Circular
The Fair Value Option and the Applicability of the Market Risk Capital Rule
August 8, 2007
Circular No. 11886

An advisory issued by the Federal Reserve reminds banking organizations that reporting an amount of gross trading assets and liabilities equal to 10 percent or more of total assets, or $1 billion or more, may subject a banking organization to the market risk capital rule. 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 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.
 
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SR 07-11 (July 24, 2007) OFFSITE