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OCC Bulletin 2013-13 | May 10, 2013

Market Risk Capital Rule: Clarification of the Treatment of Certain Sovereign and Securitization Positions


Chief Executive Officers of All National Banks and Federal Savings Associations, Federal Branches and Agencies, Department and Division Heads, All Examining Personnel, and Other Interested Parties


The Office of the Comptroller of the Currency (OCC) is publishing this bulletin to clarify certain provisions of the market risk capital rule.1 This clarification is applicable only to those institutions supervised by the OCC that are subject to that rule. Specifically, two clarifications are described below. The first relates to foreign exposures. The second addresses the measurement of a parameter used in the simplified supervisory formula approach (SSFA) for securitization exposures.

Foreign Exposures

The OCC is clarifying that, for the purpose of determining standardized specific risk capital requirements for certain sovereign debt positions, sovereign entities that are members of the Organization for Economic Cooperation and Development (OECD) but do not receive a Country Risk Classification (CRC) should be treated as having the functional equivalent of a CRC of zero. This treatment also applies to exposures to public sector entities, depository institutions, foreign banks, or credit unions for which the specific risk capital requirement is based on the creditworthiness of those sovereign entities.

Securitization Exposures

When an institution assigns the specific risk capital requirement for a securitization position, the OCC is clarifying that exposures underlying the securitization position should not necessarily be considered to be in default solely because the borrower has deferred payments of principal or interest. In limited cases, such a deferral is not a result of a change in the borrower’s creditworthiness. Instead, payment deferrals might be a result of provisions in the contract at the time funds were disbursed. In such circumstances, the loan need not be classified as being in default.


On August 30, 2012, the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (agencies) published a final rule to revise their respective market risk capital rules (the rulemaking).2 The rulemaking revised each agency’s market risk capital rules to better address positions for which the market risk capital rules are appropriate: reduce pro-cyclicality, enhance the rules’ sensitivity to risks that were not adequately captured under the existing methodologies, and increase transparency through enhanced disclosures. The rulemaking also implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), including the prohibition against including references to credit ratings in federal regulations set forth in section 939A.3 More specifically, the rulemaking incorporated non-credit ratings-based standards for the calculation of specific risk capital requirements for sovereign debt positions, certain other covered debt positions, and securitization positions.

Sovereign Debt Positions

Under the rulemaking, the specific risk capital requirement for a sovereign exposure depends, in part, on OECD CRCs.4 Following the publication of the rulemaking, the OECD determined that certain high-income countries that received a CRC of zero in 2012 would no longer receive any CRC rating.5 According to the OECD, the process of assigning CRCs to high-income OECD and Euro Area countries differed from the process used to assign CRCs to other sovereign entities. Therefore, the OECD determined that applying a CRC to a high-income OECD country or a high-income Euro Area country was no longer appropriate. However, the OECD stated that such countries “will remain subject to the same market credit risk pricing disciplines that are applied to all Category Zero countries. This means that the change will have no practical impact on the rules that apply to the provision of official export credits.”6

Because the change to the OECD’s CRC methodology is not meant to have a practical impact, the OCC believes that OECD member countries that no longer receive a CRC should continue to receive a zero percent specific risk-weighting factor (unless they are considered to be in default). That is, for the purposes of assigning specific risk capital requirements, OECD members that no longer receive a CRC should be treated as having the functional equivalent of a CRC of zero.

Exposures to a Public Sector Entity, Depository Institution, Foreign Bank, or Credit Union

Consistent with the aforementioned treatment of sovereign debt positions, an OCC-supervised institution subject to the market risk capital rule should continue to assign a specific risk-weighting factor of 0.25 percent, 1.0 percent, or 1.6 percent (depending on the remaining maturity of the position) to a covered position that is an exposure to a public sector entity, depository institution, foreign bank, or credit union, if the applicable sovereign entity does not have a CRC assigned to it but is a member of the OECD, unless the sovereign debt position must otherwise be assigned a higher specific risk-weighting factor (for example, if the sovereign entity is in default) under the market risk capital rule.7

Securitization Positions: Simplified Supervisory Formula Approach

To measure the specific risk of a securitization position, the market risk capital rule includes the Simplified Supervisory Formula Approach (SSFA). The SSFA takes into account the nature and quality of the underlying collateral. It was designed to apply relatively higher capital requirements to the more risky junior tranches of a securitization that are the first to absorb losses and apply relatively lower requirements to the most senior positions.8 The SSFA includes a variable (W) designed to increase the capital requirement for a securitization exposure when delinquencies in the underlying assets of the securitization increase. Under the capital rule, an exposure is “delinquent” if it is 90 days or more past due, subject to a bankruptcy or insolvency proceeding, in the process of foreclosure, held as real estate owned, in default, or has contractually deferred interest payments for 90 days or more.9

Since the publication of the rulemaking, commenters have noted that the term “delinquencies” can be read to include deferrals of interest that are unrelated to the performance of the loan or the borrower, including contractually permitted payment deferrals provided for in certain federally guaranteed student loan programs. The OCC did not intend for the term “delinquency” to be interpreted in this manner. Instead, the OCC sought to cover contractual provisions present in certain instruments that permit borrowers to defer payments due to financial difficulties and, therefore, can be used to hide credit quality deterioration in the assets underlying a securitization exposure. Thus, the OCC is clarifying that the meaning of “delinquency” in the market risk capital rule should be read to exclude from the calculation of W loans with contractual provisions that allow deferral of principal and interest on federally guaranteed student loan programs in accordance with the terms of those programs or on consumer loans (including non-federally guaranteed student loans), provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed, and the periods of deferral are not initiated based on changes in the creditworthiness of the borrower.

The purpose of this bulletin is to clarify ambiguities in how the OCC intends to apply the aforementioned provisions of the market risk capital rule. As the opportunity arises, the OCC intends to make appropriate clarifying changes to the market risk capital rule.

Further Information

You may direct questions or comments to Roger Tufts, Senior Economic Advisor, Capital Policy Division, at (202) 649-6981; or Carl Kaminski, Senior Attorney, at (202) 649-5869 or (202) 649-6370.


John C. Lyons Jr.
Senior Deputy Comptroller and Chief National Bank Examiner

 1 12 CFR 3, appendix B.

 2 77 Fed. Reg. 53060 (August 30, 2012).

 3 Public Law 111-203, 124 Stat. 1376 (July 21, 2010). Section 939A(a) of the Dodd-Frank Act provides that not later than one year after the date of enactment each federal agency shall review (1) any regulation issued by such agency that requires the use of an assessment of the credit-worthiness of a security or money market instrument, and (2) any references to or requirements in such regulations regarding credit ratings. Section 939A further provides that each such agency “shall modify any such regulations identified by the review under subsection (a) to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations.” See 15 USC 78o-7 note.

 4 The OECD’s CRC methodology evaluates country risk. CRC ratings are used to set interest rate charges for transactions covered by the OECD arrangement on export credits. The CRC methodology was established in 1999 and classifies countries into categories based on the application of two basic components: (1) the country risk assessment model (CRAM), which is an econometric model that produces a quantitative assessment of country credit risk; and (2) the qualitative assessment of the CRAM results, which incorporates political risk and other risk factors not fully captured by the CRAM. The two components of the CRC methodology are combined and result in countries being classified into one of eight risk categories (zero-7). Countries assigned to the zero category have the lowest risk assessment and countries assigned to the “7” category have the highest. The OECD regularly updates CRCs for over 150 countries. CRCs are recognized by the Basel Committee on Banking Supervision as an alternative to credit ratings.

For a more detailed description of the OECD’s CRC methodology, see

 5Changes agreed to the Participants Country Risk Classification System,” available at

 6 Id.

 7 12 CFR 3, appendix B, section 2 (“Default by a sovereign entity means noncompliance by the sovereign entity with its external debt service obligations or the inability or unwillingness of a sovereign entity to service an existing obligation according to its original contractual terms, as evidenced by failure to pay principal and interest timely and fully, arrearages, or restructuring.”).

 8 12 CFR 3, appendix B, section 11.

 9 12 CFR 3, appendix B, section 11(b)(2)(v).