and would
increase to 35,644 hours. The revisions would result in an increase in of 22,496 hours. There are
no required reporting forms associated with this information collection (the FR 4201 designation
is for internal purposes only).
Background and Justification
The market risk rule was adopted in 1996 as an integral part of the Board’s revised
regulatory capital framework.1 The rule includes information collections 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 organizations2 and
the industry as a whole. The information collections 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 information collections 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. This information is not available from other sources.

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).
2
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.3 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.4 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.5 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), 217.204(a)(2)(vi)(B), 217.206(b)(3), 217.208(a), and 217.209(a)
- Prior Approvals
Section 217.203(c)(1) of the market risk rule 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.

3

See 12 CFR 217.201(b)(1).
See 12 CFR 217.201(b)(3).
5
See 12 CFR 217.201(b)(2).
4

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Recordkeeping Requirements
Sections 217.203(a)(1), 217.203(b)(1), and 217.206(b)(3) - Policies and Procedures
Section 217.203(a)(1) of the market risk rule 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) of the market risk rule 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 217.203(f) - General Recordkeeping
Section 217.203(f) of the market risk rule requires that a subject banking organization
adequately document all material aspects of its internal models, management and valuation of
covered positions, control, oversight, validation and review processes and results, and internal
assessment of capital adequacy.
Section 217.205(c) - Backtesting
Section 217.205(c) of the market risk rule 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 VaR-based 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) of the market risk rule 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 217.210(f) - Securitizations
Section 217.210(f)(1) of the market risk rule requires that a subject banking organization
demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a
securitization position that would materially affect the performance of the position by conducting
and documenting the analysis set forth in section 217.210(f)(2). The baking organization’s
analysis must be commensurate with the complexity of the securitization position and the
materiality of the position in relation to capital. To support the demonstration of its
comprehensive understanding, for each securitization position a banking organization must
conduct and document an analysis of the risk characteristics of a securitization position prior to
acquiring the position, considering structural features of the securitization that would materially
impact the performance of the position, relevant information regarding the performance of
underlying credit exposure(s), relevant market data of the securitization, and, for resecuritization
positions, performance information on the underlying securitization exposure. The banking

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organization also must, on an on-going basis (but no less frequently than quarterly), evaluate,
review, and update as appropriate the analysis required above for each securitization position.
Section 217.212(b) - Disclosure Policy
Section 217.212(b) of the market risk rule 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 Disclosures
Section 217.212(c) of the market risk rule 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 VaR-based 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,
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 Disclosures
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

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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.
Respondent Panel
The FR 4201 panel comprises BHCs, SLHCs, IHCs, and SMBs that meet certain risk
thresholds. The market risk rule applies to any such 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.
Revisions to the FR 4201
In August 2019, the Board extended for three years, with revision, the FR 4201 and a
notice was published in the Federal Register (84 FR 39843). Those revisions included removing
references to provisions in section 217.210(f) of the market risk rule concerning securitizations.
This revision was in error, as the market risk rule contains a recordkeeping requirement
concerning securitizations, which is described above. Therefore, the Board reinstated this
recordkeeping requirement. Additionally, the Board revised the FR 4201 to account for the
general recordkeeping requirement in section 217.203(f) of the market risk rule, described above,
which had not previously been accounted for.
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.
Public Availability of Data
No data collected pursuant to this information collection is made available to the public
by the Board.
Legal Status
The FR 4201 is authorized pursuant to sections 9(6) and 11 of the Federal Reserve Act
for SMBs (12 U.S.C. §§ 324 and 248); pursuant to section 5 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) for BHCs (12 U.S.C. §
5365); pursuant to section 5 of the BHC Act (12 U.S.C. § 1844), in conjunction with section 8 of
the International Banking Act of 1978 (12 U.S.C. § 3106), and section 165 of the Dodd-Frank

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Act for IHCs; and pursuant to sections 10(b)(2) and (g) of the Home Owners’ Loan Act for
SLCHs (12 U.S.C. § 1467a(b)(2) and (g)). The FR 4201 is mandatory.
The information collected pursuant to 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, which exempts from disclosure “trade secrets and commercial or
financial information obtained from a person and privileged or confidential” (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
There has been no consultation outside the Federal Reserve System.
Public Comments
On January 17, 2020, the Board published an initial notice in the Federal Register
(85 FR 3049) requesting public comment for 60 days on the extension, with revision, of the
FR 4201. The comment period for this notice expired on March 17, 2020. The Board did not
receive any comments. The Board adopted the extension, with revision, of the FR 4201 as
originally proposed. On September 17, 2020, the Board published a final notice in the Federal
Register (85 FR 58054).
Estimate of Respondent Burden
As shown in the table below, the estimated total annual burden for the FR 4201 is 13,148
hours, and would increase to 35,644 hours with the revisions. These reporting, recordkeeping,
and disclosure requirements represent less than 1 percent of the Board’s total paperwork burden.

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FR 4201
Current
Reporting
Sections 217.203(c)(1),
217.204(a)(2)(vi)(B),
217.206(b)(3), 217.208(a), and
217.209(a)
Prior approvals
Recordkeeping
Sections 217.203(a)(1),
217.203(b)(1), and
217.206(b)(3)
Policies and procedures
Section 217.203(a)(2)
Trading and hedging strategy
Section 217.205(c)
Backtesting
Section 217.209(c)
Stress testing
Section 217.212(b)
Disclosure policy
Disclosure
Section 217.212(c)
Quantitative
Section 217.212(d)
Qualitative
Current Total
Proposed
Reporting
Sections 217.203(c)(1),
217.204(a)(2)(vi)(B),
217.206(b)(3), 217.208(a), and
217.209(a)
Prior approvals
Recordkeeping
Sections 217.203(a)(1),
217.203(b)(1), and
217.206(b)(3)
Policies and procedures
Section 217.203(a)(2)
Trading and hedging strategy

Estimated
number of
respondents6

Estimated
Annual
average hours
frequency
per response

Estimated
annual burden
hours

1

1

1,088

1,088

37

1

96

3,552

37

1

16

592

37

1

96

3,552

6

1

12

72

37

1

40

1,480

37

4

16

2,368

37

1

12

444
13,148

1

1

1,088

1,088

37

1

96

3,552

37

1

16

592

6

Of these respondents, none are considered small entities as defined by the Small Business Administration (i.e.,
entities with less than $600 million in total assets), https://www.sba.gov/document/support--table-size-standards.

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Section 217.203(f)
General recordkeeping
Section 217.205(c)
Backtesting
Section 217.209(c)
Stress testing
Section 217.210(f)
Securitizations
Section 217.212(b)
Disclosure policy
Disclosure
Section 217.212(c)
Quantitative
Section 217.212(d)
Qualitative
Proposed Total

37

1

128

4,736

37

1

96

3,552

6

1

12

72

37

4

120

17,760

37

1

40

1,480

37

4

16

2,368

37

1

12

444
35,644

Change

22,496

The current estimated total annual cost to the public for the FR 4201 is $777,704, and
would increase to $2,108,343 with the revisions.7
Sensitive Questions
These collections of information contain 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 for collecting and processing this
information collection is negligible.

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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 $20, 45% Financial Managers at
$73, 15% Lawyers at $72, and 10% Chief Executives at $95). 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 2020, published March 31, 2021, https://www.bls.gov/news.release/ocwage.t01.htm. Occupations are defined
using the BLS Standard Occupational Classification System, https://www.bls.gov/soc/.

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