Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 07-11
July 24, 2007

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND EACH DOMESTIC AND FOREIGN BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE
SUBJECT:  The Fair Value Option and the Applicability of the Market Risk Capital Rule

This SR Letter reminds banking organizations that reporting an amount of gross trading assets and liabilities that equals 10 percent or more of total assets, or $1 billion or more, may subject a banking organization to the market risk capital rule (See 12 CFR 208, appendix E, for state member banks and 12 CFR 225, appendix E, for bank holding companies).1 The market risk capital rule requires banking organizations subject to the rule to have in place adequate risk management processes (including but not limited to Value-at-Risk model(s) approved by the Federal Reserve) and capital sufficient to support the market risk of their covered positions.

A banking organization that has adopted Financial Accounting Standards Board Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159)2 and applied this option to securities should determine whether any resulting designation of securities as trading subjects the organization to the market risk capital rule. Banking organizations that have exceeded or expect to exceed in the near future the minimum thresholds for the market risk capital rule should contact their Reserve Bank to discuss their plans to address the rule’s requirements. As is the case for all market risk rule determinations, Reserve Bank staff will coordinate with the Board to determine appropriate direction.

Reserve Banks are asked to distribute this SR Letter to the domestic and foreign banking organizations supervised by the Federal Reserve in their districts as well as to supervisory and examination staff. Questions regarding this SR Letter may be directed to Christopher Laursen, Senior Supervisory Financial Analyst, Market & Liquidity Risks, at (202) 452-2478, in the Division of Banking Supervision and Regulation.

Roger T. Cole
Director



Notes:
  1. The market risk capital rule is currently under review and proposed changes to this rule are set forth in the Federal Register Joint Notice of Proposed Rulemaking published September 25, 2006, "Risk-Based Capital Standards: Market Risk" (71 FR 55958).  Return to text
  2. FAS 159 requires that securities to which the fair value option is applied be reported as trading securities. For most banking organizations, FAS 159 is effective on January 1, 2008; however, early adoption is permitted under certain conditions.  Return to text


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