Standardized Approach for Calculating the Exposure Amount of Derivative Contracts, 64660-64728 [2018-24924]
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Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Proposed Rules
DEPARTMENT OF TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3 and 32
[Docket ID OCC–2018–0030]
RIN 1557–AE44
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket R–1629]
RIN 7100–AF22
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 324
RIN 3064–AE80
Standardized Approach for Calculating
the Exposure Amount of Derivative
Contracts
The Board of Governors of the
Federal Reserve System; the Federal
Deposit Insurance Corporation; and the
Office of the Comptroller of the
Currency, Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Board of Governors of the
Federal Reserve System, the Federal
Deposit Insurance Corporation, and the
Office of the Comptroller of the
Currency (together, the agencies) are
inviting public comment on a proposal
that would implement a new approach
for calculating the exposure amount of
derivative contracts under the agencies’
regulatory capital rule. The proposed
approach, called the standardized
approach for counterparty credit risk
(SA–CCR), would replace the current
exposure methodology (CEM) as an
additional methodology for calculating
advanced approaches total riskweighted assets under the capital rule.
An advanced approaches banking
organization also would be required to
use SA–CCR to calculate its
standardized total risk-weighted assets;
a non–advanced approaches banking
organization could elect to use either
CEM or SA–CCR for calculating its
standardized total risk-weighted assets.
In addition, the proposal would modify
other aspects of the capital rule to
account for the proposed
implementation of SA–CCR.
Specifically, the proposal would require
an advanced approaches banking
organization to use SA–CCR with some
adjustments to determine the exposure
amount of derivative contracts for
calculating total leverage exposure (the
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SUMMARY:
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denominator of the supplementary
leverage ratio). The proposal also would
incorporate SA–CCR into the cleared
transactions framework and would
make other amendments, generally with
respect to cleared transactions. The
proposed introduction of SA–CCR
would indirectly affect the Board’s
single counterparty credit limit rule,
along with other rules. The Office of the
Comptroller of the Currency also is
proposing to update cross-references to
CEM and add SA–CCR as an option for
determining exposure amounts for
derivative contracts in its lending limit
rules.
DATES: Comments should be received on
or before February 15, 2019.
ADDRESSES: Comments should be
directed to:
Board: You may submit comments,
identified by Docket No. [R–1629 and
RIN 7100–AF22], by any of the
following methods:
1. Agency Website: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/general
info/foia/ProposedRegs.cfm.
2. Email: regs.comments@
federalreserve.gov. Include docket
number in the subject line of the
message.
3. Fax: (202) 452–3819 or (202) 452–
3102.
4. Mail: Ann E. Misback, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551. All public comments are
available from the Board’s website at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons or to remove sensitive personal
identifying information (PII) at the
commenter’s request. Public comments
may also be viewed electronically or in
paper form in Room 3515, 1801 K Street
NW (between 18th and 19th Streets
NW), Washington, DC 20006 between
9:00 a.m. and 5:00 p.m. on weekdays.
FDIC: You may submit comments,
identified by RIN 3064–AE80, by any of
the following methods:
• Agency Website: https://
www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting
comments on the Agency website.
• Email: Comments@FDIC.gov.
Include ‘‘RIN 3064–AE80’’ on the
subject line of the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/RIN
3064–AE80, Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
• Hand Delivery/Courier: Comments
may be hand delivered to the guard
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station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
All comments received must include the
agency name (FDIC) and RIN 3064–
AE80 and will be posted without change
to https://www.fdic.gov/regulations/laws/
federal, including any personal
information provided.
OCC: You may submit comments to
the OCC by any of the methods set forth
below. Commenters are encouraged to
submit comments through the Federal
eRulemaking Portal or email, if possible.
Please use the title ‘‘Capital Adequacy:
Standardized Approach for Calculating
the Exposure Amount of Derivative
Contracts’’ to facilitate the organization
and distribution of the comments. You
may submit comments by any of the
following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to
www.regulations.gov. Enter ‘‘Docket ID
OCC–2018–0030’’ in the Search Box and
click ‘‘Search.’’ Click on ‘‘Comment
Now’’ to submit public comments.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting
public comments.
• Email: regs.comments@
occ.treas.gov.
• Mail: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, 400 7th
Street SW, suite 3E–218, Washington,
DC 20219.
• Hand Delivery/Courier: 400 7th
Street SW, Suite 3E–218, Washington,
DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2018–0030’’ in your comment.
In general, the OCC will enter all
comments received into the docket and
publish the comments on the
Regulations.gov website without
change, including any business or
personal information that you provide
such as name and address information,
email addresses, or phone numbers.
Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
include any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
rulemaking action by any of the
following methods:
• Viewing Comments Electronically:
Go to www.regulations.gov. Enter
‘‘Docket ID OCC–2018–0030’’ in the
Search box and click ‘‘Search.’’ Click on
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Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Proposed Rules
‘‘Open Docket Folder’’ on the right side
of the screen. Comments and supporting
materials can be viewed and filtered by
clicking on ‘‘View all documents and
comments in this docket’’ and then
using the filtering tools on the left side
of the screen.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov.
The docket may be viewed after the
close of the comment period in the same
manner as during the comment period.
• Viewing Comments Personally: You
may personally inspect comments at the
OCC, 400 7th Street SW, Washington,
DC 20219. For security reasons, the OCC
requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 649–6700 or,
for persons who are deaf or hearing
impaired, TTY, (202) 649–5597. Upon
arrival, visitors will be required to
present valid government-issued photo
identification and submit to security
screening in order to inspect comments.
FOR FURTHER INFORMATION CONTACT:
Board: Constance M. Horsley, Deputy
Associate Director, (202) 452–5239;
David Lynch, Deputy Associate
Director, (202) 452–2081; Elizabeth
MacDonald, Manager, (202) 475–6316;
Michael Pykhtin, Manager, (202) 912–
4312; Mark Handzlik, Senior
Supervisory Financial Analyst, (202)
475–6636; Sara Saab, Supervisory
Financial Analyst, (202) 872–4936; or
Noah Cuttler, Senior Financial Analyst,
(202) 912–4678; Division of Supervision
and Regulation; or Benjamin W.
McDonough, Assistant General Counsel,
(202) 452–2036; Mark Buresh, Counsel,
(202) 452–5270; Andrew Hartlage,
Counsel, (202) 452–6483; Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf,
(202) 263–4869.
FDIC: Bobby R. Bean, Associate
Director, bbean@fdic.gov; Irina Leonova,
Senior Policy Analyst, ileonova@
fdic.gov; Peter Yen, Senior Policy
Analyst, pyen@fdic.gov, Capital Markets
Branch, Division of Risk Management
Supervision, (202) 898–6888; or Michael
Phillips, Counsel, mphillips@fdic.gov;
Catherine Wood, Counsel, cawood@
fdic.gov; Supervision Branch, Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
OCC: Guowei Zhang, Risk Expert,
Capital Policy, (202) 649–7106; Kevin
Korzeniewski, Counsel, (202) 649–5490;
or Ron Shimabukuro, Senior Counsel,
(202) 649–5490, or, for persons who are
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deaf or hearing impaired, TTY, (202)
649–5597, Chief Counsel’s Office, Office
of the Comptroller of the Currency, 400
7th Street SW, Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Scope and Application of the Proposed
Rule
B. Proposal’s Interaction With Agency
Requirements and Other Proposals
C. Overview of Derivative Contracts
D. Mechanics of the Current Exposure
Methodology
E. Mechanics of the Internal Models
Methodology
F. Review of the Capital Rule’s Treatment
of Derivative Contracts
II. Standardized Approach for Counterparty
Credit Risk
A. Key Concepts
1. Netting Sets
2. Hedging Sets
3. Derivative Contract Amount for the PFE
Component Calculation
4. Collateral Recognition and
Differentiation Between Margined and
Unmargined Derivative Contracts
B. Mechanics of the Standardized
Approach for Counterparty Credit Risk
1. Exposure Amount
2. Replacement Cost
3. Aggregated Amount and Hedging Set
Amounts
4. PFE Multiplier
5. PFE Calculation for Nonstandard Margin
Agreements
6. Adjusted Derivative Contract Amount
7. Example of Calculation
III. Revisions to the Cleared Transactions
Framework
A. Trade Exposure Amount
B. Treatment of Collateral
C. Treatment of Default Fund
Contributions
IV. Revisions to the Supplementary Leverage
Ratio
V. Technical Amendments
A. Receivables Due From a QCCP
B. Treatment of Client Financial Collateral
Held by a CCP
C. Clearing Member Exposure When CCP
Performance is Not Guaranteed
D. Bankruptcy Remoteness of Collateral
E. Adjusted Collateral Haircuts for
Derivative Contracts
F. OCC Revisions to Lending Limits
VI. Impact of the Proposed Rule
VII. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. Riegle Community Development and
Regulatory Improvement Act of 1994
E. OCC Unfunded Mandates Reform Act of
1995 Determination
I. Background
A firm with a positive exposure on a
derivative contract expects to receive a
payment from its counterparty and is
subject to the credit risk that the
counterparty will default on its
obligations and fail to pay the amount
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owed under the derivative contract.
Because of this, the regulatory capital
rule (capital rule) 1 of the Board of
Governors of the Federal Reserve
System (Board), the Federal Deposit
Insurance Corporation (FDIC), and the
Office of the Comptroller of the
Currency (OCC) (together, the agencies)
requires a banking organization 2 to hold
regulatory capital based on the exposure
amount of its derivative contracts. The
agencies are issuing this notice of
proposed rulemaking (proposal) to
implement a new approach for
calculating the exposure amount of
derivative contracts under the capital
rule.
As discussed in greater detail below,
the capital rule prescribes different
approaches to measuring the exposure
amount of derivative contracts,
depending on the size and complexity
of the banking organization. For
example, all banking organizations are
required to use the current exposure
methodology (CEM) to determine the
exposure amount of their derivative
contracts under the standardized
approach of the capital rule, which is
based on formulas described in the
capital rule. Advanced approaches
banking organizations also may use an
internal models-based approach, the
internal models methodology (IMM), to
determine the exposure amount of their
derivative contracts under the advanced
approaches of the capital rule.3 The
addition of a new approach, called the
standardized approach for counterparty
credit risk (SA–CCR), would provide
1 See 12 CFR part 3 (OCC); 12 CFR part 217
(Board); 12 CFR part 324 (FDIC). The agencies have
codified the capital rule in different parts of title 12
of the CFR (part 3 (OCC); part 217 (Board); and part
324 (FDIC)), but the internal structure of the
sections within each agency’s rule are identical. All
references to sections in the capital rule or the
proposal are intended to refer to the corresponding
sections in the capital rule of each agency.
2 Banking organizations subject to the agencies’
capital rule include national banks, state member
banks, insured state nonmember banks, savings
associations, and top-tier bank holding companies
and savings and loan holding companies domiciled
in the United States, but exclude banking
organizations subject to the Board’s Small Bank
Holding Company Policy Statement (12 CFR part
225, appendix C), and certain savings and loan
holding companies that are substantially engaged in
insurance underwriting or commercial activities or
that are estate trusts, and bank holding companies
and savings and loan holding companies that are
employee stock ownership plans.
3 A banking organization is an advanced
approaches banking organization if it has at least
$250 billion in total consolidated assets or if it has
consolidated on-balance sheet foreign exposures of
at least $10 billion, or if it is a subsidiary of a
depository institution, bank holding company,
savings and loan holding company or intermediate
holding company that is an advanced approaches
banking organization. See 12 CFR 3.100(b) (OCC);
12 CFR 217.100(b) (Board); and 12 CFR 324.100(b)
(FDIC).
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important improvements to risksensitivity and calibration relative to
CEM, but also would provide a less
complex and non-model-dependent
approach than IMM.
In addition, the agencies are
proposing to revise the capital rule’s
cleared transactions framework and the
supplementary leverage ratio to
accommodate the proposed
implementation of SA–CCR, as well as
make certain other changes to the
cleared transaction framework in the
capital rule.
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A. Scope and Application of the
Proposed Rule
The capital rule provides two
methodologies for determining total
risk-weighted assets: The standardized
approach, which applies to all banking
organizations, and the advanced
approaches, which apply only to
advanced approaches banking
organizations. The standardized
approach serves as a floor on advanced
approaches banking organizations’ total
risk-weighted assets, and thus such
banking organizations must calculate
total risk-weighted assets under both
approaches.4 Total risk-weighted assets
are the denominator of the risk-based
capital ratios; regulatory capital is the
numerator.
Under the standardized approach, the
risk-weighted asset amount for a
derivative contract is the product of the
exposure amount of the derivative
contract and the risk weight applicable
to the counterparty, as provided under
the capital rule. Under the advanced
approaches, the risk-weighted asset
amount for a derivative contract is
derived using the internal ratings-based
approach, which multiplies the
exposure amount (or exposure at default
amount) of the derivative contract by a
models-based formula that uses risk
parameters determined by a banking
organization’s internal methodologies.5
Both the standardized approach and
the advanced approaches require a
banking organization to determine the
exposure amount for its derivative
contracts that are not cleared
transactions (i.e., over-the-counter
derivative contracts or noncleared
derivative contracts). As part of the
cleared transactions framework, both
4 12 CFR 3.10(c) (OCC); 12 CFR 217.10(c) (Board);
and 12 CFR 324.10(c) (FDIC). For example, an
advanced approaches banking organization’s tier 1
capital ratio is the lower of the ratio of the banking
organization’s common equity tier 1 capital to
standardized total risk-weighted assets and the ratio
of the banking organization’s common equity tier 1
capital to advanced approaches total risk-weighted
assets.
5 See generally 12 CFR 3.132 (OCC); 12 CFR
217.132 (Board); and 12 CFR 324.132 (FDIC).
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the standardized approach and the
advanced approaches require a banking
organization to determine the exposure
amount of its derivative contracts that
are cleared transactions (i.e., cleared
derivative contracts) and determine the
risk-weighted asset amounts of its
contributions or commitments to
mutualized loss sharing agreements
with central counterparties (i.e., default
fund contributions). For the advanced
approaches, an advanced approaches
banking organization may use either
CEM or IMM to calculate the exposure
amount of its noncleared and cleared
derivative contracts, as well as the riskweighted asset amounts of its default
fund contributions. For purposes of
determining these amounts for the
standardized approach, all banking
organizations must use CEM.
The proposal would revise the
standardized approach and the
advanced approaches for advanced
approaches banking organizations by
replacing CEM with SA–CCR. As a
result, for purposes of determining total
risk-weighted assets under the advanced
approaches, an advanced approaches
banking organization would have the
option to use SA–CCR or IMM to
calculate the exposure amount of its
noncleared and cleared derivative
contracts, as well as to determine the
risk-weighted asset amount of its default
fund contributions. For purposes of
determining the exposure amount of
these items under the standardized
approach, an advanced approaches
banking organization would be required
to use SA–CCR.
The capital rule also requires an
advanced approaches banking
organization to meet a supplementary
leverage ratio. The denominator of the
supplementary leverage ratio, called
total leverage exposure, includes the
exposure amount of a banking
organization’s derivative contracts. The
capital rule requires an advanced
approaches banking organization to use
CEM to determine the exposure amount
of its derivative contracts for total
leverage exposure. Under the proposal,
an advanced approaches banking
organization would be required to use
SA–CCR to determine the exposure
amount of its derivative contracts for
total leverage exposure.
As it applies to advanced approaches
banking organizations, the proposed
implementation of SA–CCR would
provide important improvements to
risk-sensitivity and calibration relative
to CEM, resulting in more appropriate
capital requirements for derivative
contracts. SA–CCR also would be
responsive to concerns raised regarding
the current regulatory capital treatment
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for derivative contracts under CEM. For
example, the industry has raised
concerns that CEM does not
appropriately recognize collateral,
including the risk-reducing nature of
variation margin, and does not provide
sufficient netting for derivative
contracts that share similar risk factors.
The agencies intend for the proposed
implementation of SA–CCR to respond
to these concerns, and to be
substantially consistent with
international standards issued by the
Basel Committee on Banking
Supervision (Basel Committee). In
addition, requiring an advanced
approaches banking organization to use
SA–CCR or IMM for all purposes under
the advanced approaches would
facilitate regulatory reporting and the
supervisory assessment of an advanced
approaches banking organization’s
capital management program.
The proposed implementation of SA–
CCR would require advanced
approaches banking organizations to
augment existing systems or develop
new ones. Accordingly, the proposal
includes a transition period, until July
1, 2020, by which time an advanced
approaches banking organization must
implement SA–CCR. An advanced
approaches banking organization may,
however, adopt SA–CCR as of the
effective date of the final rule. In
addition, the technical revisions in this
proposal, as described in section V of
this Supplementary Information, would
become effective as of the effective date
of the final rule.
While the agencies recognize that
implementation of SA–CCR offers
several improvements to CEM, it also
will require, particularly for banking
organizations with relatively small
derivatives portfolios, internal systems
enhancements and other operational
modifications that could be costly and
present additional burden. Therefore,
the proposal would not require nonadvanced approaches banking
organizations to use SA–CCR, but
instead would provide SA–CCR as an
optional approach. However, a nonadvanced approaches banking
organization that elects to use SA–CCR
for calculating its exposure amount for
noncleared derivative contracts also
would be required to use SA–CCR to
calculate the exposure amount for its
cleared derivative contracts and for
calculating the risk-weighted asset
amount of its default fund
contributions. This approach should
provide meaningful flexibility, while
promoting consistency for the regulatory
capital treatment of derivative contracts
for non-advanced approaches banking
organizations. The proposal also would
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allow non-advanced approaches
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banking organizations to adopt SA–CCR
as of the effective date of the final rule.
TABLE 1—SCOPE AND APPLICABILITY OF THE PROPOSED RULE
Advanced approaches banking organizations,
advanced
approaches total risk-weighted assets.
Non-cleared
derivative
contracts
Cleared
transactions
framework
Default fund
contribution
Option to use SA–CCR or IMM to
determine exposure amount for
derivative contracts under the
advanced approaches.
Must use the approach selected
for purposes of the counterparty
credit risk framework (either
SA–CCR or IMM), to determine
the trade exposure amount for
cleared derivative contracts.
Must use SA–CCR to determine
trade exposure amount for
cleared derivative contracts.
Must use SA–CCR for purposes
of the default fund contribution
included in risk-weighted assets.
Advanced approaches banking or- Must use SA–CCR to determine
ganizations, standardized apexposure amount for derivative
proach total risk-weighted assets.
contracts.
Non-advanced approaches banking organizations, standardized
approach total risk-weighted assets.
Option to use CEM or SA–CCR to
determine exposure amount for
derivative contracts.
Advanced approaches banking organizations, supplementary leverage ratio.
Must use modified SA–CCR to determine the exposure amount of derivative contracts for total leverage exposure under the supplementary leverage ratio.
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Question 1: The agencies invite
comment on all aspects of this proposal.
In addition to the risk-sensitivity
enhancements SA–CCR provides
relative to CEM, what other
considerations relevant to the
determination of whether to replace
CEM with SA–CCR for advanced
approaches banking organizations
should the agencies consider?
Question 2: The agencies invite
comment on the proposed effective date
of SA–CCR for advanced approaches
banking organizations. What alternative
timing should be considered and why?
B. Proposal’s Interaction With Agency
Requirements and Other Proposals
The Board’s single counterparty credit
limit rule (SCCL) authorizes a banking
organization subject to the SCCL to use
any methodology that such a banking
organization may use under the capital
rule to value a derivative contract for
purposes of the SCCL.6 Thus, for
valuing a derivative contract under the
SCCL, the proposal would require an
advanced approaches banking
organization that is subject to the SCCL
to use SA–CCR or IMM and would
require a non-advanced approaches
banking organization that is subject to
the SCCL to use CEM or SA–CCR.7 In
addition, the agencies net stable funding
6 83
FR 38460 (August 6, 2018).
of the Board’s other regulations rely on
amounts determined under the capital rule, and the
introduction of SA–CCR therefore could indirectly
effect all such rules.
7 Many
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Must use the approach selected
for purposes of the counterparty
credit risk framework (either
CEM or SA–CCR), to determine
the trade exposure amount for
cleared derivative contracts.
Must use SA–CCR for purposes
of the default fund contribution
included in risk-weighted assets.
Must use the approach selected
for purposes of the counterparty
credit risk framework (either
CEM or SA–CCR) for purposes
of the default fund contribution
included in risk-weighted assets.
ratio proposed rules would crossreference provisions of the agencies’
supplementary leverage ratio that are
proposed to be amended in this
proposal, and thus this proposal
potentially could affect elements of the
net stable funding ratio rulemaking.8
The agencies also are in the process
of considering the appropriate scope of
‘‘advanced approaches banking
organizations’’ and may propose
changes to the scope of this term in the
near future. The agencies anticipate that
the proposal on the scope of ‘‘advanced
approaches banking organizations’’
would have an overlapping comment
period with this proposal. Commenters
should consider both proposals together
for purposes of their comments to the
agencies.
C. Overview of Derivative Contracts
In general, derivative contracts
represent agreements between parties
either to make or receive payments or to
buy or sell an underlying asset on a
certain date (or dates) in the future.
Parties generally use derivative
contracts to mitigate risk, although
nonhedging use of derivative contracts
also occurs. For example, an interest
rate derivative contract allows a party to
manage the risk associated with a
change in interest rates, while a
commodity derivative contract allows a
party to lock in commodity prices in the
future and thereby minimize any
8 See
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exposure attributable to any uncertainty
with respect to subsequent movements
in those prices.
The value of a derivative contract, and
thus a party’s exposure to its
counterparty, changes over the life of
the contract based on movements in the
value of the reference rates, assets, or
indices underlying the contract. A party
with a positive current exposure expects
to receive a payment or other beneficial
transfer from the counterparty and is
considered to be ‘‘in the money.’’ A
party that is in the money is subject to
counterparty credit risk: The risk that
the counterparty will default on its
obligations and fail to pay the amount
owed under the transaction. In contrast,
a party with a zero or negative current
exposure does not expect to receive a
payment or beneficial transfer from the
counterparty and is considered to be ‘‘at
the money’’ or ‘‘out of the money.’’ A
party that has no current exposure to
counterparty credit risk may have
exposure to counterparty credit risk in
the future if the derivative contract
becomes ‘‘in the money.’’
To mitigate the counterparty credit
risk of a derivative contract, parties
typically exchange collateral. In the
derivatives context, collateral is either
variation margin or initial margin (also
known as independent collateral).
Parties exchange variation margin on a
periodic basis during the term of a
derivative contract, as typically
specified in a variation margin
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agreement or by regulation.9 Variation
margin offsets changes in the market
value of a derivative contract and
thereby covers the potential loss arising
from default of a counterparty. Variation
margin may not always be sufficient to
cover a party’s positive exposure (e.g.,
due to delays in receiving collateral),
and thus parties may exchange initial
margin. Parties typically exchange
initial margin at the outset of the
derivative contract and usually in an
amount that does not directly depend
on changes in the value of the derivative
contract. Parties typically post initial
margin in amounts that would reduce
the likelihood of a positive exposure
amount for the derivative contract in the
event of the counterparty’s default,
resulting in overcollateralization.
To facilitate the exchange of
collateral, variation margin agreements
typically provide for a threshold amount
and a minimum transfer amount. The
threshold amount is the amount by
which the market value of the derivative
contract can change before a party must
collect or post variation margin (in other
words, the threshold amount specifies
an acceptable amount of undercollateralization). The minimum
transfer amount is the smallest amount
of collateral that a party must transfer
when it is required to exchange
collateral under the variation margin
agreement. Parties generally apply a
discount (also known as a haircut) to
collateral to account for a potential
reduction in the value of the collateral
during the period between the last
exchange of collateral before the close
out of the derivative contract (as in the
case of default of the counterparty) and
the replacement of the contract on the
market. This period is known as the
margin period of risk (MPOR). Often,
two parties will enter into a large
number of derivative contracts together.
In such cases, the parties may enter into
a netting agreement to allow for
offsetting of the derivative contracts and
to streamline certain aspects of the
contracts, including the exchange of
collateral.
Parties to a derivative contract may
clear their derivative contracts through
a central counterparty (CCP). The use of
central clearing is designed to improve
the safety and soundness of the
derivatives markets through the
multilateral netting of exposures,
establishment and enforcement of
collateral requirements, and the
promotion of market transparency. A
party engages with a CCP either as a
9 See, e.g., Swap Margin Rule, 12 CFR part 45
(OCC); 12 CFR part 237 (Board); 12 CFR part 349
(FDIC).
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clearing member or as a clearing
member client. A clearing member is a
member of, or direct participant in, a
CCP that is entitled to enter into
transactions with the CCP. A clearing
member client is a party to a cleared
transaction associated with a CCP in
which a clearing member acts as a
financial intermediary with respect to
the clearing member client and either
takes one position with the client and
an offsetting position with the CCP (the
principal model) or guarantees the
performance of the clearing member
client to the CCP (the agency model).
With respect to the latter, the clearing
member generally is responsible for
fulfilling CCP initial and variation
margin calls irrespective of the client’s
ability to post collateral.
D. Mechanics of the Current Exposure
Methodology
Under CEM, the exposure amount of
a single derivative contract is equal to
the sum of its current credit exposure
and potential future exposure (PFE).10
Current credit exposure reflects a
banking organization’s current exposure
to its counterparty and is equal to the
greater of zero and the on-balance sheet
fair value of the derivative contract.11
PFE approximates the banking
organization’s potential exposure to its
counterparty over the remaining
maturity of the derivative contract. PFE
equals the product of the notional
amount of the derivative contract and a
supervisory-provided conversion factor,
which reflects the potential volatility in
the reference asset for the derivative
contract.12 The capital rule gives the
supervisory-provided conversion factors
via a simple look-up table, based on the
derivative contract’s type and remaining
maturity.13 In general, potential
exposure increases as volatility and
duration of the derivative contract
increases.
If certain criteria are met, CEM allows
a banking organization to measure the
exposure amount of a portfolio of its
derivative contracts with a counterparty
on a net basis, rather than on a gross
10 See 12 CFR 3.34 (OCC); 12 CFR 217.34 (Board);
12 CFR 324.34 (FDIC).
11 12 CFR 3.34(a)(1)(i) (OCC); 12 CFR
217.34(a)(1)(i) (Board); 12 CFR 324.34(a)(1)(i)
(FDIC).
12 12 CFR 3.34(a)(1)(ii) (OCC); 12 CFR
217.34(a)(1)(ii) (Board); 12 CFR 324.34(a)(1)(ii)
(FDIC).
13 12 CFR 3.34, Table 1 to § 3.34 (OCC); 12 CFR
217.34, Table 1 to § 217.34 (Board); 12 CFR 324.34,
Table 1 to § 324.34 (FDIC). The derivative contract
types are interest rate, exchange rate, investment
grade credit, non-investment grade credit, equity,
gold, precious metals except gold, and other. The
maturities are one year or less, greater than one year
and less than or equal to five years, and greater than
five years.
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basis, resulting in a lower measure of
exposure and thus a lower capital
requirement. A banking organization
may measure, on a net basis, derivative
contracts that are subject to the same
qualifying master netting agreement
(QMNA). A QMNA, in general, means a
netting agreement that permits a
banking organization to terminate,
close-out on a net basis, and promptly
liquidate or set off collateral upon an
event of default of the counterparty.14
To qualify as a QMNA, the netting
agreement must satisfy certain
operational requirements under § l.3 of
the capital rule.15
For derivative contracts subject to a
QMNA, the exposure amount equals the
sum of the net current credit exposure
and the adjusted sum of the PFE
amounts of the derivative contracts.16
The net current credit exposure is the
greater of the net sum of all positive and
negative fair values of the individual
derivative contracts subject to the
QMNA or zero.17 Thus, derivative
contracts that have positive and
negative fair values can offset each other
to reduce the net current credit
exposure, subject to a floor of zero. The
adjusted sum of the PFE amount
component provides the netting
function, and is a function of the gross
PFE amount of the derivative contracts
and the net-to-gross ratio. The gross PFE
amount is the sum of the PFE of each
derivative contract subject to the
QMNA. The net-to-gross ratio is the
ratio of the net current credit exposure
of each derivative contract subject to the
QMNA to the sum of the positive
current credit exposure of these
derivative contracts. Specifically, the
adjusted sum of the PFE amounts equals
the sum of (1) the gross PFE amount
multiplied by 0.4 and (2) the gross PFE
14 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);
and 12 CFR 324.2 (FDIC). In 2017, the agencies
adopted a final rule that requires U.S. global
systemically important banking institutions (GSIBs)
and the U.S. operations of foreign GSIBs to amend
their qualified financial contracts to prevent their
immediate cancellation or termination if such a
firm enters bankruptcy or a resolution process.
Qualified financial contracts include derivative
contracts, securities lending, and short-term
funding transactions such as repurchase
agreements. The 2017 rulemaking would have
invalidated the ability of derivative contracts to be
subject to a QMNA. Therefore, as part of the 2017
rulemaking, the agencies revised the definition of
QMNA under the capital rule such that qualified
financial contracts could be subject to a QMNA
(notwithstanding other operational requirements).
See 82 FR 42882 (September 2017).
15 See Definition of ‘‘qualifying master netting
agreement,’’ 12 CFR 3.3 (OCC); 12 CFR 217.3
(Board); and 12 CFR 324.3 (FDIC).
16 12 CFR 3.34(a)(2) (OCC); 12 CFR 217.34(a)(2)
(Board); 12 CFR 324.34(a)(2) (FDIC).
17 12 CFR 3.34(a)(2)(i) (OCC); 12 CFR
217.34(a)(2)(i) (Board); 12 CFR 324.34(a)(2)(i)
(FDIC).
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amount multiplied by the net-to-gross
ratio and 0.6.18 Thus, as the net-to-gross
ratio decreases so will the adjusted sum
of the PFE amounts.
For all derivative contracts calculated
under CEM, a banking organization may
recognize the credit-risk-mitigating
benefits of financial collateral, pursuant
to § l.37 of the capital rule. In
particular, a banking organization may
either apply the risk weight applicable
to the collateral to the secured portion
of the exposure or net exposure amounts
and collateral amounts according to a
regulatory formula that includes certain
haircuts for collateral.19
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E. Mechanics of the Internal Models
Methodology
Under IMM, an advanced approaches
banking organization uses its own
internal models of exposure to
determine the exposure amount of its
derivative contracts. The exposure
amount under IMM is calculated as the
product of the effective expected
positive exposure (EEPE) for a netting
set, which is the time-weighted average
of the effective expected exposures (EE)
profile over a one-year horizon, and an
alpha factor.20 For the purposes of
regulatory capital calculations, the
resulting exposure amount is treated as
a loan equivalent exposure, which is the
amount effectively loaned by the
banking organization to the
18 12 CFR 3.34(a)(2)(ii) (OCC); 12 CFR
217.34(a)(2)(ii) (Board); 12 CFR 324.34(a)(2)(ii)
(FDIC).
19 12 CFR 3.34(b) (referencing 12 CFR 3.37)
(OCC); 12 CFR 217.34(b) (referencing 12 CFR
217.37) (Board); 12 CFR 324.34(b) (referencing 12
CFR 324.37) (FDIC).
20 A banking organization arrives at the exposure
amount by first determining the EE profile for each
netting set. In general, EE profile is determined by
computing exposure distributions over a set of
future dates using Monte Carlo simulations, and the
expectation of exposure at each date is the simple
average of all Monte Carlo simulations for each
date. The expiration of short-term trades can cause
the EE profile to decrease, even though a banking
organization is likely to replace short-term trades
with new trades (i.e., rollover). To account for
rollover, a banking organization converts the EE
profile for each netting set into an effective EE
profile by applying a nondecreasing constraint to
the corresponding EE profile over the first year. The
nondecreasing constraint prevents the effective EE
profile from declining with time by replacing the
EE amount at a given future date with the maximum
of the EE amounts across this and all prior
simulation dates. The EEPE for a netting set is the
time-weighted average of the effective EE profile
over a one-year horizon. EEPE would be the
appropriate loan equivalent exposure in a credit
risk capital calculation if the following assumptions
were true: There is no concentration risk,
systematic market risk, and wrong-way risk (i.e., the
size of an exposure is positively correlated with the
counterparty’s probability of default). However,
these conditions nearly never exist with respect to
a derivative contract. Thus, to account for these
risks, IMM requires a banking organization to
multiply EEPE by 1.4.
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counterparty under the derivative
contract.
F. Review of the Capital Rule’s
Treatment of Derivative Contracts
CEM was developed several decades
ago and, as a result, does not reflect
recent market conventions and
regulatory requirements that are
designed to reduce the risks associated
with derivative contracts.21 For banking
organizations with substantial
derivatives portfolios in particular, this
can result in a significant mismatch
between the risk posed by these
portfolios and the regulatory capital that
the banking organization must hold
against them. For instance, CEM does
not differentiate between margined and
unmargined derivative contracts, and it
does not function well with other
regulatory requirements, including the
swap margin rule, which mandates the
exchange of initial margin and variation
margin for specified covered swap
entities.22 In addition, the net-to-gross
ratio under CEM does not recognize, in
an economically meaningful way, the
risk-reducing benefits of a balanced
derivative portfolio (i.e., mixed long and
short positions). Further, the agencies
developed the supervisory conversion
factors provided under CEM prior to the
2007–2008 financial crisis and they
have not been recalibrated to reflect
stress volatilities observed in recent
years.
Although IMM is more risk-sensitive
than CEM, IMM is more complex and
requires prior supervisory approval
before an advanced approaches banking
organization may use it. Specifically, an
advanced approaches banking
organization seeking to use IMM must
demonstrate to its primary federal
supervisor that it has established and
maintains an infrastructure with risk
measurement and management
processes appropriate for the firm’s size
and level of complexity.23
For these reasons, the Basel
Committee developed SA–CCR and
published it as a final standard in
2014.24 Relative to CEM, SA–CCR
provides a more risk-sensitive approach
21 The agencies initially adopted CEM in 1989. 54
FR 4168 (January 27, 1989) (OCC); 54 FR 4186
(January 27, 1989) (Board); 54 FR 11500 (March 21,
1989) (FDIC). The last significant update to CEM
was in 1995. 60 FR 46170 (September 5, 1995).
22 See supra n. 9.
23 See 12 CFR 3.122 (OCC); 12 CFR 217.122
(Board); 12 CFR 324.122 (FDIC).
24 ‘‘The standardized approach for measuring
counterparty credit risk exposures,’’ Basel
Committee on Banking Supervision, March 2014
(rev. April 2014), https://www.bis.org/publ/bcbs
279.pdf. See ‘‘Foundations of the standardised
approach for measuring counterparty credit risk
exposures’’ (August 2014, rev. June 2017), https://
www.bis.org/publ/bcbslwp26.pdf.
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64665
to determining the replacement cost and
PFE for a derivative contract. Notably,
SA–CCR improves collateral recognition
(e.g., by differentiating between
margined and unmargined derivative
contracts); allows a banking
organization to recognize meaningful,
risk-reducing relationships between
derivative contracts within a balanced
derivative portfolio; and better captures
recently observed stress volatilities
among the primary risk drivers for
derivative contracts. In addition,
relative to IMM, SA–CCR provides a
standardized, nonmodelled approach
that is more accessible to banking
organizations to determine the exposure
amount for derivative contracts.
II. Standardized Approach for
Counterparty Credit Risk
A. Key Concepts
1. Netting Sets
Under SA–CCR, a banking
organization would calculate the
exposure amount of its derivative
contracts at the netting set level. The
Basel Committee standard provides that
a netting set may not be subject to more
than one margin agreement. Thus, a
banking organization, under the Basel
Committee standard, would need to
calculate the exposure amount at the
level of each margin agreement and not
at the level of each QMNA, regardless
whether multiple margin agreements are
under the same QMNA. The agencies
recognize, however, that the Basel
Committee standard does not reflect
current industry practice and regulatory
requirements, in which QMNAs often
cover multiple margin agreements to
order to reduce credit risk by increasing
the net settlement of derivative
contracts. Accordingly, and as with
CEM, the proposal would allow a
banking organization to calculate the
exposure amount of multiple derivative
contracts under the same netting set so
long as each derivative contract is
subject to the same QMNA. For
purposes of SA–CCR, a derivative
contract that is not subject to a QMNA
would comprise a netting set of one
derivative contract. Thus, the proposal
would define a netting set to mean
either one derivative contract between a
banking organization and a single
counterparty, or a group of derivative
contracts between a banking
organization and a single counterparty
that are subject to a QMNA. The
proposal would retain the capital rule’s
current definition of a QMNA.
2. Hedging Sets
For the PFE calculation under SA–
CCR, a banking organization would fully
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or partially net derivative contracts
within the same netting set that share
similar risk factors. This approach
would recognize that derivative
contracts with similar risk factors share
economically meaningful relationships
(i.e., are more tightly correlated) and
thus netting would be appropriate. In
contrast, CEM recognizes only 60
percent of the netting benefits of
derivative contracts subject to a QMNA,
without accounting for relationships
between derivative contracts’
underlying risk factors.
To effectuate this approach, the
proposal would introduce the concept
of hedging sets, which would generally
mean those derivative contracts within
the same netting set that share similar
risk factors. The proposal would define
five types of hedging sets—interest rate,
exchange rate, credit, equity, and
commodities—and would provide
formulas for netting within each
hedging set. Each formula would be
particular to each hedging set type and
would reflect regulatory correlation
assumptions between risk factors in the
hedging set.
3. Derivative Contract Amount for the
PFE Component Calculation
As with CEM, a banking organization
would use an adjusted derivative
contract amount for the PFE component
calculation under SA–CCR. Unlike
CEM, the agencies intend for the
adjusted derivative contract amount
under SA–CCR to reflect, in general, a
conservative estimate of EEPE for a
netting set composed of a single
derivative contract, assuming zero fair
value and zero collateral. As part of the
estimate, SA–CCR would use updated
supervisory factors that reflect stress
volatilities observed during the financial
crisis. The supervisory factors would
reflect the variability of the primary risk
factor of the derivative contract over a
one-year horizon. In addition, SA–CCR
would apply a separate maturity factor
to each derivative contract that would
scale down, if necessary, the default
one-year risk horizon of the supervisory
factor to the risk horizon appropriate for
the derivative contract. A banking
organization would apply a positive
sign to the derivative contract amount if
the derivative contract is long the risk
factor and a negative sign if the
derivative contract is short the risk
factor. This adjustment, along with the
assumption of zero fair value and zero
collateral, would allow a banking
organization to recognize offsetting and
diversification between derivative
contracts that share similar risk factors
(i.e., long and short derivative contracts
within the same hedging set would be
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able to fully or partially offset one
another).
4. Collateral Recognition and
Differentiation Between Margined and
Unmargined Derivative Contracts
The proposal would make several
improvements to the recognition of
collateral under SA–CCR. The proposal
would account for collateral directly
within the SA–CCR exposure amount
calculation, whereas under CEM a
banking organization recognizes the
collateral only after the exposure
amount has been determined. For
replacement cost, the proposal would
recognize collateral on a one-for-one
basis. For PFE, SA–CCR would
introduce the concept of a PFE
multiplier, which would allow a
banking organization to reduce the PFE
amount through recognition of
overcollateralization, in the form of both
variation margin and independent
collateral, and account for negative fair
value amounts of the derivative
contracts within the netting set. In
addition, the proposal would
differentiate between margined and
unmargined derivative contracts such
that a netting set that is subject to a
variation margin agreement (as defined
in the proposal) would always have a
lower or equal exposure amount than an
equivalent netting set that is not subject
to a variation margin agreement.
B. Mechanics of the Standardized
Approach for Counterparty Credit Risk
1. Exposure Amount
Under § l.132(c)(5) of the proposed
rule, the exposure amount of a netting
set would be equal to an alpha factor of
1.4 multiplied by the sum of the
replacement cost of the netting set and
PFE of the netting set. The can be
represented as follows:
exposure amount = 1.4 * (replacement
cost + PFE)
The alpha factor was included in the
Basel Committee standard under the
view that a standardized approach, such
as SA–CCR, should not produce lower
exposure amounts than a modelled
approach. Therefore, to instill a level of
conservatism consistent with the Basel
Committee standard, the proposal
would apply an alpha factor of 1.4 in
order to produce exposure measure
outcomes that generally are no lower
than those amounts calculated using
IMM. While the estimates of PFE under
SA–CCR are conservative in many cases,
the estimates of the sum of the
replacement cost and PFE under SA–
CCR would necessarily be close to
IMM’s EEPE for netting sets where the
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replacement cost dominates PFE.25
Thus, reducing the value of alpha in
SA–CCR below 1.4 could result in
exposure amounts produced by SA–CCR
that are smaller than exposure amounts
produced by IMM for such deep in-themoney netting sets.
The exposure amount would be zero,
however, for a netting set that consists
only of sold options in which the
counterparties to the options have paid
the premiums up front and the options
are not subject to a variation margin
agreement.
Question 3: The agencies invite
comment on whether the objective of
ensuring that SA–CCR produces more
conservative exposure amounts than
IMM is appropriate for the
implementation of SA–CCR. Does the
incorporation of the alpha factor
support this objective, why or why not?
Are there alternative measures the
agencies could incorporate into SA–CCR
to support this objective? Are there other
objectives regarding the comparability
of SA–CCR and IMM that the agencies
should consider? The agencies
encourage commenters to provide
appropriate data or examples to support
their response.
2. Replacement Cost
SA–CCR would provide separate
formulas for replacement cost
depending on whether the counterparty
to a banking organization is required to
post variation margin. In general, when
a banking organization is a net receiver
of financial collateral, the amount of
financial collateral would be positive,
which would reduce replacement cost.
Conversely, when the banking
organization is a net provider of
financial collateral, the amount of
financial collateral would be negative,
which would increase replacement cost.
In all cases, replacement cost cannot be
lower than zero. In addition, for
purposes of calculating the replacement
cost component (and the PFE
multiplier), the fair value amount of the
derivative contract would exclude any
valuation adjustments. The purpose of
excluding valuation adjustments is to
25 For an unmargined netting set, IMM’s EE
profile starts at t=0, which is the date at which
replacement cost under SA–CCR is calculated. For
a deep in-the-money netting set, PFE would be
much smaller than replacement cost, while IMM’s
EE profile would not increase significantly above
replacement cost before declining (due to cash flow
payments and trade expiration), because IMM
volatilities typically are smaller than the volatilities
implied by SA–CCR’s PFE. The nondecreasing
constraint would not allow the effective EE profile
to drop below the replacement cost level, resulting
in IMM’s EEPE being slightly above replacement
cost. Thus, both IMM’s EEPE and SA–CCR’s
replacement cost plus PFE would be slightly above
replacement cost and, therefore, close to each other.
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arrive at the risk-free value of the
derivative contract, and this
requirement would exclude credit
valuation adjustments, among other
adjustments, as applicable.
Section l.2 of the proposed rule
provides a definition of variation margin
and independent collateral, as well as
the variation margin amount and the
independent collateral amount. The
proposal would define variation margin
as financial collateral that is subject to
a collateral agreement provided by one
party to its counterparty to meet the
performance of the first party’s
obligations under one or more
transactions between the parties as a
result of a change in value of such
obligations since the last time such
financial collateral was provided.
Variation margin amount would mean
the fair value amount of the variation
margin that a counterparty to a netting
set has posted to a banking organization
less the fair value amount of the
variation margin posted by the banking
organization to the counterparty.
Further, consistent with the capital
rule, the amount of variation margin
included in the variation margin
amount would be adjusted by the
standard supervisory haircuts under
§ l.132(b)(2)(ii) of the capital rule. The
standard supervisory haircuts ensure
that the derivative contract remains
appropriately collateralized from a
regulatory capital perspective,
notwithstanding any changes in the
value of the financial collateral. In
particular, the standard supervisory
haircuts address the possible decrease
in the value of the financial collateral
received by a banking organization and
an increase in the value of the financial
collateral posted by the banking
organization over a one-year time
horizon.
The standard supervisory haircuts are
based on a ten-business-day holding
period for derivative contracts, and the
capital rule requires a banking
organization to adjust, as applicable, the
standard supervisory haircuts to align
with the risk horizon of the associated
derivative contract. To be consistent
with this proposal, the agencies are
proposing to revise the standard
supervisory haircuts so that they align
with the maturity factor adjustments as
provided under SA–CCR. In particular,
an unmargined derivative contract and
a margined derivative contract that is
not a cleared transaction would receive
a holding period of 10 business days. A
derivative contract that is a cleared
transaction would receive a holding
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period of five business days.26 A
banking organization would be required
to use a holding period of 20 business
days for collateral associated with a
derivative contract that is within a
netting set that is composed of more
than 5,000 derivative contracts that are
not cleared transactions, and if a netting
set contains one or more trades
involving illiquid collateral or a
derivative contract that cannot be easily
replaced. Notwithstanding the
aforementioned, a banking organization
would be required to double the
applicable holding period if the
derivative contract is subject to an
outstanding dispute over variation
margin.
The proposal would define
independent collateral as financial
collateral, other than variation margin,
that is subject to a collateral agreement,
or in which a banking organization has
a perfected, first-priority security
interest or, outside of the United States,
the legal equivalent thereof (with the
exception of cash on deposit; and
notwithstanding the prior security
interest of any custodial agent or any
prior security interest granted to a CCP
in connection with collateral posted to
that CCP), and the amount of which
does not change directly in response to
the value of the derivative contract or
contracts that the financial collateral
secures.
The proposal would define the net
independent collateral amount as the
fair value amount of the independent
collateral that a counterparty to a
netting set has posted to a banking
organization less the fair value amount
of the independent collateral posted by
the banking organization to the
counterparty, excluding such amounts
held in a bankruptcy remote manner,27
or posted to a qualifying central
counterparty (QCCP) and held in
conformance with the operational
requirements in § l.3 of the capital
rule. As with variation margin,
independent collateral also would be
subject to the standard supervisory
haircuts under § l.132(b)(2)(ii) of the
capital rule.
Under § l.132(c)(6)(ii) of the
proposed rule, the replacement cost of
a netting set that is not subject to a
variation margin agreement is the
greater of (1) the sum of the fair values
26 As described in section V of this preamble, the
agencies are proposing to apply a five-day holding
period to all derivative contracts that are cleared
transactions, regardless whether the method the
banking organization uses to calculate the exposure
amount of the derivative contract.
27 ‘‘Bankruptcy remote’’ is defined in § l.2 of the
capital rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); and 12 CFR 324.2 (FDIC).
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64667
(after excluding any valuation
adjustments) of the derivative contracts
within the netting set, less the net
independent collateral amount
applicable to such derivative contracts,
or (2) zero. This can be represented as
follows:
replacement cost = max{V¥C; 0}
Where:
V is the fair values (after excluding any
valuation adjustments) of the derivative
contracts within the netting set; and
C is the net independent collateral amount
applicable to such derivative contracts.
The same requirement would apply to
a netting set that is subject to a variation
margin agreement under which the
counterparty is not required to post
variation margin. In the latter case, C
would also include the negative amount
of the variation margin that the banking
organization posted to the counterparty
(thus increasing replacement cost).
For netting sets subject to a variation
margin agreement under which the
counterparty must post variation
margin, the replacement cost, as
provided under § l.132(c)(6)(i) of the
proposed rule, would equal the greater
of (1) the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the sum of the net
independent collateral amount and the
variation margin amount applicable to
such derivative contracts; (2) the sum of
the variation margin threshold and the
minimum transfer amount applicable to
the derivative contracts within the
netting set less the net independent
collateral amount applicable to such
derivative contracts; or (3) zero. This
can be represented as follows:
replacement cost = max{V¥C; VMT +
MTA¥NICA; 0}
Where:
V is the fair values (after excluding any
valuation adjustments) of the derivative
contracts within the netting set;
VMT is the variation margin threshold
applicable to the derivative contracts
within the netting set;
MTA is the minimum transfer amount
applicable to the derivative contracts
within the netting set; and
C is the sum of the net independent collateral
amount and the variation margin amount
applicable to such derivative contracts.
NICA is the net independent collateral
amount applicable to such derivative
contracts.
The requirement for the replacement
cost of a netting set subject to a variation
margin agreement is designed to
account for the maximum possible
unsecured exposure amount of the
netting set that would not trigger a
variation margin call. For example, a
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derivative contract with a high variation
margin threshold would have a higher
replacement cost compared to an
equivalent derivative contract with a
lower variation margin threshold.
Section l.2 of the proposed rule would
define the variation margin threshold
and the minimum transfer amount. The
variation margin threshold would mean
the amount of the credit exposure of a
banking organization to its counterparty
that, if exceeded, would require the
counterparty to post variation margin to
the banking organization. The minimum
transfer amount would mean the
smallest amount of variation margin that
may be transferred between
counterparties to a netting set.
In the agencies’ experience, variation
margin agreements can include
variation margin thresholds that are set
at such high levels that the netting set
is effectively unmargined since the
counterparty would never breach the
threshold and be required to post
variation margin. The agencies are
concerned that in such a case the
variation margin threshold would result
in an unreasonably high replacement
cost, because it is not attributable to the
risk associated with the derivative
contract but rather the terms of the
variation margin agreement. Therefore,
the proposal would cap the exposure
amount of a netting set subject to a
variation margin agreement at the
exposure amount of the same netting set
calculated as if the netting set were not
subject to a variation margin
agreement.28
For a netting set that is subject to
multiple variation margin agreements,
or a hybrid netting set, a banking
28 There could be a situation unrelated to the
value of the variation margin threshold in which
the exposure amount of a margined netting set
would be greater than the exposure amount of an
equivalent unmargined netting set. For example, in
the case of a margined netting set composed of
short-term transactions with a residual maturity of
10 business days or less, the risk horizon would be
the MPOR, which the proposal would floor at 10
business days. The risk horizon for an equivalent
unmargined netting set also would be equal to 10
business days because this would be the floor for
the remaining maturity of such a netting set.
However, the maturity factor for the margined
netting set would be greater than the one for the
equivalent unmargined netting set because of the
application of a factor of 1.5 to margined derivative
contracts. In such an instance, the exposure amount
of a margined netting set would be more than the
exposure amount of an equivalent unmargined
netting set by a factor of 1.5, thus triggering the cap.
In addition, in the case of disputes, the MPOR of
a margined netting set would be doubled, which
could further increase the exposure amount of a
margined netting set composed of short-term
transactions with a residual maturity of 10 business
days or less above an equivalent unmargined
netting set. The agencies believe, however, that
such instances rarely occur and thus would have
minimal effect on banking organizations’ regulatory
capital.
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organization would determine
replacement cost using the methodology
described in § l.132(c)(11)(i) of the
proposed rule. A hybrid netting set is a
netting set composed of at least one
derivative contract subject to variation
margin agreement under which the
counterparty must post variation margin
and at least one derivative contract that
is not subject to such a variation margin
agreement. In particular, a banking
organization would use the
methodology described in
§ l.132(c)(6)(ii) for netting sets subject
to a variation margin agreement, except
that the variation margin threshold
would equal the sum of the variation
margin thresholds of all the variation
margin agreements within the netting
set and the minimum transfer amount
would equal the sum of the minimum
transfer amounts of all the variation
margin agreements within the netting
set.
For multiple netting sets subject to a
single variation margin agreement, a
banking organization would assign a
single replacement cost to the multiple
netting sets, according to the following
formula, as provided under
§ l.132(c)(10)(i) of the proposed rule:
Replacement Cost = max{SNSmax{VNS;
0}¥max{CMA; 0}; 0} +
max{SNSmin{VNS; 0}¥min{CMA; 0};
0},
Where:
NS is each netting set subject to the variation
margin agreement MA;
VNS is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set NS; and
CMA is the sum of the net independent
collateral amount and the variation
margin amount applicable to the
derivative contracts within the netting
sets subject to the single variation margin
agreement.
The component max{SNS max{VNS;
0}¥max{CMA; 0}; 0} reflects the
exposure amount produced by the
netting sets that have current positive
market value. The exposure amount can
be offset by variation margin and
independent collateral when the
banking organization is the net receiver
of such amounts (i.e., when CMA is
positive). However, netting sets that
have current negative market value
would not be allowed to offset the
exposure amount. The component
max{SNS min{VNS; 0}¥min{CMA; 0}; 0}
reflects the exposure amount produced
when the banking organization posts
variation margin and independent
collateral to its counterparty (i.e., this
component contributes to replacement
cost only in instances when CMA is
negative), and the exposure amount
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would be offset by the netting sets that
have current negative market value.
Question 4: What are the potential
consequences of the proposal to cap the
exposure amount for a netting set
subject to a variation margin agreement
at the exposure amount for such netting
set in the absence of a variation margin
agreement?
Question 5: What are the potential
consequences of the proposal to exclude
from the fair value amount of the
derivative contract any valuation
adjustments? What are the potential
consequences of instead using the
market value of the derivative contract
less any valuation adjustments that are
specific to the banking organization?
Question 6: The agencies invite
comment on the proposed alignment of
the standard supervisory haircuts with
the maturity factor adjustments. How
could the agencies better align the
standard supervisory haircuts under the
capital rule with the maturity factor
adjustments provided under SA–CCR?
Question 7: The agencies invite
comment on the proposed definitions
included in this proposal. What, if any,
alternative definitions should the
agencies consider, particularly to
achieve greater consistency across other
agencies’ regulations?
3. Aggregated Amount and Hedging Set
Amounts
Under § l.132(c)(7) of the proposed
rule, the PFE of a netting set would be
the product of the PFE multiplier and
the aggregated amount. The proposal
would define the aggregated amount as
the sum of all hedging set amounts
within the netting set. This can be
represented as follows:
PFE = PFE multiplier * aggregated
amount,
Where:
aggregated amount is the sum of each
hedging set amount within the netting
set.
To determine the hedging set
amounts, a banking organization would
first group into separate hedging sets
derivative contracts that share similar
risk factors based on the following asset
classes: Interest rate, exchange rate,
credit, equity, and commodities. Basis
derivative contracts and volatility
derivative contracts would require
separate hedging sets. A banking
organization would then determine each
hedging set amount using asset-class
specific formulas that allow for full or
partial netting. If the risk of a derivative
contract materially depends on more
than one risk factor, whether interest
rate, exchange rate, credit, equity, or
commodity risk factor, a banking
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organization’s primary federal
regulator 29 may require the banking
organization to include the derivative
contract in each appropriate hedging
set. The hedging set amount of a
hedging set composed of a single
derivative contract would equal the
absolute value of the adjusted derivative
contract amount of the derivative
contract.
Section l.132(c)(2)(iii) of the
proposal provides the respective
hedging set definitions. Specifically, an
interest rate hedging set would mean all
interest rate derivative contracts within
a netting set that reference the same
reference currency. Thus, there would
be as many interest rate hedging sets in
a netting set as distinct currencies
referenced by the interest rate derivative
contracts. A credit derivative hedging
set would mean all credit derivative
contracts within a netting set. Similarly,
an equity derivative hedging set would
mean all equity derivative contracts
within a netting set. Thus, there could
be at most one equity hedging set and
one credit hedging set within a netting
set. A commodity derivative contract
hedging set would mean all commodity
derivative contracts within a netting set
that reference one of the following
commodity classes: Energy, metal,
agricultural, or other commodities.
Thus, there could be no more than four
commodity derivative contract hedging
sets within a netting set.
The proposal would define an
exchange rate hedging set as all
exchange rate derivative contracts
within a netting set that reference the
same currency pair. Thus, under this
approach, there could be as many
exchange rate hedging sets within a
netting set as distinct currency pairs
referenced by the exchange rate
derivative contracts. This treatment
would be generally consistent with the
Basel Committee’s standard. The
agencies recognize, however, that the
proposed approach to grouping
exchange rate derivative contracts into
hedging sets would not recognize
economic relationships of exchange rate
chains (i.e., when more than one
29 For the capital rule, the Board is the primary
federal regulator for all bank and savings and loan
holding companies, intermediate holding
companies of foreign banks, and state member
banks; the OCC is the primary federal regulator for
all national banks and federal thrifts; and the FDIC
is the primary federal regulatory for all state
nonmember banks.
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currency pair can offset the risk of
another). For example, a Yen/Dollar
forward contract and a Dollar/Euro
forward contract, taken together, may be
economically equivalent, with properly
set notional amounts, to a Yen/Euro
forward contract. To capture this
economic relationship, the agencies are
seeking comment on an alternative
definition of an exchange rate hedging
set that differs from the one in the Basel
Committee’s standard. Under the
alternative definition, an exchange rate
derivative contract hedging set would
mean all exchange rate derivative
contracts within a netting set that
reference the same non-U.S. currency.
Thus, a banking organization would be
required, under the proposed alternative
definition, to include in separate
hedging sets an exchange rate derivative
contract that references two or more
foreign currencies. For example, a
banking organization would include the
Yen/Euro forward contract both in one
hedging set consisting of Yen derivative
contracts and another hedging set
consisting of Euro derivative contracts.
Under this alternative approach, there
could be as many exchange rate
derivative contract hedging sets as nonU.S. referenced currencies.
The proposal sets forth treatments for
volatility derivative contracts and basis
derivative contracts separate from the
treatment for the risk factors described
above. A basis derivative contract would
mean a non-foreign-exchange derivative
contract (i.e., the contract is
denominated in a single currency) in
which the cash flows of the derivative
contract depend on the difference
between two risk factors that are
attributable solely to one of the
following derivative asset classes:
Interest rate, credit, equity, or
commodity. A basis derivative contract
hedging set would mean all basis
derivative contracts within a netting set
that reference the same pair of risk
factors and are denominated in the same
currency. A volatility contract would
mean a derivative contract in which the
payoff of the derivative contract
explicitly depends on a measure of the
volatility of an underlying risk factor to
the derivative contract. Examples of
volatility derivative contracts include
variance and volatility swaps and
options on realized or implied volatility.
A volatility derivative contract hedging
set would mean all volatility derivative
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contracts within a netting set that
reference one of interest rate, exchange
rate, credit, equity, or commodity risk
factors, separated according to the
requirements under
§ l.132(c)(2)(iii)(A)–(E) of the proposed
rule.
Question 8: Should SA–CCR include
the alternative treatment for exchange
rate derivative contracts in order to
recognize the economic equivalence of
chains of exchange rate transactions?
What would be the benefit of including
such an alternative treatment?
Commenters providing information
regarding an alternative treatment are
encouraged to provide support for such
treatment, together with information
regarding any associated burden and
complexity.
a. Interest Rate Derivative Contracts
The hedging set amount for interest
rate derivative contracts would be
determined under § l.132(c)(8)(i) of the
proposed rule. The agencies recognize
that interest rate derivative contracts
with close tenors (i.e., the amount of
time remaining before the end date of
the derivative contract) are generally
highly correlated, and thus provide a
greater offset relative to interest rate
derivative contracts that do not have
close tenors. Accordingly, the formula
to determine the hedging set amount for
interest rate derivative contracts would
permit full offsetting within a tenor
category, and partial offsetting across
tenor categories. The tenor categories
are less than one year, between one and
five years, and more than five years. The
proposal would use a correlation factor
of 70 percent across adjacent tenor
categories and a correlation factor of 30
percent across nonadjacent tenor
categories.30 The tenor of a derivative
contract would be based on the period
between the present date and the end
date of the derivative contract, which,
under the proposal, would mean the last
date of the period referenced by the
derivative contract, or if the derivative
contract references another instrument,
the period referenced by the underlying
instrument.
Accordingly, a banking organization
would calculate the hedging set amount
for interest rate derivative contracts
according to the following formula:
30 See ‘‘Foundations of the standardised approach
for measuring counterparty credit risk exposures.’’
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The proposal also includes a simpler
formula that does not provide an offset
across tenor categories. In this case, the
hedging set amount of the interest rate
derivative contracts would equal the
sum of the absolute amounts of each
tenor category, which would be the sum
of the adjusted derivative contract
amounts within each respective tenor
category. The simpler formula would
always result in a more conservative
measure of the hedging set amount for
interest rate derivative contracts of
different tenor categories but may be
less burdensome for banking
organizations with smaller interest rate
derivative contract portfolios. Under the
proposal, a banking organization could
elect to use this simpler formula for
some or all of its interest rate derivative
contracts.
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b. Exchange Rate Derivative Contracts
The hedging set amount for exchange
rate derivative contracts would be
determined under § l.132(c)(8)(ii) of
the proposed rule. The agencies
recognize that exchange rate derivative
contracts that reference the same
currency pair generally are driven by
the same market factor (i.e., the
exchange spot rate between these
currencies) and thus are highly
correlated. Therefore, the formula to
determine the hedging set amount for
exchange rate derivative contracts
would allow for full offsetting within
the exchange rate derivative contract
hedging set. Accordingly, the hedging
set amount for exchange rate derivative
contracts would equal the absolute
value of the sum of the adjusted
derivative contract amounts within the
hedging set.
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c. Credit Derivative Contracts and
Equity Derivative Contracts
A banking organization would use the
same formula to determine the hedging
set amount for both its credit derivative
contracts and equity derivative
contracts. The formula would be
provided under § l.132(c)(8)(iii) of the
proposed rule. The formula would allow
for full offsetting for credit or equity
contracts referencing the same entity,
and would use a single-factor model to
allow for partial offsetting when
aggregating across distinct reference
entities. The proposed single-factor
model recognizes that credit spreads
and equity prices of different entities
within a hedging set are, on average,
positively correlated.31 The proposed
31 The dependence between N random variables
can be described by an NxN correlation matrix. In
the most general case, such a correlation matrix
requires estimation of N*(N–1)/2 individual
correlation parameters. Estimating these
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single-factor model would use a single
systematic component to describe joint
movement of credit spreads or equity
prices that are responsible for positive
correlations, and would use an
idiosyncratic component to describe
entity-specific dynamics of each
derivative contract.
The proposal would provide
supervisory correlation parameters for
credit derivative contracts and equity
derivative contracts that depend on
whether the derivative contract
references a single name entity or an
index. A single name entity credit
derivative and a single name entity
equity derivative would receive a
correlation factor of 50 percent, while a
credit index and equity index would
receive a correlation factor of 80
percent, the higher number reflecting
partial diversification of idiosyncratic
risk within an index. The pairwise
correlation between two entities is the
product of the corresponding correlation
factors, so that the pairwise correlation
between two single name entities is 25
percent, between one single name entity
and one index is 40 percent, and
between two indices is 64 percent.
Thus, the pairwise correlation between
two single name entities is less than the
pairwise correlation between an entity
and an index, which is less than the
pairwise correlation between two
indices. The application of a higher
correlation factor does not necessarily
result in a higher exposure amount, as
there would be a reduction of the
exposure amount for balanced portfolios
but an increase in the exposure amount
for directional portfolios.32
A banking organization would
calculate the hedging set amount for a
credit derivative contract hedging set or
an equity derivative contract hedging set
according to the following formula:
Where:
k is each reference entity within the hedging
set;
K is the number of reference entities within
the hedging set;
AddOn (Refk) equals the sum of the adjusted
derivative contract amounts for all
derivative contracts within the hedging
set that reference reference entity k; and
rk equals the applicable supervisory
correlation factor, as provided in Table 2.
d. Commodity Derivative Contracts
A banking organization would use a
similar single-factor model to determine
the hedging set amount for commodity
derivative contracts as it would use for
credit derivative contracts and equity
derivative contracts. The hedging set
amount of commodity derivative
contracts would be determined under
§ l.132(c)(8)(iv) of the proposed rule.
Under the proposal, a banking
organization would group commodity
derivatives into one of four hedging sets
based on the following commodity
classes: Energy, metal, agricultural and
other. Under the single-factor model
used for commodity derivative
contracts, a banking organization would
be able to offset fully all derivative
contracts within a hedging set that
reference the same commodity type;
however, the banking organization
could only partially offset derivative
contracts within a hedging set that
reference different commodity types.
For example, a hedging set composed of
energy commodities may include crude
oil derivatives and coal derivatives.
Under the proposal, a banking
organization could fully offset all crude
oil derivatives; however, it could only
partially offset a crude oil derivative
against a coal derivative. In addition, a
banking organization cannot offset
commodity derivatives that belong to
different hedging sets (i.e., a forward
contract on crude oil cannot hedge a
forward contract on corn).
The agencies recognize that specifying
individual commodity types is
operationally difficult. Indeed, it is
likely impossible to specify sufficiently
all relevant distinctions between
commodity types so that all basis risk is
captured. Accordingly, the proposal
would allow banking organizations to
recognize commodity types without
regard to characteristics such as location
or quality. For example, a banking
organization may recognize crude oil as
a commodity type, and would not need
to distinguish further between West
Texas Intermediate and Saudi Light
crude oil. The agencies expect to
monitor the commodity-type
distinctions made within the industry to
ensure that they are sufficiently
correlated for full-offset treatment under
SA–CCR.
The agencies are proposing not to
provide separate supervisory factors for
electricity and oil/gas components of
the energy commodity class, as
provided under the Basel Committee
standard. Rather, the agencies are
proposing to provide a single
supervisory factor for an energy
commodity class that generally would
include derivative contracts that
reference electricity and oil/gas. In
addition, the agencies are proposing not
to provide more granular commodity
categories than those provided under
the Basel Committee’s standard. The
agencies believe that more granular
commodity classes could pose
operational challenges for banking
organizations and could negate certain
hedging benefits that may otherwise be
available. This is because SA–CCR only
permits offsetting within commodity
classes, and additional commodity
classes thereby may reduce the
derivative contracts across which a
banking organization may hedge.
A banking organization would
calculate the hedging set amount for a
commodity derivative contract hedging
set according to the following formula:
correlations is problematic when N is large. Factor
models are a popular means of reducing the number
of independent correlation parameters by assuming
that each random variable is driven by a
combination of a small number of systematic factors
(which are the same for all N random variables) and
an idiosyncratic factor (which is unique to each
random variable and is independent from all other
factors). The simplest factor model is a single-factor
model that assumes that a single systematic factor
drives all N random variables.
32 A higher correlation factor means that the
underlying risk factors are more closely aligned. For
a directional portfolio, more alignment between the
risk factors would result in a more concentrated
risk, leading to a higher exposure amount. For a
balanced portfolio, more alignment between the risk
factors would result in more offsetting of risk,
leading to a lower exposure amount.
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Question 9: What other commodity
classes should the agencies consider for
hedging set treatment, taking into
account operational challenges for
banking organizations and potential
hedging benefits of the derivative
contracts? What would be the
consequences of not specifying the
commodity types within each
commodity class that are eligible for full
offsetting? What level of granularity
regarding the attributes of a commodity
type would be required to appropriately
distinguish among them?
Where:
V is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set;
C is the sum of the net independent collateral
amount and the variation margin amount
applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
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Question 10: Can the PFE multiplier
be calibrated to more appropriately
recognize the risk-reducing effects of
collateral and a netting set with a
negative market value for purposes of
the PFE calculation? Is the 5 percent
floor appropriate, particularly in view of
the exponential functioning of the
formula for PFE multiplier, why or why
not? Commenters are encouraged to
provide data to support their responses.
5. PFE Calculation for Nonstandard
Margin Agreements
When a single variation margin
agreement covers multiple netting sets,
the parties exchange variation margin
based on the aggregated market value of
the netting sets. Thus, netting sets with
positive and negative market values can
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4. PFE Multiplier
Under SA–CCR, the aggregated
amount formula would not recognize
financial collateral and would assume a
zero market value for all derivative
contracts. However, excess collateral
and negative fair value of the derivative
contracts within the netting set reduce
PFE. This reduction in PFE is achieved
through the PFE multiplier, which
would recognize, if present, the amount
of excess collateral available and the
negative fair value of the derivative
contracts within the netting set.
Under the proposal, the PFE
multiplier would decrease
exponentially from a value of one as the
value of the financial collateral held
exceeds the net fair value of the
derivative contracts within the netting
set, subject to a floor of 0.05. The PFE
multiplier would decrease as the net fair
value of the derivative contracts within
the netting set decreases below zero, to
reflect that ‘‘out-of-the-money’’
offset one another to reduce the amount
of variation margin that the parties must
exchange. However, a banking
organization’s exposure amount for a
netting set is floored by zero. Thus, for
purposes of determining a banking
organization’s aggregate exposure
amount, a netting set with a negative
market value cannot offset a netting set
with a positive market value. Therefore,
in cases when a single variation
agreement covers multiple setting sets
and at least one netting set has a
negative market value, the amount of
variation margin exchanged between the
parties will be insufficient relative to
the banking organization’s exposure
amount for the netting sets.33 Under
33 For example, consider a variation margin
agreement with a zero threshold amount that covers
two netting sets, one with a market value of 100 and
the other with a market value of negative 100. The
aggregate market value of the netting sets would be
zero and thus no variation margin would be
exchanged. However, the banking organization’s
aggregate exposure amount for these netting sets
would be equal to 100 because the negative market
value of the second netting set would not be
available to offset the positive market value of the
first netting set. In the event of default of the
counterparty, the banking organization would pay
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transactions have less chance to return
to a positive, ‘‘in-the-money’’ value.
Specifically, when the component V¥C
is greater than zero, the multiplier
would be equal to one. When the
component V¥C is less than zero, the
multiplier would be less than one and
would decrease exponentially in value
as the absolute value of V¥C increases.
The PFE multiplier would approach the
floor of 0.05 as the absolute value of
V¥C becomes very large as compared
with the aggregated amount of the
netting set. Thus, the combination of the
exponential function and the floor
provides a sufficient level of
conservatism by prohibiting overly
favorable decreases in PFE when excess
collateral increases and preventing PFE
from reaching zero at any amounts of
margin.
Under § l.132(c)(7)(i) of the proposal,
a banking organization would calculate
the PFE multiplier according to the
following formula:
§ l.132(c)(10)(ii) of the proposed rule,
for multiple netting sets covered by a
single variation margin agreement such
that the banking organization’s
counterparty must post variation
margin, a banking organization would
be required to assign a single PFE equal
to the sum of PFEs for each such netting
set calculated as if none of the
derivative contracts within the netting
set are subject to a variation margin
agreement.
Since swap margin requirements
came into effect in September 2016, the
amounts of netting agreements that are
subject to more than one variation
margin agreement and hybrid netting
sets have increased. While all derivative
contracts within a netting set can fully
offset each other in the replacement cost
component calculation, regardless of
whether the netting set is subject to
multiple variation margin agreements or
is a hybrid netting set, margined
derivative contracts cannot offset
unmargined derivative contracts in the
the counterparty 100 for the second netting set and
would be exposed to a loss of 100 on the first
netting set.
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Where:
k is each commodity type within the hedging
set;
K is the number of commodity types within
the hedging set;
AddOn (Typek) equals the sum of the
adjusted derivative contract amounts for
all derivative contracts within the
hedging set that reference commodity
type k; and
r equals the applicable supervisory
correlation factor, as provided in Table 2.
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6. Adjusted Derivative Contract Amount
The agencies intend for the adjusted
derivative contract amount to represent
a conservative estimate of EEPE of a
netting set consisting of a single
derivative contract, assuming zero
market value and zero collateral, that is
either positive (if a long position) or
negative (if a short position).34 The
proposal would calculate the adjusted
derivative contract amount as a product
of four quantities: The adjusted notional
amount, the applicable supervisory
factor, the applicable supervisory delta
adjustment, and the maturity factor.
This can be represented as follows:
adjusted derivative contract amount = di
* di * MFi * SFi
Where:
di is the adjusted notional amount;
di is the applicable supervisory delta
adjustment;
MFi is the applicable maturity factor; and
SFi is the applicable supervisory factor.
The adjusted notional amount
accounts for the size of the derivative
contract and reflects attributes of the
most common derivative contracts in
each asset class. The supervisory factor
would convert the adjusted notional
amount of the derivative contract into
an EEPE based on the measured
volatility specific to each asset class
over a one-year horizon.35
Multiplication by the supervisory delta
adjustment accounts for the sensitivity
of a derivative contract (scaled to unit
size) to the underlying primary risk
factor, including the correct sign
(positive or negative) to account for the
direction of the derivative contract
amount relative to the primary risk
factor.36 Finally, multiplication by the
maturity factor scales down, if
necessary, the derivative contract
amount from the standard one-year
horizon used for supervisory factor
calibration to the risk horizon relevant
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Where:
S is the number of business days from the
present day until the start date for the
derivative contract, or zero if the start
date has already passed; and
34 For a derivative contract that can be
represented as a combination of standard option
payoffs (such as collar, butterfly spread, calendar
spread, straddle, and strangle), each standard
option component would be treated as a separate
derivative contract. For a derivative contract that
includes multiple-payment options, (such as
interest rate caps and floors) each payment option
could be represented as a combination of effective
single-payment options (such as interest rate caplets
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and floorlets). Linear derivative contracts (such as
swaps) would not be decomposed into components.
35 Specifically, the supervisory factors are
intended to reflect the EEPE of a single at-themoney linear trade of unit size, zero market value
and one-year maturity referencing a given risk
factor in the absence of collateral.
36 Sensitivity of a derivative contract to a risk
factor is the ratio of the change in the market value
of the derivative contract caused by a small change
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for a given contract. The adjusted
derivative contract amount is
determined under § l.132(c)(9) of the
proposed rule.
a. Adjusted Notional Amount
A banking organization would apply
the same formula to interest rate
derivative contracts and credit
derivative contracts to arrive at the
adjusted notional amount. For such
contracts, the adjusted notional amount
would equal the product of the notional
amount of the derivative contract, as
measured in U.S. dollars, using the
exchange rate on the date of the
calculation, and the supervisory
duration. The agencies intend for the
supervisory duration to recognize that
interest rate derivative contracts and
credit derivative contracts with a longer
tenor would have a greater degree of
variability than an identical derivative
contract with a shorter tenor for the
same change in the underlying risk
factor (interest rate or credit spread).
The supervisory duration would be
calculated for the period that starts at S
and ends at E. S would be equal to the
number of business days between the
present date and the start date for the
derivative contract, or zero if the start
date has passed, and E would be equal
to the number of business days from the
present date until the end date for the
derivative contract. The supervisory
duration is based on the assumption of
a continuous stream of equal payments
and a constant continuously
compounded interest rate of 5 percent.
The exponential function provides
discounting for S and E at 5 percent
continuously compounded. In all cases,
the supervisory duration is floored at 10
business days (or 0.04, based on an
average of 250 business days per year).
The supervisory duration formula is
provided as follows:
E is the number of business days from the
present day until the end date for the
derivative contract.
in the risk factor to the value of the change in the
risk factor. In a linear derivative contract, the payoff
of the derivative contract moves at a constant rate
with the change in the value of the underlying risk
factor. In a nonlinear contract, the payoff of the
derivative contract does not move at a constant rate
with the change in the value of the underlying risk
factor. The sensitivity is positive if the derivative
contract is long the risk factor and negative if the
derivative contract is short the risk factor.
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PFE component calculation because of
different applicable risk horizons.
Similarly, derivative contracts with
different MPORs cannot offset each
other.
Therefore, the agencies are proposing,
under § l.132(c)(11)(ii) of the proposed
rule, that for a netting set subject to
multiple variation margin agreements
such that the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
contract subject to a variation margin
agreement under which the
counterparty to the derivative contract
must post variation margin and at least
one derivative contract that is not
subject to such a variation margin
agreement, a banking organization must
divide the netting set into sub-netting
sets and calculate the aggregated
amount for each sub-netting set.
All derivative contracts within the
netting set that are not subject to a
variation margin agreement or that are
subject to a variation margin agreement
under which the counterparty is not
required to post variation margin would
form a single sub-netting set. A banking
organization would calculate the
aggregated amount for this sub-netting
set as if the netting set were not subject
to a variation margin agreement. All
derivative contracts within the netting
set that are subject to variation margin
agreements under which the
counterparty must post variation margin
and that share the same MPOR value
would form another sub-netting set. A
banking organization would calculate
the aggregated amount for this subnetting set as if the netting set is subject
to a variation margin agreement, using
the MPOR value shared by the
derivative contracts within the netting
set. A banking organization would
calculate the PFE multiplier at the
netting set level.
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For an interest rate derivative contract
or credit derivative contract that is a
variable notional swap, the notional
amount would equal the time-weighted
average of the contract notional amounts
of such a swap over the remaining life
of the swap. For an interest rate
derivative contract or credit derivative
contract that is a leveraged swap, in
which the notional amounts of all legs
of the derivative contract are divided by
a factor and all rates of the derivative
contract are multiplied by the same
factor, the notional amount would equal
the notional amount of an equivalent
unleveraged swap.
For an exchange rate derivative
contract, the adjusted notional amount
would equal the notional amount of the
non-U.S. denominated currency leg of
the derivative contract, as measured in
U.S. dollars using the exchange rate on
the date of the calculation. In general,
the non-U.S. dollar denominated
currency leg is the source of exchange
rate volatility. If both legs of the
exchange rate derivative contract are
denominated in currencies other than
U.S. dollars, the adjusted notional
amount of the derivative contract would
be the largest leg of the derivative
contract, measured in U.S. dollars.
Under the agencies’ alternative
approach for treating exchange rate
derivative contracts discussed above,
the adjusted notional amount of an
exchange rate derivative contract would
be the notional amount of the derivative
contract that is denominated in the
foreign currency of the hedging set, as
measured in U.S. dollars using the
exchange rate on the date of the
calculation. For an exchange rate
derivative contract with multiple
exchanges of principal, the notional
amount would equal the notional
amount of the derivative contract
multiplied by the number of exchanges
of principal under the derivative
contract. For an equity derivative
contract or a commodity derivative
contract, the adjusted notional amount
is the product of the fair value of one
unit of the reference instrument
underlying the derivative contract and
the number of such units referenced by
the derivative contract. The proposed
treatment is designed to reflect the
current price of the underlying reference
entity. For example, if a banking
organization has a derivative contract
that references 15,000 pounds of frozen
concentrated orange juice currently
priced at $0.0005 a pound then the
adjusted notional amount would be $75.
The payoff of a volatility derivative
contract generally is determined based
on a notional amount and the realized
or implied volatility (or variance)
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referenced by the derivative contract
and not necessarily the unit price of the
underlying reference entity.
Accordingly, for an equity derivative
contract or a commodity derivative
contract that is a volatility derivative
contract, a banking organization would
be required to replace the unit price
with the underlying volatility
referenced by the volatility derivative
contract and replace the number of units
with the notional amount of the
volatility derivative contract.
The agencies anticipate that for most
derivative contracts banking
organizations would be able to
determine the adjusted notional amount
using one of the formulas or
methodologies described above. The
agencies recognize, however, that such
approaches may not be applicable to all
types of derivative contracts, and that a
different approach may be necessary to
determine the adjusted notional amount
of a derivative contract. In such a case,
the agencies would expect a banking
organization to consult with its
appropriate federal supervisor prior to
using an alternative approach to the
formulas or methodologies described
above.
Question 11: The agencies invite
comment on the proposed approaches
to determine the adjusted notional
amount of derivative contracts. In
particular, how can the agencies
improve the approaches set forth in the
proposal to determine the adjusted
notional amount for nonstandard
derivative contracts so that they are
appropriate for such transactions,
including using formulas of the market
value of underlying contracts? What, if
any, nonstandard derivative contracts
are not addressed by the proposal, and
what approaches should be used to
determine the adjusted notional amount
for those contracts? Please provide
examples and descriptions of how such
adjusted notional amounts would be
determined.
b. Supervisory Factor
Table 2 to § l.132 of the proposed
rule provides the proposed supervisory
factors. The agencies are proposing to
use the same supervisory factors
provided in the Basel Committee
standard, with the exception of the
supervisory factors for credit derivative
contracts that reference single-name
entities, which are based on the
applicable credit rating of the reference
entity.37 Section 939A of the DoddFrank Wall Street Reform and Consumer
37 Specifically, the BCBS supervisory factors are
as follow (in percent): AAA and AA—0.38, A—0.42;
BBB—0.54; BB—1.06; B—1.6; CCC—6.0.
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Protection Act (Dodd-Frank Act)
prohibits the use of credit ratings in
federal regulations, and therefore, the
agencies are unable to propose
implementing this feature of the Basel
Committee standard.38 Accordingly, the
agencies are proposing an approach that
satisfies the requirements of section
939A while allowing for a level of
granularity among the supervisory
factors applicable to single-name credit
derivatives that is generally consistent
with the Basel Committee standard.
Specifically, the agencies are
proposing to apply a supervisory factor
to single-name credit derivative
contracts based on the following
categories: Investment grade,
speculative grade, and sub-speculative
grade. For credit derivative contracts
that reference indices, the agencies are
proposing to apply a higher supervisory
factor to speculative grade indices than
investment grade indices, because of the
additional risk present with speculative
grade credits. The proposal would
maintain the current definition of
investment grade in the capital rule and
would propose new definitions for
speculative grade and sub-speculative
grade.
The investment grade category would
capture single-name credit derivative
contracts consistent with the three
highest supervisory factor categories
under the Basel Committee standard.
The capital rule defines investment
grade to mean that the entity to which
the banking organization is exposed
through a loan or security, or the
reference entity with respect to a credit
derivative contract, has adequate
capacity to meet financial commitments
for the projected life of the asset or
exposure. Such an entity or reference
entity has adequate capacity to meet
financial commitments, as the risk of its
default is low and the full and timely
repayment of principal is expected.39
The agencies intend for the
speculative grade category to cover
single-name credit derivative contracts
consistent with the next two lower
supervisory factor categories under the
Basel Committee standard. The proposal
would define speculative grade to mean
that the reference entity has adequate
capacity to meet financial commitments
in the near term, but is vulnerable to
adverse economic conditions, such that
should economic conditions deteriorate,
the reference entity would present an
elevated default risk. The agencies
38 Public Law 11–203, 124 Stat. 1376 (2010),
§ 939A. This provision is codified as part of the
Securities Exchange Act of 1934 at 15 U.S.C. 78o–
7.
39 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);
and 12 CFR 324.2 (FDIC).
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intend for the sub-speculative grade
category to cover the lowest supervisory
factor category under the Basel
Committee standard. The proposal
would define sub-speculative grade to
mean that the reference entity depends
on favorable economic conditions to
meet its financial commitments, such
that should economic conditions
deteriorate, the reference entity likely
would default on its financial
commitments. The agencies believe that
each of the proposed categories include
exposures that perform largely in
accordance with the performance
criteria that would define each category
under the proposed rule, and therefore
would result in capital requirements
that are largely equivalent to those
resulting from application of the
supervisory factors under the Basel
Committee standard.
To determine the supervisory factor
that would apply to the investment and
speculative grade categories, the
agencies reviewed ratings issuance data
from 2012 to 2017, using information
made publicly available by the
Depository Trust & Clearing Corporation
(DTCC).40 The agencies used the DTCC
data to determine the weighted-average
supervisory factor for the investment
and speculative grade categories, and
rounded that supervisory factor to the
nearest tenth. The agencies are
proposing to retain the supervisory
factor from the Basel Committee
standard for the sub-speculative grade
category, because that category would
consist only of single name credit
derivatives with the lowest credit
quality.
The agencies considered using the
same investment grade/non-investment
grade distinction as provided under the
standardized approach for determining
whether a guarantor is an eligible
guarantor for purposes of the rule.
However, the agencies are concerned
that this approach would not provide
for sufficient risk differentiation across
credit derivative products. The agencies
also considered calibrating the
supervisory factor for the investment
and speculative grade categories by
using a simple average of the ratings
issued in accordance with the DTCC
data, or the most conservative
supervisory factor applicable to the
credit ratings that mapped to each
category. For example, if for purposes of
the investment grade category the DTCC
data demonstrated that the average
rating in that category is AA (using a
simple average of all ratings issued for
single-name credit derivatives), the
proposal would apply a 0.38 percent
supervisory factor to investment grade
single-name credit derivatives, because
that supervisory factor corresponds to a
AA rating under the Basel Committee
standard. Under the other alternative
considered, the proposal would apply
the most conservative (i.e., stringent)
supervisory factor among the
supervisory factors that apply to a given
category. Under this approach, a
supervisory factor of 1.6 percent would
apply to speculative grade single-name
credit derivatives, as that is the most
stringent supervisory factor under the
Basel Committee standard that
corresponds to the categories intended
to be captured by the term ‘‘speculative
grade.’’ The agencies believe, however,
that the weighted-average approach
more accurately reflects the ratings
issuance data and therefore would more
closely align to the single-name credit
derivatives held in banking
organizations’ derivatives portfolios.
The agencies expect that banking
organizations would conduct their own
due diligence to determine the
appropriate category for a single-name
credit derivative, in view of the
performance criteria in the definitions
for each category under the proposed
rule. Although a banking organization
would be able to consider the credit
rating for a single-name credit derivative
in making that determination, the credit
rating should be part of a multi-factor
analysis. In addition, the agencies
would expect a banking organization to
support its analysis and assignment of
the respective credit categories.
Interest rate derivative contracts and
exchange rate derivative contracts
would each be subject to a single
supervisory factor. Equity derivative
contracts that reference single-name
equities would be subject to a higher
supervisory factor than derivative
contracts that reference equity indices
in recognition of the effect of
diversification in the index. Commodity
derivative contracts that reference
energy would receive a higher
supervisory factor than commodity
derivative contracts that reference
metals, agriculture, and other
commodities (each of which would
receive the same supervisory factor), to
reflect the observed additional volatility
inherent in the energy markets.
For volatility derivative contracts, a
banking organization would multiply
the applicable supervisory factor based
on the asset class related to the volatility
measure by a factor of five. The agencies
are proposing this treatment because
volatility derivative contracts are
inherently subject to more price
volatility than the underlying asset
classes they reference. For basis
derivative contracts, the agencies are
proposing to multiply the applicable
supervisory factor based on the asset
class related to the basis measure by a
factor of one half. The agencies are
proposing this treatment because the
volatility of a basis between highly
correlated risk factors would be less
than the volatility of the risk factors
(assuming the factors have equal
volatility).
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TABLE 2—SUPERVISORY OPTION VOLATILITY AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS
Supervisory
option
volatility
(%)
Asset class
Subclass
Interest rate .....................................................
Exchange rate .................................................
Credit, single name .........................................
N/A ..................................................................
N/A ..................................................................
Investment grade ............................................
Speculative grade ...........................................
Sub-speculative grade ....................................
Investment Grade ...........................................
Speculative Grade ..........................................
N/A ..................................................................
N/A ..................................................................
Energy ............................................................
Credit, index ....................................................
Equity, single name ........................................
Equity, index ...................................................
Commodity ......................................................
40 Markit North America, Inc., accessed via
Wharton Research Data Services (WRDS), wrds-
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50
15
100
100
100
80
80
120
75
150
web.wharton.upenn.edu/wrds/about/
databaselist.cfm.
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Supervisory
correlation
parameters
(%)
N/A
N/A
50
50
50
80
80
50
80
40
Supervisory
factor a
(%)
0.5
4.0
0.5
1.3
6.0
0.38
1.06
32
20
40
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TABLE 2—SUPERVISORY OPTION VOLATILITY AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS—Continued
Asset class
Supervisory
option
volatility
(%)
Subclass
Metals .............................................................
Agricultural ......................................................
Other ...............................................................
70
70
70
Supervisory
correlation
parameters
(%)
Supervisory
factor a
(%)
40
40
40
18
18
18
Question 12: Can the agencies
improve the supervisory factors under
the proposal to reflect more
appropriately the volatility specific to
each asset class? What, if any,
additional categories and respective
supervisory factors should the agencies
consider? Commenters supporting
changes to the supervisory factors or the
categories within the asset classes
should provide analysis supporting their
request.
Question 13: Can the agencies
improve the non-ratings-based
methodology under the proposal to
determine the supervisory factor
applicable to a single-name credit
derivative contract? Are there other nonratings-based methodologies that could
be used to determine the applicable
supervisory factor for single-name credit
derivatives? What would be the benefit
of any such alternative relative to the
proposal? What would be the burden
associated with the proposed
methodology, as well as any alternative
suggested by commenters?
c. Supervisory Delta Adjustment
Where:
F is the standard normal cumulative
distribution function;
P equals the current fair value of the
instrument or risk factor, as applicable,
underlying the option;
K equals the strike price of the option;
41 A banking organization would be required to
represent binary options with strike K as the
combination of one bought European option and
one sold European option of the same type as the
original option (put or call) with the strike prices
set equal to 0.95 * K and 1.05 * K. The size of the
position in the European options must be such that
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Under the proposal, derivative
contracts that are not options or
collateralized debt obligation tranches
are considered to be linear in the
primary underlying risk factor. For such
derivative contracts, the supervisory
delta adjustment would need to account
only for the direction of the derivative
contract (positive or negative) with
respect to the underlying risk factor.
Therefore, the supervisory delta
adjustment would be equal to one if
such a derivative contract is long in the
primary risk factor and negative one if
such a derivative contract is short in the
primary risk factor. A derivative
contract is long in the primary risk
factor if the fair value of the instrument
increases when the value of the primary
risk factor increases. A derivative
contract is short in the primary risk
factor if the fair value of the instrument
decreases when the value of the primary
risk factor increases.
Because option contracts are
nonlinear, the proposal would require a
the payoff of the binary option is reproduced
exactly outside the region between the two strikes.
The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold
options is capped at the payoff amount of the binary
option.
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banking organization to use the BlackScholes Model to determine the
supervisory delta adjustment, as
provided in Table 2. The agencies are
proposing to use the Black-Scholes
Model to determine the supervisory
delta adjustment because the model is a
widely used option-pricing model
within the industry. The Black ScholesModel assumes, however, that the
underlying risk factor is greater than
zero. In particular, the Black Scholes
delta formula contains a ratio P/K that
is an input into the natural logarithm
function. P is the fair value of the
underlying instrument and K is the
strike price. Because the natural
logarithm function can be defined only
for amounts greater than zero, a
reference risk factor with a negative
value (e.g., negative interest rates)
would make the supervisory delta
adjustment inoperable. Therefore, the
formula incorporates a parameter,
lambda, the purpose of which is to
adjust the fraction P/K so that it has a
positive value.
T equals the number of business days until
the latest contractual exercise date of the
option; and
l equals zero for all derivative contracts,
except that for interest rate options that
reference currencies currently associated
with negative interest rates l must be
equal to; max {¥L + 0.1%; 0}; 42
42 The same value l of must be used for all
i
interest rate options that are denominated in the
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a The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in Table 2,
and the applicable supervisory factor for volatility derivative contract hedging sets is equal to 5 times the supervisory factor provided in Table 2.
For a derivative contract that is a
collateralized debt obligation tranche,
the supervisory delta adjustment would
be determined according to the
following formula:
Where:
A is the attachment point, which equals the
ratio of the notional amounts of all
underlying exposures that are
subordinated to the banking
organization’s exposure to the total
notional amount of all underlying
exposures, expressed as a decimal value
between zero and one; 43
D is the detachment point, which equals one
minus the ratio of the notional amounts
of all underlying exposures that are
senior to the banking organization’s
exposure to the total notional amount of
all underlying exposures, expressed as a
decimal value between zero and one; and
The proposal would apply a positive sign to
the resulting amount if the banking
organization purchased the collateralized
debt obligation tranche and would apply
a negative sign if the banking
organization sold the collateralized debt
obligation tranche.
derivative contracts subject to a
variation margin agreement under
which the counterparty to the variation
margin agreement is not required to post
variation margin to the banking
organization, the risk horizon would be
the lesser of one year and the remaining
maturity of the derivative contract,
subject to a 10-business-day floor.
Accordingly, for such a derivative
contract, a banking organization would
use the following formula:
Where M equals the greater of 10
business days and the remaining
maturity of the contract, as measured in
business days.
For derivative contracts subject to a
variation margin agreement under
which the counterparty must post
variation margin, the risk horizon would
be equal to the MPOR of the variation
margin agreement. Accordingly, for
such a derivative contract a banking
organization would use the following
formula:
Where MPOR refers to the period
from the most recent exchange of
collateral under a variation margin
agreement with a defaulting
counterparty until the derivative
contracts are closed out and the
resulting market risk is re-hedged.
For derivative contracts that are not
cleared transactions, MPOR would be
floored at 10 business days. For
derivative contracts between a clearing
member banking organization and its
client that are cleared transactions,
MPOR would be floored at five business
days. Under the capital rule, however,
the exposure of a clearing member
banking organization to its clearing
member client is not a cleared
transaction where the clearing member
banking organization is either acting as
a financial intermediary and enters into
an offsetting transaction with a CCP or
where the clearing member banking
organization provides a guarantee to the
CCP on the performance of the client.
Accordingly, in such cases, MPOR may
not be less than 10 business days. If
either a cleared or noncleared derivative
contract is subject to an outstanding
dispute over variation margin, the
applicable MPOR would be twice the
MPOR provided for those transactions
in the absence of such a dispute.44 For
a derivative contract that is within a
netting set that is composed of more
than 5,000 derivative contracts that are
not cleared transactions, MPOR would
be floored at 20 business days.
For a derivative contract in which on
specified dates any outstanding
exposure of the derivative contract is
settled and the terms of the derivative
contract are reset so that the fair value
of the derivative contract is zero, the
remaining maturity of the derivative
contract is the period until the next
reset date.45 In addition, derivative
contracts with daily settlement would
be treated as unmargined derivative
contracts.
same currency. The value of li for a given currency
would be equal to the lowest value L of Pi and Ki
of all interest rate options in a given currency that
the banking organization has with all
counterparties.
43 In the case of a first-to-default credit derivative,
there are no underlying exposures that are
subordinated to the banking organization’s
exposure and A=0. In the case of a second-orsubsequent-to-default credit derivative, the smallest
(n–1) notional amounts of the underlying exposures
are subordinated to the banking organization’s
exposure.
44 In general, a party will not have violated its
obligation to collect or post variation margin from
or to a counterparty if the counterparty has refused
or otherwise failed to provide or accept the required
variation margin to or from the party; and the party
has made the necessary efforts to collect or post the
required variation margin, including the timely
initiation and continued pursuit of formal dispute
resolution mechanisms; or has otherwise
demonstrated that it has made appropriate efforts to
collect or post the required variation margin; or
commenced termination of the derivative contract
with the counterparty promptly following the
applicable cure period and notification
requirements.
45 See ‘‘Regulatory Capital Treatment of Certain
Centrally-cleared Derivative Contracts Under
Regulatory Capital Rules’’ (August 14, 2017), OCC
Bulletin: 2017–27; FDIC Letter FIL–33–2017; and
Board SR letter 07–17.
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d. Maturity Factor
For derivative contracts not subject to
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volatility, determined in accordance
with Table 2.
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7. Example Calculation 46
To calculate the exposure amount of
a netting set a banking organization
would need to determine (1) the
replacement cost, (2) the adjusted
derivative contract amount of each
derivative contract within the netting
set, (3) the aggregated amount, which is
the sum of each hedging set within the
netting set, (4) the PFE multiplier, and
(5) PFE. A banking organization may
calculate these items together for
derivative contracts that are subject to
the same QMNA.
In this example, the netting set
consists of two fixed versus floating
interest rate swaps that are subject to the
same QMNA. Table 4 summarizes the
relevant contractual terms for these
derivative contracts. The netting set is
subject to a variation margin agreement,
and the banking organization has
received from the counterparty, as of the
calculation date, variation margin in the
amount of $10,000 and initial margin in
the amount of $200,000. Both the
variation margin threshold and the
minimum transfer amount are zero. All
notional amounts and market values in
Table 4 are denominated in U.S. Dollars.
TABLE 4—CONTRACTUAL TERMS FOR THE DERIVATIVE CONTRACTS
Type
1 .............................
2 .............................
Interest rate swap ..........
Interest rate swap ..........
Step 1: Determine the Replacement Cost
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Under § l.132(c)(6)(i) of the proposed
rule, the replacement cost of a netting
set subject to a variation margin
agreement would equal the greater of (1)
the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the sum of the net
independent collateral amount and the
variation margin amount applicable to
such derivative contracts; (2) the sum of
the variation margin threshold and the
minimum transfer amount applicable to
the derivative contracts within the
10
4
USD
USD
Notional
(thousands)
Pay leg
Fixed ...............................
Floating ...........................
netting set less the net independent
collateral amount applicable to such
derivative contracts; and (3) zero.
The replacement cost of the netting
set in the example is given as follows:
RC = max{(30¥20)¥(200 + 10); 0 + 0
¥ 200; 0} = 0
Step 2: Determine the Adjusted
Derivative Contract Amount of Each
Derivative Contract Within the Netting
Set
A banking organization would
determine the adjusted derivative
contract amount of each derivative
$10,000
10,000
Fair value
excluding
valuation
adjustments
(thousands)
$30
¥20
contract within the netting set, in
accordance with § l.132(c)(9) of the
proposed rule. The adjusted derivative
contract amount would be the product
of the adjusted notional amount, the
supervisory delta adjustment, the
maturity factor, and the applicable
supervisory factor, which are given as
follows:
Adjusted derivative contract amountiiR =
diIR * di * MFi * SFi
Under § l.132(c)(9)(ii)(A) of the
proposed rule, for each derivative
contract i, the adjusted notional amount
would be calculated as follows:
Si and Ei represent the number of
business days from the present day until
the start date and the end date,
respectively, of the period referenced by
the interest rate derivative contracts.
The residual maturity of derivative
contract 1 is 10 years and thus term Ei
equals 250 multiplied by 10. The
residual maturity of derivative contract
2 is 4 years and thus term Ei equals 250
multiplied by 4. Accordingly, the
adjusted notional amounts for derivative
contract 1 and derivative contract 2 are
given as follows:
The supervisory delta adjustment
would be assigned to each derivative
contract in accordance with
§ l.132(c)(9)(iii) of the proposed rule.
Derivative contract 1 is long in the
primary risk factor and is not an option;
therefore, the supervisory delta is equal
to one. Derivative contract 2 is short in
the primary risk factor and is not an
option; therefore, the supervisory delta
is equal to negative one.
46 This example is intended only for use as an
illustrative guide. The calculation mechanics may
vary based on a variety of factors, including for
example, the number of hedging sets, the frequency
at which variation margin is exchanged, and certain
terms of the derivative contracts and underlying
reference assets. SA–CCR considers a number of
risk attributes to determine the exposure amount of
a derivative contract, or netting set thereof, and not
all of those attributes are captured in this example.
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Derivative
Base
currency
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Residual
maturity
(years)
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The maturity factor would be assigned
to each derivative contract in
accordance with § l.132(c)(9)(iv)(A) of
the proposed rule. Assuming a MPOR of
15 business days, the maturity factor is
given as follows:
The supervisory factor for interest rate
derivative contracts is 0.50 percent, as
provided in Table 2.
For derivative contract 1, the adjusted
derivative contract amount would equal
1 * 78,694 * 0.3674 * 0.50% = 144.57.
For derivative contract 2, the adjusted
derivative contract amount equals ¥1 *
36,254 * 0.3674 * 0.50% = ¥66.60.
interest rate derivative contracts in
accordance with § l.134(c)(8)(i) of the
proposed rule, as follows:
Step 3: Determine the Hedging Set
Amount
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A banking organization would
determine the hedging set amount for
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Step 5: Determine the PFE Multiplier
Because the netting set includes only
one hedging set, the aggregated amount
is equal to 108.89.
A banking organization would
calculate the PFE multiplier in
accordance with § l.132(c)(7)(i) of the
proposed rule, as follows:
Where:
(A) V is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set;
(B) C is the sum of the net independent
collateral amount and the variation
margin amount applicable to the
derivative contracts within the netting
set
(C) A is the aggregated amount of the
netting set
Step 6: Determine PFE
contribution reflects the risk that a
clearing member banking organization
may incur loss on such contribution
resulting from the CCP’s or another
clearing member’s default. In addition,
in recognition of the credit risk of the
collateral itself, a banking organization
must calculate a risk-weighted asset
amount for any collateral provided to a
CCP, clearing member, or a custodian in
connection with a cleared transaction.
In general, the risk-based capital
treatment under the cleared transactions
framework distinguishes between
derivative contracts cleared through a
CCP and those cleared through a QCCP,
whether the derivative contract is with
a clearing member or clearing member
client, and, with respect to collateral,
the treatment depends on whether the
collateral is held in a bankruptcy remote
manner. Compared to transactions
cleared through a CCP, those involving
a QCCP generally are considered to be
less risky, because to qualify as a QCCP
for purposes of the capital rule a central
counterparty must meet certain riskmanagement, supervision, and other
requirements.47 For purposes of the
capital rule, ‘‘bankruptcy remote’’
generally means that collateral posted
by a clearing member to a CCP would
be excluded from the CCP’s estate in
receivership, insolvency, liquidation, or
similar proceeding, and thus the
banking organization would be more
likely to recover such collateral upon
the CCP’s default.
The agencies are proposing to revise
the cleared transactions framework
under the capital rule by requiring
certain banking organizations to use
SA–CCR to determine the trade
exposure amount for a cleared
derivative contract. In addition, the
agencies are proposing to simplify the
formula used to determine the riskweighted asset amount for a default
fund contribution. The proposed
revisions are consistent with standards
developed by the Basel Committee.48
Notwithstanding the proposed
implementation of SA–CCR, the
requirements under the capital rule
regarding the treatment of cleared
derivative contracts, including the
definition for cleared transactions and
the operational requirements for cleared
derivative contracts, would still apply
irrespective of whether the exposure is
associated with a CCP or a QCCP.49
Step 7: Determine the Exposure Amount
In accordance with § l.132(c)(5) of
the proposed rule, the exposure amount
of a netting net would equal sum of the
replacement cost of the netting set and
the PFE of the netting set multiplied by
1.4. Therefore, the exposure amount of
the netting set in the example would be
calculated as, 1.4 * (0 + 44.79) = 62.70.
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III. Revisions to the Cleared
Transactions Framework
Under the cleared transactions
framework in the capital rule, a banking
organization is required to hold riskbased capital for its exposure to, and
certain collateral posted in connection
with, a derivative contract that is a
cleared transaction. In addition, a
clearing member banking organization
must hold risk-based capital for its
default fund contributions. The capital
requirement for a cleared derivative
contract reflects the counterparty credit
risk of the derivative contract, whereas
the capital requirement for collateral
posted in connection with such a
derivative contract reflects the risk that
a banking organization may not be able
to recover its collateral upon default of
the entity holding the collateral. The
capital requirement for a default fund
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47 See the definition of ‘‘qualifying central
counterparty’’ in 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); and 12 CFR 324.2 (FDIC). The requirements
are consistent with the principles developed by the
Committee on Payment and Settlement Systems and
Technical Committee of the International
Organization of Securities Commissions. See
‘‘Principles for financial market infrastructure,’’
Committee on Payment and Settlement Systems and
Technical Committee of the International
Organization of Securities Commissions, (April
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2012), available at https://www.bis.org/cpmi/publ/
d101a.pdf.
48 ‘‘Capital requirements for bank exposures to
central counterparties,’’ Basel Committee on
Banking Supervision, April 2014, https://
www.bis.org/publ/bcbs282.pdf.
49 12 CFR 3.3 (OCC); 12 CFR 217.3 (Board); 12
CFR 324.3 (FDIC).
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In accordance with § l.132(c)(7) of
the proposed rule, PFE would equal the
product of the PFE multiplier and the
aggregated amount. Thus, PFE would be
calculated as 0.4113 * 108.89 = 44.79.
The PFE multiplier would be given as:
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Step 4: Determine the Aggregated
Amount
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A. Trade Exposure Amount
To determine the risk-weighted asset
amount for a cleared derivative contract,
a banking organization must multiply
the trade exposure amount of the
derivative contract by the risk weight
applicable to the CCP. In general, the
trade exposure amount is the sum of the
exposure amount of the derivative
contract and the fair value of any related
collateral held in a manner that is not
bankruptcy remote. Under the
standardized approach, a banking
organization must use CEM to
determine the trade exposure amount of
its derivative contracts, whereas under
the advanced approaches, an advanced
approaches banking organization may
use CEM or IMM to determine the trade
exposure amount.
Consistent with the proposal to
replace the use of CEM with SA–CCR in
the advanced approaches for
determining the exposure amount for a
noncleared derivative contract, the
agencies are proposing to require
advanced approaches banking
organizations to use SA–CCR or IMM to
determine the trade exposure amount
for a cleared derivative contract. Thus,
an advanced approaches banking
organization would be required to use
the same approach (SA–CCR or IMM)
for both noncleared and cleared
derivative contracts. As noted above, the
agencies believe that requiring an
advanced approaches banking
organization to use either SA–CCR or
IMM for all purposes under the
advanced approaches would facilitate
regulatory reporting and the supervisory
assessment of a banking organization’s
capital management program. In
addition, for purposes of the
standardized approach, an advanced
approaches banking organization would
be required to use SA–CCR to determine
the trade exposure amount of its cleared
derivative contracts.
For non-advanced approaches
banking organizations, the proposal
would permit the use of CEM or SA–
CCR to determine the trade exposure
amount for a derivative contract.
However, similar to the uniformity
requirement for the elections of
advanced approaches banking
organizations, a non-advanced
approaches banking organization that
elects to use SA–CCR for purposes of
determining the exposure amount of a
derivative contract (under § l.34 of the
capital rule) would also be required to
use SA–CCR (instead of CEM) to
determine the trade exposure amount
for a cleared derivative contract under
the cleared transactions framework.
Similarly, a non-advanced approaches
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banking organization that continues to
use CEM under § l.34 of the proposed
capital rule would continue to use CEM
to determine the trade exposure amount
of all its derivative contracts.
Question 14: Should the agencies
maintain the use of CEM for purposes of
the cleared transactions framework
under the advanced approaches? What
other factors should the agencies
consider in determining whether SA–
CCR is a more or less appropriate
approach for calculating the trade
exposure amount for derivative
transactions with central
counterparties?
Question 15: What would be the pros
and cons of allowing advanced
approaches banking organizations to
use either SA–CCR or IMM for purposes
of determining the risk-weighted asset
amount of both centrally and
noncentrally cleared derivative
transactions?
B. Treatment of Default Fund
Contributions
Under the capital rule, a clearing
member banking organization must
determine a risk-weighted asset amount
for its default fund contributions
according to one of three approaches. A
clearing member banking organization’s
risk-weighted asset amount for its
default fund contributions to a CCP that
is not a QCCP generally is the sum of
such default fund contributions
multiplied by 1,250 percent. A clearing
member banking organization’s riskweighted asset amount for its default
fund contributions to a QCCP equals the
sum of its capital requirement for each
QCCP to which a banking organization
contributes to a default fund, as
calculated under one of two methods.
Method one is a complex three-step
approach that compares the default fund
of the QCCP to the capital the QCCP
would be required to hold if it were a
banking organization and provides a
method to allocate the default fund
deficit or excess back to the clearing
member. Method two is a simplified
approach in which the risk-weighted
asset amount for a default fund
contribution to a QCCP equals 1,250
percent multiplied by the default fund
contribution, subject to a cap.
The proposal would eliminate method
one and method two under the capital
rule and implement a new method for
a clearing member banking organization
to determine the risk-weighted asset
amount for its default fund
contributions to a QCCP. The agencies
intend for the new method to be less
complex than the current method one
but also more granular than the current
method two. Under the proposal, the
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risk-weighted asset amount for a
clearing member banking organization’s
default fund contribution would be its
pro-rata share of the QCCP’s default
fund.
To determine the capital requirement
for a default fund contribution, a
clearing member banking organization
would first calculate the hypothetical
capital requirement of the QCCP (KCCP),
unless the QCCP has already disclosed
it, in which case the banking
organization must rely on that disclosed
figure. In either case, a banking
organization may choose to use a higher
amount of KCCP than the minimum
calculated under the formula if the
banking organization has concerns
about the nature, structure, or
characteristics of the QCCP. In effect,
KCCP would serve as a consistent
measure of a QCCP’s default fund
amount.
A clearing member banking
organization would calculate KCCP
according to the following formula:
KCCP = SCMi EADi * 1.6 percent,
Where:
CMi is each clearing member of the QCCP;
and
EADi is the exposure amount of each clearing
member of the QCCP to the QCCP, as
determined under § l.133(d)(6).
The component EADi would include
both the clearing member banking
organization’s own transactions, its
client transactions guaranteed by the
clearing member, and all values of
collateral held by the QCCP (including
the clearing member banking
organization’s pre-funded default fund
contribution against these
transactions).50 The amount 1.6 percent
represents the product of a capital ratio
of 8 percent and a 20 percent risk
weight of a clearing member banking
organization, which is equal to the sum
of the 2 percent capital requirement for
trade exposure plus 18 percent for the
default fund portion of a banking
organization’s exposure to a QCCP.
A banking organization that is
required to use SA–CCR to determine
the exposure amount for its derivative
contracts under the standardized
approach would be required to use SA–
CCR to calculate KCCP for both the
standardized approach and the
50 The definition of default fund contribution
includes fund commitments made by a clearing
member to a CCP’s mutualized loss sharing
arrangements. The references to the commitments
could include terms such as assessments, special
assessments, guarantee commitments, and
contingent capital commitments, among other
terms.
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Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Proposed Rules
advanced approaches.51 For purposes of
calculating KCCP, the PFE multiplier
would include collateral held by a
QCCP in which the QCCP has a legal
claim in the event of the default of the
member or client, including default
fund contributions of that member. In
addition, a banking organization would
use a MPOR of 10 days in the maturity
factor adjustment. A banking
organization that elects to use CEM to
determine the exposure amount of its
derivative contracts under the
standardized approach would use CEM
to calculate KCCP.
EAD must be calculated separately for
each clearing member’s sub-client
accounts and sub-house account (i.e.,
for the clearing member’s propriety
activities). If the clearing member’s
collateral and its client’s collateral are
held in the same account, then the EAD
of that account would be the sum of the
EAD for the client-related transactions
within the account and the EAD of the
house-related transactions within the
account. In such a case, for purposes of
determining such EADs, the
independent collateral of the clearing
member and its client would be
allocated in proportion to the respective
total amount of independent collateral
posted by the clearing member to the
QCCP. This treatment would protect
against a clearing member recognizing
client collateral to offset the CCP’s
exposures to the clearing members’
proprietary activity in the calculation of
KCCP.
In addition, if any account or subaccount contains both derivative
contracts and repo-style transactions,
the EAD of that account is the sum of
the EAD for the derivative contracts
within the account and the EAD of the
repo-style transactions within the
account. If independent collateral is
held for an account containing both
derivative contracts and repo-style
transactions, then such collateral must
be allocated to the derivative contracts
and repo-style transactions in
proportion to the respective product
specific exposure amounts. The
respective product specific exposure
amounts would be calculated, excluding
the effects of collateral, according to
§ l.132(b) of the capital rule for repostyle transactions and to § l.132(c)(5)
for derivative contracts. Second, a
clearing member banking organization
would calculate its capital requirement
(KCMi), which would be the clearing
member’s share of the QCCP’s default
fund, subject to a floor equal to a 2
percent risk weight multiplied by the
clearing member banking organization’s
prefunded default fund contribution to
the QCCP and an 8 percent capital ratio.
This calculation would allocate KCCP on
a pro rata basis to each clearing member
based on the clearing member’s share of
the overall default fund contributions.
Thus, a clearing member banking
organization’s capital requirement
would increase as its contribution to the
default fund increases relative to the
QCCP’s own prefunded amounts and
the total prefunded default fund
contributions from all clearing members
to the QCCP. In all cases, a banking
organization’s capital requirement for its
default fund contribution to a QCCP
may not exceed the capital requirement
that would apply if the same exposure
were calculated as if it were to a CCP.
A clearing member banking
organization would calculate according
to the following formula:
51 The agencies are not proposing to make
revisions to the calculations to determine the
exposure amount of repo-style transactions for
purposes of determining the risk-weighted asset
amount of a banking organization’s default fund
contributions.
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IV. Revisions to the Supplementary
Leverage Ratio
Under the capital rule, an advanced
approaches banking organization must
satisfy a minimum supplementary
leverage ratio of 3 percent. An advanced
approaches banking organization’s
supplementary leverage ratio is the ratio
of its tier 1 capital to its total leverage
exposure. Total leverage exposure
includes both on-balance sheet assets
and certain off-balance sheet
exposures.52 For the on-balance sheet
amount, a banking organization must
include the balance sheet carrying value
of its derivative contracts and certain
cash variation margin.53 For the offbalance sheet amount, the banking
organization must include the PFE for
each derivative contract (or each singleproduct netting set of derivative
contracts), using CEM, as provided
under § l.34 of the capital rule, but
without regard to financial collateral.
The agencies are proposing to revise
the capital rule to require advanced
approaches banking organizations to use
a modified version of SA–CCR to
determine the on- and off-balance sheet
amounts of derivative contracts for
purposes of calculating total leverage
exposure.54 The agencies believe that
SA–CCR provides a more appropriate
measure of derivative contracts for
leverage capital purposes than the
current approach. The agencies also are
sensitive to the operational complexity
that could result from requiring
advanced approaches banking
organizations to continue to use CEM
for leverage capital purposes and
another approach, SA–CCR, for risk52 See 3.10(c)(4)(ii) (OCC); 12 CFR 217.10(c)(4)(ii)
(Board); 324.10(c)(4)(ii) (FDIC).
53 To determine the carrying value of derivative
contracts, U.S. generally accepted accounting
principles (GAAP) provide a banking organization
with the option to reduce any positive fair value of
a derivative contract by the amount of any cash
collateral received from the counterparty, provided
the relevant GAAP criteria for offsetting are met (the
GAAP offset option). Similarly, under the GAAP
offset option, a banking organization has the option
to offset the negative mark-to-fair value of a
derivative contract with a counterparty. See
Accounting Standards Codification paragraphs 815–
10–45–1 through 7 and 210–20–45–1. Under the
capital rule, a banking organization that applies the
GAAP offset option to determine the carrying value
of its derivative contracts would be required to
reverse the effect of the GAAP offset option for
purposes of determining total leverage exposure,
unless the collateral is cash variation margin
recognized as settled with the derivative contract as
a single unit of account for balance sheet
presentation and satisfies the conditions under
§ l.10(c)(4)(ii)(C)(1)–(7) of the capital rule.
54 Written options create an exposure to the
derivative contact reference asset and thus must be
included in total leverage exposure even though the
proposal would allow certain written options to
receive an exposure amount of zero for risk-based
capital purposes.
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based capital purposes. Further, in
comments on prior proposals, banking
organizations have requested that the
agencies adopt SA–CCR for leverage
capital purposes.55 The proposal is
consistent with the Basel Committee’s
standard on leverage capital
requirements.56
For the on-balance sheet amount, an
advanced approaches banking
organization would include in total
leverage exposure 1.4 multiplied by the
greater of (1) the sum of the fair value
of the derivative contracts within a
netting set less the net amount of
applicable cash variation margin, or (2)
zero. Consistent with CEM, an advanced
approaches banking organization would
be able to recognize cash variation
margin in the on-balance component
calculation only if (1) the cash variation
margin meets the conditions under
§ l.10(c)(4)(ii)(C)(3)–(7) of the proposed
rule; and (2) it has not been recognized
in the form of a reduction in the fair
value of the derivative contracts within
the netting set under the advanced
approaches banking organization’s
operative accounting standard. The
proposed rule would maintain the
current treatment for the recognition of
cash variation margin in the
supplementary leverage ratio.
A banking organization would use
this same approach to determine the onbalance sheet amount for a single
netting set subject to multiple variation
margin agreements. To calculate the onbalance sheet amount for multiple
netting sets that are subject to a single
variation margin agreement or a hybrid
netting set, a banking organization
would use the formula under
§ l.132(c)(10)(i) of the proposed rule,
except the term ‘‘CMA’’ in
§ l.132(c)(10)(i)(C) would include only
cash variation margin that meets the
requirements under
§ l.10(c)(4)(ii)(C)(3)–(7) of the proposed
rule.
For the off-balance sheet amount, an
advanced approaches banking
organization would include in total
leverage exposure 1.4 multiplied by the
PFE of each netting set, calculated
according to § l.132(c)(7) of the
proposal, except an advanced
approaches banking organization would
not be permitted to recognize collateral
in the PFE multiplier.57 Thus, for
purposes of calculating total leverage
55 See
79 FR 57725, 57736 (Sept. 26, 2014).
III: Finalising post-crisis reforms,’’ Basel
Committee on Banking Supervision, December
2017, https://www.bis.org/bcbs/publ/d424.pdf.
57 Accordingly, a banking organization would not
use § l.132(c)(7)(iii)–(iv) for purposes of
calculating the PFE amount for the supplementary
leverage ratio.
56 ‘‘Basel
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64683
exposure, the term ‘‘C’’ under
§ l.132(c)(7)(i)(B) of the proposal
would be equal to zero. These
adjustments are consistent with the
current treatment under the capital rule,
which generally limits collateral
recognition in leverage capital
requirements, and also with the leverage
standards developed by the Basel
Committee. While the proposal would
limit recognition of collateral in the PFE
multiplier, the proposal would
recognize the shorter default risk
horizon applicable to margined
derivative contracts. Thus, under the
proposal, a netting set subject to a
variation margin agreement would
apply the maturity factor as provided
under § l.132(c)(9)(iv) of the proposed
rule.
Compared to CEM, the
implementation of a modified SA–CCR
for purposes of the supplementary
leverage ratio would increase advanced
approaches banking organizations’
supplementary leverage ratios.
However, the agencies are sensitive to
impediments to banking organizations’
willingness and ability to provide
client-clearing services. The agencies
also are mindful of international
commitments to support the migration
of derivative contracts to central
clearing frameworks,58 the Dodd-Frank
Act mandate to mitigate systemic risk
and promote financial stability by, in
part, developing uniform standards for
the conduct of systemically important
payment, clearing, and settlement
activities of financial institutions.59 In
view of these important, post-crisis
reform objectives, the agencies are
inviting comment on the consequences
of not recognizing collateral provided by
a clearing member client banking
organization in connection with a
cleared transaction.
Question 16: What concerns do
commenters have regarding the
proposal to replace the use of CEM with
a modified version of SA–CCR, as
proposed, for purposes of the
supplementary leverage ratio?
Question 17: The agencies invite
comment on the recognition of collateral
provided by clearing member client
banking organizations in connection
with a cleared transaction for purposes
of the SA–CCR methodology. What are
the pros and cons of recognizing such
collateral in the calculation of
58 See, e.g., G–20 Pittsburgh Summit: Leaders
Statement (September 2009); see also Consultative
Document, ‘‘Leverage ratio treatment of client
cleared derivatives,’’ Basel Committee on Banking
Supervision, October 2018, https://www.bis.org/
bcbs/publ/d451.pdf.
59 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, section 802(b).
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replacement cost and potential future
exposure? Commenters should provide
data regarding how alternative
approaches regarding the treatment of
collateral would affect the cost of
clearing services, as well as provide data
regarding how such approaches would
affect leverage capital allocation for that
activity.
V. Technical Amendments
The proposed rule would make
certain technical corrections and
clarifications to the capital rule to
address certain provisions that warrant
revision, based on questions presented
by banking organizations and further
review by the agencies.
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A. Receivables Due From a QCCP
The agencies are proposing to revise
§ l.32 of the capital rule to clarify that
cash collateral posted by a clearing
member banking organization to a
QCCP, and which could be considered
a receivable due from the QCCP under
generally accepted accounting
principles, would not be risk-weighted
as a corporate exposure. Instead, for a
client-cleared trade the cash collateral
posted to a QCCP would receive a risk
weight of 2 percent, if the cash
associated with the trade meets the
requirements under § l.35(b)(i)(3)(A) or
§ l.133(b)(i)(3)(A) of the capital rule, or
4 percent, if the collateral does not meet
the requirements necessary to receive
the 2 percent risk weight. For a trade
made on behalf of the clearing member’s
own account, the cash collateral posted
to a QCCP would receive a 2 percent
risk weight. This amendment is
intended to maintain incentives for
banking organizations to post cash
collateral and recognize that a
receivable from a QCCP that arises in
the context of a trade exposure should
not be treated as equivalent to a
receivable that would arise if, for
example, a banking organization made a
loan to a CCP.
B. Treatment of Client Financial
Collateral Held by a CCP
Under § l.2 of the capital rule,
financial collateral means, in part,
collateral in which a banking
organization has a perfected firstpriority security interest in the
collateral. However, when a banking
organization is acting as a clearing
member, it generally is required to post
any client collateral to the CCP, in
which case the CCP establishes and
maintains a perfected first-priority
security interest in the collateral instead
of the clearing member. As a result, the
capital rule does not permit a clearing
member banking organization to
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recognize client collateral posted to a
CCP as financial collateral.
Client collateral posted to a CCP
remains available to support the credit
risk of a derivative contract in the event
of a client default. Specifically, where a
client defaults the CCP will use the
client collateral to offset its exposure to
the client, and the clearing member
would be required to cover only the
amount of any deficiency between the
liquidation value of the collateral and
the exposure to the CCP. However, were
the clearing member banking
organization to enter into the derivative
contract directly with the client, the
clearing member would establish and
maintain a perfected first-priority
security interest in the collateral, and
the exposure of the clearing member to
the client would similarly be mitigated
only to the extent the collateral is
sufficient to cover the exposure amount
of the transaction at the time of default.
Therefore, the agencies are proposing to
revise the definition of financial
collateral to allow clearing member
banking organizations to recognize as
financial collateral noncash client
collateral posted to a CCP. In this
situation, the clearing member banking
organization would not be required to
establish and retain a first-priority
security interest in the collateral for it
to qualify as financial collateral under
§ l.2 of the capital rule.
C. Clearing Member Exposure When
CCP Performance Is Not Guaranteed
The agencies are proposing to revise
§ l.35(c)(3) of the capital rule to align
the capital requirements under the
standardized approach for client-cleared
transactions with the treatment under
§ l.133(c)(3) of the advanced
approaches. Specifically, the proposal
would allow a clearing member that
does not guarantee the performance of
the CCP to the clearing member’s client
to apply a zero percent risk weight to
the CCP-facing portion of the
transaction. The agencies already have
implemented this treatment for
purposes of the advanced approaches.60
D. Bankruptcy Remoteness of Collateral
The agencies are proposing to remove
the requirement in § l.35(b)(4)(i) of the
standardized approach and
§ l.133(b)(4)(i) of the advanced
approaches that collateral posted by a
clearing member client banking
organization to a clearing member must
be bankruptcy-remote from a custodian
in order for the client banking
organization to avoid the application of
risk-based capital requirements to the
60 See
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collateral, and clarify that a custodian
must be acting in its capacity as a
custodian for this treatment to apply.61
The agencies believe this revision is
appropriate because the collateral
would generally be considered to be
bankruptcy-remote if the custodian is
acting in its capacity as a custodian with
respect to the collateral. Therefore, this
revision would apply only in cases
where the collateral is deposited with a
third-party custodian, not in cases
where a clearing member offers ‘‘selfcustody’’ arrangements with its clients.
In addition, this revision would make
the collateral requirement for a clearing
member client banking organization
consistent with the treatment of
collateral posted by a clearing member
banking organization, which does not
require that the posted collateral be
bankruptcy-remote from the custodian,
but would require in each case that the
custodian be acting in its capacity as a
custodian.
E. Adjusted Collateral Haircuts for
Derivative Contracts
If a clearing member banking
organization is acting as an agent
between a client and a CCP and receives
collateral from the client, the clearing
member must determine the exposure
amount for the client-facing portion of
the derivative contract using the
collateralized transactions framework
under § l.37 of the capital rule or the
counterparty credit risk framework
under § l.132 of the capital rule. The
clearing member banking organization
may recognize the credit risk-mitigation
benefits of the collateral posted by the
client; however, under §§ l.37(c) and
l.132(b) of the capital rule, the value of
the collateral must be discounted by the
application of a standard supervisory
haircut to reflect any market price
volatility in the value of the collateral
over a 10-day holding period. For a
repo-style transaction, the capital rule
applies a scaling factor of 0.71 to the
standard supervisory haircuts to reflect
the limited risk to collateral in those
transactions and effectively reduce the
holding period to 5 days. The agencies
believe a similar reduction in the
haircuts should be provided for cleared
derivative contracts, as they typically
have a holding period of less than 10
days. Therefore, the agencies are
proposing to revise §§ l.37 and l.132
of the capital rule to add an exception
to the 10-day holding period for cleared
derivative contracts and apply a scaling
factor of 0.71 to the standard
61 See 12 CFR 3.35(b)(4) and 3.133(b)(4) (OCC); 12
CFR 217.35(b)(4) and 217.133(b)(4) (Board); 12 CFR
324.35(b)(4) and 324.133(b)(4) (FDIC).
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supervisory haircuts to reflect a 5-day
holding period.
F. OCC Revisions to Lending Limits
The OCC proposes to revise its
lending limit rule at 12 CFR part 32. The
current lending limits rule references
sections of CEM in the OCC’s advanced
approaches capital rule as one available
methodology for calculating exposures
to derivatives transactions. However,
these sections are proposed to be
amended or replaced with SA–CCR in
the advanced approaches. Therefore, the
OCC is proposing to replace the
references to CEM in the advanced
approaches with references to CEM in
the standardized approach. The OCC is
also proposing to adopt SA–CCR as an
option for calculation of exposures
under lending limits.
Question 18: Should the OCC permit
or require banking organizations to
calculate exposures for derivatives
transactions for lending limits purposes
using SA–CCR? What advantages or
disadvantages does this offer compared
with the current methods allowed for
calculating derivatives exposures for
lending limits purposes?
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VI. Impact of the Proposed Rule
To assess the effect of the proposed
changes to the capital rule, the agencies
reviewed data provided by advanced
approaches banking organizations that
represent a significant majority of the
derivatives market. In particular, the
agencies analyzed the change in
exposure amount between CEM and
SA–CCR, as well as the change in riskweighted assets as determined under the
standardized approach.62 The data
covers diverse portfolios of derivative
contracts, both in terms of asset type
and counterparty. In addition, the data
includes firms that serve as clearing
members, allowing the agencies to
consider the effect of the proposal under
the cleared transactions framework for
both a direct exposure to a CCP and an
exposure to a CCP on behalf of a client.
As a result, the analysis provides a
reasonable proxy for the potential
changes for all advanced approaches
banking organizations.
As noted above, SA–CCR would
improve risk-sensitivity when
62 The agencies estimate that, on aggregate,
exposure amounts under SA–CCR would equal
approximately 170 percent of the exposure amounts
for identical derivative contracts under IMM. Thus,
firms that use IMM currently would likely continue
to use IMM to determine the exposure amount of
their derivative contracts to determine advanced
approaches total risk-weighted assets. However, the
standardized approach serves as a floor on
advanced approaches banking organizations’ total
risk-weighted assets. Thus, a firm would only
receive the benefit of IMM if the firm is not bound
by standardized total risk-weighted assets.
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measuring the exposure amount for
derivative contracts compared to CEM,
including through improved collateral
recognition. For instance, the exposure
amount of margined derivative contracts
for these firms would decrease by
approximately 44 percent, while the
exposure amount of unmargined
derivative contracts for these firms
would increase by approximately 90
percent. Overall, the agencies estimate
that, under the proposal, the exposure
amount for derivative contracts held by
advanced approaches banking
organizations would decrease by
approximately 7 percent.
The agencies also analyzed the
changes based on both asset classes and
counterparties for these firms. With
respect to asset classes, the exposure
amount would increase for interest rate
derivative contracts, equity derivative
contracts, and commodity derivative
contracts, while the exposure amount
would decrease for exchange rate
derivative contracts and credit
derivative contracts. These changes are
largely due to the updated supervisory
factors, which reflect stress volatilities
observed during the financial crisis.
With respect to counterparties, the
exposure amount would decrease for
derivative contracts with banks, brokerdealers, and CCPs, which are typically
margined, hedged, and subject to
QMNAs. In contrast, exposure amounts
would increase for derivative contracts
with other financial institutions, such as
asset managers, investment funds, and
pension funds; sovereigns and
municipalities; and commercial entities
that use derivative contracts to hedge
commercial risk.
The agencies estimate that the
proposal would result in an
approximately 5 percent increase in
advanced approaches banking
organizations’ standardized riskweighted assets associated with
derivative contract exposures.63 This
would result in a reduction
(approximately 6 basis points) in
advanced approaches banking
organizations’ tier 1 risk-based capital
ratios, on average. This estimate
assumes, consistent with the proposal,
that a netting set is defined to include
all derivative contracts subject to a
QMNA.
63 Total risk-weighted assets are a function of the
exposure amount of the netting set and the
applicable risk-weight of the counterparty. Total
risk-weighted assets increase under the analysis
while exposure amounts decrease because higher
applicable risk-weights amplify increases in the
exposure amount of certain derivative contracts,
which outweighs decreases in the exposure amount
of other derivative contracts.
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The agencies estimate that the
proposal would result in an increase
(approximately 30 basis points) in
advanced approaches banking
organizations’ supplementary leverage
ratio, on average. However, this estimate
does not reflect the broad definition of
netting set in the proposal, which, if
adopted, would likely result in an
additional increase in advanced
approaches banking organizations’
supplementary leverage ratio. The
proposal would use a modified version
of SA–CCR that would recognize only
certain cash variation margin in the
replacement cost component calculation
for purposes of the supplementary
leverage ratio. Additional recognition of
client collateral in the modified version
of SA–CCR would further increase
clearing member banking organizations’
supplementary leverage ratio, but such
an increase would largely depend on the
degree of client clearing services
provided by a clearing member banking
organization.
The effects of the proposed rule likely
would be limited for non-advanced
approaches banking organizations. First,
these banking organizations hold
relatively small derivative portfolios.
Non-advanced approaches banking
organizations account for less than 8
percent of derivative contracts of all
banking organizations, even though they
account for 40 percent of total assets of
all banking organizations.64 Second,
non-advanced approaches banking
organization are not subject to
supplementary leverage ratio
requirements, and thus would not be
affected by any changes to the
calculation of total leverage exposure.
Finally, these banking organizations
retain the option of using CEM, and the
agencies anticipate that only those
banking organizations that receive a net
benefit from using SA–CCR would elect
to use it.
VII. Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (PRA) of 1995
(44 U.S.C. 3501–3521). In accordance
with the requirements of the PRA, the
agencies may not conduct or sponsor,
and the respondent is not required to
respond to, an information collection
unless it displays a currently-valid
Office of Management and Budget
(OMB) control number. The OMB
64 According to data from the Consolidated
Reports of Condition and Income for a Bank with
Domestic and Foreign Offices (FFIEC report forms
031, 041, and 051), as of March 31, 2018.
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control number for the OCC is 1557–
0318, Board is 7100–0313, and FDIC is
3064–0153. These information
collections will be extended for three
years, with revision. The information
collection requirements contained in
this proposed rulemaking have been
submitted by the OCC and FDIC to OMB
for review and approval under section
3507(d) of the PRA (44 U.S.C. 3507(d))
and § 1320.11 of the OMB’s
implementing regulations (5 CFR part
1320). The Board reviewed the proposed
rule under the authority delegated to the
Board by OMB.
Comments are invited on:
a. Whether the collections of
information are necessary for the proper
performance of the Board’s functions,
including whether the information has
practical utility;
b. The accuracy or the estimate of the
burden of the information collections,
including the validity of the
methodology and assumptions used;
c. Ways to enhance the quality,
utility, and clarity of the information to
be collected;
d. Ways to minimize the burden of the
information collections on respondents,
including through the use of automated
collection techniques or other forms of
information technology; and
e. Estimates of capital or startup costs
and costs of operation, maintenance,
and purchase of services to provide
information.
All comments will become a matter of
public record. Comments on aspects of
this notice that may affect reporting,
recordkeeping, or disclosure
requirements and burden estimates
should be sent to the addresses listed in
the ADDRESSES section of this document.
A copy of the comments may also be
submitted to the OMB desk officer by
mail to U.S. Office of Management and
Budget, 725 17th Street NW, #10235,
Washington, DC 20503; facsimile to
(202) 395–6974; or email to
oiralsubmission@omb.eop.gov,
Attention, Federal Banking Agency Desk
Officer.
Proposed Information Collection
Title of Information Collection:
Recordkeeping and Disclosure
Requirements Associated With Capital
Adequacy.
Frequency: Quarterly, annual.
Affected Public: Businesses or other
for-profit.
Respondents:
OCC: National banks and federal
savings associations.
Board: State member banks (SMBs),
bank holding companies (BHCs), U.S.
intermediate holding companies (IHCs),
savings and loan holding companies
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(SLHCs), and global systemically
important bank holding companies
(GSIBs) domiciled in the United States.
FDIC: State nonmember banks, state
savings associations, and certain
subsidiaries of those entities.
Current Actions: The proposal would
revise §§ l.2, l.10, l.32, l.34
(including Table 1), l.35, l.132
(including Table 2), and l.133 of the
capital rule to implement SA–CCR in
order to calculate the exposure amount
of derivatives contracts under the
agencies’ regulatory capital rule as well
as update other parts of the capital rule
to account for the proposed
incorporation of SA–CCR.
The proposal will not, however, result
in changes to the burden. In order to be
consistent across the agencies, the
agencies are applying a conforming
methodology for calculating the burden
estimates. The agencies are also
updating the number of respondents
based on the current number of
supervised entities even though this
proposal only affects a limited number
of entities. The agencies believe that any
changes to the information collections
associated with the proposed rule are
the result of the conforming
methodology and updates to the
respondent count, and not the result of
the proposed rule changes.
PRA Burden Estimates
OCC
OMB control number: 1557–0318.
Estimated number of respondents:
1,365 (of which 18 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (1,365
institutions affected for ongoing)
Recordkeeping (Ongoing)—16.
Standardized Approach (1,365
institutions affected for ongoing)
Recordkeeping (Initial setup)—122.
Recordkeeping (Ongoing)—20.
Disclosure (Initial setup)—226.25.
Disclosure (Ongoing quarterly)—
131.25.
Advanced Approach (18 institutions
affected for ongoing)
Recordkeeping (Initial setup)—460.
Recordkeeping (Ongoing)—540.77.
Recordkeeping (Ongoing quarterly)—
20.
Disclosure (Initial setup)—280.
Disclosure (Ongoing)—5.78.
Disclosure (Ongoing
quarterly)—35.
Estimated annual burden hours: 1,088
hours initial setup, 64,929 for ongoing.
Board
Agency form number: FR Q.
OMB control number: 7100–0313.
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Estimated number of respondents:
1,431 (of which 17 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (1,431
institutions affected for ongoing)
Recordkeeping (Ongoing)—16.
Standardized Approach (1,431
institutions affected for ongoing)
Recordkeeping (Initial setup)—122.
Recordkeeping (Ongoing)—20.
Disclosure (Initial setup)—226.25.
Disclosure (Ongoing
quarterly)—131.25.
Advanced Approach (17 institutions
affected)
Recordkeeping (Initial setup)—460.
Recordkeeping (Ongoing)—540.77.
Recordkeeping (Ongoing quarterly)—
20.
Disclosure (Initial setup)—280.
Disclosure (Ongoing)—5.78.
Disclosure (Ongoing quarterly)—35.
Disclosure (Table 13 quarterly)—5.
Risk-based Capital Surcharge for
GSIBs (21 institutions affected)
Recordkeeping (Ongoing)—0.5.
Estimated annual burden hours: 1,088
hours initial setup, 78,183 hours for
ongoing.
FDIC
OMB control number: 3064–0153.
Estimated number of respondents:
3,604 (of which 2 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (3,604
institutions affected)
Recordkeeping (Ongoing)—16.
Standardized Approach (3,604
institutions affected)
Recordkeeping (Initial setup)—122.
Recordkeeping (Ongoing)—20.
Disclosure (Initial setup)—226.25.
Disclosure (Ongoing quarterly)—
131.25.
Advanced Approach (2 institutions
affected)
Recordkeeping (Initial setup)—460.
Recordkeeping (Ongoing)—540.77.
Recordkeeping (Ongoing quarterly)—
20.
Disclosure (Initial setup)—280.
Disclosure (Ongoing)—5.78.
Disclosure (Ongoing quarterly)—35.
Estimated annual burden hours: 1,088
hours initial setup, 131,802 hours for
ongoing.
Also as a result of this proposed rule,
the agencies would clarify the reporting
instructions for the Consolidated
Reports of Condition and Income (Call
Reports) (FFIEC 031, FFIEC 041, and
FFIEC 051) and Regulatory Capital
Reporting for Institutions Subject to the
Advanced Capital Adequacy Framework
(FFIEC 101). The OCC and FDIC would
clarify the reporting instructions for
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DFAST 14A, and the Board would
clarify the reporting instructions for the
Consolidated Financial Statements for
Holding Companies (FR Y–9C), Capital
Assessments and Stress Testing (FR Y–
14A and FR Y–14Q), and Banking
Organization Systemic Risk Report (FR
Y–15) to reflect the changes to the
capital rules that would be required
under this proposal. The OCC also is
proposing to update cross-references in
its lending limit rules to account for the
proposed incorporation of SA–CCR.
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B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act,
5 U.S.C. 601 et seq., (RFA), requires an
agency, in connection with a proposed
rule, to prepare an Initial Regulatory
Flexibility Analysis describing the
impact of the rule on small entities
(defined by the Small Business
Administration (SBA) for purposes of
the RFA to include commercial banks
and savings institutions with total assets
of $550 million or less and trust
companies with total revenue of $38.5
million or less) or to certify that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities. As
of December 31, 2017, the OCC
supervised 886 small entities. The rule
would impose requirements on all OCC
supervised entities that are subject to
the advanced approaches risk-based
capital rules, which typically have
assets in excess of $250 billion, and
therefore would not be small entities.
While small entities would have the
option to adopt SA–CCR, the OCC does
not expect any small entities to elect
that option. Therefore, the OCC
estimates the proposed rule would not
generate any costs for small entities.
Therefore, the OCC certifies that the
proposed rule would not have a
significant economic impact on a
substantial number of OCC-supervised
small entities.
FDIC: The Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., generally
requires an agency, in connection with
a proposed rule, to prepare and make
available for public comment an initial
regulatory flexibility analysis that
describes the impact of a proposed rule
on small entities.65 However, a
regulatory flexibility analysis is not
required if the agency certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities. The Small
Business Administration (SBA) has
defined ‘‘small entities’’ to include
65 5
U.S.C. 601 et seq.
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banking organizations with total assets
of less than or equal to $550 million.66
As of March 31, 2018, there were
3,604 FDIC-supervised institutions, of
which 2,804 are considered small
entities for the purposes of RFA. These
small entities hold $505 billion in
assets, accounting for 17 percent of total
assets held by FDIC-supervised
institutions.67
The proposed rule would require
advanced approaches institutions to
replace CEM with SA–CCR as an option
for calculating EAD. There are no FDICsupervised advanced approaches
institutions that are considered small
entities for the purposes of RFA.
In addition, the proposed rule would
allow non-advanced approaches
institutions to replace CEM with SA–
CCR as the approach for calculating
EAD. This allowance applies to all 2,804
small institutions supervised by the
FDIC. Institutions that elect to use SA–
CCR would incur some costs related to
other compliance requirements of the
proposed rule. However, these costs are
difficult to estimate given that adoption
of SA–CCR is voluntary. The FDIC
expects that non-advanced approaches
institutions will elect to use SA–CCR
only if the net benefits of doing so are
positive. Thus, the FDIC expects the
proposed rule will not impose any net
economic costs on these entities.
According to recent data, 395 (14.1
percent) small FDIC-supervised
institutions, reporting $107 billion in
assets, report holding some volume of
derivatives and would thus have the
option of electing to use SA–CCR.
However, these institutions report
holding only $5.4 billion (or 5 percent
of assets) in derivatives.68 Therefore, the
potential effects of electing SA–CCR are
likely to be insignificant for these
institutions.
Based on the information above, the
FDIC certifies that the proposed rule
will not have a significant economic
impact on a substantial number of small
entities.
The FDIC invites comments on all
aspects of the supporting information
provided in this RFA section. In
66 The SBA defines a small banking organization
as having $550 million or less in assets, where an
organization’s ‘‘assets are determined by averaging
the assets reported on its four quarterly financial
statements for the preceding year.’’ See 13 CFR
121.201 (as amended, effective December 2, 2014).
In its determination, the ‘‘SBA counts the receipts,
employees, or other measure of size of the concern
whose size is at issue and all of its domestic and
foreign affiliates.’’ See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity’s
affiliated and acquired assets, averaged over the
preceding four quarters, to determine whether the
covered entity is ‘‘small’’ for the purposes of RFA.
67 FDIC Call Report, March 31, 2018.
68 Id.
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64687
particular, would this rule have any
significant effects on small entities that
the FDIC has not identified?
Board: The Board is providing an
initial regulatory flexibility analysis
with respect to this proposed rule. The
Regulatory Flexibility Act, 5 U.S.C. 601
et seq., (RFA), requires an agency to
consider whether the rules it proposes
will have a significant economic impact
on a substantial number of small
entities.69 In connection with a
proposed rule, the RFA requires an
agency to prepare an Initial Regulatory
Flexibility Analysis describing the
impact of the rule on small entities or
to certify that the proposed rule would
not have a significant economic impact
on a substantial number of small
entities. An initial regulatory flexibility
analysis must contain (1) a description
of the reasons why action by the agency
is being considered; (2) a succinct
statement of the objectives of, and legal
basis for, the proposed rule; (3) a
description of, and, where feasible, an
estimate of the number of small entities
to which the proposed rule will apply;
(4) a description of the projected
reporting, recordkeeping, and other
compliance requirements of the
proposed rule, including an estimate of
the classes of small entities that will be
subject to the requirement and the type
of professional skills necessary for
preparation of the report or record; (5)
an identification, to the extent
practicable, of all relevant Federal rules
which may duplicate, overlap with, or
conflict with the proposed rule; and (6)
a description of any significant
alternatives to the proposed rule which
accomplish its stated objectives.
The Board has considered the
potential impact of the proposed rule on
small entities in accordance with the
RFA. Based on its analysis and for the
reasons stated below, the Board believes
that this proposed rule will not have a
significant economic impact on a
substantial number of small entities.
Nevertheless, the Board is publishing
and inviting comment on this initial
regulatory flexibility analysis. A final
regulatory flexibility analysis will be
conducted after comments received
during the public comment period have
been considered. The proposal would
also make corresponding changes to the
Board’s reporting forms.
69 Under regulations issued by the Small Business
Administration, a small entity includes a depository
institution, bank holding company, or savings and
loan holding company with total assets of $550
million or less and trust companies with total assets
of $38.5 million or less. As of June 30, 2018, there
were approximately 3,304 small bank holding
companies, 216 small savings and loan holding
companies, and [541] small state member banks.
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As discussed in detail above, the
proposed rule would amend the capital
rule to provide a new methodology for
calculating the exposure amount for
derivative contracts. For purposes of
calculating advanced approaches total
risk-weighted assets, an advanced
approaches Board-regulated institution
would be able to use either SA–CCR or
the internal models methodology. For
purposes of calculating standardized
approach total risk-weighted assets, an
advanced approaches Board-regulated
institution would be required to use
SA–CCR and a non–advanced
approaches Board-regulated institution
would be able to elect either SA–CCR or
the existing methodology. In addition,
for purposes of the denominator of the
supplementary leverage ratio, the
proposal would integrate SA–CCR into
the calculation of the denominator,
replacing CEM.
The Board has broad authority under
the International Lending Supervision
Act (ILSA) 70 and the PCA provisions of
the Federal Deposit Insurance Act 71 to
establish regulatory capital
requirements for the institutions it
regulates. For example, ILSA directs
each Federal banking agency to cause
banking institutions to achieve and
maintain adequate capital by
establishing minimum capital
requirements as well as by other means
that the agency deems appropriate.72
The PCA provisions of the Federal
Deposit Insurance Act direct each
Federal banking agency to specify, for
each relevant capital measure, the level
at which an IDI subsidiary is well
capitalized, adequately capitalized,
undercapitalized, and significantly
undercapitalized.73 In addition, the
Board has broad authority to establish
regulatory capital standards for bank
holding companies, savings and loan
holding companies, and U.S.
intermediate holding companies of
foreign banking organizations under the
Bank Holding Company Act, the Home
Owners’ Loan Act, and the Dodd-Frank
Reform and Consumer Protection Act
(Dodd-Frank Act).74
The proposed rule would only impose
mandatory changes on advanced
approaches banking organizations.
Advanced approaches banking
organizations include depository
institutions, bank holding companies,
savings and loan holding companies, or
intermediate holding companies with at
least $250 billion in total consolidated
70 12
U.S.C. 3901–3911.
U.S.C. 1831o.
72 12 U.S.C. 3907(a)(1).
73 12 U.S.C. 1831o(c)(2).
74 See 12 U.S.C. 1467a, 1844, 5365, 5371.
71 12
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assets or has consolidated on-balance
sheet foreign exposures of at least $10
billion, or a subsidiary of a depository
institution, bank holding company,
savings and loan holding company, or
intermediate holding company that is an
advanced approaches banking
organization. The proposed rule
therefore would not impose mandatory
requirements on any small entities.
However, the proposal would allow
Board-regulated institutions that are not
advanced approaches Board-regulated
institutions to elect to use SA–CCR
instead of CEM. Small entities that are
subject to the Board’s capital rule could
make such an election, which would
require immediate changes to reporting,
recordkeeping, and compliance systems,
as well as the ongoing burden of
maintaining these different systems.
However, the entities that elect to use
SA–CCR may face reduced regulatory
capital requirements as a result.
Further, as discussed previously in
the Paperwork Reduction Act section,
the proposal would make changes to the
projected reporting, recordkeeping, and
other compliance requirements of the
rule by proposing to collect information
from advanced approaches Boardregulated institutions and non–
advanced approaches Board-regulated
institutions that elect to use SA–CCR.
These changes would include limited
revisions to the Call Report (FFIEC 031,
041, and 051), the Consolidated
Financial Statements for Holding
Companies (FR Y–9C), and the
Regulatory Capital Reporting for
Institutions Subject to the Advanced
Capital Adequacy Framework (FFIEC
101) to provide for reporting of
derivative contracts under SA–CCR.
Firms would be required to update their
systems to implement these changes to
reporting forms. The Board does not
expect that the compliance,
recordkeeping, and reporting updates
described previously would impose a
significant cost on small Boardregulated institutions. These changes
would only impact small entities that
elect to use SA–CCR. In addition, the
Board is aware of no other Federal rules
that duplicate, overlap, or conflict with
the proposed changes to the capital rule.
Therefore, the Board believes that the
proposed rule will not have a significant
economic impact on small banking
organizations supervised by the Board
and therefore believes that there are no
significant alternatives to the proposed
rule that would reduce the economic
impact on small banking organizations
supervised by the Board.
The Board welcomes comment on all
aspects of its analysis. In particular, the
Board requests that commenters
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describe the nature of any impact on
small entities and provide empirical
data to illustrate and support the extent
of the impact.
C. Plain Language
Section 722 of the Gramm-LeachBliley Act requires the Federal banking
agencies to use plain language in all
proposed and final rules published after
January 1, 2000. The agencies have
sought to present the proposed rule in
a simple and straightforward manner,
and invite comment on the use of plain
language. For example:
• Have the agencies organized the
material to suit your needs? If not, how
could they present the rule more
clearly?
• Are the requirements in the rule
clearly stated? If not, how could the rule
be more clearly stated?
• Do the regulations contain technical
language or jargon that is not clear? If
so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes would achieve that?
• Is this section format adequate? If
not, which of the sections should be
changed and how?
• What other changes can the
agencies incorporate to make the
regulation easier to understand?
D. Riegle Community Development and
Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the
Riegle Community Development and
Regulatory Improvement Act
(RCDRIA),75 in determining the effective
date and administrative compliance
requirements for new regulations that
impose additional reporting, disclosure,
or other requirements on IDIs, each
Federal banking agency must consider,
consistent with principles of safety and
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
benefits of such regulations. In addition,
section 302(b) of RCDRIA requires new
regulations and amendments to
regulations that impose additional
reporting, disclosures, or other new
requirements on IDIs generally to take
effect on the first day of a calendar
quarter that begins on or after the date
on which the regulations are published
in final form.76
75 12
76 12
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U.S.C. 4802.
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Because the proposal [would/would
not] impose additional reporting,
disclosure, or other requirements on
IDIs, section 302 of the RCDRIA
therefore [does/does not] apply.
Nevertheless, the requirements of
RCDRIA will be considered as part of
the overall rulemaking process. In
addition, the agencies also invite any
other comments that further will inform
the agencies’ consideration of RCDRIA.
E. OCC Unfunded Mandates Reform Act
of 1995 Determination
The OCC analyzed the proposed rule
under the factors set forth in the
Unfunded Mandates Reform Act of 1995
(UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether
the proposed rule includes a Federal
mandate that may result in the
expenditure by State, local, and Tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
in any one year (adjusted for inflation).
The OCC has determined that this
proposed rule would not result in
expenditures by State, local, and Tribal
governments, or the private sector, of
$100 million or more in any one year.
Accordingly, the OCC has not prepared
a written statement to accompany this
proposal.
List of Subjects
12 CFR Part 3
Administrative practice and
procedure, Capital, National banks,
Risk.
12 CFR Part 32
National banks, Reporting and
recordkeeping requirements.
12 CFR Part 217
Administrative practice and
procedure, Banks, Banking, Capital,
Federal Reserve System, Holding
companies.
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12 CFR Part 324
Administrative practice and
procedure, Banks, Banking, Capital
adequacy, Savings associations, State
non-member banks.
Office of the Comptroller of the
Currency
For the reasons set out in the joint
preamble, the OCC proposes to amend
12 CFR parts 3 and 32 as follows:
PART 3—CAPITAL ADEQUACY
STANDARDS
1. The authority citation for part 3
continues to read as follows:
■
Authority: 12 U.S.C. 93a, 161, 1462,
1462a, 1463, 1464, 1818, 1828(n), 1828 note,
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1831n note, 1835, 3907, 3909, and
5412(b)(2)(B).
2. Section 3.2 is amended by:
a. Adding the definitions of ‘‘Basis
derivative contract’’ in alphabetical
order;
■ b. Revising paragraph (2) of the
definition of ‘‘Financial collateral;’’
■ c. Adding the definitions of
‘‘Independent collateral,’’ ‘‘Minimum
transfer amount,’’ and ‘‘Net independent
collateral amount’’ in alphabetical
order;
■ d. Revising the definition of ‘‘Netting
set;’’ and
■ e. Adding the definitions of
‘‘Speculative grade,’’ ‘‘Sub-speculative
grade,’’ ‘‘Variation margin,’’ ‘‘Variation
margin agreement,’’ ‘‘Variation margin
amount,’’ ‘‘Variation margin threshold,’’
and ‘‘Volatility derivative contract’’ in
alphabetical order.
The additions and revisions read as
follows:
■
■
§ 3.2
Definitions.
*
*
*
*
*
Basis derivative contract means a nonforeign-exchange derivative contract
(i.e., the contract is denominated in a
single currency) in which the cash flows
of the derivative contract depend on the
difference between two risk factors that
are attributable solely to one of the
following derivative asset classes:
Interest rate, credit, equity, or
commodity.
*
*
*
*
*
Financial collateral * * *
(2) In which the national bank and
Federal savings association has a
perfected, first-priority security interest
or, outside of the United States, the legal
equivalent thereof (with the exception
of cash on deposit; and notwithstanding
the prior security interest of any
custodial agent or any priority security
interest granted to a CCP in connection
with collateral posted to that CCP).
*
*
*
*
*
Independent collateral means
financial collateral, other than variation
margin, that is subject to a collateral
agreement, or in which a national bank
and Federal savings association has a
perfected, first-priority security interest
or, outside of the United States, the legal
equivalent thereof (with the exception
of cash on deposit; notwithstanding the
prior security interest of any custodial
agent or any prior security interest
granted to a CCP in connection with
collateral posted to that CCP), and the
amount of which does not change
directly in response to the value of the
derivative contract or contracts that the
financial collateral secures.
*
*
*
*
*
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64689
Minimum transfer amount means the
smallest amount of variation margin that
may be transferred between
counterparties to a netting set.
*
*
*
*
*
Net independent collateral amount
means the fair value amount of the
independent collateral, as adjusted by
the standard supervisory haircuts under
§ 3.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to a national bank or Federal savings
association less the fair value amount of
the independent collateral, as adjusted
by the standard supervisory haircuts
under § 3.132(b)(2)(ii), as applicable,
posted by the national bank or Federal
savings association to the counterparty,
excluding such amounts held in a
bankruptcy remote manner, or posted to
a QCCP and held in conformance with
the operational requirements in § 3.3.
Netting set means either one
derivative contract between a national
bank or Federal savings association and
a single counterparty, or a group of
derivative contracts between a national
bank or Federal savings association and
a single counterparty, that are subject to
a qualifying master netting agreement.
*
*
*
*
*
Speculative grade means the reference
entity has adequate capacity to meet
financial commitments in the near term,
but is vulnerable to adverse economic
conditions, such that should economic
conditions deteriorate, the reference
entity would present an elevated default
risk.
*
*
*
*
*
Sub-speculative grade means the
reference entity depends on favorable
economic conditions to meet its
financial commitments, such that
should such economic conditions
deteriorate the reference entity likely
would default on its financial
commitments.
*
*
*
*
*
Variation margin means financial
collateral that is subject to a collateral
agreement provided by one party to its
counterparty to meet the performance of
the first party’s obligations under one or
more transactions between the parties as
a result of a change in value of such
obligations since the last time such
financial collateral was provided.
Variation margin agreement means an
agreement to collect or post variation
margin.
Variation margin amount means the
fair value amount of the variation
margin, as adjusted by the standard
supervisory haircuts under
§ 3.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to a national bank or Federal savings
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association less the fair value amount of
the variation margin, as adjusted by the
standard supervisory haircuts under
§ 3.132(b)(2)(ii), as applicable, posted by
the national bank or Federal savings
association to the counterparty.
Variation margin threshold means the
amount of credit exposure of a national
bank or Federal savings association to
its counterparty that, if exceeded, would
require the counterparty to post
variation margin to the national bank or
Federal savings association.
Volatility derivative contract means a
derivative contract in which the payoff
of the derivative contract explicitly
depends on a measure of the volatility
of an underlying risk factor to the
derivative contract.
*
*
*
*
*
■ 3. Section 3.10 is amended by revising
paragraphs (c)(4)(ii)(A) through (C) to
read as follows:
§ 3.10
Minimum capital requirements.
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*
*
*
*
*
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value
of all the national bank’s or Federal
savings association’s on-balance sheet
assets, plus the value of securities sold
under a repurchase transaction or a
securities lending transaction that
qualifies for sales treatment under U.S.
GAAP, less amounts deducted from tier
1 capital under § 3.22(a), (c), and (d),
less the value of securities received in
security-for-security repo-style
transactions, where the national bank or
Federal savings association acts as a
securities lender and includes the
securities received in its on-balance
sheet assets but has not sold or rehypothecated the securities received,
and less the fair value of any derivative
contracts;
(B) The PFE for each netting set
(including cleared transactions except
as provided in paragraph (c)(4)(ii)(I) of
this section and, at the discretion of the
national bank or Federal savings
association, excluding a forward
agreement treated as a derivative
contract that is part of a repurchase or
reverse repurchase or a securities
borrowing or lending transaction that
qualifies for sales treatment under U.S.
GAAP), as determined under
§ 3.132(c)(7), in which the term C in
§ 3.132(c)(7)(i)(B) equals zero,
multiplied by 1.4;
(C) The sum of:
(1)(i) 1.4 multiplied by the
replacement cost of each derivative
contract or single product netting set of
derivative contracts to which the
national bank or Federal savings
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association is a counterparty, calculated
according to the following formula:
Replacement Cost = max{V¥CVMr +
CVMp; 0}
Where:
V equals the fair value for each derivative
contract or each single-product netting
set of derivative contracts (including a
cleared transaction except as provided in
paragraph (c)(4)(ii)(I) of this section and,
at the discretion of the national bank or
Federal savings association, excluding a
forward agreement treated as a derivative
contract that is part of a repurchase or
reverse repurchase or a securities
borrowing or lending transaction that
qualifies for sales treatment under U.S.
GAAP);
CVMr equals the amount of cash collateral
received from a counterparty to a
derivative contract and that satisfies the
conditions in paragraph (c)(4)(ii)(C)(3)
through (7); and
CVMp equals the amount of cash collateral
that is posted to a counterparty to a
derivative contract and that has not offset the fair value of the derivative
contract and that satisfies the conditions
in paragraphs (c)(4)(ii)(C)(3) through (7)
of this section; and
(ii) Notwithstanding paragraph
(c)(4)(ii)(C)(1)(i) of this section, where
multiple netting sets are subject to a
single variation margin agreement, a
national bank or Federal savings
association must apply the formula for
replacement cost provided in
§ 3.132(c)(10), in which the term may
only include cash collateral that
satisfies the conditions in paragraphs
(c)(4)(ii)(C)(3) through (7) of this section;
(2) The amount of cash collateral that
is received from a counterparty to a
derivative contract that has off-set the
fair value of a derivative contract and
that does not satisfy the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of
this section;
(3) For derivative contracts that are
not cleared through a QCCP, the cash
collateral received by the recipient
counterparty is not segregated (by law,
regulation or an agreement with the
counterparty);
(4) Variation margin is calculated and
transferred on a daily basis based on the
fair value of the derivative contract;
(5) The variation margin transferred
under the derivative contract or the
governing rules for a cleared transaction
is the full amount that is necessary to
fully extinguish the net current credit
exposure to the counterparty of the
derivative contracts, subject to the
threshold and minimum transfer
amounts applicable to the counterparty
under the terms of the derivative
contract or the governing rules for a
cleared transaction;
(6) The variation margin is in the form
of cash in the same currency as the
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currency of settlement set forth in the
derivative contract, provided that for the
purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement
means any currency for settlement
specified in the governing qualifying
master netting agreement and the credit
support annex to the qualifying master
netting agreement, or in the governing
rules for a cleared transaction; and
(7) The derivative contract and the
variation margin are governed by a
qualifying master netting agreement
between the legal entities that are the
counterparties to the derivative contract
or by the governing rules for a cleared
transaction, and the qualifying master
netting agreement or the governing rules
for a cleared transaction must explicitly
stipulate that the counterparties agree to
settle any payment obligations on a net
basis, taking into account any variation
margin received or provided under the
contract if a credit event involving
either counterparty occurs;
*
*
*
*
*
■ 4. Section 3.32 is amended by revising
paragraph (f) to read as follows:
§ 3.32
General risk weights.
*
*
*
*
*
(f) Corporate exposures. (1) A national
bank or Federal savings association
must assign a 100 percent risk weight to
all its corporate exposures, except as
provided in paragraph (f)(2) of this
section.
(2) A national bank or Federal savings
association must assign a 2 percent risk
weight to an exposure to a QCCP arising
from the national bank or Federal
savings association posting cash
collateral to the QCCP in connection
with a cleared transaction that meets the
requirements of § 3.35(b)(3)(i)(A) and a
4 percent risk weight to an exposure to
a QCCP arising from the national bank
or Federal savings association posting
cash collateral to the QCCP in
connection with a cleared transaction
that meets the requirements of
§ 3.35(b)(3)(i)(B).
(3) A national bank or Federal savings
association must assign a 2 percent risk
weight to an exposure to a QCCP arising
from the national bank or Federal
savings association posting cash
collateral to the QCCP in connection
with a cleared transaction that meets the
requirements of § 3.35(c)(3)(i).
*
*
*
*
*
■ 5. Section 3.34 is revised to read as
follows:
§ 3.34
Derivative contracts.
(a) Exposure amount for derivative
contracts—(1) National bank or Federal
savings association that is not an
advanced approaches national bank or
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Federal savings association. (i) A
national bank or Federal savings
association that is not an advanced
approaches national bank or Federal
savings association must use the current
exposure methodology (CEM) described
in paragraph (b) of this section to
calculate the exposure amount for all its
OTC derivative contracts, unless the
national bank or Federal savings
association makes the election provided
in paragraph (a)(1)(ii) of this section.
(ii) A national bank or Federal savings
association that is not an advanced
approaches national bank or Federal
savings association may elect to
calculate the exposure amount for all its
OTC derivative contracts under the
standardized approach for counterparty
credit risk (SA–CCR) in § 3.132(c),
rather than calculating the exposure
amount for all its derivative contracts
using the CEM. A national bank or
Federal savings association that elects
under this paragraph (a)(1)(ii) to
calculate the exposure amount for its
OTC derivative contracts under the SA–
CCR must apply the treatment of cleared
transactions under § 3.133 to its
derivative contracts that are cleared
transactions, rather than applying
§ 3.35. A national bank or Federal
savings association that is not an
advanced approaches national bank or
Federal savings association must use the
derivative contract with a negative fair
value, is calculated by multiplying the
notional principal amount of the OTC
derivative contract by the appropriate
conversion factor in Table 1 to this
section.
(B) For purposes of calculating either
the PFE under this paragraph (b) or the
gross PFE under paragraph (b)(2) of this
section for exchange rate contracts and
other similar contracts in which the
notional principal amount is equivalent
to the cash flows, notional principal
amount is the net receipts to each party
falling due on each value date in each
currency.
(C) For an OTC derivative contract
that does not fall within one of the
specified categories in Table 1 to this
section, the PFE must be calculated
using the appropriate ‘‘other’’
conversion factor.
(D) A national bank or Federal savings
association must use an OTC derivative
contract’s effective notional principal
amount (that is, the apparent or stated
notional principal amount multiplied by
any multiplier in the OTC derivative
contract) rather than the apparent or
stated notional principal amount in
calculating PFE.
(E) The PFE of the protection provider
of a credit derivative is capped at the
net present value of the amount of
unpaid premiums.
same methodology to calculate the
exposure amount for all its derivative
contracts and may change its election
only with prior approval of the OCC.
(2) Advanced approaches national
bank or Federal savings association. An
advanced approaches national bank or
Federal savings association must
calculate the exposure amount for all its
derivative contracts using the SA–CCR
in § 3.132(c). An advanced approaches
national bank or Federal savings
association must apply the treatment of
cleared transactions under § 3.133 to its
derivative contracts that are cleared
transactions.
(b) Current exposure methodology
exposure amount—(1) Single OTC
derivative contract. Except as modified
by paragraph (c) of this section, the
exposure amount for a single OTC
derivative contract that is not subject to
a qualifying master netting agreement is
equal to the sum of the national bank’s
or Federal savings association’s current
credit exposure and potential future
credit exposure (PFE) on the OTC
derivative contract.
(i) Current credit exposure. The
current credit exposure for a single OTC
derivative contract is the greater of the
fair value of the OTC derivative contract
or zero.
(ii) PFE. (A) The PFE for a single OTC
derivative contract, including an OTC
TABLE 1 TO § 3.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1
Remaining maturity 2
Foreign
exchange rate
and gold
Interest rate
One year or less ...........................................
Greater than one year and less than or
equal to five years .....................................
Greater than five years .................................
Credit
(noninvestmentgrade
reference
asset)
Credit
(investment
grade
reference
asset) 3
Precious
metals
(except gold)
Equity
Other
0.00
0.01
0.05
0.10
0.06
0.07
0.10
0.005
0.015
0.05
0.075
0.05
0.05
0.10
0.10
0.08
0.10
0.07
0.08
0.12
0.15
1 For
a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of
the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than
one year that meets these criteria, the minimum conversion factor is 0.005.
3 A national bank or Federal savings association must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference
asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A national bank or Federal savings association must
use the column labeled ‘‘Credit (non-investment-grade reference asset)’’ for all other credit derivatives.
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2 For
(2) Multiple OTC derivative contracts
subject to a qualifying master netting
agreement. Except as modified by
paragraph (c) of this section, the
exposure amount for multiple OTC
derivative contracts subject to a
qualifying master netting agreement is
equal to the sum of the net current
credit exposure and the adjusted sum of
the PFE amounts for all OTC derivative
contracts subject to the qualifying
master netting agreement.
(i) Net current credit exposure. The
net current credit exposure is the greater
of the net sum of all positive and
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negative fair values of the individual
OTC derivative contracts subject to the
qualifying master netting agreement or
zero.
(ii) Adjusted sum of the PFE amounts.
The adjusted sum of the PFE amounts,
Anet, is calculated as
Anet = (0.4 × Agross) + (0.6 × NGR ×
Agross),
Where:
(A) Agross = the gross PFE (that is, the sum
of the PFE amounts as determined under
paragraph (b)(1)(ii) of this section for
each individual derivative contract
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subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the
net current credit exposure to the gross
current credit exposure. In calculating
the NGR, the gross current credit
exposure equals the sum of the positive
current credit exposures (as determined
under paragraph (b)(1)(i) of this section)
of all individual derivative contracts
subject to the qualifying master netting
agreement.
(c) Recognition of credit risk
mitigation of collateralized OTC
derivative contracts. (1) A national bank
or Federal savings association using the
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CEM under paragraph (b) of this section
may recognize the credit risk mitigation
benefits of financial collateral that
secures an OTC derivative contract or
multiple OTC derivative contracts
subject to a qualifying master netting
agreement (netting set) by using the
simple approach in § 3.37(b).
(2) As an alternative to the simple
approach, a national bank or Federal
savings association using the CEM
under paragraph (b) of this section may
recognize the credit risk mitigation
benefits of financial collateral that
secures such a contract or netting set if
the financial collateral is marked-to-fair
value on a daily basis and subject to a
daily margin maintenance requirement
by applying a risk weight to the
uncollateralized portion of the
exposure, after adjusting the exposure
amount calculated under paragraph
(b)(1) or (2) of this section using the
collateral haircut approach in § 3.37(c).
The national bank or Federal savings
association must substitute the exposure
amount calculated under paragraph
(b)(1) or (2) of this section for SE in the
equation in § 3.37(c)(2).
(d) Counterparty credit risk for credit
derivatives—(1) Protection purchasers.
A national bank or Federal savings
association that purchases a credit
derivative that is recognized under
§ 3.36 as a credit risk mitigant for an
exposure that is not a covered position
under subpart F of this part is not
required to compute a separate
counterparty credit risk capital
requirement under § 3.32 provided that
the national bank or Federal savings
association does so consistently for all
such credit derivatives. The national
bank or Federal savings association
must either include all or exclude all
such credit derivatives that are subject
to a qualifying master netting agreement
from any measure used to determine
counterparty credit risk exposure to all
relevant counterparties for risk-based
capital purposes.
(2) Protection providers. (i) A national
bank or Federal savings association that
is the protection provider under a credit
derivative must treat the credit
derivative as an exposure to the
underlying reference asset. The national
bank or Federal savings association is
not required to compute a counterparty
credit risk capital requirement for the
credit derivative under § 3.32, provided
that this treatment is applied
consistently for all such credit
derivatives. The national bank or
Federal savings association must either
include all or exclude all such credit
derivatives that are subject to a
qualifying master netting agreement
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from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph
(d)(2) apply to all relevant
counterparties for risk-based capital
purposes unless the national bank or
Federal savings association is treating
the credit derivative as a covered
position under subpart F of this part, in
which case the national bank or Federal
savings association must compute a
supplemental counterparty credit risk
capital requirement under this section.
(e) Counterparty credit risk for equity
derivatives. (1) A national bank or
Federal savings association must treat
an equity derivative contract as an
equity exposure and compute a riskweighted asset amount for the equity
derivative contract under §§ 3.51
through 3.53 (unless the national bank
or Federal savings association is treating
the contract as a covered position under
subpart F of this part).
(2) In addition, the national bank or
Federal savings association must also
calculate a risk-based capital
requirement for the counterparty credit
risk of an equity derivative contract
under this section if the national bank
or Federal savings association is treating
the contract as a covered position under
subpart F of this part.
(3) If the national bank or Federal
savings association risk weights the
contract under the Simple Risk-Weight
Approach (SRWA) in § 3.52, the
national bank or Federal savings
association may choose not to hold riskbased capital against the counterparty
credit risk of the equity derivative
contract, as long as it does so for all
such contracts. Where the equity
derivative contracts are subject to a
qualified master netting agreement, a
national bank or Federal savings
association using the SRWA must either
include all or exclude all of the
contracts from any measure used to
determine counterparty credit risk
exposure.
(f) Clearing member national bank’s
or Federal savings association’s
exposure amount. The exposure amount
of a clearing member national bank or
Federal savings association using the
CEM under paragraph (b) of this section
for an OTC derivative contract or netting
set of OTC derivative contracts where
the national bank or Federal savings
association is either acting as a financial
intermediary and enters into an
offsetting transaction with a QCCP or
where the national bank or Federal
savings association provides a guarantee
to the QCCP on the performance of the
client equals the exposure amount
calculated according to paragraph (b)(1)
or (2) of this section multiplied by the
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scaling factor 0.71. If the national bank
or Federal savings association
determines that a longer period is
appropriate, the national bank or
Federal savings association must use a
larger scaling factor to adjust for a
longer holding period as follows:
Where H = the holding period greater
than five days. Additionally, the OCC
may require the national bank or
Federal savings association to set a
longer holding period if the OCC
determines that a longer period is
appropriate due to the nature, structure,
or characteristics of the transaction or is
commensurate with the risks associated
with the transaction.
■ 6. Section 3.35 is amended by adding
paragraph (a)(3), revising paragraph
(b)(4)(i), and adding paragraph (c)(3)(iii)
to read as follows:
§ 3.35
Cleared transactions.
(a) * * *
(3) Alternate requirements.
Notwithstanding any other provision of
this section, an advanced approaches
national bank or Federal savings
association or a national bank or Federal
savings association that is not an
advanced approaches national bank or
Federal savings association and that has
elected to use SA–CCR under
§ 3.34(a)(1) must apply § 3.133 to its
derivative contracts that are cleared
transactions rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other
requirements in this section, collateral
posted by a clearing member client
national bank or Federal savings
association that is held by a custodian
(in its capacity as custodian) in a
manner that is bankruptcy remote from
the CCP, clearing member, and other
clearing member clients of the clearing
member, is not subject to a capital
requirement under this section.
*
*
*
*
*
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member national bank or
Federal savings association may apply a
risk weight of zero percent to the trade
exposure amount for a cleared
transaction with a CCP where the
clearing member national bank or
Federal savings association is acting as
a financial intermediary on behalf of a
clearing member client, the transaction
offsets another transaction that satisfies
the requirements set forth in § 3.3(a),
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§ 3.37
*
Collateralized transactions.
*
*
*
*
(c) * * *
(3) * * *
(iii) For repo-style transactions and
cleared transactions, a national bank or
Federal savings association may
multiply the standard supervisory
haircuts provided in paragraphs (c)(3)(i)
and (ii) of this section by the square root
of 1⁄2 (which equals 0.707107).
*
*
*
*
*
§§ 3.134, 3.202, and 3.210
8. For each section listed in the
following table, the footnote number
listed in the ‘‘Old footnote number’’
column is redesignated as the footnote
number listed in the ‘‘New footnote
number’’ column as follows:
■
Old footnote
No.
Section
3.134(d)(3) ...............................................................................................................................................................
3.202, paragraph (1) introductory text of the definition of ‘‘Covered position’’ .......................................................
3.202, paragraph (1)(i) of the definition of ‘‘Covered position’’ ...............................................................................
3.210(e)(1) ...............................................................................................................................................................
9. Section 3.132 is amended by:
a. Revising paragraphs (b)(2)(ii)(A)(3)
through (5);
■ b. Adding paragraphs (b)(2)(ii)(A)(6)
and (7);
■ c. Revising paragraphs (c) heading and
(c)(1) and (2) and (5) through (8);
■ d. Adding paragraphs (c)(9) through
(12);
■ e. Removing ‘‘Table 3 to § 3.132’’ and
adding in its place ‘‘Table 4 to this
section’’ in paragraphs (e)(5)(i)(A) and
(H); and
■ f. Redesignating Table 3 to § 3.132 as
Table 4 to § 3.132.
The revisions and additions read as
follows:
■
■
§ 3.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
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*
*
*
*
*
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and
cleared transactions, a national bank or
Federal savings association may
multiply the supervisory haircuts
provided in paragraphs (b)(2)(ii)(A)(1)
and (2) of this section by the square root
of 1⁄2 (which equals 0.707107).
(4) A national bank or Federal savings
association must adjust the supervisory
haircuts upward on the basis of a
holding period longer than ten business
days (for eligible margin loans) or five
business days (for repo-style
transactions), using the formula provide
in paragraph (b)(2)(ii)(A)(6) of this
section where the following conditions
apply. If the number of trades in a
netting set exceeds 5,000 at any time
during a quarter, a national bank or
Federal savings association must adjust
the supervisory haircuts upward on the
basis of a holding period of twenty
business days for the following quarter
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(except when a national bank or Federal
savings association is calculating EAD
for a cleared transaction under § 3.133).
If a netting set contains one or more
trades involving illiquid collateral, a
national bank or Federal savings
association must adjust the supervisory
haircuts upward on the basis of a
holding period of twenty business days.
If over the two previous quarters more
than two margin disputes on a netting
set have occurred that lasted more than
the holding period, then the national
bank or Federal savings association
must adjust the supervisory haircuts
upward for that netting set on the basis
of a holding period that is at least two
times the minimum holding period for
that netting set.
(5)(i) A national bank or Federal
savings association must adjust the
supervisory haircuts upward on the
basis of a holding period longer than ten
business days for collateral associated
derivative contracts that are not cleared
transactions using the formula provided
in paragraph (b)(2)(ii)(A)(6) of this
section where the following conditions
apply. For collateral associated with a
derivative contract that is within a
netting set that is composed of more
than 5,000 derivative contracts that are
not cleared transactions, a national bank
or Federal savings association must use
a holding period of twenty business
days. If a netting set contains one or
more trades involving illiquid collateral
or a derivative contract that cannot be
easily replaced, a national bank or
Federal savings association must use a
holding period of twenty business days.
(ii) Notwithstanding paragraph
(b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section, for collateral associated
with a derivative contract that is subject
to an outstanding dispute over variation
margin, the holding period is twice the
amount provide under paragraph
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30
31
32
33
New footnote
No.
31
32
33
34
(b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section.
(6) A national bank or Federal savings
association must adjust the standard
supervisory haircuts upward, pursuant
to the adjustments provided in
paragraphs (b)(2)(ii)(A)(4) and (5) of this
section, using the following formula:
Where:
TM equals a holding period of longer than 10
business days for eligible margin loans
and derivative contracts or longer than 5
business days for repo-style transactions;
Hs equals the standard supervisory haircut;
and
Ts equals 10 business days for eligible
margin loans and derivative contracts or
5 business days for repo-style
transactions.
(7) If the instrument a national bank
or Federal savings association has lent,
sold subject to repurchase, or posted as
collateral does not meet the definition of
financial collateral, the national bank or
Federal savings association must use a
25.0 percent haircut for market price
volatility (Hs).
*
*
*
*
*
(c) EAD for derivative contracts—(1)
Options for determining EAD. A
national bank or Federal savings
association must determine the EAD for
a derivative contract using the
standardized approach for counterparty
credit risk (SA–CCR) under paragraph
(c)(5) of this section or using the
internal models methodology described
in paragraph (d) of this section. If a
national bank or Federal savings
association elects to use SA–CCR for
one or more derivative contracts, the
exposure amount determined under
SA–CCR is the EAD for the derivative
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and the clearing member national bank
or Federal savings association is not
obligated to reimburse the clearing
member client in the event of the CCP
default.
*
*
*
*
*
■ 7. Section 3.37 is amended by revising
paragraph (c)(3)(iii) to read as follows:
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contract or derivatives contracts. A
national bank or Federal savings
association must use the same
methodology to calculate the exposure
amount for all its derivative contracts
and may change its election only with
prior approval of the OCC.
(2) Definitions. For purposes of this
paragraph (c), the following definitions
apply:
(i) Except as otherwise provided in
paragraph (c) of this section, the end
date means the last date of the period
referenced by an interest rate or credit
derivative contract or, if the derivative
contract references another instrument,
by the underlying instrument.
(ii) Except as otherwise provided in
paragraph (c) of this section, the start
date means the first date of the period
referenced by an interest rate or credit
derivative contract or, if the derivative
contract references the value of another
instrument, by underlying instrument.
(iii) Hedging set means:
(A) With respect interest rate
derivative contracts, all such contracts
within a netting set that reference the
same reference currency;
(B) With respect to exchange rate
derivative contracts, all such contracts
within a netting set that reference the
same currency pair;
(C) With respect to credit derivative
contract, all such contracts within a
netting set;
(D) With respect to equity derivative
contracts, all such contracts within a
netting set;
(E) With respect to a commodity
derivative contract, all such contracts
within a netting set that reference one
of the following commodity classes:
Energy, metal, agricultural, or other
commodities;
(F) With respect to basis derivative
contracts, all such contracts within a
netting set that reference the same pair
of risk factors and are denominated in
the same currency; or
(G) With respect to volatility
derivative contracts, all such contracts
within a netting set that reference one
of interest rate, exchange rate, credit,
equity, or commodity risk factors,
separated according to the requirements
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under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract
materially depends on more than one of
interest rate, exchange rate, credit,
equity, or commodity risk factors, the
OCC may require a national bank or
Federal savings association to include
the derivative contract in each
appropriate hedging set under
paragraphs (c)(2)(iii)(A) through (E) of
this section.
*
*
*
*
*
(5) Exposure amount. The exposure
amount of a netting set, as calculated
under paragraph (c) of this section, is
equal to 1.4 multiplied by the sum of
the replacement cost of the netting set,
as calculated under paragraph (c)(6) of
this section, and the potential future
exposure of the netting set, as calculated
under paragraph (c)(7) of this section,
except that, notwithstanding the
requirements of this paragraph (c)(5):
(i) The exposure amount of a netting
set subject to a variation margin
agreement, excluding a netting set that
is subject to a variation margin
agreement under which the
counterparty to the variation margin
agreement is not required to post
variation margin, is equal to the lesser
of the exposure amount of the netting
set and the exposure amount of the
netting set calculated as if the netting
set were not subject to a variation
margin agreement; and
(ii) The exposure amount of a netting
set that consists of only sold options in
which the premiums have been fully
paid and that are not subject to a
variation margin agreement is zero.
(6) Replacement cost of a netting set—
(i) Netting set subject to a variation
margin agreement under which the
counterparty must post variation
margin. The replacement cost of a
netting set subject to a variation margin
agreement, excluding a netting set that
is subject to a variation margin
agreement under which the
counterparty is not required to post
variation margin, is the greater of:
(A) The sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
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netting set less the sum of the net
independent collateral amount and the
variation margin amount applicable to
such derivative contracts;
(B) The sum of the variation margin
threshold and the minimum transfer
amount applicable to the derivative
contracts within the netting set less the
net independent collateral amount
applicable to such derivative contracts;
or
(C) Zero.
(ii) Netting sets not subject to a
variation margin agreement under
which the counterparty must post
variation margin. The replacement cost
of a netting set that is not subject to a
variation margin agreement under
which the counterparty must post
variation margin to the national bank or
Federal savings association is the greater
of:
(A) The sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the net independent
collateral amount and variation margin
amount applicable to such derivative
contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a
single variation margin agreement.
Notwithstanding paragraphs (c)(6)(i)
and (ii) of this section, the replacement
cost for multiple netting sets subject to
a single variation margin agreement
must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Multiple netting sets subject to
multiple variation margin agreements or
a hybrid netting set. Notwithstanding
paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for a
netting set subject to multiple variation
margin agreements or a hybrid netting
set must be calculated according to
paragraph (c)(11)(i) of this section.
(7) Potential future exposure of a
netting set. The potential future
exposure of a netting set is the product
of the PFE multiplier and the aggregated
amount.
(i) PFE multiplier. The PFE multiplier
is calculated according to the following
formula:
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(ii) Aggregated amount. The
aggregated amount is the sum of all
hedging set amounts, as calculated
under paragraph (c)(8) of this section,
within a netting set.
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(iii) Multiple netting sets subject to a
single variation margin agreement.
Notwithstanding paragraphs (c)(7)(i)
and (ii) of this section and when
calculating the PFE amount for purposes
of total leverage exposure under
§ 3.10(c)(4)(ii)(B), the potential future
exposure for multiple netting sets
subject to a single variation margin
agreement must be calculated according
to paragraph (c)(10)(ii) of this section.
(iv) Multiple netting sets subject to
multiple variation margin agreements or
a hybrid netting set. Notwithstanding
paragraphs (c)(7)(i) and (ii) of this
section and when calculating the PFE
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amount for purposes of total leverage
exposure under § 3.10(c)(4)(ii)(B), the
potential future exposure for a netting
set subject to multiple variation margin
agreements or a hybrid netting set must
be calculated according to paragraph
(c)(11)(ii) of this section.
(8) Hedging set amount—(i) Interest
rate derivative contracts. To calculate
the hedging set amount of an interest
rate derivative contract hedging set, a
national bank or Federal savings
association may use either of the
formulas provided in paragraphs
(c)(8)(i)(A) and (B) of this section:
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Where:
V is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set;
C is the sum of the net independent collateral
amount and the variation margin amount
applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
64695
derivative contract amounts, as
calculated under paragraph (c)(9) of this
section, within the hedging set.
(iii) Credit derivative contracts and
equity derivative contracts. The hedging
set amount of a credit derivative
contract hedging set or equity derivative
contract hedging set within a netting set
is calculated according to the following
formula:
Where:
k is each reference entity within the hedging
set.
K is the number of reference entities within
the hedging set.
AddOn(Refk) equals the sum of the adjusted
derivative contract amounts, as
determined under paragraph (c)(9) of this
section, for all derivative contracts
within the hedging set that reference
reference entity k.
ρk equals the applicable supervisory
correlation factor, as provided in Table 2
to this section.
(iv) Commodity derivative contracts.
The hedging set amount of a commodity
derivative contract hedging set within a
netting set is calculated according to the
following formula:
Where:
k is each commodity type within the hedging
set.
K is the number of commodity types within
the hedging set.
AddOn(Typek) equals the sum of the adjusted
derivative contract amounts, as
determined under paragraph (c)(9) of this
section, for all derivative contracts
within the hedging set that reference
reference commodity type k.
ρ equals the applicable supervisory
correlation factor, as provided in Table 2
to this section.
amount for each basis derivative
contract hedging set and each volatility
derivative contract hedging set. A
national bank or Federal savings
association must calculate such hedging
set amounts using one of the formulas
under paragraphs (c)(8)(i) through (iv)
that corresponds to the primary risk
factor of the hedging set being
calculated.
(9) Adjusted derivative contract
amount—(i) Summary. To calculate the
adjusted derivative contract amount of a
derivative contract, a national bank or
Federal savings association must
determine the adjusted notional amount
of derivative contract, pursuant to
paragraph (c)(9)(ii) of this section, and
multiply the adjusted notional amount
by each of the supervisory delta
adjustment, pursuant to paragraph
(c)(9)(iii) of this section, the maturity
factor, pursuant to paragraph (c)(9)(iv)
of this section, and the applicable
supervisory factor, as provided in Table
2 to this section.
(ii) Adjusted notional amount. (A)(1)
For an interest rate derivative contract
or a credit derivative contract, the
adjusted notional amount equals the
product of the notional amount of the
derivative contract, as measured in U.S.
dollars using the exchange rate on the
date of the calculation, and the
supervisory duration, as calculated by
the following formula:
(i) For an interest rate derivative contract
or credit derivative contract that is a variable
notional swap, the notional amount is equal
to the time-weighted average of the
contractual notional amounts of such a swap
over the remaining life of the swap; and
(ii) For an interest rate derivative contract
or a credit derivative contract that is a
leveraged swap, in which the notional
amount of all legs of the derivative contract
are divided by a factor and all rates of the
derivative contract are multiplied by the
same factor, the notional amount is equal to
the notional amount of an equivalent
unleveraged swap.
(B)(1) For an exchange rate derivative
contract, the adjusted notional amount is the
notional amount of the non-U.S.
denominated currency leg of the derivative
contract, as measured in U.S. dollars using
the exchange rate on the date of the
calculation. If both legs of the exchange rate
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(v) Basis derivative contracts and
volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i)
through (iv) of this section, a national
bank or Federal savings association
must calculate a separate hedging set
Where:
S is the number of business days from the
present day until the start date of the
derivative contract, or zero if the start
date has already passed; and
E is the number of business days from the
present day until the end date of the
derivative contract.
(2) For purposes of paragraph
(c)(9)(ii)(A)(1) of this section:
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(ii) Exchange rate derivative
contracts. For an exchange rate
derivative contract hedging set, the
hedging set amount equals the absolute
value of the sum of the adjusted
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derivative contract are denominated in
currencies other than U.S. dollars, the
adjusted notional amount of the derivative
contract is the largest leg of the derivative
contract, as measured in U.S. dollars using
the exchange rate on the date of the
calculation.
(2) Notwithstanding paragraph
(c)(9)(ii)(B)(1) of this section, for an exchange
rate derivative contract with multiple
exchanges of principal, the national bank or
Federal savings association must set the
adjusted notional amount of the derivative
contract equal to the notional amount of the
derivative contract multiplied by the number
of exchanges of principal under the
derivative contract.
(C)(1) For an equity derivative contract or
a commodity derivative contract, the
adjusted notional amount is the product of
the fair value of one unit of the reference
instrument underlying the derivative contract
and the number of such units referenced by
the derivative contract.
(2) Notwithstanding paragraph
(c)(9)(ii)(C)(1) of this section, when
calculating the adjusted notional amount for
an equity derivative contract or a commodity
derivative contract that is a volatility
derivative contract, the national bank or
Federal savings association must replace the
unit price with the underlying volatility
referenced by the volatility derivative
contract and replace the number of units
with the notional amount of the volatility
derivative contract.
(iii) Supervisory delta adjustments. (A) For
a derivative contract that is not an option
contract or collateralized debt obligation
tranche, the supervisory delta adjustment is
1 if the fair value of the derivative contract
increases when the value of the primary risk
factor increases and ¥1 if the fair value of
the derivative contract decreases when the
value of the primary risk factor increases;
(B)(1) For a derivative contract that is an
option contract, the supervisory delta
adjustment is determined by the following
formulas, as applicable:
(2) As used in the formulas in Table 3 to
this section:
(i) Ç is the standard normal cumulative
distribution function;
(ii) P equals the current fair value of the
instrument or risk factor, as applicable,
underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days
until the latest contractual exercise date of
the option;
(v) l equals zero for all derivative contracts
except interest rate options for the currencies
where interest rates have negative values.
The same value of l must be used for all
interest rate options that are denominated in
the same currency. To determine the value of
l for a given currency, a national bank or
Federal savings association must find the
lowest value L of P and K of all interest rate
options in a given currency that the national
bank or Federal savings association has with
all counterparties. Then, l is set according to
this formula: l = max{¥L + 0.1%, 0}; and
(vi) s equals the supervisory option
volatility, as provided in Table 2 to of this
section.
(C)(1) For a derivative contract that is a
collateralized debt obligation tranche, the
supervisory delta adjustment is determined
by the following formula:
(2) As used in the formula in paragraph
(c)(9)(iii)(C)(1) of this section:
(i) A is the attachment point, which equals
the ratio of the notional amounts of all
underlying exposures that are subordinated
to the national bank’s or Federal savings
association’s exposure to the total notional
amount of all underlying exposures,
expressed as a decimal value between zero
and one; 30
(ii) D is the detachment point, which
equals one minus the ratio of the notional
amounts of all underlying exposures that are
senior to the national bank’s or Federal
savings association’s exposure to the total
notional amount of all underlying exposures,
expressed as a decimal value between zero
and one; and
(iii) The resulting amount is designated
with a positive sign if the collateralized debt
obligation tranche was purchased by the
national bank or Federal savings association
and is designated with a negative sign if the
collateralized debt obligation tranche was
sold by the national bank or Federal savings
association.
(iv) Maturity factor. (A)(1) The maturity
factor of a derivative contract that is subject
to a variation margin agreement, excluding
derivative contracts that are subject to a
variation margin agreement under which the
counterparty is not required to post variation
margin, is determined by the following
formula:
30 In the case of a first-to-default credit derivative,
there are no underlying exposures that are
subordinated to the national bank’s or Federal
savings association’s exposure. In the case of a
second-or-subsequent-to-default credit derivative,
the smallest (n-1) notional amounts of the
underlying exposures are subordinated to the
national bank’s or Federal savings association’s
exposure.
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Where MPOR refers to the period from the
most recent exchange of collateral covering a
netting set of derivative contracts with a
defaulting counterparty until the derivative
contracts are closed out and the resulting
market risk is re-hedged.
(2) Notwithstanding paragraph
(c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a
cleared transaction, MPOR cannot be less
than ten business days plus the periodicity
of re-margining expressed in business days
minus one business day;
(ii) For a derivative contract that is a
cleared transaction, MPOR cannot be less
than five business days plus the periodicity
of re-margining expressed in business days
minus one business day; and
(iii) For a derivative contract that is within
a netting set that is composed of more than
5,000 derivative contracts that are not cleared
transactions, MPOR cannot be less than
twenty business days.
(3) Notwithstanding paragraphs
(c)(9)(iv)(A)(1) and (2) of this section, for a
derivative contract subject to an outstanding
dispute over variation margin, the applicable
floor is twice the amount provided in
(c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative
contract that is not subject to a variation
margin agreement, or derivative contracts
under which the counterparty is not required
to post variation margin, is determined by the
following formula:
Where M equals the greater of 10 business
days and the remaining maturity of the
contract, as measured in business days.
(C) For purposes of paragraph (c)(9)(iv) of
this section, derivative contracts with daily
settlement are treated as derivative contracts
not subject to a variation margin agreement
and daily settlement does not change the end
date of the period referenced by the
derivative contract.
(v) Derivative contract as multiple effective
derivative contracts. A national bank or
Federal savings association must separate a
derivative contract into separate derivative
contracts, according to the following rules:
(A) For an option where the counterparty
pays a predetermined amount if the value of
the underlying asset is above or below the
strike price and nothing otherwise (binary
option), the option must be treated as two
separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option
with strike K must be represented as the
combination of one bought European option
and one sold European option of the same
type as the original option (put or call) with
the strikes set equal to 0.95*K and 1.05*K so
that the payoff of the binary option is
reproduced exactly outside the region
between the two strikes. The absolute value
of the sum of the adjusted derivative contract
amounts of the bought and sold options is
capped at the payoff amount of the binary
option.
(B) For a derivative contract that can be
represented as a combination of standard
option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and
strangle), each standard option component
must be treated as a separate derivative
contract.
(C) For a derivative contract that includes
multiple-payment options, (such as interest
rate caps and floors) each payment option
may be represented as a combination of
effective single-payment options (such as
interest rate caplets and floorlets).
(10) Multiple netting sets subject to a single
variation margin agreement—(i) Calculating
replacement cost. Notwithstanding paragraph
(c)(6) of this section, a national bank or
Federal savings association shall assign a
single replacement cost to multiple netting
sets that are subject to a single variation
margin agreement under which the
counterparty must post variation margin,
calculated according to the following
formula:
Replacement Cost = max{SNS max{VNS;
0}¥max{CMA; 0}; 0} + max{SNS
min{VNS; 0}¥min{CMA; 0}; 0}
counterparty must post variation margin
and at least one derivative contract that
is not subject to such a variation margin
agreement, the calculation for
replacement cost is provided under
paragraph (c)(6)(ii) of this section,
except that the variation margin
threshold equals the sum of the
variation margin thresholds of all
variation margin agreements within the
netting set and the minimum transfer
amount equals the sum of the minimum
transfer amounts of all the variation
margin agreements within the netting
set.
(ii) Calculating potential future
exposure. (A) To calculate potential
future exposure for a netting set subject
to multiple variation margin agreements
under which the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
contract subject to variation margin
agreement under which the
counterparty to the derivative contract
must post variation margin and at least
one derivative contract that is not
subject to such a variation margin
agreement, a national bank or Federal
savings association must divide the
netting set into sub-netting sets and
calculate the aggregated amount for each
sub-netting set. The aggregated amount
for the netting set is calculated as the
sum of the aggregated amounts for the
sub-netting sets. The multiplier is
calculated for the entire netting set.
(B) For purposes of paragraph
(c)(11)(ii)(A) of this section, the netting
set must be divided into sub-netting sets
as follows:
(1) All derivative contracts within the
netting set that are not subject to a
variation margin agreement or that are
subject to a variation margin agreement
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Where:
NS is each netting set subject to the variation
margin agreement MA.
VNS is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set NS.
CMA is the sum of the net independent
collateral amount and the variation
margin amount applicable to the
derivative contracts within the netting
sets subject to the single variation margin
agreement.
(ii) Calculating potential future
exposure. Notwithstanding paragraph
(c)(5) of this section, a national bank or
Federal savings association shall assign
a single potential future exposure to
multiple netting sets that are subject to
a single variation margin agreement
under which the counterparty must post
variation margin equal to the sum of the
potential future exposure of each such
netting set, each calculated according to
paragraph (c)(7) of this section as if such
nettings sets were not subject to a
variation margin agreement.
(11) Netting set subject to multiple
variation margin agreements or a hybrid
netting set—(i) Calculating replacement
cost. To calculate replacement cost for
either a netting set subject to multiple
variation margin agreements under
which the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
contract subject to variation margin
agreement under which the
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under which the counterparty is not
required to post variation margin form
a single sub-netting set. The aggregated
amount for this sub-netting set is
calculated as if the netting set is not
subject to a variation margin agreement.
(2) All derivative contracts within the
netting set that are subject to variation
margin agreements in which the
counterparty must post variation margin
and that share the same value of the
MPOR form a single sub-netting set. The
aggregated amount for this sub-netting
set is calculated as if the netting set is
subject to a variation margin agreement,
using the MPOR value shared by the
derivative contracts within the netting
set.
(12) Treatment of cleared
transactions. (i) A national bank or
Federal savings association must apply
the adjustments in paragraph (c)(12)(iii)
of this section to the calculation of
exposure amount under this paragraph
(c) for a netting set that is composed
solely of one or more cleared
transactions.
(ii) A national bank or Federal savings
association that is a clearing member
must apply the adjustments in
paragraph (c)(12)(iii) of this section to
the calculation of exposure amount
under this paragraph (c) for a netting set
that is composed solely of one or more
exposures, each of which are exposures
of the national bank or Federal savings
association to its clearing member client
where the national bank or Federal
savings association is either acting as a
financial intermediary and enters into
an offsetting transaction with a CCP or
where the national bank or Federal
savings association provides a guarantee
to the CCP on the performance of the
client.
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(iii)(A) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(B) of this section, MPOR may
not be less than 10 business days;
(B) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(B) of this section, the
minimum MPOR under paragraph
(c)(9)(iv)(A)(3) of this section does not
apply if there are no outstanding
disputed trades in the netting set, there
is no illiquid collateral in the netting
set, and there are no exotic derivative
contracts in the netting set; and
(C) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(A) and (B) of this section, if the
CCP collects and holds variation margin
and the variation margin is not
bankruptcy remote from the CCP, Mi
may not exceed 250 business days.
TABLE 2 TO § 3.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND SUPERVISORY
FACTORS FOR DERIVATIVE CONTRACTS
Supervisory
option
volatility
(%)
Asset class
Subclass
Interest rate .....................................................
Exchange rate .................................................
Credit, single name .........................................
N/A .................................................................
N/A .................................................................
Investment grade ...........................................
Speculative grade ..........................................
Sub-speculative grade ...................................
Investment Grade ...........................................
Speculative Grade ..........................................
N/A .................................................................
N/A .................................................................
Energy ............................................................
Metals .............................................................
Agricultural .....................................................
Other ..............................................................
Credit, index ....................................................
Equity, single name ........................................
Equity, index ...................................................
Commodity ......................................................
50
15
100
100
100
80
80
120
75
150
70
70
70
Supervisory
correlation
factor
(%)
N/A
N/A
50
50
50
80
80
50
80
40
40
40
40
Supervisory
factor 1
(%)
0.50
4.0
0.5
1.3
6.0
0.38
1.06
32
20
40
18
18
18
1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this
Table 2, and the applicable supervisory factor for volatility derivative contract hedging sets is equal to 5 times the supervisory factor provided in
this Table 2.
*
*
*
*
*
10. Section 3.133 is amended by
revising paragraphs (a), (b) heading,
(b)(1) through (3), (b)(4)(i), (c)(1)
thorough (3), (c)(4)(i), and (d) to read as
follows:
■
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§ 3.133
Cleared transactions.
(a) General requirements—(1)
Clearing member clients. A national
bank or Federal savings association that
is a clearing member client must use the
methodologies described in paragraph
(b) of this section to calculate riskweighted assets for a cleared
transaction.
(2) Clearing members. A national bank
or Federal savings association that is a
clearing member must use the
methodologies described in paragraph
(c) of this section to calculate its risk-
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weighted assets for a cleared transaction
and paragraph (d) of this section to
calculate its risk-weighted assets for its
default fund contribution to a CCP.
(b) Clearing member client national
bank or Federal savings association—(1)
Risk-weighted assets for cleared
transactions. (i) To determine the riskweighted asset amount for a cleared
transaction, a national bank or Federal
savings association that is a clearing
member client must multiply the trade
exposure amount for the cleared
transaction, calculated in accordance
with paragraph (b)(2) of this section, by
the risk weight appropriate for the
cleared transaction, determined in
accordance with paragraph (b)(3) of this
section.
(ii) A clearing member client national
bank’s or Federal savings association’s
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total risk-weighted assets for cleared
transactions is the sum of the riskweighted asset amounts for all of its
cleared transactions.
(2) Trade exposure amount. (i) For a
cleared transaction that is a derivative
contract or a netting set of derivative
contracts, trade exposure amount equals
the EAD for the derivative contract or
netting set of derivative contracts
calculated using the methodology used
to calculate EAD for derivative contracts
set forth in § 3.132(c) or (d), plus the fair
value of the collateral posted by the
clearing member client national bank or
Federal savings association and held by
the CCP or a clearing member in a
manner that is not bankruptcy remote.
When the national bank or Federal
savings association calculates EAD for
the cleared transaction using the
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methodology in § 3.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD for the repostyle transaction calculated using the
methodology set forth in § 3.132(b)(2) or
(3) or (d), plus the fair value of the
collateral posted by the clearing member
client national bank or Federal savings
association and held by the CCP or a
clearing member in a manner that is not
bankruptcy remote. When the national
bank or Federal savings association
calculates EAD for the cleared
transaction under § 3.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member client national
bank or Federal savings association
must apply a risk weight of:
(A) 2 percent if the collateral posted
by the national bank or Federal savings
association to the QCCP or clearing
member is subject to an arrangement
that prevents any loss to the clearing
member client national bank or Federal
savings association due to the joint
default or a concurrent insolvency,
liquidation, or receivership proceeding
of the clearing member and any other
clearing member clients of the clearing
member; and the clearing member client
national bank or Federal savings
association has conducted sufficient
legal review to conclude with a wellfounded basis (and maintains sufficient
written documentation of that legal
review) that in the event of a legal
challenge (including one resulting from
an event of default or from liquidation,
insolvency or receivership proceedings)
the relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions.
(B) 4 percent, if the requirements of
paragraph (b)(3)(i)(A) of this section are
not met.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member client national bank or Federal
savings association must apply the risk
weight applicable to the CCP under
§ 3.32.
(4) * * *
(i) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
national bank or Federal savings
association that is held by a custodian
(in its capacity as a custodian) in a
manner that is bankruptcy remote from
the CCP, clearing member, and other
clearing member clients of the clearing
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member, is not subject to a capital
requirement under this section.
*
*
*
*
*
(c) * * *
(1) Risk-weighted assets for cleared
transactions. (i) To determine the riskweighted asset amount for a cleared
transaction, a clearing member national
bank or Federal savings association
must multiply the trade exposure
amount for the cleared transaction,
calculated in accordance with paragraph
(c)(2) of this section by the risk weight
appropriate for the cleared transaction,
determined in accordance with
paragraph (c)(3) of this section.
(ii) A clearing member national bank’s
or Federal savings association’s total
risk-weighted assets for cleared
transactions is the sum of the riskweighted asset amounts for all of its
cleared transactions.
(2) Trade exposure amount. A
clearing member national bank or
Federal savings association must
calculate its trade exposure amount for
a cleared transaction as follows:
(i) For a cleared transaction that is a
derivative contract or a netting set of
derivative contracts, trade exposure
amount equals the EAD calculated using
the methodology used to calculate EAD
for derivative contracts set forth in
§ 3.132(c) or (d), plus the fair value of
the collateral posted by the clearing
member national bank or Federal
savings association and held by the CCP
in a manner that is not bankruptcy
remote. When the clearing member
national bank or Federal savings
association calculates EAD for the
cleared transaction using the
methodology in § 3.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD calculated
under § 3.132(b)(2) or (3) or (d), plus the
fair value of the collateral posted by the
clearing member national bank or
Federal savings association and held by
the CCP in a manner that is not
bankruptcy remote. When the clearing
member national bank or Federal
savings association calculates EAD for
the cleared transaction under § 3.132(d),
EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) A clearing member national bank or
Federal savings association must apply
a risk weight of 2 percent to the trade
exposure amount for a cleared
transaction with a QCCP.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member national bank or Federal
savings association must apply the risk
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weight applicable to the CCP according
to § 3.32.
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member national bank or
Federal savings association may apply a
risk weight of zero percent to the trade
exposure amount for a cleared
transaction with a QCCP where the
clearing member national bank or
Federal savings association is acting as
a financial intermediary on behalf of a
clearing member client, the transaction
offsets another transaction that satisfies
the requirements set forth in § 3.3(a),
and the clearing member national bank
or Federal savings association is not
obligated to reimburse the clearing
member client in the event of the QCCP
default.
(4) * * *
(i) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
national bank or Federal savings
association that is held by a custodian
(in its capacity as a custodian) in a
manner that is bankruptcy remote from
the CCP, clearing member, and other
clearing member clients of the clearing
member, is not subject to a capital
requirement under this section.
*
*
*
*
*
(d) Default fund contributions—(1)
General requirement. A clearing
member national bank or Federal
savings association must determine the
risk-weighted asset amount for a default
fund contribution to a CCP at least
quarterly, or more frequently if, in the
opinion of the national bank or Federal
savings association or the OCC, there is
a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for
default fund contributions to
nonqualifying CCPs. A clearing member
national bank’s or Federal savings
association’s risk-weighted asset amount
for default fund contributions to CCPs
that are not QCCPs equals the sum of
such default fund contributions
multiplied by 1,250 percent, or an
amount determined by the OCC, based
on factors such as size, structure and
membership characteristics of the CCP
and riskiness of its transactions, in cases
where such default fund contributions
may be unlimited.
(3) Risk-weighted asset amount for
default fund contributions to QCCPs. A
clearing member national bank’s or
Federal savings association’s riskweighted asset amount for default fund
contributions to QCCPs equals the sum
of its capital requirement, KCM for each
QCCP, as calculated under the
methodology set forth in paragraph
(e)(4) of this section.
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(i) EAD must be calculated separately
for each clearing member’s sub-client
accounts and sub-house account (i.e.,
for the clearing member’s propriety
activities). If the clearing member’s
collateral and its client’s collateral are
held in the same default fund
contribution account, then the EAD of
that account is the sum of the EAD for
the client-related transactions within
the account and the EAD of the houserelated transactions within the account.
For purposes of determining such EADs,
the independent collateral of the
clearing member and its client must be
allocated in proportion to the respective
total amount of independent collateral
posted by the clearing member to the
QCCP.
(ii) If any account or sub-account
contains both derivative contracts and
repo-style transactions, the EAD of that
account is the sum of the EAD for the
derivative contracts within the account
and the EAD of the repo-style
transactions within the account. If
independent collateral is held for an
account containing both derivative
contracts and repo-style transactions,
then such collateral must be allocated to
the derivative contracts and repo-style
transactions in proportion to the
respective product specific exposure
amounts, calculated, excluding the
effects of collateral, according to
§ 3.132(b) for repo-style transactions and
to § 3.132(c)(5) for derivative contracts.
(4) Risk-weighted asset amount for
default fund contributions to a QCCP. A
clearing member national bank’s or
Federal savings association’s capital
requirement for its default fund
contribution to a QCCP (KCM) is equal
to:
(5) Hypothetical capital requirement
of a QCCP. Where a QCCP has provided
its KCCP, a national bank or Federal
savings association must rely on such
disclosed figure instead of calculating
KCCP under this paragraph (d)(5), unless
the national bank or Federal savings
association determines that a more
conservative figure is appropriate based
on the nature, structure, or
characteristics of the QCCP. The
hypothetical capital requirement of a
QCCP (KCCP), as determined by the
national bank or Federal savings
association, is equal to:
Where:
CMi is each clearing member of the QCCP;
and
EADi is the exposure amount of each clearing
member of the QCCP to the QCCP, as
determined under paragraph (d)(6) of
this section.
transactions determined under
paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative
contracts between the national bank or
Federal savings association and the CCP
that are cleared transactions and any
guarantees that the national bank or
Federal savings association has
provided to the CCP with respect to
performance of a clearing member client
on a derivative contract, the EAD is
equal to the sum of:
(A) The exposure amount for all such
derivative contracts and guarantees of
derivative contracts calculated under
SA–CCR in § 3.132(c) using a value of
KCCP = SCMi EADi * 1.6 percent
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(6) EAD of a clearing member national
bank or Federal savings association to a
QCCP. (i) The EAD of a clearing member
national bank or Federal savings
association to a QCCP is equal to the
sum of the EAD for derivative contracts
determined under paragraph (d)(6)(ii) of
this section and the EAD for repo-style
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10 business days for purposes of
§ 3.132(c)(9)(iv)(B);
(B) The value of all collateral held by
the CCP posted by the clearing member
national bank or Federal savings
association or a clearing member client
of the national bank or Federal savings
association in connection with a
derivative contract for which the
national bank or Federal savings
association has provided a guarantee to
the CCP; and
(C) The amount of the prefunded
default fund contribution of the national
bank or Federal savings association to
the CCP.
(iii) With respect to any repo-style
transactions between the national bank
or Federal savings association and the
CCP that are cleared transactions, EAD
is equal to:
EAD = max{EBRM ¥ IM ¥ DF; 0}
Where:
EBRM is the sum of the exposure amounts of
each repo-style transaction between the
national bank or Federal savings
association and the CCP as determined
under § 3.132(b)(2) and without
recognition of any collateral securing the
repo-style transactions;
IM is the initial margin collateral posted by
the national bank or Federal savings
association to the CCP with respect to
the repo-style transactions; and
DF is the prefunded default fund
contribution of the national bank or
Federal savings association to the CCP.
11. Section 3.300 is amended by
adding paragraph (f) to read as follows:
■
§ 3.300
Transitions.
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*
*
*
*
*
(f) SA–CCR. After giving prior notice
to the OCC, an advanced approaches
national bank or Federal savings
association may use CEM rather than
SA–CCR to determine the exposure
amount for purposes of § 3.34 and the
EAD for purposes of § 3.132 for its
derivative contracts until July 1, 2020.
On July 1, 2020, and thereafter, an
advanced approaches national bank or
Federal savings association must use
SA–CCR for purposes of § 3.34 and must
use either SA–CCR or IMM for purposes
of § 3.132. Once an advanced
approaches national bank or Federal
savings association has begun to use
SA–CCR, the advanced approaches
national bank or Federal savings
association may not change to use CEM.
PART 32—LENDING LIMITS
12. The authority citation for part 32
continues to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 12 U.S.C.
84, 93a, 1462a, 1463, 1464(u), 5412(b)(2)(B),
and 15 U.S.C. 1639h.
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13. Section 32.9 is amended by
revising paragraph (b)(1)(iii) and adding
paragraph (b)(1)(iv) to read as follows:
■
§ 32.9 Credit exposure arising from
derivative and securities financing
transactions.
*
*
*
*
*
(b) * * *
(1) * * *
(iii) Current Exposure Method. The
credit exposure arising from a derivative
transaction (other than a credit
derivative transaction) under the
Current Exposure Method shall be
calculated pursuant to 12 CFR 3.34(b)(1)
and (2) and (c) or 324.34(b)(1) and (2)
and (c), as appropriate.
(iv) Standardized Approach for
Counterparty Credit Risk Method. The
credit exposure arising from a derivative
transaction (other than a credit
derivative transaction) under the
Standardized Approach for
Counterparty Credit Risk Method shall
be calculated pursuant to 12 CFR
3.132(c)(5) or 324.132(c)(5), as
appropriate.
*
*
*
*
*
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
preamble, chapter II of title 12 of the
Code of Federal Regulations is proposed
to be amended as set forth below:
PART 217—CAPITAL ADEQUACY OF
BANK HOLDING COMPANIES,
SAVINGS AND LOAN HOLDING
COMPANIES, AND STATE MEMBER
BANKS (REGULATION Q)
14. The authority citation for part 217
continues to read as follows:
■
Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1462a, 1467a, 1818, 1828, 1831n,
1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,
3904, 3906–3909, 4808, 5365, 5368, 5371.
15. Section 217.2 is amended by:
a. Adding the definition of ‘‘Basis
derivative contract’’ in alphabetical
order;
■ b. Revising paragraph (2) of the
definition of ‘‘Financial collateral;’’
■ c. Adding the definitions of
‘‘Independent collateral,’’ ‘‘Minimum
transfer amount,’’ and ‘‘Net independent
collateral amount’’ in alphabetical
order;
■ d. Revising the definition of ‘‘Netting
set;’’
■ e. Adding the definitions of
‘‘Speculative grade,’’ ‘‘Sub-speculative
grade,’’ ‘‘Variation margin,’’ ‘‘Variation
margin agreement,’’ ‘‘Variation margin
amount,’’ ‘‘Variation margin threshold,’’
■
■
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and ‘‘Volatility derivative contract’’ in
alphabetical order.
The additions and revisions read as
follows:
§ 217.2
Definitions.
*
*
*
*
*
Basis derivative contract means a nonforeign-exchange derivative contract
(i.e., the contract is denominated in a
single currency) in which the cash flows
of the derivative contract depend on the
difference between two risk factors that
are attributable solely to one of the
following derivative asset classes:
interest rate, credit, equity, or
commodity.
*
*
*
*
*
Financial collateral * * *
(2) In which the Board-regulated
institution has a perfected, first-priority
security interest or, outside of the
United States, the legal equivalent
thereof, (with the exception of cash on
deposit; and notwithstanding the prior
security interest of any custodial agent
or any priority security interest granted
to a CCP in connection with collateral
posted to that CCP).
*
*
*
*
*
Independent collateral means
financial collateral, other than variation
margin, that is subject to a collateral
agreement, or in which a Boardregulated institution has a perfected,
first-priority security interest or, outside
of the United States, the legal equivalent
thereof (with the exception of cash on
deposit; notwithstanding the prior
security interest of any custodial agent
or any prior security interest granted to
a CCP in connection with collateral
posted to that CCP), and the amount of
which does not change directly in
response to the value of the derivative
contract or contracts that the financial
collateral secures.
*
*
*
*
*
Minimum transfer amount means the
smallest amount of variation margin that
may be transferred between
counterparties to a netting set.
*
*
*
*
*
Net independent collateral amount
means the fair value amount of the
independent collateral, as adjusted by
the standard supervisory haircuts under
§ 217.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to a Board-regulated institution less the
fair value amount of the independent
collateral, as adjusted by the standard
supervisory haircuts under
§ 217.132(b)(2)(ii), as applicable, posted
by the Board-regulated institution to the
counterparty, excluding such amounts
held in a bankruptcy remote manner, or
posted to a QCCP and held in
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conformance with the operational
requirements in § 217.3.
Netting set means either one
derivative contract between a Boardregulated institution and a single
counterparty, or a group of derivative
contracts between a Board-regulated
institution and a single counterparty,
that are subject to a qualifying master
netting agreement.
*
*
*
*
*
Speculative grade means the reference
entity has adequate capacity to meet
financial commitments in the near term,
but is vulnerable to adverse economic
conditions, such that should economic
conditions deteriorate, the reference
entity would present an elevated default
risk.
*
*
*
*
*
Sub-speculative grade means the
reference entity depends on favorable
economic conditions to meet its
financial commitments, such that
should such economic conditions
deteriorate the reference entity likely
would default on its financial
commitments.
*
*
*
*
*
Variation margin means financial
collateral that is subject to a collateral
agreement provided by one party to its
counterparty to meet the performance of
the first party’s obligations under one or
more transactions between the parties as
a result of a change in value of such
obligations since the last time such
financial collateral was provided.
Variation margin agreement means an
agreement to collect or post variation
margin.
Variation margin amount means the
fair value amount of the variation
margin, as adjusted by the standard
supervisory haircuts under
§ 217.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to a Board-regulated institution less the
fair value amount of the variation
margin, as adjusted by the standard
supervisory haircuts under
§ 217.132(b)(2)(ii), as applicable, posted
by the Board-regulated institution to the
counterparty.
Variation margin threshold means the
amount of credit exposure of a Boardregulated institution to its counterparty
that, if exceeded, would require the
counterparty to post variation margin to
the Board-regulated institution.
Volatility derivative contract means a
derivative contract in which the payoff
of the derivative contract explicitly
depends on a measure of the volatility
of an underlying risk factor to the
derivative contract.
*
*
*
*
*
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16. Section 217.10 is amended by
revising paragraphs (c)(4)(ii)(A) through
(C) to read as follows:
■
§ 217.10
Minimum capital requirements.
*
*
*
*
*
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value
of all the Board-regulated institution’s
on-balance sheet assets, plus the value
of securities sold under a repurchase
transaction or a securities lending
transaction that qualifies for sales
treatment under U.S. GAAP, less
amounts deducted from tier 1 capital
under § 217.22(a), (c), and (d), less the
value of securities received in securityfor-security repo-style transactions,
where the Board-regulated institution
acts as a securities lender and includes
the securities received in its on-balance
sheet assets but has not sold or rehypothecated the securities received,
and less the fair value of any derivative
contracts;
(B) The PFE for each netting set
(including cleared transactions except
as provided in paragraph (c)(4)(ii)(I) of
this section and, at the discretion of the
Board-regulated institution, excluding a
forward agreement treated as a
derivative contract that is part of a
repurchase or reverse repurchase or a
securities borrowing or lending
transaction that qualifies for sales
treatment under U.S. GAAP), as
determined under § 217.132(c)(7), in
which the term C in § 217.132(c)(7)(i)(B)
equals zero, multiplied by 1.4;
(C) The sum of:
(1)(i) 1.4 multiplied by the
replacement cost of each derivative
contract or single product netting set of
derivative contracts to which the Boardregulated institution is a counterparty,
calculated according to the following
formula:
Replacement Cost = {V ¥ CVMr +
CVMp; 0}
Where:
V equals the fair value for each derivative
contract or each single-product netting
set of derivative contracts (including a
cleared transaction except as provided in
paragraph (c)(4)(ii)(I) of this section and,
at the discretion of the Board-regulated
institution, excluding a forward
agreement treated as a derivative
contract that is part of a repurchase or
reverse repurchase or a securities
borrowing or lending transaction that
qualifies for sales treatment under U.S.
GAAP);
CVMr equals the amount of cash collateral
received from a counterparty to a
derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3)
through (7) of this section; and
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CVMp equals the amount of cash collateral
that is posted to a counterparty to a
derivative contract and that has not offset the fair value of the derivative
contract and that satisfies the conditions
in paragraphs (c)(4)(ii)(C)(3) through (7)
of this section; and
(ii) Notwithstanding paragraph
(c)(4)(ii)(C)(1)(i) of this section, where
multiple netting sets are subject to a
single variation margin agreement, a
Board-regulated institution must apply
the formula for replacement cost
provided in § 217.132(c)(10), in which
the term may only include cash
collateral that satisfies the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of
this section;
(2) The amount of cash collateral that
is received from a counterparty to a
derivative contract that has off-set the
fair value of a derivative contract and
that does not satisfy the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of
this section;
(3) For derivative contracts that are
not cleared through a QCCP, the cash
collateral received by the recipient
counterparty is not segregated (by law,
regulation or an agreement with the
counterparty);
(4) Variation margin is calculated and
transferred on a daily basis based on the
fair value of the derivative contract;
(5) The variation margin transferred
under the derivative contract or the
governing rules for a cleared transaction
is the full amount that is necessary to
fully extinguish the net current credit
exposure to the counterparty of the
derivative contracts, subject to the
threshold and minimum transfer
amounts applicable to the counterparty
under the terms of the derivative
contract or the governing rules for a
cleared transaction;
(6) The variation margin is in the form
of cash in the same currency as the
currency of settlement set forth in the
derivative contract, provided that for the
purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement
means any currency for settlement
specified in the governing qualifying
master netting agreement and the credit
support annex to the qualifying master
netting agreement, or in the governing
rules for a cleared transaction; and
(7) The derivative contract and the
variation margin are governed by a
qualifying master netting agreement
between the legal entities that are the
counterparties to the derivative contract
or by the governing rules for a cleared
transaction, and the qualifying master
netting agreement or the governing rules
for a cleared transaction must explicitly
stipulate that the counterparties agree to
settle any payment obligations on a net
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basis, taking into account any variation
margin received or provided under the
contract if a credit event involving
either counterparty occurs;
*
*
*
*
*
■ 17. Section 217.32 is amended by
revising paragraph (f) to read as follows:
§ 217.32
General risk weights.
*
*
*
*
*
(f) Corporate exposures. (1) A Boardregulated institution must assign a 100
percent risk weight to all its corporate
exposures, except as provided in
paragraph (f)(2) of this section.
(2) A Board-regulated institution must
assign a 2 percent risk weight to an
exposure to a QCCP arising from the
Board-regulated institution posting cash
collateral to the QCCP in connection
with a cleared transaction that meets the
requirements of § 217.35(b)(3)(i)(A) and
a 4 percent risk weight to an exposure
to a QCCP arising from the Boardregulated institution posting cash
collateral to the QCCP in connection
with a cleared transaction that meets the
requirements of § 217.35(b)(3)(i)(B).
(3) A Board-regulated institution must
assign a 2 percent risk weight to an
exposure to a QCCP arising from the
Board-regulated institution posting cash
collateral to the QCCP in connection
with a cleared transaction that meets the
requirements of § 217.35(c)(3)(i).
*
*
*
*
*
■ 18. Section 217.34 is revised to read
as follows:
§ 217.34
Derivative contracts.
(a) Exposure amount for derivative
contracts—(1) Board-regulated
institution that is not an advanced
approaches Board-regulated institution.
(i) A Board-regulated institution that is
not an advanced approaches Boardregulated institution must use the
current exposure methodology (CEM)
a qualifying master netting agreement is
equal to the sum of the Board-regulated
institution’s current credit exposure and
potential future credit exposure (PFE)
on the OTC derivative contract.
(i) Current credit exposure. The
current credit exposure for a single OTC
derivative contract is the greater of the
fair value of the OTC derivative contract
or zero.
(ii) PFE. (A) The PFE for a single OTC
derivative contract, including an OTC
derivative contract with a negative fair
value, is calculated by multiplying the
notional principal amount of the OTC
derivative contract by the appropriate
conversion factor in Table 1 to this
section.
(B) For purposes of calculating either
the PFE under this paragraph (b) or the
gross PFE under paragraph (b)(2) of this
section for exchange rate contracts and
other similar contracts in which the
notional principal amount is equivalent
to the cash flows, notional principal
amount is the net receipts to each party
falling due on each value date in each
currency.
(C) For an OTC derivative contract
that does not fall within one of the
specified categories in Table 1 to this
section, the PFE must be calculated
using the appropriate ‘‘other’’
conversion factor.
(D) A Board-regulated institution
must use an OTC derivative contract’s
effective notional principal amount (that
is, the apparent or stated notional
principal amount multiplied by any
multiplier in the OTC derivative
contract) rather than the apparent or
stated notional principal amount in
calculating PFE.
(E) The PFE of the protection provider
of a credit derivative is capped at the
net present value of the amount of
unpaid premiums.
described in paragraph (b) of this
section to calculate the exposure
amount for all its OTC derivative
contracts, unless the Board-regulated
institution makes the election provided
in paragraph (a)(1)(ii) of this section.
(ii) A Board-regulated institution that
is not an advanced approaches Boardregulated institution may elect to
calculate the exposure amount for all its
OTC derivative contracts under the
standardized approach for counterparty
credit risk (SA–CCR) in § 217.132(c),
rather than calculating the exposure
amount for all its derivative contracts
using the CEM. A Board-regulated
institution that elects under this
paragraph (a)(1)(ii) to calculate the
exposure amount for its OTC derivative
contracts under the SA–CCR must apply
the treatment of cleared transactions
under § 217.133 to its derivative
contracts that are cleared transactions,
rather than applying § 217.35. A Boardregulated institution that is not an
advanced approaches Board-regulated
institution must use the same
methodology to calculate the exposure
amount for all its derivative contracts
and may change its election only with
prior approval of the Board.
(2) Advanced approaches Boardregulated institution. An advanced
approaches Board-regulated institution
must calculate the exposure amount for
all its derivative contracts using the SA–
CCR in § 217.132(c). An advanced
approaches Board-regulated institution
must apply the treatment of cleared
transactions under § 217.133 to its
derivative contracts that are cleared
transactions.
(b) Current exposure methodology
exposure amount—(1) Single OTC
derivative contract. Except as modified
by paragraph (c) of this section, the
exposure amount for a single OTC
derivative contract that is not subject to
TABLE 1 TO § 217.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1
Remaining
Foreign
exchange
rate and
gold
Interest
rate
maturity 2
One year or less ...........................................
Greater than one year and less than or
equal to five years .....................................
Greater than five years .................................
Credit
(investment
grade
reference
asset) 3
Credit
(non-investment-grade
reference
asset)
Precious
metals
(except gold)
Equity
Other
0.00
0.01
0.05
0.10
0.06
0.07
0.10
0.005
0.015
0.05
0.075
0.05
0.05
0.10
0.10
0.08
0.10
0.07
0.08
0.12
0.15
1 For
a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of
the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than
one year that meets these criteria, the minimum conversion factor is 0.005.
3 A Board-regulated institution must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A Board-regulated institution must use the column labeled ‘‘Credit
(non-investment-grade reference asset)’’ for all other credit derivatives.
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2 For
(2) Multiple OTC derivative contracts
subject to a qualifying master netting
agreement. Except as modified by
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paragraph (c) of this section, the
exposure amount for multiple OTC
derivative contracts subject to a
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qualifying master netting agreement is
equal to the sum of the net current
credit exposure and the adjusted sum of
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the PFE amounts for all OTC derivative
contracts subject to the qualifying
master netting agreement.
(i) Net current credit exposure. The
net current credit exposure is the greater
of the net sum of all positive and
negative fair values of the individual
OTC derivative contracts subject to the
qualifying master netting agreement or
zero.
(ii) Adjusted sum of the PFE amounts.
The adjusted sum of the PFE amounts,
Anet, is calculated as Anet = (0.4 ×
Agross) + (0.6 × NGR × Agross), where:
(A) Agross = the gross PFE (that is, the
sum of the PFE amounts as determined
under paragraph (b)(1)(ii) of this section
for each individual derivative contract
subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the
ratio of the net current credit exposure
to the gross current credit exposure. In
calculating the NGR, the gross current
credit exposure equals the sum of the
positive current credit exposures (as
determined under paragraph (b)(1)(i) of
this section) of all individual derivative
contracts subject to the qualifying
master netting agreement.
(c) Recognition of credit risk
mitigation of collateralized OTC
derivative contracts. (1) A Boardregulated institution using the CEM
under paragraph (b) of this section may
recognize the credit risk mitigation
benefits of financial collateral that
secures an OTC derivative contract or
multiple OTC derivative contracts
subject to a qualifying master netting
agreement (netting set) by using the
simple approach in § 217.37(b).
(2) As an alternative to the simple
approach, a Board-regulated institution
using the CEM under paragraph (b) of
this section may recognize the credit
risk mitigation benefits of financial
collateral that secures such a contract or
netting set if the financial collateral is
marked-to-fair value on a daily basis
and subject to a daily margin
maintenance requirement by applying a
risk weight to the uncollateralized
portion of the exposure, after adjusting
the exposure amount calculated under
paragraph (b)(1) or (2) of this section
using the collateral haircut approach in
§ 217.37(c). The Board-regulated
institution must substitute the exposure
amount calculated under paragraph
(b)(1) or (2) of this section for SE in the
equation in § 217.37(c)(2).
(d) Counterparty credit risk for credit
derivatives—(1) Protection purchasers.
A Board-regulated institution that
purchases a credit derivative that is
recognized under § 217.36 as a credit
risk mitigant for an exposure that is not
a covered position under subpart F of
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this part is not required to compute a
separate counterparty credit risk capital
requirement under § 217.32 provided
that the Board-regulated institution does
so consistently for all such credit
derivatives. The Board-regulated
institution must either include all or
exclude all such credit derivatives that
are subject to a qualifying master netting
agreement from any measure used to
determine counterparty credit risk
exposure to all relevant counterparties
for risk-based capital purposes.
(2) Protection providers. (i) A Boardregulated institution that is the
protection provider under a credit
derivative must treat the credit
derivative as an exposure to the
underlying reference asset. The Boardregulated institution is not required to
compute a counterparty credit risk
capital requirement for the credit
derivative under § 217.32, provided that
this treatment is applied consistently for
all such credit derivatives. The Boardregulated institution must either include
all or exclude all such credit derivatives
that are subject to a qualifying master
netting agreement from any measure
used to determine counterparty credit
risk exposure.
(ii) The provisions of this paragraph
(d)(2) apply to all relevant
counterparties for risk-based capital
purposes unless the Board-regulated
institution is treating the credit
derivative as a covered position under
subpart F of this part, in which case the
Board-regulated institution must
compute a supplemental counterparty
credit risk capital requirement under
this section.
(e) Counterparty credit risk for equity
derivatives. (1) A Board-regulated
institution must treat an equity
derivative contract as an equity
exposure and compute a risk-weighted
asset amount for the equity derivative
contract under §§ 217.51 through 217.53
(unless the Board-regulated institution
is treating the contract as a covered
position under subpart F of this part).
(2) In addition, the Board-regulated
institution must also calculate a riskbased capital requirement for the
counterparty credit risk of an equity
derivative contract under this section if
the Board-regulated institution is
treating the contract as a covered
position under subpart F of this part.
(3) If the Board-regulated institution
risk weights the contract under the
Simple Risk-Weight Approach (SRWA)
in § 217.52, the Board-regulated
institution may choose not to hold riskbased capital against the counterparty
credit risk of the equity derivative
contract, as long as it does so for all
such contracts. Where the equity
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derivative contracts are subject to a
qualified master netting agreement, a
Board-regulated institution using the
SRWA must either include all or
exclude all of the contracts from any
measure used to determine counterparty
credit risk exposure.
(f) Clearing member Board-regulated
institution’s exposure amount. The
exposure amount of a clearing member
Board-regulated institution using the
CEM under paragraph (b) of this section
for an OTC derivative contract or netting
set of OTC derivative contracts where
the Board-regulated institution is either
acting as a financial intermediary and
enters into an offsetting transaction with
a QCCP or where the Board-regulated
institution provides a guarantee to the
QCCP on the performance of the client
equals the exposure amount calculated
according to paragraph (b)(1) or (2) of
this section multiplied by the scaling
factor 0.71. If the Board-regulated
institution determines that a longer
period is appropriate, the Boardregulated institution must use a larger
scaling factor to adjust for a longer
holding period as follows:
Where H = the holding period greater
than five days. Additionally, the Board
may require the Board-regulated
institution to set a longer holding period
if the Board determines that a longer
period is appropriate due to the nature,
structure, or characteristics of the
transaction or is commensurate with the
risks associated with the transaction.
■ 19. Section 217.35 is amended by
adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding
paragraph (c)(3)(iii) to read as follows:
§ 217.35
Cleared transactions.
(a) * * *
(3) Alternate requirements.
Notwithstanding any other provision of
this section, an advanced approaches
Board-regulated institution or a Boardregulated institution that is not an
advanced approaches Board-regulated
institution and that has elected to use
SA–CCR under § 217.34(a)(1) must
apply § 217.133 to its derivative
contracts that are cleared transactions
rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other
requirements in this section, collateral
posted by a clearing member client
Board-regulated institution that is held
by a custodian (in its capacity as
custodian) in a manner that is
bankruptcy remote from the CCP,
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clearing member, and other clearing
member clients of the clearing member,
is not subject to a capital requirement
under this section.
*
*
*
*
*
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member Board-regulated
institution may apply a risk weight of
zero percent to the trade exposure
amount for a cleared transaction with a
CCP where the clearing member Boardregulated institution is acting as a
financial intermediary on behalf of a
clearing member client, the transaction
offsets another transaction that satisfies
the requirements set forth in § 217.3(a),
and the clearing member Boardregulated institution is not obligated to
reimburse the clearing member client in
the event of the CCP default.
*
*
*
*
*
■ 20. Section 217.37 is amended by
revising paragraph (c)(3)(iii) to read as
follows:
§ 217.37
Collateralized transactions.
*
*
*
*
*
(c) * * *
(3) * * *
(iii) For repo-style transactions and
cleared transactions, a Board-regulated
institution may multiply the standard
supervisory haircuts provided in
paragraphs (c)(3)(i) and (ii) of this
section by the square root of 1⁄2 (which
equals 0.707107).
*
*
*
*
*
§§ 217.134, 217.202, and 217.210
[Amended]
21. For each section listed in the
following table, the footnote number
listed in the ‘‘Old footnote number’’
column is redesignated as the footnote
number listed in the ‘‘New footnote
number’’ column as follows:
■
Old
footnote
No.
Section
217.134(d)(3) ...........................................................................................................................................................
217.202, paragraph (1) introductory text of the definition of ‘‘Covered position’’ ...................................................
217.202, paragraph (1)(i) of the definition of ‘‘Covered position’’ ...........................................................................
217.210(e)(1) ...........................................................................................................................................................
22. Section 217.132 is amended by:
a. Revising paragraphs (b)(2)(ii)(A)(3)
through (5);
■ b. Adding paragraphs (b)(2)(ii)(A)(6)
and (7);
■ c. Revising paragraphs (c) heading and
(c)(1) and (2) and (5) through (8);
■ d. Adding paragraphs (c)(9) through
(12);
■ e. Removing ‘‘Table 3 to § 217.132’’
and adding in its place ‘‘Table 4 to this
section’’ in paragraphs (e)(5)(i)(A) and
(H); and
■ f. Redesignating Table 3 to § 217.132
as Table 4 to § 217.132.
The revisions and additions read as
follows:
■
■
§ 217.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
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*
*
*
*
*
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and
cleared transactions, a Board-regulated
institution may multiply the
supervisory haircuts provided in
paragraphs (b)(2)(ii)(A)(1) and (2) of this
section by the square root of 1⁄2 (which
equals 0.707107).
(4) A Board-regulated institution must
adjust the supervisory haircuts upward
on the basis of a holding period longer
than ten business days (for eligible
margin loans) or five business days (for
repo-style transactions), using the
formula provide in paragraph
(b)(2)(ii)(A)(6) of this section where the
following conditions apply. If the
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number of trades in a netting set
exceeds 5,000 at any time during a
quarter, a Board-regulated institution
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days for the
following quarter (except when a Boardregulated institution is calculating EAD
for a cleared transaction under
§ 217.133). If a netting set contains one
or more trades involving illiquid
collateral, a Board-regulated institution
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days. If over the two
previous quarters more than two margin
disputes on a netting set have occurred
that lasted more than the holding
period, then the Board-regulated
institution must adjust the supervisory
haircuts upward for that netting set on
the basis of a holding period that is at
least two times the minimum holding
period for that netting set.
(5)(i) A Board-regulated institution
must adjust the supervisory haircuts
upward on the basis of a holding period
longer than ten business days for
collateral associated derivative contracts
that are not cleared transactions using
the formula provided in paragraph
(b)(2)(ii)(A)(6) of this section where the
following conditions apply. For
collateral associated with a derivative
contract that is within a netting set that
is composed of more than 5,000
derivative contracts that are not cleared
transactions, a Board-regulated
institution must use a holding period of
twenty business days. If a netting set
contains one or more trades involving
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31
32
33
31
32
33
34
illiquid collateral or a derivative
contract that cannot be easily replaced,
a Board-regulated institution must use a
holding period of twenty business days.
(ii) Notwithstanding paragraph
(b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section, for collateral associated
with a derivative contract that is subject
to an outstanding dispute over variation
margin, the holding period is twice the
amount provide under paragraph
(b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section.
(6) A Board-regulated institution must
adjust the standard supervisory haircuts
upward, pursuant to the adjustments
provided in paragraphs (b)(2)(ii)(A)(4)
and (5) of this section, using the
following formula:
Where:
TM equals a holding period of longer than 10
business days for eligible margin loans
and derivative contracts or longer than 5
business days for repo-style transactions;
Hs equals the standard supervisory haircut;
and
Ts equals 10 business days for eligible
margin loans and derivative contracts or
5 business days for repo-style
transactions.
(7) If the instrument a Board-regulated
institution has lent, sold subject to
repurchase, or posted as collateral does
not meet the definition of financial
collateral, the Board-regulated
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institution must use a 25.0 percent
haircut for market price volatility (Hs).
*
*
*
*
*
(c) EAD for derivative contracts—(1)
Options for determining EAD. A Boardregulated institution must determine the
EAD for a derivative contract using the
standardized approach for counterparty
credit risk (SA–CCR) under paragraph
(c)(5) of this section or using the
internal models methodology described
in paragraph (d) of this section. If a
Board-regulated institution elects to use
SA–CCR for one or more derivative
contracts, the exposure amount
determined under SA–CCR is the EAD
for the derivative contract or derivatives
contracts. A Board-regulation institution
must use the same methodology to
calculate the exposure amount for all its
derivative contracts and may change its
election only with prior approval of the
Board.
(2) Definitions. For purposes of this
paragraph (c), the following definitions
apply:
(i) Except as otherwise provided in
paragraph (c) of this section, the end
date means the last date of the period
referenced by an interest rate or credit
derivative contract or, if the derivative
contract references another instrument,
by the underlying instrument.
(ii) Except as otherwise provided in
paragraph (c) of this section, the start
date means the first date of the period
referenced by an interest rate or credit
derivative contract or, if the derivative
contract references the value of another
instrument, by underlying instrument.
(iii) Hedging set means:
(A) With respect interest rate
derivative contracts, all such contracts
within a netting set that reference the
same reference currency;
(B) With respect to exchange rate
derivative contracts, all such contracts
within a netting set that reference the
same currency pair;
(C) With respect to credit derivative
contract, all such contracts within a
netting set;
(D) With respect to equity derivative
contracts, all such contracts within a
netting set;
(E) With respect to a commodity
derivative contract, all such contracts
within a netting set that reference one
of the following commodity classes:
Energy, metal, agricultural, or other
commodities;
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(F) With respect to basis derivative
contracts, all such contracts within a
netting set that reference the same pair
of risk factors and are denominated in
the same currency; or
(G) With respect to volatility
derivative contracts, all such contracts
within a netting set that reference one
of interest rate, exchange rate, credit,
equity, or commodity risk factors,
separated according to the requirements
under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract
materially depends on more than one of
interest rate, exchange rate, credit,
equity, or commodity risk factors, the
Board may require a Board-regulated
institution to include the derivative
contract in each appropriate hedging set
under paragraphs (c)(1)(iii)(A) through
(E) of this section.
*
*
*
*
*
(5) Exposure amount. The exposure
amount of a netting set, as calculated
under paragraph (c) of this section, is
equal to 1.4 multiplied by the sum of
the replacement cost of the netting set,
as calculated under paragraph (c)(6) of
this section, and the potential future
exposure of the netting set, as calculated
under paragraph (c)(7) of this section,
except that, notwithstanding the
requirements of this paragraph (c)(5):
(i) The exposure amount of a netting
set subject to a variation margin
agreement, excluding a netting set that
is subject to a variation margin
agreement under which the
counterparty to the variation margin
agreement is not required to post
variation margin, is equal to the lesser
of the exposure amount of the netting
set and the exposure amount of the
netting set calculated as if the netting
set were not subject to a variation
margin agreement; and
(ii) The exposure amount of a netting
set that consists of only sold options in
which the premiums have been fully
paid and that are not subject to a
variation margin agreement is zero.
(6) Replacement cost of a netting set—
(i) Netting set subject to a variation
margin agreement under which the
counterparty must post variation
margin. The replacement cost of a
netting set subject to a variation margin
agreement, excluding a netting set that
is subject to a variation margin
agreement under which the
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counterparty is not required to post
variation margin, is the greater of:
(A) The sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the sum of the net
independent collateral amount and the
variation margin amount applicable to
such derivative contracts;
(B) The sum of the variation margin
threshold and the minimum transfer
amount applicable to the derivative
contracts within the netting set less the
net independent collateral amount
applicable to such derivative contracts;
or
(C) Zero.
(ii) Netting sets not subject to a
variation margin agreement under
which the counterparty must post
variation margin. The replacement cost
of a netting set that is not subject to a
variation margin agreement under
which the counterparty must post
variation margin to the Board-regulated
institution is the greater of:
(A) The sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the net independent
collateral amount and variation margin
amount applicable to such derivative
contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a
single variation margin agreement.
Notwithstanding paragraphs (c)(6)(i)
and (ii) of this section, the replacement
cost for multiple netting sets subject to
a single variation margin agreement
must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Multiple netting sets subject to
multiple variation margin agreements or
a hybrid netting set. Notwithstanding
paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for a
netting set subject to multiple variation
margin agreements or a hybrid netting
set must be calculated according to
paragraph (c)(11)(i) of this section.
(7) Potential future exposure of a
netting set. The potential future
exposure of a netting set is the product
of the PFE multiplier and the aggregated
amount.
(i) PFE multiplier. The PFE multiplier
is calculated according to the following
formula:
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Where:
V is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set;
C is the sum of the net independent collateral
amount and the variation margin amount
applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
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(ii) Aggregated amount. The
aggregated amount is the sum of all
hedging set amounts, as calculated
under paragraph (c)(8) of this section,
within a netting set.
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(iii) Multiple netting sets subject to a
single variation margin agreement.
Notwithstanding paragraphs (c)(7)(i)
and (ii) of this section and when
calculating the PFE amount for purposes
of total leverage exposure under
§ 217.10(c)(4)(ii)(B), the potential future
exposure for multiple netting sets
subject to a single variation margin
agreement must be calculated according
to paragraph (c)(10)(ii) of this section.
(iv) Multiple netting sets subject to
multiple variation margin agreements or
a hybrid netting set. Notwithstanding
paragraphs (c)(7)(i) and (ii) of this
section and when calculating the PFE
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amount for purposes of total leverage
exposure under § 217.10(c)(4)(ii)(B), the
potential future exposure for a netting
set subject to multiple variation margin
agreements or a hybrid netting set must
be calculated according to paragraph
(c)(11)(ii) of this section.
(8) Hedging set amount—(i) Interest
rate derivative contracts. To calculate
the hedging set amount of an interest
rate derivative contract hedging set, a
Board-regulated institution may use
either of the formulas provided in
paragraphs (c)(8)(i)(A) and (B) of this
section:
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set amount of a credit derivative
contract hedging set or equity derivative
contract hedging set within a netting set
is calculated according to the following
formula:
Where:
k is each reference entity within the hedging
set.
K is the number of reference entities within
the hedging set.
AddOn(Refk) equals the sum of the adjusted
derivative contract amounts, as
determined under paragraph (c)(9) of this
section, for all derivative contracts
within the hedging set that reference
reference entity k.
rk equals the applicable supervisory
correlation factor, as provided in Table 2
to this section.
(iv) Commodity derivative contracts.
The hedging set amount of a commodity
derivative contract hedging set within a
netting set is calculated according to the
following formula:
Where:
k is each commodity type within the hedging
set.
K is the number of commodity types within
the hedging set.
AddOn(Typek) equals the sum of the adjusted
derivative contract amounts, as
determined under paragraph (c)(9) of this
section, for all derivative contracts
within the hedging set that reference
reference commodity type k.
r equals the applicable supervisory
correlation factor, as provided in Table 2 to
this section.
separate hedging set amount for each
basis derivative contract hedging set and
each volatility derivative contract
hedging set. A Board-regulated
institution must calculate such hedging
set amounts using one of the formulas
under paragraphs (c)(8)(i) through (iv)
that corresponds to the primary risk
factor of the hedging set being
calculated.
(9) Adjusted derivative contract
amount—(i) Summary. To calculate the
adjusted derivative contract amount of a
derivative contract, a Board-regulated
institution must determine the adjusted
notional amount of derivative contract,
pursuant to paragraph (c)(9)(ii) of this
section, and multiply the adjusted
notional amount by each of the
supervisory delta adjustment, pursuant
to paragraph (c)(9)(iii) of this section,
the maturity factor, pursuant to
paragraph (c)(9)(iv) of this section, and
the applicable supervisory factor, as
provided in Table 2 to this section.
(ii) Adjusted notional amount. (A)(1)
For an interest rate derivative contract
or a credit derivative contract, the
adjusted notional amount equals the
product of the notional amount of the
derivative contract, as measured in U.S.
dollars using the exchange rate on the
date of the calculation, and the
supervisory duration, as calculated by
the following formula:
(i) For an interest rate derivative
contract or credit derivative contract
that is a variable notional swap, the
notional amount is equal to the timeweighted average of the contractual
notional amounts of such a swap over
the remaining life of the swap; and
(ii) For an interest rate derivative
contract or a credit derivative contract
that is a leveraged swap, in which the
notional amount of all legs of the
derivative contract are divided by a
factor and all rates of the derivative
contract are multiplied by the same
factor, the notional amount is equal to
the notional amount of an equivalent
unleveraged swap.
(B)(1) For an exchange rate derivative
contract, the adjusted notional amount
is the notional amount of the non-U.S.
Where:
S is the number of business days from the
present day until the start date of the
derivative contract, or zero if the start
date has already passed; and
E is the number of business days from the
present day until the end date of the
derivative contract.
(2) For purposes of paragraph
(c)(9)(ii)(A)(1) of this section:
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derivative contract amounts, as
calculated under paragraph (c)(9) of this
section, within the hedging set.
(iii) Credit derivative contracts and
equity derivative contracts. The hedging
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(ii) Exchange rate derivative
contracts. For an exchange rate
derivative contract hedging set, the
hedging set amount equals the absolute
value of the sum of the adjusted
(v) Basis derivative contracts and
volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i)
through (iv) of this section, a Boardregulated institution must calculate a
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denominated currency leg of the
derivative contract, as measured in U.S.
dollars using the exchange rate on the
date of the calculation. If both legs of
the exchange rate derivative contract are
denominated in currencies other than
U.S. dollars, the adjusted notional
amount of the derivative contract is the
largest leg of the derivative contract, as
measured in U.S. dollars using the
exchange rate on the date of the
calculation.
(2) Notwithstanding paragraph
(c)(9)(i)(B)(1) of this section, for an
exchange rate derivative contract with
multiple exchanges of principal, the
Board-regulated institution must set the
adjusted notional amount of the
derivative contract equal to the notional
amount of the derivative contract
multiplied by the number of exchanges
of principal under the derivative
contract.
(C)(1) For an equity derivative
contract or a commodity derivative
contract, the adjusted notional amount
is the product of the fair value of one
unit of the reference instrument
underlying the derivative contract and
the number of such units referenced by
the derivative contract.
(2) Notwithstanding paragraph
(c)(9)(i)(C)(1) of this section, when
calculating the adjusted notional
amount for an equity derivative contract
or a commodity derivative contract that
is a volatility derivative contract, the
Board-regulated institution must replace
the unit price with the underlying
volatility referenced by the volatility
derivative contract and replace the
number of units with the notional
amount of the volatility derivative
contract.
(iii) Supervisory delta adjustments.
(A) For a derivative contract that is not
an option contract or collateralized debt
obligation tranche, the supervisory delta
adjustment is 1 if the fair value of the
derivative contract increases when the
value of the primary risk factor
increases and ¥1 if the fair value of the
derivative contract decreases when the
value of the primary risk factor
increases;
(B)(1) For a derivative contract that is
an option contract, the supervisory delta
adjustment is determined by the
following formulas, as applicable:
(2) As used in the formulas in Table
3 to this section:
(i) F is the standard normal
cumulative distribution function;
(ii) P equals the current fair value of
the instrument or risk factor, as
applicable, underlying the option;
(iii) K equals the strike price of the
option;
(iv) T equals the number of business
days until the latest contractual exercise
date of the option;
(v) l equals zero for all derivative
contracts except interest rate options for
the currencies where interest rates have
negative values. The same value of l
must be used for all interest rate options
that are denominated in the same
currency. To determine the value of l
for a given currency, a Board-regulated
institution must find the lowest value L
of P and K of all interest rate options in
a given currency that the Board-
regulated institution has with all
counterparties. Then, l is set according
to this formula: l = max{¥L + 0.1%, 0}
and
(vi) s equals the supervisory option
volatility, as provided in Table 2 to this
section.
(C)(1) For a derivative contract that is
a collateralized debt obligation tranche,
the supervisory delta adjustment is
determined by the following formula:
(2) As used in the formula in
paragraph (c)(9)(iii)(C)(1) of this section:
(i) A is the attachment point, which
equals the ratio of the notional amounts
of all underlying exposures that are
subordinated to the Board-regulated
institution’s exposure to the total
notional amount of all underlying
exposures, expressed as a decimal value
between zero and one; 30
(ii) D is the detachment point, which
equals one minus the ratio of the
notional amounts of all underlying
exposures that are senior to the Boardregulated institution’s exposure to the
total notional amount of all underlying
exposures, expressed as a decimal value
between zero and one; and
(iii) The resulting amount is
designated with a positive sign if the
collateralized debt obligation tranche
was purchased by the Board-regulated
institution and is designated with a
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30 In the case of a first-to-default credit derivative,
there are no underlying exposures that are
subordinated to the Board-regulated institution’s
exposure. In the case of a second-or-subsequent-todefault credit derivative, the smallest (n–1) notional
amounts of the underlying exposures are
subordinated to the Board-regulated institution’s
exposure.
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negative sign if the collateralized debt
obligation tranche was sold by the
Board-regulated institution.
(iv) Maturity factor. (A)(1) The
maturity factor of a derivative contract
that is subject to a variation margin
agreement, excluding derivative
contracts that are subject to a variation
margin agreement under which the
counterparty is not required to post
variation margin, is determined by the
following formula:
Where MPOR refers to the period
from the most recent exchange of
collateral covering a netting set of
derivative contracts with a defaulting
counterparty until the derivative
contracts are closed out and the
resulting market risk is re-hedged.
(2) Notwithstanding paragraph
(c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not
a cleared transaction, MPOR cannot be
less than ten business days plus the
periodicity of re-margining expressed in
business days minus one business day;
(ii) For a derivative contract that is a
cleared transaction, MPOR cannot be
less than five business days plus the
periodicity of re-margining expressed in
business days minus one business day;
and
(iii) For a derivative contract that is
within a netting set that is composed of
more than 5,000 derivative contracts
that are not cleared transactions, MPOR
cannot be less than twenty business
days.
(3) Notwithstanding paragraphs
(c)(9)(iv)(A)(1) and (2) of this section, for
a derivative contract subject to an
outstanding dispute over variation
margin, the applicable floor is twice the
amount provided in (c)(9)(iv)(A)(1) and
(2) of this section.
(B) The maturity factor of a derivative
contract that is not subject to a variation
margin agreement, or derivative
contracts under which the counterparty
is not required to post variation margin,
is determined by the following formula:
Where M equals the greater of 10
business days and the remaining
maturity of the contract, as measured in
business days.
(C) For purposes of paragraph
(c)(9)(iv) of this section, derivative
contracts with daily settlement are
treated as derivative contracts not
subject to a variation margin agreement
and daily settlement does not change
the end date of the period referenced by
the derivative contract.
(v) Derivative contract as multiple
effective derivative contracts. A Boardregulated institution must separate a
derivative contract into separate
derivative contracts, according to the
following rules:
(A) For an option where the
counterparty pays a predetermined
amount if the value of the underlying
asset is above or below the strike price
and nothing otherwise (binary option),
the option must be treated as two
separate options. For purposes of
paragraph (c)(9)(iii)(B) of this section, a
binary option with strike K must be
represented as the combination of one
bought European option and one sold
European option of the same type as the
original option (put or call) with the
strikes set equal to 0.95*K and 1.05*K
so that the payoff of the binary option
is reproduced exactly outside the region
between the two strikes. The absolute
value of the sum of the adjusted
derivative contract amounts of the
bought and sold options is capped at the
payoff amount of the binary option.
(B) For a derivative contract that can
be represented as a combination of
standard option payoffs (such as collar,
butterfly spread, calendar spread,
straddle, and strangle), each standard
option component must be treated as a
separate derivative contract.
(C) For a derivative contract that
includes multiple-payment options,
(such as interest rate caps and floors)
each payment option may be
represented as a combination of
effective single-payment options (such
as interest rate caplets and floorlets).
(10) Multiple netting sets subject to a
single variation margin agreement—(i)
Calculating replacement cost.
Notwithstanding paragraph (c)(6) of this
section, a Board-regulated institution
shall assign a single replacement cost to
multiple netting sets that are subject to
a single variation margin agreement
under which the counterparty must post
variation margin, calculated according
to the following formula:
Replacement Cost = max{SNSmax {VNS;
0} ¥ max {CMA; 0}; 0} +
max{SNSmin {VNS;0} ¥ min
{CMA0}; 0}
the derivative contracts within the
netting set NS; and
CMA is the sum of the net independent
collateral amount and the variation
margin amount applicable to the
derivative contracts within the netting
sets subject to the single variation margin
agreement.
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Where:
NS is each netting set subject to the variation
margin agreement MA;
VNS is the sum of the fair values (after
excluding any valuation adjustments) of
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(ii) Calculating potential future
exposure. Notwithstanding paragraph
(c)(5) of this section, a Board-regulated
institution shall assign a single potential
future exposure to multiple netting sets
that are subject to a single variation
margin agreement under which the
counterparty must post variation margin
equal to the sum of the potential future
exposure of each such netting set, each
calculated according to paragraph (c)(7)
of this section as if such nettings sets
were not subject to a variation margin
agreement.
(11) Netting set subject to multiple
variation margin agreements or a hybrid
netting set—(i) Calculating replacement
cost. To calculate replacement cost for
either a netting set subject to multiple
variation margin agreements under
which the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
contract subject to variation margin
agreement under which the
counterparty must post variation margin
and at least one derivative contract that
is not subject to such a variation margin
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agreement, the calculation for
replacement cost is provided under
paragraph (c)(6)(ii) of this section,
except that the variation margin
threshold equals the sum of the
variation margin thresholds of all
variation margin agreements within the
netting set and the minimum transfer
amount equals the sum of the minimum
transfer amounts of all the variation
margin agreements within the netting
set.
(ii) Calculating potential future
exposure. (A) To calculate potential
future exposure for a netting set subject
to multiple variation margin agreements
under which the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
contract subject to variation margin
agreement under which the
counterparty to the derivative contract
must post variation margin and at least
one derivative contract that is not
subject to such a variation margin
agreement, a Board-regulated institution
must divide the netting set into subnetting sets and calculate the aggregated
amount for each sub-netting set. The
aggregated amount for the netting set is
calculated as the sum of the aggregated
amounts for the sub-netting sets. The
multiplier is calculated for the entire
netting set.
(B) For purposes of paragraph
(c)(11)(ii)(A) of this section, the netting
set must be divided into sub-netting sets
as follows:
(1) All derivative contracts within the
netting set that are not subject to a
variation margin agreement or that are
subject to a variation margin agreement
under which the counterparty is not
required to post variation margin form
a single sub-netting set. The aggregated
amount for this sub-netting set is
calculated as if the netting set is not
subject to a variation margin agreement.
(2) All derivative contracts within the
netting set that are subject to variation
margin agreements in which the
counterparty must post variation margin
and that share the same value of the
MPOR form a single sub-netting set. The
aggregated amount for this sub-netting
set is calculated as if the netting set is
subject to a variation margin agreement,
using the MPOR value shared by the
derivative contracts within the netting
set.
(12) Treatment of cleared
transactions. (i) A Board-regulated
institution must apply the adjustments
in paragraph (c)(12)(iii) of this section to
the calculation of exposure amount
under this paragraph (c) for a netting set
that is composed solely of one or more
cleared transactions.
(ii) A Board-regulated institution that
is a clearing member must apply the
adjustments in paragraph (c)(12)(iii) of
this section to the calculation of
exposure amount under this paragraph
(c) for a netting set that is composed
solely of one or more exposures, each of
which are exposures of the Boardregulated institution to its clearing
member client where the Boardregulated institution is either acting as
a financial intermediary and enters into
an offsetting transaction with a CCP or
where the Board-regulated institution
provides a guarantee to the CCP on the
performance of the client.
(iii)(A) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(B) of this section, MPOR may
not be less than 10 business days;
(B) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(B) of this section, the
minimum MPOR under paragraph
(c)(9)(iv)(A)(3) of this section does not
apply if there are no outstanding
disputed trades in the netting set, there
is no illiquid collateral in the netting
set, and there are no exotic derivative
contracts in the netting set; and
(C) For purposes of calculating the
maturity factor under paragraphs
(c)(9)(iv)(A) and (B) of this section, if the
CCP collects and holds variation margin
and the variation margin is not
bankruptcy remote from the CCP, Mi
may not exceed 250 business days.
TABLE 2 TO § 217.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND
SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS
Supervisory
option
volatility
(%)
Asset class
Subclass
Interest rate .....................................................
Exchange rate .................................................
Credit, single name .........................................
N/A .................................................................
N/A .................................................................
Investment grade ...........................................
Speculative grade ..........................................
Sub-speculative grade ...................................
Investment Grade ...........................................
Speculative Grade ..........................................
N/A .................................................................
N/A .................................................................
Energy ............................................................
Metals .............................................................
Agricultural .....................................................
Other ..............................................................
Credit, index ....................................................
Equity, single name ........................................
Equity, index ...................................................
Commodity ......................................................
50
15
100
100
100
80
80
120
75
150
70
70
70
Supervisory
correlation
factor
(%)
N/A
N/A
50
50
50
80
80
50
80
40
40
40
40
Supervisory
factor 1
(%)
0.50
4.0
0.5
1.3
6.0
0.38
1.06
32
20
40
18
18
18
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1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table
2, and the applicable supervisory factor for volatility derivative contract hedging sets is equal to 5 times the supervisory factor provided in this
Table 2.
*
*
*
*
*
■ 23. Section 217.133 is amended by
revising paragraphs (a), (b)(1) through
(3), (b)(4)(i), (c)(1) through (3), (c)(4)(i),
and (d) to read as follows:
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§ 217.133
Cleared transactions.
(a) General requirements—(1)
Clearing member clients. A Boardregulated institution that is a clearing
member client must use the
methodologies described in paragraph
(b) of this section to calculate risk-
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weighted assets for a cleared
transaction.
(2) Clearing members. A Boardregulated institution that is a clearing
member must use the methodologies
described in paragraph (c) of this
section to calculate its risk-weighted
assets for a cleared transaction and
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paragraph (d) of this section to calculate
its risk-weighted assets for its default
fund contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared
transactions. (i) To determine the riskweighted asset amount for a cleared
transaction, a Board-regulated
institution that is a clearing member
client must multiply the trade exposure
amount for the cleared transaction,
calculated in accordance with paragraph
(b)(2) of this section, by the risk weight
appropriate for the cleared transaction,
determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client Boardregulated institution’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all of its cleared
transactions.
(2) Trade exposure amount. (i) For a
cleared transaction that is a derivative
contract or a netting set of derivative
contracts, trade exposure amount equals
the EAD for the derivative contract or
netting set of derivative contracts
calculated using the methodology used
to calculate EAD for derivative contracts
set forth in § 217.132(c) or (d), plus the
fair value of the collateral posted by the
clearing member client Board-regulated
institution and held by the CCP or a
clearing member in a manner that is not
bankruptcy remote. When the Boardregulated institution calculates EAD for
the cleared transaction using the
methodology in § 217.132(d), EAD
equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD for the repostyle transaction calculated using the
methodology set forth in § 217.132(b)(2)
or (3) or (d), plus the fair value of the
collateral posted by the clearing member
client Board-regulated institution and
held by the CCP or a clearing member
in a manner that is not bankruptcy
remote. When the Board-regulated
institution calculates EAD for the
cleared transaction under § 217.132(d),
EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member client Boardregulated institution must apply a risk
weight of:
(A) 2 percent if the collateral posted
by the Board-regulated institution to the
QCCP or clearing member is subject to
an arrangement that prevents any loss to
the clearing member client Boardregulated institution due to the joint
default or a concurrent insolvency,
liquidation, or receivership proceeding
of the clearing member and any other
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clearing member clients of the clearing
member; and the clearing member client
Board-regulated institution has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from an event
of default or from liquidation,
insolvency or receivership proceedings)
the relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions.
(B) 4 percent, if the requirements of
paragraph (b)(3)(i)(A) of this section are
not met.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member client Board-regulated
institution must apply the risk weight
applicable to the CCP under § 217.32.
(4) * * *
(i) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
Board-regulated institution that is held
by a custodian (in its capacity as a
custodian) in a manner that is
bankruptcy remote from the CCP,
clearing member, and other clearing
member clients of the clearing member,
is not subject to a capital requirement
under this section.
*
*
*
*
*
(c) * * *
(1) Risk-weighted assets for cleared
transactions. (i) To determine the riskweighted asset amount for a cleared
transaction, a clearing member Boardregulated institution must multiply the
trade exposure amount for the cleared
transaction, calculated in accordance
with paragraph (c)(2) of this section by
the risk weight appropriate for the
cleared transaction, determined in
accordance with paragraph (c)(3) of this
section.
(ii) A clearing member Boardregulated institution’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all of its cleared
transactions.
(2) Trade exposure amount. A
clearing member Board-regulated
institution must calculate its trade
exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a
derivative contract or a netting set of
derivative contracts, trade exposure
amount equals the EAD calculated using
the methodology used to calculate EAD
for derivative contracts set forth in
§ 217.132(c) or (d), plus the fair value of
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the collateral posted by the clearing
member Board-regulated institution and
held by the CCP in a manner that is not
bankruptcy remote. When the clearing
member Board-regulated institution
calculates EAD for the cleared
transaction using the methodology in
§ 217.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD calculated
under § 217.132(b)(2) or (3) or (d), plus
the fair value of the collateral posted by
the clearing member Board-regulated
institution and held by the CCP in a
manner that is not bankruptcy remote.
When the clearing member Boardregulated institution calculates EAD for
the cleared transaction under
§ 217.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) A clearing member Board-regulated
institution must apply a risk weight of
2 percent to the trade exposure amount
for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member Board-regulated institution
must apply the risk weight applicable to
the CCP according to § 217.32.
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member Board-regulated
institution may apply a risk weight of
zero percent to the trade exposure
amount for a cleared transaction with a
QCCP where the clearing member
Board-regulated institution is acting as a
financial intermediary on behalf of a
clearing member client, the transaction
offsets another transaction that satisfies
the requirements set forth in § 217.3(a),
and the clearing member Boardregulated institution is not obligated to
reimburse the clearing member client in
the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
Board-regulated institution that is held
by a custodian (in its capacity as a
custodian) in a manner that is
bankruptcy remote from the CCP,
clearing member, and other clearing
member clients of the clearing member,
is not subject to a capital requirement
under this section.
*
*
*
*
*
(d) Default fund contributions—(1)
General requirement. A clearing
member Board-regulated institution
must determine the risk-weighted asset
amount for a default fund contribution
to a CCP at least quarterly, or more
frequently if, in the opinion of the
Board-regulated institution or the Board,
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there is a material change in the
financial condition of the CCP.
(2) Risk-weighted asset amount for
default fund contributions to
nonqualifying CCPs. A clearing member
Board-regulated institution’s riskweighted asset amount for default fund
contributions to CCPs that are not
QCCPs equals the sum of such default
fund contributions multiplied by 1,250
percent, or an amount determined by
the Board, based on factors such as size,
structure and membership
characteristics of the CCP and riskiness
of its transactions, in cases where such
default fund contributions may be
unlimited.
(3) Risk-weighted asset amount for
default fund contributions to QCCPs. A
clearing member Board-regulated
institution’s risk-weighted asset amount
for default fund contributions to QCCPs
equals the sum of its capital
requirement, KCM for each QCCP, as
calculated under the methodology set
forth in paragraph (e)(4) of this section.
(i) EAD must be calculated separately
for each clearing member’s sub-client
accounts and sub-house account (i.e.,
for the clearing member’s propriety
activities). If the clearing member’s
collateral and its client’s collateral are
held in the same default fund
contribution account, then the EAD of
that account is the sum of the EAD for
the client-related transactions within
the account and the EAD of the houserelated transactions within the account.
For purposes of determining such EADs,
the independent collateral of the
clearing member and its client must be
allocated in proportion to the respective
total amount of independent collateral
posted by the clearing member to the
QCCP.
(ii) If any account or sub-account
contains both derivative contracts and
repo-style transactions, the EAD of that
account is the sum of the EAD for the
derivative contracts within the account
and the EAD of the repo-style
transactions within the account. If
independent collateral is held for an
account containing both derivative
contracts and repo-style transactions,
then such collateral must be allocated to
the derivative contracts and repo-style
transactions in proportion to the
respective product specific exposure
amounts, calculated, excluding the
effects of collateral, according to
§ 217.132(b) for repo-style transactions
and to § 217.132(c)(5) for derivative
contracts.
(4) Risk-weighted asset amount for
default fund contributions to a QCCP. A
clearing member Board regulated
institution’s capital requirement for its
default fund contribution to a QCCP
(KCM) is equal to:
(5) Hypothetical capital requirement
of a QCCP. Where a QCCP has provided
its KCCP, a Board-regulated institution
must rely on such disclosed figure
instead of calculating KCCP under this
paragraph (d)(5), unless the Boardregulated institution determines that a
more conservative figure is appropriate
based on the nature, structure, or
characteristics of the QCCP. The
hypothetical capital requirement of a
QCCP (KCCP), as determined by the
Board-regulated institution, is equal to:
Where:
CMi is each clearing member of the QCCP;
and
EADi is the exposure amount of each clearing
member of the QCCP to the QCCP, as
determined under paragraph (d)(6) of
this section.
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(6) EAD of a clearing member Boardregulated institution to a QCCP. (i) The
EAD of a clearing member Boardregulated institution to a QCCP is equal
to the sum of the EAD for derivative
contracts determined under paragraph
(d)(6)(ii) of this section and the EAD for
repo-style transactions determined
under paragraph (d)(6)(iii) of this
section.
(ii) With respect to any derivative
contracts between the Board-regulated
institution and the CCP that are cleared
transactions and any guarantees that the
Board-regulated institution has
provided to the CCP with respect to
performance of a clearing member client
on a derivative contract, the EAD is
equal to the sum of:
(A) The exposure amount for all such
derivative contracts and guarantees of
derivative contracts calculated under
SA–CCR in § 217.132(c) using a value of
10 business days for purposes of
§ 217.132(c)(9)(iv)(B);
(B) The value of all collateral held by
the CCP posted by the clearing member
Board-regulated institution or a clearing
member client of the Board-regulated
institution in connection with a
derivative contract for which the Boardregulated institution has provided a
guarantee to the CCP; and
(C) The amount of the prefunded
default fund contribution of the Boardregulated institution to the CCP.
(iii) With respect to any repo-style
transactions between the Boardregulated institution and the CCP that
are cleared transactions, EAD is equal
to:
EAD = max{EBRM¥IM¥DF; 0}
12 CFR Part 324
Federal Deposit Insurance Corporation
For the reasons forth out in the
preamble, 12 CFR part 324 is proposed
to be amended as set forth below.
PART 324—CAPITAL ADEQUACY OF
FDIC-SUPERVISED INSTITUTIONS
25. The authority citation for part 324
continues to read as follows:
■
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(c), 1818(t),
1819(Tenth), 1828(c), 1828(d), 1828(i),
1828(n), 1828(o), 1831o, 1835, 3907, 3909,
4808; 5371; 5412; Pub. L. 102–233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub.
L. 102–242, 105 Stat. 2236, 2355, as amended
by Pub. L. 103–325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102–242, 105 Stat.
2236, 2386, as amended by Pub. L. 102–550,
106 Stat. 3672, 4089 (12 U.S.C. 1828 note);
Pub. L. 111–203, 124 Stat. 1376, 1887 (15
U.S.C. 78o–7 note).
24. Section 217.300 is amended by
adding paragraph (g) to read as follows:
26. Section 324.2 is amended by:
a. Adding the definition of ‘‘Basis
derivative contract’’ in alphabetical
order;
■ b. Revising paragraph (2) of the
definition of ‘‘Financial collateral;’’
■ c. Adding the definitions of
‘‘Independent collateral,’’ ‘‘Minimum
transfer amount,’’ and ‘‘Net independent
collateral amount’’ in alphabetical
order.
■ d. Revising the definition of ‘‘Netting
set;’’ and
■ e. Adding the definitions of
‘‘Speculative grade,’’ ‘‘Sub-speculative
grade,’’ ‘‘Variation margin,’’ ‘‘Variation
margin agreement,’’ ‘‘Variation margin
amount,’’ ‘‘Variation margin threshold,’’
and ‘‘Volatility derivative contract’’ in
alphabetical order.
The additions and revisions read as
follows:
§ 217.300
§ 324.2
Where:
EBRM is the sum of the exposure amounts of
each repo-style transaction between the
Board-regulated institution and the CCP
as determined under § 217.132(b)(2) and
without recognition of any collateral
securing the repo-style transactions;
IM is the initial margin collateral posted by
the Board-regulated institution to the
CCP with respect to the repo-style
transactions; and
DF is the prefunded default fund
contribution of the Board-regulation
institution to the CCP.
■
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thereafter, an advanced approaches
Board-regulated institution must use
SA–CCR for purposes of § 217.34 and
must use either SA–CCR or IMM for
purposes of § 217.132. Once an
advanced approaches Board-regulated
institution has begun to use SA–CCR,
the advanced approaches Boardregulated institution may not change to
use CEM.
Transitions.
*
*
*
*
*
(g) SA–CCR. After giving prior notice
to the Board, an advanced approaches
Board-regulated institution may use
CEM rather than SA–CCR to determine
the exposure amount for purposes of
§ 217.34 and the EAD for purposes of
§ 217.132 for its derivative contracts
until July 1, 2020. On July 1, 2020, and
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■
■
Definitions.
*
*
*
*
*
Basis derivative contract means a nonforeign-exchange derivative contract
(i.e., the contract is denominated in a
single currency) in which the cash flows
of the derivative contract depend on the
difference between two risk factors that
are attributable solely to one of the
following derivative asset classes:
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Interest rate, credit, equity, or
commodity.
*
*
*
*
*
Financial collateral * * *
(2) In which the FDIC-supervised
institution has a perfected, first-priority
security interest or, outside of the
United States, the legal equivalent
thereof (with the exception of cash on
deposit; and notwithstanding the prior
security interest of any custodial agent
or any priority security interest granted
to a CCP in connection with collateral
posted to that CCP).
*
*
*
*
*
Independent collateral means
financial collateral, other than variation
margin that is subject to a collateral
agreement, or in which a FDICsupervised institution has a perfected,
first-priority security interest or, outside
of the United States, the legal equivalent
thereof (with the exception of cash on
deposit; notwithstanding the prior
security interest of any custodial agent
or any prior security interest granted to
a CCP in connection with collateral
posted to that CCP), and the amount of
which does not change directly in
response to the value of the derivative
contract or contracts that the financial
collateral secures.
*
*
*
*
*
Minimum transfer amount means the
smallest amount of variation margin that
may be transferred between
counterparties to a netting set.
*
*
*
*
*
Net independent collateral amount
means the fair value amount of the
independent collateral, as adjusted by
the standard supervisory haircuts under
§ 324.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to a FDIC-supervised institution less the
fair value amount of the independent
collateral, as adjusted by the standard
supervisory haircuts under
§ 324.132(b)(2)(ii), as applicable, posted
by the FDIC-supervised institution to
the counterparty, excluding such
amounts held in a bankruptcy remote
manner, or posted to a QCCP and held
in conformance with the operational
requirements in § 324.3.
Netting set means either one
derivative contract between a FDICsupervised institution and a single
counterparty, or a group of derivative
contracts between a FDIC-supervised
institution and a single counterparty,
that are subject to a qualifying master
netting agreement.
*
*
*
*
*
Speculative grade means the reference
entity has adequate capacity to meet
financial commitments in the near term,
but is vulnerable to adverse economic
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conditions, such that should economic
conditions deteriorate, the reference
entity would present an elevated default
risk.
*
*
*
*
*
Sub-speculative grade means the
reference entity depends on favorable
economic conditions to meet its
financial commitments, such that
should such economic conditions
deteriorate the reference entity likely
would default on its financial
commitments.
*
*
*
*
*
Variation margin means financial
collateral that is subject to a collateral
agreement provided by one party to its
counterparty to meet the performance of
the first party’s obligations under one or
more transactions between the parties as
a result of a change in value of such
obligations since the last time such
financial collateral was provided.
Variation margin agreement means an
agreement to collect or post variation
margin.
Variation margin amount means the
fair value amount of the variation
margin, as adjusted by the standard
supervisory haircuts under
§ 324.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to a FDIC-supervised institution less the
fair value amount of the variation
margin, as adjusted by the standard
supervisory haircuts under
§ 324.132(b)(2)(ii), as applicable, posted
by the FDIC-supervised institution to
the counterparty.
Variation margin threshold means the
amount of credit exposure of a FDICsupervised institution to its
counterparty that, if exceeded, would
require the counterparty to post
variation margin to the FDIC-supervised
institution.
Volatility derivative contract means a
derivative contract in which the payoff
of the derivative contract explicitly
depends on a measure of the volatility
of an underlying risk factor to the
derivative contract.
*
*
*
*
*
■ 27. Section 324.10 is amended by
revising paragraphs (c)(4)(ii)(A) through
(C) to read as follows:
§ 324.10
Minimum capital requirements.
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(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value
of all the FDIC-supervised institution’s
on-balance sheet assets, plus the value
of securities sold under a repurchase
transaction or a securities lending
transaction that qualifies for sales
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treatment under U.S. GAAP, less
amounts deducted from tier 1 capital
under § 324.22(a), (c), and (d), less the
value of securities received in securityfor-security repo-style transactions,
where the FDIC-supervised institution
acts as a securities lender and includes
the securities received in its on-balance
sheet assets but has not sold or rehypothecated the securities received,
and less the fair value of any derivative
contracts;
(B) The PFE for each netting set
(including cleared transactions except
as provided in paragraph (c)(4)(ii)(I) of
this section and, at the discretion of the
FDIC-supervised institution, excluding a
forward agreement treated as a
derivative contract that is part of a
repurchase or reverse repurchase or a
securities borrowing or lending
transaction that qualifies for sales
treatment under U.S. GAAP), as
determined under § 324.132(c)(7), in
which the term C in § 324.132(c)(7)(i)(B)
equals zero, multiplied by 1.4;
(C) The sum of:
(1)(i) 1.4 multiplied by the
replacement cost of each derivative
contract or single product netting set of
derivative contracts to which the FDICsupervised institution is a counterparty,
calculated according to the following
formula:
Replacement Cost = max{V ¥ CVMr +
CVMp; 0}
Where:
V equals the fair value for each derivative
contract or each single-product netting
set of derivative contracts (including a
cleared transaction except as provided in
paragraph (c)(4)(ii)(I) of this section and,
at the discretion of the FDIC-supervised
institution, excluding a forward
agreement treated as a derivative
contract that is part of a repurchase or
reverse repurchase or a securities
borrowing or lending transaction that
qualifies for sales treatment under U.S.
GAAP);
CVMr equals the amount of cash collateral
received from a counterparty to a
derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3)
through (7); and
CVMp equals the amount of cash collateral
that is posted to a counterparty to a
derivative contract and that has not offset the fair value of the derivative
contract and that satisfies the conditions
in paragraphs (c)(4)(ii)(C)(3) through (7)
of this section; and
(ii) Notwithstanding paragraph
(c)(4)(ii)(C)(1)(i) of this section, where
multiple netting sets are subject to a
single variation margin agreement, a
FDIC-supervised institution must apply
the formula for replacement cost
provided in § 324.132(c)(10), in which
the term may only include cash
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collateral that satisfies the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of
this section;
(2) The amount of cash collateral that
is received from a counterparty to a
derivative contract that has off-set the
fair value of a derivative contract and
that does not satisfy the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of
this section;
(3) For derivative contracts that are
not cleared through a QCCP, the cash
collateral received by the recipient
counterparty is not segregated (by law,
regulation or an agreement with the
counterparty);
(4) Variation margin is calculated and
transferred on a daily basis based on the
fair value of the derivative contract;
(5) The variation margin transferred
under the derivative contract or the
governing rules for a cleared transaction
is the full amount that is necessary to
fully extinguish the net current credit
exposure to the counterparty of the
derivative contracts, subject to the
threshold and minimum transfer
amounts applicable to the counterparty
under the terms of the derivative
contract or the governing rules for a
cleared transaction;
(6) The variation margin is in the form
of cash in the same currency as the
currency of settlement set forth in the
derivative contract, provided that for the
purposes of this paragraph, currency of
settlement means any currency for
settlement specified in the governing
qualifying master netting agreement and
the credit support annex to the
qualifying master netting agreement, or
in the governing rules for a cleared
transaction; and
(7) The derivative contract and the
variation margin are governed by a
qualifying master netting agreement
between the legal entities that are the
counterparties to the derivative contract
or by the governing rules for a cleared
transaction, and the qualifying master
netting agreement or the governing rules
for a cleared transaction must explicitly
stipulate that the counterparties agree to
settle any payment obligations on a net
basis, taking into account any variation
margin received or provided under the
contract if a credit event involving
either counterparty occurs;
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■ 28. Section 324.32 is amended by
revising paragraph (f) to read as follows:
§ 324.32
General risk weights.
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(f) Corporate exposures. (1) A FDICsupervised institution must assign a 100
percent risk weight to all its corporate
exposures, except as provided in
paragraph (f)(2) of this section.
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(2) A FDIC-supervised institution
must assign a 2 percent risk weight to
an exposure to a QCCP arising from the
FDIC-supervised institution posting
cash collateral to the QCCP in
connection with a cleared transaction
that meets the requirements of
§ 324.35(b)(3)(i)(A) and a 4 percent risk
weight to an exposure to a QCCP arising
from the FDIC-supervised institution
posting cash collateral to the QCCP in
connection with a cleared transaction
that meets the requirements of
§ 324.35(b)(3)(i)(B).
(3) A FDIC-supervised institution
must assign a 2 percent risk weight to
an exposure to a QCCP arising from the
FDIC-supervised institution posting
cash collateral to the QCCP in
connection with a cleared transaction
that meets the requirements of
§ 324.35(c)(3)(i).
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■ 29. Section 324.34 is revised to read
as follows:
§ 324.34
Derivative contracts.
(a) Exposure amount for derivative
contracts—(1) FDIC-supervised
institution that is not an advanced
approaches FDIC-supervised institution.
(i) A FDIC-supervised institution that is
not an advanced approaches FDICsupervised institution must use the
current exposure methodology (CEM)
described in paragraph (b) of this
section to calculate the exposure
amount for all its OTC derivative
contracts, unless the FDIC-supervised
institution makes the election provided
in paragraph (a)(1)(ii) of this section.
(ii) A FDIC-supervised institution that
is not an advanced approaches FDICsupervised institution may elect to
(i) Current credit exposure. The
current credit exposure for a single OTC
derivative contract is the greater of the
fair value of the OTC derivative contract
or zero.
(ii) PFE. (A) The PFE for a single OTC
derivative contract, including an OTC
derivative contract with a negative fair
value, is calculated by multiplying the
notional principal amount of the OTC
derivative contract by the appropriate
conversion factor in Table 1 to of this
section.
(B) For purposes of calculating either
the PFE under this paragraph (b) or the
gross PFE under paragraph (b)(2) of this
section for exchange rate contracts and
other similar contracts in which the
notional principal amount is equivalent
to the cash flows, notional principal
amount is the net receipts to each party
falling due on each value date in each
currency.
(C) For an OTC derivative contract
that does not fall within one of the
specified categories in Table 1 to this
section, the PFE must be calculated
using the appropriate ‘‘other’’
conversion factor.
(D) A FDIC-supervised institution
must use an OTC derivative contract’s
effective notional principal amount (that
is, the apparent or stated notional
principal amount multiplied by any
multiplier in the OTC derivative
contract) rather than the apparent or
stated notional principal amount in
calculating PFE.
(E) The PFE of the protection provider
of a credit derivative is capped at the
net present value of the amount of
unpaid premiums.
calculate the exposure amount for all its
OTC derivative contracts under the
standardized approach for counterparty
credit risk (SA–CCR) in § 324.132(c),
rather than calculating the exposure
amount for all its derivative contracts
using the CEM. A FDIC-supervised
institution that elects under this
paragraph (a)(1)(ii) to calculate the
exposure amount for its OTC derivative
contracts under the SA–CCR must apply
the treatment of cleared transactions
under § 324.133 to its derivative
contracts that are cleared transactions,
rather than applying § 324.35. A FDICsupervised institution that is not an
advanced approaches FDIC-supervised
institution must use the same
methodology to calculate the exposure
amount for all its derivative contracts
and may change its election only with
prior approval of the FDIC.
(2) Advanced approaches FDICsupervised institution. An advanced
approaches FDIC-supervised institution
must calculate the exposure amount for
all its derivative contracts using the SA–
CCR in § 324.132(c). An advanced
approaches FDIC-supervised institution
must apply the treatment of cleared
transactions under § 324.133 to its
derivative contracts that are cleared
transactions.
(b) Current exposure methodology
exposure amount—(1) Single OTC
derivative contract. Except as modified
by paragraph (c) of this section, the
exposure amount for a single OTC
derivative contract that is not subject to
a qualifying master netting agreement is
equal to the sum of the FDIC-supervised
institution’s current credit exposure and
potential future credit exposure (PFE)
on the OTC derivative contract.
TABLE 1 TO § 324.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1
Remaining maturity 2
Foreign
exchange
rate
and gold
Interest rate
One year or less ...........................................
Greater than one year and less than or
equal to five years .....................................
Greater than five years .................................
Credit
(investment
grade
reference
asset) 3
Credit
(non-investment-grade
reference
asset)
Precious
metals
(except gold)
Equity
Other
0.00
0.01
0.05
0.10
0.06
0.07
0.10
0.005
0.015
0.05
0.075
0.05
0.05
0.10
0.10
0.08
0.10
0.07
0.08
0.12
0.15
1 For
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a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of
the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than
one year that meets these criteria, the minimum conversion factor is 0.005.
3 A FDIC-supervised institution must use the column labeled ‘‘Credit (investment-grade reference asset)’’ for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A FDIC-supervised institution must use the column labeled ‘‘Credit
(non-investment-grade reference asset)’’ for all other credit derivatives.
(2) Multiple OTC derivative contracts
subject to a qualifying master netting
agreement. Except as modified by
paragraph (c) of this section, the
exposure amount for multiple OTC
derivative contracts subject to a
qualifying master netting agreement is
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equal to the sum of the net current
credit exposure and the adjusted sum of
the PFE amounts for all OTC derivative
contracts subject to the qualifying
master netting agreement.
(i) Net current credit exposure. The
net current credit exposure is the greater
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of the net sum of all positive and
negative fair values of the individual
OTC derivative contracts subject to the
qualifying master netting agreement or
zero.
(ii) Adjusted sum of the PFE amounts.
The adjusted sum of the PFE amounts,
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Anet, is calculated as Anet = (0.4 ×
Agross) + (0.6 × NGR × Agross), where:
(A) Agross = the gross PFE (that is, the
sum of the PFE amounts as determined
under paragraph (b)(1)(ii) of this section
for each individual derivative contract
subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the
ratio of the net current credit exposure
to the gross current credit exposure. In
calculating the NGR, the gross current
credit exposure equals the sum of the
positive current credit exposures (as
determined under paragraph (b)(1)(i) of
this section) of all individual derivative
contracts subject to the qualifying
master netting agreement.
(c) Recognition of credit risk
mitigation of collateralized OTC
derivative contracts. (1) A FDICsupervised institution using the CEM
under paragraph (b) of this section may
recognize the credit risk mitigation
benefits of financial collateral that
secures an OTC derivative contract or
multiple OTC derivative contracts
subject to a qualifying master netting
agreement (netting set) by using the
simple approach in § 324.37(b).
(2) As an alternative to the simple
approach, a FDIC-supervised institution
using the CEM under paragraph (b) of
this section may recognize the credit
risk mitigation benefits of financial
collateral that secures such a contract or
netting set if the financial collateral is
marked-to-fair value on a daily basis
and subject to a daily margin
maintenance requirement by applying a
risk weight to the uncollateralized
portion of the exposure, after adjusting
the exposure amount calculated under
paragraph (b)(1) or (2) of this section
using the collateral haircut approach in
§ 324.37(c). The FDIC-supervised
institution must substitute the exposure
amount calculated under paragraph
(b)(1) or (2) of this section for SE in the
equation in § 324.37(c)(2).
(d) Counterparty credit risk for credit
derivatives—(1) Protection purchasers.
A FDIC-supervised institution that
purchases a credit derivative that is
recognized under § 324.36 as a credit
risk mitigant for an exposure that is not
a covered position under subpart F of
this part is not required to compute a
separate counterparty credit risk capital
requirement under § 324.32 provided
that the FDIC-supervised institution
does so consistently for all such credit
derivatives. The FDIC-supervised
institution must either include all or
exclude all such credit derivatives that
are subject to a qualifying master netting
agreement from any measure used to
determine counterparty credit risk
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exposure to all relevant counterparties
for risk-based capital purposes.
(2) Protection providers. (i) A FDICsupervised institution that is the
protection provider under a credit
derivative must treat the credit
derivative as an exposure to the
underlying reference asset. The FDICsupervised institution is not required to
compute a counterparty credit risk
capital requirement for the credit
derivative under § 324.32, provided that
this treatment is applied consistently for
all such credit derivatives. The FDICsupervised institution must either
include all or exclude all such credit
derivatives that are subject to a
qualifying master netting agreement
from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph
(d)(2) apply to all relevant
counterparties for risk-based capital
purposes unless the FDIC-supervised
institution is treating the credit
derivative as a covered position under
subpart F of this part, in which case the
FDIC-supervised institution must
compute a supplemental counterparty
credit risk capital requirement under
this section.
(e) Counterparty credit risk for equity
derivatives. (1) A FDIC-supervised
institution must treat an equity
derivative contract as an equity
exposure and compute a risk-weighted
asset amount for the equity derivative
contract under §§ 324.51 through 324.53
(unless the FDIC-supervised institution
is treating the contract as a covered
position under subpart F of this part).
(2) In addition, the FDIC-supervised
institution must also calculate a riskbased capital requirement for the
counterparty credit risk of an equity
derivative contract under this section if
the FDIC-supervised institution is
treating the contract as a covered
position under subpart F of this part.
(3) If the FDIC-supervised institution
risk weights the contract under the
Simple Risk-Weight Approach (SRWA)
in § 324.52, the FDIC-supervised
institution may choose not to hold riskbased capital against the counterparty
credit risk of the equity derivative
contract, as long as it does so for all
such contracts. Where the equity
derivative contracts are subject to a
qualified master netting agreement, a
FDIC-supervised institution using the
SRWA must either include all or
exclude all of the contracts from any
measure used to determine counterparty
credit risk exposure.
(f) Clearing member FDIC-supervised
institution’s exposure amount. The
exposure amount of a clearing member
FDIC-supervised institution using the
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CEM under paragraph (b) of this section
for an OTC derivative contract or netting
set of OTC derivative contracts where
the FDIC-supervised institution is either
acting as a financial intermediary and
enters into an offsetting transaction with
a QCCP or where the FDIC-supervised
institution provides a guarantee to the
QCCP on the performance of the client
equals the exposure amount calculated
according to paragraph (b)(1) or (2) of
this section multiplied by the scaling
factor 0.71. If the FDIC-supervised
institution determines that a longer
period is appropriate, the FDICsupervised institution must use a larger
scaling factor to adjust for a longer
holding period as follows:
Where H = the holding period greater
than five days. Additionally, the FDIC
may require the FDIC-supervised
institution to set a longer holding period
if the FDIC determines that a longer
period is appropriate due to the nature,
structure, or characteristics of the
transaction or is commensurate with the
risks associated with the transaction.
■ 30. Section 324.35 is amended by
adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding
paragraph (c)(3)(iii) to read as follows:
§ 324.35
Cleared transactions.
(a) * * *
(3) Alternate requirements.
Notwithstanding any other provision of
this section, an advanced approaches
FDIC-supervised institution or a FDICsupervised institution that is not an
advanced approaches FDIC-supervised
institution and that has elected to use
SA–CCR under § 324.34(a)(1) must
apply § 324.133 to its derivative
contracts that are cleared transactions
rather than this section § 324.35.
(b) * * *
(4) * * *
(i) Notwithstanding any other
requirements in this section, collateral
posted by a clearing member client
FDIC-supervised institution that is held
by a custodian (in its capacity as
custodian) in a manner that is
bankruptcy remote from the CCP,
clearing member, and other clearing
member clients of the clearing member,
is not subject to a capital requirement
under this section.
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(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member FDIC-supervised
institution may apply a risk weight of
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31. Section 324.37 is amended by
revising paragraph (c)(3)(iii) to read as
follows:
■
§ 324.37
Collateralized transactions.
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(c) * * *
(3) * * *
(iii) For repo-style transactions and
cleared transactions, a FDIC-supervised
institution may multiply the standard
supervisory haircuts provided in
paragraphs (c)(3)(i) and (ii) of this
section by the square root of 1⁄2 (which
equals 0.707107).
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§§ 324.134, 324.202, and 324.210
[Amended]
32. For each section listed in the
following table, the footnote number
listed in the ‘‘Old footnote number’’
column is redesignated as the footnote
number listed in the ‘‘New footnote
number’’ column as follows:
■
Old
footnote
No.
Section
324.134(d)(3) ...........................................................................................................................................................
324.202, paragraph (1) introductory text of the definition of ‘‘Covered position’’ ...................................................
324.202, paragraph (1)(i) of the definition of ‘‘Covered position’’ ...........................................................................
324.210(e)(1) ...........................................................................................................................................................
33. Section 324.132 is amended by:
a. Revising paragraphs (b)(2)(ii)(A)(3)
through (5);
■ b. Adding paragraphs (b)(2)(ii)(A)(6)
and (7);
■ c. Revising paragraphs (c) heading and
(c)(1) and (2) and (5) through (8);
■ d. Adding paragraphs (c)(9) through
(12);
■ e. Removing ‘‘Table 3 to § 324.132’’
and adding in its place ‘‘Table 4 to this
section’’ in paragraphs (e)(5)(i)(A) and
(H); and
■ f. Redesignating Table 3 to § 324.132
as Table 4 to § 324.132.
The revisions and additions read as
follows:
■
■
§ 324.132 Counterparty credit risk of repostyle transactions, eligible margin loans,
and OTC derivative contracts.
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(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and
cleared transactions, a FDIC-supervised
institution may multiply the
supervisory haircuts provided in
paragraphs (b)(2)(ii)(A)(1) and (2) of this
section by the square root of 1⁄2 (which
equals 0.707107).
(4) A FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
longer than ten business days (for
eligible margin loans) or five business
days (for repo-style transactions), using
the formula provide in paragraph
(b)(2)(ii)(A)(6) of this section where the
following conditions apply. If the
number of trades in a netting set
exceeds 5,000 at any time during a
quarter, a FDIC-supervised institution
must adjust the supervisory haircuts
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upward on the basis of a holding period
of twenty business days for the
following quarter (except when a FDICsupervised institution is calculating
EAD for a cleared transaction under
§ 324.133). If a netting set contains one
or more trades involving illiquid
collateral, a FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
of twenty business days. If over the two
previous quarters more than two margin
disputes on a netting set have occurred
that lasted more than the holding
period, then the FDIC-supervised
institution must adjust the supervisory
haircuts upward for that netting set on
the basis of a holding period that is at
least two times the minimum holding
period for that netting set.
(5)(i) A FDIC-supervised institution
must adjust the supervisory haircuts
upward on the basis of a holding period
longer than ten business days for
collateral associated derivative contracts
that are not cleared transactions using
the formula provided in paragraph
(b)(2)(ii)(A)(6) of this section where the
following conditions apply. For
collateral associated with a derivative
contract that is within a netting set that
is composed of more than 5,000
derivative contracts that are not cleared
transactions, a FDIC-supervised
institution must use a holding period of
twenty business days. If a netting set
contains one or more trades involving
illiquid collateral or a derivative
contract that cannot be easily replaced,
a FDIC-supervised institution must use
a holding period of twenty business
days.
(ii) Notwithstanding paragraph
(b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section, for collateral associated
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New
footnote
No.
30
31
32
33
31
32
33
34
with a derivative contract that is subject
to an outstanding dispute over variation
margin, the holding period is twice the
amount provide under paragraph
(b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section.
(6) A FDIC-supervised institution
must adjust the standard supervisory
haircuts upward, pursuant to the
adjustments provided in paragraphs
(b)(2)(ii)(A)(4) and (5) of this section,
using the following formula:
Where:
TM equals a holding period of longer than 10
business days for eligible margin loans
and derivative contracts or longer than 5
business days for repo-style transactions;
Hs equals the standard supervisory haircut;
and
Ts equals 10 business days for eligible
margin loans and derivative contracts or
5 business days for repo-style
transactions.
(7) If the instrument a FDICsupervised institution has lent, sold
subject to repurchase, or posted as
collateral does not meet the definition of
financial collateral, the FDIC-supervised
institution must use a 25.0 percent
haircut for market price volatility (Hs).
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(c) EAD for derivative contracts—(1)
Options for determining EAD. A FDICsupervised institution must determine
the EAD for a derivative contract using
SA–CCR under paragraph (c)(5) of this
section or using the internal models
methodology described in paragraph (d)
of this section. If a FDIC-supervised
institution elects to use SA–CCR for one
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zero percent to the trade exposure
amount for a cleared transaction with a
CCP where the clearing member FDICsupervised institution is acting as a
financial intermediary on behalf of a
clearing member client, the transaction
offsets another transaction that satisfies
the requirements set forth in § 324.3(a),
and the clearing member FDICsupervised institution is not obligated to
reimburse the clearing member client in
the event of the CCP default.
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or more derivative contracts, the
exposure amount determined under
SA–CCR is the EAD for the derivative
contract or derivatives contracts. A
FDIC-supervised institution must use
the same methodology to calculate the
exposure amount for all its derivative
contracts and may change its election
only with prior approval of the FDIC.
(2) Definitions. For purposes of this
paragraph (c), the following definitions
apply:
(i) Except as otherwise provided in
paragraph (c) of this section, the end
date means the last date of the period
referenced by an interest rate or credit
derivative contract or, if the derivative
contract references another instrument,
by the underlying instrument.
(ii) Except as otherwise provided in
paragraph (c) of this section, the start
date means the first date of the period
referenced by an interest rate or credit
derivative contract or, if the derivative
contract references the value of another
instrument, by underlying instrument.
(iii) Hedging set means:
(A) With respect interest rate
derivative contracts, all such contracts
within a netting set that reference the
same reference currency;
(B) With respect to exchange rate
derivative contracts, all such contracts
within a netting set that reference the
same currency pair;
(C) With respect to credit derivative
contract, all such contracts within a
netting set;
(D) With respect to equity derivative
contracts, all such contracts within a
netting set;
(E) With respect to a commodity
derivative contract, all such contracts
within a netting set that reference one
of the following commodity classes:
Energy, metal, agricultural, or other
commodities;
(F) With respect to basis derivative
contracts, all such contracts within a
netting set that reference the same pair
of risk factors and are denominated in
the same currency; or
(G) With respect to volatility
derivative contracts, all such contracts
within a netting set that reference one
of interest rate, exchange rate, credit,
equity, or commodity risk factors,
separated according to the requirements
under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract
materially depends on more than one of
interest rate, exchange rate, credit,
equity, or commodity risk factors, the
FDIC may require a FDIC-supervised
institution to include the derivative
contract in each appropriate hedging set
under paragraph (c)(2)(iii)(A) through
(E) of this section.
*
*
*
*
*
(5) Exposure amount. The exposure
amount of a netting set, as calculated
under paragraph (c) of this section, is
equal to 1.4 multiplied by the sum of
the replacement cost of the netting set,
as calculated under paragraph (c)(6) of
this section, and the potential future
exposure of the netting set, as calculated
under paragraph (c)(7) of this section,
except that, notwithstanding the
requirements of this paragraph (c)(5):
(i) The exposure amount of a netting
set subject to a variation margin
agreement, excluding a netting set that
is subject to a variation margin
agreement under which the
counterparty to the variation margin
agreement is not required to post
variation margin, is equal to the lesser
of the exposure amount of the netting
set and the exposure amount of the
netting set calculated as if the netting
set were not subject to a variation
margin agreement; and
(ii) The exposure amount of a netting
set that consists of only sold options in
which the premiums have been fully
paid and that are not subject to a
variation margin agreement is zero.
(6) Replacement cost of a netting set—
(i) Netting set subject to a variation
margin agreement under which the
counterparty must post variation
margin. The replacement cost of a
netting set subject to a variation margin
agreement, excluding a netting set that
is subject to a variation margin
agreement under which the
counterparty is not required to post
variation margin, is the greater of:
(A) The sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the sum of the net
independent collateral amount and the
variation margin amount applicable to
such derivative contracts;
(B) The sum of the variation margin
threshold and the minimum transfer
amount applicable to the derivative
contracts within the netting set less the
net independent collateral amount
applicable to such derivative contracts;
or
(C) Zero.
(ii) Netting sets not subject to a
variation margin agreement under
which the counterparty must post
variation margin. The replacement cost
of a netting set that is not subject to a
variation margin agreement under
which the counterparty must post
variation margin to the FDIC-supervised
institution is the greater of:
(A) The sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set less the net independent
collateral amount and variation margin
amount applicable to such derivative
contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a
single variation margin agreement.
Notwithstanding paragraphs (c)(6)(i)
and (ii) of this section, the replacement
cost for multiple netting sets subject to
a single variation margin agreement
must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Multiple netting sets subject to
multiple variation margin agreements or
a hybrid netting set. Notwithstanding
paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for a
netting set subject to multiple variation
margin agreements or a hybrid netting
set must be calculated according to
paragraph (c)(11)(i) of this section.
(7) Potential future exposure of a
netting set. The potential future
exposure of a netting set is the product
of the PFE multiplier and the aggregated
amount.
(i) PFE multiplier. The PFE multiplier
is calculated according to the following
formula:
Where:
V is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set;
C is the sum of the net independent collateral
amount and the variation margin amount
applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The
aggregated amount is the sum of all
hedging set amounts, as calculated
under paragraph (c)(8) of this section,
within a netting set.
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(iii) Multiple netting sets subject to a
single variation margin agreement.
Notwithstanding paragraphs (c)(7)(i)
and (ii) of this section and when
calculating the PFE amount for purposes
of total leverage exposure under
§ 324.10(c)(4)(ii)(B), the potential future
exposure for multiple netting sets
subject to a single variation margin
agreement must be calculated according
to paragraph (c)(10)(ii) of this section.
(iv) Multiple netting sets subject to
multiple variation margin agreements or
a hybrid netting set. Notwithstanding
paragraphs (c)(7)(i) and (ii) of this
section and when calculating the PFE
amount for purposes of total leverage
exposure under section
324.10(c)(4)(ii)(B), the potential future
exposure for a netting set subject to
multiple variation margin agreements or
a hybrid netting set must be calculated
according to paragraph (c)(11)(ii) of this
section.
(8) Hedging set amount—(i) Interest
rate derivative contracts. To calculate
the hedging set amount of an interest
rate derivative contract hedging set, a
FDIC-supervised institution may use
either of the formulas provided in
paragraphs (c)(8)(i)(A) and (B) of this
section:
(ii) Exchange rate derivative
contracts. For an exchange rate
derivative contract hedging set, the
hedging set amount equals the absolute
value of the sum of the adjusted
derivative contract amounts, as
calculated under paragraph (c)(9) of this
section, within the hedging set.
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contract hedging set or equity derivative
contract hedging set within a netting set
is calculated according to the following
formula:
Where:
k is each reference entity within the hedging
set.
K is the number of reference entities within
the hedging set.
AddOn(Refk) equals the sum of the adjusted
derivative contract amounts, as
determined under paragraph (c)(9) of this
section, for all derivative contracts
within the hedging set that reference
reference entity k; and
rk equals the applicable supervisory
correlation factor, as provided in Table 2
to this section.
(iv) Commodity derivative contracts.
The hedging set amount of a commodity
derivative contract hedging set within a
netting set is calculated according to the
following formula:
Where:
k is each commodity type within the hedging
set.
K is the number of commodity types within
the hedging set.
AddOn(Typek) equals the sum of the adjusted
derivative contract amounts, as
determined under paragraph (c)(9) of this
section, for all derivative contracts
within the hedging set that reference
commodity type k.
r equals the applicable supervisory
correlation factor, as provided in Table 2
to this section.
separate hedging set amount for each
basis derivative contract hedging set and
each volatility derivative contract
hedging set. A FDIC-supervised
institution must calculate such hedging
set amounts using one of the formulas
under paragraphs (c)(8)(i) through (iv)
that corresponds to the primary risk
factor of the hedging set being
calculated.
(9) Adjusted derivative contract
amount—(i) Summary. To calculate the
adjusted derivative contract amount of a
derivative contract, a FDIC-supervised
institution must determine the adjusted
notional amount of derivative contract,
pursuant to paragraph (c)(9)(ii) of this
section, and multiply the adjusted
notional amount by each of the
supervisory delta adjustment, pursuant
to paragraph (c)(9)(iii) of this section,
the maturity factor, pursuant to
paragraph (c)(9)(iv) of this section, and
the applicable supervisory factor, as
provided in Table 2 to this section.
(ii) Adjusted notional amount. (A)(1)
For an interest rate derivative contract
or a credit derivative contract, the
adjusted notional amount equals the
product of the notional amount of the
derivative contract, as measured in U.S.
dollars using the exchange rate on the
date of the calculation, and the
supervisory duration, as calculated by
the following formula:
(ii) For an interest rate derivative
contract or a credit derivative contract
that is a leveraged swap, in which the
notional amount of all legs of the
derivative contract are divided by a
factor and all rates of the derivative
contract are multiplied by the same
factor, the notional amount is equal to
the notional amount of an equivalent
unleveraged swap.
(B)(1) For an exchange rate derivative
contract, the adjusted notional amount
is the notional amount of the non-U.S.
denominated currency leg of the
derivative contract, as measured in U.S.
dollars using the exchange rate on the
date of the calculation. If both legs of
the exchange rate derivative contract are
denominated in currencies other than
U.S. dollars, the adjusted notional
amount of the derivative contract is the
largest leg of the derivative contract, as
measured in U.S. dollars using the
exchange rate on the date of the
calculation.
(2) Notwithstanding paragraph
(c)(9)(i)(B)(1) of this section, for an
exchange rate derivative contract with
multiple exchanges of principal, the
FDIC-supervised institution must set the
adjusted notional amount of the
derivative contract equal to the notional
(v) Basis derivative contracts and
volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i)
through (iv) of this section, a FDICsupervised institution must calculate a
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Where:
S is the number of business days from the
present day until the start date of the
derivative contract, or zero if the start
date has already passed; and
E is the number of business days from the
present day until the end date of the
derivative contract.
(2) For purposes of paragraph
(c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative
contract or credit derivative contract
that is a variable notional swap, the
notional amount is equal to the timeweighted average of the contractual
notional amounts of such a swap over
the remaining life of the swap; and
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(iii) Credit derivative contracts and
equity derivative contracts. The hedging
set amount of a credit derivative
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amount of the derivative contract
multiplied by the number of exchanges
of principal under the derivative
contract.
(C)(1) For an equity derivative
contract or a commodity derivative
contract, the adjusted notional amount
is the product of the fair value of one
unit of the reference instrument
underlying the derivative contract and
the number of such units referenced by
the derivative contract.
(2) Notwithstanding paragraph
(c)(9)(i)(C)(1) of this section, when
calculating the adjusted notional
amount for an equity derivative contract
or a commodity derivative contract that
is a volatility derivative contract, the
FDIC-supervised institution must
replace the unit price with the
underlying volatility referenced by the
volatility derivative contract and replace
the number of units with the notional
amount of the volatility derivative
contract.
(iii) Supervisory delta adjustments.
(A) For a derivative contract that is not
an option contract or collateralized debt
obligation tranche, the supervisory delta
adjustment is 1 if the fair value of the
derivative contract increases when the
value of the primary risk factor
increases and ¥1 if the fair value of the
derivative contract decreases when the
value of the primary risk factor
increases;
(B)(1) For a derivative contract that is
an option contract, the supervisory delta
adjustment is determined by the
following formulas, as applicable:
(2) As used in the formulas in Table
3 to this section:
(i) j is the standard normal
cumulative distribution function;
(ii) P equals the current fair value of
the instrument or risk factor, as
applicable, underlying the option;
(iii) K equals the strike price of the
option;
(iv) T equals the number of business
days until the latest contractual exercise
date of the option;
(v) l equals zero for all derivative
contracts except interest rate options for
the currencies where interest rates have
negative values. The same value of l
must be used for all interest rate options
that are denominated in the same
currency. To determine the value of l
for a given currency, a FDIC-supervised
institution must find the lowest value L
of P and K of all interest rate options in
a given currency that the FDIC-
supervised institution has with all
counterparties. Then, l is set according
to this formula: l = max{¥L + 0.1%, 0};
and
(vi) s equals the supervisory option
volatility, as provided in Table 2 to this
section; and
(C)(1) For a derivative contract that is
a collateralized debt obligation tranche,
the supervisory delta adjustment is
determined by the following formula:
(2) As used in the formula in
paragraph (c)(9)(iii)(C)(1) of this section:
(i) A is the attachment point, which
equals the ratio of the notional amounts
of all underlying exposures that are
subordinated to the FDIC-supervised
institution’s exposure to the total
notional amount of all underlying
exposures, expressed as a decimal value
between zero and one; 30
(ii) D is the detachment point, which
equals one minus the ratio of the
notional amounts of all underlying
exposures that are senior to the FDICsupervised institution’s exposure to the
total notional amount of all underlying
exposures, expressed as a decimal value
between zero and one; and
(iii) The resulting amount is
designated with a positive sign if the
collateralized debt obligation tranche
was purchased by the FDIC-supervised
institution and is designated with a
negative sign if the collateralized debt
obligation tranche was sold by the FDICsupervised institution.
(iv) Maturity factor. (A)(1) The
maturity factor of a derivative contract
that is subject to a variation margin
agreement, excluding derivative
contracts that are subject to a variation
margin agreement under which the
counterparty is not required to post
variation margin, is determined by the
following formula:
30 In the case of a first-to-default credit derivative,
there are no underlying exposures that are
subordinated to the FDIC-supervised institution’s
exposure. In the case of a second-or-subsequent-todefault credit derivative, the smallest (n–1) notional
amounts of the underlying exposures are
subordinated to the FDIC-supervised institution’s
exposure.
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Where MPOR refers to the period
from the most recent exchange of
collateral covering a netting set of
derivative contracts with a defaulting
counterparty until the derivative
contracts are closed out and the
resulting market risk is re-hedged.
(2) Notwithstanding paragraph
(c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not
a cleared transaction, MPOR cannot be
less than ten business days plus the
periodicity of re-margining expressed in
business days minus one business day;
(ii) For a derivative contract that is a
cleared transaction, MPOR cannot be
less than five business days plus the
periodicity of re-margining expressed in
business days minus one business day;
and
(iii) For a derivative contract that is
within a netting set that is composed of
more than 5,000 derivative contracts
that are not cleared transactions, MPOR
cannot be less than twenty business
days.
(3) Notwithstanding paragraphs
(c)(9)(iv)(A)(1) and (2) of this section, for
a derivative contract subject to an
outstanding dispute over variation
margin, the applicable floor is twice the
amount provided in (c)(9)(iv)(A)(1) and
(2) of this section.
(B) The maturity factor of a derivative
contract that is not subject to a variation
margin agreement, or derivative
contracts under which the counterparty
is not required to post variation margin,
is determined by the following formula:
Where M equals the greater of 10
business days and the remaining
maturity of the contract, as measured in
business days.
(C) For purposes of paragraph
(c)(9)(iv) of this section, derivative
contracts with daily settlement are
treated as derivative contracts not
subject to a variation margin agreement
and daily settlement does not change
the end date of the period referenced by
the derivative contract.
(v) Derivative contract as multiple
effective derivative contracts. A FDICsupervised institution must separate a
derivative contract into separate
derivative contracts, according to the
following rules:
(A) For an option where the
counterparty pays a predetermined
amount if the value of the underlying
asset is above or below the strike price
and nothing otherwise (binary option),
the option must be treated as two
separate options. For purposes of
paragraph (c)(9)(iii)(B) of this section, a
binary option with strike K must be
represented as the combination of one
bought European option and one sold
European option of the same type as the
original option (put or call) with the
strikes set equal to 0.95*K and 1.05*K
so that the payoff of the binary option
is reproduced exactly outside the region
between the two strikes. The absolute
value of the sum of the adjusted
derivative contract amounts of the
bought and sold options is capped at the
payoff amount of the binary option.
(B) For a derivative contract that can
be represented as a combination of
standard option payoffs (such as collar,
butterfly spread, calendar spread,
straddle, and strangle), each standard
option component must be treated as a
separate derivative contract.
(C) For a derivative contract that
includes multiple-payment options,
(such as interest rate caps and floors)
each payment option may be
represented as a combination of
effective single-payment options (such
as interest rate caplets and floorlets).
(10) Multiple netting sets subject to a
single variation margin agreement—(i)
Calculating replacement cost.
Notwithstanding paragraph (c)(6) of this
section, a FDIC-supervised institution
shall assign a single replacement cost to
multiple netting sets that are subject to
a single variation margin agreement
under which the counterparty must post
variation margin, calculated according
to the following formula:
Replacement Cost = max{SNSmax{VNS;
0} ¥ max{CMA; 0}; 0} +
max{SNSmin{VNS; 0} ¥ min{CMA;
0}; 0}
margin agreement under which the
counterparty must post variation margin
equal to the sum of the potential future
exposure of each such netting set, each
calculated according to paragraph (c)(7)
of this section as if such nettings sets
were not subject to a variation margin
agreement.
(11) Netting set subject to multiple
variation margin agreements or a hybrid
netting set—(i) Calculating replacement
cost. To calculate replacement cost for
either a netting set subject to multiple
variation margin agreements under
which the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
contract subject to variation margin
agreement under which the
counterparty must post variation margin
and at least one derivative contract that
is not subject to such a variation margin
agreement, the calculation for
replacement cost is provided under
paragraph (c)(6)(ii) of this section,
except that the variation margin
threshold equals the sum of the
variation margin thresholds of all
variation margin agreements within the
netting set and the minimum transfer
amount equals the sum of the minimum
transfer amounts of all the variation
margin agreements within the netting
set.
(ii) Calculating potential future
exposure. (A) To calculate potential
future exposure for a netting set subject
to multiple variation margin agreements
under which the counterparty to each
variation margin agreement must post
variation margin, or a netting set
composed of at least one derivative
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Where:
NS is each netting set subject to the variation
margin agreement MA;
VNS is the sum of the fair values (after
excluding any valuation adjustments) of
the derivative contracts within the
netting set NS;
CMAis the sum of the net independent
collateral amount and the variation
margin amount applicable to the
derivative contracts within the netting
sets subject to the single variation margin
agreement.
(ii) Calculating potential future
exposure. Notwithstanding paragraph
(c)(5) of this section, a FDIC-supervised
institution shall assign a single potential
future exposure to multiple netting sets
that are subject to a single variation
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contract subject to variation margin
agreement under which the
counterparty to the derivative contract
must post variation margin and at least
one derivative contract that is not
subject to such a variation margin
agreement, a FDIC-supervised
institution must divide the netting set
into sub-netting sets and calculate the
aggregated amount for each sub-netting
set. The aggregated amount for the
netting set is calculated as the sum of
the aggregated amounts for the subnetting sets. The multiplier is calculated
for the entire netting set.
(B) For purposes of paragraph
(c)(11)(ii)(A) of this section, the netting
set must be divided into sub-netting sets
as follows:
(1) All derivative contracts within the
netting set that are not subject to a
variation margin agreement or that are
subject to a variation margin agreement
under which the counterparty is not
required to post variation margin form
a single sub-netting set. The aggregated
amount for this sub-netting set is
calculated as if the netting set is not
subject to a variation margin agreement.
(2) All derivative contracts within the
netting set that are subject to variation
margin agreements in which the
counterparty must post variation margin
and that share the same value of the
MPOR form a single sub-netting set. The
aggregated amount for this sub-netting
set is calculated as if the netting set is
subject to a variation margin agreement,
using the MPOR value shared by the
derivative contracts within the netting
set.
(12) Treatment of cleared
transactions. (i) A FDIC-supervised
institution must apply the adjustments
in paragraph (c)(12)(iii) of this section to
the calculation of exposure amount
under this paragraph (c) for a netting set
that is composed solely of one or more
cleared transactions.
(ii) A FDIC-supervised institution that
is a clearing member must apply the
adjustments in paragraph (c)(12)(iii) of
this section to the calculation of
exposure amount under this paragraph
(c) for a netting set that is composed
solely of one or more exposures, each of
which are exposures of the FDICsupervised institution to its clearing
64725
member client where the FDICsupervised institution is either acting as
a financial intermediary and enters into
an offsetting transaction with a CCP or
where the FDIC-supervised institution
provides a guarantee to the CCP on the
performance of the client.
(iii)(A) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(B) of this section, MPOR may
not be less than 10 business days;
(B) For purposes of calculating the
maturity factor under paragraph
(c)(9)(iv)(B) of this section, the
minimum MPOR under paragraph
(c)(9)(iv)(A)(3) of this section does not
apply if there are no outstanding
disputed trades in the netting set, there
is no illiquid collateral in the netting
set, and there are no exotic derivative
contracts in the netting set; and
(C) For purposes of calculating the
maturity factor under paragraphs
(c)(9)(iv)(A) and (B) of this section, if the
CCP collects and holds variation margin
and the variation margin is not
bankruptcy remote from the CCP, Mi
may not exceed 250 business days.
TABLE 2 TO § 324.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND
SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS
Supervisory
option
volatility
(%)
Asset class
Subclass
Interest rate .....................................................
Exchange rate .................................................
Credit, single name .........................................
N/A .................................................................
N/A .................................................................
Investment grade ...........................................
Speculative grade ..........................................
Sub-speculative grade ...................................
Investment Grade ...........................................
Speculative Grade ..........................................
N/A .................................................................
N/A .................................................................
Energy ............................................................
Metals .............................................................
Agricultural .....................................................
Other ..............................................................
Credit, index ....................................................
Equity, single name ........................................
Equity, index ...................................................
Commodity ......................................................
50
15
100
100
100
80
80
120
75
150
70
70
70
Supervisory
correlation
factor
(%)
N/A
N/A
50
50
50
80
80
50
80
40
40
40
40
Supervisory
factor 1
(%)
0.50
4.0
0.5
1.3
6.0
0.38
1.06
32
20
40
18
18
18
1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table
2, and the applicable supervisory factor for volatility derivative contract hedging sets is equal to 5 times the supervisory factor provided in this
Table 2.
*
*
*
*
*
34. Section 324.133 amended by
revising paragraphs (a), (b)(1) through
(3), (b)(4)(i), (c)(1) through (3), (c)(4)(i),
and (d) to read as follows:
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■
§ 324.133
Cleared transactions.
(a) General requirements—(1)
Clearing member clients. A FDICsupervised institution that is a clearing
member client must use the
methodologies described in paragraph
(b) of this section to calculate riskweighted assets for a cleared
transaction.
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(2) Clearing members. A FDICsupervised institution that is a clearing
member must use the methodologies
described in paragraph (c) of this
section to calculate its risk-weighted
assets for a cleared transaction and
paragraph (d) of this section to calculate
its risk-weighted assets for its default
fund contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared
transactions. (i) To determine the riskweighted asset amount for a cleared
transaction, a FDIC-supervised
institution that is a clearing member
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client must multiply the trade exposure
amount for the cleared transaction,
calculated in accordance with paragraph
(b)(2) of this section, by the risk weight
appropriate for the cleared transaction,
determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client FDICsupervised institution’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all of its cleared
transactions.
(2) Trade exposure amount. (i) For a
cleared transaction that is a derivative
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contract or a netting set of derivative
contracts, trade exposure amount equals
the EAD for the derivative contract or
netting set of derivative contracts
calculated using the methodology used
to calculate EAD for derivative contracts
set forth in § 324.132(c) or (d), plus the
fair value of the collateral posted by the
clearing member client FDIC-supervised
institution and held by the CCP or a
clearing member in a manner that is not
bankruptcy remote. When the FDICsupervised institution calculates EAD
for the cleared transaction using the
methodology in § 324.132(d), EAD
equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD for the repostyle transaction calculated using the
methodology set forth in § 324.132(b)(2)
or (3) or (d), plus the fair value of the
collateral posted by the clearing member
client FDIC-supervised institution and
held by the CCP or a clearing member
in a manner that is not bankruptcy
remote. When the FDIC-supervised
institution calculates EAD for the
cleared transaction under § 324.132(d),
EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) For a cleared transaction with a
QCCP, a clearing member client FDICsupervised institution must apply a risk
weight of:
(A) 2 percent if the collateral posted
by the FDIC-supervised institution to
the QCCP or clearing member is subject
to an arrangement that prevents any loss
to the clearing member client FDICsupervised institution due to the joint
default or a concurrent insolvency,
liquidation, or receivership proceeding
of the clearing member and any other
clearing member clients of the clearing
member; and the clearing member client
FDIC-supervised institution has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from an event
of default or from liquidation,
insolvency or receivership proceedings)
the relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions.
(B) 4 percent, if the requirements of
paragraph (b)(3)(i)(A) of this section are
not met.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member client FDIC-supervised
institution must apply the risk weight
applicable to the CCP under § 324.32.
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20:58 Dec 14, 2018
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(4) * * *
(i) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
FDIC-supervised institution that is held
by a custodian (in its capacity as a
custodian) in a manner that is
bankruptcy remote from the CCP,
clearing member, and other clearing
member clients of the clearing member,
is not subject to a capital requirement
under this section.
*
*
*
*
*
(c) * * *
(1) Risk-weighted assets for cleared
transactions. (i) To determine the riskweighted asset amount for a cleared
transaction, a clearing member FDICsupervised institution must multiply the
trade exposure amount for the cleared
transaction, calculated in accordance
with paragraph (c)(2) of this section by
the risk weight appropriate for the
cleared transaction, determined in
accordance with paragraph (c)(3) of this
section.
(ii) A clearing member FDICsupervised institution’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all of its cleared
transactions.
(2) Trade exposure amount. A
clearing member FDIC-supervised
institution must calculate its trade
exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a
derivative contract or a netting set of
derivative contracts, trade exposure
amount equals the EAD calculated using
the methodology used to calculate EAD
for derivative contracts set forth in
§ 324.132(c) or (d), plus the fair value of
the collateral posted by the clearing
member FDIC-supervised institution
and held by the CCP in a manner that
is not bankruptcy remote. When the
clearing member FDIC-supervised
institution calculates EAD for the
cleared transaction using the
methodology in § 324.132(d), EAD
equals EADunstressed.
(ii) For a cleared transaction that is a
repo-style transaction or netting set of
repo-style transactions, trade exposure
amount equals the EAD calculated
under § 324.132(b)(2) or (3) or (d), plus
the fair value of the collateral posted by
the clearing member FDIC-supervised
institution and held by the CCP in a
manner that is not bankruptcy remote.
When the clearing member FDICsupervised institution calculates EAD
for the cleared transaction under
§ 324.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights.
(i) A clearing member FDIC-supervised
PO 00000
Frm 00068
Fmt 4701
Sfmt 4702
institution must apply a risk weight of
2 percent to the trade exposure amount
for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a
CCP that is not a QCCP, a clearing
member FDIC-supervised institution
must apply the risk weight applicable to
the CCP according to § 324.32.
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member FDIC-supervised
institution may apply a risk weight of
zero percent to the trade exposure
amount for a cleared transaction with a
QCCP where the clearing member FDICsupervised institution is acting as a
financial intermediary on behalf of a
clearing member client, the transaction
offsets another transaction that satisfies
the requirements set forth in § 324.3(a),
and the clearing member FDICsupervised institution is not obligated to
reimburse the clearing member client in
the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other
requirement of this section, collateral
posted by a clearing member client
FDIC-supervised institution that is held
by a custodian (in its capacity as a
custodian) in a manner that is
bankruptcy remote from the CCP,
clearing member, and other clearing
member clients of the clearing member,
is not subject to a capital requirement
under this section.
*
*
*
*
*
(d) Default fund contributions—(1)
General requirement. A clearing
member FDIC-supervised institution
must determine the risk-weighted asset
amount for a default fund contribution
to a CCP at least quarterly, or more
frequently if, in the opinion of the FDICsupervised institution or the FDIC, there
is a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for
default fund contributions to
nonqualifying CCPs. A clearing member
FDIC-supervised institution’s riskweighted asset amount for default fund
contributions to CCPs that are not
QCCPs equals the sum of such default
fund contributions multiplied by 1,250
percent, or an amount determined by
the FDIC, based on factors such as size,
structure and membership
characteristics of the CCP and riskiness
of its transactions, in cases where such
default fund contributions may be
unlimited.
(3) Risk-weighted asset amount for
default fund contributions to QCCPs. A
clearing member FDIC-supervised
institution’s risk-weighted asset amount
for default fund contributions to QCCPs
equals the sum of its capital
E:\FR\FM\17DEP2.SGM
17DEP2
64727
requirement, KCM for each QCCP, as
calculated under the methodology set
forth in paragraph (e)(4) of this section.
(i) EAD must be calculated separately
for each clearing member’s sub-client
accounts and sub-house account (i.e.,
for the clearing member’s propriety
activities). If the clearing member’s
collateral and its client’s collateral are
held in the same default fund
contribution account, then the EAD of
that account is the sum of the EAD for
the client-related transactions within
the account and the EAD of the houserelated transactions within the account.
For purposes of determining such EADs,
the independent collateral of the
clearing member and its client must be
allocated in proportion to the respective
total amount of independent collateral
posted by the clearing member to the
QCCP.
(ii) If any account or sub-account
contains both derivative contracts and
repo-style transactions, the EAD of that
account is the sum of the EAD for the
derivative contracts within the account
and the EAD of the repo-style
transactions within the account. If
independent collateral is held for an
account containing both derivative
contracts and repo-style transactions,
then such collateral must be allocated to
the derivative contracts and repo-style
transactions in proportion to the
respective product specific exposure
amounts, calculated, excluding the
effects of collateral, according to
§ 324.132(b) for repo-style transactions
and to § 324.132(c)(5) for derivative
contracts.
(4) Risk-weighted asset amount for
default fund contributions to a QCCP. A
clearing member FDIC-supervised
institution’s capital requirement for its
default fund contribution to a QCCP
(KCM) is equal to:
(5) Hypothetical capital requirement
of a QCCP. Where a QCCP has provided
its KCCP, a FDIC-supervised institution
must rely on such disclosed figure
instead of calculating KCCP under this
paragraph (d)(5), unless the FDICsupervised institution determines that a
more conservative figure is appropriate
based on the nature, structure, or
characteristics of the QCCP. The
hypothetical capital requirement of a
QCCP (KCCP), as determined by the
FDIC-supervised institution, is equal to:
KCCP = SCMiEADi * 1.6 percent
CMi is each clearing member of the QCCP;
and
EADi is the exposure amount of each clearing
member of the QCCP to the QCCP, as
determined under paragraph (d)(6) of
this section.
determined under paragraph (d)(6)(iii)
of this section.
(ii) With respect to any derivative
contracts between the FDIC-supervised
institution and the CCP that are cleared
transactions and any guarantees that the
FDIC-supervised institution has
provided to the CCP with respect to
performance of a clearing member client
on a derivative contract, the EAD is
equal to the sum of:
(A) The exposure amount for all such
derivative contracts and guarantees of
derivative contracts calculated under
SA–CCR in § 324.132(c) using a value of
Where:
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20:58 Dec 14, 2018
Jkt 247001
(6) EAD of a clearing member FDICsupervised institution to a QCCP. (i) The
EAD of a clearing member FDICsupervised institution to a QCCP is
equal to the sum of the EAD for
derivative contracts determined under
paragraph (d)(6)(ii) of this section and
the EAD for repo-style transactions
PO 00000
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Fmt 4701
Sfmt 4702
E:\FR\FM\17DEP2.SGM
17DEP2
EP17DE18.052</GPH>
amozie on DSK3GDR082PROD with PROPOSALS2
Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Proposed Rules
64728
Federal Register / Vol. 83, No. 241 / Monday, December 17, 2018 / Proposed Rules
10 business days for purposes of
§ 324.132(c)(9)(iv)(B);
(B) The value of all collateral held by
the CCP posted by the clearing member
FDIC-supervised institution or a
clearing member client of the FDICsupervised institution in connection
with a derivative contract for which the
FDIC-supervised institution has
provided a guarantee to the CCP; and
(C) The amount of the prefunded
default fund contribution of the FDICsupervised institution to the CCP.
(iii) With respect to any repo-style
transactions between the FDICsupervised institution and the CCP that
are cleared transactions, EAD is equal
to:
EAD = max{EBRM¥IM¥DF; 0}
amozie on DSK3GDR082PROD with PROPOSALS2
Where:
EBRM is the sum of the exposure amounts of
each repo-style transaction between the
FDIC-supervised institution and the CCP
as determined under § 324.132(b)(2) and
VerDate Sep<11>2014
20:58 Dec 14, 2018
Jkt 247001
without recognition of any collateral
securing the repo-style transactions;
IM is the initial margin collateral posted by
the FDIC-supervised institution to the
CCP with respect to the repo-style
transactions; and
DF is the prefunded default fund
contribution of the FDIC-supervised
institution to the CCP.
35. Section 324.300 is amended by
adding paragraph (f) to read as follows:
■
§ 324.300
Transitions.
*
*
*
*
*
(f) SA–CCR. After giving prior notice
to the FDIC, an advanced approaches
FDIC-supervised institution may use
CEM rather than SA–CCR to determine
the exposure amount for purposes of
§ 324.34 and the EAD for purposes of
§ 324.132 for its derivative contracts
until July 1, 2020. On July 1, 2020, and
thereafter, an advanced approaches
FDIC-supervised institution must use
SA–CCR for purposes of § 324.34 and
PO 00000
Frm 00070
Fmt 4701
Sfmt 9990
must use either SA–CCR or IMM for
purposes of § 324.132. Once an
advanced approaches FDIC-supervised
institution has begun to use SA–CCR,
the advanced approaches FDICsupervised institution may not change
to use CEM.
Dated: November 7, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, November 6, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC, on October 17,
2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2018–24924 Filed 12–14–18; 8:45 am]
BILLING CODE 4810–33–6210–01;6714–01;P
E:\FR\FM\17DEP2.SGM
17DEP2
]]>Agencies
[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Proposed Rules]
[Pages 64660-64728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24924]
[[Page 64659]]
Vol. 83
Monday,
No. 241
December 17, 2018
Part III
Department of the Treasury
-----------------------------------------------------------------------
Office of the Comptroller of the Currency
Federal Reserve System
-----------------------------------------------------------------------
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Parts 3, 32, 217, and 324
Standardized Approach for Calculating the Exposure Amount of Derivative
Contracts; Proposed Rules
Federal Register / Vol. 83 , No. 241 / Monday, December 17, 2018 /
Proposed Rules
[[Page 64660]]
-----------------------------------------------------------------------
DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 32
[Docket ID OCC-2018-0030]
RIN 1557-AE44
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket R-1629]
RIN 7100-AF22
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE80
Standardized Approach for Calculating the Exposure Amount of
Derivative Contracts
AGENCY: The Board of Governors of the Federal Reserve System; the
Federal Deposit Insurance Corporation; and the Office of the
Comptroller of the Currency, Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency (together, the agencies) are inviting
public comment on a proposal that would implement a new approach for
calculating the exposure amount of derivative contracts under the
agencies' regulatory capital rule. The proposed approach, called the
standardized approach for counterparty credit risk (SA-CCR), would
replace the current exposure methodology (CEM) as an additional
methodology for calculating advanced approaches total risk-weighted
assets under the capital rule. An advanced approaches banking
organization also would be required to use SA-CCR to calculate its
standardized total risk-weighted assets; a non-advanced approaches
banking organization could elect to use either CEM or SA-CCR for
calculating its standardized total risk-weighted assets. In addition,
the proposal would modify other aspects of the capital rule to account
for the proposed implementation of SA-CCR. Specifically, the proposal
would require an advanced approaches banking organization to use SA-CCR
with some adjustments to determine the exposure amount of derivative
contracts for calculating total leverage exposure (the denominator of
the supplementary leverage ratio). The proposal also would incorporate
SA-CCR into the cleared transactions framework and would make other
amendments, generally with respect to cleared transactions. The
proposed introduction of SA-CCR would indirectly affect the Board's
single counterparty credit limit rule, along with other rules. The
Office of the Comptroller of the Currency also is proposing to update
cross-references to CEM and add SA-CCR as an option for determining
exposure amounts for derivative contracts in its lending limit rules.
DATES: Comments should be received on or before February 15, 2019.
ADDRESSES: Comments should be directed to:
Board: You may submit comments, identified by Docket No. [R-1629
and RIN 7100-AF22], by any of the following methods:
1. Agency Website: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
2. Email: regs.comments@federalreserve.gov. Include docket number
in the subject line of the message.
3. Fax: (202) 452-3819 or (202) 452-3102.
4. Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. All public comments are available from the
Board's website at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or
to remove sensitive personal identifying information (PII) at the
commenter's request. Public comments may also be viewed electronically
or in paper form in Room 3515, 1801 K Street NW (between 18th and 19th
Streets NW), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on
weekdays.
FDIC: You may submit comments, identified by RIN 3064-AE80, by any
of the following methods:
Agency Website: https://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency
website.
Email: Comments@FDIC.gov. Include ``RIN 3064-AE80'' on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/RIN 3064-AE80, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand delivered to
the guard station at the rear of the 550 17th Street Building (located
on F Street) on business days between 7 a.m. and 5 p.m. All comments
received must include the agency name (FDIC) and RIN 3064-AE80 and will
be posted without change to https://www.fdic.gov/regulations/laws/federal, including any personal information provided.
OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Capital Adequacy: Standardized Approach for Calculating the Exposure
Amount of Derivative Contracts'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0030'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Email: regs.comments@occ.treas.gov.
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW, suite 3E-
218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2018-0030'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not include any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0030'' in the Search
box and click ``Search.'' Click on
[[Page 64661]]
``Open Docket Folder'' on the right side of the screen. Comments and
supporting materials can be viewed and filtered by clicking on ``View
all documents and comments in this docket'' and then using the
filtering tools on the left side of the screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov. The docket may be viewed
after the close of the comment period in the same manner as during the
comment period.
Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 649-6700 or, for
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon
arrival, visitors will be required to present valid government-issued
photo identification and submit to security screening in order to
inspect comments.
FOR FURTHER INFORMATION CONTACT:
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; David Lynch, Deputy Associate Director, (202) 452-2081; Elizabeth
MacDonald, Manager, (202) 475-6316; Michael Pykhtin, Manager, (202)
912-4312; Mark Handzlik, Senior Supervisory Financial Analyst, (202)
475-6636; Sara Saab, Supervisory Financial Analyst, (202) 872-4936; or
Noah Cuttler, Senior Financial Analyst, (202) 912-4678; Division of
Supervision and Regulation; or Benjamin W. McDonough, Assistant General
Counsel, (202) 452-2036; Mark Buresh, Counsel, (202) 452-5270; Andrew
Hartlage, Counsel, (202) 452-6483; Legal Division, Board of Governors
of the Federal Reserve System, 20th and C Streets NW, Washington, DC
20551. For the hearing impaired only, Telecommunication Device for the
Deaf, (202) 263-4869.
FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov; Irina
Leonova, Senior Policy Analyst, ileonova@fdic.gov; Peter Yen, Senior
Policy Analyst, pyen@fdic.gov, Capital Markets Branch, Division of Risk
Management Supervision, (202) 898-6888; or Michael Phillips, Counsel,
mphillips@fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov;
Supervision Branch, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
OCC: Guowei Zhang, Risk Expert, Capital Policy, (202) 649-7106;
Kevin Korzeniewski, Counsel, (202) 649-5490; or Ron Shimabukuro, Senior
Counsel, (202) 649-5490, or, for persons who are deaf or hearing
impaired, TTY, (202) 649-5597, Chief Counsel's Office, Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Scope and Application of the Proposed Rule
B. Proposal's Interaction With Agency Requirements and Other
Proposals
C. Overview of Derivative Contracts
D. Mechanics of the Current Exposure Methodology
E. Mechanics of the Internal Models Methodology
F. Review of the Capital Rule's Treatment of Derivative
Contracts
II. Standardized Approach for Counterparty Credit Risk
A. Key Concepts
1. Netting Sets
2. Hedging Sets
3. Derivative Contract Amount for the PFE Component Calculation
4. Collateral Recognition and Differentiation Between Margined
and Unmargined Derivative Contracts
B. Mechanics of the Standardized Approach for Counterparty
Credit Risk
1. Exposure Amount
2. Replacement Cost
3. Aggregated Amount and Hedging Set Amounts
4. PFE Multiplier
5. PFE Calculation for Nonstandard Margin Agreements
6. Adjusted Derivative Contract Amount
7. Example of Calculation
III. Revisions to the Cleared Transactions Framework
A. Trade Exposure Amount
B. Treatment of Collateral
C. Treatment of Default Fund Contributions
IV. Revisions to the Supplementary Leverage Ratio
V. Technical Amendments
A. Receivables Due From a QCCP
B. Treatment of Client Financial Collateral Held by a CCP
C. Clearing Member Exposure When CCP Performance is Not
Guaranteed
D. Bankruptcy Remoteness of Collateral
E. Adjusted Collateral Haircuts for Derivative Contracts
F. OCC Revisions to Lending Limits
VI. Impact of the Proposed Rule
VII. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. Riegle Community Development and Regulatory Improvement Act
of 1994
E. OCC Unfunded Mandates Reform Act of 1995 Determination
I. Background
A firm with a positive exposure on a derivative contract expects to
receive a payment from its counterparty and is subject to the credit
risk that the counterparty will default on its obligations and fail to
pay the amount owed under the derivative contract. Because of this, the
regulatory capital rule (capital rule) \1\ of the Board of Governors of
the Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), and the Office of the Comptroller of the Currency
(OCC) (together, the agencies) requires a banking organization \2\ to
hold regulatory capital based on the exposure amount of its derivative
contracts. The agencies are issuing this notice of proposed rulemaking
(proposal) to implement a new approach for calculating the exposure
amount of derivative contracts under the capital rule.
---------------------------------------------------------------------------
\1\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR
part 324 (FDIC). The agencies have codified the capital rule in
different parts of title 12 of the CFR (part 3 (OCC); part 217
(Board); and part 324 (FDIC)), but the internal structure of the
sections within each agency's rule are identical. All references to
sections in the capital rule or the proposal are intended to refer
to the corresponding sections in the capital rule of each agency.
\2\ Banking organizations subject to the agencies' capital rule
include national banks, state member banks, insured state nonmember
banks, savings associations, and top-tier bank holding companies and
savings and loan holding companies domiciled in the United States,
but exclude banking organizations subject to the Board's Small Bank
Holding Company Policy Statement (12 CFR part 225, appendix C), and
certain savings and loan holding companies that are substantially
engaged in insurance underwriting or commercial activities or that
are estate trusts, and bank holding companies and savings and loan
holding companies that are employee stock ownership plans.
---------------------------------------------------------------------------
As discussed in greater detail below, the capital rule prescribes
different approaches to measuring the exposure amount of derivative
contracts, depending on the size and complexity of the banking
organization. For example, all banking organizations are required to
use the current exposure methodology (CEM) to determine the exposure
amount of their derivative contracts under the standardized approach of
the capital rule, which is based on formulas described in the capital
rule. Advanced approaches banking organizations also may use an
internal models-based approach, the internal models methodology (IMM),
to determine the exposure amount of their derivative contracts under
the advanced approaches of the capital rule.\3\ The addition of a new
approach, called the standardized approach for counterparty credit risk
(SA-CCR), would provide
[[Page 64662]]
important improvements to risk-sensitivity and calibration relative to
CEM, but also would provide a less complex and non-model-dependent
approach than IMM.
---------------------------------------------------------------------------
\3\ A banking organization is an advanced approaches banking
organization if it has at least $250 billion in total consolidated
assets or if it has consolidated on-balance sheet foreign exposures
of at least $10 billion, or if it is a subsidiary of a depository
institution, bank holding company, savings and loan holding company
or intermediate holding company that is an advanced approaches
banking organization. See 12 CFR 3.100(b) (OCC); 12 CFR 217.100(b)
(Board); and 12 CFR 324.100(b) (FDIC).
---------------------------------------------------------------------------
In addition, the agencies are proposing to revise the capital
rule's cleared transactions framework and the supplementary leverage
ratio to accommodate the proposed implementation of SA-CCR, as well as
make certain other changes to the cleared transaction framework in the
capital rule.
A. Scope and Application of the Proposed Rule
The capital rule provides two methodologies for determining total
risk-weighted assets: The standardized approach, which applies to all
banking organizations, and the advanced approaches, which apply only to
advanced approaches banking organizations. The standardized approach
serves as a floor on advanced approaches banking organizations' total
risk-weighted assets, and thus such banking organizations must
calculate total risk-weighted assets under both approaches.\4\ Total
risk-weighted assets are the denominator of the risk-based capital
ratios; regulatory capital is the numerator.
---------------------------------------------------------------------------
\4\ 12 CFR 3.10(c) (OCC); 12 CFR 217.10(c) (Board); and 12 CFR
324.10(c) (FDIC). For example, an advanced approaches banking
organization's tier 1 capital ratio is the lower of the ratio of the
banking organization's common equity tier 1 capital to standardized
total risk-weighted assets and the ratio of the banking
organization's common equity tier 1 capital to advanced approaches
total risk-weighted assets.
---------------------------------------------------------------------------
Under the standardized approach, the risk-weighted asset amount for
a derivative contract is the product of the exposure amount of the
derivative contract and the risk weight applicable to the counterparty,
as provided under the capital rule. Under the advanced approaches, the
risk-weighted asset amount for a derivative contract is derived using
the internal ratings-based approach, which multiplies the exposure
amount (or exposure at default amount) of the derivative contract by a
models-based formula that uses risk parameters determined by a banking
organization's internal methodologies.\5\
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\5\ See generally 12 CFR 3.132 (OCC); 12 CFR 217.132 (Board);
and 12 CFR 324.132 (FDIC).
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Both the standardized approach and the advanced approaches require
a banking organization to determine the exposure amount for its
derivative contracts that are not cleared transactions (i.e., over-the-
counter derivative contracts or noncleared derivative contracts). As
part of the cleared transactions framework, both the standardized
approach and the advanced approaches require a banking organization to
determine the exposure amount of its derivative contracts that are
cleared transactions (i.e., cleared derivative contracts) and determine
the risk-weighted asset amounts of its contributions or commitments to
mutualized loss sharing agreements with central counterparties (i.e.,
default fund contributions). For the advanced approaches, an advanced
approaches banking organization may use either CEM or IMM to calculate
the exposure amount of its noncleared and cleared derivative contracts,
as well as the risk-weighted asset amounts of its default fund
contributions. For purposes of determining these amounts for the
standardized approach, all banking organizations must use CEM.
The proposal would revise the standardized approach and the
advanced approaches for advanced approaches banking organizations by
replacing CEM with SA-CCR. As a result, for purposes of determining
total risk-weighted assets under the advanced approaches, an advanced
approaches banking organization would have the option to use SA-CCR or
IMM to calculate the exposure amount of its noncleared and cleared
derivative contracts, as well as to determine the risk-weighted asset
amount of its default fund contributions. For purposes of determining
the exposure amount of these items under the standardized approach, an
advanced approaches banking organization would be required to use SA-
CCR.
The capital rule also requires an advanced approaches banking
organization to meet a supplementary leverage ratio. The denominator of
the supplementary leverage ratio, called total leverage exposure,
includes the exposure amount of a banking organization's derivative
contracts. The capital rule requires an advanced approaches banking
organization to use CEM to determine the exposure amount of its
derivative contracts for total leverage exposure. Under the proposal,
an advanced approaches banking organization would be required to use
SA-CCR to determine the exposure amount of its derivative contracts for
total leverage exposure.
As it applies to advanced approaches banking organizations, the
proposed implementation of SA-CCR would provide important improvements
to risk-sensitivity and calibration relative to CEM, resulting in more
appropriate capital requirements for derivative contracts. SA-CCR also
would be responsive to concerns raised regarding the current regulatory
capital treatment for derivative contracts under CEM. For example, the
industry has raised concerns that CEM does not appropriately recognize
collateral, including the risk-reducing nature of variation margin, and
does not provide sufficient netting for derivative contracts that share
similar risk factors. The agencies intend for the proposed
implementation of SA-CCR to respond to these concerns, and to be
substantially consistent with international standards issued by the
Basel Committee on Banking Supervision (Basel Committee). In addition,
requiring an advanced approaches banking organization to use SA-CCR or
IMM for all purposes under the advanced approaches would facilitate
regulatory reporting and the supervisory assessment of an advanced
approaches banking organization's capital management program.
The proposed implementation of SA-CCR would require advanced
approaches banking organizations to augment existing systems or develop
new ones. Accordingly, the proposal includes a transition period, until
July 1, 2020, by which time an advanced approaches banking organization
must implement SA-CCR. An advanced approaches banking organization may,
however, adopt SA-CCR as of the effective date of the final rule. In
addition, the technical revisions in this proposal, as described in
section V of this Supplementary Information, would become effective as
of the effective date of the final rule.
While the agencies recognize that implementation of SA-CCR offers
several improvements to CEM, it also will require, particularly for
banking organizations with relatively small derivatives portfolios,
internal systems enhancements and other operational modifications that
could be costly and present additional burden. Therefore, the proposal
would not require non-advanced approaches banking organizations to use
SA-CCR, but instead would provide SA-CCR as an optional approach.
However, a non-advanced approaches banking organization that elects to
use SA-CCR for calculating its exposure amount for noncleared
derivative contracts also would be required to use SA-CCR to calculate
the exposure amount for its cleared derivative contracts and for
calculating the risk-weighted asset amount of its default fund
contributions. This approach should provide meaningful flexibility,
while promoting consistency for the regulatory capital treatment of
derivative contracts for non-advanced approaches banking organizations.
The proposal also would
[[Page 64663]]
allow non-advanced approaches banking organizations to adopt SA-CCR as
of the effective date of the final rule.
Table 1--Scope and Applicability of the Proposed Rule
----------------------------------------------------------------------------------------------------------------
Non-cleared derivative Cleared transactions Default fund
contracts framework contribution
----------------------------------------------------------------------------------------------------------------
Advanced approaches banking Option to use SA-CCR or Must use the approach Must use SA-CCR for
organizations, advanced approaches IMM to determine selected for purposes purposes of the
total risk-weighted assets. exposure amount for of the counterparty default fund
derivative contracts credit risk framework contribution included
under the advanced (either SA-CCR or in risk-weighted
approaches. IMM), to determine the assets.
trade exposure amount
for cleared derivative
contracts.
Advanced approaches banking Must use SA-CCR to Must use SA-CCR to Must use SA-CCR for
organizations, standardized approach determine exposure determine trade purposes of the
total risk-weighted assets. amount for derivative exposure amount for default fund
contracts. cleared derivative contribution included
contracts. in risk-weighted
assets.
Non-advanced approaches banking Option to use CEM or SA- Must use the approach Must use the approach
organizations, standardized approach CCR to determine selected for purposes selected for purposes
total risk-weighted assets. exposure amount for of the counterparty of the counterparty
derivative contracts. credit risk framework credit risk framework
(either CEM or SA- (either CEM or SA-CCR)
CCR), to determine the for purposes of the
trade exposure amount default fund
for cleared derivative contribution included
contracts. in risk-weighted
assets.
--------------------------------------------------------------------------
Advanced approaches banking Must use modified SA-CCR to determine the exposure amount of derivative
organizations, supplementary contracts for total leverage exposure under the supplementary leverage
leverage ratio. ratio.
----------------------------------------------------------------------------------------------------------------
Question 1: The agencies invite comment on all aspects of this
proposal. In addition to the risk-sensitivity enhancements SA-CCR
provides relative to CEM, what other considerations relevant to the
determination of whether to replace CEM with SA-CCR for advanced
approaches banking organizations should the agencies consider?
Question 2: The agencies invite comment on the proposed effective
date of SA-CCR for advanced approaches banking organizations. What
alternative timing should be considered and why?
B. Proposal's Interaction With Agency Requirements and Other Proposals
The Board's single counterparty credit limit rule (SCCL) authorizes
a banking organization subject to the SCCL to use any methodology that
such a banking organization may use under the capital rule to value a
derivative contract for purposes of the SCCL.\6\ Thus, for valuing a
derivative contract under the SCCL, the proposal would require an
advanced approaches banking organization that is subject to the SCCL to
use SA-CCR or IMM and would require a non-advanced approaches banking
organization that is subject to the SCCL to use CEM or SA-CCR.\7\ In
addition, the agencies net stable funding ratio proposed rules would
cross-reference provisions of the agencies' supplementary leverage
ratio that are proposed to be amended in this proposal, and thus this
proposal potentially could affect elements of the net stable funding
ratio rulemaking.\8\
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\6\ 83 FR 38460 (August 6, 2018).
\7\ Many of the Board's other regulations rely on amounts
determined under the capital rule, and the introduction of SA-CCR
therefore could indirectly effect all such rules.
\8\ See 81 FR 35124 (June 1, 2016).
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The agencies also are in the process of considering the appropriate
scope of ``advanced approaches banking organizations'' and may propose
changes to the scope of this term in the near future. The agencies
anticipate that the proposal on the scope of ``advanced approaches
banking organizations'' would have an overlapping comment period with
this proposal. Commenters should consider both proposals together for
purposes of their comments to the agencies.
C. Overview of Derivative Contracts
In general, derivative contracts represent agreements between
parties either to make or receive payments or to buy or sell an
underlying asset on a certain date (or dates) in the future. Parties
generally use derivative contracts to mitigate risk, although
nonhedging use of derivative contracts also occurs. For example, an
interest rate derivative contract allows a party to manage the risk
associated with a change in interest rates, while a commodity
derivative contract allows a party to lock in commodity prices in the
future and thereby minimize any exposure attributable to any
uncertainty with respect to subsequent movements in those prices.
The value of a derivative contract, and thus a party's exposure to
its counterparty, changes over the life of the contract based on
movements in the value of the reference rates, assets, or indices
underlying the contract. A party with a positive current exposure
expects to receive a payment or other beneficial transfer from the
counterparty and is considered to be ``in the money.'' A party that is
in the money is subject to counterparty credit risk: The risk that the
counterparty will default on its obligations and fail to pay the amount
owed under the transaction. In contrast, a party with a zero or
negative current exposure does not expect to receive a payment or
beneficial transfer from the counterparty and is considered to be ``at
the money'' or ``out of the money.'' A party that has no current
exposure to counterparty credit risk may have exposure to counterparty
credit risk in the future if the derivative contract becomes ``in the
money.''
To mitigate the counterparty credit risk of a derivative contract,
parties typically exchange collateral. In the derivatives context,
collateral is either variation margin or initial margin (also known as
independent collateral). Parties exchange variation margin on a
periodic basis during the term of a derivative contract, as typically
specified in a variation margin
[[Page 64664]]
agreement or by regulation.\9\ Variation margin offsets changes in the
market value of a derivative contract and thereby covers the potential
loss arising from default of a counterparty. Variation margin may not
always be sufficient to cover a party's positive exposure (e.g., due to
delays in receiving collateral), and thus parties may exchange initial
margin. Parties typically exchange initial margin at the outset of the
derivative contract and usually in an amount that does not directly
depend on changes in the value of the derivative contract. Parties
typically post initial margin in amounts that would reduce the
likelihood of a positive exposure amount for the derivative contract in
the event of the counterparty's default, resulting in
overcollateralization.
---------------------------------------------------------------------------
\9\ See, e.g., Swap Margin Rule, 12 CFR part 45 (OCC); 12 CFR
part 237 (Board); 12 CFR part 349 (FDIC).
---------------------------------------------------------------------------
To facilitate the exchange of collateral, variation margin
agreements typically provide for a threshold amount and a minimum
transfer amount. The threshold amount is the amount by which the market
value of the derivative contract can change before a party must collect
or post variation margin (in other words, the threshold amount
specifies an acceptable amount of under-collateralization). The minimum
transfer amount is the smallest amount of collateral that a party must
transfer when it is required to exchange collateral under the variation
margin agreement. Parties generally apply a discount (also known as a
haircut) to collateral to account for a potential reduction in the
value of the collateral during the period between the last exchange of
collateral before the close out of the derivative contract (as in the
case of default of the counterparty) and the replacement of the
contract on the market. This period is known as the margin period of
risk (MPOR). Often, two parties will enter into a large number of
derivative contracts together. In such cases, the parties may enter
into a netting agreement to allow for offsetting of the derivative
contracts and to streamline certain aspects of the contracts, including
the exchange of collateral.
Parties to a derivative contract may clear their derivative
contracts through a central counterparty (CCP). The use of central
clearing is designed to improve the safety and soundness of the
derivatives markets through the multilateral netting of exposures,
establishment and enforcement of collateral requirements, and the
promotion of market transparency. A party engages with a CCP either as
a clearing member or as a clearing member client. A clearing member is
a member of, or direct participant in, a CCP that is entitled to enter
into transactions with the CCP. A clearing member client is a party to
a cleared transaction associated with a CCP in which a clearing member
acts as a financial intermediary with respect to the clearing member
client and either takes one position with the client and an offsetting
position with the CCP (the principal model) or guarantees the
performance of the clearing member client to the CCP (the agency
model). With respect to the latter, the clearing member generally is
responsible for fulfilling CCP initial and variation margin calls
irrespective of the client's ability to post collateral.
D. Mechanics of the Current Exposure Methodology
Under CEM, the exposure amount of a single derivative contract is
equal to the sum of its current credit exposure and potential future
exposure (PFE).\10\ Current credit exposure reflects a banking
organization's current exposure to its counterparty and is equal to the
greater of zero and the on-balance sheet fair value of the derivative
contract.\11\ PFE approximates the banking organization's potential
exposure to its counterparty over the remaining maturity of the
derivative contract. PFE equals the product of the notional amount of
the derivative contract and a supervisory-provided conversion factor,
which reflects the potential volatility in the reference asset for the
derivative contract.\12\ The capital rule gives the supervisory-
provided conversion factors via a simple look-up table, based on the
derivative contract's type and remaining maturity.\13\ In general,
potential exposure increases as volatility and duration of the
derivative contract increases.
---------------------------------------------------------------------------
\10\ See 12 CFR 3.34 (OCC); 12 CFR 217.34 (Board); 12 CFR 324.34
(FDIC).
\11\ 12 CFR 3.34(a)(1)(i) (OCC); 12 CFR 217.34(a)(1)(i) (Board);
12 CFR 324.34(a)(1)(i) (FDIC).
\12\ 12 CFR 3.34(a)(1)(ii) (OCC); 12 CFR 217.34(a)(1)(ii)
(Board); 12 CFR 324.34(a)(1)(ii) (FDIC).
\13\ 12 CFR 3.34, Table 1 to Sec. 3.34 (OCC); 12 CFR 217.34,
Table 1 to Sec. 217.34 (Board); 12 CFR 324.34, Table 1 to Sec.
324.34 (FDIC). The derivative contract types are interest rate,
exchange rate, investment grade credit, non-investment grade credit,
equity, gold, precious metals except gold, and other. The maturities
are one year or less, greater than one year and less than or equal
to five years, and greater than five years.
---------------------------------------------------------------------------
If certain criteria are met, CEM allows a banking organization to
measure the exposure amount of a portfolio of its derivative contracts
with a counterparty on a net basis, rather than on a gross basis,
resulting in a lower measure of exposure and thus a lower capital
requirement. A banking organization may measure, on a net basis,
derivative contracts that are subject to the same qualifying master
netting agreement (QMNA). A QMNA, in general, means a netting agreement
that permits a banking organization to terminate, close-out on a net
basis, and promptly liquidate or set off collateral upon an event of
default of the counterparty.\14\ To qualify as a QMNA, the netting
agreement must satisfy certain operational requirements under Sec. _.3
of the capital rule.\15\
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\14\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR
324.2 (FDIC). In 2017, the agencies adopted a final rule that
requires U.S. global systemically important banking institutions
(GSIBs) and the U.S. operations of foreign GSIBs to amend their
qualified financial contracts to prevent their immediate
cancellation or termination if such a firm enters bankruptcy or a
resolution process. Qualified financial contracts include derivative
contracts, securities lending, and short-term funding transactions
such as repurchase agreements. The 2017 rulemaking would have
invalidated the ability of derivative contracts to be subject to a
QMNA. Therefore, as part of the 2017 rulemaking, the agencies
revised the definition of QMNA under the capital rule such that
qualified financial contracts could be subject to a QMNA
(notwithstanding other operational requirements). See 82 FR 42882
(September 2017).
\15\ See Definition of ``qualifying master netting agreement,''
12 CFR 3.3 (OCC); 12 CFR 217.3 (Board); and 12 CFR 324.3 (FDIC).
---------------------------------------------------------------------------
For derivative contracts subject to a QMNA, the exposure amount
equals the sum of the net current credit exposure and the adjusted sum
of the PFE amounts of the derivative contracts.\16\ The net current
credit exposure is the greater of the net sum of all positive and
negative fair values of the individual derivative contracts subject to
the QMNA or zero.\17\ Thus, derivative contracts that have positive and
negative fair values can offset each other to reduce the net current
credit exposure, subject to a floor of zero. The adjusted sum of the
PFE amount component provides the netting function, and is a function
of the gross PFE amount of the derivative contracts and the net-to-
gross ratio. The gross PFE amount is the sum of the PFE of each
derivative contract subject to the QMNA. The net-to-gross ratio is the
ratio of the net current credit exposure of each derivative contract
subject to the QMNA to the sum of the positive current credit exposure
of these derivative contracts. Specifically, the adjusted sum of the
PFE amounts equals the sum of (1) the gross PFE amount multiplied by
0.4 and (2) the gross PFE
[[Page 64665]]
amount multiplied by the net-to-gross ratio and 0.6.\18\ Thus, as the
net-to-gross ratio decreases so will the adjusted sum of the PFE
amounts.
---------------------------------------------------------------------------
\16\ 12 CFR 3.34(a)(2) (OCC); 12 CFR 217.34(a)(2) (Board); 12
CFR 324.34(a)(2) (FDIC).
\17\ 12 CFR 3.34(a)(2)(i) (OCC); 12 CFR 217.34(a)(2)(i) (Board);
12 CFR 324.34(a)(2)(i) (FDIC).
\18\ 12 CFR 3.34(a)(2)(ii) (OCC); 12 CFR 217.34(a)(2)(ii)
(Board); 12 CFR 324.34(a)(2)(ii) (FDIC).
---------------------------------------------------------------------------
For all derivative contracts calculated under CEM, a banking
organization may recognize the credit-risk-mitigating benefits of
financial collateral, pursuant to Sec. _.37 of the capital rule. In
particular, a banking organization may either apply the risk weight
applicable to the collateral to the secured portion of the exposure or
net exposure amounts and collateral amounts according to a regulatory
formula that includes certain haircuts for collateral.\19\
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\19\ 12 CFR 3.34(b) (referencing 12 CFR 3.37) (OCC); 12 CFR
217.34(b) (referencing 12 CFR 217.37) (Board); 12 CFR 324.34(b)
(referencing 12 CFR 324.37) (FDIC).
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E. Mechanics of the Internal Models Methodology
Under IMM, an advanced approaches banking organization uses its own
internal models of exposure to determine the exposure amount of its
derivative contracts. The exposure amount under IMM is calculated as
the product of the effective expected positive exposure (EEPE) for a
netting set, which is the time-weighted average of the effective
expected exposures (EE) profile over a one-year horizon, and an alpha
factor.\20\ For the purposes of regulatory capital calculations, the
resulting exposure amount is treated as a loan equivalent exposure,
which is the amount effectively loaned by the banking organization to
the counterparty under the derivative contract.
---------------------------------------------------------------------------
\20\ A banking organization arrives at the exposure amount by
first determining the EE profile for each netting set. In general,
EE profile is determined by computing exposure distributions over a
set of future dates using Monte Carlo simulations, and the
expectation of exposure at each date is the simple average of all
Monte Carlo simulations for each date. The expiration of short-term
trades can cause the EE profile to decrease, even though a banking
organization is likely to replace short-term trades with new trades
(i.e., rollover). To account for rollover, a banking organization
converts the EE profile for each netting set into an effective EE
profile by applying a nondecreasing constraint to the corresponding
EE profile over the first year. The nondecreasing constraint
prevents the effective EE profile from declining with time by
replacing the EE amount at a given future date with the maximum of
the EE amounts across this and all prior simulation dates. The EEPE
for a netting set is the time-weighted average of the effective EE
profile over a one-year horizon. EEPE would be the appropriate loan
equivalent exposure in a credit risk capital calculation if the
following assumptions were true: There is no concentration risk,
systematic market risk, and wrong-way risk (i.e., the size of an
exposure is positively correlated with the counterparty's
probability of default). However, these conditions nearly never
exist with respect to a derivative contract. Thus, to account for
these risks, IMM requires a banking organization to multiply EEPE by
1.4.
---------------------------------------------------------------------------
F. Review of the Capital Rule's Treatment of Derivative Contracts
CEM was developed several decades ago and, as a result, does not
reflect recent market conventions and regulatory requirements that are
designed to reduce the risks associated with derivative contracts.\21\
For banking organizations with substantial derivatives portfolios in
particular, this can result in a significant mismatch between the risk
posed by these portfolios and the regulatory capital that the banking
organization must hold against them. For instance, CEM does not
differentiate between margined and unmargined derivative contracts, and
it does not function well with other regulatory requirements, including
the swap margin rule, which mandates the exchange of initial margin and
variation margin for specified covered swap entities.\22\ In addition,
the net-to-gross ratio under CEM does not recognize, in an economically
meaningful way, the risk-reducing benefits of a balanced derivative
portfolio (i.e., mixed long and short positions). Further, the agencies
developed the supervisory conversion factors provided under CEM prior
to the 2007-2008 financial crisis and they have not been recalibrated
to reflect stress volatilities observed in recent years.
---------------------------------------------------------------------------
\21\ The agencies initially adopted CEM in 1989. 54 FR 4168
(January 27, 1989) (OCC); 54 FR 4186 (January 27, 1989) (Board); 54
FR 11500 (March 21, 1989) (FDIC). The last significant update to CEM
was in 1995. 60 FR 46170 (September 5, 1995).
\22\ See supra n. 9.
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Although IMM is more risk-sensitive than CEM, IMM is more complex
and requires prior supervisory approval before an advanced approaches
banking organization may use it. Specifically, an advanced approaches
banking organization seeking to use IMM must demonstrate to its primary
federal supervisor that it has established and maintains an
infrastructure with risk measurement and management processes
appropriate for the firm's size and level of complexity.\23\
---------------------------------------------------------------------------
\23\ See 12 CFR 3.122 (OCC); 12 CFR 217.122 (Board); 12 CFR
324.122 (FDIC).
---------------------------------------------------------------------------
For these reasons, the Basel Committee developed SA-CCR and
published it as a final standard in 2014.\24\ Relative to CEM, SA-CCR
provides a more risk-sensitive approach to determining the replacement
cost and PFE for a derivative contract. Notably, SA-CCR improves
collateral recognition (e.g., by differentiating between margined and
unmargined derivative contracts); allows a banking organization to
recognize meaningful, risk-reducing relationships between derivative
contracts within a balanced derivative portfolio; and better captures
recently observed stress volatilities among the primary risk drivers
for derivative contracts. In addition, relative to IMM, SA-CCR provides
a standardized, nonmodelled approach that is more accessible to banking
organizations to determine the exposure amount for derivative
contracts.
---------------------------------------------------------------------------
\24\ ``The standardized approach for measuring counterparty
credit risk exposures,'' Basel Committee on Banking Supervision,
March 2014 (rev. April 2014), https://www.bis.org/publ/bcbs279.pdf.
See ``Foundations of the standardised approach for measuring
counterparty credit risk exposures'' (August 2014, rev. June 2017),
https://www.bis.org/publ/bcbs_wp26.pdf.
---------------------------------------------------------------------------
II. Standardized Approach for Counterparty Credit Risk
A. Key Concepts
1. Netting Sets
Under SA-CCR, a banking organization would calculate the exposure
amount of its derivative contracts at the netting set level. The Basel
Committee standard provides that a netting set may not be subject to
more than one margin agreement. Thus, a banking organization, under the
Basel Committee standard, would need to calculate the exposure amount
at the level of each margin agreement and not at the level of each
QMNA, regardless whether multiple margin agreements are under the same
QMNA. The agencies recognize, however, that the Basel Committee
standard does not reflect current industry practice and regulatory
requirements, in which QMNAs often cover multiple margin agreements to
order to reduce credit risk by increasing the net settlement of
derivative contracts. Accordingly, and as with CEM, the proposal would
allow a banking organization to calculate the exposure amount of
multiple derivative contracts under the same netting set so long as
each derivative contract is subject to the same QMNA. For purposes of
SA-CCR, a derivative contract that is not subject to a QMNA would
comprise a netting set of one derivative contract. Thus, the proposal
would define a netting set to mean either one derivative contract
between a banking organization and a single counterparty, or a group of
derivative contracts between a banking organization and a single
counterparty that are subject to a QMNA. The proposal would retain the
capital rule's current definition of a QMNA.
2. Hedging Sets
For the PFE calculation under SA-CCR, a banking organization would
fully
[[Page 64666]]
or partially net derivative contracts within the same netting set that
share similar risk factors. This approach would recognize that
derivative contracts with similar risk factors share economically
meaningful relationships (i.e., are more tightly correlated) and thus
netting would be appropriate. In contrast, CEM recognizes only 60
percent of the netting benefits of derivative contracts subject to a
QMNA, without accounting for relationships between derivative
contracts' underlying risk factors.
To effectuate this approach, the proposal would introduce the
concept of hedging sets, which would generally mean those derivative
contracts within the same netting set that share similar risk factors.
The proposal would define five types of hedging sets--interest rate,
exchange rate, credit, equity, and commodities--and would provide
formulas for netting within each hedging set. Each formula would be
particular to each hedging set type and would reflect regulatory
correlation assumptions between risk factors in the hedging set.
3. Derivative Contract Amount for the PFE Component Calculation
As with CEM, a banking organization would use an adjusted
derivative contract amount for the PFE component calculation under SA-
CCR. Unlike CEM, the agencies intend for the adjusted derivative
contract amount under SA-CCR to reflect, in general, a conservative
estimate of EEPE for a netting set composed of a single derivative
contract, assuming zero fair value and zero collateral. As part of the
estimate, SA-CCR would use updated supervisory factors that reflect
stress volatilities observed during the financial crisis. The
supervisory factors would reflect the variability of the primary risk
factor of the derivative contract over a one-year horizon. In addition,
SA-CCR would apply a separate maturity factor to each derivative
contract that would scale down, if necessary, the default one-year risk
horizon of the supervisory factor to the risk horizon appropriate for
the derivative contract. A banking organization would apply a positive
sign to the derivative contract amount if the derivative contract is
long the risk factor and a negative sign if the derivative contract is
short the risk factor. This adjustment, along with the assumption of
zero fair value and zero collateral, would allow a banking organization
to recognize offsetting and diversification between derivative
contracts that share similar risk factors (i.e., long and short
derivative contracts within the same hedging set would be able to fully
or partially offset one another).
4. Collateral Recognition and Differentiation Between Margined and
Unmargined Derivative Contracts
The proposal would make several improvements to the recognition of
collateral under SA-CCR. The proposal would account for collateral
directly within the SA-CCR exposure amount calculation, whereas under
CEM a banking organization recognizes the collateral only after the
exposure amount has been determined. For replacement cost, the proposal
would recognize collateral on a one-for-one basis. For PFE, SA-CCR
would introduce the concept of a PFE multiplier, which would allow a
banking organization to reduce the PFE amount through recognition of
overcollateralization, in the form of both variation margin and
independent collateral, and account for negative fair value amounts of
the derivative contracts within the netting set. In addition, the
proposal would differentiate between margined and unmargined derivative
contracts such that a netting set that is subject to a variation margin
agreement (as defined in the proposal) would always have a lower or
equal exposure amount than an equivalent netting set that is not
subject to a variation margin agreement.
B. Mechanics of the Standardized Approach for Counterparty Credit Risk
1. Exposure Amount
Under Sec. _.132(c)(5) of the proposed rule, the exposure amount
of a netting set would be equal to an alpha factor of 1.4 multiplied by
the sum of the replacement cost of the netting set and PFE of the
netting set. The can be represented as follows:
exposure amount = 1.4 * (replacement cost + PFE)
The alpha factor was included in the Basel Committee standard under
the view that a standardized approach, such as SA-CCR, should not
produce lower exposure amounts than a modelled approach. Therefore, to
instill a level of conservatism consistent with the Basel Committee
standard, the proposal would apply an alpha factor of 1.4 in order to
produce exposure measure outcomes that generally are no lower than
those amounts calculated using IMM. While the estimates of PFE under
SA-CCR are conservative in many cases, the estimates of the sum of the
replacement cost and PFE under SA-CCR would necessarily be close to
IMM's EEPE for netting sets where the replacement cost dominates
PFE.\25\ Thus, reducing the value of alpha in SA-CCR below 1.4 could
result in exposure amounts produced by SA-CCR that are smaller than
exposure amounts produced by IMM for such deep in-the-money netting
sets.
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\25\ For an unmargined netting set, IMM's EE profile starts at
t=0, which is the date at which replacement cost under SA-CCR is
calculated. For a deep in-the-money netting set, PFE would be much
smaller than replacement cost, while IMM's EE profile would not
increase significantly above replacement cost before declining (due
to cash flow payments and trade expiration), because IMM
volatilities typically are smaller than the volatilities implied by
SA-CCR's PFE. The nondecreasing constraint would not allow the
effective EE profile to drop below the replacement cost level,
resulting in IMM's EEPE being slightly above replacement cost. Thus,
both IMM's EEPE and SA-CCR's replacement cost plus PFE would be
slightly above replacement cost and, therefore, close to each other.
---------------------------------------------------------------------------
The exposure amount would be zero, however, for a netting set that
consists only of sold options in which the counterparties to the
options have paid the premiums up front and the options are not subject
to a variation margin agreement.
Question 3: The agencies invite comment on whether the objective of
ensuring that SA-CCR produces more conservative exposure amounts than
IMM is appropriate for the implementation of SA-CCR. Does the
incorporation of the alpha factor support this objective, why or why
not? Are there alternative measures the agencies could incorporate into
SA-CCR to support this objective? Are there other objectives regarding
the comparability of SA-CCR and IMM that the agencies should consider?
The agencies encourage commenters to provide appropriate data or
examples to support their response.
2. Replacement Cost
SA-CCR would provide separate formulas for replacement cost
depending on whether the counterparty to a banking organization is
required to post variation margin. In general, when a banking
organization is a net receiver of financial collateral, the amount of
financial collateral would be positive, which would reduce replacement
cost. Conversely, when the banking organization is a net provider of
financial collateral, the amount of financial collateral would be
negative, which would increase replacement cost. In all cases,
replacement cost cannot be lower than zero. In addition, for purposes
of calculating the replacement cost component (and the PFE multiplier),
the fair value amount of the derivative contract would exclude any
valuation adjustments. The purpose of excluding valuation adjustments
is to
[[Page 64667]]
arrive at the risk-free value of the derivative contract, and this
requirement would exclude credit valuation adjustments, among other
adjustments, as applicable.
Section _.2 of the proposed rule provides a definition of variation
margin and independent collateral, as well as the variation margin
amount and the independent collateral amount. The proposal would define
variation margin as financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided. Variation margin amount would mean the fair value amount of
the variation margin that a counterparty to a netting set has posted to
a banking organization less the fair value amount of the variation
margin posted by the banking organization to the counterparty.
Further, consistent with the capital rule, the amount of variation
margin included in the variation margin amount would be adjusted by the
standard supervisory haircuts under Sec. _.132(b)(2)(ii) of the
capital rule. The standard supervisory haircuts ensure that the
derivative contract remains appropriately collateralized from a
regulatory capital perspective, notwithstanding any changes in the
value of the financial collateral. In particular, the standard
supervisory haircuts address the possible decrease in the value of the
financial collateral received by a banking organization and an increase
in the value of the financial collateral posted by the banking
organization over a one-year time horizon.
The standard supervisory haircuts are based on a ten-business-day
holding period for derivative contracts, and the capital rule requires
a banking organization to adjust, as applicable, the standard
supervisory haircuts to align with the risk horizon of the associated
derivative contract. To be consistent with this proposal, the agencies
are proposing to revise the standard supervisory haircuts so that they
align with the maturity factor adjustments as provided under SA-CCR. In
particular, an unmargined derivative contract and a margined derivative
contract that is not a cleared transaction would receive a holding
period of 10 business days. A derivative contract that is a cleared
transaction would receive a holding period of five business days.\26\ A
banking organization would be required to use a holding period of 20
business days for collateral associated with a derivative contract that
is within a netting set that is composed of more than 5,000 derivative
contracts that are not cleared transactions, and if a netting set
contains one or more trades involving illiquid collateral or a
derivative contract that cannot be easily replaced. Notwithstanding the
aforementioned, a banking organization would be required to double the
applicable holding period if the derivative contract is subject to an
outstanding dispute over variation margin.
---------------------------------------------------------------------------
\26\ As described in section V of this preamble, the agencies
are proposing to apply a five-day holding period to all derivative
contracts that are cleared transactions, regardless whether the
method the banking organization uses to calculate the exposure
amount of the derivative contract.
---------------------------------------------------------------------------
The proposal would define independent collateral as financial
collateral, other than variation margin, that is subject to a
collateral agreement, or in which a banking organization has a
perfected, first-priority security interest or, outside of the United
States, the legal equivalent thereof (with the exception of cash on
deposit; and notwithstanding the prior security interest of any
custodial agent or any prior security interest granted to a CCP in
connection with collateral posted to that CCP), and the amount of which
does not change directly in response to the value of the derivative
contract or contracts that the financial collateral secures.
The proposal would define the net independent collateral amount as
the fair value amount of the independent collateral that a counterparty
to a netting set has posted to a banking organization less the fair
value amount of the independent collateral posted by the banking
organization to the counterparty, excluding such amounts held in a
bankruptcy remote manner,\27\ or posted to a qualifying central
counterparty (QCCP) and held in conformance with the operational
requirements in Sec. _.3 of the capital rule. As with variation
margin, independent collateral also would be subject to the standard
supervisory haircuts under Sec. _.132(b)(2)(ii) of the capital rule.
---------------------------------------------------------------------------
\27\ ``Bankruptcy remote'' is defined in Sec. _.2 of the
capital rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR
324.2 (FDIC).
---------------------------------------------------------------------------
Under Sec. _.132(c)(6)(ii) of the proposed rule, the replacement
cost of a netting set that is not subject to a variation margin
agreement is the greater of (1) the sum of the fair values (after
excluding any valuation adjustments) of the derivative contracts within
the netting set, less the net independent collateral amount applicable
to such derivative contracts, or (2) zero. This can be represented as
follows:
replacement cost = max{V-C; 0{time}
Where:
V is the fair values (after excluding any valuation adjustments) of
the derivative contracts within the netting set; and
C is the net independent collateral amount applicable to such
derivative contracts.
The same requirement would apply to a netting set that is subject
to a variation margin agreement under which the counterparty is not
required to post variation margin. In the latter case, C would also
include the negative amount of the variation margin that the banking
organization posted to the counterparty (thus increasing replacement
cost).
For netting sets subject to a variation margin agreement under
which the counterparty must post variation margin, the replacement
cost, as provided under Sec. _.132(c)(6)(i) of the proposed rule,
would equal the greater of (1) the sum of the fair values (after
excluding any valuation adjustments) of the derivative contracts within
the netting set less the sum of the net independent collateral amount
and the variation margin amount applicable to such derivative
contracts; (2) the sum of the variation margin threshold and the
minimum transfer amount applicable to the derivative contracts within
the netting set less the net independent collateral amount applicable
to such derivative contracts; or (3) zero. This can be represented as
follows:
replacement cost = max{V-C; VMT + MTA-NICA; 0{time}
Where:
V is the fair values (after excluding any valuation adjustments) of
the derivative contracts within the netting set;
VMT is the variation margin threshold applicable to the derivative
contracts within the netting set;
MTA is the minimum transfer amount applicable to the derivative
contracts within the netting set; and
C is the sum of the net independent collateral amount and the
variation margin amount applicable to such derivative contracts.
NICA is the net independent collateral amount applicable to such
derivative contracts.
The requirement for the replacement cost of a netting set subject
to a variation margin agreement is designed to account for the maximum
possible unsecured exposure amount of the netting set that would not
trigger a variation margin call. For example, a
[[Page 64668]]
derivative contract with a high variation margin threshold would have a
higher replacement cost compared to an equivalent derivative contract
with a lower variation margin threshold. Section _.2 of the proposed
rule would define the variation margin threshold and the minimum
transfer amount. The variation margin threshold would mean the amount
of the credit exposure of a banking organization to its counterparty
that, if exceeded, would require the counterparty to post variation
margin to the banking organization. The minimum transfer amount would
mean the smallest amount of variation margin that may be transferred
between counterparties to a netting set.
In the agencies' experience, variation margin agreements can
include variation margin thresholds that are set at such high levels
that the netting set is effectively unmargined since the counterparty
would never breach the threshold and be required to post variation
margin. The agencies are concerned that in such a case the variation
margin threshold would result in an unreasonably high replacement cost,
because it is not attributable to the risk associated with the
derivative contract but rather the terms of the variation margin
agreement. Therefore, the proposal would cap the exposure amount of a
netting set subject to a variation margin agreement at the exposure
amount of the same netting set calculated as if the netting set were
not subject to a variation margin agreement.\28\
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\28\ There could be a situation unrelated to the value of the
variation margin threshold in which the exposure amount of a
margined netting set would be greater than the exposure amount of an
equivalent unmargined netting set. For example, in the case of a
margined netting set composed of short-term transactions with a
residual maturity of 10 business days or less, the risk horizon
would be the MPOR, which the proposal would floor at 10 business
days. The risk horizon for an equivalent unmargined netting set also
would be equal to 10 business days because this would be the floor
for the remaining maturity of such a netting set. However, the
maturity factor for the margined netting set would be greater than
the one for the equivalent unmargined netting set because of the
application of a factor of 1.5 to margined derivative contracts. In
such an instance, the exposure amount of a margined netting set
would be more than the exposure amount of an equivalent unmargined
netting set by a factor of 1.5, thus triggering the cap. In
addition, in the case of disputes, the MPOR of a margined netting
set would be doubled, which could further increase the exposure
amount of a margined netting set composed of short-term transactions
with a residual maturity of 10 business days or less above an
equivalent unmargined netting set. The agencies believe, however,
that such instances rarely occur and thus would have minimal effect
on banking organizations' regulatory capital.
---------------------------------------------------------------------------
For a netting set that is subject to multiple variation margin
agreements, or a hybrid netting set, a banking organization would
determine replacement cost using the methodology described in Sec.
_.132(c)(11)(i) of the proposed rule. A hybrid netting set is a netting
set composed of at least one derivative contract subject to variation
margin agreement under which the counterparty must post variation
margin and at least one derivative contract that is not subject to such
a variation margin agreement. In particular, a banking organization
would use the methodology described in Sec. _.132(c)(6)(ii) for
netting sets subject to a variation margin agreement, except that the
variation margin threshold would equal the sum of the variation margin
thresholds of all the variation margin agreements within the netting
set and the minimum transfer amount would equal the sum of the minimum
transfer amounts of all the variation margin agreements within the
netting set.
For multiple netting sets subject to a single variation margin
agreement, a banking organization would assign a single replacement
cost to the multiple netting sets, according to the following formula,
as provided under Sec. _.132(c)(10)(i) of the proposed rule:
Replacement Cost = max{[Sigma]NSmax{VNS; 0{time} -max{CMA; 0{time} ;
0{time} + max{[Sigma]NSmin{VNS; 0{time} -min{CMA; 0{time} ; 0{time} ,
Where:
NS is each netting set subject to the variation margin agreement MA;
VNS is the sum of the fair values (after excluding any
valuation adjustments) of the derivative contracts within the
netting set NS; and
CMA is the sum of the net independent collateral amount
and the variation margin amount applicable to the derivative
contracts within the netting sets subject to the single variation
margin agreement.
The component max{SNS max{VNS; 0{time} -max{CMA; 0{time} ; 0{time}
reflects the exposure amount produced by the netting sets that have
current positive market value. The exposure amount can be offset by
variation margin and independent collateral when the banking
organization is the net receiver of such amounts (i.e., when CMA is
positive). However, netting sets that have current negative market
value would not be allowed to offset the exposure amount. The component
max{SNS min{VNS; 0{time} -min{CMA; 0{time} ; 0{time} reflects the
exposure amount produced when the banking organization posts variation
margin and independent collateral to its counterparty (i.e., this
component contributes to replacement cost only in instances when CMA is
negative), and the exposure amount would be offset by the netting sets
that have current negative market value.
Question 4: What are the potential consequences of the proposal to
cap the exposure amount for a netting set subject to a variation margin
agreement at the exposure amount for such netting set in the absence of
a variation margin agreement?
Question 5: What are the potential consequences of the proposal to
exclude from the fair value amount of the derivative contract any
valuation adjustments? What are the potential consequences of instead
using the market value of the derivative contract less any valuation
adjustments that are specific to the banking organization?
Question 6: The agencies invite comment on the proposed alignment
of the standard supervisory haircuts with the maturity factor
adjustments. How could the agencies better align the standard
supervisory haircuts under the capital rule with the maturity factor
adjustments provided under SA-CCR?
Question 7: The agencies invite comment on the proposed definitions
included in this proposal. What, if any, alternative definitions should
the agencies consider, particularly to achieve greater consistency
across other agencies' regulations?
3. Aggregated Amount and Hedging Set Amounts
Under Sec. _.132(c)(7) of the proposed rule, the PFE of a netting
set would be the product of the PFE multiplier and the aggregated
amount. The proposal would define the aggregated amount as the sum of
all hedging set amounts within the netting set. This can be represented
as follows:
PFE = PFE multiplier * aggregated amount,
Where:
aggregated amount is the sum of each hedging set amount within the
netting set.
To determine the hedging set amounts, a banking organization would
first group into separate hedging sets derivative contracts that share
similar risk factors based on the following asset classes: Interest
rate, exchange rate, credit, equity, and commodities. Basis derivative
contracts and volatility derivative contracts would require separate
hedging sets. A banking organization would then determine each hedging
set amount using asset-class specific formulas that allow for full or
partial netting. If the risk of a derivative contract materially
depends on more than one risk factor, whether interest rate, exchange
rate, credit, equity, or commodity risk factor, a banking
[[Page 64669]]
organization's primary federal regulator \29\ may require the banking
organization to include the derivative contract in each appropriate
hedging set. The hedging set amount of a hedging set composed of a
single derivative contract would equal the absolute value of the
adjusted derivative contract amount of the derivative contract.
---------------------------------------------------------------------------
\29\ For the capital rule, the Board is the primary federal
regulator for all bank and savings and loan holding companies,
intermediate holding companies of foreign banks, and state member
banks; the OCC is the primary federal regulator for all national
banks and federal thrifts; and the FDIC is the primary federal
regulatory for all state nonmember banks.
---------------------------------------------------------------------------
Section _.132(c)(2)(iii) of the proposal provides the respective
hedging set definitions. Specifically, an interest rate hedging set
would mean all interest rate derivative contracts within a netting set
that reference the same reference currency. Thus, there would be as
many interest rate hedging sets in a netting set as distinct currencies
referenced by the interest rate derivative contracts. A credit
derivative hedging set would mean all credit derivative contracts
within a netting set. Similarly, an equity derivative hedging set would
mean all equity derivative contracts within a netting set. Thus, there
could be at most one equity hedging set and one credit hedging set
within a netting set. A commodity derivative contract hedging set would
mean all commodity derivative contracts within a netting set that
reference one of the following commodity classes: Energy, metal,
agricultural, or other commodities. Thus, there could be no more than
four commodity derivative contract hedging sets within a netting set.
The proposal would define an exchange rate hedging set as all
exchange rate derivative contracts within a netting set that reference
the same currency pair. Thus, under this approach, there could be as
many exchange rate hedging sets within a netting set as distinct
currency pairs referenced by the exchange rate derivative contracts.
This treatment would be generally consistent with the Basel Committee's
standard. The agencies recognize, however, that the proposed approach
to grouping exchange rate derivative contracts into hedging sets would
not recognize economic relationships of exchange rate chains (i.e.,
when more than one currency pair can offset the risk of another). For
example, a Yen/Dollar forward contract and a Dollar/Euro forward
contract, taken together, may be economically equivalent, with properly
set notional amounts, to a Yen/Euro forward contract. To capture this
economic relationship, the agencies are seeking comment on an
alternative definition of an exchange rate hedging set that differs
from the one in the Basel Committee's standard. Under the alternative
definition, an exchange rate derivative contract hedging set would mean
all exchange rate derivative contracts within a netting set that
reference the same non-U.S. currency. Thus, a banking organization
would be required, under the proposed alternative definition, to
include in separate hedging sets an exchange rate derivative contract
that references two or more foreign currencies. For example, a banking
organization would include the Yen/Euro forward contract both in one
hedging set consisting of Yen derivative contracts and another hedging
set consisting of Euro derivative contracts. Under this alternative
approach, there could be as many exchange rate derivative contract
hedging sets as non-U.S. referenced currencies.
The proposal sets forth treatments for volatility derivative
contracts and basis derivative contracts separate from the treatment
for the risk factors described above. A basis derivative contract would
mean a non-foreign-exchange derivative contract (i.e., the contract is
denominated in a single currency) in which the cash flows of the
derivative contract depend on the difference between two risk factors
that are attributable solely to one of the following derivative asset
classes: Interest rate, credit, equity, or commodity. A basis
derivative contract hedging set would mean all basis derivative
contracts within a netting set that reference the same pair of risk
factors and are denominated in the same currency. A volatility contract
would mean a derivative contract in which the payoff of the derivative
contract explicitly depends on a measure of the volatility of an
underlying risk factor to the derivative contract. Examples of
volatility derivative contracts include variance and volatility swaps
and options on realized or implied volatility. A volatility derivative
contract hedging set would mean all volatility derivative contracts
within a netting set that reference one of interest rate, exchange
rate, credit, equity, or commodity risk factors, separated according to
the requirements under Sec. _.132(c)(2)(iii)(A)-(E) of the proposed
rule.
Question 8: Should SA-CCR include the alternative treatment for
exchange rate derivative contracts in order to recognize the economic
equivalence of chains of exchange rate transactions? What would be the
benefit of including such an alternative treatment? Commenters
providing information regarding an alternative treatment are encouraged
to provide support for such treatment, together with information
regarding any associated burden and complexity.
a. Interest Rate Derivative Contracts
The hedging set amount for interest rate derivative contracts would
be determined under Sec. _.132(c)(8)(i) of the proposed rule. The
agencies recognize that interest rate derivative contracts with close
tenors (i.e., the amount of time remaining before the end date of the
derivative contract) are generally highly correlated, and thus provide
a greater offset relative to interest rate derivative contracts that do
not have close tenors. Accordingly, the formula to determine the
hedging set amount for interest rate derivative contracts would permit
full offsetting within a tenor category, and partial offsetting across
tenor categories. The tenor categories are less than one year, between
one and five years, and more than five years. The proposal would use a
correlation factor of 70 percent across adjacent tenor categories and a
correlation factor of 30 percent across nonadjacent tenor
categories.\30\ The tenor of a derivative contract would be based on
the period between the present date and the end date of the derivative
contract, which, under the proposal, would mean the last date of the
period referenced by the derivative contract, or if the derivative
contract references another instrument, the period referenced by the
underlying instrument.
---------------------------------------------------------------------------
\30\ See ``Foundations of the standardised approach for
measuring counterparty credit risk exposures.''
---------------------------------------------------------------------------
Accordingly, a banking organization would calculate the hedging set
amount for interest rate derivative contracts according to the
following formula:
[[Page 64670]]
[GRAPHIC] [TIFF OMITTED] TP17DE18.000
The proposal also includes a simpler formula that does not provide
an offset across tenor categories. In this case, the hedging set amount
of the interest rate derivative contracts would equal the sum of the
absolute amounts of each tenor category, which would be the sum of the
adjusted derivative contract amounts within each respective tenor
category. The simpler formula would always result in a more
conservative measure of the hedging set amount for interest rate
derivative contracts of different tenor categories but may be less
burdensome for banking organizations with smaller interest rate
derivative contract portfolios. Under the proposal, a banking
organization could elect to use this simpler formula for some or all of
its interest rate derivative contracts.
b. Exchange Rate Derivative Contracts
The hedging set amount for exchange rate derivative contracts would
be determined under Sec. _.132(c)(8)(ii) of the proposed rule. The
agencies recognize that exchange rate derivative contracts that
reference the same currency pair generally are driven by the same
market factor (i.e., the exchange spot rate between these currencies)
and thus are highly correlated. Therefore, the formula to determine the
hedging set amount for exchange rate derivative contracts would allow
for full offsetting within the exchange rate derivative contract
hedging set. Accordingly, the hedging set amount for exchange rate
derivative contracts would equal the absolute value of the sum of the
adjusted derivative contract amounts within the hedging set.
c. Credit Derivative Contracts and Equity Derivative Contracts
A banking organization would use the same formula to determine the
hedging set amount for both its credit derivative contracts and equity
derivative contracts. The formula would be provided under Sec.
_.132(c)(8)(iii) of the proposed rule. The formula would allow for full
offsetting for credit or equity contracts referencing the same entity,
and would use a single-factor model to allow for partial offsetting
when aggregating across distinct reference entities. The proposed
single-factor model recognizes that credit spreads and equity prices of
different entities within a hedging set are, on average, positively
correlated.\31\ The proposed
[[Page 64671]]
single-factor model would use a single systematic component to describe
joint movement of credit spreads or equity prices that are responsible
for positive correlations, and would use an idiosyncratic component to
describe entity-specific dynamics of each derivative contract.
---------------------------------------------------------------------------
\31\ The dependence between N random variables can be described
by an NxN correlation matrix. In the most general case, such a
correlation matrix requires estimation of N*(N-1)/2 individual
correlation parameters. Estimating these correlations is problematic
when N is large. Factor models are a popular means of reducing the
number of independent correlation parameters by assuming that each
random variable is driven by a combination of a small number of
systematic factors (which are the same for all N random variables)
and an idiosyncratic factor (which is unique to each random variable
and is independent from all other factors). The simplest factor
model is a single-factor model that assumes that a single systematic
factor drives all N random variables.
---------------------------------------------------------------------------
The proposal would provide supervisory correlation parameters for
credit derivative contracts and equity derivative contracts that depend
on whether the derivative contract references a single name entity or
an index. A single name entity credit derivative and a single name
entity equity derivative would receive a correlation factor of 50
percent, while a credit index and equity index would receive a
correlation factor of 80 percent, the higher number reflecting partial
diversification of idiosyncratic risk within an index. The pairwise
correlation between two entities is the product of the corresponding
correlation factors, so that the pairwise correlation between two
single name entities is 25 percent, between one single name entity and
one index is 40 percent, and between two indices is 64 percent. Thus,
the pairwise correlation between two single name entities is less than
the pairwise correlation between an entity and an index, which is less
than the pairwise correlation between two indices. The application of a
higher correlation factor does not necessarily result in a higher
exposure amount, as there would be a reduction of the exposure amount
for balanced portfolios but an increase in the exposure amount for
directional portfolios.\32\
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\32\ A higher correlation factor means that the underlying risk
factors are more closely aligned. For a directional portfolio, more
alignment between the risk factors would result in a more
concentrated risk, leading to a higher exposure amount. For a
balanced portfolio, more alignment between the risk factors would
result in more offsetting of risk, leading to a lower exposure
amount.
---------------------------------------------------------------------------
A banking organization would calculate the hedging set amount for a
credit derivative contract hedging set or an equity derivative contract
hedging set according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.001
Where:
k is each reference entity within the hedging set;
K is the number of reference entities within the hedging set;
AddOn (Refk) equals the sum of the adjusted derivative contract
amounts for all derivative contracts within the hedging set that
reference reference entity k; and
rk equals the applicable supervisory correlation factor, as provided
in Table 2.
d. Commodity Derivative Contracts
A banking organization would use a similar single-factor model to
determine the hedging set amount for commodity derivative contracts as
it would use for credit derivative contracts and equity derivative
contracts. The hedging set amount of commodity derivative contracts
would be determined under Sec. _.132(c)(8)(iv) of the proposed rule.
Under the proposal, a banking organization would group commodity
derivatives into one of four hedging sets based on the following
commodity classes: Energy, metal, agricultural and other. Under the
single-factor model used for commodity derivative contracts, a banking
organization would be able to offset fully all derivative contracts
within a hedging set that reference the same commodity type; however,
the banking organization could only partially offset derivative
contracts within a hedging set that reference different commodity
types. For example, a hedging set composed of energy commodities may
include crude oil derivatives and coal derivatives. Under the proposal,
a banking organization could fully offset all crude oil derivatives;
however, it could only partially offset a crude oil derivative against
a coal derivative. In addition, a banking organization cannot offset
commodity derivatives that belong to different hedging sets (i.e., a
forward contract on crude oil cannot hedge a forward contract on corn).
The agencies recognize that specifying individual commodity types
is operationally difficult. Indeed, it is likely impossible to specify
sufficiently all relevant distinctions between commodity types so that
all basis risk is captured. Accordingly, the proposal would allow
banking organizations to recognize commodity types without regard to
characteristics such as location or quality. For example, a banking
organization may recognize crude oil as a commodity type, and would not
need to distinguish further between West Texas Intermediate and Saudi
Light crude oil. The agencies expect to monitor the commodity-type
distinctions made within the industry to ensure that they are
sufficiently correlated for full-offset treatment under SA-CCR.
The agencies are proposing not to provide separate supervisory
factors for electricity and oil/gas components of the energy commodity
class, as provided under the Basel Committee standard. Rather, the
agencies are proposing to provide a single supervisory factor for an
energy commodity class that generally would include derivative
contracts that reference electricity and oil/gas. In addition, the
agencies are proposing not to provide more granular commodity
categories than those provided under the Basel Committee's standard.
The agencies believe that more granular commodity classes could pose
operational challenges for banking organizations and could negate
certain hedging benefits that may otherwise be available. This is
because SA-CCR only permits offsetting within commodity classes, and
additional commodity classes thereby may reduce the derivative
contracts across which a banking organization may hedge.
A banking organization would calculate the hedging set amount for a
commodity derivative contract hedging set according to the following
formula:
[[Page 64672]]
[GRAPHIC] [TIFF OMITTED] TP17DE18.002
Where:
k is each commodity type within the hedging set;
K is the number of commodity types within the hedging set;
AddOn (Typek) equals the sum of the adjusted derivative contract
amounts for all derivative contracts within the hedging set that
reference commodity type k; and
r equals the applicable supervisory correlation factor, as provided
in Table 2.
Question 9: What other commodity classes should the agencies
consider for hedging set treatment, taking into account operational
challenges for banking organizations and potential hedging benefits of
the derivative contracts? What would be the consequences of not
specifying the commodity types within each commodity class that are
eligible for full offsetting? What level of granularity regarding the
attributes of a commodity type would be required to appropriately
distinguish among them?
4. PFE Multiplier
Under SA-CCR, the aggregated amount formula would not recognize
financial collateral and would assume a zero market value for all
derivative contracts. However, excess collateral and negative fair
value of the derivative contracts within the netting set reduce PFE.
This reduction in PFE is achieved through the PFE multiplier, which
would recognize, if present, the amount of excess collateral available
and the negative fair value of the derivative contracts within the
netting set.
Under the proposal, the PFE multiplier would decrease exponentially
from a value of one as the value of the financial collateral held
exceeds the net fair value of the derivative contracts within the
netting set, subject to a floor of 0.05. The PFE multiplier would
decrease as the net fair value of the derivative contracts within the
netting set decreases below zero, to reflect that ``out-of-the-money''
transactions have less chance to return to a positive, ``in-the-money''
value. Specifically, when the component V-C is greater than zero, the
multiplier would be equal to one. When the component V-C is less than
zero, the multiplier would be less than one and would decrease
exponentially in value as the absolute value of V-C increases. The PFE
multiplier would approach the floor of 0.05 as the absolute value of V-
C becomes very large as compared with the aggregated amount of the
netting set. Thus, the combination of the exponential function and the
floor provides a sufficient level of conservatism by prohibiting overly
favorable decreases in PFE when excess collateral increases and
preventing PFE from reaching zero at any amounts of margin.
Under Sec. _.132(c)(7)(i) of the proposal, a banking organization
would calculate the PFE multiplier according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.003
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
Question 10: Can the PFE multiplier be calibrated to more
appropriately recognize the risk-reducing effects of collateral and a
netting set with a negative market value for purposes of the PFE
calculation? Is the 5 percent floor appropriate, particularly in view
of the exponential functioning of the formula for PFE multiplier, why
or why not? Commenters are encouraged to provide data to support their
responses.
5. PFE Calculation for Nonstandard Margin Agreements
When a single variation margin agreement covers multiple netting
sets, the parties exchange variation margin based on the aggregated
market value of the netting sets. Thus, netting sets with positive and
negative market values can offset one another to reduce the amount of
variation margin that the parties must exchange. However, a banking
organization's exposure amount for a netting set is floored by zero.
Thus, for purposes of determining a banking organization's aggregate
exposure amount, a netting set with a negative market value cannot
offset a netting set with a positive market value. Therefore, in cases
when a single variation agreement covers multiple setting sets and at
least one netting set has a negative market value, the amount of
variation margin exchanged between the parties will be insufficient
relative to the banking organization's exposure amount for the netting
sets.\33\ Under Sec. _.132(c)(10)(ii) of the proposed rule, for
multiple netting sets covered by a single variation margin agreement
such that the banking organization's counterparty must post variation
margin, a banking organization would be required to assign a single PFE
equal to the sum of PFEs for each such netting set calculated as if
none of the derivative contracts within the netting set are subject to
a variation margin agreement.
---------------------------------------------------------------------------
\33\ For example, consider a variation margin agreement with a
zero threshold amount that covers two netting sets, one with a
market value of 100 and the other with a market value of negative
100. The aggregate market value of the netting sets would be zero
and thus no variation margin would be exchanged. However, the
banking organization's aggregate exposure amount for these netting
sets would be equal to 100 because the negative market value of the
second netting set would not be available to offset the positive
market value of the first netting set. In the event of default of
the counterparty, the banking organization would pay the
counterparty 100 for the second netting set and would be exposed to
a loss of 100 on the first netting set.
---------------------------------------------------------------------------
Since swap margin requirements came into effect in September 2016,
the amounts of netting agreements that are subject to more than one
variation margin agreement and hybrid netting sets have increased.
While all derivative contracts within a netting set can fully offset
each other in the replacement cost component calculation, regardless of
whether the netting set is subject to multiple variation margin
agreements or is a hybrid netting set, margined derivative contracts
cannot offset unmargined derivative contracts in the
[[Page 64673]]
PFE component calculation because of different applicable risk
horizons. Similarly, derivative contracts with different MPORs cannot
offset each other.
Therefore, the agencies are proposing, under Sec. _.132(c)(11)(ii)
of the proposed rule, that for a netting set subject to multiple
variation margin agreements such that the counterparty to each
variation margin agreement must post variation margin, or a netting set
composed of at least one derivative contract subject to a variation
margin agreement under which the counterparty to the derivative
contract must post variation margin and at least one derivative
contract that is not subject to such a variation margin agreement, a
banking organization must divide the netting set into sub-netting sets
and calculate the aggregated amount for each sub-netting set.
All derivative contracts within the netting set that are not
subject to a variation margin agreement or that are subject to a
variation margin agreement under which the counterparty is not required
to post variation margin would form a single sub-netting set. A banking
organization would calculate the aggregated amount for this sub-netting
set as if the netting set were not subject to a variation margin
agreement. All derivative contracts within the netting set that are
subject to variation margin agreements under which the counterparty
must post variation margin and that share the same MPOR value would
form another sub-netting set. A banking organization would calculate
the aggregated amount for this sub-netting set as if the netting set is
subject to a variation margin agreement, using the MPOR value shared by
the derivative contracts within the netting set. A banking organization
would calculate the PFE multiplier at the netting set level.
6. Adjusted Derivative Contract Amount
The agencies intend for the adjusted derivative contract amount to
represent a conservative estimate of EEPE of a netting set consisting
of a single derivative contract, assuming zero market value and zero
collateral, that is either positive (if a long position) or negative
(if a short position).\34\ The proposal would calculate the adjusted
derivative contract amount as a product of four quantities: The
adjusted notional amount, the applicable supervisory factor, the
applicable supervisory delta adjustment, and the maturity factor. This
can be represented as follows:
\34\ For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), each standard
option component would be treated as a separate derivative contract.
For a derivative contract that includes multiple-payment options,
(such as interest rate caps and floors) each payment option could be
represented as a combination of effective single-payment options
(such as interest rate caplets and floorlets). Linear derivative
contracts (such as swaps) would not be decomposed into components.
---------------------------------------------------------------------------
adjusted derivative contract amount = di * [delta]i * MFi * SFi
Where:
di is the adjusted notional amount;
[delta]i is the applicable supervisory delta adjustment;
MFi is the applicable maturity factor; and
SFi is the applicable supervisory factor.
The adjusted notional amount accounts for the size of the
derivative contract and reflects attributes of the most common
derivative contracts in each asset class. The supervisory factor would
convert the adjusted notional amount of the derivative contract into an
EEPE based on the measured volatility specific to each asset class over
a one-year horizon.\35\ Multiplication by the supervisory delta
adjustment accounts for the sensitivity of a derivative contract
(scaled to unit size) to the underlying primary risk factor, including
the correct sign (positive or negative) to account for the direction of
the derivative contract amount relative to the primary risk factor.\36\
Finally, multiplication by the maturity factor scales down, if
necessary, the derivative contract amount from the standard one-year
horizon used for supervisory factor calibration to the risk horizon
relevant for a given contract. The adjusted derivative contract amount
is determined under Sec. _.132(c)(9) of the proposed rule.
---------------------------------------------------------------------------
\35\ Specifically, the supervisory factors are intended to
reflect the EEPE of a single at-the-money linear trade of unit size,
zero market value and one-year maturity referencing a given risk
factor in the absence of collateral.
\36\ Sensitivity of a derivative contract to a risk factor is
the ratio of the change in the market value of the derivative
contract caused by a small change in the risk factor to the value of
the change in the risk factor. In a linear derivative contract, the
payoff of the derivative contract moves at a constant rate with the
change in the value of the underlying risk factor. In a nonlinear
contract, the payoff of the derivative contract does not move at a
constant rate with the change in the value of the underlying risk
factor. The sensitivity is positive if the derivative contract is
long the risk factor and negative if the derivative contract is
short the risk factor.
---------------------------------------------------------------------------
a. Adjusted Notional Amount
A banking organization would apply the same formula to interest
rate derivative contracts and credit derivative contracts to arrive at
the adjusted notional amount. For such contracts, the adjusted notional
amount would equal the product of the notional amount of the derivative
contract, as measured in U.S. dollars, using the exchange rate on the
date of the calculation, and the supervisory duration. The agencies
intend for the supervisory duration to recognize that interest rate
derivative contracts and credit derivative contracts with a longer
tenor would have a greater degree of variability than an identical
derivative contract with a shorter tenor for the same change in the
underlying risk factor (interest rate or credit spread).
The supervisory duration would be calculated for the period that
starts at S and ends at E. S would be equal to the number of business
days between the present date and the start date for the derivative
contract, or zero if the start date has passed, and E would be equal to
the number of business days from the present date until the end date
for the derivative contract. The supervisory duration is based on the
assumption of a continuous stream of equal payments and a constant
continuously compounded interest rate of 5 percent. The exponential
function provides discounting for S and E at 5 percent continuously
compounded. In all cases, the supervisory duration is floored at 10
business days (or 0.04, based on an average of 250 business days per
year).
The supervisory duration formula is provided as follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.004
Where:
S is the number of business days from the present day until the
start date for the derivative contract, or zero if the start date
has already passed; and
E is the number of business days from the present day until the end
date for the derivative contract.
[[Page 64674]]
For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount would
equal the time-weighted average of the contract notional amounts of
such a swap over the remaining life of the swap. For an interest rate
derivative contract or credit derivative contract that is a leveraged
swap, in which the notional amounts of all legs of the derivative
contract are divided by a factor and all rates of the derivative
contract are multiplied by the same factor, the notional amount would
equal the notional amount of an equivalent unleveraged swap.
For an exchange rate derivative contract, the adjusted notional
amount would equal the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. In general, the
non-U.S. dollar denominated currency leg is the source of exchange rate
volatility. If both legs of the exchange rate derivative contract are
denominated in currencies other than U.S. dollars, the adjusted
notional amount of the derivative contract would be the largest leg of
the derivative contract, measured in U.S. dollars. Under the agencies'
alternative approach for treating exchange rate derivative contracts
discussed above, the adjusted notional amount of an exchange rate
derivative contract would be the notional amount of the derivative
contract that is denominated in the foreign currency of the hedging
set, as measured in U.S. dollars using the exchange rate on the date of
the calculation. For an exchange rate derivative contract with multiple
exchanges of principal, the notional amount would equal the notional
amount of the derivative contract multiplied by the number of exchanges
of principal under the derivative contract. For an equity derivative
contract or a commodity derivative contract, the adjusted notional
amount is the product of the fair value of one unit of the reference
instrument underlying the derivative contract and the number of such
units referenced by the derivative contract. The proposed treatment is
designed to reflect the current price of the underlying reference
entity. For example, if a banking organization has a derivative
contract that references 15,000 pounds of frozen concentrated orange
juice currently priced at $0.0005 a pound then the adjusted notional
amount would be $75.
The payoff of a volatility derivative contract generally is
determined based on a notional amount and the realized or implied
volatility (or variance) referenced by the derivative contract and not
necessarily the unit price of the underlying reference entity.
Accordingly, for an equity derivative contract or a commodity
derivative contract that is a volatility derivative contract, a banking
organization would be required to replace the unit price with the
underlying volatility referenced by the volatility derivative contract
and replace the number of units with the notional amount of the
volatility derivative contract.
The agencies anticipate that for most derivative contracts banking
organizations would be able to determine the adjusted notional amount
using one of the formulas or methodologies described above. The
agencies recognize, however, that such approaches may not be applicable
to all types of derivative contracts, and that a different approach may
be necessary to determine the adjusted notional amount of a derivative
contract. In such a case, the agencies would expect a banking
organization to consult with its appropriate federal supervisor prior
to using an alternative approach to the formulas or methodologies
described above.
Question 11: The agencies invite comment on the proposed approaches
to determine the adjusted notional amount of derivative contracts. In
particular, how can the agencies improve the approaches set forth in
the proposal to determine the adjusted notional amount for nonstandard
derivative contracts so that they are appropriate for such
transactions, including using formulas of the market value of
underlying contracts? What, if any, nonstandard derivative contracts
are not addressed by the proposal, and what approaches should be used
to determine the adjusted notional amount for those contracts? Please
provide examples and descriptions of how such adjusted notional amounts
would be determined.
b. Supervisory Factor
Table 2 to Sec. _.132 of the proposed rule provides the proposed
supervisory factors. The agencies are proposing to use the same
supervisory factors provided in the Basel Committee standard, with the
exception of the supervisory factors for credit derivative contracts
that reference single-name entities, which are based on the applicable
credit rating of the reference entity.\37\ Section 939A of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
prohibits the use of credit ratings in federal regulations, and
therefore, the agencies are unable to propose implementing this feature
of the Basel Committee standard.\38\ Accordingly, the agencies are
proposing an approach that satisfies the requirements of section 939A
while allowing for a level of granularity among the supervisory factors
applicable to single-name credit derivatives that is generally
consistent with the Basel Committee standard.
---------------------------------------------------------------------------
\37\ Specifically, the BCBS supervisory factors are as follow
(in percent): AAA and AA--0.38, A--0.42; BBB--0.54; BB--1.06; B--
1.6; CCC--6.0.
\38\ Public Law 11-203, 124 Stat. 1376 (2010), Sec. 939A. This
provision is codified as part of the Securities Exchange Act of 1934
at 15 U.S.C. 78o-7.
---------------------------------------------------------------------------
Specifically, the agencies are proposing to apply a supervisory
factor to single-name credit derivative contracts based on the
following categories: Investment grade, speculative grade, and sub-
speculative grade. For credit derivative contracts that reference
indices, the agencies are proposing to apply a higher supervisory
factor to speculative grade indices than investment grade indices,
because of the additional risk present with speculative grade credits.
The proposal would maintain the current definition of investment grade
in the capital rule and would propose new definitions for speculative
grade and sub-speculative grade.
The investment grade category would capture single-name credit
derivative contracts consistent with the three highest supervisory
factor categories under the Basel Committee standard. The capital rule
defines investment grade to mean that the entity to which the banking
organization is exposed through a loan or security, or the reference
entity with respect to a credit derivative contract, has adequate
capacity to meet financial commitments for the projected life of the
asset or exposure. Such an entity or reference entity has adequate
capacity to meet financial commitments, as the risk of its default is
low and the full and timely repayment of principal is expected.\39\
---------------------------------------------------------------------------
\39\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR
324.2 (FDIC).
---------------------------------------------------------------------------
The agencies intend for the speculative grade category to cover
single-name credit derivative contracts consistent with the next two
lower supervisory factor categories under the Basel Committee standard.
The proposal would define speculative grade to mean that the reference
entity has adequate capacity to meet financial commitments in the near
term, but is vulnerable to adverse economic conditions, such that
should economic conditions deteriorate, the reference entity would
present an elevated default risk. The agencies
[[Page 64675]]
intend for the sub-speculative grade category to cover the lowest
supervisory factor category under the Basel Committee standard. The
proposal would define sub-speculative grade to mean that the reference
entity depends on favorable economic conditions to meet its financial
commitments, such that should economic conditions deteriorate, the
reference entity likely would default on its financial commitments. The
agencies believe that each of the proposed categories include exposures
that perform largely in accordance with the performance criteria that
would define each category under the proposed rule, and therefore would
result in capital requirements that are largely equivalent to those
resulting from application of the supervisory factors under the Basel
Committee standard.
To determine the supervisory factor that would apply to the
investment and speculative grade categories, the agencies reviewed
ratings issuance data from 2012 to 2017, using information made
publicly available by the Depository Trust & Clearing Corporation
(DTCC).\40\ The agencies used the DTCC data to determine the weighted-
average supervisory factor for the investment and speculative grade
categories, and rounded that supervisory factor to the nearest tenth.
The agencies are proposing to retain the supervisory factor from the
Basel Committee standard for the sub-speculative grade category,
because that category would consist only of single name credit
derivatives with the lowest credit quality.
---------------------------------------------------------------------------
\40\ Markit North America, Inc., accessed via Wharton Research
Data Services (WRDS), wrds-web.wharton.upenn.edu/wrds/about/databaselist.cfm.
---------------------------------------------------------------------------
The agencies considered using the same investment grade/non-
investment grade distinction as provided under the standardized
approach for determining whether a guarantor is an eligible guarantor
for purposes of the rule. However, the agencies are concerned that this
approach would not provide for sufficient risk differentiation across
credit derivative products. The agencies also considered calibrating
the supervisory factor for the investment and speculative grade
categories by using a simple average of the ratings issued in
accordance with the DTCC data, or the most conservative supervisory
factor applicable to the credit ratings that mapped to each category.
For example, if for purposes of the investment grade category the DTCC
data demonstrated that the average rating in that category is AA (using
a simple average of all ratings issued for single-name credit
derivatives), the proposal would apply a 0.38 percent supervisory
factor to investment grade single-name credit derivatives, because that
supervisory factor corresponds to a AA rating under the Basel Committee
standard. Under the other alternative considered, the proposal would
apply the most conservative (i.e., stringent) supervisory factor among
the supervisory factors that apply to a given category. Under this
approach, a supervisory factor of 1.6 percent would apply to
speculative grade single-name credit derivatives, as that is the most
stringent supervisory factor under the Basel Committee standard that
corresponds to the categories intended to be captured by the term
``speculative grade.'' The agencies believe, however, that the
weighted-average approach more accurately reflects the ratings issuance
data and therefore would more closely align to the single-name credit
derivatives held in banking organizations' derivatives portfolios.
The agencies expect that banking organizations would conduct their
own due diligence to determine the appropriate category for a single-
name credit derivative, in view of the performance criteria in the
definitions for each category under the proposed rule. Although a
banking organization would be able to consider the credit rating for a
single-name credit derivative in making that determination, the credit
rating should be part of a multi-factor analysis. In addition, the
agencies would expect a banking organization to support its analysis
and assignment of the respective credit categories.
Interest rate derivative contracts and exchange rate derivative
contracts would each be subject to a single supervisory factor. Equity
derivative contracts that reference single-name equities would be
subject to a higher supervisory factor than derivative contracts that
reference equity indices in recognition of the effect of
diversification in the index. Commodity derivative contracts that
reference energy would receive a higher supervisory factor than
commodity derivative contracts that reference metals, agriculture, and
other commodities (each of which would receive the same supervisory
factor), to reflect the observed additional volatility inherent in the
energy markets.
For volatility derivative contracts, a banking organization would
multiply the applicable supervisory factor based on the asset class
related to the volatility measure by a factor of five. The agencies are
proposing this treatment because volatility derivative contracts are
inherently subject to more price volatility than the underlying asset
classes they reference. For basis derivative contracts, the agencies
are proposing to multiply the applicable supervisory factor based on
the asset class related to the basis measure by a factor of one half.
The agencies are proposing this treatment because the volatility of a
basis between highly correlated risk factors would be less than the
volatility of the risk factors (assuming the factors have equal
volatility).
Table 2--Supervisory Option Volatility and Supervisory Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
Asset class Subclass option correlation Supervisory
volatility (%) parameters (%) factor \a\ (%)
----------------------------------------------------------------------------------------------------------------
Interest rate......................... N/A..................... 50 N/A 0.5
Exchange rate......................... N/A..................... 15 N/A 4.0
Credit, single name................... Investment grade........ 100 50 0.5
Speculative grade....... 100 50 1.3
Sub-speculative grade... 100 50 6.0
Credit, index......................... Investment Grade........ 80 80 0.38
Speculative Grade....... 80 80 1.06
Equity, single name................... N/A..................... 120 50 32
Equity, index......................... N/A..................... 75 80 20
Commodity............................. Energy.................. 150 40 40
[[Page 64676]]
Metals.................. 70 40 18
Agricultural............ 70 40 18
Other................... 70 40 18
----------------------------------------------------------------------------------------------------------------
\a\ The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the
supervisory factor provided in Table 2, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in Table 2.
Question 12: Can the agencies improve the supervisory factors under
the proposal to reflect more appropriately the volatility specific to
each asset class? What, if any, additional categories and respective
supervisory factors should the agencies consider? Commenters supporting
changes to the supervisory factors or the categories within the asset
classes should provide analysis supporting their request.
Question 13: Can the agencies improve the non-ratings-based
methodology under the proposal to determine the supervisory factor
applicable to a single-name credit derivative contract? Are there other
non-ratings-based methodologies that could be used to determine the
applicable supervisory factor for single-name credit derivatives? What
would be the benefit of any such alternative relative to the proposal?
What would be the burden associated with the proposed methodology, as
well as any alternative suggested by commenters?
c. Supervisory Delta Adjustment
Under the proposal, derivative contracts that are not options or
collateralized debt obligation tranches are considered to be linear in
the primary underlying risk factor. For such derivative contracts, the
supervisory delta adjustment would need to account only for the
direction of the derivative contract (positive or negative) with
respect to the underlying risk factor. Therefore, the supervisory delta
adjustment would be equal to one if such a derivative contract is long
in the primary risk factor and negative one if such a derivative
contract is short in the primary risk factor. A derivative contract is
long in the primary risk factor if the fair value of the instrument
increases when the value of the primary risk factor increases. A
derivative contract is short in the primary risk factor if the fair
value of the instrument decreases when the value of the primary risk
factor increases.
Because option contracts are nonlinear, the proposal would require
a banking organization to use the Black-Scholes Model to determine the
supervisory delta adjustment, as provided in Table 2. The agencies are
proposing to use the Black-Scholes Model to determine the supervisory
delta adjustment because the model is a widely used option-pricing
model within the industry. The Black Scholes-Model assumes, however,
that the underlying risk factor is greater than zero. In particular,
the Black Scholes delta formula contains a ratio P/K that is an input
into the natural logarithm function. P is the fair value of the
underlying instrument and K is the strike price. Because the natural
logarithm function can be defined only for amounts greater than zero, a
reference risk factor with a negative value (e.g., negative interest
rates) would make the supervisory delta adjustment inoperable.
Therefore, the formula incorporates a parameter, lambda, the purpose of
which is to adjust the fraction P/K so that it has a positive value.
[GRAPHIC] [TIFF OMITTED] TP17DE18.005
Where:
F is the standard normal cumulative distribution function;
---------------------------------------------------------------------------
\41\ A banking organization would be required to represent
binary options with strike K as the combination of one bought
European option and one sold European option of the same type as the
original option (put or call) with the strike prices set equal to
0.95 * K and 1.05 * K. The size of the position in the European
options must be such that the payoff of the binary option is
reproduced exactly outside the region between the two strikes. The
absolute value of the sum of the adjusted derivative contract
amounts of the bought and sold options is capped at the payoff
amount of the binary option.
---------------------------------------------------------------------------
P equals the current fair value of the instrument or risk factor, as
applicable, underlying the option;
K equals the strike price of the option;
T equals the number of business days until the latest contractual
exercise date of the option; and
l equals zero for all derivative contracts, except that for interest
rate options that reference currencies currently associated with
negative interest rates l must be equal to; max {-L + 0.1%;
0{time} ; \42\
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\42\ The same value li of must be used for all
interest rate options that are denominated in the same currency. The
value of li for a given currency would be equal to the
lowest value L of Pi and Ki of all interest
rate options in a given currency that the banking organization has
with all counterparties.
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[[Page 64677]]
and [sigma] equals the supervisory option volatility, determined in
---------------------------------------------------------------------------
accordance with Table 2.
For a derivative contract that is a collateralized debt obligation
tranche, the supervisory delta adjustment would be determined according
to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.006
Where:
A is the attachment point, which equals the ratio of the notional
amounts of all underlying exposures that are subordinated to the
banking organization's exposure to the total notional amount of all
underlying exposures, expressed as a decimal value between zero and
one; \43\
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\43\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the banking
organization's exposure and A=0. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) notional
amounts of the underlying exposures are subordinated to the banking
organization's exposure.
---------------------------------------------------------------------------
D is the detachment point, which equals one minus the ratio of the
notional amounts of all underlying exposures that are senior to the
banking organization's exposure to the total notional amount of all
underlying exposures, expressed as a decimal value between zero and
one; and
The proposal would apply a positive sign to the resulting amount if
the banking organization purchased the collateralized debt
obligation tranche and would apply a negative sign if the banking
organization sold the collateralized debt obligation tranche.
d. Maturity Factor
For derivative contracts not subject to a variation margin
agreement, or derivative contracts subject to a variation margin
agreement under which the counterparty to the variation margin
agreement is not required to post variation margin to the banking
organization, the risk horizon would be the lesser of one year and the
remaining maturity of the derivative contract, subject to a 10-
business-day floor. Accordingly, for such a derivative contract, a
banking organization would use the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.007
Where M equals the greater of 10 business days and the remaining
maturity of the contract, as measured in business days.
For derivative contracts subject to a variation margin agreement
under which the counterparty must post variation margin, the risk
horizon would be equal to the MPOR of the variation margin agreement.
Accordingly, for such a derivative contract a banking organization
would use the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.008
Where MPOR refers to the period from the most recent exchange of
collateral under a variation margin agreement with a defaulting
counterparty until the derivative contracts are closed out and the
resulting market risk is re-hedged.
For derivative contracts that are not cleared transactions, MPOR
would be floored at 10 business days. For derivative contracts between
a clearing member banking organization and its client that are cleared
transactions, MPOR would be floored at five business days. Under the
capital rule, however, the exposure of a clearing member banking
organization to its clearing member client is not a cleared transaction
where the clearing member banking organization is either acting as a
financial intermediary and enters into an offsetting transaction with a
CCP or where the clearing member banking organization provides a
guarantee to the CCP on the performance of the client. Accordingly, in
such cases, MPOR may not be less than 10 business days. If either a
cleared or noncleared derivative contract is subject to an outstanding
dispute over variation margin, the applicable MPOR would be twice the
MPOR provided for those transactions in the absence of such a
dispute.\44\ For a derivative contract that is within a netting set
that is composed of more than 5,000 derivative contracts that are not
cleared transactions, MPOR would be floored at 20 business days.
---------------------------------------------------------------------------
\44\ In general, a party will not have violated its obligation
to collect or post variation margin from or to a counterparty if the
counterparty has refused or otherwise failed to provide or accept
the required variation margin to or from the party; and the party
has made the necessary efforts to collect or post the required
variation margin, including the timely initiation and continued
pursuit of formal dispute resolution mechanisms; or has otherwise
demonstrated that it has made appropriate efforts to collect or post
the required variation margin; or commenced termination of the
derivative contract with the counterparty promptly following the
applicable cure period and notification requirements.
---------------------------------------------------------------------------
For a derivative contract in which on specified dates any
outstanding exposure of the derivative contract is settled and the
terms of the derivative contract are reset so that the fair value of
the derivative contract is zero, the remaining maturity of the
derivative contract is the period until the next reset date.\45\ In
addition, derivative contracts with daily settlement would be treated
as unmargined derivative contracts.
---------------------------------------------------------------------------
\45\ See ``Regulatory Capital Treatment of Certain Centrally-
cleared Derivative Contracts Under Regulatory Capital Rules''
(August 14, 2017), OCC Bulletin: 2017-27; FDIC Letter FIL-33-2017;
and Board SR letter 07-17.
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[[Page 64678]]
7. Example Calculation \46\
To calculate the exposure amount of a netting set a banking
organization would need to determine (1) the replacement cost, (2) the
adjusted derivative contract amount of each derivative contract within
the netting set, (3) the aggregated amount, which is the sum of each
hedging set within the netting set, (4) the PFE multiplier, and (5)
PFE. A banking organization may calculate these items together for
derivative contracts that are subject to the same QMNA.
---------------------------------------------------------------------------
\46\ This example is intended only for use as an illustrative
guide. The calculation mechanics may vary based on a variety of
factors, including for example, the number of hedging sets, the
frequency at which variation margin is exchanged, and certain terms
of the derivative contracts and underlying reference assets. SA-CCR
considers a number of risk attributes to determine the exposure
amount of a derivative contract, or netting set thereof, and not all
of those attributes are captured in this example.
---------------------------------------------------------------------------
In this example, the netting set consists of two fixed versus
floating interest rate swaps that are subject to the same QMNA. Table 4
summarizes the relevant contractual terms for these derivative
contracts. The netting set is subject to a variation margin agreement,
and the banking organization has received from the counterparty, as of
the calculation date, variation margin in the amount of $10,000 and
initial margin in the amount of $200,000. Both the variation margin
threshold and the minimum transfer amount are zero. All notional
amounts and market values in Table 4 are denominated in U.S. Dollars.
Table 4--Contractual Terms for the Derivative Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value
Residual excluding
Derivative Type maturity Base currency Pay leg Notional valuation
(years) (thousands) adjustments
(thousands)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.............................. Interest rate swap.... 10 USD Fixed................ $10,000 $30
2.............................. Interest rate swap.... 4 USD Floating............. 10,000 -20
--------------------------------------------------------------------------------------------------------------------------------------------------------
Step 1: Determine the Replacement Cost
Under Sec. _.132(c)(6)(i) of the proposed rule, the replacement
cost of a netting set subject to a variation margin agreement would
equal the greater of (1) the sum of the fair values (after excluding
any valuation adjustments) of the derivative contracts within the
netting set less the sum of the net independent collateral amount and
the variation margin amount applicable to such derivative contracts;
(2) the sum of the variation margin threshold and the minimum transfer
amount applicable to the derivative contracts within the netting set
less the net independent collateral amount applicable to such
derivative contracts; and (3) zero.
The replacement cost of the netting set in the example is given as
follows:
RC = max{(30-20)-(200 + 10); 0 + 0 - 200; 0{time} = 0
Step 2: Determine the Adjusted Derivative Contract Amount of Each
Derivative Contract Within the Netting Set
A banking organization would determine the adjusted derivative
contract amount of each derivative contract within the netting set, in
accordance with Sec. _.132(c)(9) of the proposed rule. The adjusted
derivative contract amount would be the product of the adjusted
notional amount, the supervisory delta adjustment, the maturity factor,
and the applicable supervisory factor, which are given as follows:
Adjusted derivative contract amountiiR = diIR * di * MFi * SFi
Under Sec. _.132(c)(9)(ii)(A) of the proposed rule, for each
derivative contract i, the adjusted notional amount would be calculated
as follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.009
Si and Ei represent the number of business days
from the present day until the start date and the end date,
respectively, of the period referenced by the interest rate derivative
contracts. The residual maturity of derivative contract 1 is 10 years
and thus term Ei equals 250 multiplied by 10. The residual
maturity of derivative contract 2 is 4 years and thus term
Ei equals 250 multiplied by 4. Accordingly, the adjusted
notional amounts for derivative contract 1 and derivative contract 2
are given as follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.010
The supervisory delta adjustment would be assigned to each
derivative contract in accordance with Sec. _.132(c)(9)(iii) of the
proposed rule. Derivative contract 1 is long in the primary risk factor
and is not an option; therefore, the supervisory delta is equal to one.
Derivative contract 2 is short in the primary risk factor and is not an
option; therefore, the supervisory delta is equal to negative one.
[[Page 64679]]
The maturity factor would be assigned to each derivative contract
in accordance with Sec. _.132(c)(9)(iv)(A) of the proposed rule.
Assuming a MPOR of 15 business days, the maturity factor is given as
follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.011
The supervisory factor for interest rate derivative contracts is
0.50 percent, as provided in Table 2.
For derivative contract 1, the adjusted derivative contract amount
would equal 1 * 78,694 * 0.3674 * 0.50% = 144.57. For derivative
contract 2, the adjusted derivative contract amount equals -1 * 36,254
* 0.3674 * 0.50% = -66.60.
Step 3: Determine the Hedging Set Amount
A banking organization would determine the hedging set amount for
interest rate derivative contracts in accordance with Sec.
_.134(c)(8)(i) of the proposed rule, as follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.012
[[Page 64680]]
[GRAPHIC] [TIFF OMITTED] TP17DE18.013
Step 4: Determine the Aggregated Amount
Because the netting set includes only one hedging set, the
aggregated amount is equal to 108.89.
Step 5: Determine the PFE Multiplier
A banking organization would calculate the PFE multiplier in
accordance with Sec. _.132(c)(7)(i) of the proposed rule, as follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.014
Where:
(A) V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
(B) C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set
(C) A is the aggregated amount of the netting set
The PFE multiplier would be given as:
[GRAPHIC] [TIFF OMITTED] TP17DE18.015
Step 6: Determine PFE
In accordance with Sec. _.132(c)(7) of the proposed rule, PFE
would equal the product of the PFE multiplier and the aggregated
amount. Thus, PFE would be calculated as 0.4113 * 108.89 = 44.79.
Step 7: Determine the Exposure Amount
In accordance with Sec. _.132(c)(5) of the proposed rule, the
exposure amount of a netting net would equal sum of the replacement
cost of the netting set and the PFE of the netting set multiplied by
1.4. Therefore, the exposure amount of the netting set in the example
would be calculated as, 1.4 * (0 + 44.79) = 62.70.
III. Revisions to the Cleared Transactions Framework
Under the cleared transactions framework in the capital rule, a
banking organization is required to hold risk-based capital for its
exposure to, and certain collateral posted in connection with, a
derivative contract that is a cleared transaction. In addition, a
clearing member banking organization must hold risk-based capital for
its default fund contributions. The capital requirement for a cleared
derivative contract reflects the counterparty credit risk of the
derivative contract, whereas the capital requirement for collateral
posted in connection with such a derivative contract reflects the risk
that a banking organization may not be able to recover its collateral
upon default of the entity holding the collateral. The capital
requirement for a default fund contribution reflects the risk that a
clearing member banking organization may incur loss on such
contribution resulting from the CCP's or another clearing member's
default. In addition, in recognition of the credit risk of the
collateral itself, a banking organization must calculate a risk-
weighted asset amount for any collateral provided to a CCP, clearing
member, or a custodian in connection with a cleared transaction.
In general, the risk-based capital treatment under the cleared
transactions framework distinguishes between derivative contracts
cleared through a CCP and those cleared through a QCCP, whether the
derivative contract is with a clearing member or clearing member
client, and, with respect to collateral, the treatment depends on
whether the collateral is held in a bankruptcy remote manner. Compared
to transactions cleared through a CCP, those involving a QCCP generally
are considered to be less risky, because to qualify as a QCCP for
purposes of the capital rule a central counterparty must meet certain
risk-management, supervision, and other requirements.\47\ For purposes
of the capital rule, ``bankruptcy remote'' generally means that
collateral posted by a clearing member to a CCP would be excluded from
the CCP's estate in receivership, insolvency, liquidation, or similar
proceeding, and thus the banking organization would be more likely to
recover such collateral upon the CCP's default.
---------------------------------------------------------------------------
\47\ See the definition of ``qualifying central counterparty''
in 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 324.2 (FDIC).
The requirements are consistent with the principles developed by the
Committee on Payment and Settlement Systems and Technical Committee
of the International Organization of Securities Commissions. See
``Principles for financial market infrastructure,'' Committee on
Payment and Settlement Systems and Technical Committee of the
International Organization of Securities Commissions, (April 2012),
available at https://www.bis.org/cpmi/publ/d101a.pdf.
---------------------------------------------------------------------------
The agencies are proposing to revise the cleared transactions
framework under the capital rule by requiring certain banking
organizations to use SA-CCR to determine the trade exposure amount for
a cleared derivative contract. In addition, the agencies are proposing
to simplify the formula used to determine the risk-weighted asset
amount for a default fund contribution. The proposed revisions are
consistent with standards developed by the Basel Committee.\48\
---------------------------------------------------------------------------
\48\ ``Capital requirements for bank exposures to central
counterparties,'' Basel Committee on Banking Supervision, April
2014, https://www.bis.org/publ/bcbs282.pdf.
---------------------------------------------------------------------------
Notwithstanding the proposed implementation of SA-CCR, the
requirements under the capital rule regarding the treatment of cleared
derivative contracts, including the definition for cleared transactions
and the operational requirements for cleared derivative contracts,
would still apply irrespective of whether the exposure is associated
with a CCP or a QCCP.\49\
---------------------------------------------------------------------------
\49\ 12 CFR 3.3 (OCC); 12 CFR 217.3 (Board); 12 CFR 324.3
(FDIC).
---------------------------------------------------------------------------
[[Page 64681]]
A. Trade Exposure Amount
To determine the risk-weighted asset amount for a cleared
derivative contract, a banking organization must multiply the trade
exposure amount of the derivative contract by the risk weight
applicable to the CCP. In general, the trade exposure amount is the sum
of the exposure amount of the derivative contract and the fair value of
any related collateral held in a manner that is not bankruptcy remote.
Under the standardized approach, a banking organization must use CEM to
determine the trade exposure amount of its derivative contracts,
whereas under the advanced approaches, an advanced approaches banking
organization may use CEM or IMM to determine the trade exposure amount.
Consistent with the proposal to replace the use of CEM with SA-CCR
in the advanced approaches for determining the exposure amount for a
noncleared derivative contract, the agencies are proposing to require
advanced approaches banking organizations to use SA-CCR or IMM to
determine the trade exposure amount for a cleared derivative contract.
Thus, an advanced approaches banking organization would be required to
use the same approach (SA-CCR or IMM) for both noncleared and cleared
derivative contracts. As noted above, the agencies believe that
requiring an advanced approaches banking organization to use either SA-
CCR or IMM for all purposes under the advanced approaches would
facilitate regulatory reporting and the supervisory assessment of a
banking organization's capital management program. In addition, for
purposes of the standardized approach, an advanced approaches banking
organization would be required to use SA-CCR to determine the trade
exposure amount of its cleared derivative contracts.
For non-advanced approaches banking organizations, the proposal
would permit the use of CEM or SA-CCR to determine the trade exposure
amount for a derivative contract. However, similar to the uniformity
requirement for the elections of advanced approaches banking
organizations, a non-advanced approaches banking organization that
elects to use SA-CCR for purposes of determining the exposure amount of
a derivative contract (under Sec. _.34 of the capital rule) would also
be required to use SA-CCR (instead of CEM) to determine the trade
exposure amount for a cleared derivative contract under the cleared
transactions framework. Similarly, a non-advanced approaches banking
organization that continues to use CEM under Sec. _.34 of the proposed
capital rule would continue to use CEM to determine the trade exposure
amount of all its derivative contracts.
Question 14: Should the agencies maintain the use of CEM for
purposes of the cleared transactions framework under the advanced
approaches? What other factors should the agencies consider in
determining whether SA-CCR is a more or less appropriate approach for
calculating the trade exposure amount for derivative transactions with
central counterparties?
Question 15: What would be the pros and cons of allowing advanced
approaches banking organizations to use either SA-CCR or IMM for
purposes of determining the risk-weighted asset amount of both
centrally and noncentrally cleared derivative transactions?
B. Treatment of Default Fund Contributions
Under the capital rule, a clearing member banking organization must
determine a risk-weighted asset amount for its default fund
contributions according to one of three approaches. A clearing member
banking organization's risk-weighted asset amount for its default fund
contributions to a CCP that is not a QCCP generally is the sum of such
default fund contributions multiplied by 1,250 percent. A clearing
member banking organization's risk-weighted asset amount for its
default fund contributions to a QCCP equals the sum of its capital
requirement for each QCCP to which a banking organization contributes
to a default fund, as calculated under one of two methods. Method one
is a complex three-step approach that compares the default fund of the
QCCP to the capital the QCCP would be required to hold if it were a
banking organization and provides a method to allocate the default fund
deficit or excess back to the clearing member. Method two is a
simplified approach in which the risk-weighted asset amount for a
default fund contribution to a QCCP equals 1,250 percent multiplied by
the default fund contribution, subject to a cap.
The proposal would eliminate method one and method two under the
capital rule and implement a new method for a clearing member banking
organization to determine the risk-weighted asset amount for its
default fund contributions to a QCCP. The agencies intend for the new
method to be less complex than the current method one but also more
granular than the current method two. Under the proposal, the risk-
weighted asset amount for a clearing member banking organization's
default fund contribution would be its pro-rata share of the QCCP's
default fund.
To determine the capital requirement for a default fund
contribution, a clearing member banking organization would first
calculate the hypothetical capital requirement of the QCCP
(KCCP), unless the QCCP has already disclosed it, in which
case the banking organization must rely on that disclosed figure. In
either case, a banking organization may choose to use a higher amount
of KCCP than the minimum calculated under the formula if the
banking organization has concerns about the nature, structure, or
characteristics of the QCCP. In effect, KCCP would serve as
a consistent measure of a QCCP's default fund amount.
A clearing member banking organization would calculate
KCCP according to the following formula:
KCCP = SCMi EADi * 1.6 percent,
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of
the QCCP to the QCCP, as determined under Sec. _.133(d)(6).
The component EADi would include both the clearing member banking
organization's own transactions, its client transactions guaranteed by
the clearing member, and all values of collateral held by the QCCP
(including the clearing member banking organization's pre-funded
default fund contribution against these transactions).\50\ The amount
1.6 percent represents the product of a capital ratio of 8 percent and
a 20 percent risk weight of a clearing member banking organization,
which is equal to the sum of the 2 percent capital requirement for
trade exposure plus 18 percent for the default fund portion of a
banking organization's exposure to a QCCP.
---------------------------------------------------------------------------
\50\ The definition of default fund contribution includes fund
commitments made by a clearing member to a CCP's mutualized loss
sharing arrangements. The references to the commitments could
include terms such as assessments, special assessments, guarantee
commitments, and contingent capital commitments, among other terms.
---------------------------------------------------------------------------
A banking organization that is required to use SA-CCR to determine
the exposure amount for its derivative contracts under the standardized
approach would be required to use SA-CCR to calculate KCCP
for both the standardized approach and the
[[Page 64682]]
advanced approaches.\51\ For purposes of calculating KCCP,
the PFE multiplier would include collateral held by a QCCP in which the
QCCP has a legal claim in the event of the default of the member or
client, including default fund contributions of that member. In
addition, a banking organization would use a MPOR of 10 days in the
maturity factor adjustment. A banking organization that elects to use
CEM to determine the exposure amount of its derivative contracts under
the standardized approach would use CEM to calculate KCCP.
---------------------------------------------------------------------------
\51\ The agencies are not proposing to make revisions to the
calculations to determine the exposure amount of repo-style
transactions for purposes of determining the risk-weighted asset
amount of a banking organization's default fund contributions.
---------------------------------------------------------------------------
EAD must be calculated separately for each clearing member's sub-
client accounts and sub-house account (i.e., for the clearing member's
propriety activities). If the clearing member's collateral and its
client's collateral are held in the same account, then the EAD of that
account would be the sum of the EAD for the client-related transactions
within the account and the EAD of the house-related transactions within
the account. In such a case, for purposes of determining such EADs, the
independent collateral of the clearing member and its client would be
allocated in proportion to the respective total amount of independent
collateral posted by the clearing member to the QCCP. This treatment
would protect against a clearing member recognizing client collateral
to offset the CCP's exposures to the clearing members' proprietary
activity in the calculation of KCCP.
In addition, if any account or sub-account contains both derivative
contracts and repo-style transactions, the EAD of that account is the
sum of the EAD for the derivative contracts within the account and the
EAD of the repo-style transactions within the account. If independent
collateral is held for an account containing both derivative contracts
and repo-style transactions, then such collateral must be allocated to
the derivative contracts and repo-style transactions in proportion to
the respective product specific exposure amounts. The respective
product specific exposure amounts would be calculated, excluding the
effects of collateral, according to Sec. _.132(b) of the capital rule
for repo-style transactions and to Sec. _.132(c)(5) for derivative
contracts. Second, a clearing member banking organization would
calculate its capital requirement (KCMi), which would be the clearing
member's share of the QCCP's default fund, subject to a floor equal to
a 2 percent risk weight multiplied by the clearing member banking
organization's prefunded default fund contribution to the QCCP and an 8
percent capital ratio. This calculation would allocate KCCP
on a pro rata basis to each clearing member based on the clearing
member's share of the overall default fund contributions. Thus, a
clearing member banking organization's capital requirement would
increase as its contribution to the default fund increases relative to
the QCCP's own prefunded amounts and the total prefunded default fund
contributions from all clearing members to the QCCP. In all cases, a
banking organization's capital requirement for its default fund
contribution to a QCCP may not exceed the capital requirement that
would apply if the same exposure were calculated as if it were to a
CCP.
A clearing member banking organization would calculate according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.016
[[Page 64683]]
IV. Revisions to the Supplementary Leverage Ratio
Under the capital rule, an advanced approaches banking organization
must satisfy a minimum supplementary leverage ratio of 3 percent. An
advanced approaches banking organization's supplementary leverage ratio
is the ratio of its tier 1 capital to its total leverage exposure.
Total leverage exposure includes both on-balance sheet assets and
certain off-balance sheet exposures.\52\ For the on-balance sheet
amount, a banking organization must include the balance sheet carrying
value of its derivative contracts and certain cash variation
margin.\53\ For the off-balance sheet amount, the banking organization
must include the PFE for each derivative contract (or each single-
product netting set of derivative contracts), using CEM, as provided
under Sec. _.34 of the capital rule, but without regard to financial
collateral.
---------------------------------------------------------------------------
\52\ See 3.10(c)(4)(ii) (OCC); 12 CFR 217.10(c)(4)(ii) (Board);
324.10(c)(4)(ii) (FDIC).
\53\ To determine the carrying value of derivative contracts,
U.S. generally accepted accounting principles (GAAP) provide a
banking organization with the option to reduce any positive fair
value of a derivative contract by the amount of any cash collateral
received from the counterparty, provided the relevant GAAP criteria
for offsetting are met (the GAAP offset option). Similarly, under
the GAAP offset option, a banking organization has the option to
offset the negative mark-to-fair value of a derivative contract with
a counterparty. See Accounting Standards Codification paragraphs
815-10-45-1 through 7 and 210-20-45-1. Under the capital rule, a
banking organization that applies the GAAP offset option to
determine the carrying value of its derivative contracts would be
required to reverse the effect of the GAAP offset option for
purposes of determining total leverage exposure, unless the
collateral is cash variation margin recognized as settled with the
derivative contract as a single unit of account for balance sheet
presentation and satisfies the conditions under Sec.
_.10(c)(4)(ii)(C)(1)-(7) of the capital rule.
---------------------------------------------------------------------------
The agencies are proposing to revise the capital rule to require
advanced approaches banking organizations to use a modified version of
SA-CCR to determine the on- and off-balance sheet amounts of derivative
contracts for purposes of calculating total leverage exposure.\54\ The
agencies believe that SA-CCR provides a more appropriate measure of
derivative contracts for leverage capital purposes than the current
approach. The agencies also are sensitive to the operational complexity
that could result from requiring advanced approaches banking
organizations to continue to use CEM for leverage capital purposes and
another approach, SA-CCR, for risk-based capital purposes. Further, in
comments on prior proposals, banking organizations have requested that
the agencies adopt SA-CCR for leverage capital purposes.\55\ The
proposal is consistent with the Basel Committee's standard on leverage
capital requirements.\56\
---------------------------------------------------------------------------
\54\ Written options create an exposure to the derivative
contact reference asset and thus must be included in total leverage
exposure even though the proposal would allow certain written
options to receive an exposure amount of zero for risk-based capital
purposes.
\55\ See 79 FR 57725, 57736 (Sept. 26, 2014).
\56\ ``Basel III: Finalising post-crisis reforms,'' Basel
Committee on Banking Supervision, December 2017, https://www.bis.org/bcbs/publ/d424.pdf.
---------------------------------------------------------------------------
For the on-balance sheet amount, an advanced approaches banking
organization would include in total leverage exposure 1.4 multiplied by
the greater of (1) the sum of the fair value of the derivative
contracts within a netting set less the net amount of applicable cash
variation margin, or (2) zero. Consistent with CEM, an advanced
approaches banking organization would be able to recognize cash
variation margin in the on-balance component calculation only if (1)
the cash variation margin meets the conditions under Sec.
_.10(c)(4)(ii)(C)(3)-(7) of the proposed rule; and (2) it has not been
recognized in the form of a reduction in the fair value of the
derivative contracts within the netting set under the advanced
approaches banking organization's operative accounting standard. The
proposed rule would maintain the current treatment for the recognition
of cash variation margin in the supplementary leverage ratio.
A banking organization would use this same approach to determine
the on-balance sheet amount for a single netting set subject to
multiple variation margin agreements. To calculate the on-balance sheet
amount for multiple netting sets that are subject to a single variation
margin agreement or a hybrid netting set, a banking organization would
use the formula under Sec. _.132(c)(10)(i) of the proposed rule,
except the term ``CMA'' in Sec. _.132(c)(10)(i)(C) would
include only cash variation margin that meets the requirements under
Sec. _.10(c)(4)(ii)(C)(3)-(7) of the proposed rule.
For the off-balance sheet amount, an advanced approaches banking
organization would include in total leverage exposure 1.4 multiplied by
the PFE of each netting set, calculated according to Sec. _.132(c)(7)
of the proposal, except an advanced approaches banking organization
would not be permitted to recognize collateral in the PFE
multiplier.\57\ Thus, for purposes of calculating total leverage
exposure, the term ``C'' under Sec. _.132(c)(7)(i)(B) of the proposal
would be equal to zero. These adjustments are consistent with the
current treatment under the capital rule, which generally limits
collateral recognition in leverage capital requirements, and also with
the leverage standards developed by the Basel Committee. While the
proposal would limit recognition of collateral in the PFE multiplier,
the proposal would recognize the shorter default risk horizon
applicable to margined derivative contracts. Thus, under the proposal,
a netting set subject to a variation margin agreement would apply the
maturity factor as provided under Sec. _.132(c)(9)(iv) of the proposed
rule.
---------------------------------------------------------------------------
\57\ Accordingly, a banking organization would not use Sec.
_.132(c)(7)(iii)-(iv) for purposes of calculating the PFE amount for
the supplementary leverage ratio.
---------------------------------------------------------------------------
Compared to CEM, the implementation of a modified SA-CCR for
purposes of the supplementary leverage ratio would increase advanced
approaches banking organizations' supplementary leverage ratios.
However, the agencies are sensitive to impediments to banking
organizations' willingness and ability to provide client-clearing
services. The agencies also are mindful of international commitments to
support the migration of derivative contracts to central clearing
frameworks,\58\ the Dodd-Frank Act mandate to mitigate systemic risk
and promote financial stability by, in part, developing uniform
standards for the conduct of systemically important payment, clearing,
and settlement activities of financial institutions.\59\ In view of
these important, post-crisis reform objectives, the agencies are
inviting comment on the consequences of not recognizing collateral
provided by a clearing member client banking organization in connection
with a cleared transaction.
---------------------------------------------------------------------------
\58\ See, e.g., G-20 Pittsburgh Summit: Leaders Statement
(September 2009); see also Consultative Document, ``Leverage ratio
treatment of client cleared derivatives,'' Basel Committee on
Banking Supervision, October 2018, https://www.bis.org/bcbs/publ/d451.pdf.
\59\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, section 802(b).
---------------------------------------------------------------------------
Question 16: What concerns do commenters have regarding the
proposal to replace the use of CEM with a modified version of SA-CCR,
as proposed, for purposes of the supplementary leverage ratio?
Question 17: The agencies invite comment on the recognition of
collateral provided by clearing member client banking organizations in
connection with a cleared transaction for purposes of the SA-CCR
methodology. What are the pros and cons of recognizing such collateral
in the calculation of
[[Page 64684]]
replacement cost and potential future exposure? Commenters should
provide data regarding how alternative approaches regarding the
treatment of collateral would affect the cost of clearing services, as
well as provide data regarding how such approaches would affect
leverage capital allocation for that activity.
V. Technical Amendments
The proposed rule would make certain technical corrections and
clarifications to the capital rule to address certain provisions that
warrant revision, based on questions presented by banking organizations
and further review by the agencies.
A. Receivables Due From a QCCP
The agencies are proposing to revise Sec. _.32 of the capital rule
to clarify that cash collateral posted by a clearing member banking
organization to a QCCP, and which could be considered a receivable due
from the QCCP under generally accepted accounting principles, would not
be risk-weighted as a corporate exposure. Instead, for a client-cleared
trade the cash collateral posted to a QCCP would receive a risk weight
of 2 percent, if the cash associated with the trade meets the
requirements under Sec. _.35(b)(i)(3)(A) or Sec. _.133(b)(i)(3)(A) of
the capital rule, or 4 percent, if the collateral does not meet the
requirements necessary to receive the 2 percent risk weight. For a
trade made on behalf of the clearing member's own account, the cash
collateral posted to a QCCP would receive a 2 percent risk weight. This
amendment is intended to maintain incentives for banking organizations
to post cash collateral and recognize that a receivable from a QCCP
that arises in the context of a trade exposure should not be treated as
equivalent to a receivable that would arise if, for example, a banking
organization made a loan to a CCP.
B. Treatment of Client Financial Collateral Held by a CCP
Under Sec. _.2 of the capital rule, financial collateral means, in
part, collateral in which a banking organization has a perfected first-
priority security interest in the collateral. However, when a banking
organization is acting as a clearing member, it generally is required
to post any client collateral to the CCP, in which case the CCP
establishes and maintains a perfected first-priority security interest
in the collateral instead of the clearing member. As a result, the
capital rule does not permit a clearing member banking organization to
recognize client collateral posted to a CCP as financial collateral.
Client collateral posted to a CCP remains available to support the
credit risk of a derivative contract in the event of a client default.
Specifically, where a client defaults the CCP will use the client
collateral to offset its exposure to the client, and the clearing
member would be required to cover only the amount of any deficiency
between the liquidation value of the collateral and the exposure to the
CCP. However, were the clearing member banking organization to enter
into the derivative contract directly with the client, the clearing
member would establish and maintain a perfected first-priority security
interest in the collateral, and the exposure of the clearing member to
the client would similarly be mitigated only to the extent the
collateral is sufficient to cover the exposure amount of the
transaction at the time of default. Therefore, the agencies are
proposing to revise the definition of financial collateral to allow
clearing member banking organizations to recognize as financial
collateral noncash client collateral posted to a CCP. In this
situation, the clearing member banking organization would not be
required to establish and retain a first-priority security interest in
the collateral for it to qualify as financial collateral under Sec.
_.2 of the capital rule.
C. Clearing Member Exposure When CCP Performance Is Not Guaranteed
The agencies are proposing to revise Sec. _.35(c)(3) of the
capital rule to align the capital requirements under the standardized
approach for client-cleared transactions with the treatment under Sec.
_.133(c)(3) of the advanced approaches. Specifically, the proposal
would allow a clearing member that does not guarantee the performance
of the CCP to the clearing member's client to apply a zero percent risk
weight to the CCP-facing portion of the transaction. The agencies
already have implemented this treatment for purposes of the advanced
approaches.\60\
---------------------------------------------------------------------------
\60\ See 80 FR 41411 (July 15, 2015).
---------------------------------------------------------------------------
D. Bankruptcy Remoteness of Collateral
The agencies are proposing to remove the requirement in Sec.
_.35(b)(4)(i) of the standardized approach and Sec. _.133(b)(4)(i) of
the advanced approaches that collateral posted by a clearing member
client banking organization to a clearing member must be bankruptcy-
remote from a custodian in order for the client banking organization to
avoid the application of risk-based capital requirements to the
collateral, and clarify that a custodian must be acting in its capacity
as a custodian for this treatment to apply.\61\ The agencies believe
this revision is appropriate because the collateral would generally be
considered to be bankruptcy-remote if the custodian is acting in its
capacity as a custodian with respect to the collateral. Therefore, this
revision would apply only in cases where the collateral is deposited
with a third-party custodian, not in cases where a clearing member
offers ``self-custody'' arrangements with its clients. In addition,
this revision would make the collateral requirement for a clearing
member client banking organization consistent with the treatment of
collateral posted by a clearing member banking organization, which does
not require that the posted collateral be bankruptcy-remote from the
custodian, but would require in each case that the custodian be acting
in its capacity as a custodian.
---------------------------------------------------------------------------
\61\ See 12 CFR 3.35(b)(4) and 3.133(b)(4) (OCC); 12 CFR
217.35(b)(4) and 217.133(b)(4) (Board); 12 CFR 324.35(b)(4) and
324.133(b)(4) (FDIC).
---------------------------------------------------------------------------
E. Adjusted Collateral Haircuts for Derivative Contracts
If a clearing member banking organization is acting as an agent
between a client and a CCP and receives collateral from the client, the
clearing member must determine the exposure amount for the client-
facing portion of the derivative contract using the collateralized
transactions framework under Sec. _.37 of the capital rule or the
counterparty credit risk framework under Sec. _.132 of the capital
rule. The clearing member banking organization may recognize the credit
risk-mitigation benefits of the collateral posted by the client;
however, under Sec. Sec. _.37(c) and _.132(b) of the capital rule, the
value of the collateral must be discounted by the application of a
standard supervisory haircut to reflect any market price volatility in
the value of the collateral over a 10-day holding period. For a repo-
style transaction, the capital rule applies a scaling factor of 0.71 to
the standard supervisory haircuts to reflect the limited risk to
collateral in those transactions and effectively reduce the holding
period to 5 days. The agencies believe a similar reduction in the
haircuts should be provided for cleared derivative contracts, as they
typically have a holding period of less than 10 days. Therefore, the
agencies are proposing to revise Sec. Sec. _.37 and _.132 of the
capital rule to add an exception to the 10-day holding period for
cleared derivative contracts and apply a scaling factor of 0.71 to the
standard
[[Page 64685]]
supervisory haircuts to reflect a 5-day holding period.
F. OCC Revisions to Lending Limits
The OCC proposes to revise its lending limit rule at 12 CFR part
32. The current lending limits rule references sections of CEM in the
OCC's advanced approaches capital rule as one available methodology for
calculating exposures to derivatives transactions. However, these
sections are proposed to be amended or replaced with SA-CCR in the
advanced approaches. Therefore, the OCC is proposing to replace the
references to CEM in the advanced approaches with references to CEM in
the standardized approach. The OCC is also proposing to adopt SA-CCR as
an option for calculation of exposures under lending limits.
Question 18: Should the OCC permit or require banking organizations
to calculate exposures for derivatives transactions for lending limits
purposes using SA-CCR? What advantages or disadvantages does this offer
compared with the current methods allowed for calculating derivatives
exposures for lending limits purposes?
VI. Impact of the Proposed Rule
To assess the effect of the proposed changes to the capital rule,
the agencies reviewed data provided by advanced approaches banking
organizations that represent a significant majority of the derivatives
market. In particular, the agencies analyzed the change in exposure
amount between CEM and SA-CCR, as well as the change in risk-weighted
assets as determined under the standardized approach.\62\ The data
covers diverse portfolios of derivative contracts, both in terms of
asset type and counterparty. In addition, the data includes firms that
serve as clearing members, allowing the agencies to consider the effect
of the proposal under the cleared transactions framework for both a
direct exposure to a CCP and an exposure to a CCP on behalf of a
client. As a result, the analysis provides a reasonable proxy for the
potential changes for all advanced approaches banking organizations.
---------------------------------------------------------------------------
\62\ The agencies estimate that, on aggregate, exposure amounts
under SA-CCR would equal approximately 170 percent of the exposure
amounts for identical derivative contracts under IMM. Thus, firms
that use IMM currently would likely continue to use IMM to determine
the exposure amount of their derivative contracts to determine
advanced approaches total risk-weighted assets. However, the
standardized approach serves as a floor on advanced approaches
banking organizations' total risk-weighted assets. Thus, a firm
would only receive the benefit of IMM if the firm is not bound by
standardized total risk-weighted assets.
---------------------------------------------------------------------------
As noted above, SA-CCR would improve risk-sensitivity when
measuring the exposure amount for derivative contracts compared to CEM,
including through improved collateral recognition. For instance, the
exposure amount of margined derivative contracts for these firms would
decrease by approximately 44 percent, while the exposure amount of
unmargined derivative contracts for these firms would increase by
approximately 90 percent. Overall, the agencies estimate that, under
the proposal, the exposure amount for derivative contracts held by
advanced approaches banking organizations would decrease by
approximately 7 percent.
The agencies also analyzed the changes based on both asset classes
and counterparties for these firms. With respect to asset classes, the
exposure amount would increase for interest rate derivative contracts,
equity derivative contracts, and commodity derivative contracts, while
the exposure amount would decrease for exchange rate derivative
contracts and credit derivative contracts. These changes are largely
due to the updated supervisory factors, which reflect stress
volatilities observed during the financial crisis. With respect to
counterparties, the exposure amount would decrease for derivative
contracts with banks, broker-dealers, and CCPs, which are typically
margined, hedged, and subject to QMNAs. In contrast, exposure amounts
would increase for derivative contracts with other financial
institutions, such as asset managers, investment funds, and pension
funds; sovereigns and municipalities; and commercial entities that use
derivative contracts to hedge commercial risk.
The agencies estimate that the proposal would result in an
approximately 5 percent increase in advanced approaches banking
organizations' standardized risk-weighted assets associated with
derivative contract exposures.\63\ This would result in a reduction
(approximately 6 basis points) in advanced approaches banking
organizations' tier 1 risk-based capital ratios, on average. This
estimate assumes, consistent with the proposal, that a netting set is
defined to include all derivative contracts subject to a QMNA.
---------------------------------------------------------------------------
\63\ Total risk-weighted assets are a function of the exposure
amount of the netting set and the applicable risk-weight of the
counterparty. Total risk-weighted assets increase under the analysis
while exposure amounts decrease because higher applicable risk-
weights amplify increases in the exposure amount of certain
derivative contracts, which outweighs decreases in the exposure
amount of other derivative contracts.
---------------------------------------------------------------------------
The agencies estimate that the proposal would result in an increase
(approximately 30 basis points) in advanced approaches banking
organizations' supplementary leverage ratio, on average. However, this
estimate does not reflect the broad definition of netting set in the
proposal, which, if adopted, would likely result in an additional
increase in advanced approaches banking organizations' supplementary
leverage ratio. The proposal would use a modified version of SA-CCR
that would recognize only certain cash variation margin in the
replacement cost component calculation for purposes of the
supplementary leverage ratio. Additional recognition of client
collateral in the modified version of SA-CCR would further increase
clearing member banking organizations' supplementary leverage ratio,
but such an increase would largely depend on the degree of client
clearing services provided by a clearing member banking organization.
The effects of the proposed rule likely would be limited for non-
advanced approaches banking organizations. First, these banking
organizations hold relatively small derivative portfolios. Non-advanced
approaches banking organizations account for less than 8 percent of
derivative contracts of all banking organizations, even though they
account for 40 percent of total assets of all banking
organizations.\64\ Second, non-advanced approaches banking organization
are not subject to supplementary leverage ratio requirements, and thus
would not be affected by any changes to the calculation of total
leverage exposure. Finally, these banking organizations retain the
option of using CEM, and the agencies anticipate that only those
banking organizations that receive a net benefit from using SA-CCR
would elect to use it.
---------------------------------------------------------------------------
\64\ According to data from the Consolidated Reports of
Condition and Income for a Bank with Domestic and Foreign Offices
(FFIEC report forms 031, 041, and 051), as of March 31, 2018.
---------------------------------------------------------------------------
VII. Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently-valid Office of Management
and Budget (OMB) control number. The OMB
[[Page 64686]]
control number for the OCC is 1557-0318, Board is 7100-0313, and FDIC
is 3064-0153. These information collections will be extended for three
years, with revision. The information collection requirements contained
in this proposed rulemaking have been submitted by the OCC and FDIC to
OMB for review and approval under section 3507(d) of the PRA (44 U.S.C.
3507(d)) and Sec. 1320.11 of the OMB's implementing regulations (5 CFR
part 1320). The Board reviewed the proposed rule under the authority
delegated to the Board by OMB.
Comments are invited on:
a. Whether the collections of information are necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
b. The accuracy or the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
c. Ways to enhance the quality, utility, and clarity of the
information to be collected;
d. Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. A copy of
the comments may also be submitted to the OMB desk officer by mail to
U.S. Office of Management and Budget, 725 17th Street NW, #10235,
Washington, DC 20503; facsimile to (202) 395-6974; or email to
oira_submission@omb.eop.gov, Attention, Federal Banking Agency Desk
Officer.
Proposed Information Collection
Title of Information Collection: Recordkeeping and Disclosure
Requirements Associated With Capital Adequacy.
Frequency: Quarterly, annual.
Affected Public: Businesses or other for-profit.
Respondents:
OCC: National banks and federal savings associations.
Board: State member banks (SMBs), bank holding companies (BHCs),
U.S. intermediate holding companies (IHCs), savings and loan holding
companies (SLHCs), and global systemically important bank holding
companies (GSIBs) domiciled in the United States.
FDIC: State nonmember banks, state savings associations, and
certain subsidiaries of those entities.
Current Actions: The proposal would revise Sec. Sec. _.2, _.10,
_.32, _.34 (including Table 1), _.35, _.132 (including Table 2), and
_.133 of the capital rule to implement SA-CCR in order to calculate the
exposure amount of derivatives contracts under the agencies' regulatory
capital rule as well as update other parts of the capital rule to
account for the proposed incorporation of SA-CCR.
The proposal will not, however, result in changes to the burden. In
order to be consistent across the agencies, the agencies are applying a
conforming methodology for calculating the burden estimates. The
agencies are also updating the number of respondents based on the
current number of supervised entities even though this proposal only
affects a limited number of entities. The agencies believe that any
changes to the information collections associated with the proposed
rule are the result of the conforming methodology and updates to the
respondent count, and not the result of the proposed rule changes.
PRA Burden Estimates
OCC
OMB control number: 1557-0318.
Estimated number of respondents: 1,365 (of which 18 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (1,365 institutions affected for ongoing)
Recordkeeping (Ongoing)--16.
Standardized Approach (1,365 institutions affected for ongoing)
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approach (18 institutions affected for ongoing)
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--280.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--35.
Estimated annual burden hours: 1,088 hours initial setup, 64,929
for ongoing.
Board
Agency form number: FR Q.
OMB control number: 7100-0313.
Estimated number of respondents: 1,431 (of which 17 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (1,431 institutions affected for ongoing)
Recordkeeping (Ongoing)--16.
Standardized Approach (1,431 institutions affected for ongoing)
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approach (17 institutions affected)
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--280.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--35.
Disclosure (Table 13 quarterly)--5.
Risk-based Capital Surcharge for GSIBs (21 institutions affected)
Recordkeeping (Ongoing)--0.5.
Estimated annual burden hours: 1,088 hours initial setup, 78,183
hours for ongoing.
FDIC
OMB control number: 3064-0153.
Estimated number of respondents: 3,604 (of which 2 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios (3,604 institutions affected)
Recordkeeping (Ongoing)--16.
Standardized Approach (3,604 institutions affected)
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approach (2 institutions affected)
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--280.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--35.
Estimated annual burden hours: 1,088 hours initial setup, 131,802
hours for ongoing.
Also as a result of this proposed rule, the agencies would clarify
the reporting instructions for the Consolidated Reports of Condition
and Income (Call Reports) (FFIEC 031, FFIEC 041, and FFIEC 051) and
Regulatory Capital Reporting for Institutions Subject to the Advanced
Capital Adequacy Framework (FFIEC 101). The OCC and FDIC would clarify
the reporting instructions for
[[Page 64687]]
DFAST 14A, and the Board would clarify the reporting instructions for
the Consolidated Financial Statements for Holding Companies (FR Y-9C),
Capital Assessments and Stress Testing (FR Y-14A and FR Y-14Q), and
Banking Organization Systemic Risk Report (FR Y-15) to reflect the
changes to the capital rules that would be required under this
proposal. The OCC also is proposing to update cross-references in its
lending limit rules to account for the proposed incorporation of SA-
CCR.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a proposed rule, to prepare an
Initial Regulatory Flexibility Analysis describing the impact of the
rule on small entities (defined by the Small Business Administration
(SBA) for purposes of the RFA to include commercial banks and savings
institutions with total assets of $550 million or less and trust
companies with total revenue of $38.5 million or less) or to certify
that the proposed rule would not have a significant economic impact on
a substantial number of small entities. As of December 31, 2017, the
OCC supervised 886 small entities. The rule would impose requirements
on all OCC supervised entities that are subject to the advanced
approaches risk-based capital rules, which typically have assets in
excess of $250 billion, and therefore would not be small entities.
While small entities would have the option to adopt SA-CCR, the OCC
does not expect any small entities to elect that option. Therefore, the
OCC estimates the proposed rule would not generate any costs for small
entities. Therefore, the OCC certifies that the proposed rule would not
have a significant economic impact on a substantial number of OCC-
supervised small entities.
FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires an agency, in connection with a proposed rule, to
prepare and make available for public comment an initial regulatory
flexibility analysis that describes the impact of a proposed rule on
small entities.\65\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The Small Business Administration (SBA) has defined ``small entities''
to include banking organizations with total assets of less than or
equal to $550 million.\66\
---------------------------------------------------------------------------
\65\ 5 U.S.C. 601 et seq.
\66\ The SBA defines a small banking organization as having $550
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended, effective December 2, 2014). In its determination, the
``SBA counts the receipts, employees, or other measure of size of
the concern whose size is at issue and all of its domestic and
foreign affiliates.'' See 13 CFR 121.103. Following these
regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
---------------------------------------------------------------------------
As of March 31, 2018, there were 3,604 FDIC-supervised
institutions, of which 2,804 are considered small entities for the
purposes of RFA. These small entities hold $505 billion in assets,
accounting for 17 percent of total assets held by FDIC-supervised
institutions.\67\
---------------------------------------------------------------------------
\67\ FDIC Call Report, March 31, 2018.
---------------------------------------------------------------------------
The proposed rule would require advanced approaches institutions to
replace CEM with SA-CCR as an option for calculating EAD. There are no
FDIC-supervised advanced approaches institutions that are considered
small entities for the purposes of RFA.
In addition, the proposed rule would allow non-advanced approaches
institutions to replace CEM with SA-CCR as the approach for calculating
EAD. This allowance applies to all 2,804 small institutions supervised
by the FDIC. Institutions that elect to use SA-CCR would incur some
costs related to other compliance requirements of the proposed rule.
However, these costs are difficult to estimate given that adoption of
SA-CCR is voluntary. The FDIC expects that non-advanced approaches
institutions will elect to use SA-CCR only if the net benefits of doing
so are positive. Thus, the FDIC expects the proposed rule will not
impose any net economic costs on these entities.
According to recent data, 395 (14.1 percent) small FDIC-supervised
institutions, reporting $107 billion in assets, report holding some
volume of derivatives and would thus have the option of electing to use
SA-CCR. However, these institutions report holding only $5.4 billion
(or 5 percent of assets) in derivatives.\68\ Therefore, the potential
effects of electing SA-CCR are likely to be insignificant for these
institutions.
---------------------------------------------------------------------------
\68\ Id.
---------------------------------------------------------------------------
Based on the information above, the FDIC certifies that the
proposed rule will not have a significant economic impact on a
substantial number of small entities.
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would this
rule have any significant effects on small entities that the FDIC has
not identified?
Board: The Board is providing an initial regulatory flexibility
analysis with respect to this proposed rule. The Regulatory Flexibility
Act, 5 U.S.C. 601 et seq., (RFA), requires an agency to consider
whether the rules it proposes will have a significant economic impact
on a substantial number of small entities.\69\ In connection with a
proposed rule, the RFA requires an agency to prepare an Initial
Regulatory Flexibility Analysis describing the impact of the rule on
small entities or to certify that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
An initial regulatory flexibility analysis must contain (1) a
description of the reasons why action by the agency is being
considered; (2) a succinct statement of the objectives of, and legal
basis for, the proposed rule; (3) a description of, and, where
feasible, an estimate of the number of small entities to which the
proposed rule will apply; (4) a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed rule,
including an estimate of the classes of small entities that will be
subject to the requirement and the type of professional skills
necessary for preparation of the report or record; (5) an
identification, to the extent practicable, of all relevant Federal
rules which may duplicate, overlap with, or conflict with the proposed
rule; and (6) a description of any significant alternatives to the
proposed rule which accomplish its stated objectives.
---------------------------------------------------------------------------
\69\ Under regulations issued by the Small Business
Administration, a small entity includes a depository institution,
bank holding company, or savings and loan holding company with total
assets of $550 million or less and trust companies with total assets
of $38.5 million or less. As of June 30, 2018, there were
approximately 3,304 small bank holding companies, 216 small savings
and loan holding companies, and [541] small state member banks.
---------------------------------------------------------------------------
The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing and
inviting comment on this initial regulatory flexibility analysis. A
final regulatory flexibility analysis will be conducted after comments
received during the public comment period have been considered. The
proposal would also make corresponding changes to the Board's reporting
forms.
[[Page 64688]]
As discussed in detail above, the proposed rule would amend the
capital rule to provide a new methodology for calculating the exposure
amount for derivative contracts. For purposes of calculating advanced
approaches total risk-weighted assets, an advanced approaches Board-
regulated institution would be able to use either SA-CCR or the
internal models methodology. For purposes of calculating standardized
approach total risk-weighted assets, an advanced approaches Board-
regulated institution would be required to use SA-CCR and a non-
advanced approaches Board-regulated institution would be able to elect
either SA-CCR or the existing methodology. In addition, for purposes of
the denominator of the supplementary leverage ratio, the proposal would
integrate SA-CCR into the calculation of the denominator, replacing
CEM.
The Board has broad authority under the International Lending
Supervision Act (ILSA) \70\ and the PCA provisions of the Federal
Deposit Insurance Act \71\ to establish regulatory capital requirements
for the institutions it regulates. For example, ILSA directs each
Federal banking agency to cause banking institutions to achieve and
maintain adequate capital by establishing minimum capital requirements
as well as by other means that the agency deems appropriate.\72\ The
PCA provisions of the Federal Deposit Insurance Act direct each Federal
banking agency to specify, for each relevant capital measure, the level
at which an IDI subsidiary is well capitalized, adequately capitalized,
undercapitalized, and significantly undercapitalized.\73\ In addition,
the Board has broad authority to establish regulatory capital standards
for bank holding companies, savings and loan holding companies, and
U.S. intermediate holding companies of foreign banking organizations
under the Bank Holding Company Act, the Home Owners' Loan Act, and the
Dodd-Frank Reform and Consumer Protection Act (Dodd-Frank Act).\74\
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\70\ 12 U.S.C. 3901-3911.
\71\ 12 U.S.C. 1831o.
\72\ 12 U.S.C. 3907(a)(1).
\73\ 12 U.S.C. 1831o(c)(2).
\74\ See 12 U.S.C. 1467a, 1844, 5365, 5371.
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The proposed rule would only impose mandatory changes on advanced
approaches banking organizations. Advanced approaches banking
organizations include depository institutions, bank holding companies,
savings and loan holding companies, or intermediate holding companies
with at least $250 billion in total consolidated assets or has
consolidated on-balance sheet foreign exposures of at least $10
billion, or a subsidiary of a depository institution, bank holding
company, savings and loan holding company, or intermediate holding
company that is an advanced approaches banking organization. The
proposed rule therefore would not impose mandatory requirements on any
small entities. However, the proposal would allow Board-regulated
institutions that are not advanced approaches Board-regulated
institutions to elect to use SA-CCR instead of CEM. Small entities that
are subject to the Board's capital rule could make such an election,
which would require immediate changes to reporting, recordkeeping, and
compliance systems, as well as the ongoing burden of maintaining these
different systems. However, the entities that elect to use SA-CCR may
face reduced regulatory capital requirements as a result.
Further, as discussed previously in the Paperwork Reduction Act
section, the proposal would make changes to the projected reporting,
recordkeeping, and other compliance requirements of the rule by
proposing to collect information from advanced approaches Board-
regulated institutions and non-advanced approaches Board-regulated
institutions that elect to use SA-CCR. These changes would include
limited revisions to the Call Report (FFIEC 031, 041, and 051), the
Consolidated Financial Statements for Holding Companies (FR Y-9C), and
the Regulatory Capital Reporting for Institutions Subject to the
Advanced Capital Adequacy Framework (FFIEC 101) to provide for
reporting of derivative contracts under SA-CCR. Firms would be required
to update their systems to implement these changes to reporting forms.
The Board does not expect that the compliance, recordkeeping, and
reporting updates described previously would impose a significant cost
on small Board-regulated institutions. These changes would only impact
small entities that elect to use SA-CCR. In addition, the Board is
aware of no other Federal rules that duplicate, overlap, or conflict
with the proposed changes to the capital rule. Therefore, the Board
believes that the proposed rule will not have a significant economic
impact on small banking organizations supervised by the Board and
therefore believes that there are no significant alternatives to the
proposed rule that would reduce the economic impact on small banking
organizations supervised by the Board.
The Board welcomes comment on all aspects of its analysis. In
particular, the Board requests that commenters describe the nature of
any impact on small entities and provide empirical data to illustrate
and support the extent of the impact.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the proposed rule in a simple and straightforward manner, and invite
comment on the use of plain language. For example:
Have the agencies organized the material to suit your
needs? If not, how could they present the rule more clearly?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
Is this section format adequate? If not, which of the
sections should be changed and how?
What other changes can the agencies incorporate to make
the regulation easier to understand?
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\75\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements on IDIs generally to take effect
on the first day of a calendar quarter that begins on or after the date
on which the regulations are published in final form.\76\
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\75\ 12 U.S.C. 4802(a).
\76\ 12 U.S.C. 4802.
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[[Page 64689]]
Because the proposal [would/would not] impose additional reporting,
disclosure, or other requirements on IDIs, section 302 of the RCDRIA
therefore [does/does not] apply. Nevertheless, the requirements of
RCDRIA will be considered as part of the overall rulemaking process. In
addition, the agencies also invite any other comments that further will
inform the agencies' consideration of RCDRIA.
E. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the proposed rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under
this analysis, the OCC considered whether the proposed rule includes a
Federal mandate that may result in the expenditure by State, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). The OCC has
determined that this proposed rule would not result in expenditures by
State, local, and Tribal governments, or the private sector, of $100
million or more in any one year. Accordingly, the OCC has not prepared
a written statement to accompany this proposal.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Risk.
12 CFR Part 32
National banks, Reporting and recordkeeping requirements.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies.
12 CFR Part 324
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Savings associations, State non-member banks.
Office of the Comptroller of the Currency
For the reasons set out in the joint preamble, the OCC proposes to
amend 12 CFR parts 3 and 32 as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
0
2. Section 3.2 is amended by:
0
a. Adding the definitions of ``Basis derivative contract'' in
alphabetical order;
0
b. Revising paragraph (2) of the definition of ``Financial
collateral;''
0
c. Adding the definitions of ``Independent collateral,'' ``Minimum
transfer amount,'' and ``Net independent collateral amount'' in
alphabetical order;
0
d. Revising the definition of ``Netting set;'' and
0
e. Adding the definitions of ``Speculative grade,'' ``Sub-speculative
grade,'' ``Variation margin,'' ``Variation margin agreement,''
``Variation margin amount,'' ``Variation margin threshold,'' and
``Volatility derivative contract'' in alphabetical order.
The additions and revisions read as follows:
Sec. 3.2 Definitions.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: Interest rate, credit,
equity, or commodity.
* * * * *
Financial collateral * * *
(2) In which the national bank and Federal savings association has
a perfected, first-priority security interest or, outside of the United
States, the legal equivalent thereof (with the exception of cash on
deposit; and notwithstanding the prior security interest of any
custodial agent or any priority security interest granted to a CCP in
connection with collateral posted to that CCP).
* * * * *
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which a national bank and Federal savings association has a perfected,
first-priority security interest or, outside of the United States, the
legal equivalent thereof (with the exception of cash on deposit;
notwithstanding the prior security interest of any custodial agent or
any prior security interest granted to a CCP in connection with
collateral posted to that CCP), and the amount of which does not change
directly in response to the value of the derivative contract or
contracts that the financial collateral secures.
* * * * *
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 3.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to a national bank or Federal
savings association less the fair value amount of the independent
collateral, as adjusted by the standard supervisory haircuts under
Sec. 3.132(b)(2)(ii), as applicable, posted by the national bank or
Federal savings association to the counterparty, excluding such amounts
held in a bankruptcy remote manner, or posted to a QCCP and held in
conformance with the operational requirements in Sec. 3.3.
Netting set means either one derivative contract between a national
bank or Federal savings association and a single counterparty, or a
group of derivative contracts between a national bank or Federal
savings association and a single counterparty, that are subject to a
qualifying master netting agreement.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic conditions, such that should economic conditions
deteriorate, the reference entity would present an elevated default
risk.
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely would default on its financial commitments.
* * * * *
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 3.132(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to a national bank or Federal savings
[[Page 64690]]
association less the fair value amount of the variation margin, as
adjusted by the standard supervisory haircuts under Sec.
3.132(b)(2)(ii), as applicable, posted by the national bank or Federal
savings association to the counterparty.
Variation margin threshold means the amount of credit exposure of a
national bank or Federal savings association to its counterparty that,
if exceeded, would require the counterparty to post variation margin to
the national bank or Federal savings association.
Volatility derivative contract means a derivative contract in which
the payoff of the derivative contract explicitly depends on a measure
of the volatility of an underlying risk factor to the derivative
contract.
* * * * *
0
3. Section 3.10 is amended by revising paragraphs (c)(4)(ii)(A) through
(C) to read as follows:
Sec. 3.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value of all the national bank's or
Federal savings association's on-balance sheet assets, plus the value
of securities sold under a repurchase transaction or a securities
lending transaction that qualifies for sales treatment under U.S. GAAP,
less amounts deducted from tier 1 capital under Sec. 3.22(a), (c), and
(d), less the value of securities received in security-for-security
repo-style transactions, where the national bank or Federal savings
association acts as a securities lender and includes the securities
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received, and less the fair value of any
derivative contracts;
(B) The PFE for each netting set (including cleared transactions
except as provided in paragraph (c)(4)(ii)(I) of this section and, at
the discretion of the national bank or Federal savings association,
excluding a forward agreement treated as a derivative contract that is
part of a repurchase or reverse repurchase or a securities borrowing or
lending transaction that qualifies for sales treatment under U.S.
GAAP), as determined under Sec. 3.132(c)(7), in which the term C in
Sec. 3.132(c)(7)(i)(B) equals zero, multiplied by 1.4;
(C) The sum of:
(1)(i) 1.4 multiplied by the replacement cost of each derivative
contract or single product netting set of derivative contracts to which
the national bank or Federal savings association is a counterparty,
calculated according to the following formula:
Replacement Cost = max{V-CVMr + CVMp; 0{time}
Where:
V equals the fair value for each derivative contract or each single-
product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (c)(4)(ii)(I) of this
section and, at the discretion of the national bank or Federal
savings association, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse
repurchase or a securities borrowing or lending transaction that
qualifies for sales treatment under U.S. GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraph (c)(4)(ii)(C)(3) through (7); and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not off-set the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section; and
(ii) Notwithstanding paragraph (c)(4)(ii)(C)(1)(i) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a national bank or Federal savings association must apply
the formula for replacement cost provided in Sec. 3.132(c)(10), in
which the term may only include cash collateral that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
(2) The amount of cash collateral that is received from a
counterparty to a derivative contract that has off-set the fair value
of a derivative contract and that does not satisfy the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
(3) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation or an agreement with the counterparty);
(4) Variation margin is calculated and transferred on a daily basis
based on the fair value of the derivative contract;
(5) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the net current credit exposure
to the counterparty of the derivative contracts, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(6) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master netting
agreement, or in the governing rules for a cleared transaction; and
(7) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
* * * * *
0
4. Section 3.32 is amended by revising paragraph (f) to read as
follows:
Sec. 3.32 General risk weights.
* * * * *
(f) Corporate exposures. (1) A national bank or Federal savings
association must assign a 100 percent risk weight to all its corporate
exposures, except as provided in paragraph (f)(2) of this section.
(2) A national bank or Federal savings association must assign a 2
percent risk weight to an exposure to a QCCP arising from the national
bank or Federal savings association posting cash collateral to the QCCP
in connection with a cleared transaction that meets the requirements of
Sec. 3.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a
QCCP arising from the national bank or Federal savings association
posting cash collateral to the QCCP in connection with a cleared
transaction that meets the requirements of Sec. 3.35(b)(3)(i)(B).
(3) A national bank or Federal savings association must assign a 2
percent risk weight to an exposure to a QCCP arising from the national
bank or Federal savings association posting cash collateral to the QCCP
in connection with a cleared transaction that meets the requirements of
Sec. 3.35(c)(3)(i).
* * * * *
0
5. Section 3.34 is revised to read as follows:
Sec. 3.34 Derivative contracts.
(a) Exposure amount for derivative contracts--(1) National bank or
Federal savings association that is not an advanced approaches national
bank or
[[Page 64691]]
Federal savings association. (i) A national bank or Federal savings
association that is not an advanced approaches national bank or Federal
savings association must use the current exposure methodology (CEM)
described in paragraph (b) of this section to calculate the exposure
amount for all its OTC derivative contracts, unless the national bank
or Federal savings association makes the election provided in paragraph
(a)(1)(ii) of this section.
(ii) A national bank or Federal savings association that is not an
advanced approaches national bank or Federal savings association may
elect to calculate the exposure amount for all its OTC derivative
contracts under the standardized approach for counterparty credit risk
(SA-CCR) in Sec. 3.132(c), rather than calculating the exposure amount
for all its derivative contracts using the CEM. A national bank or
Federal savings association that elects under this paragraph (a)(1)(ii)
to calculate the exposure amount for its OTC derivative contracts under
the SA-CCR must apply the treatment of cleared transactions under Sec.
3.133 to its derivative contracts that are cleared transactions, rather
than applying Sec. 3.35. A national bank or Federal savings
association that is not an advanced approaches national bank or Federal
savings association must use the same methodology to calculate the
exposure amount for all its derivative contracts and may change its
election only with prior approval of the OCC.
(2) Advanced approaches national bank or Federal savings
association. An advanced approaches national bank or Federal savings
association must calculate the exposure amount for all its derivative
contracts using the SA-CCR in Sec. 3.132(c). An advanced approaches
national bank or Federal savings association must apply the treatment
of cleared transactions under Sec. 3.133 to its derivative contracts
that are cleared transactions.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to a qualifying master netting agreement is equal to the
sum of the national bank's or Federal savings association's current
credit exposure and potential future credit exposure (PFE) on the OTC
derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
this section.
(B) For purposes of calculating either the PFE under this paragraph
(b) or the gross PFE under paragraph (b)(2) of this section for
exchange rate contracts and other similar contracts in which the
notional principal amount is equivalent to the cash flows, notional
principal amount is the net receipts to each party falling due on each
value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to this section, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A national bank or Federal savings association must use an OTC
derivative contract's effective notional principal amount (that is, the
apparent or stated notional principal amount multiplied by any
multiplier in the OTC derivative contract) rather than the apparent or
stated notional principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 1 to Sec. 3.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals (except Other
and gold reference reference gold)
asset) \3\ asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A national bank or Federal savings association must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative
whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A national bank or
Federal savings association must use the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as
Anet = (0.4 x Agross) + (0.6 x NGR x Agross),
Where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master
netting agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the
NGR, the gross current credit exposure equals the sum of the
positive current credit exposures (as determined under paragraph
(b)(1)(i) of this section) of all individual derivative contracts
subject to the qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) A national bank or Federal savings
association using the
[[Page 64692]]
CEM under paragraph (b) of this section may recognize the credit risk
mitigation benefits of financial collateral that secures an OTC
derivative contract or multiple OTC derivative contracts subject to a
qualifying master netting agreement (netting set) by using the simple
approach in Sec. 3.37(b).
(2) As an alternative to the simple approach, a national bank or
Federal savings association using the CEM under paragraph (b) of this
section may recognize the credit risk mitigation benefits of financial
collateral that secures such a contract or netting set if the financial
collateral is marked-to-fair value on a daily basis and subject to a
daily margin maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 3.37(c). The national bank or
Federal savings association must substitute the exposure amount
calculated under paragraph (b)(1) or (2) of this section for [Sigma]E
in the equation in Sec. 3.37(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. A national bank or Federal savings association that
purchases a credit derivative that is recognized under Sec. 3.36 as a
credit risk mitigant for an exposure that is not a covered position
under subpart F of this part is not required to compute a separate
counterparty credit risk capital requirement under Sec. 3.32 provided
that the national bank or Federal savings association does so
consistently for all such credit derivatives. The national bank or
Federal savings association must either include all or exclude all such
credit derivatives that are subject to a qualifying master netting
agreement from any measure used to determine counterparty credit risk
exposure to all relevant counterparties for risk-based capital
purposes.
(2) Protection providers. (i) A national bank or Federal savings
association that is the protection provider under a credit derivative
must treat the credit derivative as an exposure to the underlying
reference asset. The national bank or Federal savings association is
not required to compute a counterparty credit risk capital requirement
for the credit derivative under Sec. 3.32, provided that this
treatment is applied consistently for all such credit derivatives. The
national bank or Federal savings association must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes unless the national bank
or Federal savings association is treating the credit derivative as a
covered position under subpart F of this part, in which case the
national bank or Federal savings association must compute a
supplemental counterparty credit risk capital requirement under this
section.
(e) Counterparty credit risk for equity derivatives. (1) A national
bank or Federal savings association must treat an equity derivative
contract as an equity exposure and compute a risk-weighted asset amount
for the equity derivative contract under Sec. Sec. 3.51 through 3.53
(unless the national bank or Federal savings association is treating
the contract as a covered position under subpart F of this part).
(2) In addition, the national bank or Federal savings association
must also calculate a risk-based capital requirement for the
counterparty credit risk of an equity derivative contract under this
section if the national bank or Federal savings association is treating
the contract as a covered position under subpart F of this part.
(3) If the national bank or Federal savings association risk
weights the contract under the Simple Risk-Weight Approach (SRWA) in
Sec. 3.52, the national bank or Federal savings association may choose
not to hold risk-based capital against the counterparty credit risk of
the equity derivative contract, as long as it does so for all such
contracts. Where the equity derivative contracts are subject to a
qualified master netting agreement, a national bank or Federal savings
association using the SRWA must either include all or exclude all of
the contracts from any measure used to determine counterparty credit
risk exposure.
(f) Clearing member national bank's or Federal savings
association's exposure amount. The exposure amount of a clearing member
national bank or Federal savings association using the CEM under
paragraph (b) of this section for an OTC derivative contract or netting
set of OTC derivative contracts where the national bank or Federal
savings association is either acting as a financial intermediary and
enters into an offsetting transaction with a QCCP or where the national
bank or Federal savings association provides a guarantee to the QCCP on
the performance of the client equals the exposure amount calculated
according to paragraph (b)(1) or (2) of this section multiplied by the
scaling factor 0.71. If the national bank or Federal savings
association determines that a longer period is appropriate, the
national bank or Federal savings association must use a larger scaling
factor to adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.017
Where H = the holding period greater than five days. Additionally,
the OCC may require the national bank or Federal savings association to
set a longer holding period if the OCC determines that a longer period
is appropriate due to the nature, structure, or characteristics of the
transaction or is commensurate with the risks associated with the
transaction.
0
6. Section 3.35 is amended by adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding paragraph (c)(3)(iii) to read as
follows:
Sec. 3.35 Cleared transactions.
(a) * * *
(3) Alternate requirements. Notwithstanding any other provision of
this section, an advanced approaches national bank or Federal savings
association or a national bank or Federal savings association that is
not an advanced approaches national bank or Federal savings association
and that has elected to use SA-CCR under Sec. 3.34(a)(1) must apply
Sec. 3.133 to its derivative contracts that are cleared transactions
rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other requirements in this section,
collateral posted by a clearing member client national bank or Federal
savings association that is held by a custodian (in its capacity as
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member national bank or Federal savings association
may apply a risk weight of zero percent to the trade exposure amount
for a cleared transaction with a CCP where the clearing member national
bank or Federal savings association is acting as a financial
intermediary on behalf of a clearing member client, the transaction
offsets another transaction that satisfies the requirements set forth
in Sec. 3.3(a),
[[Page 64693]]
and the clearing member national bank or Federal savings association is
not obligated to reimburse the clearing member client in the event of
the CCP default.
* * * * *
0
7. Section 3.37 is amended by revising paragraph (c)(3)(iii) to read as
follows:
Sec. 3.37 Collateralized transactions.
* * * * *
(c) * * *
(3) * * *
(iii) For repo-style transactions and cleared transactions, a
national bank or Federal savings association may multiply the standard
supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this
section by the square root of \1/2\ (which equals 0.707107).
* * * * *
Sec. Sec. 3.134, 3.202, and 3.210 [Amended]
0
8. For each section listed in the following table, the footnote number
listed in the ``Old footnote number'' column is redesignated as the
footnote number listed in the ``New footnote number'' column as
follows:
------------------------------------------------------------------------
Old footnote New footnote
Section No. No.
------------------------------------------------------------------------
3.134(d)(3)............................. 30 31
3.202, paragraph (1) introductory text 31 32
of the definition of ``Covered
position''.............................
3.202, paragraph (1)(i) of the 32 33
definition of ``Covered position''.....
3.210(e)(1)............................. 33 34
------------------------------------------------------------------------
0
9. Section 3.132 is amended by:
0
a. Revising paragraphs (b)(2)(ii)(A)(3) through (5);
0
b. Adding paragraphs (b)(2)(ii)(A)(6) and (7);
0
c. Revising paragraphs (c) heading and (c)(1) and (2) and (5) through
(8);
0
d. Adding paragraphs (c)(9) through (12);
0
e. Removing ``Table 3 to Sec. 3.132'' and adding in its place ``Table
4 to this section'' in paragraphs (e)(5)(i)(A) and (H); and
0
f. Redesignating Table 3 to Sec. 3.132 as Table 4 to Sec. 3.132.
The revisions and additions read as follows:
Sec. 3.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and cleared transactions, a
national bank or Federal savings association may multiply the
supervisory haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) of
this section by the square root of \1/2\ (which equals 0.707107).
(4) A national bank or Federal savings association must adjust the
supervisory haircuts upward on the basis of a holding period longer
than ten business days (for eligible margin loans) or five business
days (for repo-style transactions), using the formula provide in
paragraph (b)(2)(ii)(A)(6) of this section where the following
conditions apply. If the number of trades in a netting set exceeds
5,000 at any time during a quarter, a national bank or Federal savings
association must adjust the supervisory haircuts upward on the basis of
a holding period of twenty business days for the following quarter
(except when a national bank or Federal savings association is
calculating EAD for a cleared transaction under Sec. 3.133). If a
netting set contains one or more trades involving illiquid collateral,
a national bank or Federal savings association must adjust the
supervisory haircuts upward on the basis of a holding period of twenty
business days. If over the two previous quarters more than two margin
disputes on a netting set have occurred that lasted more than the
holding period, then the national bank or Federal savings association
must adjust the supervisory haircuts upward for that netting set on the
basis of a holding period that is at least two times the minimum
holding period for that netting set.
(5)(i) A national bank or Federal savings association must adjust
the supervisory haircuts upward on the basis of a holding period longer
than ten business days for collateral associated derivative contracts
that are not cleared transactions using the formula provided in
paragraph (b)(2)(ii)(A)(6) of this section where the following
conditions apply. For collateral associated with a derivative contract
that is within a netting set that is composed of more than 5,000
derivative contracts that are not cleared transactions, a national bank
or Federal savings association must use a holding period of twenty
business days. If a netting set contains one or more trades involving
illiquid collateral or a derivative contract that cannot be easily
replaced, a national bank or Federal savings association must use a
holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or
(b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a
derivative contract that is subject to an outstanding dispute over
variation margin, the holding period is twice the amount provide under
paragraph (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) of this
section.
(6) A national bank or Federal savings association must adjust the
standard supervisory haircuts upward, pursuant to the adjustments
provided in paragraphs (b)(2)(ii)(A)(4) and (5) of this section, using
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.018
Where:
TM equals a holding period of longer than 10 business days for
eligible margin loans and derivative contracts or longer than 5
business days for repo-style transactions;
Hs equals the standard supervisory haircut; and
Ts equals 10 business days for eligible margin loans and derivative
contracts or 5 business days for repo-style transactions.
(7) If the instrument a national bank or Federal savings
association has lent, sold subject to repurchase, or posted as
collateral does not meet the definition of financial collateral, the
national bank or Federal savings association must use a 25.0 percent
haircut for market price volatility (Hs).
* * * * *
(c) EAD for derivative contracts--(1) Options for determining EAD.
A national bank or Federal savings association must determine the EAD
for a derivative contract using the standardized approach for
counterparty credit risk (SA-CCR) under paragraph (c)(5) of this
section or using the internal models methodology described in paragraph
(d) of this section. If a national bank or Federal savings association
elects to use SA-CCR for one or more derivative contracts, the exposure
amount determined under SA-CCR is the EAD for the derivative
[[Page 64694]]
contract or derivatives contracts. A national bank or Federal savings
association must use the same methodology to calculate the exposure
amount for all its derivative contracts and may change its election
only with prior approval of the OCC.
(2) Definitions. For purposes of this paragraph (c), the following
definitions apply:
(i) Except as otherwise provided in paragraph (c) of this section,
the end date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument.
(ii) Except as otherwise provided in paragraph (c) of this section,
the start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument.
(iii) Hedging set means:
(A) With respect interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity classes: Energy, metal, agricultural, or other commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, the OCC may require a national bank or Federal savings
association to include the derivative contract in each appropriate
hedging set under paragraphs (c)(2)(iii)(A) through (E) of this
section.
* * * * *
(5) Exposure amount. The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section, except that, notwithstanding the requirements
of this paragraph (c)(5):
(i) The exposure amount of a netting set subject to a variation
margin agreement, excluding a netting set that is subject to a
variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set and the
exposure amount of the netting set calculated as if the netting set
were not subject to a variation margin agreement; and
(ii) The exposure amount of a netting set that consists of only
sold options in which the premiums have been fully paid and that are
not subject to a variation margin agreement is zero.
(6) Replacement cost of a netting set--(i) Netting set subject to a
variation margin agreement under which the counterparty must post
variation margin. The replacement cost of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty is not
required to post variation margin, is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the sum of the net independent collateral amount and the variation
margin amount applicable to such derivative contracts;
(B) The sum of the variation margin threshold and the minimum
transfer amount applicable to the derivative contracts within the
netting set less the net independent collateral amount applicable to
such derivative contracts; or
(C) Zero.
(ii) Netting sets not subject to a variation margin agreement under
which the counterparty must post variation margin. The replacement cost
of a netting set that is not subject to a variation margin agreement
under which the counterparty must post variation margin to the national
bank or Federal savings association is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the net independent collateral amount and variation margin amount
applicable to such derivative contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for multiple netting sets subject to a
single variation margin agreement must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Multiple netting sets subject to multiple variation margin
agreements or a hybrid netting set. Notwithstanding paragraphs
(c)(6)(i) and (ii) of this section, the replacement cost for a netting
set subject to multiple variation margin agreements or a hybrid netting
set must be calculated according to paragraph (c)(11)(i) of this
section.
(7) Potential future exposure of a netting set. The potential
future exposure of a netting set is the product of the PFE multiplier
and the aggregated amount.
(i) PFE multiplier. The PFE multiplier is calculated according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.018
[[Page 64695]]
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the PFE amount for purposes of total
leverage exposure under Sec. 3.10(c)(4)(ii)(B), the potential future
exposure for multiple netting sets subject to a single variation margin
agreement must be calculated according to paragraph (c)(10)(ii) of this
section.
(iv) Multiple netting sets subject to multiple variation margin
agreements or a hybrid netting set. Notwithstanding paragraphs
(c)(7)(i) and (ii) of this section and when calculating the PFE amount
for purposes of total leverage exposure under Sec. 3.10(c)(4)(ii)(B),
the potential future exposure for a netting set subject to multiple
variation margin agreements or a hybrid netting set must be calculated
according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, a national bank or Federal savings association
may use either of the formulas provided in paragraphs (c)(8)(i)(A) and
(B) of this section:
[GRAPHIC] [TIFF OMITTED] TP17DE18.020
[[Page 64696]]
(ii) Exchange rate derivative contracts. For an exchange rate
derivative contract hedging set, the hedging set amount equals the
absolute value of the sum of the adjusted derivative contract amounts,
as calculated under paragraph (c)(9) of this section, within the
hedging set.
(iii) Credit derivative contracts and equity derivative contracts.
The hedging set amount of a credit derivative contract hedging set or
equity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.021
Where:
k is each reference entity within the hedging set.
K is the number of reference entities within the hedging set.
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference entity k.
rk equals the applicable supervisory correlation factor, as provided
in Table 2 to this section.
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.022
Where:
k is each commodity type within the hedging set.
K is the number of commodity types within the hedging set.
AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference commodity type k.
r equals the applicable supervisory correlation factor, as provided
in Table 2 to this section.
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a
national bank or Federal savings association must calculate a separate
hedging set amount for each basis derivative contract hedging set and
each volatility derivative contract hedging set. A national bank or
Federal savings association must calculate such hedging set amounts
using one of the formulas under paragraphs (c)(8)(i) through (iv) that
corresponds to the primary risk factor of the hedging set being
calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, a
national bank or Federal savings association must determine the
adjusted notional amount of derivative contract, pursuant to paragraph
(c)(9)(ii) of this section, and multiply the adjusted notional amount
by each of the supervisory delta adjustment, pursuant to paragraph
(c)(9)(iii) of this section, the maturity factor, pursuant to paragraph
(c)(9)(iv) of this section, and the applicable supervisory factor, as
provided in Table 2 to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.023
Where:
S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
E is the number of business days from the present day until the end
date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit
derivative contract that is a variable notional swap, the notional
amount is equal to the time-weighted average of the contractual
notional amounts of such a swap over the remaining life of the swap;
and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a
factor and all rates of the derivative contract are multiplied by
the same factor, the notional amount is equal to the notional amount
of an equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. If both legs
of the exchange rate
[[Page 64697]]
derivative contract are denominated in currencies other than U.S.
dollars, the adjusted notional amount of the derivative contract is
the largest leg of the derivative contract, as measured in U.S.
dollars using the exchange rate on the date of the calculation.
(2) Notwithstanding paragraph (c)(9)(ii)(B)(1) of this section,
for an exchange rate derivative contract with multiple exchanges of
principal, the national bank or Federal savings association must set
the adjusted notional amount of the derivative contract equal to the
notional amount of the derivative contract multiplied by the number
of exchanges of principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity
derivative contract, the adjusted notional amount is the product of
the fair value of one unit of the reference instrument underlying
the derivative contract and the number of such units referenced by
the derivative contract.
(2) Notwithstanding paragraph (c)(9)(ii)(C)(1) of this section,
when calculating the adjusted notional amount for an equity
derivative contract or a commodity derivative contract that is a
volatility derivative contract, the national bank or Federal savings
association must replace the unit price with the underlying
volatility referenced by the volatility derivative contract and
replace the number of units with the notional amount of the
volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative
contract that is not an option contract or collateralized debt
obligation tranche, the supervisory delta adjustment is 1 if the
fair value of the derivative contract increases when the value of
the primary risk factor increases and -1 if the fair value of the
derivative contract decreases when the value of the primary risk
factor increases;
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following
formulas, as applicable:
[GRAPHIC] [TIFF OMITTED] TP17DE18.024
(2) As used in the formulas in Table 3 to this section:
(i) [b.Phi] is the standard normal cumulative distribution
function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) l equals zero for all derivative contracts except interest
rate options for the currencies where interest rates have negative
values. The same value of l must be used for all interest rate
options that are denominated in the same currency. To determine the
value of l for a given currency, a national bank or Federal savings
association must find the lowest value L of P and K of all interest
rate options in a given currency that the national bank or Federal
savings association has with all counterparties. Then, l is set
according to this formula: l = max{-L + 0.1%, 0{time} ; and
(vi) [sigma] equals the supervisory option volatility, as
provided in Table 2 to of this section.
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined
by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.025
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of
this section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated
to the national bank's or Federal savings association's exposure to
the total notional amount of all underlying exposures, expressed as
a decimal value between zero and one; \30\
---------------------------------------------------------------------------
\30\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the national
bank's or Federal savings association's exposure. In the case of a
second-or-subsequent-to-default credit derivative, the smallest (n-
1) notional amounts of the underlying exposures are subordinated to
the national bank's or Federal savings association's exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio
of the notional amounts of all underlying exposures that are senior
to the national bank's or Federal savings association's exposure to
the total notional amount of all underlying exposures, expressed as
a decimal value between zero and one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the
national bank or Federal savings association and is designated with
a negative sign if the collateralized debt obligation tranche was
sold by the national bank or Federal savings association.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract that is subject to a variation margin agreement, excluding
derivative contracts that are subject to a variation margin
agreement under which the counterparty is not required to post
variation margin, is determined by the following formula:
[[Page 64698]]
[GRAPHIC] [TIFF OMITTED] TP17DE18.026
Where MPOR refers to the period from the most recent exchange of
collateral covering a netting set of derivative contracts with a
defaulting counterparty until the derivative contracts are closed
out and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a cleared transaction,
MPOR cannot be less than ten business days plus the periodicity of
re-margining expressed in business days minus one business day;
(ii) For a derivative contract that is a cleared transaction,
MPOR cannot be less than five business days plus the periodicity of
re-margining expressed in business days minus one business day; and
(iii) For a derivative contract that is within a netting set
that is composed of more than 5,000 derivative contracts that are
not cleared transactions, MPOR cannot be less than twenty business
days.
(3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this
section, for a derivative contract subject to an outstanding dispute
over variation margin, the applicable floor is twice the amount
provided in (c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts
under which the counterparty is not required to post variation
margin, is determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.027
Where M equals the greater of 10 business days and the remaining
maturity of the contract, as measured in business days.
(C) For purposes of paragraph (c)(9)(iv) of this section,
derivative contracts with daily settlement are treated as derivative
contracts not subject to a variation margin agreement and daily
settlement does not change the end date of the period referenced by
the derivative contract.
(v) Derivative contract as multiple effective derivative
contracts. A national bank or Federal savings association must
separate a derivative contract into separate derivative contracts,
according to the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must
be treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must
be represented as the combination of one bought European option and
one sold European option of the same type as the original option
(put or call) with the strikes set equal to 0.95*K and 1.05*K so
that the payoff of the binary option is reproduced exactly outside
the region between the two strikes. The absolute value of the sum of
the adjusted derivative contract amounts of the bought and sold
options is capped at the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), each standard
option component must be treated as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment
options, (such as interest rate caps and floors) each payment option
may be represented as a combination of effective single-payment
options (such as interest rate caplets and floorlets).
(10) Multiple netting sets subject to a single variation margin
agreement--(i) Calculating replacement cost. Notwithstanding
paragraph (c)(6) of this section, a national bank or Federal savings
association shall assign a single replacement cost to multiple
netting sets that are subject to a single variation margin agreement
under which the counterparty must post variation margin, calculated
according to the following formula:
Replacement Cost = max{SNS max{VNS; 0{time} -max{CMA; 0{time} ;
0{time} + max{SNS min{VNS; 0{time} -min{CMA; 0{time} ; 0{time}
Where:
NS is each netting set subject to the variation margin agreement MA.
VNS is the sum of the fair values (after excluding any
valuation adjustments) of the derivative contracts within the
netting set NS.
CMA is the sum of the net independent collateral amount
and the variation margin amount applicable to the derivative
contracts within the netting sets subject to the single variation
margin agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, a national bank or Federal savings
association shall assign a single potential future exposure to multiple
netting sets that are subject to a single variation margin agreement
under which the counterparty must post variation margin equal to the
sum of the potential future exposure of each such netting set, each
calculated according to paragraph (c)(7) of this section as if such
nettings sets were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(ii) of this section, except that the variation margin
threshold equals the sum of the variation margin thresholds of all
variation margin agreements within the netting set and the minimum
transfer amount equals the sum of the minimum transfer amounts of all
the variation margin agreements within the netting set.
(ii) Calculating potential future exposure. (A) To calculate
potential future exposure for a netting set subject to multiple
variation margin agreements under which the counterparty to each
variation margin agreement must post variation margin, or a netting set
composed of at least one derivative contract subject to variation
margin agreement under which the counterparty to the derivative
contract must post variation margin and at least one derivative
contract that is not subject to such a variation margin agreement, a
national bank or Federal savings association must divide the netting
set into sub-netting sets and calculate the aggregated amount for each
sub-netting set. The aggregated amount for the netting set is
calculated as the sum of the aggregated amounts for the sub-netting
sets. The multiplier is calculated for the entire netting set.
(B) For purposes of paragraph (c)(11)(ii)(A) of this section, the
netting set must be divided into sub-netting sets as follows:
(1) All derivative contracts within the netting set that are not
subject to a variation margin agreement or that are subject to a
variation margin agreement
[[Page 64699]]
under which the counterparty is not required to post variation margin
form a single sub-netting set. The aggregated amount for this sub-
netting set is calculated as if the netting set is not subject to a
variation margin agreement.
(2) All derivative contracts within the netting set that are
subject to variation margin agreements in which the counterparty must
post variation margin and that share the same value of the MPOR form a
single sub-netting set. The aggregated amount for this sub-netting set
is calculated as if the netting set is subject to a variation margin
agreement, using the MPOR value shared by the derivative contracts
within the netting set.
(12) Treatment of cleared transactions. (i) A national bank or
Federal savings association must apply the adjustments in paragraph
(c)(12)(iii) of this section to the calculation of exposure amount
under this paragraph (c) for a netting set that is composed solely of
one or more cleared transactions.
(ii) A national bank or Federal savings association that is a
clearing member must apply the adjustments in paragraph (c)(12)(iii) of
this section to the calculation of exposure amount under this paragraph
(c) for a netting set that is composed solely of one or more exposures,
each of which are exposures of the national bank or Federal savings
association to its clearing member client where the national bank or
Federal savings association is either acting as a financial
intermediary and enters into an offsetting transaction with a CCP or
where the national bank or Federal savings association provides a
guarantee to the CCP on the performance of the client.
(iii)(A) For purposes of calculating the maturity factor under
paragraph (c)(9)(iv)(B) of this section, MPOR may not be less than 10
business days;
(B) For purposes of calculating the maturity factor under paragraph
(c)(9)(iv)(B) of this section, the minimum MPOR under paragraph
(c)(9)(iv)(A)(3) of this section does not apply if there are no
outstanding disputed trades in the netting set, there is no illiquid
collateral in the netting set, and there are no exotic derivative
contracts in the netting set; and
(C) For purposes of calculating the maturity factor under paragraph
(c)(9)(iv)(A) and (B) of this section, if the CCP collects and holds
variation margin and the variation margin is not bankruptcy remote from
the CCP, Mi may not exceed 250 business days.
Table 2 to Sec. 3.132--Supervisory Option Volatility, Supervisory Correlation Parameters, and Supervisory
Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
Asset class Subclass option correlation Supervisory
volatility (%) factor (%) factor \1\ (%)
----------------------------------------------------------------------------------------------------------------
Interest rate......................... N/A..................... 50 N/A 0.50
Exchange rate......................... N/A..................... 15 N/A 4.0
Credit, single name................... Investment grade........ 100 50 0.5
Speculative grade....... 100 50 1.3
Sub-speculative grade... 100 50 6.0
Credit, index......................... Investment Grade........ 80 80 0.38
Speculative Grade....... 80 80 1.06
Equity, single name................... N/A..................... 120 50 32
Equity, index......................... N/A..................... 75 80 20
Commodity............................. Energy.................. 150 40 40
Metals.................. 70 40 18
Agricultural............ 70 40 18
Other................... 70 40 18
----------------------------------------------------------------------------------------------------------------
\1\ The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the
supervisory factor provided in this Table 2, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this Table 2.
* * * * *
0
10. Section 3.133 is amended by revising paragraphs (a), (b) heading,
(b)(1) through (3), (b)(4)(i), (c)(1) thorough (3), (c)(4)(i), and (d)
to read as follows:
Sec. 3.133 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A national
bank or Federal savings association that is a clearing member client
must use the methodologies described in paragraph (b) of this section
to calculate risk-weighted assets for a cleared transaction.
(2) Clearing members. A national bank or Federal savings
association that is a clearing member must use the methodologies
described in paragraph (c) of this section to calculate its risk-
weighted assets for a cleared transaction and paragraph (d) of this
section to calculate its risk-weighted assets for its default fund
contribution to a CCP.
(b) Clearing member client national bank or Federal savings
association--(1) Risk-weighted assets for cleared transactions. (i) To
determine the risk-weighted asset amount for a cleared transaction, a
national bank or Federal savings association that is a clearing member
client must multiply the trade exposure amount for the cleared
transaction, calculated in accordance with paragraph (b)(2) of this
section, by the risk weight appropriate for the cleared transaction,
determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is
the sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or a netting set of derivative contracts, trade
exposure amount equals the EAD for the derivative contract or netting
set of derivative contracts calculated using the methodology used to
calculate EAD for derivative contracts set forth in Sec. 3.132(c) or
(d), plus the fair value of the collateral posted by the clearing
member client national bank or Federal savings association and held by
the CCP or a clearing member in a manner that is not bankruptcy remote.
When the national bank or Federal savings association calculates EAD
for the cleared transaction using the
[[Page 64700]]
methodology in Sec. 3.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 3.132(b)(2) or (3) or (d), plus the fair value of
the collateral posted by the clearing member client national bank or
Federal savings association and held by the CCP or a clearing member in
a manner that is not bankruptcy remote. When the national bank or
Federal savings association calculates EAD for the cleared transaction
under Sec. 3.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client national bank or Federal savings
association must apply a risk weight of:
(A) 2 percent if the collateral posted by the national bank or
Federal savings association to the QCCP or clearing member is subject
to an arrangement that prevents any loss to the clearing member client
national bank or Federal savings association due to the joint default
or a concurrent insolvency, liquidation, or receivership proceeding of
the clearing member and any other clearing member clients of the
clearing member; and the clearing member client national bank or
Federal savings association has conducted sufficient legal review to
conclude with a well-founded basis (and maintains sufficient written
documentation of that legal review) that in the event of a legal
challenge (including one resulting from an event of default or from
liquidation, insolvency or receivership proceedings) the relevant court
and administrative authorities would find the arrangements to be legal,
valid, binding and enforceable under the law of the relevant
jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client national bank or Federal savings association
must apply the risk weight applicable to the CCP under Sec. 3.32.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client national bank or Federal
savings association that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a clearing
member national bank or Federal savings association must multiply the
trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (c)(2) of this section by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (c)(3) of this section.
(ii) A clearing member national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is
the sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. A clearing member national bank or
Federal savings association must calculate its trade exposure amount
for a cleared transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 3.132(c) or (d), plus the fair
value of the collateral posted by the clearing member national bank or
Federal savings association and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member national bank or Federal
savings association calculates EAD for the cleared transaction using
the methodology in Sec. 3.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 3.132(b)(2) or (3) or (d), plus the fair
value of the collateral posted by the clearing member national bank or
Federal savings association and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member national bank or Federal
savings association calculates EAD for the cleared transaction under
Sec. 3.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member
national bank or Federal savings association must apply a risk weight
of 2 percent to the trade exposure amount for a cleared transaction
with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member national bank or Federal savings association must apply
the risk weight applicable to the CCP according to Sec. 3.32.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member national bank or Federal savings association
may apply a risk weight of zero percent to the trade exposure amount
for a cleared transaction with a QCCP where the clearing member
national bank or Federal savings association is acting as a financial
intermediary on behalf of a clearing member client, the transaction
offsets another transaction that satisfies the requirements set forth
in Sec. 3.3(a), and the clearing member national bank or Federal
savings association is not obligated to reimburse the clearing member
client in the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client national bank or Federal
savings association that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(d) Default fund contributions--(1) General requirement. A clearing
member national bank or Federal savings association must determine the
risk-weighted asset amount for a default fund contribution to a CCP at
least quarterly, or more frequently if, in the opinion of the national
bank or Federal savings association or the OCC, there is a material
change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member national bank's or Federal
savings association's risk-weighted asset amount for default fund
contributions to CCPs that are not QCCPs equals the sum of such default
fund contributions multiplied by 1,250 percent, or an amount determined
by the OCC, based on factors such as size, structure and membership
characteristics of the CCP and riskiness of its transactions, in cases
where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member national bank's or Federal savings
association's risk-weighted asset amount for default fund contributions
to QCCPs equals the sum of its capital requirement, KCM for
each QCCP, as calculated under the methodology set forth in paragraph
(e)(4) of this section.
[[Page 64701]]
(i) EAD must be calculated separately for each clearing member's
sub-client accounts and sub-house account (i.e., for the clearing
member's propriety activities). If the clearing member's collateral and
its client's collateral are held in the same default fund contribution
account, then the EAD of that account is the sum of the EAD for the
client-related transactions within the account and the EAD of the
house-related transactions within the account. For purposes of
determining such EADs, the independent collateral of the clearing
member and its client must be allocated in proportion to the respective
total amount of independent collateral posted by the clearing member to
the QCCP.
(ii) If any account or sub-account contains both derivative
contracts and repo-style transactions, the EAD of that account is the
sum of the EAD for the derivative contracts within the account and the
EAD of the repo-style transactions within the account. If independent
collateral is held for an account containing both derivative contracts
and repo-style transactions, then such collateral must be allocated to
the derivative contracts and repo-style transactions in proportion to
the respective product specific exposure amounts, calculated, excluding
the effects of collateral, according to Sec. 3.132(b) for repo-style
transactions and to Sec. 3.132(c)(5) for derivative contracts.
(4) Risk-weighted asset amount for default fund contributions to a
QCCP. A clearing member national bank's or Federal savings
association's capital requirement for its default fund contribution to
a QCCP (KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TP17DE18.028
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has
provided its KCCP, a national bank or Federal savings
association must rely on such disclosed figure instead of calculating
KCCP under this paragraph (d)(5), unless the national bank
or Federal savings association determines that a more conservative
figure is appropriate based on the nature, structure, or
characteristics of the QCCP. The hypothetical capital requirement of a
QCCP (KCCP), as determined by the national bank or Federal savings
association, is equal to:
KCCP = [Sigma]CMi EADi * 1.6 percent
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of the QCCP to
the QCCP, as determined under paragraph (d)(6) of this section.
(6) EAD of a clearing member national bank or Federal savings
association to a QCCP. (i) The EAD of a clearing member national bank
or Federal savings association to a QCCP is equal to the sum of the EAD
for derivative contracts determined under paragraph (d)(6)(ii) of this
section and the EAD for repo-style transactions determined under
paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the national
bank or Federal savings association and the CCP that are cleared
transactions and any guarantees that the national bank or Federal
savings association has provided to the CCP with respect to performance
of a clearing member client on a derivative contract, the EAD is equal
to the sum of:
(A) The exposure amount for all such derivative contracts and
guarantees of derivative contracts calculated under SA-CCR in Sec.
3.132(c) using a value of
[[Page 64702]]
10 business days for purposes of Sec. 3.132(c)(9)(iv)(B);
(B) The value of all collateral held by the CCP posted by the
clearing member national bank or Federal savings association or a
clearing member client of the national bank or Federal savings
association in connection with a derivative contract for which the
national bank or Federal savings association has provided a guarantee
to the CCP; and
(C) The amount of the prefunded default fund contribution of the
national bank or Federal savings association to the CCP.
(iii) With respect to any repo-style transactions between the
national bank or Federal savings association and the CCP that are
cleared transactions, EAD is equal to:
EAD = max{EBRM - IM - DF; 0{time}
Where:
EBRM is the sum of the exposure amounts of each repo-style
transaction between the national bank or Federal savings association
and the CCP as determined under Sec. 3.132(b)(2) and without
recognition of any collateral securing the repo-style transactions;
IM is the initial margin collateral posted by the national bank or
Federal savings association to the CCP with respect to the repo-
style transactions; and
DF is the prefunded default fund contribution of the national bank
or Federal savings association to the CCP.
0
11. Section 3.300 is amended by adding paragraph (f) to read as
follows:
Sec. 3.300 Transitions.
* * * * *
(f) SA-CCR. After giving prior notice to the OCC, an advanced
approaches national bank or Federal savings association may use CEM
rather than SA-CCR to determine the exposure amount for purposes of
Sec. 3.34 and the EAD for purposes of Sec. 3.132 for its derivative
contracts until July 1, 2020. On July 1, 2020, and thereafter, an
advanced approaches national bank or Federal savings association must
use SA-CCR for purposes of Sec. 3.34 and must use either SA-CCR or IMM
for purposes of Sec. 3.132. Once an advanced approaches national bank
or Federal savings association has begun to use SA-CCR, the advanced
approaches national bank or Federal savings association may not change
to use CEM.
PART 32--LENDING LIMITS
0
12. The authority citation for part 32 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463,
1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h.
0
13. Section 32.9 is amended by revising paragraph (b)(1)(iii) and
adding paragraph (b)(1)(iv) to read as follows:
Sec. 32.9 Credit exposure arising from derivative and securities
financing transactions.
* * * * *
(b) * * *
(1) * * *
(iii) Current Exposure Method. The credit exposure arising from a
derivative transaction (other than a credit derivative transaction)
under the Current Exposure Method shall be calculated pursuant to 12
CFR 3.34(b)(1) and (2) and (c) or 324.34(b)(1) and (2) and (c), as
appropriate.
(iv) Standardized Approach for Counterparty Credit Risk Method. The
credit exposure arising from a derivative transaction (other than a
credit derivative transaction) under the Standardized Approach for
Counterparty Credit Risk Method shall be calculated pursuant to 12 CFR
3.132(c)(5) or 324.132(c)(5), as appropriate.
* * * * *
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is proposed to be amended as set
forth below:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
14. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
15. Section 217.2 is amended by:
0
a. Adding the definition of ``Basis derivative contract'' in
alphabetical order;
0
b. Revising paragraph (2) of the definition of ``Financial
collateral;''
0
c. Adding the definitions of ``Independent collateral,'' ``Minimum
transfer amount,'' and ``Net independent collateral amount'' in
alphabetical order;
0
d. Revising the definition of ``Netting set;''
0
e. Adding the definitions of ``Speculative grade,'' ``Sub-speculative
grade,'' ``Variation margin,'' ``Variation margin agreement,''
``Variation margin amount,'' ``Variation margin threshold,'' and
``Volatility derivative contract'' in alphabetical order.
The additions and revisions read as follows:
Sec. 217.2 Definitions.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: interest rate, credit,
equity, or commodity.
* * * * *
Financial collateral * * *
(2) In which the Board-regulated institution has a perfected,
first-priority security interest or, outside of the United States, the
legal equivalent thereof, (with the exception of cash on deposit; and
notwithstanding the prior security interest of any custodial agent or
any priority security interest granted to a CCP in connection with
collateral posted to that CCP).
* * * * *
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which a Board-regulated institution has a perfected, first-priority
security interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on deposit;
notwithstanding the prior security interest of any custodial agent or
any prior security interest granted to a CCP in connection with
collateral posted to that CCP), and the amount of which does not change
directly in response to the value of the derivative contract or
contracts that the financial collateral secures.
* * * * *
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 217.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to a Board-regulated
institution less the fair value amount of the independent collateral,
as adjusted by the standard supervisory haircuts under Sec.
217.132(b)(2)(ii), as applicable, posted by the Board-regulated
institution to the counterparty, excluding such amounts held in a
bankruptcy remote manner, or posted to a QCCP and held in
[[Page 64703]]
conformance with the operational requirements in Sec. 217.3.
Netting set means either one derivative contract between a Board-
regulated institution and a single counterparty, or a group of
derivative contracts between a Board-regulated institution and a single
counterparty, that are subject to a qualifying master netting
agreement.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic conditions, such that should economic conditions
deteriorate, the reference entity would present an elevated default
risk.
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely would default on its financial commitments.
* * * * *
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 217.132(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to a Board-regulated institution less the fair
value amount of the variation margin, as adjusted by the standard
supervisory haircuts under Sec. 217.132(b)(2)(ii), as applicable,
posted by the Board-regulated institution to the counterparty.
Variation margin threshold means the amount of credit exposure of a
Board-regulated institution to its counterparty that, if exceeded,
would require the counterparty to post variation margin to the Board-
regulated institution.
Volatility derivative contract means a derivative contract in which
the payoff of the derivative contract explicitly depends on a measure
of the volatility of an underlying risk factor to the derivative
contract.
* * * * *
0
16. Section 217.10 is amended by revising paragraphs (c)(4)(ii)(A)
through (C) to read as follows:
Sec. 217.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value of all the Board-regulated
institution's on-balance sheet assets, plus the value of securities
sold under a repurchase transaction or a securities lending transaction
that qualifies for sales treatment under U.S. GAAP, less amounts
deducted from tier 1 capital under Sec. 217.22(a), (c), and (d), less
the value of securities received in security-for-security repo-style
transactions, where the Board-regulated institution acts as a
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities
received, and less the fair value of any derivative contracts;
(B) The PFE for each netting set (including cleared transactions
except as provided in paragraph (c)(4)(ii)(I) of this section and, at
the discretion of the Board-regulated institution, excluding a forward
agreement treated as a derivative contract that is part of a repurchase
or reverse repurchase or a securities borrowing or lending transaction
that qualifies for sales treatment under U.S. GAAP), as determined
under Sec. 217.132(c)(7), in which the term C in Sec.
217.132(c)(7)(i)(B) equals zero, multiplied by 1.4;
(C) The sum of:
(1)(i) 1.4 multiplied by the replacement cost of each derivative
contract or single product netting set of derivative contracts to which
the Board-regulated institution is a counterparty, calculated according
to the following formula:
Replacement Cost = {V - CVMr + CVMp; 0{time}
Where:
V equals the fair value for each derivative contract or each single-
product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (c)(4)(ii)(I) of this
section and, at the discretion of the Board-regulated institution,
excluding a forward agreement treated as a derivative contract that
is part of a repurchase or reverse repurchase or a securities
borrowing or lending transaction that qualifies for sales treatment
under U.S. GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section; and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not off-set the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section; and
(ii) Notwithstanding paragraph (c)(4)(ii)(C)(1)(i) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a Board-regulated institution must apply the formula for
replacement cost provided in Sec. 217.132(c)(10), in which the term
may only include cash collateral that satisfies the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
(2) The amount of cash collateral that is received from a
counterparty to a derivative contract that has off-set the fair value
of a derivative contract and that does not satisfy the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
(3) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation or an agreement with the counterparty);
(4) Variation margin is calculated and transferred on a daily basis
based on the fair value of the derivative contract;
(5) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the net current credit exposure
to the counterparty of the derivative contracts, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(6) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master netting
agreement, or in the governing rules for a cleared transaction; and
(7) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net
[[Page 64704]]
basis, taking into account any variation margin received or provided
under the contract if a credit event involving either counterparty
occurs;
* * * * *
0
17. Section 217.32 is amended by revising paragraph (f) to read as
follows:
Sec. 217.32 General risk weights.
* * * * *
(f) Corporate exposures. (1) A Board-regulated institution must
assign a 100 percent risk weight to all its corporate exposures, except
as provided in paragraph (f)(2) of this section.
(2) A Board-regulated institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the Board-regulated
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
217.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP
arising from the Board-regulated institution posting cash collateral to
the QCCP in connection with a cleared transaction that meets the
requirements of Sec. 217.35(b)(3)(i)(B).
(3) A Board-regulated institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the Board-regulated
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
217.35(c)(3)(i).
* * * * *
0
18. Section 217.34 is revised to read as follows:
Sec. 217.34 Derivative contracts.
(a) Exposure amount for derivative contracts--(1) Board-regulated
institution that is not an advanced approaches Board-regulated
institution. (i) A Board-regulated institution that is not an advanced
approaches Board-regulated institution must use the current exposure
methodology (CEM) described in paragraph (b) of this section to
calculate the exposure amount for all its OTC derivative contracts,
unless the Board-regulated institution makes the election provided in
paragraph (a)(1)(ii) of this section.
(ii) A Board-regulated institution that is not an advanced
approaches Board-regulated institution may elect to calculate the
exposure amount for all its OTC derivative contracts under the
standardized approach for counterparty credit risk (SA-CCR) in Sec.
217.132(c), rather than calculating the exposure amount for all its
derivative contracts using the CEM. A Board-regulated institution that
elects under this paragraph (a)(1)(ii) to calculate the exposure amount
for its OTC derivative contracts under the SA-CCR must apply the
treatment of cleared transactions under Sec. 217.133 to its derivative
contracts that are cleared transactions, rather than applying Sec.
217.35. A Board-regulated institution that is not an advanced
approaches Board-regulated institution must use the same methodology to
calculate the exposure amount for all its derivative contracts and may
change its election only with prior approval of the Board.
(2) Advanced approaches Board-regulated institution. An advanced
approaches Board-regulated institution must calculate the exposure
amount for all its derivative contracts using the SA-CCR in Sec.
217.132(c). An advanced approaches Board-regulated institution must
apply the treatment of cleared transactions under Sec. 217.133 to its
derivative contracts that are cleared transactions.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to a qualifying master netting agreement is equal to the
sum of the Board-regulated institution's current credit exposure and
potential future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
this section.
(B) For purposes of calculating either the PFE under this paragraph
(b) or the gross PFE under paragraph (b)(2) of this section for
exchange rate contracts and other similar contracts in which the
notional principal amount is equivalent to the cash flows, notional
principal amount is the net receipts to each party falling due on each
value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to this section, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A Board-regulated institution must use an OTC derivative
contract's effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
OTC derivative contract) rather than the apparent or stated notional
principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 1 to Sec. 217.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals (except Other
and gold reference reference gold)
asset) \3\ asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A Board-regulated institution must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference
asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A Board-regulated institution must use
the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of
[[Page 64705]]
the PFE amounts for all OTC derivative contracts subject to the
qualifying master netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x
Agross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the NGR,
the gross current credit exposure equals the sum of the positive
current credit exposures (as determined under paragraph (b)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) A Board-regulated institution using the CEM
under paragraph (b) of this section may recognize the credit risk
mitigation benefits of financial collateral that secures an OTC
derivative contract or multiple OTC derivative contracts subject to a
qualifying master netting agreement (netting set) by using the simple
approach in Sec. 217.37(b).
(2) As an alternative to the simple approach, a Board-regulated
institution using the CEM under paragraph (b) of this section may
recognize the credit risk mitigation benefits of financial collateral
that secures such a contract or netting set if the financial collateral
is marked-to-fair value on a daily basis and subject to a daily margin
maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 217.37(c). The Board-regulated
institution must substitute the exposure amount calculated under
paragraph (b)(1) or (2) of this section for [Sigma]E in the equation in
Sec. 217.37(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. A Board-regulated institution that purchases a credit
derivative that is recognized under Sec. 217.36 as a credit risk
mitigant for an exposure that is not a covered position under subpart F
of this part is not required to compute a separate counterparty credit
risk capital requirement under Sec. 217.32 provided that the Board-
regulated institution does so consistently for all such credit
derivatives. The Board-regulated institution must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) A Board-regulated institution that is
the protection provider under a credit derivative must treat the credit
derivative as an exposure to the underlying reference asset. The Board-
regulated institution is not required to compute a counterparty credit
risk capital requirement for the credit derivative under Sec. 217.32,
provided that this treatment is applied consistently for all such
credit derivatives. The Board-regulated institution must either include
all or exclude all such credit derivatives that are subject to a
qualifying master netting agreement from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes unless the Board-
regulated institution is treating the credit derivative as a covered
position under subpart F of this part, in which case the Board-
regulated institution must compute a supplemental counterparty credit
risk capital requirement under this section.
(e) Counterparty credit risk for equity derivatives. (1) A Board-
regulated institution must treat an equity derivative contract as an
equity exposure and compute a risk-weighted asset amount for the equity
derivative contract under Sec. Sec. 217.51 through 217.53 (unless the
Board-regulated institution is treating the contract as a covered
position under subpart F of this part).
(2) In addition, the Board-regulated institution must also
calculate a risk-based capital requirement for the counterparty credit
risk of an equity derivative contract under this section if the Board-
regulated institution is treating the contract as a covered position
under subpart F of this part.
(3) If the Board-regulated institution risk weights the contract
under the Simple Risk-Weight Approach (SRWA) in Sec. 217.52, the
Board-regulated institution may choose not to hold risk-based capital
against the counterparty credit risk of the equity derivative contract,
as long as it does so for all such contracts. Where the equity
derivative contracts are subject to a qualified master netting
agreement, a Board-regulated institution using the SRWA must either
include all or exclude all of the contracts from any measure used to
determine counterparty credit risk exposure.
(f) Clearing member Board-regulated institution's exposure amount.
The exposure amount of a clearing member Board-regulated institution
using the CEM under paragraph (b) of this section for an OTC derivative
contract or netting set of OTC derivative contracts where the Board-
regulated institution is either acting as a financial intermediary and
enters into an offsetting transaction with a QCCP or where the Board-
regulated institution provides a guarantee to the QCCP on the
performance of the client equals the exposure amount calculated
according to paragraph (b)(1) or (2) of this section multiplied by the
scaling factor 0.71. If the Board-regulated institution determines that
a longer period is appropriate, the Board-regulated institution must
use a larger scaling factor to adjust for a longer holding period as
follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.029
Where H = the holding period greater than five days. Additionally,
the Board may require the Board-regulated institution to set a longer
holding period if the Board determines that a longer period is
appropriate due to the nature, structure, or characteristics of the
transaction or is commensurate with the risks associated with the
transaction.
0
19. Section 217.35 is amended by adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding paragraph (c)(3)(iii) to read as
follows:
Sec. 217.35 Cleared transactions.
(a) * * *
(3) Alternate requirements. Notwithstanding any other provision of
this section, an advanced approaches Board-regulated institution or a
Board-regulated institution that is not an advanced approaches Board-
regulated institution and that has elected to use SA-CCR under Sec.
217.34(a)(1) must apply Sec. 217.133 to its derivative contracts that
are cleared transactions rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other requirements in this section,
collateral posted by a clearing member client Board-regulated
institution that is held by a custodian (in its capacity as custodian)
in a manner that is bankruptcy remote from the CCP,
[[Page 64706]]
clearing member, and other clearing member clients of the clearing
member, is not subject to a capital requirement under this section.
* * * * *
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Board-regulated institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a CCP where the clearing member Board-regulated
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 217.3(a), and the
clearing member Board-regulated institution is not obligated to
reimburse the clearing member client in the event of the CCP default.
* * * * *
0
20. Section 217.37 is amended by revising paragraph (c)(3)(iii) to read
as follows:
Sec. 217.37 Collateralized transactions.
* * * * *
(c) * * *
(3) * * *
(iii) For repo-style transactions and cleared transactions, a
Board-regulated institution may multiply the standard supervisory
haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by
the square root of \1/2\ (which equals 0.707107).
* * * * *
Sec. Sec. 217.134, 217.202, and 217.210 [Amended]
0
21. For each section listed in the following table, the footnote number
listed in the ``Old footnote number'' column is redesignated as the
footnote number listed in the ``New footnote number'' column as
follows:
------------------------------------------------------------------------
Old footnote New footnote
Section No. No.
------------------------------------------------------------------------
217.134(d)(3)........................... 30 31
217.202, paragraph (1) introductory text 31 32
of the definition of ``Covered
position''.............................
217.202, paragraph (1)(i) of the 32 33
definition of ``Covered position''.....
217.210(e)(1)........................... 33 34
------------------------------------------------------------------------
0
22. Section 217.132 is amended by:
0
a. Revising paragraphs (b)(2)(ii)(A)(3) through (5);
0
b. Adding paragraphs (b)(2)(ii)(A)(6) and (7);
0
c. Revising paragraphs (c) heading and (c)(1) and (2) and (5) through
(8);
0
d. Adding paragraphs (c)(9) through (12);
0
e. Removing ``Table 3 to Sec. 217.132'' and adding in its place
``Table 4 to this section'' in paragraphs (e)(5)(i)(A) and (H); and
0
f. Redesignating Table 3 to Sec. 217.132 as Table 4 to Sec. 217.132.
The revisions and additions read as follows:
Sec. 217.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and cleared transactions, a Board-
regulated institution may multiply the supervisory haircuts provided in
paragraphs (b)(2)(ii)(A)(1) and (2) of this section by the square root
of \1/2\ (which equals 0.707107).
(4) A Board-regulated institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days (for eligible margin loans) or five business days (for
repo-style transactions), using the formula provide in paragraph
(b)(2)(ii)(A)(6) of this section where the following conditions apply.
If the number of trades in a netting set exceeds 5,000 at any time
during a quarter, a Board-regulated institution must adjust the
supervisory haircuts upward on the basis of a holding period of twenty
business days for the following quarter (except when a Board-regulated
institution is calculating EAD for a cleared transaction under Sec.
217.133). If a netting set contains one or more trades involving
illiquid collateral, a Board-regulated institution must adjust the
supervisory haircuts upward on the basis of a holding period of twenty
business days. If over the two previous quarters more than two margin
disputes on a netting set have occurred that lasted more than the
holding period, then the Board-regulated institution must adjust the
supervisory haircuts upward for that netting set on the basis of a
holding period that is at least two times the minimum holding period
for that netting set.
(5)(i) A Board-regulated institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days for collateral associated derivative contracts that are
not cleared transactions using the formula provided in paragraph
(b)(2)(ii)(A)(6) of this section where the following conditions apply.
For collateral associated with a derivative contract that is within a
netting set that is composed of more than 5,000 derivative contracts
that are not cleared transactions, a Board-regulated institution must
use a holding period of twenty business days. If a netting set contains
one or more trades involving illiquid collateral or a derivative
contract that cannot be easily replaced, a Board-regulated institution
must use a holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or
(b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a
derivative contract that is subject to an outstanding dispute over
variation margin, the holding period is twice the amount provide under
paragraph (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) of this
section.
(6) A Board-regulated institution must adjust the standard
supervisory haircuts upward, pursuant to the adjustments provided in
paragraphs (b)(2)(ii)(A)(4) and (5) of this section, using the
following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.030
Where:
TM equals a holding period of longer than 10 business days for
eligible margin loans and derivative contracts or longer than 5
business days for repo-style transactions;
Hs equals the standard supervisory haircut; and
Ts equals 10 business days for eligible margin loans and derivative
contracts or 5 business days for repo-style transactions.
(7) If the instrument a Board-regulated institution has lent, sold
subject to repurchase, or posted as collateral does not meet the
definition of financial collateral, the Board-regulated
[[Page 64707]]
institution must use a 25.0 percent haircut for market price volatility
(Hs).
* * * * *
(c) EAD for derivative contracts--(1) Options for determining EAD.
A Board-regulated institution must determine the EAD for a derivative
contract using the standardized approach for counterparty credit risk
(SA-CCR) under paragraph (c)(5) of this section or using the internal
models methodology described in paragraph (d) of this section. If a
Board-regulated institution elects to use SA-CCR for one or more
derivative contracts, the exposure amount determined under SA-CCR is
the EAD for the derivative contract or derivatives contracts. A Board-
regulation institution must use the same methodology to calculate the
exposure amount for all its derivative contracts and may change its
election only with prior approval of the Board.
(2) Definitions. For purposes of this paragraph (c), the following
definitions apply:
(i) Except as otherwise provided in paragraph (c) of this section,
the end date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument.
(ii) Except as otherwise provided in paragraph (c) of this section,
the start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument.
(iii) Hedging set means:
(A) With respect interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity classes: Energy, metal, agricultural, or other commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, the Board may require a Board-regulated institution to
include the derivative contract in each appropriate hedging set under
paragraphs (c)(1)(iii)(A) through (E) of this section.
* * * * *
(5) Exposure amount. The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section, except that, notwithstanding the requirements
of this paragraph (c)(5):
(i) The exposure amount of a netting set subject to a variation
margin agreement, excluding a netting set that is subject to a
variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set and the
exposure amount of the netting set calculated as if the netting set
were not subject to a variation margin agreement; and
(ii) The exposure amount of a netting set that consists of only
sold options in which the premiums have been fully paid and that are
not subject to a variation margin agreement is zero.
(6) Replacement cost of a netting set--(i) Netting set subject to a
variation margin agreement under which the counterparty must post
variation margin. The replacement cost of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty is not
required to post variation margin, is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the sum of the net independent collateral amount and the variation
margin amount applicable to such derivative contracts;
(B) The sum of the variation margin threshold and the minimum
transfer amount applicable to the derivative contracts within the
netting set less the net independent collateral amount applicable to
such derivative contracts; or
(C) Zero.
(ii) Netting sets not subject to a variation margin agreement under
which the counterparty must post variation margin. The replacement cost
of a netting set that is not subject to a variation margin agreement
under which the counterparty must post variation margin to the Board-
regulated institution is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the net independent collateral amount and variation margin amount
applicable to such derivative contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for multiple netting sets subject to a
single variation margin agreement must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Multiple netting sets subject to multiple variation margin
agreements or a hybrid netting set. Notwithstanding paragraphs
(c)(6)(i) and (ii) of this section, the replacement cost for a netting
set subject to multiple variation margin agreements or a hybrid netting
set must be calculated according to paragraph (c)(11)(i) of this
section.
(7) Potential future exposure of a netting set. The potential
future exposure of a netting set is the product of the PFE multiplier
and the aggregated amount.
(i) PFE multiplier. The PFE multiplier is calculated according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.031
[[Page 64708]]
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the PFE amount for purposes of total
leverage exposure under Sec. 217.10(c)(4)(ii)(B), the potential future
exposure for multiple netting sets subject to a single variation margin
agreement must be calculated according to paragraph (c)(10)(ii) of this
section.
(iv) Multiple netting sets subject to multiple variation margin
agreements or a hybrid netting set. Notwithstanding paragraphs
(c)(7)(i) and (ii) of this section and when calculating the PFE amount
for purposes of total leverage exposure under Sec.
217.10(c)(4)(ii)(B), the potential future exposure for a netting set
subject to multiple variation margin agreements or a hybrid netting set
must be calculated according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, a Board-regulated institution may use either of
the formulas provided in paragraphs (c)(8)(i)(A) and (B) of this
section:
[GRAPHIC] [TIFF OMITTED] TP17DE18.032
[[Page 64709]]
(ii) Exchange rate derivative contracts. For an exchange rate
derivative contract hedging set, the hedging set amount equals the
absolute value of the sum of the adjusted derivative contract amounts,
as calculated under paragraph (c)(9) of this section, within the
hedging set.
(iii) Credit derivative contracts and equity derivative contracts.
The hedging set amount of a credit derivative contract hedging set or
equity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.033
Where:
k is each reference entity within the hedging set.
K is the number of reference entities within the hedging set.
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference entity k.
[rho]k equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.034
Where:
k is each commodity type within the hedging set.
K is the number of commodity types within the hedging set.
AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference commodity type k.
[rho] equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a
Board-regulated institution must calculate a separate hedging set
amount for each basis derivative contract hedging set and each
volatility derivative contract hedging set. A Board-regulated
institution must calculate such hedging set amounts using one of the
formulas under paragraphs (c)(8)(i) through (iv) that corresponds to
the primary risk factor of the hedging set being calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, a
Board-regulated institution must determine the adjusted notional amount
of derivative contract, pursuant to paragraph (c)(9)(ii) of this
section, and multiply the adjusted notional amount by each of the
supervisory delta adjustment, pursuant to paragraph (c)(9)(iii) of this
section, the maturity factor, pursuant to paragraph (c)(9)(iv) of this
section, and the applicable supervisory factor, as provided in Table 2
to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.035
Where:
S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
E is the number of business days from the present day until the end
date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount is equal
to the time-weighted average of the contractual notional amounts of
such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a factor
and all rates of the derivative contract are multiplied by the same
factor, the notional amount is equal to the notional amount of an
equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S.
[[Page 64710]]
denominated currency leg of the derivative contract, as measured in
U.S. dollars using the exchange rate on the date of the calculation. If
both legs of the exchange rate derivative contract are denominated in
currencies other than U.S. dollars, the adjusted notional amount of the
derivative contract is the largest leg of the derivative contract, as
measured in U.S. dollars using the exchange rate on the date of the
calculation.
(2) Notwithstanding paragraph (c)(9)(i)(B)(1) of this section, for
an exchange rate derivative contract with multiple exchanges of
principal, the Board-regulated institution must set the adjusted
notional amount of the derivative contract equal to the notional amount
of the derivative contract multiplied by the number of exchanges of
principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity derivative
contract, the adjusted notional amount is the product of the fair value
of one unit of the reference instrument underlying the derivative
contract and the number of such units referenced by the derivative
contract.
(2) Notwithstanding paragraph (c)(9)(i)(C)(1) of this section, when
calculating the adjusted notional amount for an equity derivative
contract or a commodity derivative contract that is a volatility
derivative contract, the Board-regulated institution must replace the
unit price with the underlying volatility referenced by the volatility
derivative contract and replace the number of units with the notional
amount of the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract
that is not an option contract or collateralized debt obligation
tranche, the supervisory delta adjustment is 1 if the fair value of the
derivative contract increases when the value of the primary risk factor
increases and -1 if the fair value of the derivative contract decreases
when the value of the primary risk factor increases;
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following formulas,
as applicable:
[GRAPHIC] [TIFF OMITTED] TP17DE18.036
(2) As used in the formulas in Table 3 to this section:
(i) F is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) [lgr] equals zero for all derivative contracts except interest
rate options for the currencies where interest rates have negative
values. The same value of [lgr] must be used for all interest rate
options that are denominated in the same currency. To determine the
value of [lgr] for a given currency, a Board-regulated institution must
find the lowest value L of P and K of all interest rate options in a
given currency that the Board-regulated institution has with all
counterparties. Then, [lgr] is set according to this formula: [lgr] =
max{-L + 0.1%, 0{time} and
(vi) [sigma] equals the supervisory option volatility, as provided
in Table 2 to this section.
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined by
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.037
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this
section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated to
the Board-regulated institution's exposure to the total notional amount
of all underlying exposures, expressed as a decimal value between zero
and one; \30\
---------------------------------------------------------------------------
\30\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the Board-
regulated institution's exposure. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) notional
amounts of the underlying exposures are subordinated to the Board-
regulated institution's exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio of
the notional amounts of all underlying exposures that are senior to the
Board-regulated institution's exposure to the total notional amount of
all underlying exposures, expressed as a decimal value between zero and
one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the Board-
regulated institution and is designated with a
[[Page 64711]]
negative sign if the collateralized debt obligation tranche was sold by
the Board-regulated institution.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract that is subject to a variation margin agreement, excluding
derivative contracts that are subject to a variation margin agreement
under which the counterparty is not required to post variation margin,
is determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.038
Where MPOR refers to the period from the most recent exchange of
collateral covering a netting set of derivative contracts with a
defaulting counterparty until the derivative contracts are closed out
and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a cleared transaction,
MPOR cannot be less than ten business days plus the periodicity of re-
margining expressed in business days minus one business day;
(ii) For a derivative contract that is a cleared transaction, MPOR
cannot be less than five business days plus the periodicity of re-
margining expressed in business days minus one business day; and
(iii) For a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, MPOR cannot be less than twenty business days.
(3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this
section, for a derivative contract subject to an outstanding dispute
over variation margin, the applicable floor is twice the amount
provided in (c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts under
which the counterparty is not required to post variation margin, is
determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.039
Where M equals the greater of 10 business days and the remaining
maturity of the contract, as measured in business days.
(C) For purposes of paragraph (c)(9)(iv) of this section,
derivative contracts with daily settlement are treated as derivative
contracts not subject to a variation margin agreement and daily
settlement does not change the end date of the period referenced by the
derivative contract.
(v) Derivative contract as multiple effective derivative contracts.
A Board-regulated institution must separate a derivative contract into
separate derivative contracts, according to the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must be
treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must be
represented as the combination of one bought European option and one
sold European option of the same type as the original option (put or
call) with the strikes set equal to 0.95*K and 1.05*K so that the
payoff of the binary option is reproduced exactly outside the region
between the two strikes. The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold options is capped at
the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), each standard option
component must be treated as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment
options, (such as interest rate caps and floors) each payment option
may be represented as a combination of effective single-payment options
(such as interest rate caplets and floorlets).
(10) Multiple netting sets subject to a single variation margin
agreement--(i) Calculating replacement cost. Notwithstanding paragraph
(c)(6) of this section, a Board-regulated institution shall assign a
single replacement cost to multiple netting sets that are subject to a
single variation margin agreement under which the counterparty must
post variation margin, calculated according to the following formula:
Replacement Cost = max{[Sigma]NSmax {VNS; 0{time} - max {CMA;
0{time} ; 0{time} + max{[Sigma]NSmin {VNS;0{time} - min {CMA0{time} ;
0{time}
Where:
NS is each netting set subject to the variation margin agreement MA;
VNS is the sum of the fair values (after excluding any
valuation adjustments) of the derivative contracts within the
netting set NS; and
CMA is the sum of the net independent collateral amount
and the variation margin amount applicable to the derivative
contracts within the netting sets subject to the single variation
margin agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, a Board-regulated institution shall
assign a single potential future exposure to multiple netting sets that
are subject to a single variation margin agreement under which the
counterparty must post variation margin equal to the sum of the
potential future exposure of each such netting set, each calculated
according to paragraph (c)(7) of this section as if such nettings sets
were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
[[Page 64712]]
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(ii) of this section, except that the variation margin
threshold equals the sum of the variation margin thresholds of all
variation margin agreements within the netting set and the minimum
transfer amount equals the sum of the minimum transfer amounts of all
the variation margin agreements within the netting set.
(ii) Calculating potential future exposure. (A) To calculate
potential future exposure for a netting set subject to multiple
variation margin agreements under which the counterparty to each
variation margin agreement must post variation margin, or a netting set
composed of at least one derivative contract subject to variation
margin agreement under which the counterparty to the derivative
contract must post variation margin and at least one derivative
contract that is not subject to such a variation margin agreement, a
Board-regulated institution must divide the netting set into sub-
netting sets and calculate the aggregated amount for each sub-netting
set. The aggregated amount for the netting set is calculated as the sum
of the aggregated amounts for the sub-netting sets. The multiplier is
calculated for the entire netting set.
(B) For purposes of paragraph (c)(11)(ii)(A) of this section, the
netting set must be divided into sub-netting sets as follows:
(1) All derivative contracts within the netting set that are not
subject to a variation margin agreement or that are subject to a
variation margin agreement under which the counterparty is not required
to post variation margin form a single sub-netting set. The aggregated
amount for this sub-netting set is calculated as if the netting set is
not subject to a variation margin agreement.
(2) All derivative contracts within the netting set that are
subject to variation margin agreements in which the counterparty must
post variation margin and that share the same value of the MPOR form a
single sub-netting set. The aggregated amount for this sub-netting set
is calculated as if the netting set is subject to a variation margin
agreement, using the MPOR value shared by the derivative contracts
within the netting set.
(12) Treatment of cleared transactions. (i) A Board-regulated
institution must apply the adjustments in paragraph (c)(12)(iii) of
this section to the calculation of exposure amount under this paragraph
(c) for a netting set that is composed solely of one or more cleared
transactions.
(ii) A Board-regulated institution that is a clearing member must
apply the adjustments in paragraph (c)(12)(iii) of this section to the
calculation of exposure amount under this paragraph (c) for a netting
set that is composed solely of one or more exposures, each of which are
exposures of the Board-regulated institution to its clearing member
client where the Board-regulated institution is either acting as a
financial intermediary and enters into an offsetting transaction with a
CCP or where the Board-regulated institution provides a guarantee to
the CCP on the performance of the client.
(iii)(A) For purposes of calculating the maturity factor under
paragraph (c)(9)(iv)(B) of this section, MPOR may not be less than 10
business days;
(B) For purposes of calculating the maturity factor under paragraph
(c)(9)(iv)(B) of this section, the minimum MPOR under paragraph
(c)(9)(iv)(A)(3) of this section does not apply if there are no
outstanding disputed trades in the netting set, there is no illiquid
collateral in the netting set, and there are no exotic derivative
contracts in the netting set; and
(C) For purposes of calculating the maturity factor under
paragraphs (c)(9)(iv)(A) and (B) of this section, if the CCP collects
and holds variation margin and the variation margin is not bankruptcy
remote from the CCP, Mi may not exceed 250 business days.
Table 2 to Sec. 217.132--Supervisory Option Volatility, Supervisory Correlation Parameters, and Supervisory
Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
Asset class Subclass option correlation Supervisory
volatility (%) factor (%) factor \1\ (%)
----------------------------------------------------------------------------------------------------------------
Interest rate......................... N/A..................... 50 N/A 0.50
Exchange rate......................... N/A..................... 15 N/A 4.0
Credit, single name................... Investment grade........ 100 50 0.5
Speculative grade....... 100 50 1.3
Sub-speculative grade... 100 50 6.0
Credit, index......................... Investment Grade........ 80 80 0.38
Speculative Grade....... 80 80 1.06
Equity, single name................... N/A..................... 120 50 32
Equity, index......................... N/A..................... 75 80 20
Commodity............................. Energy.................. 150 40 40
Metals.................. 70 40 18
Agricultural............ 70 40 18
Other................... 70 40 18
----------------------------------------------------------------------------------------------------------------
\1\ The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the
supervisory factor provided in this Table 2, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this Table 2.
* * * * *
0
23. Section 217.133 is amended by revising paragraphs (a), (b)(1)
through (3), (b)(4)(i), (c)(1) through (3), (c)(4)(i), and (d) to read
as follows:
Sec. 217.133 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A Board-
regulated institution that is a clearing member client must use the
methodologies described in paragraph (b) of this section to calculate
risk-weighted assets for a cleared transaction.
(2) Clearing members. A Board-regulated institution that is a
clearing member must use the methodologies described in paragraph (c)
of this section to calculate its risk-weighted assets for a cleared
transaction and
[[Page 64713]]
paragraph (d) of this section to calculate its risk-weighted assets for
its default fund contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a Board-
regulated institution that is a clearing member client must multiply
the trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (b)(2) of this section, by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client Board-regulated institution's total
risk-weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or a netting set of derivative contracts, trade
exposure amount equals the EAD for the derivative contract or netting
set of derivative contracts calculated using the methodology used to
calculate EAD for derivative contracts set forth in Sec. 217.132(c) or
(d), plus the fair value of the collateral posted by the clearing
member client Board-regulated institution and held by the CCP or a
clearing member in a manner that is not bankruptcy remote. When the
Board-regulated institution calculates EAD for the cleared transaction
using the methodology in Sec. 217.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 217.132(b)(2) or (3) or (d), plus the fair value of
the collateral posted by the clearing member client Board-regulated
institution and held by the CCP or a clearing member in a manner that
is not bankruptcy remote. When the Board-regulated institution
calculates EAD for the cleared transaction under Sec. 217.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client Board-regulated institution must
apply a risk weight of:
(A) 2 percent if the collateral posted by the Board-regulated
institution to the QCCP or clearing member is subject to an arrangement
that prevents any loss to the clearing member client Board-regulated
institution due to the joint default or a concurrent insolvency,
liquidation, or receivership proceeding of the clearing member and any
other clearing member clients of the clearing member; and the clearing
member client Board-regulated institution has conducted sufficient
legal review to conclude with a well-founded basis (and maintains
sufficient written documentation of that legal review) that in the
event of a legal challenge (including one resulting from an event of
default or from liquidation, insolvency or receivership proceedings)
the relevant court and administrative authorities would find the
arrangements to be legal, valid, binding and enforceable under the law
of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client Board-regulated institution must apply the risk
weight applicable to the CCP under Sec. 217.32.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client Board-regulated
institution that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a clearing
member Board-regulated institution must multiply the trade exposure
amount for the cleared transaction, calculated in accordance with
paragraph (c)(2) of this section by the risk weight appropriate for the
cleared transaction, determined in accordance with paragraph (c)(3) of
this section.
(ii) A clearing member Board-regulated institution's total risk-
weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member Board-regulated
institution must calculate its trade exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 217.132(c) or (d), plus the
fair value of the collateral posted by the clearing member Board-
regulated institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member Board-regulated institution
calculates EAD for the cleared transaction using the methodology in
Sec. 217.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 217.132(b)(2) or (3) or (d), plus the
fair value of the collateral posted by the clearing member Board-
regulated institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member Board-regulated institution
calculates EAD for the cleared transaction under Sec. 217.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member Board-
regulated institution must apply a risk weight of 2 percent to the
trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member Board-regulated institution must apply the risk weight
applicable to the CCP according to Sec. 217.32.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Board-regulated institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a QCCP where the clearing member Board-regulated
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 217.3(a), and the
clearing member Board-regulated institution is not obligated to
reimburse the clearing member client in the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client Board-regulated
institution that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(d) Default fund contributions--(1) General requirement. A clearing
member Board-regulated institution must determine the risk-weighted
asset amount for a default fund contribution to a CCP at least
quarterly, or more frequently if, in the opinion of the Board-regulated
institution or the Board,
[[Page 64714]]
there is a material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member Board-regulated institution's
risk-weighted asset amount for default fund contributions to CCPs that
are not QCCPs equals the sum of such default fund contributions
multiplied by 1,250 percent, or an amount determined by the Board,
based on factors such as size, structure and membership characteristics
of the CCP and riskiness of its transactions, in cases where such
default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member Board-regulated institution's risk-weighted
asset amount for default fund contributions to QCCPs equals the sum of
its capital requirement, KCM for each QCCP, as calculated
under the methodology set forth in paragraph (e)(4) of this section.
(i) EAD must be calculated separately for each clearing member's
sub-client accounts and sub-house account (i.e., for the clearing
member's propriety activities). If the clearing member's collateral and
its client's collateral are held in the same default fund contribution
account, then the EAD of that account is the sum of the EAD for the
client-related transactions within the account and the EAD of the
house-related transactions within the account. For purposes of
determining such EADs, the independent collateral of the clearing
member and its client must be allocated in proportion to the respective
total amount of independent collateral posted by the clearing member to
the QCCP.
(ii) If any account or sub-account contains both derivative
contracts and repo-style transactions, the EAD of that account is the
sum of the EAD for the derivative contracts within the account and the
EAD of the repo-style transactions within the account. If independent
collateral is held for an account containing both derivative contracts
and repo-style transactions, then such collateral must be allocated to
the derivative contracts and repo-style transactions in proportion to
the respective product specific exposure amounts, calculated, excluding
the effects of collateral, according to Sec. 217.132(b) for repo-style
transactions and to Sec. 217.132(c)(5) for derivative contracts.
(4) Risk-weighted asset amount for default fund contributions to a
QCCP. A clearing member Board regulated institution's capital
requirement for its default fund contribution to a QCCP
(KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TP17DE18.040
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has
provided its KCCP, a Board-regulated institution must rely
on such disclosed figure instead of calculating KCCP under
this paragraph (d)(5), unless the Board-regulated institution
determines that a more conservative figure is appropriate based on the
nature, structure, or characteristics of the QCCP. The hypothetical
capital requirement of a QCCP (KCCP), as determined by the
Board-regulated institution, is equal to:
KCCP = SCMi EADi * 1.6 percent
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of the QCCP to
the QCCP, as determined under paragraph (d)(6) of this section.
[[Page 64715]]
(6) EAD of a clearing member Board-regulated institution to a QCCP.
(i) The EAD of a clearing member Board-regulated institution to a QCCP
is equal to the sum of the EAD for derivative contracts determined
under paragraph (d)(6)(ii) of this section and the EAD for repo-style
transactions determined under paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the Board-
regulated institution and the CCP that are cleared transactions and any
guarantees that the Board-regulated institution has provided to the CCP
with respect to performance of a clearing member client on a derivative
contract, the EAD is equal to the sum of:
(A) The exposure amount for all such derivative contracts and
guarantees of derivative contracts calculated under SA-CCR in Sec.
217.132(c) using a value of 10 business days for purposes of Sec.
217.132(c)(9)(iv)(B);
(B) The value of all collateral held by the CCP posted by the
clearing member Board-regulated institution or a clearing member client
of the Board-regulated institution in connection with a derivative
contract for which the Board-regulated institution has provided a
guarantee to the CCP; and
(C) The amount of the prefunded default fund contribution of the
Board-regulated institution to the CCP.
(iii) With respect to any repo-style transactions between the
Board-regulated institution and the CCP that are cleared transactions,
EAD is equal to:
EAD = max{EBRM-IM-DF; 0{time}
Where:
EBRM is the sum of the exposure amounts of each repo-style
transaction between the Board-regulated institution and the CCP as
determined under Sec. 217.132(b)(2) and without recognition of any
collateral securing the repo-style transactions;
IM is the initial margin collateral posted by the Board-regulated
institution to the CCP with respect to the repo-style transactions;
and
DF is the prefunded default fund contribution of the Board-
regulation institution to the CCP.
0
24. Section 217.300 is amended by adding paragraph (g) to read as
follows:
Sec. 217.300 Transitions.
* * * * *
(g) SA-CCR. After giving prior notice to the Board, an advanced
approaches Board-regulated institution may use CEM rather than SA-CCR
to determine the exposure amount for purposes of Sec. 217.34 and the
EAD for purposes of Sec. 217.132 for its derivative contracts until
July 1, 2020. On July 1, 2020, and thereafter, an advanced approaches
Board-regulated institution must use SA-CCR for purposes of Sec.
217.34 and must use either SA-CCR or IMM for purposes of Sec. 217.132.
Once an advanced approaches Board-regulated institution has begun to
use SA-CCR, the advanced approaches Board-regulated institution may not
change to use CEM.
12 CFR Part 324
Federal Deposit Insurance Corporation
For the reasons forth out in the preamble, 12 CFR part 324 is
proposed to be amended as set forth below.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
25. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
26. Section 324.2 is amended by:
0
a. Adding the definition of ``Basis derivative contract'' in
alphabetical order;
0
b. Revising paragraph (2) of the definition of ``Financial
collateral;''
0
c. Adding the definitions of ``Independent collateral,'' ``Minimum
transfer amount,'' and ``Net independent collateral amount'' in
alphabetical order.
0
d. Revising the definition of ``Netting set;'' and
0
e. Adding the definitions of ``Speculative grade,'' ``Sub-speculative
grade,'' ``Variation margin,'' ``Variation margin agreement,''
``Variation margin amount,'' ``Variation margin threshold,'' and
``Volatility derivative contract'' in alphabetical order.
The additions and revisions read as follows:
Sec. 324.2 Definitions.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: Interest rate, credit,
equity, or commodity.
* * * * *
Financial collateral * * *
(2) In which the FDIC-supervised institution has a perfected,
first-priority security interest or, outside of the United States, the
legal equivalent thereof (with the exception of cash on deposit; and
notwithstanding the prior security interest of any custodial agent or
any priority security interest granted to a CCP in connection with
collateral posted to that CCP).
* * * * *
Independent collateral means financial collateral, other than
variation margin that is subject to a collateral agreement, or in which
a FDIC-supervised institution has a perfected, first-priority security
interest or, outside of the United States, the legal equivalent thereof
(with the exception of cash on deposit; notwithstanding the prior
security interest of any custodial agent or any prior security interest
granted to a CCP in connection with collateral posted to that CCP), and
the amount of which does not change directly in response to the value
of the derivative contract or contracts that the financial collateral
secures.
* * * * *
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 324.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to a FDIC-supervised
institution less the fair value amount of the independent collateral,
as adjusted by the standard supervisory haircuts under Sec.
324.132(b)(2)(ii), as applicable, posted by the FDIC-supervised
institution to the counterparty, excluding such amounts held in a
bankruptcy remote manner, or posted to a QCCP and held in conformance
with the operational requirements in Sec. 324.3.
Netting set means either one derivative contract between a FDIC-
supervised institution and a single counterparty, or a group of
derivative contracts between a FDIC-supervised institution and a single
counterparty, that are subject to a qualifying master netting
agreement.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic
[[Page 64716]]
conditions, such that should economic conditions deteriorate, the
reference entity would present an elevated default risk.
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely would default on its financial commitments.
* * * * *
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 324.132(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to a FDIC-supervised institution less the fair
value amount of the variation margin, as adjusted by the standard
supervisory haircuts under Sec. 324.132(b)(2)(ii), as applicable,
posted by the FDIC-supervised institution to the counterparty.
Variation margin threshold means the amount of credit exposure of a
FDIC-supervised institution to its counterparty that, if exceeded,
would require the counterparty to post variation margin to the FDIC-
supervised institution.
Volatility derivative contract means a derivative contract in which
the payoff of the derivative contract explicitly depends on a measure
of the volatility of an underlying risk factor to the derivative
contract.
* * * * *
0
27. Section 324.10 is amended by revising paragraphs (c)(4)(ii)(A)
through (C) to read as follows:
Sec. 324.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value of all the FDIC-supervised
institution's on-balance sheet assets, plus the value of securities
sold under a repurchase transaction or a securities lending transaction
that qualifies for sales treatment under U.S. GAAP, less amounts
deducted from tier 1 capital under Sec. 324.22(a), (c), and (d), less
the value of securities received in security-for-security repo-style
transactions, where the FDIC-supervised institution acts as a
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities
received, and less the fair value of any derivative contracts;
(B) The PFE for each netting set (including cleared transactions
except as provided in paragraph (c)(4)(ii)(I) of this section and, at
the discretion of the FDIC-supervised institution, excluding a forward
agreement treated as a derivative contract that is part of a repurchase
or reverse repurchase or a securities borrowing or lending transaction
that qualifies for sales treatment under U.S. GAAP), as determined
under Sec. 324.132(c)(7), in which the term C in Sec.
324.132(c)(7)(i)(B) equals zero, multiplied by 1.4;
(C) The sum of:
(1)(i) 1.4 multiplied by the replacement cost of each derivative
contract or single product netting set of derivative contracts to which
the FDIC-supervised institution is a counterparty, calculated according
to the following formula:
Replacement Cost = max{V - CVMr + CVMp; 0{time}
Where:
V equals the fair value for each derivative contract or each single-
product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (c)(4)(ii)(I) of this
section and, at the discretion of the FDIC-supervised institution,
excluding a forward agreement treated as a derivative contract that
is part of a repurchase or reverse repurchase or a securities
borrowing or lending transaction that qualifies for sales treatment
under U.S. GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7); and
CVMp equals the amount of cash collateral that is posted
to a counterparty to a derivative contract and that has not off-set
the fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section; and
(ii) Notwithstanding paragraph (c)(4)(ii)(C)(1)(i) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a FDIC-supervised institution must apply the formula for
replacement cost provided in Sec. 324.132(c)(10), in which the term
may only include cash collateral that satisfies the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
(2) The amount of cash collateral that is received from a
counterparty to a derivative contract that has off-set the fair value
of a derivative contract and that does not satisfy the conditions in
paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
(3) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation or an agreement with the counterparty);
(4) Variation margin is calculated and transferred on a daily basis
based on the fair value of the derivative contract;
(5) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the net current credit exposure
to the counterparty of the derivative contracts, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(6) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph, currency of
settlement means any currency for settlement specified in the governing
qualifying master netting agreement and the credit support annex to the
qualifying master netting agreement, or in the governing rules for a
cleared transaction; and
(7) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
* * * * *
0
28. Section 324.32 is amended by revising paragraph (f) to read as
follows:
Sec. 324.32 General risk weights.
* * * * *
(f) Corporate exposures. (1) A FDIC-supervised institution must
assign a 100 percent risk weight to all its corporate exposures, except
as provided in paragraph (f)(2) of this section.
[[Page 64717]]
(2) A FDIC-supervised institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the FDIC-supervised
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
324.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP
arising from the FDIC-supervised institution posting cash collateral to
the QCCP in connection with a cleared transaction that meets the
requirements of Sec. 324.35(b)(3)(i)(B).
(3) A FDIC-supervised institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the FDIC-supervised
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
324.35(c)(3)(i).
* * * * *
0
29. Section 324.34 is revised to read as follows:
Sec. 324.34 Derivative contracts.
(a) Exposure amount for derivative contracts--(1) FDIC-supervised
institution that is not an advanced approaches FDIC-supervised
institution. (i) A FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution must use the current exposure
methodology (CEM) described in paragraph (b) of this section to
calculate the exposure amount for all its OTC derivative contracts,
unless the FDIC-supervised institution makes the election provided in
paragraph (a)(1)(ii) of this section.
(ii) A FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution may elect to calculate the
exposure amount for all its OTC derivative contracts under the
standardized approach for counterparty credit risk (SA-CCR) in Sec.
324.132(c), rather than calculating the exposure amount for all its
derivative contracts using the CEM. A FDIC-supervised institution that
elects under this paragraph (a)(1)(ii) to calculate the exposure amount
for its OTC derivative contracts under the SA-CCR must apply the
treatment of cleared transactions under Sec. 324.133 to its derivative
contracts that are cleared transactions, rather than applying Sec.
324.35. A FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution must use the same methodology to
calculate the exposure amount for all its derivative contracts and may
change its election only with prior approval of the FDIC.
(2) Advanced approaches FDIC-supervised institution. An advanced
approaches FDIC-supervised institution must calculate the exposure
amount for all its derivative contracts using the SA-CCR in Sec.
324.132(c). An advanced approaches FDIC-supervised institution must
apply the treatment of cleared transactions under Sec. 324.133 to its
derivative contracts that are cleared transactions.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to a qualifying master netting agreement is equal to the
sum of the FDIC-supervised institution's current credit exposure and
potential future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
of this section.
(B) For purposes of calculating either the PFE under this paragraph
(b) or the gross PFE under paragraph (b)(2) of this section for
exchange rate contracts and other similar contracts in which the
notional principal amount is equivalent to the cash flows, notional
principal amount is the net receipts to each party falling due on each
value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to this section, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A FDIC-supervised institution must use an OTC derivative
contract's effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
OTC derivative contract) rather than the apparent or stated notional
principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 1 to Sec. 324.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals (except Other
and gold reference reference gold)
asset) \3\ asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A FDIC-supervised institution must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference
asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A FDIC-supervised institution must use
the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts,
[[Page 64718]]
Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x Agross),
where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the NGR,
the gross current credit exposure equals the sum of the positive
current credit exposures (as determined under paragraph (b)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) A FDIC-supervised institution using the CEM
under paragraph (b) of this section may recognize the credit risk
mitigation benefits of financial collateral that secures an OTC
derivative contract or multiple OTC derivative contracts subject to a
qualifying master netting agreement (netting set) by using the simple
approach in Sec. 324.37(b).
(2) As an alternative to the simple approach, a FDIC-supervised
institution using the CEM under paragraph (b) of this section may
recognize the credit risk mitigation benefits of financial collateral
that secures such a contract or netting set if the financial collateral
is marked-to-fair value on a daily basis and subject to a daily margin
maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 324.37(c). The FDIC-supervised
institution must substitute the exposure amount calculated under
paragraph (b)(1) or (2) of this section for [Sigma]E in the equation in
Sec. 324.37(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. A FDIC-supervised institution that purchases a credit
derivative that is recognized under Sec. 324.36 as a credit risk
mitigant for an exposure that is not a covered position under subpart F
of this part is not required to compute a separate counterparty credit
risk capital requirement under Sec. 324.32 provided that the FDIC-
supervised institution does so consistently for all such credit
derivatives. The FDIC-supervised institution must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) A FDIC-supervised institution that is
the protection provider under a credit derivative must treat the credit
derivative as an exposure to the underlying reference asset. The FDIC-
supervised institution is not required to compute a counterparty credit
risk capital requirement for the credit derivative under Sec. 324.32,
provided that this treatment is applied consistently for all such
credit derivatives. The FDIC-supervised institution must either include
all or exclude all such credit derivatives that are subject to a
qualifying master netting agreement from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes unless the FDIC-
supervised institution is treating the credit derivative as a covered
position under subpart F of this part, in which case the FDIC-
supervised institution must compute a supplemental counterparty credit
risk capital requirement under this section.
(e) Counterparty credit risk for equity derivatives. (1) A FDIC-
supervised institution must treat an equity derivative contract as an
equity exposure and compute a risk-weighted asset amount for the equity
derivative contract under Sec. Sec. 324.51 through 324.53 (unless the
FDIC-supervised institution is treating the contract as a covered
position under subpart F of this part).
(2) In addition, the FDIC-supervised institution must also
calculate a risk-based capital requirement for the counterparty credit
risk of an equity derivative contract under this section if the FDIC-
supervised institution is treating the contract as a covered position
under subpart F of this part.
(3) If the FDIC-supervised institution risk weights the contract
under the Simple Risk-Weight Approach (SRWA) in Sec. 324.52, the FDIC-
supervised institution may choose not to hold risk-based capital
against the counterparty credit risk of the equity derivative contract,
as long as it does so for all such contracts. Where the equity
derivative contracts are subject to a qualified master netting
agreement, a FDIC-supervised institution using the SRWA must either
include all or exclude all of the contracts from any measure used to
determine counterparty credit risk exposure.
(f) Clearing member FDIC-supervised institution's exposure amount.
The exposure amount of a clearing member FDIC-supervised institution
using the CEM under paragraph (b) of this section for an OTC derivative
contract or netting set of OTC derivative contracts where the FDIC-
supervised institution is either acting as a financial intermediary and
enters into an offsetting transaction with a QCCP or where the FDIC-
supervised institution provides a guarantee to the QCCP on the
performance of the client equals the exposure amount calculated
according to paragraph (b)(1) or (2) of this section multiplied by the
scaling factor 0.71. If the FDIC-supervised institution determines that
a longer period is appropriate, the FDIC-supervised institution must
use a larger scaling factor to adjust for a longer holding period as
follows:
[GRAPHIC] [TIFF OMITTED] TP17DE18.041
Where H = the holding period greater than five days. Additionally,
the FDIC may require the FDIC-supervised institution to set a longer
holding period if the FDIC determines that a longer period is
appropriate due to the nature, structure, or characteristics of the
transaction or is commensurate with the risks associated with the
transaction.
0
30. Section 324.35 is amended by adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding paragraph (c)(3)(iii) to read as
follows:
Sec. 324.35 Cleared transactions.
(a) * * *
(3) Alternate requirements. Notwithstanding any other provision of
this section, an advanced approaches FDIC-supervised institution or a
FDIC-supervised institution that is not an advanced approaches FDIC-
supervised institution and that has elected to use SA-CCR under Sec.
324.34(a)(1) must apply Sec. 324.133 to its derivative contracts that
are cleared transactions rather than this section Sec. 324.35.
(b) * * *
(4) * * *
(i) Notwithstanding any other requirements in this section,
collateral posted by a clearing member client FDIC-supervised
institution that is held by a custodian (in its capacity as custodian)
in a manner that is bankruptcy remote from the CCP, clearing member,
and other clearing member clients of the clearing member, is not
subject to a capital requirement under this section.
* * * * *
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member FDIC-supervised institution may apply a risk
weight of
[[Page 64719]]
zero percent to the trade exposure amount for a cleared transaction
with a CCP where the clearing member FDIC-supervised institution is
acting as a financial intermediary on behalf of a clearing member
client, the transaction offsets another transaction that satisfies the
requirements set forth in Sec. 324.3(a), and the clearing member FDIC-
supervised institution is not obligated to reimburse the clearing
member client in the event of the CCP default.
* * * * *
0
31. Section 324.37 is amended by revising paragraph (c)(3)(iii) to read
as follows:
Sec. 324.37 Collateralized transactions.
* * * * *
(c) * * *
(3) * * *
(iii) For repo-style transactions and cleared transactions, a FDIC-
supervised institution may multiply the standard supervisory haircuts
provided in paragraphs (c)(3)(i) and (ii) of this section by the square
root of \1/2\ (which equals 0.707107).
* * * * *
Sec. Sec. 324.134, 324.202, and 324.210 [Amended]
0
32. For each section listed in the following table, the footnote number
listed in the ``Old footnote number'' column is redesignated as the
footnote number listed in the ``New footnote number'' column as
follows:
------------------------------------------------------------------------
Old footnote New footnote
Section No. No.
------------------------------------------------------------------------
324.134(d)(3)........................... 30 31
324.202, paragraph (1) introductory text 31 32
of the definition of ``Covered
position''.............................
324.202, paragraph (1)(i) of the 32 33
definition of ``Covered position''.....
324.210(e)(1)........................... 33 34
------------------------------------------------------------------------
0
33. Section 324.132 is amended by:
0
a. Revising paragraphs (b)(2)(ii)(A)(3) through (5);
0
b. Adding paragraphs (b)(2)(ii)(A)(6) and (7);
0
c. Revising paragraphs (c) heading and (c)(1) and (2) and (5) through
(8);
0
d. Adding paragraphs (c)(9) through (12);
0
e. Removing ``Table 3 to Sec. 324.132'' and adding in its place
``Table 4 to this section'' in paragraphs (e)(5)(i)(A) and (H); and
0
f. Redesignating Table 3 to Sec. 324.132 as Table 4 to Sec. 324.132.
The revisions and additions read as follows:
Sec. 324.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and cleared transactions, a FDIC-
supervised institution may multiply the supervisory haircuts provided
in paragraphs (b)(2)(ii)(A)(1) and (2) of this section by the square
root of \1/2\ (which equals 0.707107).
(4) A FDIC-supervised institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days (for eligible margin loans) or five business days (for
repo-style transactions), using the formula provide in paragraph
(b)(2)(ii)(A)(6) of this section where the following conditions apply.
If the number of trades in a netting set exceeds 5,000 at any time
during a quarter, a FDIC-supervised institution must adjust the
supervisory haircuts upward on the basis of a holding period of twenty
business days for the following quarter (except when a FDIC-supervised
institution is calculating EAD for a cleared transaction under Sec.
324.133). If a netting set contains one or more trades involving
illiquid collateral, a FDIC-supervised institution must adjust the
supervisory haircuts upward on the basis of a holding period of twenty
business days. If over the two previous quarters more than two margin
disputes on a netting set have occurred that lasted more than the
holding period, then the FDIC-supervised institution must adjust the
supervisory haircuts upward for that netting set on the basis of a
holding period that is at least two times the minimum holding period
for that netting set.
(5)(i) A FDIC-supervised institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days for collateral associated derivative contracts that are
not cleared transactions using the formula provided in paragraph
(b)(2)(ii)(A)(6) of this section where the following conditions apply.
For collateral associated with a derivative contract that is within a
netting set that is composed of more than 5,000 derivative contracts
that are not cleared transactions, a FDIC-supervised institution must
use a holding period of twenty business days. If a netting set contains
one or more trades involving illiquid collateral or a derivative
contract that cannot be easily replaced, a FDIC-supervised institution
must use a holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or
(b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a
derivative contract that is subject to an outstanding dispute over
variation margin, the holding period is twice the amount provide under
paragraph (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) of this
section.
(6) A FDIC-supervised institution must adjust the standard
supervisory haircuts upward, pursuant to the adjustments provided in
paragraphs (b)(2)(ii)(A)(4) and (5) of this section, using the
following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.042
Where:
TM equals a holding period of longer than 10 business days for
eligible margin loans and derivative contracts or longer than 5
business days for repo-style transactions;
Hs equals the standard supervisory haircut; and
Ts equals 10 business days for eligible margin loans and derivative
contracts or 5 business days for repo-style transactions.
(7) If the instrument a FDIC-supervised institution has lent, sold
subject to repurchase, or posted as collateral does not meet the
definition of financial collateral, the FDIC-supervised institution
must use a 25.0 percent haircut for market price volatility (Hs).
* * * * *
(c) EAD for derivative contracts--(1) Options for determining EAD.
A FDIC-supervised institution must determine the EAD for a derivative
contract using SA-CCR under paragraph (c)(5) of this section or using
the internal models methodology described in paragraph (d) of this
section. If a FDIC-supervised institution elects to use SA-CCR for one
[[Page 64720]]
or more derivative contracts, the exposure amount determined under SA-
CCR is the EAD for the derivative contract or derivatives contracts. A
FDIC-supervised institution must use the same methodology to calculate
the exposure amount for all its derivative contracts and may change its
election only with prior approval of the FDIC.
(2) Definitions. For purposes of this paragraph (c), the following
definitions apply:
(i) Except as otherwise provided in paragraph (c) of this section,
the end date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument.
(ii) Except as otherwise provided in paragraph (c) of this section,
the start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument.
(iii) Hedging set means:
(A) With respect interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity classes: Energy, metal, agricultural, or other commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, the FDIC may require a FDIC-supervised institution to
include the derivative contract in each appropriate hedging set under
paragraph (c)(2)(iii)(A) through (E) of this section.
* * * * *
(5) Exposure amount. The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section, except that, notwithstanding the requirements
of this paragraph (c)(5):
(i) The exposure amount of a netting set subject to a variation
margin agreement, excluding a netting set that is subject to a
variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set and the
exposure amount of the netting set calculated as if the netting set
were not subject to a variation margin agreement; and
(ii) The exposure amount of a netting set that consists of only
sold options in which the premiums have been fully paid and that are
not subject to a variation margin agreement is zero.
(6) Replacement cost of a netting set--(i) Netting set subject to a
variation margin agreement under which the counterparty must post
variation margin. The replacement cost of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty is not
required to post variation margin, is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the sum of the net independent collateral amount and the variation
margin amount applicable to such derivative contracts;
(B) The sum of the variation margin threshold and the minimum
transfer amount applicable to the derivative contracts within the
netting set less the net independent collateral amount applicable to
such derivative contracts; or
(C) Zero.
(ii) Netting sets not subject to a variation margin agreement under
which the counterparty must post variation margin. The replacement cost
of a netting set that is not subject to a variation margin agreement
under which the counterparty must post variation margin to the FDIC-
supervised institution is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the net independent collateral amount and variation margin amount
applicable to such derivative contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for multiple netting sets subject to a
single variation margin agreement must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Multiple netting sets subject to multiple variation margin
agreements or a hybrid netting set. Notwithstanding paragraphs
(c)(6)(i) and (ii) of this section, the replacement cost for a netting
set subject to multiple variation margin agreements or a hybrid netting
set must be calculated according to paragraph (c)(11)(i) of this
section.
(7) Potential future exposure of a netting set. The potential
future exposure of a netting set is the product of the PFE multiplier
and the aggregated amount.
(i) PFE multiplier. The PFE multiplier is calculated according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.019
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
[[Page 64721]]
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the PFE amount for purposes of total
leverage exposure under Sec. 324.10(c)(4)(ii)(B), the potential future
exposure for multiple netting sets subject to a single variation margin
agreement must be calculated according to paragraph (c)(10)(ii) of this
section.
(iv) Multiple netting sets subject to multiple variation margin
agreements or a hybrid netting set. Notwithstanding paragraphs
(c)(7)(i) and (ii) of this section and when calculating the PFE amount
for purposes of total leverage exposure under section
324.10(c)(4)(ii)(B), the potential future exposure for a netting set
subject to multiple variation margin agreements or a hybrid netting set
must be calculated according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, a FDIC-supervised institution may use either of
the formulas provided in paragraphs (c)(8)(i)(A) and (B) of this
section:
[GRAPHIC] [TIFF OMITTED] TP17DE18.044
(ii) Exchange rate derivative contracts. For an exchange rate
derivative contract hedging set, the hedging set amount equals the
absolute value of the sum of the adjusted derivative contract amounts,
as calculated under paragraph (c)(9) of this section, within the
hedging set.
[[Page 64722]]
(iii) Credit derivative contracts and equity derivative contracts.
The hedging set amount of a credit derivative contract hedging set or
equity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.045
Where:
k is each reference entity within the hedging set.
K is the number of reference entities within the hedging set.
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference entity k; and
[rho]k equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.046
Where:
k is each commodity type within the hedging set.
K is the number of commodity types within the hedging set.
AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
commodity type k.
[rho] equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a
FDIC-supervised institution must calculate a separate hedging set
amount for each basis derivative contract hedging set and each
volatility derivative contract hedging set. A FDIC-supervised
institution must calculate such hedging set amounts using one of the
formulas under paragraphs (c)(8)(i) through (iv) that corresponds to
the primary risk factor of the hedging set being calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, a
FDIC-supervised institution must determine the adjusted notional amount
of derivative contract, pursuant to paragraph (c)(9)(ii) of this
section, and multiply the adjusted notional amount by each of the
supervisory delta adjustment, pursuant to paragraph (c)(9)(iii) of this
section, the maturity factor, pursuant to paragraph (c)(9)(iv) of this
section, and the applicable supervisory factor, as provided in Table 2
to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.047
Where:
S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
E is the number of business days from the present day until the end
date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount is equal
to the time-weighted average of the contractual notional amounts of
such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a factor
and all rates of the derivative contract are multiplied by the same
factor, the notional amount is equal to the notional amount of an
equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. If both legs of
the exchange rate derivative contract are denominated in currencies
other than U.S. dollars, the adjusted notional amount of the derivative
contract is the largest leg of the derivative contract, as measured in
U.S. dollars using the exchange rate on the date of the calculation.
(2) Notwithstanding paragraph (c)(9)(i)(B)(1) of this section, for
an exchange rate derivative contract with multiple exchanges of
principal, the FDIC-supervised institution must set the adjusted
notional amount of the derivative contract equal to the notional
[[Page 64723]]
amount of the derivative contract multiplied by the number of exchanges
of principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity derivative
contract, the adjusted notional amount is the product of the fair value
of one unit of the reference instrument underlying the derivative
contract and the number of such units referenced by the derivative
contract.
(2) Notwithstanding paragraph (c)(9)(i)(C)(1) of this section, when
calculating the adjusted notional amount for an equity derivative
contract or a commodity derivative contract that is a volatility
derivative contract, the FDIC-supervised institution must replace the
unit price with the underlying volatility referenced by the volatility
derivative contract and replace the number of units with the notional
amount of the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract
that is not an option contract or collateralized debt obligation
tranche, the supervisory delta adjustment is 1 if the fair value of the
derivative contract increases when the value of the primary risk factor
increases and -1 if the fair value of the derivative contract decreases
when the value of the primary risk factor increases;
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following formulas,
as applicable:
[GRAPHIC] [TIFF OMITTED] TP17DE18.048
(2) As used in the formulas in Table 3 to this section:
(i) [phis] is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) l equals zero for all derivative contracts except interest rate
options for the currencies where interest rates have negative values.
The same value of l must be used for all interest rate options that are
denominated in the same currency. To determine the value of l for a
given currency, a FDIC-supervised institution must find the lowest
value L of P and K of all interest rate options in a given currency
that the FDIC-supervised institution has with all counterparties. Then,
l is set according to this formula: [lgr] = max{-L + 0.1%, 0{time} ;
and
(vi) [sigma] equals the supervisory option volatility, as provided
in Table 2 to this section; and
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined by
the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.049
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this
section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated to
the FDIC-supervised institution's exposure to the total notional amount
of all underlying exposures, expressed as a decimal value between zero
and one; \30\
---------------------------------------------------------------------------
\30\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the FDIC-
supervised institution's exposure. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) notional
amounts of the underlying exposures are subordinated to the FDIC-
supervised institution's exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio of
the notional amounts of all underlying exposures that are senior to the
FDIC-supervised institution's exposure to the total notional amount of
all underlying exposures, expressed as a decimal value between zero and
one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the FDIC-
supervised institution and is designated with a negative sign if the
collateralized debt obligation tranche was sold by the FDIC-supervised
institution.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract that is subject to a variation margin agreement, excluding
derivative contracts that are subject to a variation margin agreement
under which the counterparty is not required to post variation margin,
is determined by the following formula:
[[Page 64724]]
[GRAPHIC] [TIFF OMITTED] TP17DE18.050
Where MPOR refers to the period from the most recent exchange of
collateral covering a netting set of derivative contracts with a
defaulting counterparty until the derivative contracts are closed out
and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a cleared transaction,
MPOR cannot be less than ten business days plus the periodicity of re-
margining expressed in business days minus one business day;
(ii) For a derivative contract that is a cleared transaction, MPOR
cannot be less than five business days plus the periodicity of re-
margining expressed in business days minus one business day; and
(iii) For a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, MPOR cannot be less than twenty business days.
(3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this
section, for a derivative contract subject to an outstanding dispute
over variation margin, the applicable floor is twice the amount
provided in (c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts under
which the counterparty is not required to post variation margin, is
determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TP17DE18.051
Where M equals the greater of 10 business days and the remaining
maturity of the contract, as measured in business days.
(C) For purposes of paragraph (c)(9)(iv) of this section,
derivative contracts with daily settlement are treated as derivative
contracts not subject to a variation margin agreement and daily
settlement does not change the end date of the period referenced by the
derivative contract.
(v) Derivative contract as multiple effective derivative contracts.
A FDIC-supervised institution must separate a derivative contract into
separate derivative contracts, according to the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must be
treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must be
represented as the combination of one bought European option and one
sold European option of the same type as the original option (put or
call) with the strikes set equal to 0.95*K and 1.05*K so that the
payoff of the binary option is reproduced exactly outside the region
between the two strikes. The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold options is capped at
the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), each standard option
component must be treated as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment
options, (such as interest rate caps and floors) each payment option
may be represented as a combination of effective single-payment options
(such as interest rate caplets and floorlets).
(10) Multiple netting sets subject to a single variation margin
agreement--(i) Calculating replacement cost. Notwithstanding paragraph
(c)(6) of this section, a FDIC-supervised institution shall assign a
single replacement cost to multiple netting sets that are subject to a
single variation margin agreement under which the counterparty must
post variation margin, calculated according to the following formula:
Replacement Cost = max{[Sigma]NSmax{VNS; 0{time} - max{CMA; 0{time} ;
0{time} + max{[Sigma]NSmin{VNS; 0{time} - min{CMA; 0{time} ; 0{time}
Where:
NS is each netting set subject to the variation margin agreement MA;
VNS is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set NS;
CMAis the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting sets subject to the single variation margin
agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, a FDIC-supervised institution shall
assign a single potential future exposure to multiple netting sets that
are subject to a single variation margin agreement under which the
counterparty must post variation margin equal to the sum of the
potential future exposure of each such netting set, each calculated
according to paragraph (c)(7) of this section as if such nettings sets
were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(ii) of this section, except that the variation margin
threshold equals the sum of the variation margin thresholds of all
variation margin agreements within the netting set and the minimum
transfer amount equals the sum of the minimum transfer amounts of all
the variation margin agreements within the netting set.
(ii) Calculating potential future exposure. (A) To calculate
potential future exposure for a netting set subject to multiple
variation margin agreements under which the counterparty to each
variation margin agreement must post variation margin, or a netting set
composed of at least one derivative
[[Page 64725]]
contract subject to variation margin agreement under which the
counterparty to the derivative contract must post variation margin and
at least one derivative contract that is not subject to such a
variation margin agreement, a FDIC-supervised institution must divide
the netting set into sub-netting sets and calculate the aggregated
amount for each sub-netting set. The aggregated amount for the netting
set is calculated as the sum of the aggregated amounts for the sub-
netting sets. The multiplier is calculated for the entire netting set.
(B) For purposes of paragraph (c)(11)(ii)(A) of this section, the
netting set must be divided into sub-netting sets as follows:
(1) All derivative contracts within the netting set that are not
subject to a variation margin agreement or that are subject to a
variation margin agreement under which the counterparty is not required
to post variation margin form a single sub-netting set. The aggregated
amount for this sub-netting set is calculated as if the netting set is
not subject to a variation margin agreement.
(2) All derivative contracts within the netting set that are
subject to variation margin agreements in which the counterparty must
post variation margin and that share the same value of the MPOR form a
single sub-netting set. The aggregated amount for this sub-netting set
is calculated as if the netting set is subject to a variation margin
agreement, using the MPOR value shared by the derivative contracts
within the netting set.
(12) Treatment of cleared transactions. (i) A FDIC-supervised
institution must apply the adjustments in paragraph (c)(12)(iii) of
this section to the calculation of exposure amount under this paragraph
(c) for a netting set that is composed solely of one or more cleared
transactions.
(ii) A FDIC-supervised institution that is a clearing member must
apply the adjustments in paragraph (c)(12)(iii) of this section to the
calculation of exposure amount under this paragraph (c) for a netting
set that is composed solely of one or more exposures, each of which are
exposures of the FDIC-supervised institution to its clearing member
client where the FDIC-supervised institution is either acting as a
financial intermediary and enters into an offsetting transaction with a
CCP or where the FDIC-supervised institution provides a guarantee to
the CCP on the performance of the client.
(iii)(A) For purposes of calculating the maturity factor under
paragraph (c)(9)(iv)(B) of this section, MPOR may not be less than 10
business days;
(B) For purposes of calculating the maturity factor under paragraph
(c)(9)(iv)(B) of this section, the minimum MPOR under paragraph
(c)(9)(iv)(A)(3) of this section does not apply if there are no
outstanding disputed trades in the netting set, there is no illiquid
collateral in the netting set, and there are no exotic derivative
contracts in the netting set; and
(C) For purposes of calculating the maturity factor under
paragraphs (c)(9)(iv)(A) and (B) of this section, if the CCP collects
and holds variation margin and the variation margin is not bankruptcy
remote from the CCP, Mi may not exceed 250 business days.
Table 2 to Sec. 324.132--Supervisory Option Volatility, Supervisory Correlation Parameters, and Supervisory
Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
Asset class Subclass option correlation Supervisory
volatility (%) factor (%) factor \1\ (%)
----------------------------------------------------------------------------------------------------------------
Interest rate......................... N/A..................... 50 N/A 0.50
Exchange rate......................... N/A..................... 15 N/A 4.0
Credit, single name................... Investment grade........ 100 50 0.5
Speculative grade....... 100 50 1.3
Sub-speculative grade... 100 50 6.0
Credit, index......................... Investment Grade........ 80 80 0.38
Speculative Grade....... 80 80 1.06
Equity, single name................... N/A..................... 120 50 32
Equity, index......................... N/A..................... 75 80 20
Commodity............................. Energy.................. 150 40 40
Metals.................. 70 40 18
Agricultural............ 70 40 18
Other................... 70 40 18
----------------------------------------------------------------------------------------------------------------
\1\ The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the
supervisory factor provided in this Table 2, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this Table 2.
* * * * *
0
34. Section 324.133 amended by revising paragraphs (a), (b)(1) through
(3), (b)(4)(i), (c)(1) through (3), (c)(4)(i), and (d) to read as
follows:
Sec. 324.133 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A FDIC-
supervised institution that is a clearing member client must use the
methodologies described in paragraph (b) of this section to calculate
risk-weighted assets for a cleared transaction.
(2) Clearing members. A FDIC-supervised institution that is a
clearing member must use the methodologies described in paragraph (c)
of this section to calculate its risk-weighted assets for a cleared
transaction and paragraph (d) of this section to calculate its risk-
weighted assets for its default fund contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a FDIC-
supervised institution that is a clearing member client must multiply
the trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (b)(2) of this section, by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client FDIC-supervised institution's total
risk-weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative
[[Page 64726]]
contract or a netting set of derivative contracts, trade exposure
amount equals the EAD for the derivative contract or netting set of
derivative contracts calculated using the methodology used to calculate
EAD for derivative contracts set forth in Sec. 324.132(c) or (d), plus
the fair value of the collateral posted by the clearing member client
FDIC-supervised institution and held by the CCP or a clearing member in
a manner that is not bankruptcy remote. When the FDIC-supervised
institution calculates EAD for the cleared transaction using the
methodology in Sec. 324.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 324.132(b)(2) or (3) or (d), plus the fair value of
the collateral posted by the clearing member client FDIC-supervised
institution and held by the CCP or a clearing member in a manner that
is not bankruptcy remote. When the FDIC-supervised institution
calculates EAD for the cleared transaction under Sec. 324.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client FDIC-supervised institution must
apply a risk weight of:
(A) 2 percent if the collateral posted by the FDIC-supervised
institution to the QCCP or clearing member is subject to an arrangement
that prevents any loss to the clearing member client FDIC-supervised
institution due to the joint default or a concurrent insolvency,
liquidation, or receivership proceeding of the clearing member and any
other clearing member clients of the clearing member; and the clearing
member client FDIC-supervised institution has conducted sufficient
legal review to conclude with a well-founded basis (and maintains
sufficient written documentation of that legal review) that in the
event of a legal challenge (including one resulting from an event of
default or from liquidation, insolvency or receivership proceedings)
the relevant court and administrative authorities would find the
arrangements to be legal, valid, binding and enforceable under the law
of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client FDIC-supervised institution must apply the risk
weight applicable to the CCP under Sec. 324.32.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client FDIC-supervised
institution that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a clearing
member FDIC-supervised institution must multiply the trade exposure
amount for the cleared transaction, calculated in accordance with
paragraph (c)(2) of this section by the risk weight appropriate for the
cleared transaction, determined in accordance with paragraph (c)(3) of
this section.
(ii) A clearing member FDIC-supervised institution's total risk-
weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member FDIC-supervised
institution must calculate its trade exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 324.132(c) or (d), plus the
fair value of the collateral posted by the clearing member FDIC-
supervised institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member FDIC-supervised institution
calculates EAD for the cleared transaction using the methodology in
Sec. 324.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 324.132(b)(2) or (3) or (d), plus the
fair value of the collateral posted by the clearing member FDIC-
supervised institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member FDIC-supervised institution
calculates EAD for the cleared transaction under Sec. 324.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member FDIC-
supervised institution must apply a risk weight of 2 percent to the
trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member FDIC-supervised institution must apply the risk weight
applicable to the CCP according to Sec. 324.32.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member FDIC-supervised institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a QCCP where the clearing member FDIC-supervised
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 324.3(a), and the
clearing member FDIC-supervised institution is not obligated to
reimburse the clearing member client in the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client FDIC-supervised
institution that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(d) Default fund contributions--(1) General requirement. A clearing
member FDIC-supervised institution must determine the risk-weighted
asset amount for a default fund contribution to a CCP at least
quarterly, or more frequently if, in the opinion of the FDIC-supervised
institution or the FDIC, there is a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member FDIC-supervised institution's
risk-weighted asset amount for default fund contributions to CCPs that
are not QCCPs equals the sum of such default fund contributions
multiplied by 1,250 percent, or an amount determined by the FDIC, based
on factors such as size, structure and membership characteristics of
the CCP and riskiness of its transactions, in cases where such default
fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member FDIC-supervised institution's risk-weighted
asset amount for default fund contributions to QCCPs equals the sum of
its capital
[[Page 64727]]
requirement, KCM for each QCCP, as calculated under the
methodology set forth in paragraph (e)(4) of this section.
(i) EAD must be calculated separately for each clearing member's
sub-client accounts and sub-house account (i.e., for the clearing
member's propriety activities). If the clearing member's collateral and
its client's collateral are held in the same default fund contribution
account, then the EAD of that account is the sum of the EAD for the
client-related transactions within the account and the EAD of the
house-related transactions within the account. For purposes of
determining such EADs, the independent collateral of the clearing
member and its client must be allocated in proportion to the respective
total amount of independent collateral posted by the clearing member to
the QCCP.
(ii) If any account or sub-account contains both derivative
contracts and repo-style transactions, the EAD of that account is the
sum of the EAD for the derivative contracts within the account and the
EAD of the repo-style transactions within the account. If independent
collateral is held for an account containing both derivative contracts
and repo-style transactions, then such collateral must be allocated to
the derivative contracts and repo-style transactions in proportion to
the respective product specific exposure amounts, calculated, excluding
the effects of collateral, according to Sec. 324.132(b) for repo-style
transactions and to Sec. 324.132(c)(5) for derivative contracts.
(4) Risk-weighted asset amount for default fund contributions to a
QCCP. A clearing member FDIC-supervised institution's capital
requirement for its default fund contribution to a QCCP (KCM) is equal
to:
[GRAPHIC] [TIFF OMITTED] TP17DE18.052
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has
provided its KCCP, a FDIC-supervised institution must rely
on such disclosed figure instead of calculating KCCP under
this paragraph (d)(5), unless the FDIC-supervised institution
determines that a more conservative figure is appropriate based on the
nature, structure, or characteristics of the QCCP. The hypothetical
capital requirement of a QCCP (KCCP), as determined by the FDIC-
supervised institution, is equal to:
KCCP = [Sigma]CMiEADi * 1.6 percent
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of the QCCP to
the QCCP, as determined under paragraph (d)(6) of this section.
(6) EAD of a clearing member FDIC-supervised institution to a QCCP.
(i) The EAD of a clearing member FDIC-supervised institution to a QCCP
is equal to the sum of the EAD for derivative contracts determined
under paragraph (d)(6)(ii) of this section and the EAD for repo-style
transactions determined under paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the FDIC-
supervised institution and the CCP that are cleared transactions and
any guarantees that the FDIC-supervised institution has provided to the
CCP with respect to performance of a clearing member client on a
derivative contract, the EAD is equal to the sum of:
(A) The exposure amount for all such derivative contracts and
guarantees of derivative contracts calculated under SA-CCR in Sec.
324.132(c) using a value of
[[Page 64728]]
10 business days for purposes of Sec. 324.132(c)(9)(iv)(B);
(B) The value of all collateral held by the CCP posted by the
clearing member FDIC-supervised institution or a clearing member client
of the FDIC-supervised institution in connection with a derivative
contract for which the FDIC-supervised institution has provided a
guarantee to the CCP; and
(C) The amount of the prefunded default fund contribution of the
FDIC-supervised institution to the CCP.
(iii) With respect to any repo-style transactions between the FDIC-
supervised institution and the CCP that are cleared transactions, EAD
is equal to:
EAD = max{EBRM-IM-DF; 0{time}
Where:
EBRM is the sum of the exposure amounts of each repo-style
transaction between the FDIC-supervised institution and the CCP as
determined under Sec. 324.132(b)(2) and without recognition of any
collateral securing the repo-style transactions;
IM is the initial margin collateral posted by the FDIC-supervised
institution to the CCP with respect to the repo-style transactions;
and
DF is the prefunded default fund contribution of the FDIC-supervised
institution to the CCP.
0
35. Section 324.300 is amended by adding paragraph (f) to read as
follows:
Sec. 324.300 Transitions.
* * * * *
(f) SA-CCR. After giving prior notice to the FDIC, an advanced
approaches FDIC-supervised institution may use CEM rather than SA-CCR
to determine the exposure amount for purposes of Sec. 324.34 and the
EAD for purposes of Sec. 324.132 for its derivative contracts until
July 1, 2020. On July 1, 2020, and thereafter, an advanced approaches
FDIC-supervised institution must use SA-CCR for purposes of Sec.
324.34 and must use either SA-CCR or IMM for purposes of Sec. 324.132.
Once an advanced approaches FDIC-supervised institution has begun to
use SA-CCR, the advanced approaches FDIC-supervised institution may not
change to use CEM.
Dated: November 7, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, November 6, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC, on October 17, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2018-24924 Filed 12-14-18; 8:45 am]
BILLING CODE 4810-33-6210-01;6714-01;P
