Fr4201_20240430

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 reporting, recordkeeping, and disclosure requirements associated with the Market
Risk Capital Rule (FR 4201; OMB No. 7100-0314) 1. The market risk rule, which requires
banking organizations to hold capital to cover their exposure to market risk, is a component of
the Board’s regulatory capital framework, Regulation Q - Capital Adequacy of Bank Holding
Companies, Savings and Loan Holding Companies, and State Member Banks (12 CFR Part 217).
The respondents for this information collection are bank holding companies (BHCs), covered
savings and loan holding companies (SLHCs), 2 U.S. intermediate holding companies of foreign
banking organizations (IHCs), and state member banks (SMBs) (collectively, “banking
organizations”) that meet certain risk thresholds described below.
The Board has revised the FR 4201 information collection to account for a recordkeeping
requirement in section 217.203(b)(2) of Regulation Q that had not been previously cleared by the
Board.
The current estimated total annual burden for the FR 4201 is 35,644 hours, and increased
to 36,236 hours. The adopted revisions resulted in an increase of 592 hours.
Background and Justification
The market risk rule is part of the Board’s regulatory capital framework. 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. These 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.
This information is not available from other sources. Basel III Subpart F Section 205(c)
requires banks to backtest their trading risk models (i.e. Value at Risk “VaR” models) at
subportfolio levels and identify any backtesting exceptions, (i.e. trading losses greater than the
respective VaR estimates). A high number of backtesting exceptions and large trading losses are
1 This information collection is currently titled “Market Risk Capital Rule” with a collection identifier of “FR
4201”. As part of this clearance, the collection title will be changed to “Reporting, Recordkeeping, and Disclosure
Requirements Associated with Regulation Q (Market Risk Capital Rule)” and the collection identifier will be
updated to “FR Q-2”. The purpose of this non-substantive change is to implement consistent nomenclature for
information collections contained within a rule. This change would not modify the reporting, recordkeeping, or
disclosure requirements in any way.
2

For the definition of “covered savings and loan holding company,” see 12 CFR 217.2.

safety and soundness issues. The Board must monitor the backtesting exceptions as well as large
trading losses in trading desks to identify systematic issues and investigate the associated root
causes of large trading losses in the banking system.
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) and (2), 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 a subject banking organization 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 217.203(c)(2) requires that a subject
banking organization institution promptly notify the Board when the subject banking
organization (1) plans to extend the use of a model that the Board has approved under this
subpart to an additional business line or product type; (2) the banking organization plans makes
any change to an internal model approved by the Board under this subpart that would result in a
material change in the subject banking organization’s risk-weighted asset amount for a portfolio
of covered positions; or (3) the banking organization makes any material change to its modeling
assumptions.
Section 217.204(a)(2)(vi)(B) requires a subject banking organization 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.

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

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Section 217.206(b)(3) requires a subject banking organization to obtain the prior approval
of the Board 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 a subject banking organization that measures the specific risk
of a portfolio of debt positions using internal models to obtain prior approval of the Board to
include portfolios of equity positions in its incremental risk model.
Section 217.209(a) requires a subject banking organization to obtain the 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.
Recordkeeping Requirements
Sections 217.203(a)(1), 217.203(b)(1), Section 217.203(b)(2), 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 217.203(b)(2) requires subject banking organizations to have a process for
prudent valuation of its covered positions that includes policies and procedures on the valuation
of positions, marking positions to market or to model, independent price verification, and
valuation adjustments or reserves. The valuation process must consider, as appropriate, unearned
credit spreads, close-out costs, early termination costs, investing and funding costs, liquidity, and
model risk.
Section 217.206(b)(3) requires a subject banking organization to have policies and
procedures that describe how the banking organization determines the period of significant

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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 banking 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.
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

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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 banking 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
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
The market risk rule includes certain disclosure requirements described below. If a
subject banking organization believes that disclosure of specific commercial or financial
information would prejudice seriously its position by making public certain information that is
either proprietary or confidential in nature, the subject banking organization is not required to
disclose these specific items, but must disclose more general information about the subject
matter of the requirement, together with the fact that, and the reason why, the specific items of
information have not been disclosed. 6
A subject banking organization's management may provide all of the disclosures required
described below in one place on the institution’s public web site or may provide the disclosures
in more than one public financial report or other regulatory reports, provided that the subject

6

12 CFR 217.212(a).

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banking organization publicly provides a summary table specifically indicating the location(s) of
all such disclosures. 7
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 publicly
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
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.
7

Id.

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Respondent Panel
The FR 4201 panel comprises BHCs, covered 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.
Frequency and Time Schedule
This information collection contains reporting, recordkeeping, and disclosure
requirements. The recordkeeping requirements are ongoing. The prior written approvals are all
required on occasion. The disclosures are required quarterly, annually, and on occasion.
Adopted Revisions to the FR 4201
The Board revised the FR 4201 information collection to account for a recordkeeping
requirement in section 217.203(b)(2) of Regulation Q that had not been previously cleared by the
Board. Under section 217.203(b)(2), the Board requires subject banking organizations to have a
process for prudent valuation of their covered positions that includes policies and procedures on
the valuation of positions, marking positions to market or to model, independent price
verification, and valuation adjustments or reserves. The valuation process must consider, as
appropriate, unearned credit spreads, close-out costs, early termination costs, investing and
funding costs, liquidity, and model risk.
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 state member banks (12 U.S.C. §§ 324 and 248); pursuant to section 5 of the Bank Holding
Company Act (BHC Act)(12 U.S.C. § 1844(c)) and, in some cases, section 165 of the DoddFrank Act for BHCs (12 U.S.C. § 5365); pursuant to section 5 of the BHC Act, in conjunction
with section 8 of the International Banking Act (12 U.S.C. §§ 1844 and 3106), and section 165
of the Dodd-Frank Act for IHCs; and pursuant to sections 10(b)(2) and (g) of the Home Owners’
Loan Act for SLHCs (12 U.S.C. § 1467a(b)(2) and (g)). The FR 4201 includes certain
information collections that are mandatory, and others that are required to obtain a benefit.
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

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the Freedom of Information Act (FOIA). 8 In addition, individual respondents may request that
certain data be afforded confidential treatment pursuant to FOIA exemption 4, if it is nonpublic
commercial or financial information which is both customarily and actually treated as private by
the respondent. 9 Determinations of confidentiality based on FOIA exemption 4 would be made
on a case-by-case basis.
Consultation Outside the Agency
The Board consulted with the OCC and FDIC with respect to the extension, with
revision, of this information collection.
Public Comments
On December 4, 2023, the Board published an initial notice in the Federal Register (88
FR 84141) requesting public comment for 60 days on the extension, with revision, of the Market
Risk Capital Rule. The comment period for this notice expired on February 2, 2024. The Board
did not receive any comments. On April 26, 2024, the Board published a final notice in the
Federal Register (89 FR 32430).

Estimate of Respondent Burden
As shown in the table below, the estimated total annual burden for the FR 4201 is 35,644
hours, and would increase to 36,236 hours with the proposed revisions. As of December 31,
2022, there are 37 banking organizations 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. The number
of respondents has been stable for the past five years. The initial implementation of market risk
rule requirements can be labor intensive, as estimated in the prior approvals reporting row.
Assuming a firm may conduct trades in all five asset classes i.e., interest rate, foreign exchange,
credit spread, equities and commodities, implementing pricing models and generating daily
profits and losses may take 200 hours per asset class. Hence, it may take a total of 1,000 hours to
complete the initial implementation of the market risk rule. An additional 88 hours of
independent verification for all the five asset classes may be required for the prior approvals.
This would bring the total estimate for prior approvals to 1,088 hours. These reporting,
recordkeeping, and disclosure requirements represent less than 1 percent of the Board’s total
paperwork burden.

8

5 U.S.C. § 552(b)(8).

9

5 U.S.C. § 552(b)(4).

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FR 4201

Estimated
number of
respondents

Estimated
annual
frequency

Estimated
average hours
per response

Estimated
annual burden
hours

1

1

1,088

1,088

37

1

96

3,552

37

1

16

592

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

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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 217.203(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
Current Total
Adopted
Reporting
Sections 217.203(c)(1) and (2),
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), 217.203(b)(2),
and 217.206(b)(3)

1

1

1,088

1,088

37

1

112

4,144

Of these respondents, none are considered small entities as defined by the Small Business Administration (i.e.,
entities with less than $850 million in total assets), https://www.sba.gov/document/support--table-size-standards.

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Policies and procedures
Section 217.203(a)(2)
Trading and hedging strategy
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
Change

37

1

16

592

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
36,236
592

The estimated total annual cost to the public for the FR 4201 is $2,489,733 and would
increase to $2,531,085 with the adopted revisions. 11
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.

Total cost to the responding public is estimated using the following formula: total burden hours, multiplied by the
cost of staffing, where the cost of staffing is calculated as a percent of time for each occupational group multiplied
by the group’s hourly rate and then summed (30% Office & Administrative Support at $23, 45% Financial
Managers at $84, 15% Lawyers at $85, and 10% Chief Executives at $124). Hourly rates for each occupational
group are the (rounded) mean hourly wages from the Bureau of Labor Statistics (BLS), Occupational Employment
and Wages, May 2023, published April 3, 2024 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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