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Federal Register / Vol. 86, No. 188 / Friday, October 1, 2021 / Rules and Regulations FCLs ownership status were to change in the future, we will reassess whether to separately apply our regulatory capital requirements.38
Commenters supported this change, and we are adopting it as proposed.

F. Qualified Financial Contract QFC
Related Definitions
In 2017, the Federal banking regulatory agencies adopted rules establishing certain restrictions and requirements for the financial contracts QFC Rules of global systemically E. Lending and Leasing Limit Base important banking institutions Calculation GSIBs.42 We provided details on the Since adopting the 2017 Capital Rule, background and impetus for these regulatory changes in the preamble to FCA has relied on tier 1 and tier 2
the proposed rule.43 The QFC Rules capital, not on permanent capital, to prompted related definitional changes evaluate the safety and soundness of in the U.S. Rule to ensure regulated System institutions. In order to better entities continued to benefit from align the lending and leasing limit base recognition of the risk-mitigating effects with FCAs supervisory focus on tier 1
of netting and financial collateral on and tier 2 capital, we proposed to shift certain financial transactions. This the base of the lending and leasing limit recognition likely results in reduced from permanent capital 39 to total capital capital requirements for those as defined and adjusted in 628.20
transactions.
628.22 and to continue to include To incorporate amendments made to otherwise eligible third-party capital the U.S. Rule 44 and to ensure System that must be excluded under 628.23.
institutions would also continue to We further proposed to align the benefit from recognition of the risktreatment of investments in other mitigating effects of netting and System institutions under the lending financial collateral, we proposed and leasing limit base with the changes to the definitions of Collateral treatment under regulatory capital agreement, Eligible margin loan, calculations by eliminating the Qualifying master netting agreement exceptional treatment of stock QMNA, and Repo-style transaction.
purchased in connection with a loan The proposed changes to QMNA would also harmonize that definition with the participation under 614.4351a1.40
definition of Eligible master netting We estimated that the impacts to agreement as used in FCAs Margin lending limits at System institutions and Capital requirements for Covered resulting from these changes would be Swap Entities regulation.45 The System small.41 The System Comment Letter Comment Letter supported these supported the change to the use of total revisions, and we are adopting them as capital as the lending limit base and proposed.
noted that most institutions have internal lending limit policies that are G. Common Equity Tier 1 Capital lower than the lending limit base in the Eligibility Requirements regulation. We received no other Consistent with the Basel III
comments and are adopting the regulatory capital framework 46 and the amendment as proposed.
U.S. Rule, we proposed to add the term paid-in to the eligibility criteria for 38 The definitions of System institution under CET1 capital in 628.20b1i. Basel 615.5201 and 628.2 provide that we may include III defines paid-in capital as capital any other institution chartered by the FCA that we that 1 has been received with finality determine should be included for purposes of this subpart.
by the institution, 2 is reliably valued, 39 The existing lending and leasing limit base 3 is fully under the institutions which this final rule is changing is a System control, and 4 does not directly or institutions permanent capital with adjustments applicable to the institution in accordance with 615.5207, and with two additional adjustments in 614.4351a that apply only to the lending and leasing limit base.
40 The 2017 Capital Rule requires System institutions to deduct their investments in other System institutions from regulatory capital calculations. Existing 614.4351a1 directs a System institution to include its investment in another System institution in its lending limit base where the investment resulted from stock purchased in connection with a loan participation.
This is, in effect, the exact opposite of the regulatory capital requirements in the 2017 Capital Rule.
41 See 85 FR 55786, 55790 September 10, 2020, footnotes 29 and 30.

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42 See 82 FR 56630 November 29, 2017 OCC;
82 FR 50228 October 30, 2017 FDIC; and 82 FR
42882 September 12, 2017 FRB.
43 See 85 FR 55786, 5579055791 September 10, 2020.
44 As we have previously stated, FCA seeks to achieve comparability between our regulatory capital rules and those of the Federal banking regulatory agencies. Among other benefits, comparability of rules increases transparency for investors in the capital markets.
45 See 624.2.
46 See Basel Committee on Banking Supervision BCBS, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, December 2010 as revised June 2011.

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indirectly expose the institution to the credit risk of the investor.47
As discussed in the preamble to the proposed rule, we proposed this amendment to the eligibility criteria for CET1 capital after re-evaluating the attributes of System allocated equities, which we have subsequently determined meet the Basel definition of paid-in. 48 We further discussed our reexamination of the attributes of allocated equities and the financing of statutorily required borrower stock at System institutions.49 The System Comment Letter supported our recognition of allocated equities as meeting the definition of paid-in and expressed no concern with the additional criteria for an instruments inclusion in CET1 capital.50 We are adopting the revision as proposed.
We also proposed a conforming change in 628.20d1i to clarify that all instruments included in tier 2 capital must be issued and paid-in. We received no comments on this proposed change and are adopting it as proposed.
Lastly, we proposed clarifying, nonsubstantive changes to 628.20b1i and b1ii, both to align our language more closely with the language in the U.S. Rule and to emphasize a difference between the rules prioritization of a capital instrument holders claim on the residual assets of an institution in a receivership, insolvency, liquidation, or similar proceeding. We received no comments on these proposed revisions and are adopting them as proposed.
III. Clarifying and Other Revisions to the Capital Rule A. Capitalization Bylaw Adjustment Section 615.5220a6 requires a System institution to include in its capitalization bylaws a provision stating that equities other than those protected under Section 4.9A of the Act are retireable at the sole discretion of the board, provided minimum capital adequacy standards established in subpart H of part 615 and part 628 are 47 See BCBS, Basel III Definition of capital Frequently Asked Questions, September 2017
update of FAQs published in December 2011.
48 See 85 FR 55786, 5579155792 September 10, 2020.
49 Id.
50 As discussed under Section III, EUnallocated Retained Earnings and Equivalents Deductions and Adjustments, the System Comment Letter draws a connection between our determination that allocated equities are paid-in, as defined by the Basel Committee, and arguments in the letter requesting the elimination of the URE and URE
equivalents requirements in FCAs capital rules.
Our determination that allocated equities fully meet the Basel III definition of paid-in capital does not have any connection to our URE and URE
equivalents requirements.

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