Enterprise Regulatory Capital Framework-Commingled Securities, Multifamily Government Subsidy, Derivatives, and Other Enhancements, 15306-15333 [2023-04041]
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Federal Register / Vol. 88, No. 48 / Monday, March 13, 2023 / Proposed Rules
XII. Proposed Rule Text
List of Subjects in 9 CFR Part 412
Food labeling, Food packaging, Meat
and meat products, Meat inspection,
Poultry and poultry products, Reporting
and recordkeeping requirements.
For the reasons set forth in the
preamble, FSIS is proposing to amend 9
CFR part 412 as follows:
PART 412—LABEL APPROVAL
1. The authority citation for part 412
continues to read as follows:
■
Authority: 21 U.S.C. 451–470, 601–695; 7
CFR 2.18, 2.53.
■
2. Add § 412.3 to read as follows:
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§ 412.3 Approval of U.S.-origin generic
label claims.
(a) The authorized claims ‘‘Product of
USA’’ and ‘‘Made in the USA’’ may be
used under generic approval on labels to
designate single ingredient products
derived from animals born, raised,
slaughtered, and processed in the
United States.
(b) The authorized claims ‘‘Product of
USA’’ and ‘‘Made in the USA’’ may be
used under generic approval on labels to
designate multi-ingredient products if
all FSIS-regulated components of the
product are derived from animals born,
raised, slaughtered, and processed in
the United States, and all other
ingredients in the product are of
domestic origin. For purposes of this
paragraph (b), spices and flavorings
need not be of domestic origin for claim
use, but all other ingredients of the
product must be of domestic origin.
(c) Claims other than ‘‘Product of
USA’’ and ‘‘Made in the USA’’ may be
used under generic approval on labels to
designate the U.S.-origin component of
single ingredient and multi-ingredient
products only if the product also
includes a description on the package as
to how the claim compares to the
definitions for the authorized claims,
‘‘Product of USA’’ and ‘‘Made in the
USA’’ as set forth in paragraphs (a) and
(b) of this section. The product must
include a description on the package of
all preparation and processing steps that
occurred in the United States upon
which the claim is being made. Such
labels must be truthful and not
misleading.
(1) The wording of the package
description must be shown in print no
smaller than one third the size of the
largest letter in the U.S.-origin claim,
and positioned near the U.S.-origin
claim.
(d) In addition to the requirements in
§ 412.2, official establishments using
and facilities choosing to use labels that
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bear the authorized claims ‘‘Product of
USA’’ or ‘‘Made in the USA’’ to
designate products of U.S. origin must
maintain records to support the U.S.origin claim. Examples of the types of
documentation that may be maintained
to support the authorized U.S.-origin
claims ‘‘Product of USA’’ or ‘‘Made in
the USA’’ include:
(1) A written description of the
controls used in the birthing, raising,
slaughter, and processing of the source
animals, and for multi-ingredient
products the preparation and processing
of all additional ingredients other than
spices and flavorings, to ensure that
each step complies with paragraphs (a)
and (b) of this section.
(2) A written description of the
controls used to trace and segregate,
from the time of birth or processing
through packaging and wholesale or
retail distribution, source animals, all
additional ingredients other than spices
and flavorings, and resulting products
that comply with paragraphs (a) and (b)
of this section from those that do not
comply.
(3) A signed and dated document
describing how the product is prepared
and processed to support that the
authorized claim is not false or
misleading.
(e) In addition to the requirements in
§ 412.2, official establishments using
and facilities choosing to use a qualified
U.S.-origin label claim to designate the
U.S.-origin preparation and processing
component of a product must maintain
records to support the qualified U.S.origin claim. Examples of the types of
documentation that may be maintained
to support the qualified U.S.-origin
claim include:
(1) A written description of the
controls used in each applicable
preparation and processing step of
source animals, all additional
ingredients other than spices and
flavorings, and resulting products to
demonstrate that the qualified U.S.origin claim complies with paragraph
(c) of this section. The described
controls may include those used to trace
and segregate, during each applicable
step, source animals, all additional
ingredients other than spices and
flavorings, and resulting products that
comply with the U.S.-origin claim from
those that do not comply.
(2) A signed and dated document
describing how the qualified U.S.-origin
claim regarding the preparation and
processing component is not false or
misleading.
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Done in Washington, DC.
Paul Kiecker,
Administrator.
[FR Doc. 2023–04815 Filed 3–10–23; 8:45 am]
BILLING CODE 3410–DM–P
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1240
RIN 2590–AB27
Enterprise Regulatory Capital
Framework—Commingled Securities,
Multifamily Government Subsidy,
Derivatives, and Other Enhancements
Federal Housing Finance
Agency.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Federal Housing Finance
Agency (FHFA or the Agency) is seeking
comments on a notice of proposed
rulemaking (proposed rule) that would
amend several provisions in the
Enterprise Regulatory Capital
Framework (ERCF) for the Federal
National Mortgage Association (Fannie
Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac, and
with Fannie Mae, each an Enterprise).
The proposed rule would include
modifications related to guarantees on
commingled securities, multifamily
mortgage exposures secured by
government-subsidized properties,
derivatives and cleared transactions,
and credit scores, among other items.
DATES: Comments must be received on
or before May 12, 2023.
ADDRESSES: You may submit your
comments on the proposed rule,
identified by regulatory information
number (RIN) 2590–AB27, by any one of
the following methods:
• Agency website: www.fhfa.gov/
open-for-comment-or-input.
• Federal eRulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comment to the
Federal eRulemaking Portal, please also
send it by email to FHFA at
RegComments@fhfa.gov to ensure
timely receipt by FHFA. Include the
following information in the subject line
of your submission: Comments/RIN
2590–AB27.
• Hand Delivered/Courier: The hand
delivery address is: Clinton Jones,
General Counsel, Attention: Comments/
RIN 2590–AB27, Federal Housing
Finance Agency, 400 Seventh Street
SW, Washington, DC 20219. Deliver the
package at the Seventh Street entrance
Guard Desk, First Floor, on business
days between 9 a.m. and 5 p.m.
SUMMARY:
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Federal Register / Vol. 88, No. 48 / Monday, March 13, 2023 / Proposed Rules
• U.S. Mail, United Parcel Service,
Federal Express, or Other Mail Service:
The mailing address for comments is:
Clinton Jones, General Counsel,
Attention: Comments/RIN 2590–AB27,
Federal Housing Finance Agency, 400
Seventh Street SW, Washington, DC
20219. Please note that all mail sent to
FHFA via U.S. Mail is routed through a
national irradiation facility, a process
that may delay delivery by
approximately two weeks. For any timesensitive correspondence, please plan
accordingly.
FOR FURTHER INFORMATION CONTACT:
Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202)
649–3141, Andrew.Varrieur@fhfa.gov;
Christopher Vincent, Principal
Financial Analyst, Office of Capital
Policy, (202) 649–3685,
Christopher.Vincent@fhfa.gov; or James
Jordan, Associate General Counsel,
Office of General Counsel, (202) 649–
3075, James.Jordan@fhfa.gov. These are
not toll-free numbers. For TTY/TRS
users with hearing and speech
disabilities, dial 711 and ask to be
connected to any of the contact numbers
above.
SUPPLEMENTARY INFORMATION:
Comments
FHFA invites comments on all aspects
of the proposed rule. Copies of all
comments will be posted without
change and will include any personal
information you provide, such as your
name, address, email address, and
telephone number, on the FHFA website
at https://www.fhfa.gov. In addition,
copies of all comments received will be
available for examination by the public
through the electronic rulemaking
docket for this proposed rule also
located on the FHFA website.
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Table of Contents
I. Introduction
II. Proposed Requirements
A. Guarantees on Commingled Securities
B. Multifamily Government Subsidy Risk
Multiplier
C. Derivatives and Cleared Transactions
D. Representative Credit Scores for SingleFamily Mortgage Exposures
E. Original Credit Scores for Single-Family
Mortgage Exposures Without a
Representative Original Credit Score
F. Guarantee Assets
G. Mortgage Servicing Assets
H. Time-Based Calls for CRT Exposures
I. Interest-Only Mortgage-Backed Securities
J. Single-Family Countercyclical
Adjustment
K. Stability Capital Buffer
L. Advanced Approaches
III. Effective Date
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act
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I. Introduction
FHFA is seeking comments on
amendments to the ERCF that would
enhance, clarify, or otherwise refine
various regulatory capital requirements
for the Enterprises. The proposed rule
would modify provisions in the ERCF
related to the following items:
guarantees on commingled securities,
multifamily mortgage exposures secured
by properties with a government
subsidy, derivatives and cleared
transactions, credit scores for singlefamily mortgage exposures, guarantee
assets, mortgage servicing assets
(MSAs), time-based calls for credit risk
transfer (CRT) exposures, interest-only
(IO) mortgage-backed securities (MBS),
the single-family countercyclical
adjustment, the stability capital buffer,
and the compliance date for the
advanced approaches.
The proposed amendments would
implement the lessons learned through
the continued application of the ERCF
and better reflect the risks inherent in
the Enterprises’ business models. In
addition, the proposed rule would
clarify certain areas of the ERCF. In
doing so, the modifications in this
proposed rule would enhance the safety
and soundness of the Enterprises and
contribute to the furtherance of the
Enterprises’ missions.
FHFA adopted the ERCF on December
17, 2020, with the purpose of
implementing a going-concern
regulatory capital standard to ensure
that each of Fannie Mae and Freddie
Mac operates in a safe and sound
manner, and, across the economic cycle
is positioned to fulfill its statutory
mission to provide stability and ongoing
assistance to the secondary mortgage
market. The ERCF satisfied a statutory
requirement that FHFA establish by
regulation, risk-based capital
requirements to safeguard the
Enterprises against the risks that arise in
the operation and management of their
businesses. The ERCF also implemented
a new leverage framework that included
both a minimum requirement and a
leverage buffer. The ERCF became
effective on February 16, 2021. FHFA
subsequently amended the ERCF three
times. The amendments refined the
prescribed leverage buffer amount
(PLBA or leverage buffer) and the riskbased capital treatment of CRT,
implemented a more comprehensive set
of public disclosure requirements for
the standardized approach, and required
the Enterprises to submit capital plans
to FHFA on an annual basis. Each of the
amendments became effective in 2022.
Since the adoption of the ERCF, the
Enterprises have been operating under
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the capital requirements and buffers
outlined in the standardized approach
while simultaneously building their
capital positions. However, despite their
recent progress accumulating capital,
the Enterprises remain severely
undercapitalized. Since the Enterprises
were placed into conservatorships in
September 2008, they have been
supported by Senior Preferred Stock
Purchase Agreements (PSPAs) between
the U.S. Department of the Treasury
(Treasury) and each Enterprise.1
As conservator and prudential
regulator, FHFA continuously monitors
the risk inherent in the Enterprises’
business operations and reviews the
appropriateness of the ERCF’s capital
requirements and buffers to mitigate
those risks. FHFA has identified several
provisions in the ERCF that could be
revised to enhance the ERCF.
Specifically, the proposed rule would
introduce:
• A 5 percent risk weight and 50
percent credit conversion factor for
guarantees on commingled securities,
• A risk multiplier of 0.6 for
multifamily mortgage exposures secured
by properties with certain government
subsidies,
• A standardized approach for
counterparty credit risk (SA–CCR) as the
method for computing risk weights for
derivatives and cleared transactions,
• A modified procedure for
determining a representative credit
score for single-family mortgage
exposures,
• A modified credit score assumption
for single-family mortgage exposures
originated without a representative
credit score,
• A 20 percent risk weight for
guarantee assets, and
• A timing alignment between the
application of single-family
countercyclical adjustments and
property value adjustments.
FHFA has also identified several
aspects of the ERCF where specific
language would clarify and enhance the
usefulness of the ERCF. The proposed
rule would:
• Expand the definition of MSAs to
include servicing rights on mortgage
loans owned by the Enterprise,
• Explicitly permit eligible timebased call options in the CRT
operational criteria,
• Amend the risk weights for IO MBS
to 0 percent, 20 percent, and 100
1 Fannie Mae’s and Freddie Mac’s Amended and
Restated Senior Preferred Stock Purchase
Agreements with Treasury, as amended through
September 14, 2021, can be found on FHFA’s web
page at https://www.fhfa.gov/Conservatorship/
Pages/Senior-Preferred-Stock-PurchaseAgreements.aspx.
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percent, conditional on whether the
security was issued by the Enterprise,
the other Enterprise, or a non-Enterprise
entity, respectively, and
• Clarify the calculation of the
stability capital buffer when an increase
and a decrease might be applied
concurrently.
Finally, the proposed rule would
extend the compliance date for the
advanced approaches. Each item is
discussed below.
II. Proposed Requirements
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A. Guarantees on Commingled
Securities
The ERCF includes risk-based,
leverage, and buffer capital
requirements for guarantees on
commingled securities—certain
resecuritizations guaranteed by a
combination of Fannie Mae and Freddie
Mac, described more fully below. For
risk-based capital, an Enterprise is
currently required to apply a 20 percent
risk weight on exposures to the other
Enterprise in a commingled security.
For leverage capital and buffer
calculations, an Enterprise is currently
required to apply a 100 percent credit
conversion factor to these exposures
because they are off-balance sheet
guarantees. The 20 percent risk weight
and 100 percent credit conversion factor
for guarantees on commingled securities
may not accurately reflect the
counterparty risks posed by
commingling activities and in certain
circumstances may impair the liquidity
of the Enterprises’ securities, which may
adversely affect the nation’s housing
finance market. The proposed rule
would reduce the risk weight and the
credit conversion factor for guarantees
on commingled securities to 5 percent
and 50 percent, respectively.
On February 28, 2019, FHFA issued a
final rule on common MBS known as
the Uniform Mortgage-Backed Security
(UMBS) with the purpose of enhancing
liquidity in the MBS marketplace and
fostering the efficiency and liquidity of
the secondary mortgage market. On June
3, 2019, the Enterprises launched newly
issued UMBS. The UMBS are a singleclass security issued by either Fannie
Mae or Freddie Mac backed by singlefamily mortgage loans purchased by the
issuing Enterprise. For the UMBS
market to operate successfully, market
participants must continue to accept
UMBS as fungible irrespective of the
issuing Enterprise. That is, investors
generally must agree that a UMBS of a
certain coupon, maturity, and loan
origination year issued by one
Enterprise is roughly equivalent to the
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corresponding UMBS issued by the
other Enterprise.2
To foster fungibility, each Enterprise
may issue ‘‘Supers,’’ which are singleclass resecuritizations of UMBS. The
securities underlying Supers may be
commingled, i.e., Supers may be backed
by both securities that are issued and
guaranteed by Fannie Mae and
securities that are issued and guaranteed
by Freddie Mac. The Enterprises may
also issue collateralized mortgage
obligations, or CMOs, and real estate
mortgage investment conduits, or
REMICs, which are each a type of
structured security in which the
collateral can include UMBS. If an
Enterprise guarantees a security backed
in whole or in part by securities of the
other Enterprise, the Enterprise is
obligated under its guarantee to fund
any shortfall in the event that the other
Enterprise fails to make a payment due
on its securities.3 Investors in
commingled securities benefit from the
original guarantees extended by
guarantors of the underlying collateral,
as well as the additional guarantees of
resecuritizing Enterprise, including on
the commingled collateral.
As a result of these multiple
guarantees, the current 20 percent risk
weight and 100 percent credit
conversion factor for commingled
securities may not accurately reflect
these counterparty risks and, in certain
circumstances, may impair the liquidity
of the Enterprises’ securities. However,
despite their current Treasury support
under the PSPAs, the Enterprises also
remain privately-owned corporations,
and their obligations do not have the
explicit guarantee of the full faith and
credit of the United States. Therefore,
the MBS and other obligations of an
Enterprise pose some degree of
counterparty risk.
The proposed rule would reduce the
risk weight for guarantees on
commingled securities from 20 percent
to 5 percent to better align the capital
requirements with the inherent
counterparty risk. A lower risk weight
should reduce an Enterprise’s incentive
to only guarantee Supers securities
collateralized by its own UMBS, leading
to different volumes and investor
2 To support investor confidence in that
fungibility, FHFA adopted a final rule governing
Enterprise actions affecting UMBS cash flows to
investors (12 CFR part 1248), publishes quarterly
prepayment monitoring reports, and limits certain
pooling practices with respect to the creation of
UMBS.
3 The Enterprises have entered into an
indemnification agreement relating to commingled
securities issued by the Enterprises. The
indemnification agreement obligates each
Enterprise to reimburse the other for any such
shortfall.
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perceptions of UMBS issued by each
Enterprise, and potentially leading to a
bifurcation of UMBS pricing and
trading. Several commenters on FHFA’s
2020 notice of proposed rulemaking on
Enterprise capital 4 recommended FHFA
implement a similar treatment, while
also stating that an Enterprise’s
exposures to the other Enterprise do not
increase aggregate credit risk and the 20
percent risk weight is therefore
excessive.
The risk-weight floor assigned to any
retained CRT exposure is 5 percent.5
This risk weight applies to senior
tranches of CRT transactions that absorb
catastrophic levels of loss only after
resources to absorb expected and
unexpected losses are exhausted.
Similarly, the losses that an Enterprise
would experience from commingled
securities would likely occur in remote
circumstances through sustained
catastrophic levels of loss after the other
Enterprise has exhausted its lossabsorbing financial resources. Therefore,
the proposed 5 percent risk weight for
credit exposures arising out of
guarantees on commingling activities
would align with the risk-weight floor
for retained CRT exposures.
The proposed rule would also reduce
the credit conversion factor for
guarantees on commingled securities
from 100 percent to 50 percent. To
enhance the liquidity of UMBS and the
overall stability of the secondary
mortgage market, the leverage and buffer
requirements for guarantees on
commingled securities would also need
to be updated. FHFA proposes to
accomplish this by reducing the impact
of these guarantees on an Enterprise’s
adjusted total assets. According to
generally accepted accounting
principles, an Enterprise’s guarantee of
commingled collateral is not
consolidated on the balance sheet
because the Enterprise issuing the
guarantee does not have any rights or
powers to direct the activities of the
underlying commingled resecuritization
trust and is not the primary beneficiary
of its activities.6 Under the ERCF, offbalance sheet assets are subject to a
range of credit conversion factors to
determine adjusted total assets. FHFA’s
proposal to update the credit conversion
factor for guarantees on commingled
securities to 50 percent would align
with the prevailing regulatory capital
treatment for off-balance sheet undrawn
commitments with an original maturity
of more than one year that are not
4 85
FR 39274 (June 30, 2020).
FR 14764 (March 16, 2022).
6 FASB ASC 810.
5 87
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unconditionally cancelable by the
Enterprise.
The proposed changes to the
requirements for guarantees on
commingled securities would affect
both risk-weighted assets and adjusted
total assets. FHFA estimates that under
the proposed rule, the total common
equity tier 1 capital (CET1) required to
meet the risk-based capital requirements
and buffers for the Enterprises’
guarantees on commingled securities as
of June 30, 2022 would decline by
approximately $5.1 billion.
Question 1: What, if any, other factors
should FHFA consider in its
determination of a 5 percent risk weight
and 50 percent credit conversion factor
for guarantees on commingled
securities?
Question 2: Is the proposed 5 percent
risk weight for guarantees on
commingled securities appropriately
calibrated?
Question 3: Is the proposed 50
percent credit conversion factor for
guarantees on commingled securities
appropriately calibrated?
Question 4: Should FHFA adjust the
regulatory capital treatment for
exposures to MBS guaranteed by the
other Enterprise to mitigate any risk of
disruption to the UMBS?
Question 5: Should FHFA consider a
different risk weight for second-level
resecuritizations backed by UMBS?
Question 6: What should be the
regulatory capital treatment of any
credit risk mitigation effect of any
indemnification or similar arrangements
between the Enterprises relating to
UMBS resecuritizations?
Question 7: Should FHFA adopt
different risk weights for MBS
guaranteed by an Enterprise and the
unsecured debt of an Enterprise?
B. Multifamily Government Subsidy
Risk Multiplier
The methodology for calculating
multifamily credit risk weights in the
ERCF does not differentiate between
multifamily mortgage exposures secured
by properties with a government
subsidy and by properties without a
government subsidy. Two previous
FHFA products that together formed
much of the basis for the ERCF—the
Conservatorship Capital Framework, an
internal risk measurement framework
established in 2017, and FHFA’s 2018
notice of proposed rulemaking on
Enterprise Capital Requirements 7—each
contained such a differentiation in the
form of a multifamily risk multiplier.
FHFA did not include such a multiplier
in the ERCF due to calibration
7 83
FR 33312 (July 17, 2018).
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challenges caused by the relatively
infrequent instances of loss across
multifamily loan programs that include
a government subsidy. However, several
commenters on FHFA’s 2020 notice of
proposed rulemaking on Enterprise
capital 8 recommended that FHFA
introduce a risk multiplier to reflect that
multifamily mortgage exposures
associated with government-subsidized
properties are less risky than those
associated with unsubsidized
properties, all else equal.
Properties with government subsidies
represent an important segment of the
Enterprises’ multifamily business
models. FHFA sets a yearly limit or cap
on the dollar value of the Enterprises’
multifamily acquisitions, ensuring they
provide liquidity to the secondary
market without crowding out private
competition. As part of the annual
acquisition limits, FHFA directs the
Enterprises to meet specific affordable
housing or mission goals by acquiring
multifamily loans collateralized by
properties that charge rents affordable to
certain segments of the population with
specified income levels. Affordable
property units are available to renters at
a rental rate below the typical market
rate, leading to generally strong demand
for affordable property units and
therefore to relatively stable vacancy
rates.
Government subsidies of affordable
housing are issued either at the Federal
or state and local levels, typically in the
form of a tax credit, direct subsidy, or
voucher reimbursement. The purpose of
these subsidies is to compensate
property owners for providing belowmarket rental rates on units within their
multifamily properties. Many subsidies
last for multiple years and remain in
place only if the property owner meets
certain program-specific requirements.
Although government-subsidized
properties typically collect lower gross
rents per unit than comparable nonaffordable properties and may generate
lower net operating income (NOI),
property owners compensate for the
lower property income through the
value of the government-subsidies.
Thus, property owners have an
incentive to ensure the property follows
the contractual subsidy restrictions,
including avoiding potential default (60
or more days past due), to retain the
government subsidy. The primary
subsidy programs include the LowIncome Housing Tax Credit (LIHTC)
program,9 Section 8 Housing Assistance
8 85
FR 39274.
42 of the Internal Revenue Code (26
U.S.C.A. section 42); 26 CFR 1.42 (Treasury
regulations); each state agency’s qualified allocation
9 Section
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Payment contracts, and diverse stateand local-level programs.
Many government subsidy programs
require property owners to make a
specified percentage of units affordable
to residents at or below a certain percent
of area median income (AMI). For
example, to qualify for the LIHTC
program, a property owner must (in
general) make at least 20 percent of the
units available to renters at or below 50
percent of AMI, make at least 40 percent
of the units available to renters at or
below 60 percent of AMI, or make at
least 40 percent of the units available to
renters with an average income of no
more than 60 percent of AMI and no
units to renters with an income greater
than 80 percent of AMI. In practice, the
number of units restricted as affordable
at a multifamily property often
significantly exceeds the applicable
minimum program requirements
because the penalties for noncompliance can be quite costly.
Minimum affordability criteria aim to
ensure that the primary benefits of
government subsidy programs accrue to
low-income renters rather than to
property owners acting in bad faith.
The proposed rule would introduce a
risk multiplier equal to 0.6 for any
multifamily mortgage exposures secured
by one or more properties each with at
least one applicable government
subsidy, subject to certain affordability
criteria. The applicable government
subsidies would be limited to the
following three primary subsidy
programs: (i) LIHTC, (ii) Section 8
project-based rental assistance, and (iii)
state and local affordable housing
programs that require the provision of
affordable housing for the life of the
loan. A multifamily mortgage exposure
meeting the collateral criteria would
qualify for the 0.6 risk multiplier if the
Enterprise can verify that each property
securing the exposure has at least 20
percent of its units restricted as
affordable units, where the affordability
restriction means less than or equal to
80 percent of AMI.
For a multifamily mortgage exposure
to qualify for the government subsidy
multiplier, the properties securing the
exposure must have significant, longterm, and continuous government
subsidies. LIHTC and project-based
Section 8 programs meet these criteria,
so to ensure alignment in this regard,
the proposed rule would require that
qualifying state and local affordable
housing programs require affordable
plan, regulations and compliance manual, along
with a list of state and local LIHTC-allocating
agencies, can be found at https://www.huduser.gov/
portal/datasets/lihtc.html.
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housing to be provided for the life of the
loan.
The addition of a government subsidy
multiplier would affect risk-weighted
assets, only. FHFA estimates that under
the proposed rule, required CET1
capital for the Enterprises’ multifamily
mortgage exposures as of June 30, 2022
would decline by approximately $0.4
billion.
Question 8: Is the 0.6 risk multiplier
for multifamily mortgage exposures
secured by properties with a
government subsidy appropriately
calibrated?
Question 9: Is the restriction that at
least 20 percent of units must be made
available at or below 80 percent of AMI
appropriately calibrated?
Question 10: Should FHFA consider
additional thresholds and/or
affordability restrictions for a
multifamily mortgage exposure to
qualify for a risk multiplier greater than
0.6 but less than 1.0?
Question 11: Do FHFA’s proposed
categories of applicable government
subsidies appropriately capture the
population of multifamily government
subsidies that are significant, long-term,
and continuous?
Question 12: Are there data or
analyses available that would support a
multi-tiered government subsidy risk
multiplier that varies with the level of
subsidy or by other relevant factors? If
so, what data and factors?
ddrumheller on DSK120RN23PROD with PROPOSALS1
C. Derivatives and Cleared Transactions
An Enterprise 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 contract.
Therefore, the ERCF requires an
Enterprise to hold risk-based capital
based on the exposure amount of its
derivative contracts.
The current rule requires an
Enterprise to use the current exposure
methodology (CEM) to determine the
exposure amount of each derivative
contract. The risk-weighted asset
amount for the derivative contract is
then the product of the exposure
amount and the risk weight of the
counterparty. The ERCF requires an
Enterprise to use CEM to determine the
exposure amounts of their over-thecounter (OTC) derivative contacts and
cleared derivative contracts, as well as
determine the risk-weighted assets
amount of their contributions of
commitments to mutualized loss sharing
agreements with central counterparties
(i.e., default fund contributions).
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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).
Current credit exposure is equal to the
greater of zero and the on-balance sheet
fair value of the derivative contract. PFE
approximates the Enterprise’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
of the derivative contract. The ERCF
provides the conversion factors in a
look-up table that is based on the
derivative contract’s type and remaining
maturity. The potential exposure
generally increases with an increase in
volatility and the duration of the
derivative contract.
CEM was developed before the
financial crisis and does not reflect
recent market conventions and
regulatory requirements that are
designed to reduce the risks associated
with derivative contracts. This can lead
to a significant mismatch between the
risks of derivative portfolios and the
regulatory capital that the Enterprises
must hold against them. Examples of
CEM drawbacks include a lack of
differentiation between margined and
unmargined derivative contracts and
inadequate recognition of the riskreducing benefits of a balanced
derivatives portfolio. Furthermore, the
supervisory conversion factors provided
under CEM were developed prior to the
2007–2008 financial crisis and they
have not been recalibrated to reflect the
stress volatilities observed in recent
years.
For these reasons, the Basel
Committee on Banking Supervision
(Basel Committee) developed the SA–
CCR and published it as a final standard
in 2014.10 The U.S. banking regulators
adopted SA–CCR as a replacement for
CEM in 2020.
SA–CCR provides important
improvements to risk sensitivity and
calibration relative to CEM, including
differentiation of margin and nonmargin trades and recognition of netting
agreements, resulting in more
appropriate capital requirements for
derivative contracts. One of the
concerns regarding the current
regulatory capital treatment for
derivative contracts under CEM is that
CEM does not appropriately recognize
collateral, including the risk-reducing
nature of variation margin, and does not
provide sufficient netting for derivative
10 https://www.bis.org/publ/bcbs279.pdf.
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contracts that share similar risk factors.
The SA–CCR methodology addresses
these concerns.
Compared to CEM, SA–CCR offers a
more risk-sensitive approach to
determine the replacement cost and PFE
for a derivative contract. Specifically,
SA–CCR improves collateral recognition
by differentiating between margined and
unmargined derivative contracts. SA–
CCR also better captures recently
observed stress volatilities among the
primary risk drivers for derivative
contracts. SA–CCR is a standardized,
non-modelled approach that is
relatively straightforward to implement.
The proposed rule would require an
Enterprise to calculate the exposure
amounts of OTC and cleared derivative
contracts using SA–CCR rather than
CEM, as well as the risk-weighted asset
amounts of default fund contributions.
The Enterprises would also be required
to use SA–CCR to determine the
exposure amount of their derivative
contracts for inclusion in adjusted total
assets. Use of SA–CCR would allow an
Enterprise to recognize the meaningful,
risk-reducing relationship between
derivative contracts within a balanced
derivatives portfolio and to recognize
the risk-mitigation effects of guarantees,
credit derivatives, and collateral for
purposes of its risk-based capital
requirements. In addition, the
replacement of CEM with SA–CCR
would result in better alignment
between the ERCF and both the U.S.
banking framework and the
international standards issued by the
Basel Committee.11
Under the proposed rule and
consistent with the U.S. banking
framework, the Enterprises would apply
SA–CCR in the following ways:
1. Netting Sets
Under SA–CCR, an Enterprise would
calculate the exposure amount of its
derivative contract at the netting set
level. The proposed rule would define
a netting set to mean either one
derivative contract between an
Enterprise and a single counterparty, or
a group of derivative contracts between
an Enterprise and a single counterparty
that are subject to a qualifying master
netting agreement (QMNA). The
proposed rule would retain the current
definition of a QMNA.
2. Hedging Sets
For the PFE calculation under SA–
CCR, an Enterprise would fully or
partially net derivative contracts within
11 To note one point of departure, the proposed
rule would not include the internal models
methodology from 12 CFR 217.132(d) to reduce
reliance on internal models.
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the same netting set that share similar
risk factors. This approach would
recognize that derivative contracts with
similar risk factors share economically
meaningful relationships with close
correlations that make netting
appropriate. In contrast, CEM recognizes
only a portion of the netting benefits of
derivative contracts subject to a QMNA,
without accounting for relationships
between the underlying risk factors of
derivative contracts.
Under SA–CCR, a hedging set means
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 the regulatory correlation
assumptions between risk factors in the
hedging set.
ddrumheller on DSK120RN23PROD with PROPOSALS1
3. Derivative Contract Amount for the
PFE Component Calculation
Similar to CEM, an Enterprise would
use an adjusted derivative contract
amount for the PFE component
calculation under SA–CCR. However, as
part of the estimate, SA–CCR would use
updated supervisory factors that reflect
the stress volatilities observed during
the financial crisis. The supervisory
factors would reflect the variability of
the primary risk factors of the derivative
contract over a one-year time 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.
4. Collateral Recognition and
Differentiation Between Margined and
Unmargined Derivative Contracts
Under CEM, an Enterprise recognizes
the collateral only after the exposure
amount has been determined. Under the
proposed rule, SA–CCR would account
for collateral directly within the
exposure amount calculation. For
replacement cost, the proposed rule
would recognize collateral on a one-forone basis. For PFE, SA–CCR would use
the concept of a PFE multiplier, which
would allow an Enterprise to reduce the
PFE amount through recognition of
over-collateralization, in the form of
both variation margin and independent
collateral. It would also account for
negative fair value amounts of the
derivative contracts within the netting
set. In addition, the proposed rule
would differentiate between margined
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and unmargined derivative contracts,
such that the netting set subject to
variation margin would always have an
exposure amount no higher than an
equivalent netting set that is not subject
to a variation margin agreement.
To accommodate the introduction of
the SA–CCR into the ERCF’s
standardized approach, the proposed
rule would make a series of
corresponding modifications, including
adding appropriate defined terms to
ERCF’s definitions and updating the
calculation of total risk-weighted assets.
Notably, the proposed rule would
replace the current requirements for
cleared transactions (12 CFR 1240.37)
and collateralized transactions (12 CFR
1240.39) with modified requirements
from the U.S. banking framework’s
advanced approaches (12 CFR 217.133
and 12 CFR 217.132(b)). As a result, the
proposed rule’s requirements for cleared
transactions would reflect the U.S.
banking framework’s risk weights on
cleared transactions and risk-weighted
assets on default fund contributions.
The proposal would depart from the
U.S. banking framework by omitting
exposure calculations related to internal
model methodology to reduce reliance
on the Enterprises’ internal model
results.
The proposed rule’s requirements for
collateralized transactions would
maintain the current collateral haircut
approach and standard supervisory
haircuts, both of which are also
included in the U.S. banking
framework. However, the proposed
rule’s requirements for collateralized
transactions would remove the current
simple approach and add the U.S.
banking framework’s simple value-atrisk (VaR) methodology to align with the
U.S. banking framework’s advanced
approaches application of collateralized
transactions.
The proposed rule would also add
credit valuation adjustment (CVA) riskweighted assets to the calculation of
standardized total risk-weighted assets.
The CVA is a fair value adjustment that
reflects counterparty credit risk in the
valuation of OTC derivative contracts.
CVA risk-weighted assets cover the risk
of incurring mark-to-market losses
because of the deterioration in the
creditworthiness of an Enterprise’s
counterparties. The proposed rule
would include the U.S. banking
framework’s formulaic simple CVA
approach but not the advanced CVA
approach. This departure from the U.S.
banking framework would reduce
reliance on the Enterprises’ internal
model results.
The proposed changes to the
approaches for derivatives and cleared
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15311
transactions would affect both riskweighted assets and adjusted total
assets. FHFA estimates that under the
proposed rule, the total CET1 capital
required to meet the risk-based capital
requirements and buffers for the
Enterprises’ derivatives and cleared
transactions as of September 30, 2022
would increase by less than $0.1 billion.
Question 13: In addition to the risksensitivity enhancements SA–CCR
provides relative to CEM, what, if any,
other factors should FHFA consider in
its determination to replace CEM with
SA–CCR?
D. Representative Credit Scores for
Single-Family Mortgage Exposures
Credit scores are a primary risk factor
for determining the riskiness of a singlefamily mortgage exposure due to their
strong correlation with the likelihood of
a borrower default. Therefore, credit
scores are an important input in the
ERCF calculation of risk weights for
single-family mortgage exposures, both
at origination (original credit score) and
over time (refreshed credit score). A
single-family mortgage exposure is
normally associated with multiple
credit scores because an exposure can
have multiple borrowers and each
borrower can have multiple scores.
Often, each borrower has three credit
reports and, therefore, three credit
scores, one from each national
consumer reporting agency (repository).
To account for multiple credit scores
associated with a single-family mortgage
exposure, the ERCF includes a
procedure to determine a single
representative credit score for each
single-family mortgage exposure.
The proposed rule would modify the
current procedure for selecting a
representative credit score to reflect
FHFA’s announcement 12 in October
2022 that the Enterprises will require
two, rather than three, credit reports
from the repositories (bi-merge credit
report requirement). While the
implementation date for the bi-merge
credit report requirement has yet to be
announced, the proposed rule would
position the Enterprises to account for
the new requirement upon
implementation.
The current ERCF instructs the
Enterprises to use a two-step procedure
for identifying the representative credit
score on a single-family mortgage
exposure. In the first step, an Enterprise
12 FHFA Announces Validation of FICO 10T and
VantageScore 4.0 for Use by Fannie Mae and
Freddie Mac | Federal Housing Finance Agency,
available at https://www.fhfa.gov/Media/
PublicAffairs/Pages/FHFA-Announces-Validationof-FICO10T-and-Vantage-Score4-for-FNMFRE.aspx.
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selects a single score for each borrower
on the loan by either selecting the
median score if the borrower has scores
from three repositories or selecting the
lowest score if the borrower has fewer
than three scores. In the second step, an
Enterprise determines the representative
score for the exposure by selecting the
lowest single score across all borrowers
from step one.
After the adoption of the bi-merge
credit score requirement, the current
procedure for determining a
representative credit score could result
in a significant downward shift in
representative credit scores for most
borrowers. This is because with the bimerge credit report requirement, there is
a higher likelihood that the
representative credit score for most
borrowers would end up being the
lower of two scores rather than the
median of three scores.
To mitigate this risk, the proposed
rule would replace the first step in
determining a single-family mortgage
exposure’s representative credit score.
Rather than using the median or lowest
score, the proposed rule would require
an Enterprise to calculate the average
credit score across repositories for each
borrower in step one. This change
should mitigate the concern about
downward bias, as the average across
the two scores is closer to the center of
the borrower’s credit score distribution
than the minimum across scores. To
validate this assumption, FHFA
analyzed original credit scores from
over 39 million borrowers associated
with loans acquired between 2010 and
2022 and found that changing the
procedure from the minimum of the
medians to the minimum of the averages
(where for each borrower FHFA
selected, at random, two out of three
scores) had little aggregate effect on the
average representative score. The results
of this analysis suggested that under the
current rule, the average representative
credit score was 750.6, whereas under
the proposed rule, the average
representative credit score was 750.3
using two borrower scores (selected at
random from the set of three) and 750.7
using three borrower scores.
The proposed change to step one
would also alleviate concerns about
when the bi-merge credit score
requirement will be implemented. To
examine the effect of the proposed
change before the implementation date
of the bi-merge credit score requirement,
FHFA repeated the previous analysis
but analyzed the difference between the
use of the median of three scores and
the use of the mean of three scores. The
results of this analysis again showed
little change (750.6 vs. 750.7) in the
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central tendency of the representative
credit score distributions, and it showed
there is little difference between the two
approaches in aggregate. Under the
proposed rule, FHFA expects that for
the period before the implementation
date of the bi-merge credit score
requirement the borrower credit score
would typically be based on three
scores, and after the implementation
date the borrower credit score would
typically be based on two scores.
The proposed change to the procedure
for selecting a representative credit
score would affect risk-weighted assets,
only. FHFA estimates that under the
proposed rule, the total CET1 capital
required to meet the risk-based capital
requirements for the Enterprises’ singlefamily mortgage exposures as of June 30,
2022 would decline by less than $0.1
billion.
Question 14: What, if any, changes
should FHFA consider to the proposed
methodology for determining a
representative credit score? For
example, should FHFA consider
requiring an Enterprise to calculate a
representative credit score by averaging
credit scores across multiple borrowers
in step two rather than by taking the
lowest score across those borrowers?
E. Original Credit Scores for SingleFamily Mortgage Exposures Without a
Representative Original Credit Score
As discussed above, credit scores play
an important role in the ERCF
calculation of risk weights for singlefamily mortgage exposures due to their
strong correlation with the likelihood of
a borrower default. Credit scores are
commonly used as a proxy for a
borrower’s creditworthiness and are
therefore a primary input in many
lenders’ automated underwriting
systems. Historically, and in particular
prior to the financial crisis, a borrower’s
lack of credit history and credit score
indicated a significant level of risk.
Therefore, the current ERCF requires an
Enterprise to assign a credit score of 600
to any single-family mortgage exposure
where a permissible credit score cannot
be determined (unscored). This
conservative assignation places singlefamily mortgage exposures with
unscored borrowers in the lowest
possible ERCF credit score buckets
across the single-family base grids,
implying the highest level of risk.
However, advances in financial
regulation and improvements in
mortgage underwriting and lending
standards since the financial crisis
suggest that FHFA’s initial credit score
assignation for single-family mortgage
exposures associated with unscored
borrowers may not accurately reflect the
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prevailing level of credit risk in these
exposures. Although a missing credit
score could be due to a data error, today
it is far more likely the loan was either
manually underwritten with the
establishment of nontraditional credit
and strict requirements on property
type, loan purpose, and DTI, or the loan
was underwritten through an automated
system with more stringent
requirements than would be necessary if
the borrower had an available credit
score.13
To reflect the post-crisis
improvements in regulatory,
underwriting, and lending standards, as
well as the recent inclusions of positive
rental payment histories in the
Enterprises’ automated underwriting
systems, the proposed rule would
modify the assignation process of an
original credit score to a single-family
mortgage exposure without a
permissible credit score at origination.
FHFA analyzed the two-year default
performance of single-family mortgage
exposures associated with unscored
borrowers relative to similar exposures
associated with scored borrowers and
determined that unscored exposures
performed most similarly to scored
exposures with original credit scores in
the range of 680 to 699. Therefore,
subject to Enterprise verification that
none of the borrowers have a credit
score at one of the repositories, the
proposed rule would require an
Enterprise to assign an original credit
score of 680 to a single-family mortgage
exposure without a permissible credit
score at origination.
After five months, an Enterprise
would continue to assign a refreshed
credit score. To reflect the implied
default performance in the population
of unscored borrowers, the proposed
rule would modify the definition of a
refreshed credit score to mean the most
recently available credit score. For a
single-family mortgage exposure
without a permissible credit score at
origination, the refreshed credit score
would be either an updated credit score
if one is available at the credit
repositories or the original credit score,
as determined per the proposed rule, if
one is not.
13 In August 2021, FHFA announced that to
expand access to credit in a safe and sound manner,
Fannie Mae would begin to consider rental payment
history as part of its mortgage underwiring
processes (https://www.fhfa.gov/mobile/Pages/
public-affairs-detail.aspx?PageName=FHFAAnnounces-Inclusion-of-Rental-Payment-History-inFannie-Maes-Underwriting-Process.aspx). In July
2022, Freddie Mac made a similar announcement
(https://freddiemac.gcs-web.com/news-releases/
news-release-details/freddie-mac-takes-furtheraction-help-renters-achieve).
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ddrumheller on DSK120RN23PROD with PROPOSALS1
The proposed change to the
assignation process of an original credit
score to a single-family mortgage
exposure without a permissible credit
score at origination would affect riskweighted assets during the period
between origination and the later of 5
months and when a borrower’s
refreshed credit score becomes
available. FHFA estimates that under
the proposed rule, required CET1
capital for the Enterprises’ single-family
mortgage exposures as of June 30, 2022
would decline by less than $0.1 billion.
Question 15: What, if any, changes
should FHFA consider to the proposed
methodology for determining an original
credit score for a single-family mortgage
exposure without a permissible credit
score at origination?
F. Guarantee Assets
A guarantee asset is an on-balance
sheet asset that represents the present
value of a future consideration for
providing a financial guarantee on a
portfolio of mortgage exposures not
recognized on the balance sheet.
Examples of such off-balance sheet
exposures include, but are not limited
to, Freddie Mac’s multifamily K-deals,
Fannie Mae’s multifamily bond credit
enhancements, and certain single-family
guarantee arrangements without
securitization. The current ERCF does
not include an explicit risk weight for
guarantee assets. As an ‘‘other asset’’ not
specifically assigned a different risk
weight, an Enterprise is required to
assign a 100 percent risk weight
(§ 1240.32(i)(5)) to guarantee assets.
The proposed rule would introduce a
20 percent risk weight for an
Enterprise’s guarantee assets. This risk
weight would reflect the risk-weight
floor for mortgage exposures in the
ERCF as well as the minimum risk
weight for residential mortgage
exposures under the Basel framework.
In addition, FHFA’s proposal would
promote consistency across the financial
system by aligning the risk weight for
guarantee assets with the risk weight
assigned to exposures to an Enterprise
in the U.S banking framework.
The specification of a 20 percent risk
weight for guarantee assets would affect
risk-weighted assets, only. FHFA
estimates that under the proposed rule,
the total CET1 capital required to meet
the risk-based capital requirements for
the Enterprises’ guarantee assets as of
September 30, 2022 would decline by
approximately $0.2 billion.
Question 16: What, if any, other
factors should FHFA consider in its
determination that guarantee assets
should be assigned an explicit risk
weight?
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Question 17: Is the proposed 20
percent risk weight for guarantee assets
appropriately calibrated?
Question 18: Should FHFA include
guarantee assets in its definition of
covered positions subject to market risk
capital requirements?
G. Mortgage Servicing Assets
When a lender originates a mortgage
loan, the lender may retain in its
portfolio or transfer to another party
both the loan and the servicing function,
or the lender may separate the mortgage
servicing rights (MSRs) from the
mortgage loan and transfer individually
either the loan or the MSR to another
party. MSAs are, in general, assets
resulting from owning MSRs that are
expected to generate future income in
exchange for performing the servicing
function on one or more mortgage loans.
MSA valuations rely on assessments
of future economic variables and are
therefore subjective and subject to
uncertainty. If interest rates rapidly
decline, such as during a stress event,
MSA values can also rapidly decline. In
addition, adverse financial conditions
may cause liquidity strains for firms
seeking to sell or transfer their MSAs,
further impacting the potential loss
absorbing capacity of MSAs. For these
and other reasons, the U.S. banking
framework requires banks to capitalize
MSAs through a combination of capital
deductions and a 250 percent risk
weight, and the current ERCF requires
the Enterprises to do the same.
The ERCF defines an MSA as the
contractual right to service for a fee
mortgage loans that are owned by
others. This definition reflects the
traditional practice of acquiring MSRs
for mortgage loans not already owned by
the acquiring institution. However, it is
unlikely that the value of MSRs would
be less subjective or subject to less
uncertainty if the underlying mortgage
loans were already owned by the
acquiring institution rather than by
others. Therefore, the proposed rule
would modify the definition of MSAs to
include the contractual right to service
any mortgage loans, regardless of the
owner of the loan at the time the
servicing rights are acquired.
FHFA anticipates that the proposed
rule would not affect the total CET1
capital required to meet the Enterprises’
stability capital buffers as of June 30,
2022.
Question 19: What, if any, changes
should FHFA consider to the proposed
definition for MSAs?
Question 20: Does the proposed
definition for MSAs include
circumstances in which an Enterprise
acquires a contractual right to service
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15313
mortgage loans already owned by the
Enterprise?
Question 21: Does the proposed
definition for MSAs include
circumstances in which an Enterprise
acquires a contractual right to service
mortgage loans but, for reasons
including compliance with generally
accepted accounting principles, the
servicing rights would not result in the
creation of an MSA in the absence of the
proposed requirement?
H. Time-Based Calls for CRT Exposures
For mortgage exposures that are
included in a CRT, an Enterprise has the
option to calculate risk weights using
the ‘‘credit risk transfer approach’’ 14
only if the CRT satisfies the ERCF’s
‘‘operational criteria for credit risk
transfers.’’ 15 Under the current rule,
these operational criteria include
restrictions for clean-up calls. Clean-up
calls are contractual provisions that
permit an originating Enterprise to
redeem securitization exposures before
their stated maturity or call date. Timebased calls are contractual provisions
that permit an issuing Enterprise to
redeem a securitization exposure on one
or more prespecified call dates. Timebased calls, which are integral to the
Enterprises’ credit risk management and
are routinely used by the Enterprises to
manage CRT economics, are not
explicitly included as eligible clean-up
calls. This lack of specificity has led to
a lack of clarity about the eligibility of
CRT transactions with time-based calls
under the credit risk transfer approach
in the ERCF.
The proposed rule would define an
eligible time-based call as a time-based
call that:
(i) Is exercisable solely at the
discretion of the issuing Enterprise, and
with a non-objection letter from FHFA
prior to being exercised;
(ii) Is not structured to avoid
allocating losses to securitization
exposures held by investors or
otherwise structured to provide at most
de minimis credit protection to the
securitization; and
(iii) Is only exercisable five years after
the securitization exposure’s issuance
date.
The proposed changes would clarify
that the ERCF permits time-based calls,
with restrictions. To ensure a significant
length of time before the first
prespecified exercise date, the proposed
rule would require that the eligible
time-based calls have a first exercise call
date at least five years after issuance.
Further, to ensure safety and soundness,
14 12
15 12
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CFR 1240.41(c).
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an Enterprise must request FHFA
approval before exercising its timebased calls.
To satisfy the proposed operational
criteria for CRT, any time-based call
associated with a CRT must be an
eligible time-based call.
FHFA anticipates that the proposed
rule would result in an insignificant
change to the total CET1 capital
required to meet the risk-based capital
requirements for the Enterprises’ CRT
exposures as of June 30, 2022.
Question 22: What, if any, changes
should FHFA consider to the proposed
definitions of time-based calls and
eligible time-based calls for CRT?
ddrumheller on DSK120RN23PROD with PROPOSALS1
I. Interest-Only Mortgage-Backed
Securities
An IO MBS is a financial instrument
that receives solely the interest payment
stream generated by a pool of mortgages.
An Enterprise may securitize the IO
income stream from a pool of mortgages
to better manage the interest rate risk
exposure of the pool, or an Enterprise
may buy IO securities of other issuers to
hold in its portfolio as investment
assets. Through the ownership of these
investments, the Enterprises are
exposed to both credit and market risk.
This discussion pertains to credit risk
only, as risk weights for market risk on
IO securities are contemplated in
subpart F of the ERCF.
Under the current rule, an Enterprise
must assign a zero percent risk weight
to any MBS guaranteed by the
Enterprise (other than any retained CRT
exposure). Thus, by implication, IO
MBS guaranteed by the securitizing
Enterprise should receive a zero percent
risk weight. However, the ERCF also
states that the risk weight for a noncredit-enhancing IO MBS must not be
less than 100 percent. Therefore, there
is a need to clarify the risk weight for
IO MBS to clarify whether a zero
percent or 100 percent risk weight
should apply.
An Enterprise could be both the issuer
of and investor in an IO MBS. The credit
risk on IO MBS issued and guaranteed
by an Enterprise is significantly
different from that of an IO MBS issued
by a non-Enterprise entity and held in
the Enterprise’s retained portfolio as an
investment.16 Therefore, the proposed
rule would require an Enterprise to
apply a different risk weight to IO MBS
issued and guaranteed by the Enterprise
versus an IO MBS issued by a nonEnterprise entity. This bifurcation
would better align the capital
16 Risk weights for an Enterprise’s exposures to
the other Enterprise are determined in 12 CFR
1240.32(c).
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requirements for IO MBS to the risks
inherent in the positions.
For IO MBS issued and guaranteed by
an Enterprise, the proposed rule would
require the issuing Enterprise to assign
a zero percent risk weight to that
exposure. The zero percent risk weight
reflects that the Enterprise has already
capitalized the credit risk on the
underlying single-family mortgage
exposures and that there is no
incremental credit risk due to the
securitization process. For IO MBS
issued by a non-Enterprise entity, the
proposed rule would require the
Enterprise to assign a 100 percent risk
weight to that exposure. The 100
percent risk weight reflects that there is
incremental credit risk accruing to the
investing Enterprise through the
acquisition of the IO MBS. Therefore, an
Enterprise must hold credit risk capital
against that asset. For IO MBS issued by
the other Enterprise, the ERCF would
continue to require an Enterprise to
assign a 20 percent risk weight to that
exposure.
FHFA anticipates that the proposed
rule would not affect the total CET1
capital required to meet the risk-based
capital requirements for the Enterprises’
IO MBS as of June 30, 2022.
Question 23: Is the 100 percent risk
weight assigned to the IO MBS issued
by a non-Enterprise entity appropriately
calibrated?
Question 24: Is the 20 percent risk
weight assigned to the IO MBS issued
by the other Enterprise appropriated
calibrated?
J. Single-Family Countercyclical
Adjustment
In the ERCF, the mark-to-market loanto-value ratio (MTMLTV) of a singlefamily mortgage exposure is a key input
to determining credit risk-weighted
assets for these exposures. The rule
requires an Enterprise to use the FHFA
Purchase-only State-level House Price
Index (HPI) to update a property value
when calculating an MTMLTV. The
MTMLTV is then adjusted up or down
by the application of a single-family
countercyclical adjustment. This
adjustment seeks to reduce the
procyclicality of the capital
requirements by increasing
requirements when house prices are
significantly above their long-term trend
and reducing requirements when house
prices are significantly below their longterm trend.
In calculating an MTMLTV, the ERCF
mandates a six-month delay between
loan origination and the first property
value adjustment to reflect the time lag
between loan origination and the
publication of the FHFA HPI for the
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quarter following origination. However,
there is no similar delay in the
application of the single-family
countercyclical adjustment. When
house price appreciation is consistently
high, such as in 2020 and 2021, this
misalignment results in rapid increases
to the risk-weighted assets for singlefamily mortgage exposures for the first
six months due to the countercyclical
adjustment, followed by a rapid
decrease with the application of the first
property value adjustment. In 2020 and
2021, this misalignment created a
significant challenge for the Enterprises’
reinsurance CRT programs. While FHFA
has continually encouraged the
Enterprises to reduce the time lag
between loan origination and when they
acquire credit protection, the
misalignment created an incentive for
the Enterprises to wait seven months
before acquiring protection. By waiting
until the capital requirement decreased
mechanically, the Enterprises were able
to reduce the amount of credit
protection they acquired and save on
premium costs.
The proposed rule would correct this
misalignment by requiring an Enterprise
to apply the first single-family
countercyclical adjustment
simultaneously with the first property
value adjustment. This modification
would reduce the volatility in the
capital requirement for a single-family
mortgage exposure over the first six
months after origination and mitigate
the incentive for the Enterprises to delay
acquiring credit protection.
FHFA anticipates that adjusting the
timing of the first single-family
countercyclical adjustment would not
affect the total CET1 capital required to
meet the risk-based capital requirements
for the Enterprises’ single-family
mortgage exposures as of June 30, 2022.
Question 25: What, if any, changes
should FHFA consider to the proposed
adjustment to the timing and
application of the single-family
countercyclical adjustment?
K. Stability Capital Buffer
The stability capital buffer is an
Enterprise-specific amount of common
equity tier 1 capital in excess of an
Enterprise’s risk-based capital
requirements. It is tailored to the risk
that an Enterprise’s default or other
financial distress could have on the
liquidity, efficiency, competitiveness, or
resiliency of the national housing
finance markets. The stability capital
buffer is based on an Enterprise’s share
of the total residential mortgage debt
outstanding in the United States and is
expressed as a percent of adjusted total
assets.
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Under the current rule, an
Enterprise’s share of residential
mortgage debt outstanding is assessed
annually, and the stability capital buffer
is derived from that assessment.
Increases in the stability capital buffer
are implemented with a two-year delay,
while decreases are implemented with a
one-year delay. These implementation
delays contribute to the overall stability
of the capital framework by providing
the Enterprises with time to adjust their
capital positions in response to changes
in the stability capital buffer. However,
having increases and decreases
implemented with different delays
potentially creates a situation where an
increase and a decrease in the stability
capital buffer are scheduled to become
effective at the same time. To address
this situation, the proposed rule would
clarify that if an increase and decrease
in the stability capital buffer are
scheduled for the same date, the
Enterprise should rely on the more
recent data and implement the decrease,
disregarding the increase.
FHFA anticipates that the proposed
rule would not affect the total CET1
capital required to meet the Enterprises’
stability capital buffers as of June 30,
2022.
Question 26: What, if any, changes
should FHFA consider to the proposed
change to the application of the stability
capital buffer?
L. Advanced Approaches
The ERCF’s advanced approaches for
determining risk-weighted assets rely on
an Enterprise’s internal models. These
approaches require an Enterprise to
maintain its own processes for
identifying and assessing credit, market,
and operational risk. They are intended
to ensure that an Enterprise continues to
enhance its risk management and
analytical systems and not rely solely on
its regulator’s views on risk tolerance,
risk measurement, and capital
allocation. Because of the effort required
to develop the governance processes
and risk models necessary for
effectuating the advanced approaches,
the ERCF includes a transition period
that delays the compliance date for the
advanced approaches until January 1,
2025.
In December 2017, the Basel
Committee finalized its Basel III
framework.17 As part of these post-crisis
reforms, the Basel Committee sought to
reduce excess variability of riskweighted assets and restore credibility
in the calculation of risk-weighted
assets, in part by significantly
constraining the use of internally17 https://www.bis.org/bcbs/publ/d424.pdf.
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modeled approaches. Much of the
finalized Basel III framework became
effective in 2022.
U.S. banking regulators have yet to
implement many of the reforms outlined
in the finalized Basel III framework.
However, on September 9, 2022, the
U.S. banking regulators formally
reaffirmed their commitment to
implementing enhanced regulatory
capital requirements that align with the
finalized Basel III framework.18 Further,
in a recent speech,19 the Vice Chair for
Supervision of the Board of Governors
of the Federal Reserve System noted
that the last set of comprehensive
adjustments to the Basel III framework,
now under consideration in the U.S.,
would ‘‘further strengthen capital rules
by reducing reliance on internal bank
models.’’
Because the U.S. banking regulators
are currently contemplating the last set
of comprehensive adjustments to the
Basel III framework, including the
reliance on internal models, and given
the costly nature of developing suitable
internal models and governance
processes for the advanced approaches,
the proposed rule would further extend
the compliance date for an Enterprise’s
advanced approaches to January 1,
2028. Until that time, the Enterprises
will continue to rely on the
standardized approach.
regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include an initial regulatory flexibility
analysis describing the regulation’s
impact on small entities. FHFA need not
undertake such an analysis if the agency
has certified that the regulation will not
have a significant economic impact on
a substantial number of small entities (5
U.S.C. 605(b)). FHFA has considered the
impact of the proposed rule under the
Regulatory Flexibility Act. FHFA
certifies that the proposed rule, if
adopted as a final rule, would not have
a significant economic impact on a
substantial number of small entities
because the proposed rule is applicable
only to the Enterprises, which are not
small entities for purposes of the
Regulatory Flexibility Act.
III. Effective Date
Under the rule published on
December 17, 2020 establishing the
ERCF, an Enterprise will not be subject
to any requirement in the ERCF until
the compliance date for the requirement
as detailed in the ERCF. The effective
date for the ERCF was February 16,
2021. The effective date for the ERCF
amendments in this proposed rule
would be 60 days after the day of
publication of the final rule in the
Federal Register.
PART 1240—CAPITAL ADEQUACY OF
ENTERPRISES
IV. Paperwork Reduction Act
The Paperwork Reduction Act (PRA)
(44 U.S.C. 3501 et seq.) requires that
regulations involving the collection of
information receive clearance from the
Office of Management and Budget
(OMB). The proposed rule contains no
such collection of information requiring
OMB approval under the PRA.
Therefore, no information has been
submitted to OMB for review.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires that a
18 https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20220909a.htm.
19 https://www.federalreserve.gov/newsevents/
speech/barr20221201a.htm.
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List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise,
Investments, Reporting and
recordkeeping requirements.
Accordingly, for the reasons stated in
the Preamble, under the authority of 12
U.S.C. 4511, 4513, 4513b, 4514, 4515–
17, 4526, 4611–4612, 4631–36, FHFA
proposes to amend part 1240 of title 12
of the Code of Federal Regulations as
follows:
1. The authority citation for part 1240
continues to read as follows:
■
Authority: 12 U.S.C. 4511, 4513, 4513b,
4514, 4515, 4517, 4526, 4611–4612, 4631–36.
2. Amend § 1240.2 by:
a. Revising paragraphs (1) through (3)
in the definition of ‘‘Adjusted total
assets’’;
■ b. Adding in alphabetical order the
definitions of ‘‘Backtesting,’’ ‘‘Basis
derivative contract,’’ ‘‘Commercial enduser,’’ ‘‘Commingled security,’’ ‘‘Credit
default swap,’’ and ‘‘Credit valuation
adjustment’’;
■ c. Removing the definitions of
‘‘Current exposure’’ and ‘‘Current
exposure methodology’’;
■ d. Adding in alphabetical order the
definition of ‘‘Eligible time-based call’’;
■ e. In the definition of ‘‘Exposure
amount’’:
■ i. In paragraph (1), removing the
words ‘‘; an OTC derivative contract’’
and adding in their place the words
‘‘(other than an OTC derivative
contract’’; and
■ ii. In paragraph (3), adding the words
‘‘or exposure at default (EAD)’’ after the
word ‘‘amount’’;
■ f. Revising paragraph (2) in the
definition of ‘‘Financial collateral’’;
■
■
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g. Adding in alphabetical order the
definitions of ‘‘Guarantee asset,’’ and
‘‘Independent collateral’’;
■ h. Revising the definition of
‘‘Mortgage servicing assets’’;
■ i. Adding in alphabetical order the
definition of ‘‘Net independent
collateral amount’’;
■ j. Revising the definition of ‘‘Netting
set’’;
■ k. Adding in alphabetical order the
definitions of ‘‘Qualifying cross-product
master netting agreement,’’ and
‘‘Speculative grade’’;
■ l. In the definition of ‘‘Standardized
total risk-weighted assets’’,
redesignating paragraphs (1)(vi) and
(1)(vii) as paragraphs (1)(vii) and
(1)(viii), adding new paragraph (1)(vi),
and revising newly designated
paragraph (1)(viii); and
■ m. Adding in alphabetical order the
definitions of ‘‘Sub-speculative grade,’’
‘‘Time-based call,’’ ‘‘Uniform Mortgagebacked Security,’’ ‘‘Value-at-Risk,’’
‘‘Variation margin,’’ ‘‘Variation margin
amount,’’ and ‘‘Volatility derivative
contract’’;
The additions and revisions read as
follows:
■
§ 1240.2
Definitions.
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*
*
*
*
*
Adjusted total assets * * *
(1) The balance sheet carrying value
of all of the Enterprise’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
Generally Accepted Accounting
Principles (GAAP), less amounts
deducted from tier 1 capital under
§ 1240.22(a), (c), and (d), and less the
value of securities received in securityfor-security repo-style transactions,
where the Enterprise 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, less the fair value of
any derivative contracts;
(2)(i) The potential future exposure
(PFE) for each netting set to which the
Enterprise is a counterparty (including
cleared transactions except as provided
in paragraph (9) of this definition and,
at the discretion of the Enterprise,
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 GAAP), as determined
under § 1240.36(c)(7), in which the term
C in § 1240.36(c)(7)(i) equals zero, and,
for any counterparty that is not a
commercial end-user, multiplied by 1.4.
For purposes of this paragraph, an
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Enterprise may set the value of the term
C in § 1240.36(c)(7)(i) equal to the
amount of collateral posted by a clearing
member client of the Enterprise in
connection with the client-facing
derivative transactions within the
netting set; and
(ii) An Enterprise may choose to
exclude the PFE of all credit derivatives
or other similar instruments through
which it provides credit protection
when calculating the PFE under
§ 1240.36(c), provided that it does so
consistently over time for the
calculation of the PFE for all such
instruments;
(3)(i)(A) The replacement cost of each
derivative contract or single product
netting set of derivative contracts to
which the Enterprise is a counterparty,
calculated according to the following
formula, and, for any counterparty that
is not a commercial end-user,
multiplied by 1.4:
Replacement Cost = max {V¥CVMr +
CVMp;0}
Where:
(1) V equals the fair value for each
derivative contract or each singleproduct netting set of derivative
contracts (including a cleared
transaction except as provided in
paragraph (9) of this definition and, at
the discretion of the Enterprise,
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 GAAP);
(2) CVMr equals the amount of cash
collateral received from a counterparty
to a derivative contract and that satisfies
the conditions in paragraphs (3)(ii)
through (vi) of this definition, or, in the
case of a client-facing derivative
transaction, the amount of collateral
received from the clearing member
client; and
(3) 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 (3)(ii)
through (vi) of this definition, or, in the
case of a client-facing derivative
transaction, the amount of collateral
posted to the clearing member client;
(B) Notwithstanding paragraph
(3)(i)(A) of this definition, where
multiple netting sets are subject to a
single variation margin agreement, an
Enterprise must apply the formula for
replacement cost provided in
§ 1240.36(c)(10)(i), in which the term
CMA may only include cash collateral
that satisfies the conditions in
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paragraphs (3)(ii) through (vi) of this
definition; and
(C) For purposes of paragraph (3)(i)(A)
of this definition, an Enterprise must
treat a derivative contract that
references an index as if it were
multiple derivative contracts each
referencing one component of the index
if the Enterprise elected to treat the
derivative contract as multiple
derivative contracts under
§ 1240.36(c)(5)(vi);
(ii) 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);
(iii) Variation margin is calculated
and transferred on a daily basis based
on the mark-to-fair value of the
derivative contract;
(iv) The variation margin transferred
under the derivative contract or the
governing rules of the CCP or QCCP 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;
(v) 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
(vi) 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;
*
*
*
*
*
Backtesting means the comparison of
an Enterprise’s internal estimates with
actual outcomes during a sample period
not used in model development. In this
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context, backtesting is one form of outof-sample testing.
*
*
*
*
*
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.
*
*
*
*
*
Commercial end-user means an entity
that:
(1)(i) Is using derivative contracts to
hedge or mitigate commercial risk; and
(ii)(A) Is not an entity described in
section 2(h)(7)(C)(i)(I) through (VIII) of
the Commodity Exchange Act (7 U.S.C.
2(h)(7)(C)(i)(I) through (VIII)); or
(B) Is not a ‘‘financial entity’’ for
purposes of section 2(h)(7) of the
Commodity Exchange Act (7 U.S.C.
2(h)) by virtue of section 2(h)(7)(C)(iii)
of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or
(2)(i) Is using derivative contracts to
hedge or mitigate commercial risk; and
(ii) Is not an entity described in
section 3C(g)(3)(A)(i) through (viii) of
the Securities Exchange Act of 1934 (15
U.S.C. 78c–3(g)(3)(A)(i) through (viii));
or
(3) Qualifies for the exemption in
section 2(h)(7)(A) of the Commodity
Exchange Act (7 U.S.C. 2(h)(7)(A)) by
virtue of section 2(h)(7)(D) of the Act (7
U.S.C. 2(h)(7)(D)); or
(4) Qualifies for an exemption in
section 3C(g)(1) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c–
3(g)(1)) by virtue of section 3C(g)(4) of
the Act (15 U.S.C. 78c–3(g)(4)).
Commingled security means a
resecuritization of UMBS in which one
or more of the underlying exposures is
a UMBS guaranteed by the other
Enterprise or is a resecuritization of
UMBS guaranteed by the other
Enterprise.
*
*
*
*
*
Credit default swap (CDS) means a
financial contract executed under
standard industry documentation that
allows one party (the protection
purchaser) to transfer the credit risk of
one or more exposures (reference
exposure(s)) to another party (the
protection provider) for a certain period
of time.
*
*
*
*
*
Credit valuation adjustment (CVA)
means the fair value adjustment to
reflect counterparty credit risk in
valuation of OTC derivative contracts.
*
*
*
*
*
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Eligible time-based call means a timebased call that:
(1) Is exercisable solely at the
discretion of the originating Enterprise,
provided the Enterprise obtains FHFA’s
non-objection prior to exercising the
time-based call;
(2) Is not structured to avoid
allocating credit losses to investors or
otherwise structured to provide at most
de minimis credit protection to the
securitization or credit risk transfer; and
(3) Is exercisable no less than five
years after the securitization or credit
risk transfer issuance date.
*
*
*
*
*
Financial collateral * * *
(2) In which the Enterprise 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).
*
*
*
*
*
Guarantee asset means the present
value of a future consideration to be
received for providing a financial
guarantee on a portfolio of mortgage
exposures not recognized on the balance
sheet.
Independent collateral means
financial collateral, other than variation
margin, that is subject to a collateral
agreement, or in which an Enterprise
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.
*
*
*
*
*
Mortgage servicing assets (MSAs)
means the contractual rights to service
mortgage loans for a fee.
*
*
*
*
*
Net independent collateral amount
means the fair value amount of the
independent collateral, as adjusted by
the standard supervisory haircuts under
§ 1240.39(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to an Enterprise less the fair value
amount of the independent collateral, as
adjusted by the standard supervisory
haircuts under § 1240.39(b)(2)(ii), as
applicable, posted by the Enterprise to
the counterparty, excluding such
amounts held in a bankruptcy remote
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manner or posted to a QCCP and held
in conformance with the operational
requirements in § 1240.3.
Netting set means a group of
transactions with a single counterparty
that are subject to a qualifying master
netting agreement or a qualifying crossproduct master netting agreement. For
derivative contracts, netting set also
includes a single derivative contract
between an Enterprise and a single
counterparty.
*
*
*
*
*
Qualifying cross-product master
netting agreement means a qualifying
master netting agreement that provides
for termination and close-out netting
across multiple types of financial
transactions or qualifying master netting
agreements in the event of a
counterparty’s default, provided that the
underlying financial transactions are
OTC derivative contracts, eligible
margin loans, or repo-style transactions.
In order to treat an agreement as a
qualifying cross-product master netting
agreement for purposes of this subpart,
an Enterprise must comply with the
requirements of § 1240.3(c) with respect
to that 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.
*
*
*
*
*
Standardized total risk-weighted
assets * * *
(1) * * *
(vi) Credit valuation adjustment
(CVA) risk-weighted assets as calculated
under § 1240.36(d);
*
*
*
*
*
(viii) Standardized market riskweighted assets, as calculated under
§ 1240.204; minus
*
*
*
*
*
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.
*
*
*
*
*
Time-based call means a contractual
provision that permits an originating
Enterprise to redeem a securitization
exposure on or after a specified
redemption or cancellation date.
*
*
*
*
*
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Uniform Mortgage-backed Security
(UMBS) means the same as that defined
in § 1248.1.
Value-at-Risk (VaR) means the
estimate of the maximum amount that
the value of one or more exposures
could decline due to market price or
rate movements during a fixed holding
period within a stated confidence
interval.
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 amount means the
fair value amount of the variation
margin, as adjusted by the standard
supervisory haircuts under
§ 1240.39(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted
to an Enterprise less the fair value
amount of the variation margin, as
adjusted by the standard supervisory
haircuts under § 1240.39(b)(2)(ii), as
applicable, posted by the Enterprise to
the counterparty.
*
*
*
*
*
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.
*
*
*
*
*
§ 1240.4
[Amended]
3. Amend § 1240.4(c) by removing the
year ‘‘2025’’ and adding, in its place, the
year ‘‘2028’’.
■ 4. Amend § 1240.31 by:
■ a. In paragraph (a)(1)(iv) removing the
word ‘‘or’’ after the ‘‘;’’;
■ b. In paragraph (a)(1)(v) removing the
‘‘.’’ after ‘‘1240.52’’ and adding ‘‘; or’’ in
its place; and
■ c. Adding paragraph (a)(1)(vi) to read
as follows:
■
§ 1240.31 Mechanics for calculating riskweighted assets for general credit risk.
(a) * * *
(1) * * *
(vi) CVA risk-weighted assets subject
to § 1240.36(d).
*
*
*
*
*
■ 5. Amend § 1240.32 by:
■ a. Redesignating paragraph (c)(2) as
paragraph (c)(3), adding new paragraph
(c)(2), and revising redesignated
paragraph (c)(3); and
■ b. Redesignating paragraph (i)(5) as
paragraph (i)(6) and adding new
paragraph (i)(5).
The additions and revision read as
follows:
§ 1240.32
General risk weights.
(c) * * *
(2) An Enterprise must assign a 5
percent risk weight to an exposure to
the other Enterprise in a commingled
security.
(3) An Enterprise must assign a 20
percent risk weight to an exposure to
another GSE, including an MBS
guaranteed by the other Enterprise,
except for exposures under paragraph
(c)(2) of this section.
*
*
*
*
*
(i) * * *
(5) An Enterprise must assign a 20
percent risk weight to guarantee assets.
*
*
*
*
*
■ 6. Amend § 1240.33 by:
■ a. Revising paragraph (ii) in the
definition of ‘‘Adjusted MTMLTV’’; and
■ b. Revising table 1 to paragraph (a).
The revisions read as follows:
§ 1240.33 Single-family mortgage
exposures.
(a) * * *
Adjusted MTMLTV * * *
(ii) The amount equal to 1 plus either:
(A) The single-family countercyclical
adjustment available at the time of the
exposure’s origination if the loan age of
the single-family mortgage exposure is
less than or equal to 5; or
(B) The single-family countercyclical
adjustment available as of that time if
the loan age of the single-family
mortgage exposure is greater than or
equal to 6.
*
*
*
*
*
TABLE 1 TO PARAGRAPH (a)—PERMISSIBLE VALUES AND ADDITIONAL INSTRUCTIONS
Defined term
Permissible values
Cohort burnout ...........
‘‘No burnout,’’ if the single-family mortgage exposure has not had a
refinance opportunity since the loan age of the single-family mortgage exposure was 6.
‘‘Low,’’ if the single-family mortgage exposure has had 12 or fewer
refinance opportunities since the loan age of the single-family
mortgage exposure was 6.
‘‘Medium,’’ if the single-family mortgage exposure has had between
13 and 24 refinance opportunities since the loan age of the singlefamily mortgage exposure was 6.
‘‘High,’’ if the single-family mortgage exposure has had more than 24
refinance opportunities since the loan age of the single-family
mortgage exposure was 6.
0 percent ≤ coverage percent ≤ 100 percent .......................................
Non-negative integer .............................................................................
0 percent < DTI < 100 percent .............................................................
ddrumheller on DSK120RN23PROD with PROPOSALS1
Coverage percent ......
Days past due ...........
Debt-to-income (DTI)
ratio.
Interest-only (IO) ........
Loan age ....................
Loan documentation ..
Loan purpose .............
MTMLTV ....................
Mortgage concentration risk.
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Additional instructions
Yes, no ..................................................................................................
0 ≤ loan age ≤ 500 ................................................................................
None, low, full .......................................................................................
Purchase, cashout refinance, rate/term refinance ................................
0 percent < MTMLTV ≤ 300 percent ....................................................
High, not high ........................................................................................
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High if unable to determine.
0 percent if outside of permissible range or unable to determine.
210 if negative or unable to determine.
42 percent if outside of permissible range or unable to determine.
Yes if unable to determine.
500 if outside of permissible range or unable to determine.
None if unable to determine.
Cashout refinance if unable to determine.
If the property securing the single-family mortgage exposure is located in Puerto Rico or the U.S. Virgin Islands, use the FHFA
House Price Index of the United States.
If the property securing the single-family mortgage exposure is located in Hawaii, use the FHFA Purchase-only State-level House
Price Index of Guam.
If the single-family mortgage exposure was originated before 1991,
use the Enterprise’s proprietary housing price index.
Use geometric interpolation to convert quarterly housing price index
data to monthly data.
300 percent if outside of permissible range or unable to determine.
High if unable to determine.
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TABLE 1 TO PARAGRAPH (a)—PERMISSIBLE VALUES AND ADDITIONAL INSTRUCTIONS—Continued
Defined term
Permissible values
MI cancellation feature.
Occupancy type .........
OLTV .........................
Original credit score ..
Cancellable mortgage insurance, non-cancellable mortgage insurance.
Investment, owner-occupied, second home .........................................
0 percent < OLTV ≤ 300 percent ..........................................................
300 ≤ original credit score ≤ 850 ..........................................................
Origination channel ....
Retail, third-party origination (TPO) ......................................................
Payment change from
modification.
¥80 percent < payment change from modification < 50 percent ........
Previous maximum
days past due.
Product type ..............
Non-negative integer .............................................................................
Property type .............
ddrumheller on DSK120RN23PROD with PROPOSALS1
Refreshed credit
score.
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Additional instructions
‘‘FRM30’’ means a fixed-rate single-family mortgage exposure with
an original amortization term greater than 309 months and less
than or equal to 429 months.
‘‘FRM20’’ means a fixed-rate single-family mortgage exposure with
an original amortization term greater than 189 months and less
than or equal to 309 months.
‘‘FRM15’’ means a fixed-rate single-family mortgage exposure with
an original amortization term less than or equal to 189 months.
‘‘ARM1/1’’ is an adjustable-rate single-family mortgage exposure that
has a mortgage rate and required payment that adjust annually.
1-unit, 2–4 units, condominium, manufactured home ..........................
300 ≤ refreshed credit score ≤ 850 ......................................................
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Cancellable mortgage insurance, if unable to determine.
Investment if unable to determine.
300 percent if outside of permissible range or unable to determine.
The original credit score for the single-family mortgage exposure is
determined based on the original credit scores of each borrower
on the exposure using the following procedure.
Determine the borrower credit score for each borrower:
• If there are original credit scores from multiple credit repositories for a borrower, the borrower credit score is the mean
across the borrower’s original credit scores.
• If there is only one original credit score for the borrower from
one repository, the borrower credit score is the one available
original credit score.
Determine the original credit score for the single-family mortgage exposure:
• If there is only one borrower, the borrower credit score is the
original credit score for the single-family mortgage exposure.
• If there are multiple borrowers, the lowest borrower credit
score across all borrowers is the original credit score for the
single-family mortgage exposure.
• If a borrower does not have a borrower credit score, determine the original credit score for the single-family mortgage
exposure based on the borrower credit scores of the other
borrowers on the loan.
The original credit score for the single-family mortgage exposure is
680 if the Enterprise has verified that no borrower has a credit
score at any of the three repositories.
The original credit score for the single-family mortgage exposure is
600 if (i) an Enterprise is unable to determine the original credit
score using the above procedure or (ii) the original credit score
calculated using the procedure falls outside of the permissible
range.
TPO includes broker and correspondent channels.
TPO if unable to determine.
If the single-family mortgage exposure initially had an adjustable or
step-rate feature, the monthly payment after a permanent modification is calculated using the initial modified rate.
0 percent if unable to determine.
¥79 percent if less than or equal to ¥80 percent.
49 percent if greater than or equal to 50 percent.
181 months if negative or unable to determine.
Product types other than FRM30, FRM20, FRM15 or ARM 1/1
should be assigned to FRM30.
Use the post-modification product type for modified mortgage exposures.
ARM 1/1 if unable to determine.
Use condominium for cooperatives.
2–4 units if unable to determine.
The refreshed credit score for the single-family mortgage exposure is
determined based on the refreshed credit scores of each borrower
on the exposure using the following procedure.
Determine the borrower credit score for each borrower:
• If the Enterprise acquires refreshed credit scores from multiple
repositories for a borrower, the borrower credit score is the
mean across the borrower’s refreshed credit scores.
• If the Enterprise acquires only one refreshed credit score for
the borrower from one repository, the borrower credit score is
the one available refreshed credit score.
• If the Enterprise does not acquire refreshed credit scores, the
borrower’s refreshed credit score is the borrower’s most recently available credit score, which could be the borrower’s
original credit score.
Determine the refreshed credit score for the single-family mortgage
exposure:
• If there is only one borrower, the borrower credit score is the
refreshed credit score for the single-family mortgage exposure.
• If there are multiple borrowers, the lowest borrower credit
score across all borrowers is the refreshed credit score for the
single-family mortgage exposure. If a borrower does not have
a borrower credit score, determine the refreshed credit score
for the single-family mortgage exposure based on the borrower credit scores of the other borrowers on the loan.
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TABLE 1 TO PARAGRAPH (a)—PERMISSIBLE VALUES AND ADDITIONAL INSTRUCTIONS—Continued
Defined term
Additional instructions
Yes, no ..................................................................................................
0 percent ≤ Subordination ≤ 80 percent ...............................................
• If no refreshed credit scores are available for any borrowers
on the loan, then the refreshed credit score for the single-family mortgage exposure is the same as the original credit score
for the single-family mortgage exposure.
No if unable to determine.
80 percent if outside permissible range.
*
*
*
*
*
7. Amend § 1240.34 by:
a. Adding in alphabetical order the
definition of ‘‘Affordable unit’’;
■ b. Adding in alphabetical order the
definition of ‘‘Government subsidy’’;
■ c. Revising table 1 to paragraph (a);
and
■ d. Revising table 4 to paragraph (d).
The additions and revisions read as
follows:
■
■
§ 1240.34
Multifamily mortgage exposures.
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(a) * * *
*
*
*
VerDate Sep<11>2014
*
Affordable unit means a unit within a
property securing a multifamily
mortgage exposure that can be rented by
occupants with income less than or
equal to 80 percent of the area median
income where the property resides.
*
*
*
*
*
Government subsidy means that the
property satisfies both of the following
criteria:
(1) at least 20 percent of the property’s
units are restricted to be affordable
units; and
(2) the property benefits from one of
the following three government
programs:
(i) Low Income Housing Tax Credits
(LIHTC);
(ii) Section 8 project-based rental
assistance; or
(iii) State/Local affordable housing
programs that require the provision of
affordable housing for the life of the
loan.
*
*
*
*
*
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*
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Streamlined refi .........
Subordination .............
Permissible values
Federal Register / Vol. 88, No. 48 / Monday, March 13, 2023 / Proposed Rules
8. Amend § 1240.35 by revising
paragraphs (b)(3) and (b)(4)(i) to read as
follows:
■
§ 1240.35
Off-balance sheet exposures.
*
*
*
*
*
(b) * * *
(3) 50 percent CCF. An Enterprise
must apply a 50 percent CCF to:
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(i) The amount of commitments with
an original maturity of more than one
year that are not unconditionally
cancelable by the Enterprise; and
(ii) Guarantees on exposures to the
other Enterprise in commingled
securities.
(4) * * *
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(i) Guarantees, except guarantees
included in paragraph (b)(3)(ii) of this
section;
*
*
*
*
*
■ 9. Revise § 1240.36 to read as follows:
§ 1240.36
Derivative contracts.
(a) Exposure amount for derivative
contracts. An Enterprise must calculate
the exposure amount or EAD for all its
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derivative contracts using the
standardized approach for counterparty
credit risk (SA–CCR) in paragraph (c) of
this section for purposes of standardized
total risk-weighted assets. An Enterprise
must apply the treatment of cleared
transactions under § 1240.37 to its
derivative contracts that are cleared
transactions and to all default fund
contributions associated with such
derivative contracts for purposes of
standardized total risk-weighted assets.
(b) Methodologies for collateral
recognition. (1) An Enterprise may use
the methodologies under § 1240.39 to
recognize the benefits of financial
collateral in mitigating the counterparty
credit risk of repo-style transactions,
eligible margin loans, collateralized
OTC derivative contracts and single
product netting sets of such
transactions.
(2) An Enterprise must use the
methodology in paragraph (c) of this
section to calculate EAD for an OTC
derivative contract or a set of OTC
derivative contracts subject to a
qualifying master netting agreement.
(3) An Enterprise must also use the
methodology in paragraph (d) of this
section to calculate the risk-weighted
asset amounts for CVA for OTC
derivatives.
(c) EAD for derivative contracts—(1)
Options for determining EAD. An
Enterprise must determine the EAD for
a derivative contract using SA–CCR
under paragraph (c)(5) of this section.
The exposure amount determined under
SA–CCR is the EAD for the derivative
contract or derivatives contracts. An
Enterprise must use the same
methodology to calculate the exposure
amount for all its derivative contracts.
An Enterprise may reduce the EAD
calculated according to paragraph (c)(5)
of this section by the credit valuation
adjustment that the Enterprise has
recognized in its balance sheet valuation
of any derivative contracts in the netting
set. For purposes of this paragraph
(c)(1), the credit valuation adjustment
does not include any adjustments to
common equity tier 1 capital
attributable to changes in the fair value
of the Enterprise’s liabilities that are due
to changes in its own credit risk since
the inception of the transaction with the
counterparty.
(2) Definitions. For purposes of
paragraph (c) of this section, the
following definitions apply:
(i) 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, except as otherwise
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17:51 Mar 10, 2023
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provided in paragraph (c) of this
section.
(ii) 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, except as otherwise
provided in paragraph (c) of this
section.
(iii) Hedging set means:
(A) With respect to 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 categories:
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, FHFA
may require an Enterprise to include the
derivative contract in each appropriate
hedging set under paragraphs
(c)(2)(iii)(A) through (E) of this section.
(3) Credit derivatives.
Notwithstanding paragraphs (c)(1) and
(c)(2) of this section:
(i) An Enterprise that purchases a
credit derivative that is recognized
under § 1240.38 as a credit risk mitigant
for an exposure is not required to
calculate a separate counterparty credit
risk capital requirement under this
section so long as the Enterprise does so
consistently for all such credit
derivatives and either includes or
excludes all such credit derivatives that
are subject to a master netting agreement
from any measure used to determine
counterparty credit risk exposure to all
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relevant counterparties for risk-based
capital purposes.
(ii) An Enterprise that is the
protection provider in a credit
derivative must treat the credit
derivative as an exposure to the
reference obligor and is not required to
calculate a counterparty credit risk
capital requirement for the credit
derivative under this section, so long as
it does so consistently for all such credit
derivatives and either includes all or
excludes all such credit derivatives that
are subject to a master netting agreement
from any measure used to determine
counterparty credit risk exposure to all
relevant counterparties for risk-based
capital purposes.
(4) Equity derivatives. An Enterprise
must treat an equity derivative contract
as an equity exposure and compute a
risk-weighted asset amount for the
equity derivative contract under
§ 1240.51. In addition, if an Enterprise
is treating the contract as a covered
position under subpart F of this part, the
Enterprise must also calculate a riskbased capital requirement for the
counterparty credit risk of an equity
derivative contract under this section.
(5) Exposure amount. (i) 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.
(ii) Notwithstanding the requirements
of paragraph (c)(5)(i) of this section, 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 calculated under paragraph (c)(5)(i)
of this section and the exposure amount
of the netting set calculated under
paragraph (c)(5)(i) of this section as if
the netting set were not subject to a
variation margin agreement.
(iii) Notwithstanding the
requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a
netting set that consists of only sold
options in which the premiums have
been fully paid by the counterparty to
the options and where the options are
not subject to a variation margin
agreement is zero.
(iv) Notwithstanding the requirements
of paragraph (c)(5)(i) of this section, the
exposure amount of a netting set in
which the counterparty is a commercial
end-user is equal to the sum of
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replacement cost, 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.
(v) For purposes of the exposure
amount calculated under paragraph
(c)(5)(i) of this section and all
calculations that are part of that
exposure amount, an Enterprise may
elect to treat a derivative contract that
is a cleared transaction that is not
subject to a variation margin agreement
as one that is subject to a variation
margin agreement, if the derivative
contract is subject to a requirement that
the counterparties make daily cash
payments to each other to account for
changes in the fair value of the
derivative contract and to reduce the net
position of the contract to zero. If an
Enterprise makes an election under this
paragraph (c)(5)(v) for one derivative
contract, it must treat all other
derivative contracts within the same
netting set that are eligible for an
election under this paragraph (c)(5)(v) as
derivative contracts that are subject to a
variation margin agreement.
(vi) For purposes of the exposure
amount calculated under paragraph
(c)(5)(i) of this section and all
calculations that are part of that
exposure amount, an Enterprise may
elect to treat a credit derivative contract,
equity derivative contract, or
commodity derivative contract that
references an index as if it were
multiple derivative contracts each
referencing one component of the index.
(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
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; and
(C) 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 potential future exposure
for purposes of adjusted total assets, 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) Netting set 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 potential future exposure
for purposes of adjusted total assets, 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, an
Enterprise may use either of the
formulas provided in paragraphs
(c)(8)(i)(A) and (B) of this section:
(A) Formula 1 is as follows:
Hedging set amount = [(AddOnTB1IR)2 +
AddOnTB2IR)2 + 1.4 * AddOnTB1IR *
AddOnTB2IR + 1.4 * AddOnTB2IR *
AddOnTB3IR + 0.6 * AddOnTB1IR *
AddOnTB3IR]1⁄2; or
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15323
variation margin to the Enterprise 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
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) Netting set 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:
BILLING CODE 4910–13–P
(B) Formula 2 is as follows:
Hedging set amount = |AddOnTB1IR| +
|AddOnTB2IR| + |AddOnTB3IR|.
Where in paragraphs (c)(8)(i)(A) and (B)
of this section:
(1) AddOnTB1IR is the sum of the
adjusted derivative contract amounts, as
calculated under paragraph (c)(9) of this
section, within the hedging set with an
end date of less than one year from the
present date;
(2) AddOnTB2IR is the sum of the
adjusted derivative contract amounts, as
calculated under paragraph (c)(9) of this
section, within the hedging set with an
end date of one to five years from the
present date; and
(3) AddOnTB3IR is the sum of the
adjusted derivative contract amounts, as
calculated under paragraph (c)(9) of this
section, within the hedging set with an
end date of more than five years from
the present date.
(ii) Exchange rate derivative
contracts. For an exchange rate
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Federal Register / Vol. 88, No. 48 / Monday, March 13, 2023 / Proposed Rules
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:
Where:
(A) k is each reference entity within
the hedging set.
(B) K is the number of reference
entities within the hedging set.
(C) 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.
(D) ρk equals the applicable
supervisory correlation factor, as
provided in table 2 to paragraph
(c)(11)(ii)(B)(2).
(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:
(A) k is each commodity type within
the hedging set.
(B) K is the number of commodity
types within the hedging set.
(C) 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.
(D) r equals the applicable
supervisory correlation factor, as
provided in table 2 to paragraph
(c)(11)(ii)(B)(2).
(v) Basis derivative contracts and
volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i)
through (iv) of this section, an
Enterprise must calculate a separate
hedging set amount for each basis
derivative contract hedging set and each
volatility derivative contract hedging
set. An Enterprise 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, an Enterprise 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 paragraph (c)(11)(ii)(B)(2).
(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:
Where:
(i) 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
(ii) 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
(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)(ii)(B)(1) of this section, for an
exchange rate derivative contract with
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multiple exchanges of principal, the
Enterprise 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
Enterprise 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 1
to paragraph (c)(9)(iii)(B)(1):
(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, an Enterprise must
find the lowest value L of P and K of
all interest rate options in a given
currency that the Enterprise has with all
counterparties. Then, l is set according
to this 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 Enterprise’s
exposure to the total notional amount of
all underlying exposures, expressed as a
decimal value between zero and one; 1
(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
Enterprise’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 Enterprise and is
designated with a negative sign if the
collateralized debt obligation tranche
was sold by the Enterprise.
(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:
1 In the case of a first-to-default credit derivative,
there are no underlying exposures that are
subordinated to the Enterprise’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
Enterprise’s exposure.
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(vi) s equals the supervisory option
volatility, as provided in table 2 to
paragraph (c)(11)(ii)(B)(2).
(C)(1) For a derivative contract that is
a collateralized debt obligation tranche,
the supervisory delta adjustment is
determined by the following formula:
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Where Margin Period of Risk (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 client-facing derivative transaction,
MPOR cannot be less than ten business
days plus the periodicity of remargining expressed in business days
minus one business day;
(ii) For a derivative contract that is a
client-facing derivative transaction,
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, or a
netting set that contains one or more
trades involving illiquid collateral or a
derivative contract that cannot be easily
replaced, MPOR cannot be less than
twenty business days.
(3) Notwithstanding paragraphs
(c)(9)(iv)(A)(1) and (2) of this section, for
a netting set subject to more than two
outstanding disputes over margin that
lasted longer than the MPOR over the
previous two quarters, the applicable
floor is twice the amount provided in
paragraphs (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:
BILLING CODE 4910–13–C
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), an Enterprise
must treat each standard option
component as a separate derivative
contract.
(C) For a derivative contract that
includes multiple-payment options,
(such as interest rate caps and floors), an
Enterprise may represent each payment
option as a combination of effective
single-payment options (such as interest
rate caplets and floorlets).
(D) An Enterprise may not decompose
linear derivative contracts (such as
swaps) into components.
(10) Multiple netting sets subject to a
single variation margin agreement—(i)
Calculating replacement cost.
Notwithstanding paragraph (c)(6) of this
section, an Enterprise 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}
Where:
(A) NS is each netting set subject to
the variation margin agreement MA;
(B) VNS is the sum of the fair values
(after excluding any valuation
adjustments) of the derivative contracts
within the netting set NS; and
(C) 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, an Enterprise 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
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, if an Enterprise
has elected pursuant to paragraph
(c)(5)(v) of this section to treat a
derivative contract that is a cleared
transaction that is not subject to a
variation margin agreement as one that
is subject to a variation margin
agreement, the Enterprise must treat the
derivative contract as subject to a
variation margin agreement with
maturity factor as determined according
to (c)(9)(iv)(A) of this section, 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. An
Enterprise 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 *
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agreement, the calculation for
replacement cost is provided under
paragraph (c)(6)(i) 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, an Enterprise must divide
the netting set into sub-netting sets (as
described in paragraph (c)(11)(ii)(B) of
this section) 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.
TABLE 2 TO PARAGRAPH (c)(11)(ii)(B)(2)—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS,
AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS
Asset class
Category
Type
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 .................................................
N/A .................
N/A .................
N/A .................
N/A .................
N/A .................
N/A .................
N/A .................
N/A .................
N/A .................
Electricity .......
Other ..............
N/A .................
N/A .................
N/A .................
Credit, index ........................................
Equity, single name .............................
Equity, index ........................................
Commodity ...........................................
Metals ..................................................
Agricultural ...........................................
Other ....................................................
Supervisory
option
volatility
(percent)
50
15
100
100
100
80
80
120
75
150
70
70
70
70
Supervisory
correlation
factor
(percent)
N/A
N/A
50
50
50
80
80
50
80
40
40
40
40
40
Supervisory
factor 1
(percent)
0.50
4.0
0.46
1.3
6.0
0.38
1.06
32
20
40
18
18
18
18
(d) Credit valuation adjustment (CVA)
risk-weighted assets—(1) In general.
With respect to its OTC derivative
contracts, an Enterprise must calculate a
CVA risk-weighted asset amount for its
portfolio of OTC derivative transactions
that are subject to the CVA capital
requirement using the simple CVA
approach described in paragraph (d)(5)
of this section.
(2) [Reserved]
(3) Recognition of hedges. (i) An
Enterprise may recognize a single name
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other equivalent hedging instrument
that references the counterparty
directly, and index credit default swaps
(CDSind) as a CVA hedge under
paragraph (d)(5)(ii) of this section or
paragraph (d)(6) of this section,
provided that the position is managed as
a CVA hedge in accordance with the
Enterprise’s hedging policies.
(ii) An Enterprise shall not recognize
as a CVA hedge any tranched or nth-todefault credit derivative.
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(4) Total CVA risk-weighted assets.
Total CVA risk-weighted assets is the
CVA capital requirement, KCVA,
calculated for an Enterprise’s entire
portfolio of OTC derivative
counterparties that are subject to the
CVA capital requirement, multiplied by
12.5.
(5) Simple CVA approach. (i) Under
the simple CVA approach, the CVA
capital requirement, KCVA, is calculated
according to the following formula:
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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.
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Federal Register / Vol. 88, No. 48 / Monday, March 13, 2023 / Proposed Rules
Where:
style transaction calculated using the
TABLE 3 TO PARAGRAPH (d)(5)(ii)—
ASSIGNMENT OF COUNTERPARTY methodology set forth in § 1240.39(b)(2)
or (3), plus the fair value of the
WEIGHT—Continued
collateral posted by the clearing member
client Enterprise and held by the CCP or
a clearing member in a manner that is
not bankruptcy remote.
(3) Cleared transaction risk weights.
>2.00–6.00
3.00
>6.00
10.00 (i) For a cleared transaction with a
QCCP, a clearing member client
■ 10. Revise § 1240.37 to read as
Enterprise must apply a risk weight of:
follows:
(A) 2 percent if the collateral posted
by the Enterprise to the QCCP or
§ 1240.37 Cleared transactions.
clearing member is subject to an
(a) General requirements—(1)
arrangement that prevents any loss to
Clearing member clients. An Enterprise
the clearing member client Enterprise
that is a clearing member client must
due to the joint default or a concurrent
use the methodologies described in
insolvency, liquidation, or receivership
paragraph (b) of this section to calculate proceeding of the clearing member and
risk-weighted assets for a cleared
any other clearing member clients of the
transaction.
clearing member; and the clearing
(2) Clearing members. An Enterprise
member client Enterprise has conducted
that is a clearing member must use the
sufficient legal review to conclude with
methodologies described in paragraph
a well-founded basis (and maintains
(c) of this section to calculate its risksufficient written documentation of that
weighted assets for a cleared transaction legal review) that in the event of a legal
and paragraph (b) of this section to
challenge (including one resulting from
calculate its risk-weighted assets for its
an event of default or from liquidation,
default fund contribution to a CCP.
insolvency, or receivership proceedings)
(b) Clearing member client
the relevant court and administrative
Enterprises—(1) Risk-weighted assets for
authorities would find the arrangements
cleared transactions. (i) To determine
to be legal, valid, binding, and
the risk-weighted asset amount for a
enforceable under the law of the
cleared transaction, an Enterprise that is
relevant jurisdictions.
a clearing member client must multiply
(B) 4 percent, if the requirements of
the trade exposure amount for the
paragraph (b)(3)(i)(A) of this section are
cleared transaction, calculated in
not met.
accordance with paragraph (b)(2) of this
(ii) For a cleared transaction with a
section, by the risk weight appropriate
CCP that is not a QCCP, a clearing
for the cleared transaction, determined
member client Enterprise must apply
in accordance with paragraph (b)(3) of
the risk weight applicable to the CCP
this section.
under this subpart D.
(ii) A clearing member client
(4) Collateral. (i) Notwithstanding any
Enterprise’s total risk-weighted assets
other requirement of this section,
for cleared transactions is the sum of the collateral posted by a clearing member
risk-weighted asset amounts for all of its client Enterprise that is held by a
cleared transactions.
custodian (in its capacity as a custodian)
(2) Trade exposure amount. (i) For a
in a manner that is bankruptcy remote
cleared transaction that is a derivative
from the CCP, clearing member, and
contract or a netting set of derivative
other clearing member clients of the
contracts, trade exposure amount equals clearing member, is not subject to a
the EAD for the derivative contract or
capital requirement under this section.
netting set of derivative contracts
(ii) A clearing member client
calculated using the methodology used
Enterprise must calculate a riskto calculate EAD for derivative contracts weighted asset amount for any collateral
TABLE 3 TO PARAGRAPH (d)(5)(ii)—
set forth in § 1240.36(c), plus the fair
provided to a CCP, clearing member or
ASSIGNMENT OF COUNTERPARTY value of the collateral posted by the
a custodian in connection with a cleared
WEIGHT
clearing member client Enterprise and
transaction in accordance with
held by the CCP or a clearing member
requirements under this subpart D, as
Internal PD
Weight wi
in a manner that is not bankruptcy
applicable.
(in percent)
(in percent)
(c) Clearing member Enterprise—(1)
remote.
(ii) For a cleared transaction that is a
Risk-weighted assets for cleared
0.00–0.07
0.70
transactions. (i) To determine the risk>0.070–0.15
0.80 repo-style transaction or netting set of
weighted asset amount for a cleared
>0.15–0.40
1.00 repo-style transactions, trade exposure
>0.40–2.00
2.00 amount equals the EAD for the repotransaction, a clearing member
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(in percent)
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(A) wi = the weight applicable to
counterparty i under table 3 to
paragraph (d)(5)(ii);
(B) Mi = the EAD-weighted average of
the effective maturity of each netting set
with counterparty i (where each netting
set’s effective maturity can be no less
than one year.)
(C) EADitotal = the sum of the EAD for
all netting sets of OTC derivative
contracts with counterparty i calculated
using the standardized approach to
counterparty credit risk described in
paragraph (c) of this section. When the
Enterprise calculates EAD under
paragraph (c) of this section, such EAD
may be adjusted for purposes of
calculating EADitotal by multiplying EAD
by (1-exp(¥0.05 × Mi))/(0.05 × Mi),
where ‘‘exp’’ is the exponential
function.
(D) Mihedge = the notional weighted
average maturity of the hedge
instrument.
(E) Bi = the sum of the notional
amounts of any purchased single name
CDS referencing counterparty i that is
used to hedge CVA risk to counterparty
i multiplied by (1-exp(¥0.05 × Mihedge))/
(0.05 × Mihedge).
(F) Mind = the maturity of the CDSind
or the notional weighted average
maturity of any CDSind purchased to
hedge CVA risk of counterparty i.
(G) Bind = the notional amount of one
or more CDSind purchased to hedge CVA
risk for counterparty i multiplied by (1exp(¥0.05 × Mind))/(0.05 × Mind)
(H) wind = the weight applicable to the
CDSind based on the average weight of
the underlying reference names that
comprise the index under table 3 to
paragraph (d)(5)(ii).
(ii) The Enterprise may treat the
notional amount of the index
attributable to a counterparty as a single
name hedge of counterparty i (Bi,) when
calculating KCVA, and subtract the
notional amount of Bi from the notional
amount of the CDSind. An Enterprise
must treat the CDSind hedge with the
notional amount reduced by Bi as a CVA
hedge.
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Enterprise 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 Enterprise’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 Enterprise 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
§ 1240.36(c), plus the fair value of the
collateral posted by the clearing member
Enterprise and held by the CCP in a
manner that is not bankruptcy remote.
(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 § 1240.39(b)(2) or (3), plus the fair
value of the collateral posted by the
clearing member Enterprise and held by
the CCP in a manner that is not
bankruptcy remote.
(3) Cleared transaction risk weights.
(i) A clearing member Enterprise 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 Enterprise must apply the risk
weight applicable to the CCP according
to this subpart D.
(iii) Notwithstanding paragraphs
(c)(3)(i) and (ii) of this section, a
clearing member Enterprise may apply a
risk weight of zero percent to the trade
exposure amount for a cleared
transaction with a QCCP where the
clearing member Enterprise 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 § 1240.3(a),
and the clearing member Enterprise is
not obligated to reimburse the clearing
member client in the event of the QCCP
default.
(4) Collateral. (i) Notwithstanding any
other requirement of this section,
collateral posted by a clearing member
Enterprise 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.
(ii) A clearing member Enterprise
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
accordance with requirements under
this subpart D.
(d) Default fund contributions—(1)
General requirement. A clearing
member Enterprise 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 Enterprise or FHFA, 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
Enterprise’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 FHFA, 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 Enterprise’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
(d)(4) of this section, multiplied by 12.5.
(4) Capital requirement for default
fund contributions to a QCCP. A
clearing member Enterprise’s capital
requirement for its default fund
contribution to a QCCP (KCM) is equal
to:
Where:
(i) KCCP is the hypothetical capital
requirement of the QCCP, as determined
under paragraph (d)(5) of this section;
(ii) DFpref is prefunded default fund
contribution of the clearing member
Enterprise to the QCCP;
(iii) DFCCP is the QCCP’s own
prefunded amount that are contributed
to the default waterfall and are junior or
pari passu with prefunded default fund
contributions of clearing members of the
QCCP; and
(iv) DFprefCCPCM is the total prefunded
default fund contributions from clearing
members of the QCCP to the QCCP.
(5) Hypothetical capital requirement
of a QCCP. Where a QCCP has provided
its KCCP, an Enterprise must rely on such
disclosed figure instead of calculating
KCCP under this paragraph (d)(5), unless
the Enterprise 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
Enterprise, is equal to:
KCCP = SCMi EADi * 1.6 percent
(ii) With respect to any derivative
contracts between the QCCP and the
clearing member that are cleared
transactions and any guarantees that the
clearing member has provided to the
QCCP with respect to performance of a
clearing member client on a derivative
contract, the EAD is equal to the
exposure amount of the QCCP to the
clearing member for all such derivative
contracts and guarantees of derivative
contracts calculated under SA–CCR in
§ 1240.36(c) (or, with respect to a QCCP
located outside the United States, under
a substantially identical methodology in
effect in the jurisdiction) using a value
of 10 business days for purposes of
§ 1240.36(c)(9)(iv); less the value of all
collateral held by the QCCP posted by
the clearing member or a client of the
clearing member in connection with a
derivative contract for which the
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Where:
(i) CMi is each clearing member of the
QCCP; and
(ii) EADi is the exposure amount of
the QCCP to each clearing member of
the QCCP, as determined under
paragraph (d)(6) of this section.
(6) EAD of a QCCP to a clearing
member. (i) The EAD of a QCCP to a
clearing member 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.
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clearing member has provided a
guarantee to the QCCP and the amount
of the prefunded default fund
contribution of the clearing member to
the QCCP.
(iii) With respect to any repo-style
transactions between the QCCP and a
clearing member that are cleared
transactions, EAD is equal to:
EADi = max{EBRMi¥IMi¥DFi;0}
Where:
(A) EBRMi is the exposure amount of
the QCCP to each clearing member for
all repo-style transactions between the
QCCP and the clearing member, as
determined under § 1240.39(b)(2) and
without recognition of the initial margin
collateral posted by the clearing member
to the QCCP with respect to the repostyle transactions or the prefunded
default fund contribution of the clearing
member institution to the QCCP;
(B) IMi is the initial margin collateral
posted by each clearing member to the
QCCP with respect to the repo-style
transactions; and
(C) DFi is the prefunded default fund
contribution of each clearing member to
the
(D) QCCP that is not already deducted
in paragraph (d)(6)(ii) of this section.
(iv) EAD must be calculated
separately for each clearing member’s
sub-client accounts and sub-house
account (i.e., for the clearing member’s
proprietary 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.
(v) 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
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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
§ 1240.39(b) for repo-style transactions
and to § 1240.36(c)(5) for derivative
contracts.
■ 11. Revise § 1240.39 to read as
follows:
§ 1240.39
Collateralized transactions.
(a) General. (1) An Enterprise may use
the following methodologies to
recognize the benefits of financial
collateral (other than with respect to a
retained CRT exposure) in mitigating
the counterparty credit risk of repo-style
transactions, eligible margin loans,
collateralized OTC derivative contracts
and single product netting sets of such
transactions:
(i) The collateral haircut approach set
forth in paragraph (b)(2) of this section;
and
(ii) For single product netting sets of
repo-style transactions and eligible
margin loans, the simple VaR
methodology set forth in paragraph
(b)(3) of this section.
(2) An Enterprise may use any
combination of the two methodologies
for collateral recognition; however, it
must use the same methodology for
similar exposures or transactions.
(b) EAD for eligible margin loans and
repo-style transactions—(1) General. An
Enterprise may recognize the credit risk
mitigation benefits of financial collateral
that secures an eligible margin loan,
repo-style transaction, or single-product
netting set of such transactions by
determining the EAD of the exposure
using:
(i) The collateral haircut approach
described in paragraph (b)(2) of this
section; or
(ii) For netting sets only, the simple
VaR methodology described in
paragraph (b)(3) of this section.
(2) Collateral haircut approach—(i)
EAD equation. An Enterprise may
determine EAD for an eligible margin
loan, repo-style transaction, or netting
set by setting EAD equal to
max{0, [(SE ¥ SC) + S(Es × Hs) + S(Efx
× Hfx)]},
Where:
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(A) SE equals the value of the
exposure (the sum of the current fair
values of all instruments, gold, and cash
the Enterprise has lent, sold subject to
repurchase, or posted as collateral to the
counterparty under the transaction (or
netting set));
(B) SC equals the value of the
collateral (the sum of the current fair
values of all instruments, gold, and cash
the Enterprise has borrowed, purchased
subject to resale, or taken as collateral
from the counterparty under the
transaction (or netting set));
(C) Es equals the absolute value of the
net position in a given instrument or in
gold (where the net position in a given
instrument or in gold equals the sum of
the current fair values of the instrument
or gold the Enterprise has lent, sold
subject to repurchase, or posted as
collateral to the counterparty minus the
sum of the current fair values of that
same instrument or gold the Enterprise
has borrowed, purchased subject to
resale, or taken as collateral from the
counterparty);
(D) Hs equals the market price
volatility haircut appropriate to the
instrument or gold referenced in Es;
(E) Efx equals the absolute value of the
net position of instruments and cash in
a currency that is different from the
settlement currency (where the net
position in a given currency equals the
sum of the current fair values of any
instruments or cash in the currency the
Enterprise has lent, sold subject to
repurchase, or posted as collateral to the
counterparty minus the sum of the
current fair values of any instruments or
cash in the currency the Enterprise has
borrowed, purchased subject to resale,
or taken as collateral from the
counterparty); and
(F) Hfx equals the haircut appropriate
to the mismatch between the currency
referenced in Efx and the settlement
currency.
(ii) Standard supervisory haircuts.
Under the standard supervisory haircuts
approach:
(A) An Enterprise must use the
haircuts for market price volatility (Hs)
in table 1 to paragraph (b)(2)(ii)(A) as
adjusted in certain circumstances as
provided in paragraphs (b)(2)(ii)(C) and
(D) of this section;
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TABLE 1 TO PARAGRAPH (b)(2)(ii)(A)—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
Haircut (in percent) assigned based on:
Sovereign issuers risk weight
under § 1240.32 2
(in percent)
Residual maturity
Zero
Less than or equal to 1 year .................................................................
Greater than 1 year and less than or equal to 5 years ........................
Greater than 5 years .............................................................................
0.5
2.0
4.0
20 or 50
Non-sovereign issuers risk weight
under § 1240.32
(in percent)
100
1.0
3.0
6.0
15.0
15.0
15.0
20
50
1.0
4.0
8.0
2.0
6.0
12.0
Investment grade
securitization
exposures
(in percent)
100
4.0
8.0
16.0
4.0
12.0
24.0
Main index equities (including convertible bonds) and gold .............................................................................
15.0
Other publicly traded equities (including convertible bonds) ............................................................................
25.0
Mutual funds ......................................................................................................................................................
Highest haircut applicable to any security in which the
fund can invest.
Cash collateral held ..........................................................................................................................................
Zero
Other exposure types ........................................................................................................................................
25.0
1 The
(B) For currency mismatches, an
Enterprise must use a haircut for foreign
exchange rate volatility (Hfx) of 8
percent, as adjusted in certain
circumstances as provided in
paragraphs (b)(2)(ii)(C) and (D) of this
section.
(C) For repo-style transactions and
client-facing derivative transactions, an
Enterprise may multiply the supervisory
haircuts provided in paragraphs
(b)(2)(ii)(A) and (B) of this section by the
square root of 1⁄2 (which equals
0.707107). If the Enterprise determines
that a longer holding period is
appropriate for client-facing derivative
transactions, then it must use a larger
scaling factor to adjust for the longer
holding period pursuant to paragraph
(b)(2)(ii)(F) of this section.
(D) An Enterprise 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
provided in paragraph (b)(2)(ii)(F) of
this section where the conditions in this
paragraph (b)(2)(ii)(D) apply. If the
number of trades in a netting set
exceeds 5,000 at any time during a
quarter, an Enterprise must adjust the
supervisory haircuts upward on the
basis of a minimum holding period of
twenty business days for the following
quarter (except when an Enterprise is
calculating EAD for a cleared
transaction under § 1240.37). If a netting
set contains one or more trades
involving illiquid collateral, an
Enterprise must adjust the supervisory
haircuts upward on the basis of a
minimum holding period of twenty
business days. If over the two previous
quarters more than two margin disputes
on a netting set have occurred that
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lasted longer than the holding period,
then the Enterprise must adjust the
supervisory haircuts upward for that
netting set on the basis of a minimum
holding period that is at least two times
the minimum holding period for that
netting set.
(E)(1) An Enterprise must adjust the
supervisory haircuts upward on the
basis of a holding period longer than ten
business days for collateral associated
with derivative contracts (five business
days for client-facing derivative
contracts) using the formula provided in
paragraph (b)(2)(ii)(F) of this section
where the conditions in this paragraph
(b)(2)(ii)(E)(1) 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, an Enterprise must use a
minimum 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, an Enterprise
must use a minimum holding period of
twenty business days.
(2) Notwithstanding paragraph
(b)(2)(ii)(A) or (C) or (b)(2)(ii)(E)(1) of
this section, for collateral associated
with a derivative contract in a netting
set under which more than two margin
disputes that lasted longer than the
holding period occurred during the two
previous quarters, the minimum holding
period is twice the amount provided
under paragraph (b)(2)(ii)(A) or (C) or
(b)(2)(ii)(E)(1) of this section.
(F) An Enterprise must adjust the
standard supervisory haircuts upward,
pursuant to the adjustments provided in
paragraphs (b)(2)(ii)(C) through (E) of
this section, using the following
formula:
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Where:
(1) TM equals a holding period of
longer than 10 business days for eligible
margin loans and derivative contracts
other than client-facing derivative
transactions or longer than 5 business
days for repo-style transactions and
client-facing derivative transactions;
(2) Hs equals the standard supervisory
haircut; and
(3) Ts equals 10 business days for
eligible margin loans and derivative
contracts other than client-facing
derivative transactions or 5 business
days for repo-style transactions and
client-facing derivative transactions.
(G) If the instrument an Enterprise has
lent, sold subject to repurchase, or
posted as collateral does not meet the
definition of financial collateral, the
Enterprise must use a 25.0 percent
haircut for market price volatility (Hs).
(iii) Own internal estimates for
haircuts. With the prior written notice
to FHFA, an Enterprise may calculate
haircuts (Hs and Hfx) using its own
internal estimates of the volatilities of
market prices and foreign exchange
rates.
(A) To use its own internal estimates,
an Enterprise must satisfy the following
minimum quantitative standards:
(1) An Enterprise must use a 99th
percentile one-tailed confidence
interval.
(2) The minimum holding period for
a repo-style transaction is five business
days and for an eligible margin loan is
ten business days except for
transactions or netting sets for which
paragraph (b)(2)(iii)(A)(3) of this section
applies. When an Enterprise calculates
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market price volatility haircuts in this table 1 are based on a 10 business-day holding period.
2 Includes a foreign PSE that receives a zero percent risk weight.
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an own-estimates haircut on a TN-day
holding period, which is different from
the minimum holding period for the
transaction type, the applicable haircut
(HM) is calculated using the following
square root of time formula:
Where:
(i) TM equals 5 for repo-style
transactions and 10 for eligible margin
loans;
(ii) TN equals the holding period used
by the Enterprise to derive HN; and
(iii) HN equals the haircut based on
the holding period TN
(3) If the number of trades in a netting
set exceeds 5,000 at any time during a
quarter, an Enterprise must calculate the
haircut using a minimum holding
period of twenty business days for the
following quarter (except when an
Enterprise is calculating EAD for a
cleared transaction under § 1240.37). If
a netting set contains one or more trades
involving illiquid collateral or an OTC
derivative that cannot be easily
replaced, an Enterprise must calculate
the haircut using a minimum 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 Enterprise
must calculate the haircut for
transactions in that netting set on the
basis of a holding period that is at least
two times the minimum holding period
for that netting set.
(4) An Enterprise is required to
calculate its own internal estimates with
inputs calibrated to historical data from
a continuous 12-month period that
reflects a period of significant financial
stress appropriate to the security or
category of securities.
(5) An Enterprise must have policies
and procedures that describe how it
determines the period of significant
financial stress used to calculate the
Enterprise’s own internal estimates for
haircuts under this section and must be
able to provide empirical support for the
period used. The Enterprise must obtain
the prior approval of FHFA for, and
notify FHFA if the Enterprise makes any
material changes to, these policies and
procedures.
(6) Nothing in this section prevents
FHFA from requiring an Enterprise to
use a different period of significant
financial stress in the calculation of own
internal estimates for haircuts.
(7) An Enterprise must update its data
sets and calculate haircuts no less
frequently than quarterly and must also
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reassess data sets and haircuts whenever
market prices change materially.
(B) With respect to debt securities that
are investment grade, an Enterprise may
calculate haircuts for categories of
securities. For a category of securities,
the Enterprise must calculate the haircut
on the basis of internal volatility
estimates for securities in that category
that are representative of the securities
in that category that the Enterprise has
lent, sold subject to repurchase, posted
as collateral, borrowed, purchased
subject to resale, or taken as collateral.
In determining relevant categories, the
Enterprise must at a minimum take into
account:
(1) The type of issuer of the security;
(2) The credit quality of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the
security.
(C) With respect to debt securities that
are not investment grade and equity
securities, an Enterprise must calculate
a separate haircut for each individual
security.
(D) Where an exposure or collateral
(whether in the form of cash or
securities) is denominated in a currency
that differs from the settlement
currency, the Enterprise must calculate
a separate currency mismatch haircut
for its net position in each mismatched
currency based on estimated volatilities
of foreign exchange rates between the
mismatched currency and the
settlement currency.
(E) An Enterprise’s own estimates of
market price and foreign exchange rate
volatilities may not take into account
the correlations among securities and
foreign exchange rates on either the
exposure or collateral side of a
transaction (or netting set) or the
correlations among securities and
foreign exchange rates between the
exposure and collateral sides of the
transaction (or netting set).
(3) Simple VaR methodology. With
the prior written notice to FHFA, an
Enterprise may estimate EAD for a
netting set using a VaR model that meets
the requirements in paragraph (b)(3)(iii)
of this section. In such event, the
Enterprise must set EAD equal to max
{0, [(SE ¥ SC) + PFE]}, where:
(i) SE equals the value of the exposure
(the sum of the current fair values of all
instruments, gold, and cash the
Enterprise has lent, sold subject to
repurchase, or posted as collateral to the
counterparty under the netting set);
(ii) SC equals the value of the
collateral (the sum of the current fair
values of all instruments, gold, and cash
the Enterprise has borrowed, purchased
subject to resale, or taken as collateral
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from the counterparty under the netting
set); and
(iii) PFE (potential future exposure)
equals the Enterprise’s empirically
based best estimate of the 99th
percentile, one-tailed confidence
interval for an increase in the value of
(SE ¥ SC) over a five-business-day
holding period for repo-style
transactions, or over a ten-business-day
holding period for eligible margin loans
except for netting sets for which
paragraph (b)(3)(iv) of this section
applies using a minimum one-year
historical observation period of price
data representing the instruments that
the Enterprise has lent, sold subject to
repurchase, posted as collateral,
borrowed, purchased subject to resale,
or taken as collateral. The Enterprise
must validate its VaR model by
establishing and maintaining a rigorous
and regular backtesting regime.
(iv) If the number of trades in a
netting set exceeds 5,000 at any time
during a quarter, an Enterprise must use
a twenty-business-day holding period
for the following quarter (except when
an Enterprise is calculating EAD for a
cleared transaction under § 1240.37). If
a netting set contains one or more trades
involving illiquid collateral, an
Enterprise must use a twenty-businessday holding period. 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 Enterprise must set its
PFE for that netting set equal to an
estimate over a holding period that is at
least two times the minimum holding
period for that netting set.
■ 12. Amend § 1240.41 by revising
paragraph (c)(5), redesignating
paragraph (c)(6) as paragraph (c)(7), and
adding new paragraph (c)(6) to read as
follows:
§ 1240.41 Operational requirements for
CRT and other securitization exposures.
*
*
*
*
*
(c) * * *
(5) Any clean-up calls relating to the
credit risk transfer are eligible clean-up
calls;
(6) Any time-based calls relating to
the credit risk transfer are eligible timebased calls; and
*
*
*
*
*
■ 13. Amend § 1240.42 by revising
paragraph (f) to read as follows:
§ 1240.42 Risk-weighted assets for CRT
and other securitization exposures.
*
*
*
*
*
(f) Interest-only mortgage-backed
securities. For non-credit-enhancing
interest-only mortgage-backed securities
that are not subject to § 1240.32(c), the
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risk weight may not be less than 100
percent.
*
*
*
*
*
■ 14. Amend § 1240.400 by revising
paragraph (c)(1), and removing
paragraph (d) to read as follows:
§ 1240.400
Stability capital buffer.
*
*
*
*
*
(c) * * *
(1) Increase in stability capital buffer.
An increase in the stability capital
buffer of an Enterprise under this
section will take effect (i.e., be
incorporated into the maximum payout
ratio under table 1 to paragraph (b)(5) in
§ 1240.11) on January 1 of the year that
is one full calendar year after the
increased stability capital buffer was
calculated, provided that where a
stability capital buffer under paragraph
(c)(2) of this section is calculated to be
a decrease in the stability capital buffer
from the previously calculated
scheduled increase applicable on the
same January 1, the decreased stability
capital buffer under paragraph (c)(2) of
this section shall take effect.
*
*
*
*
*
Clinton Jones,
General Counsel, Federal Housing Finance
Agency.
[FR Doc. 2023–04041 Filed 3–10–23; 8:45 am]
BILLING CODE 8070–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2023–0431; Project
Identifier MCAI–2022–01277–T]
RIN 2120–AA64
Airworthiness Directives; ATR—GIE
Avions de Transport Re´gional
Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
The FAA proposes to
supersede Airworthiness Directive (AD)
2022–25–16, which applies to all ATR—
GIE Avions de Transport Re´gional
Model ATR42–200, –300, and –320
airplanes. AD 2022–25–16 requires
revising the existing maintenance or
inspection program, as applicable, to
incorporate new or more restrictive
airworthiness limitations. Since the
FAA issued AD 2022–25–16, the FAA
has determined that new or more
restrictive airworthiness limitations are
ddrumheller on DSK120RN23PROD with PROPOSALS1
SUMMARY:
VerDate Sep<11>2014
22:33 Mar 10, 2023
Jkt 259001
necessary. This proposed AD would
continue to require certain actions in
AD 2022–25–16 and would require
revising the existing maintenance or
inspection program, as applicable, to
incorporate new or more restrictive
airworthiness limitations, as specified
in a European Union Aviation Safety
Agency (EASA) AD, which is proposed
for incorporation by reference (IBR). The
FAA is proposing this AD to address the
unsafe condition on these products.
DATES: The FAA must receive comments
on this proposed AD by April 27, 2023.
ADDRESSES: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
• Federal eRulemaking Portal: Go to
regulations.gov. Follow the instructions
for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
AD Docket: You may examine the AD
docket at regulations.gov under Docket
No. FAA–2023–0431; or in person at
Docket Operations between 9 a.m. and
5 p.m., Monday through Friday, except
Federal holidays. The AD docket
contains this NPRM, the mandatory
continuing airworthiness information
(MCAI), any comments received, and
other information. The street address for
Docket Operations is listed above.
Material Incorporated by Reference:
• For material that is proposed for
IBR in this NPRM, contact EASA,
Konrad-Adenauer-Ufer 3, 50668
Cologne, Germany; telephone +49 221
8999 000; email ADs@easa.europa.eu;
website easa.europa.eu. You may find
this material on the EASA website at
ad.easa.europa.eu. It is also available at
regulations.gov under Docket No. FAA–
2023–0431.
• You may view this service
information at the FAA, Airworthiness
Products Section, Operational Safety
Branch, 2200 South 216th St., Des
Moines, WA. For information on the
availability of this material at the FAA,
call 206–231–3195.
FOR FURTHER INFORMATION CONTACT:
Shahram Daneshmandi, Aerospace
Engineer, Large Aircraft Section,
International Validation Branch, FAA,
2200 South 216th St., Des Moines, WA
98198; telephone 206–231–3220; email
Shahram.Daneshmandi@faa.gov.
SUPPLEMENTARY INFORMATION:
PO 00000
Frm 00044
Fmt 4702
Sfmt 4702
15333
Comments Invited
The FAA invites you to send any
written relevant data, views, or
arguments about this proposal. Send
your comments to an address listed
under ADDRESSES. Include ‘‘Docket No.
FAA–2023–0431; Project Identifier
MCAI–2022–01277–T’’ at the beginning
of your comments. The most helpful
comments reference a specific portion of
the proposal, explain the reason for any
recommended change, and include
supporting data. The FAA will consider
all comments received by the closing
date and may amend this proposal
because of those comments.
Except for Confidential Business
Information (CBI) as described in the
following paragraph, and other
information as described in 14 CFR
11.35, the FAA will post all comments
received, without change, to
regulations.gov, including any personal
information you provide. The agency
will also post a report summarizing each
substantive verbal contact received
about this NPRM.
Confidential Business Information
CBI is commercial or financial
information that is both customarily and
actually treated as private by its owner.
Under the Freedom of Information Act
(FOIA) (5 U.S.C. 552), CBI is exempt
from public disclosure. If your
comments responsive to this NPRM
contain commercial or financial
information that is customarily treated
as private, that you actually treat as
private, and that is relevant or
responsive to this NPRM, it is important
that you clearly designate the submitted
comments as CBI. Please mark each
page of your submission containing CBI
as ‘‘PROPIN.’’ The FAA will treat such
marked submissions as confidential
under the FOIA, and they will not be
placed in the public docket of this
NPRM. Submissions containing CBI
should be sent to Shahram
Daneshmandi, Aerospace Engineer,
Large Aircraft Section, International
Validation Branch, FAA, 2200 South
216th St., Des Moines, WA 98198;
telephone 206–231–3220; email
Shahram.Daneshmandi@faa.gov. Any
commentary that the FAA receives that
is not specifically designated as CBI will
be placed in the public docket for this
rulemaking.
Background
The FAA issued AD 2022–25–16,
Amendment 39–22272 (87 FR 77491,
December 19, 2022) (AD 2022–25–16),
for all ATR—GIE Avions de Transport
Re´gional Model ATR42–200, –300, and
–320 airplanes. AD 2022–25–16 was
E:\FR\FM\13MRP1.SGM
13MRP1
]]>Agencies
[Federal Register Volume 88, Number 48 (Monday, March 13, 2023)]
[Proposed Rules]
[Pages 15306-15333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04041]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1240
RIN 2590-AB27
Enterprise Regulatory Capital Framework--Commingled Securities,
Multifamily Government Subsidy, Derivatives, and Other Enhancements
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
seeking comments on a notice of proposed rulemaking (proposed rule)
that would amend several provisions in the Enterprise Regulatory
Capital Framework (ERCF) for the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac, and with Fannie Mae, each an Enterprise). The proposed rule would
include modifications related to guarantees on commingled securities,
multifamily mortgage exposures secured by government-subsidized
properties, derivatives and cleared transactions, and credit scores,
among other items.
DATES: Comments must be received on or before May 12, 2023.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB27, by any one
of the following methods:
Agency website: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at [email protected] to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB27.
Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB27,
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC
20219. Deliver the package at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
[[Page 15307]]
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AB27, Federal Housing
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please
note that all mail sent to FHFA via U.S. Mail is routed through a
national irradiation facility, a process that may delay delivery by
approximately two weeks. For any time-sensitive correspondence, please
plan accordingly.
FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202) 649-3141,
[email protected]; Christopher Vincent, Principal Financial
Analyst, Office of Capital Policy, (202) 649-3685,
[email protected]; or James Jordan, Associate General
Counsel, Office of General Counsel, (202) 649-3075,
[email protected]. These are not toll-free numbers. For TTY/TRS
users with hearing and speech disabilities, dial 711 and ask to be
connected to any of the contact numbers above.
SUPPLEMENTARY INFORMATION:
Comments
FHFA invites comments on all aspects of the proposed rule. Copies
of all comments will be posted without change and will include any
personal information you provide, such as your name, address, email
address, and telephone number, on the FHFA website at https://www.fhfa.gov. In addition, copies of all comments received will be
available for examination by the public through the electronic
rulemaking docket for this proposed rule also located on the FHFA
website.
Table of Contents
I. Introduction
II. Proposed Requirements
A. Guarantees on Commingled Securities
B. Multifamily Government Subsidy Risk Multiplier
C. Derivatives and Cleared Transactions
D. Representative Credit Scores for Single-Family Mortgage
Exposures
E. Original Credit Scores for Single-Family Mortgage Exposures
Without a Representative Original Credit Score
F. Guarantee Assets
G. Mortgage Servicing Assets
H. Time-Based Calls for CRT Exposures
I. Interest-Only Mortgage-Backed Securities
J. Single-Family Countercyclical Adjustment
K. Stability Capital Buffer
L. Advanced Approaches
III. Effective Date
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act
I. Introduction
FHFA is seeking comments on amendments to the ERCF that would
enhance, clarify, or otherwise refine various regulatory capital
requirements for the Enterprises. The proposed rule would modify
provisions in the ERCF related to the following items: guarantees on
commingled securities, multifamily mortgage exposures secured by
properties with a government subsidy, derivatives and cleared
transactions, credit scores for single-family mortgage exposures,
guarantee assets, mortgage servicing assets (MSAs), time-based calls
for credit risk transfer (CRT) exposures, interest-only (IO) mortgage-
backed securities (MBS), the single-family countercyclical adjustment,
the stability capital buffer, and the compliance date for the advanced
approaches.
The proposed amendments would implement the lessons learned through
the continued application of the ERCF and better reflect the risks
inherent in the Enterprises' business models. In addition, the proposed
rule would clarify certain areas of the ERCF. In doing so, the
modifications in this proposed rule would enhance the safety and
soundness of the Enterprises and contribute to the furtherance of the
Enterprises' missions.
FHFA adopted the ERCF on December 17, 2020, with the purpose of
implementing a going-concern regulatory capital standard to ensure that
each of Fannie Mae and Freddie Mac operates in a safe and sound manner,
and, across the economic cycle is positioned to fulfill its statutory
mission to provide stability and ongoing assistance to the secondary
mortgage market. The ERCF satisfied a statutory requirement that FHFA
establish by regulation, risk-based capital requirements to safeguard
the Enterprises against the risks that arise in the operation and
management of their businesses. The ERCF also implemented a new
leverage framework that included both a minimum requirement and a
leverage buffer. The ERCF became effective on February 16, 2021. FHFA
subsequently amended the ERCF three times. The amendments refined the
prescribed leverage buffer amount (PLBA or leverage buffer) and the
risk-based capital treatment of CRT, implemented a more comprehensive
set of public disclosure requirements for the standardized approach,
and required the Enterprises to submit capital plans to FHFA on an
annual basis. Each of the amendments became effective in 2022.
Since the adoption of the ERCF, the Enterprises have been operating
under the capital requirements and buffers outlined in the standardized
approach while simultaneously building their capital positions.
However, despite their recent progress accumulating capital, the
Enterprises remain severely undercapitalized. Since the Enterprises
were placed into conservatorships in September 2008, they have been
supported by Senior Preferred Stock Purchase Agreements (PSPAs) between
the U.S. Department of the Treasury (Treasury) and each Enterprise.\1\
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\1\ Fannie Mae's and Freddie Mac's Amended and Restated Senior
Preferred Stock Purchase Agreements with Treasury, as amended
through September 14, 2021, can be found on FHFA's web page at
https://www.fhfa.gov/Conservatorship/Pages/Senior-Preferred-Stock-Purchase-Agreements.aspx.
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As conservator and prudential regulator, FHFA continuously monitors
the risk inherent in the Enterprises' business operations and reviews
the appropriateness of the ERCF's capital requirements and buffers to
mitigate those risks. FHFA has identified several provisions in the
ERCF that could be revised to enhance the ERCF. Specifically, the
proposed rule would introduce:
A 5 percent risk weight and 50 percent credit conversion
factor for guarantees on commingled securities,
A risk multiplier of 0.6 for multifamily mortgage
exposures secured by properties with certain government subsidies,
A standardized approach for counterparty credit risk (SA-
CCR) as the method for computing risk weights for derivatives and
cleared transactions,
A modified procedure for determining a representative
credit score for single-family mortgage exposures,
A modified credit score assumption for single-family
mortgage exposures originated without a representative credit score,
A 20 percent risk weight for guarantee assets, and
A timing alignment between the application of single-
family countercyclical adjustments and property value adjustments.
FHFA has also identified several aspects of the ERCF where specific
language would clarify and enhance the usefulness of the ERCF. The
proposed rule would:
Expand the definition of MSAs to include servicing rights
on mortgage loans owned by the Enterprise,
Explicitly permit eligible time-based call options in the
CRT operational criteria,
Amend the risk weights for IO MBS to 0 percent, 20
percent, and 100
[[Page 15308]]
percent, conditional on whether the security was issued by the
Enterprise, the other Enterprise, or a non-Enterprise entity,
respectively, and
Clarify the calculation of the stability capital buffer
when an increase and a decrease might be applied concurrently.
Finally, the proposed rule would extend the compliance date for the
advanced approaches. Each item is discussed below.
II. Proposed Requirements
A. Guarantees on Commingled Securities
The ERCF includes risk-based, leverage, and buffer capital
requirements for guarantees on commingled securities--certain
resecuritizations guaranteed by a combination of Fannie Mae and Freddie
Mac, described more fully below. For risk-based capital, an Enterprise
is currently required to apply a 20 percent risk weight on exposures to
the other Enterprise in a commingled security. For leverage capital and
buffer calculations, an Enterprise is currently required to apply a 100
percent credit conversion factor to these exposures because they are
off-balance sheet guarantees. The 20 percent risk weight and 100
percent credit conversion factor for guarantees on commingled
securities may not accurately reflect the counterparty risks posed by
commingling activities and in certain circumstances may impair the
liquidity of the Enterprises' securities, which may adversely affect
the nation's housing finance market. The proposed rule would reduce the
risk weight and the credit conversion factor for guarantees on
commingled securities to 5 percent and 50 percent, respectively.
On February 28, 2019, FHFA issued a final rule on common MBS known
as the Uniform Mortgage-Backed Security (UMBS) with the purpose of
enhancing liquidity in the MBS marketplace and fostering the efficiency
and liquidity of the secondary mortgage market. On June 3, 2019, the
Enterprises launched newly issued UMBS. The UMBS are a single-class
security issued by either Fannie Mae or Freddie Mac backed by single-
family mortgage loans purchased by the issuing Enterprise. For the UMBS
market to operate successfully, market participants must continue to
accept UMBS as fungible irrespective of the issuing Enterprise. That
is, investors generally must agree that a UMBS of a certain coupon,
maturity, and loan origination year issued by one Enterprise is roughly
equivalent to the corresponding UMBS issued by the other Enterprise.\2\
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\2\ To support investor confidence in that fungibility, FHFA
adopted a final rule governing Enterprise actions affecting UMBS
cash flows to investors (12 CFR part 1248), publishes quarterly
prepayment monitoring reports, and limits certain pooling practices
with respect to the creation of UMBS.
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To foster fungibility, each Enterprise may issue ``Supers,'' which
are single-class resecuritizations of UMBS. The securities underlying
Supers may be commingled, i.e., Supers may be backed by both securities
that are issued and guaranteed by Fannie Mae and securities that are
issued and guaranteed by Freddie Mac. The Enterprises may also issue
collateralized mortgage obligations, or CMOs, and real estate mortgage
investment conduits, or REMICs, which are each a type of structured
security in which the collateral can include UMBS. If an Enterprise
guarantees a security backed in whole or in part by securities of the
other Enterprise, the Enterprise is obligated under its guarantee to
fund any shortfall in the event that the other Enterprise fails to make
a payment due on its securities.\3\ Investors in commingled securities
benefit from the original guarantees extended by guarantors of the
underlying collateral, as well as the additional guarantees of
resecuritizing Enterprise, including on the commingled collateral.
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\3\ The Enterprises have entered into an indemnification
agreement relating to commingled securities issued by the
Enterprises. The indemnification agreement obligates each Enterprise
to reimburse the other for any such shortfall.
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As a result of these multiple guarantees, the current 20 percent
risk weight and 100 percent credit conversion factor for commingled
securities may not accurately reflect these counterparty risks and, in
certain circumstances, may impair the liquidity of the Enterprises'
securities. However, despite their current Treasury support under the
PSPAs, the Enterprises also remain privately-owned corporations, and
their obligations do not have the explicit guarantee of the full faith
and credit of the United States. Therefore, the MBS and other
obligations of an Enterprise pose some degree of counterparty risk.
The proposed rule would reduce the risk weight for guarantees on
commingled securities from 20 percent to 5 percent to better align the
capital requirements with the inherent counterparty risk. A lower risk
weight should reduce an Enterprise's incentive to only guarantee Supers
securities collateralized by its own UMBS, leading to different volumes
and investor perceptions of UMBS issued by each Enterprise, and
potentially leading to a bifurcation of UMBS pricing and trading.
Several commenters on FHFA's 2020 notice of proposed rulemaking on
Enterprise capital \4\ recommended FHFA implement a similar treatment,
while also stating that an Enterprise's exposures to the other
Enterprise do not increase aggregate credit risk and the 20 percent
risk weight is therefore excessive.
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\4\ 85 FR 39274 (June 30, 2020).
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The risk-weight floor assigned to any retained CRT exposure is 5
percent.\5\ This risk weight applies to senior tranches of CRT
transactions that absorb catastrophic levels of loss only after
resources to absorb expected and unexpected losses are exhausted.
Similarly, the losses that an Enterprise would experience from
commingled securities would likely occur in remote circumstances
through sustained catastrophic levels of loss after the other
Enterprise has exhausted its loss-absorbing financial resources.
Therefore, the proposed 5 percent risk weight for credit exposures
arising out of guarantees on commingling activities would align with
the risk-weight floor for retained CRT exposures.
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\5\ 87 FR 14764 (March 16, 2022).
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The proposed rule would also reduce the credit conversion factor
for guarantees on commingled securities from 100 percent to 50 percent.
To enhance the liquidity of UMBS and the overall stability of the
secondary mortgage market, the leverage and buffer requirements for
guarantees on commingled securities would also need to be updated. FHFA
proposes to accomplish this by reducing the impact of these guarantees
on an Enterprise's adjusted total assets. According to generally
accepted accounting principles, an Enterprise's guarantee of commingled
collateral is not consolidated on the balance sheet because the
Enterprise issuing the guarantee does not have any rights or powers to
direct the activities of the underlying commingled resecuritization
trust and is not the primary beneficiary of its activities.\6\ Under
the ERCF, off-balance sheet assets are subject to a range of credit
conversion factors to determine adjusted total assets. FHFA's proposal
to update the credit conversion factor for guarantees on commingled
securities to 50 percent would align with the prevailing regulatory
capital treatment for off-balance sheet undrawn commitments with an
original maturity of more than one year that are not
[[Page 15309]]
unconditionally cancelable by the Enterprise.
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\6\ FASB ASC 810.
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The proposed changes to the requirements for guarantees on
commingled securities would affect both risk-weighted assets and
adjusted total assets. FHFA estimates that under the proposed rule, the
total common equity tier 1 capital (CET1) required to meet the risk-
based capital requirements and buffers for the Enterprises' guarantees
on commingled securities as of June 30, 2022 would decline by
approximately $5.1 billion.
Question 1: What, if any, other factors should FHFA consider in its
determination of a 5 percent risk weight and 50 percent credit
conversion factor for guarantees on commingled securities?
Question 2: Is the proposed 5 percent risk weight for guarantees on
commingled securities appropriately calibrated?
Question 3: Is the proposed 50 percent credit conversion factor for
guarantees on commingled securities appropriately calibrated?
Question 4: Should FHFA adjust the regulatory capital treatment for
exposures to MBS guaranteed by the other Enterprise to mitigate any
risk of disruption to the UMBS?
Question 5: Should FHFA consider a different risk weight for
second-level resecuritizations backed by UMBS?
Question 6: What should be the regulatory capital treatment of any
credit risk mitigation effect of any indemnification or similar
arrangements between the Enterprises relating to UMBS
resecuritizations?
Question 7: Should FHFA adopt different risk weights for MBS
guaranteed by an Enterprise and the unsecured debt of an Enterprise?
B. Multifamily Government Subsidy Risk Multiplier
The methodology for calculating multifamily credit risk weights in
the ERCF does not differentiate between multifamily mortgage exposures
secured by properties with a government subsidy and by properties
without a government subsidy. Two previous FHFA products that together
formed much of the basis for the ERCF--the Conservatorship Capital
Framework, an internal risk measurement framework established in 2017,
and FHFA's 2018 notice of proposed rulemaking on Enterprise Capital
Requirements \7\--each contained such a differentiation in the form of
a multifamily risk multiplier. FHFA did not include such a multiplier
in the ERCF due to calibration challenges caused by the relatively
infrequent instances of loss across multifamily loan programs that
include a government subsidy. However, several commenters on FHFA's
2020 notice of proposed rulemaking on Enterprise capital \8\
recommended that FHFA introduce a risk multiplier to reflect that
multifamily mortgage exposures associated with government-subsidized
properties are less risky than those associated with unsubsidized
properties, all else equal.
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\7\ 83 FR 33312 (July 17, 2018).
\8\ 85 FR 39274.
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Properties with government subsidies represent an important segment
of the Enterprises' multifamily business models. FHFA sets a yearly
limit or cap on the dollar value of the Enterprises' multifamily
acquisitions, ensuring they provide liquidity to the secondary market
without crowding out private competition. As part of the annual
acquisition limits, FHFA directs the Enterprises to meet specific
affordable housing or mission goals by acquiring multifamily loans
collateralized by properties that charge rents affordable to certain
segments of the population with specified income levels. Affordable
property units are available to renters at a rental rate below the
typical market rate, leading to generally strong demand for affordable
property units and therefore to relatively stable vacancy rates.
Government subsidies of affordable housing are issued either at the
Federal or state and local levels, typically in the form of a tax
credit, direct subsidy, or voucher reimbursement. The purpose of these
subsidies is to compensate property owners for providing below-market
rental rates on units within their multifamily properties. Many
subsidies last for multiple years and remain in place only if the
property owner meets certain program-specific requirements. Although
government-subsidized properties typically collect lower gross rents
per unit than comparable non-affordable properties and may generate
lower net operating income (NOI), property owners compensate for the
lower property income through the value of the government-subsidies.
Thus, property owners have an incentive to ensure the property follows
the contractual subsidy restrictions, including avoiding potential
default (60 or more days past due), to retain the government subsidy.
The primary subsidy programs include the Low-Income Housing Tax Credit
(LIHTC) program,\9\ Section 8 Housing Assistance Payment contracts, and
diverse state- and local-level programs.
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\9\ Section 42 of the Internal Revenue Code (26 U.S.C.A. section
42); 26 CFR 1.42 (Treasury regulations); each state agency's
qualified allocation plan, regulations and compliance manual, along
with a list of state and local LIHTC-allocating agencies, can be
found at https://www.huduser.gov/portal/datasets/lihtc.html.
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Many government subsidy programs require property owners to make a
specified percentage of units affordable to residents at or below a
certain percent of area median income (AMI). For example, to qualify
for the LIHTC program, a property owner must (in general) make at least
20 percent of the units available to renters at or below 50 percent of
AMI, make at least 40 percent of the units available to renters at or
below 60 percent of AMI, or make at least 40 percent of the units
available to renters with an average income of no more than 60 percent
of AMI and no units to renters with an income greater than 80 percent
of AMI. In practice, the number of units restricted as affordable at a
multifamily property often significantly exceeds the applicable minimum
program requirements because the penalties for non-compliance can be
quite costly. Minimum affordability criteria aim to ensure that the
primary benefits of government subsidy programs accrue to low-income
renters rather than to property owners acting in bad faith.
The proposed rule would introduce a risk multiplier equal to 0.6
for any multifamily mortgage exposures secured by one or more
properties each with at least one applicable government subsidy,
subject to certain affordability criteria. The applicable government
subsidies would be limited to the following three primary subsidy
programs: (i) LIHTC, (ii) Section 8 project-based rental assistance,
and (iii) state and local affordable housing programs that require the
provision of affordable housing for the life of the loan. A multifamily
mortgage exposure meeting the collateral criteria would qualify for the
0.6 risk multiplier if the Enterprise can verify that each property
securing the exposure has at least 20 percent of its units restricted
as affordable units, where the affordability restriction means less
than or equal to 80 percent of AMI.
For a multifamily mortgage exposure to qualify for the government
subsidy multiplier, the properties securing the exposure must have
significant, long-term, and continuous government subsidies. LIHTC and
project-based Section 8 programs meet these criteria, so to ensure
alignment in this regard, the proposed rule would require that
qualifying state and local affordable housing programs require
affordable
[[Page 15310]]
housing to be provided for the life of the loan.
The addition of a government subsidy multiplier would affect risk-
weighted assets, only. FHFA estimates that under the proposed rule,
required CET1 capital for the Enterprises' multifamily mortgage
exposures as of June 30, 2022 would decline by approximately $0.4
billion.
Question 8: Is the 0.6 risk multiplier for multifamily mortgage
exposures secured by properties with a government subsidy appropriately
calibrated?
Question 9: Is the restriction that at least 20 percent of units
must be made available at or below 80 percent of AMI appropriately
calibrated?
Question 10: Should FHFA consider additional thresholds and/or
affordability restrictions for a multifamily mortgage exposure to
qualify for a risk multiplier greater than 0.6 but less than 1.0?
Question 11: Do FHFA's proposed categories of applicable government
subsidies appropriately capture the population of multifamily
government subsidies that are significant, long-term, and continuous?
Question 12: Are there data or analyses available that would
support a multi-tiered government subsidy risk multiplier that varies
with the level of subsidy or by other relevant factors? If so, what
data and factors?
C. Derivatives and Cleared Transactions
An Enterprise 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 contract. Therefore, the ERCF
requires an Enterprise to hold risk-based capital based on the exposure
amount of its derivative contracts.
The current rule requires an Enterprise to use the current exposure
methodology (CEM) to determine the exposure amount of each derivative
contract. The risk-weighted asset amount for the derivative contract is
then the product of the exposure amount and the risk weight of the
counterparty. The ERCF requires an Enterprise to use CEM to determine
the exposure amounts of their over-the-counter (OTC) derivative
contacts and cleared derivative contracts, as well as determine the
risk-weighted assets amount of their contributions of commitments to
mutualized loss sharing agreements with central counterparties (i.e.,
default fund contributions).
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). Current credit exposure is equal to the greater of zero
and the on-balance sheet fair value of the derivative contract. PFE
approximates the Enterprise'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 of the derivative contract. The ERCF
provides the conversion factors in a look-up table that is based on the
derivative contract's type and remaining maturity. The potential
exposure generally increases with an increase in volatility and the
duration of the derivative contract.
CEM was developed before the financial crisis and does not reflect
recent market conventions and regulatory requirements that are designed
to reduce the risks associated with derivative contracts. This can lead
to a significant mismatch between the risks of derivative portfolios
and the regulatory capital that the Enterprises must hold against them.
Examples of CEM drawbacks include a lack of differentiation between
margined and unmargined derivative contracts and inadequate recognition
of the risk-reducing benefits of a balanced derivatives portfolio.
Furthermore, the supervisory conversion factors provided under CEM were
developed prior to the 2007-2008 financial crisis and they have not
been recalibrated to reflect the stress volatilities observed in recent
years.
For these reasons, the Basel Committee on Banking Supervision
(Basel Committee) developed the SA-CCR and published it as a final
standard in 2014.\10\ The U.S. banking regulators adopted SA-CCR as a
replacement for CEM in 2020.
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\10\ https://www.bis.org/publ/bcbs279.pdf.
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SA-CCR provides important improvements to risk sensitivity and
calibration relative to CEM, including differentiation of margin and
non-margin trades and recognition of netting agreements, resulting in
more appropriate capital requirements for derivative contracts. One of
the concerns regarding the current regulatory capital treatment for
derivative contracts under CEM is 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 SA-CCR methodology
addresses these concerns.
Compared to CEM, SA-CCR offers a more risk-sensitive approach to
determine the replacement cost and PFE for a derivative contract.
Specifically, SA-CCR improves collateral recognition by differentiating
between margined and unmargined derivative contracts. SA-CCR also
better captures recently observed stress volatilities among the primary
risk drivers for derivative contracts. SA-CCR is a standardized, non-
modelled approach that is relatively straightforward to implement.
The proposed rule would require an Enterprise to calculate the
exposure amounts of OTC and cleared derivative contracts using SA-CCR
rather than CEM, as well as the risk-weighted asset amounts of default
fund contributions. The Enterprises would also be required to use SA-
CCR to determine the exposure amount of their derivative contracts for
inclusion in adjusted total assets. Use of SA-CCR would allow an
Enterprise to recognize the meaningful, risk-reducing relationship
between derivative contracts within a balanced derivatives portfolio
and to recognize the risk-mitigation effects of guarantees, credit
derivatives, and collateral for purposes of its risk-based capital
requirements. In addition, the replacement of CEM with SA-CCR would
result in better alignment between the ERCF and both the U.S. banking
framework and the international standards issued by the Basel
Committee.\11\
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\11\ To note one point of departure, the proposed rule would not
include the internal models methodology from 12 CFR 217.132(d) to
reduce reliance on internal models.
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Under the proposed rule and consistent with the U.S. banking
framework, the Enterprises would apply SA-CCR in the following ways:
1. Netting Sets
Under SA-CCR, an Enterprise would calculate the exposure amount of
its derivative contract at the netting set level. The proposed rule
would define a netting set to mean either one derivative contract
between an Enterprise and a single counterparty, or a group of
derivative contracts between an Enterprise and a single counterparty
that are subject to a qualifying master netting agreement (QMNA). The
proposed rule would retain the current definition of a QMNA.
2. Hedging Sets
For the PFE calculation under SA-CCR, an Enterprise would fully or
partially net derivative contracts within
[[Page 15311]]
the same netting set that share similar risk factors. This approach
would recognize that derivative contracts with similar risk factors
share economically meaningful relationships with close correlations
that make netting appropriate. In contrast, CEM recognizes only a
portion of the netting benefits of derivative contracts subject to a
QMNA, without accounting for relationships between the underlying risk
factors of derivative contracts.
Under SA-CCR, a hedging set means 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 the regulatory correlation
assumptions between risk factors in the hedging set.
3. Derivative Contract Amount for the PFE Component Calculation
Similar to CEM, an Enterprise would use an adjusted derivative
contract amount for the PFE component calculation under SA-CCR.
However, as part of the estimate, SA-CCR would use updated supervisory
factors that reflect the stress volatilities observed during the
financial crisis. The supervisory factors would reflect the variability
of the primary risk factors of the derivative contract over a one-year
time 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.
4. Collateral Recognition and Differentiation Between Margined and
Unmargined Derivative Contracts
Under CEM, an Enterprise recognizes the collateral only after the
exposure amount has been determined. Under the proposed rule, SA-CCR
would account for collateral directly within the exposure amount
calculation. For replacement cost, the proposed rule would recognize
collateral on a one-for-one basis. For PFE, SA-CCR would use the
concept of a PFE multiplier, which would allow an Enterprise to reduce
the PFE amount through recognition of over-collateralization, in the
form of both variation margin and independent collateral. It would also
account for negative fair value amounts of the derivative contracts
within the netting set. In addition, the proposed rule would
differentiate between margined and unmargined derivative contracts,
such that the netting set subject to variation margin would always have
an exposure amount no higher than an equivalent netting set that is not
subject to a variation margin agreement.
To accommodate the introduction of the SA-CCR into the ERCF's
standardized approach, the proposed rule would make a series of
corresponding modifications, including adding appropriate defined terms
to ERCF's definitions and updating the calculation of total risk-
weighted assets. Notably, the proposed rule would replace the current
requirements for cleared transactions (12 CFR 1240.37) and
collateralized transactions (12 CFR 1240.39) with modified requirements
from the U.S. banking framework's advanced approaches (12 CFR 217.133
and 12 CFR 217.132(b)). As a result, the proposed rule's requirements
for cleared transactions would reflect the U.S. banking framework's
risk weights on cleared transactions and risk-weighted assets on
default fund contributions. The proposal would depart from the U.S.
banking framework by omitting exposure calculations related to internal
model methodology to reduce reliance on the Enterprises' internal model
results.
The proposed rule's requirements for collateralized transactions
would maintain the current collateral haircut approach and standard
supervisory haircuts, both of which are also included in the U.S.
banking framework. However, the proposed rule's requirements for
collateralized transactions would remove the current simple approach
and add the U.S. banking framework's simple value-at-risk (VaR)
methodology to align with the U.S. banking framework's advanced
approaches application of collateralized transactions.
The proposed rule would also add credit valuation adjustment (CVA)
risk-weighted assets to the calculation of standardized total risk-
weighted assets. The CVA is a fair value adjustment that reflects
counterparty credit risk in the valuation of OTC derivative contracts.
CVA risk-weighted assets cover the risk of incurring mark-to-market
losses because of the deterioration in the creditworthiness of an
Enterprise's counterparties. The proposed rule would include the U.S.
banking framework's formulaic simple CVA approach but not the advanced
CVA approach. This departure from the U.S. banking framework would
reduce reliance on the Enterprises' internal model results.
The proposed changes to the approaches for derivatives and cleared
transactions would affect both risk-weighted assets and adjusted total
assets. FHFA estimates that under the proposed rule, the total CET1
capital required to meet the risk-based capital requirements and
buffers for the Enterprises' derivatives and cleared transactions as of
September 30, 2022 would increase by less than $0.1 billion.
Question 13: In addition to the risk-sensitivity enhancements SA-
CCR provides relative to CEM, what, if any, other factors should FHFA
consider in its determination to replace CEM with SA-CCR?
D. Representative Credit Scores for Single-Family Mortgage Exposures
Credit scores are a primary risk factor for determining the
riskiness of a single-family mortgage exposure due to their strong
correlation with the likelihood of a borrower default. Therefore,
credit scores are an important input in the ERCF calculation of risk
weights for single-family mortgage exposures, both at origination
(original credit score) and over time (refreshed credit score). A
single-family mortgage exposure is normally associated with multiple
credit scores because an exposure can have multiple borrowers and each
borrower can have multiple scores. Often, each borrower has three
credit reports and, therefore, three credit scores, one from each
national consumer reporting agency (repository). To account for
multiple credit scores associated with a single-family mortgage
exposure, the ERCF includes a procedure to determine a single
representative credit score for each single-family mortgage exposure.
The proposed rule would modify the current procedure for selecting
a representative credit score to reflect FHFA's announcement \12\ in
October 2022 that the Enterprises will require two, rather than three,
credit reports from the repositories (bi-merge credit report
requirement). While the implementation date for the bi-merge credit
report requirement has yet to be announced, the proposed rule would
position the Enterprises to account for the new requirement upon
implementation.
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\12\ FHFA Announces Validation of FICO 10T and VantageScore 4.0
for Use by Fannie Mae and Freddie Mac [bond] Federal Housing Finance
Agency, available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Validation-of-FICO10T-and-Vantage-Score4-for-FNM-FRE.aspx.
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The current ERCF instructs the Enterprises to use a two-step
procedure for identifying the representative credit score on a single-
family mortgage exposure. In the first step, an Enterprise
[[Page 15312]]
selects a single score for each borrower on the loan by either
selecting the median score if the borrower has scores from three
repositories or selecting the lowest score if the borrower has fewer
than three scores. In the second step, an Enterprise determines the
representative score for the exposure by selecting the lowest single
score across all borrowers from step one.
After the adoption of the bi-merge credit score requirement, the
current procedure for determining a representative credit score could
result in a significant downward shift in representative credit scores
for most borrowers. This is because with the bi-merge credit report
requirement, there is a higher likelihood that the representative
credit score for most borrowers would end up being the lower of two
scores rather than the median of three scores.
To mitigate this risk, the proposed rule would replace the first
step in determining a single-family mortgage exposure's representative
credit score. Rather than using the median or lowest score, the
proposed rule would require an Enterprise to calculate the average
credit score across repositories for each borrower in step one. This
change should mitigate the concern about downward bias, as the average
across the two scores is closer to the center of the borrower's credit
score distribution than the minimum across scores. To validate this
assumption, FHFA analyzed original credit scores from over 39 million
borrowers associated with loans acquired between 2010 and 2022 and
found that changing the procedure from the minimum of the medians to
the minimum of the averages (where for each borrower FHFA selected, at
random, two out of three scores) had little aggregate effect on the
average representative score. The results of this analysis suggested
that under the current rule, the average representative credit score
was 750.6, whereas under the proposed rule, the average representative
credit score was 750.3 using two borrower scores (selected at random
from the set of three) and 750.7 using three borrower scores.
The proposed change to step one would also alleviate concerns about
when the bi-merge credit score requirement will be implemented. To
examine the effect of the proposed change before the implementation
date of the bi-merge credit score requirement, FHFA repeated the
previous analysis but analyzed the difference between the use of the
median of three scores and the use of the mean of three scores. The
results of this analysis again showed little change (750.6 vs. 750.7)
in the central tendency of the representative credit score
distributions, and it showed there is little difference between the two
approaches in aggregate. Under the proposed rule, FHFA expects that for
the period before the implementation date of the bi-merge credit score
requirement the borrower credit score would typically be based on three
scores, and after the implementation date the borrower credit score
would typically be based on two scores.
The proposed change to the procedure for selecting a representative
credit score would affect risk-weighted assets, only. FHFA estimates
that under the proposed rule, the total CET1 capital required to meet
the risk-based capital requirements for the Enterprises' single-family
mortgage exposures as of June 30, 2022 would decline by less than $0.1
billion.
Question 14: What, if any, changes should FHFA consider to the
proposed methodology for determining a representative credit score? For
example, should FHFA consider requiring an Enterprise to calculate a
representative credit score by averaging credit scores across multiple
borrowers in step two rather than by taking the lowest score across
those borrowers?
E. Original Credit Scores for Single-Family Mortgage Exposures Without
a Representative Original Credit Score
As discussed above, credit scores play an important role in the
ERCF calculation of risk weights for single-family mortgage exposures
due to their strong correlation with the likelihood of a borrower
default. Credit scores are commonly used as a proxy for a borrower's
creditworthiness and are therefore a primary input in many lenders'
automated underwriting systems. Historically, and in particular prior
to the financial crisis, a borrower's lack of credit history and credit
score indicated a significant level of risk. Therefore, the current
ERCF requires an Enterprise to assign a credit score of 600 to any
single-family mortgage exposure where a permissible credit score cannot
be determined (unscored). This conservative assignation places single-
family mortgage exposures with unscored borrowers in the lowest
possible ERCF credit score buckets across the single-family base grids,
implying the highest level of risk.
However, advances in financial regulation and improvements in
mortgage underwriting and lending standards since the financial crisis
suggest that FHFA's initial credit score assignation for single-family
mortgage exposures associated with unscored borrowers may not
accurately reflect the prevailing level of credit risk in these
exposures. Although a missing credit score could be due to a data
error, today it is far more likely the loan was either manually
underwritten with the establishment of nontraditional credit and strict
requirements on property type, loan purpose, and DTI, or the loan was
underwritten through an automated system with more stringent
requirements than would be necessary if the borrower had an available
credit score.\13\
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\13\ In August 2021, FHFA announced that to expand access to
credit in a safe and sound manner, Fannie Mae would begin to
consider rental payment history as part of its mortgage underwiring
processes (https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Inclusion-of-Rental-Payment-History-in-Fannie-Maes-Underwriting-Process.aspx). In July 2022,
Freddie Mac made a similar announcement (https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-takes-further-action-help-renters-achieve).
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To reflect the post-crisis improvements in regulatory,
underwriting, and lending standards, as well as the recent inclusions
of positive rental payment histories in the Enterprises' automated
underwriting systems, the proposed rule would modify the assignation
process of an original credit score to a single-family mortgage
exposure without a permissible credit score at origination. FHFA
analyzed the two-year default performance of single-family mortgage
exposures associated with unscored borrowers relative to similar
exposures associated with scored borrowers and determined that unscored
exposures performed most similarly to scored exposures with original
credit scores in the range of 680 to 699. Therefore, subject to
Enterprise verification that none of the borrowers have a credit score
at one of the repositories, the proposed rule would require an
Enterprise to assign an original credit score of 680 to a single-family
mortgage exposure without a permissible credit score at origination.
After five months, an Enterprise would continue to assign a
refreshed credit score. To reflect the implied default performance in
the population of unscored borrowers, the proposed rule would modify
the definition of a refreshed credit score to mean the most recently
available credit score. For a single-family mortgage exposure without a
permissible credit score at origination, the refreshed credit score
would be either an updated credit score if one is available at the
credit repositories or the original credit score, as determined per the
proposed rule, if one is not.
[[Page 15313]]
The proposed change to the assignation process of an original
credit score to a single-family mortgage exposure without a permissible
credit score at origination would affect risk-weighted assets during
the period between origination and the later of 5 months and when a
borrower's refreshed credit score becomes available. FHFA estimates
that under the proposed rule, required CET1 capital for the
Enterprises' single-family mortgage exposures as of June 30, 2022 would
decline by less than $0.1 billion.
Question 15: What, if any, changes should FHFA consider to the
proposed methodology for determining an original credit score for a
single-family mortgage exposure without a permissible credit score at
origination?
F. Guarantee Assets
A guarantee asset is an on-balance sheet asset that represents the
present value of a future consideration for providing a financial
guarantee on a portfolio of mortgage exposures not recognized on the
balance sheet. Examples of such off-balance sheet exposures include,
but are not limited to, Freddie Mac's multifamily K-deals, Fannie Mae's
multifamily bond credit enhancements, and certain single-family
guarantee arrangements without securitization. The current ERCF does
not include an explicit risk weight for guarantee assets. As an ``other
asset'' not specifically assigned a different risk weight, an
Enterprise is required to assign a 100 percent risk weight (Sec.
1240.32(i)(5)) to guarantee assets.
The proposed rule would introduce a 20 percent risk weight for an
Enterprise's guarantee assets. This risk weight would reflect the risk-
weight floor for mortgage exposures in the ERCF as well as the minimum
risk weight for residential mortgage exposures under the Basel
framework. In addition, FHFA's proposal would promote consistency
across the financial system by aligning the risk weight for guarantee
assets with the risk weight assigned to exposures to an Enterprise in
the U.S banking framework.
The specification of a 20 percent risk weight for guarantee assets
would affect risk-weighted assets, only. FHFA estimates that under the
proposed rule, the total CET1 capital required to meet the risk-based
capital requirements for the Enterprises' guarantee assets as of
September 30, 2022 would decline by approximately $0.2 billion.
Question 16: What, if any, other factors should FHFA consider in
its determination that guarantee assets should be assigned an explicit
risk weight?
Question 17: Is the proposed 20 percent risk weight for guarantee
assets appropriately calibrated?
Question 18: Should FHFA include guarantee assets in its definition
of covered positions subject to market risk capital requirements?
G. Mortgage Servicing Assets
When a lender originates a mortgage loan, the lender may retain in
its portfolio or transfer to another party both the loan and the
servicing function, or the lender may separate the mortgage servicing
rights (MSRs) from the mortgage loan and transfer individually either
the loan or the MSR to another party. MSAs are, in general, assets
resulting from owning MSRs that are expected to generate future income
in exchange for performing the servicing function on one or more
mortgage loans.
MSA valuations rely on assessments of future economic variables and
are therefore subjective and subject to uncertainty. If interest rates
rapidly decline, such as during a stress event, MSA values can also
rapidly decline. In addition, adverse financial conditions may cause
liquidity strains for firms seeking to sell or transfer their MSAs,
further impacting the potential loss absorbing capacity of MSAs. For
these and other reasons, the U.S. banking framework requires banks to
capitalize MSAs through a combination of capital deductions and a 250
percent risk weight, and the current ERCF requires the Enterprises to
do the same.
The ERCF defines an MSA as the contractual right to service for a
fee mortgage loans that are owned by others. This definition reflects
the traditional practice of acquiring MSRs for mortgage loans not
already owned by the acquiring institution. However, it is unlikely
that the value of MSRs would be less subjective or subject to less
uncertainty if the underlying mortgage loans were already owned by the
acquiring institution rather than by others. Therefore, the proposed
rule would modify the definition of MSAs to include the contractual
right to service any mortgage loans, regardless of the owner of the
loan at the time the servicing rights are acquired.
FHFA anticipates that the proposed rule would not affect the total
CET1 capital required to meet the Enterprises' stability capital
buffers as of June 30, 2022.
Question 19: What, if any, changes should FHFA consider to the
proposed definition for MSAs?
Question 20: Does the proposed definition for MSAs include
circumstances in which an Enterprise acquires a contractual right to
service mortgage loans already owned by the Enterprise?
Question 21: Does the proposed definition for MSAs include
circumstances in which an Enterprise acquires a contractual right to
service mortgage loans but, for reasons including compliance with
generally accepted accounting principles, the servicing rights would
not result in the creation of an MSA in the absence of the proposed
requirement?
H. Time-Based Calls for CRT Exposures
For mortgage exposures that are included in a CRT, an Enterprise
has the option to calculate risk weights using the ``credit risk
transfer approach'' \14\ only if the CRT satisfies the ERCF's
``operational criteria for credit risk transfers.'' \15\ Under the
current rule, these operational criteria include restrictions for
clean-up calls. Clean-up calls are contractual provisions that permit
an originating Enterprise to redeem securitization exposures before
their stated maturity or call date. Time-based calls are contractual
provisions that permit an issuing Enterprise to redeem a securitization
exposure on one or more prespecified call dates. Time-based calls,
which are integral to the Enterprises' credit risk management and are
routinely used by the Enterprises to manage CRT economics, are not
explicitly included as eligible clean-up calls. This lack of
specificity has led to a lack of clarity about the eligibility of CRT
transactions with time-based calls under the credit risk transfer
approach in the ERCF.
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\14\ 12 CFR 1240.44.
\15\ 12 CFR 1240.41(c).
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The proposed rule would define an eligible time-based call as a
time-based call that:
(i) Is exercisable solely at the discretion of the issuing
Enterprise, and with a non-objection letter from FHFA prior to being
exercised;
(ii) Is not structured to avoid allocating losses to securitization
exposures held by investors or otherwise structured to provide at most
de minimis credit protection to the securitization; and
(iii) Is only exercisable five years after the securitization
exposure's issuance date.
The proposed changes would clarify that the ERCF permits time-based
calls, with restrictions. To ensure a significant length of time before
the first prespecified exercise date, the proposed rule would require
that the eligible time-based calls have a first exercise call date at
least five years after issuance. Further, to ensure safety and
soundness,
[[Page 15314]]
an Enterprise must request FHFA approval before exercising its time-
based calls.
To satisfy the proposed operational criteria for CRT, any time-
based call associated with a CRT must be an eligible time-based call.
FHFA anticipates that the proposed rule would result in an
insignificant change to the total CET1 capital required to meet the
risk-based capital requirements for the Enterprises' CRT exposures as
of June 30, 2022.
Question 22: What, if any, changes should FHFA consider to the
proposed definitions of time-based calls and eligible time-based calls
for CRT?
I. Interest-Only Mortgage-Backed Securities
An IO MBS is a financial instrument that receives solely the
interest payment stream generated by a pool of mortgages. An Enterprise
may securitize the IO income stream from a pool of mortgages to better
manage the interest rate risk exposure of the pool, or an Enterprise
may buy IO securities of other issuers to hold in its portfolio as
investment assets. Through the ownership of these investments, the
Enterprises are exposed to both credit and market risk. This discussion
pertains to credit risk only, as risk weights for market risk on IO
securities are contemplated in subpart F of the ERCF.
Under the current rule, an Enterprise must assign a zero percent
risk weight to any MBS guaranteed by the Enterprise (other than any
retained CRT exposure). Thus, by implication, IO MBS guaranteed by the
securitizing Enterprise should receive a zero percent risk weight.
However, the ERCF also states that the risk weight for a non-credit-
enhancing IO MBS must not be less than 100 percent. Therefore, there is
a need to clarify the risk weight for IO MBS to clarify whether a zero
percent or 100 percent risk weight should apply.
An Enterprise could be both the issuer of and investor in an IO
MBS. The credit risk on IO MBS issued and guaranteed by an Enterprise
is significantly different from that of an IO MBS issued by a non-
Enterprise entity and held in the Enterprise's retained portfolio as an
investment.\16\ Therefore, the proposed rule would require an
Enterprise to apply a different risk weight to IO MBS issued and
guaranteed by the Enterprise versus an IO MBS issued by a non-
Enterprise entity. This bifurcation would better align the capital
requirements for IO MBS to the risks inherent in the positions.
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\16\ Risk weights for an Enterprise's exposures to the other
Enterprise are determined in 12 CFR 1240.32(c).
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For IO MBS issued and guaranteed by an Enterprise, the proposed
rule would require the issuing Enterprise to assign a zero percent risk
weight to that exposure. The zero percent risk weight reflects that the
Enterprise has already capitalized the credit risk on the underlying
single-family mortgage exposures and that there is no incremental
credit risk due to the securitization process. For IO MBS issued by a
non-Enterprise entity, the proposed rule would require the Enterprise
to assign a 100 percent risk weight to that exposure. The 100 percent
risk weight reflects that there is incremental credit risk accruing to
the investing Enterprise through the acquisition of the IO MBS.
Therefore, an Enterprise must hold credit risk capital against that
asset. For IO MBS issued by the other Enterprise, the ERCF would
continue to require an Enterprise to assign a 20 percent risk weight to
that exposure.
FHFA anticipates that the proposed rule would not affect the total
CET1 capital required to meet the risk-based capital requirements for
the Enterprises' IO MBS as of June 30, 2022.
Question 23: Is the 100 percent risk weight assigned to the IO MBS
issued by a non-Enterprise entity appropriately calibrated?
Question 24: Is the 20 percent risk weight assigned to the IO MBS
issued by the other Enterprise appropriated calibrated?
J. Single-Family Countercyclical Adjustment
In the ERCF, the mark-to-market loan-to-value ratio (MTMLTV) of a
single-family mortgage exposure is a key input to determining credit
risk-weighted assets for these exposures. The rule requires an
Enterprise to use the FHFA Purchase-only State-level House Price Index
(HPI) to update a property value when calculating an MTMLTV. The MTMLTV
is then adjusted up or down by the application of a single-family
countercyclical adjustment. This adjustment seeks to reduce the
procyclicality of the capital requirements by increasing requirements
when house prices are significantly above their long-term trend and
reducing requirements when house prices are significantly below their
long-term trend.
In calculating an MTMLTV, the ERCF mandates a six-month delay
between loan origination and the first property value adjustment to
reflect the time lag between loan origination and the publication of
the FHFA HPI for the quarter following origination. However, there is
no similar delay in the application of the single-family
countercyclical adjustment. When house price appreciation is
consistently high, such as in 2020 and 2021, this misalignment results
in rapid increases to the risk-weighted assets for single-family
mortgage exposures for the first six months due to the countercyclical
adjustment, followed by a rapid decrease with the application of the
first property value adjustment. In 2020 and 2021, this misalignment
created a significant challenge for the Enterprises' reinsurance CRT
programs. While FHFA has continually encouraged the Enterprises to
reduce the time lag between loan origination and when they acquire
credit protection, the misalignment created an incentive for the
Enterprises to wait seven months before acquiring protection. By
waiting until the capital requirement decreased mechanically, the
Enterprises were able to reduce the amount of credit protection they
acquired and save on premium costs.
The proposed rule would correct this misalignment by requiring an
Enterprise to apply the first single-family countercyclical adjustment
simultaneously with the first property value adjustment. This
modification would reduce the volatility in the capital requirement for
a single-family mortgage exposure over the first six months after
origination and mitigate the incentive for the Enterprises to delay
acquiring credit protection.
FHFA anticipates that adjusting the timing of the first single-
family countercyclical adjustment would not affect the total CET1
capital required to meet the risk-based capital requirements for the
Enterprises' single-family mortgage exposures as of June 30, 2022.
Question 25: What, if any, changes should FHFA consider to the
proposed adjustment to the timing and application of the single-family
countercyclical adjustment?
K. Stability Capital Buffer
The stability capital buffer is an Enterprise-specific amount of
common equity tier 1 capital in excess of an Enterprise's risk-based
capital requirements. It is tailored to the risk that an Enterprise's
default or other financial distress could have on the liquidity,
efficiency, competitiveness, or resiliency of the national housing
finance markets. The stability capital buffer is based on an
Enterprise's share of the total residential mortgage debt outstanding
in the United States and is expressed as a percent of adjusted total
assets.
[[Page 15315]]
Under the current rule, an Enterprise's share of residential
mortgage debt outstanding is assessed annually, and the stability
capital buffer is derived from that assessment. Increases in the
stability capital buffer are implemented with a two-year delay, while
decreases are implemented with a one-year delay. These implementation
delays contribute to the overall stability of the capital framework by
providing the Enterprises with time to adjust their capital positions
in response to changes in the stability capital buffer. However, having
increases and decreases implemented with different delays potentially
creates a situation where an increase and a decrease in the stability
capital buffer are scheduled to become effective at the same time. To
address this situation, the proposed rule would clarify that if an
increase and decrease in the stability capital buffer are scheduled for
the same date, the Enterprise should rely on the more recent data and
implement the decrease, disregarding the increase.
FHFA anticipates that the proposed rule would not affect the total
CET1 capital required to meet the Enterprises' stability capital
buffers as of June 30, 2022.
Question 26: What, if any, changes should FHFA consider to the
proposed change to the application of the stability capital buffer?
L. Advanced Approaches
The ERCF's advanced approaches for determining risk-weighted assets
rely on an Enterprise's internal models. These approaches require an
Enterprise to maintain its own processes for identifying and assessing
credit, market, and operational risk. They are intended to ensure that
an Enterprise continues to enhance its risk management and analytical
systems and not rely solely on its regulator's views on risk tolerance,
risk measurement, and capital allocation. Because of the effort
required to develop the governance processes and risk models necessary
for effectuating the advanced approaches, the ERCF includes a
transition period that delays the compliance date for the advanced
approaches until January 1, 2025.
In December 2017, the Basel Committee finalized its Basel III
framework.\17\ As part of these post-crisis reforms, the Basel
Committee sought to reduce excess variability of risk-weighted assets
and restore credibility in the calculation of risk-weighted assets, in
part by significantly constraining the use of internally-modeled
approaches. Much of the finalized Basel III framework became effective
in 2022.
---------------------------------------------------------------------------
\17\ https://www.bis.org/bcbs/publ/d424.pdf.
---------------------------------------------------------------------------
U.S. banking regulators have yet to implement many of the reforms
outlined in the finalized Basel III framework. However, on September 9,
2022, the U.S. banking regulators formally reaffirmed their commitment
to implementing enhanced regulatory capital requirements that align
with the finalized Basel III framework.\18\ Further, in a recent
speech,\19\ the Vice Chair for Supervision of the Board of Governors of
the Federal Reserve System noted that the last set of comprehensive
adjustments to the Basel III framework, now under consideration in the
U.S., would ``further strengthen capital rules by reducing reliance on
internal bank models.''
---------------------------------------------------------------------------
\18\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220909a.htm.
\19\ https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm.
---------------------------------------------------------------------------
Because the U.S. banking regulators are currently contemplating the
last set of comprehensive adjustments to the Basel III framework,
including the reliance on internal models, and given the costly nature
of developing suitable internal models and governance processes for the
advanced approaches, the proposed rule would further extend the
compliance date for an Enterprise's advanced approaches to January 1,
2028. Until that time, the Enterprises will continue to rely on the
standardized approach.
III. Effective Date
Under the rule published on December 17, 2020 establishing the
ERCF, an Enterprise will not be subject to any requirement in the ERCF
until the compliance date for the requirement as detailed in the ERCF.
The effective date for the ERCF was February 16, 2021. The effective
date for the ERCF amendments in this proposed rule would be 60 days
after the day of publication of the final rule in the Federal Register.
IV. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The proposed
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified that the regulation will not have
a significant economic impact on a substantial number of small entities
(5 U.S.C. 605(b)). FHFA has considered the impact of the proposed rule
under the Regulatory Flexibility Act. FHFA certifies that the proposed
rule, if adopted as a final rule, would not have a significant economic
impact on a substantial number of small entities because the proposed
rule is applicable only to the Enterprises, which are not small
entities for purposes of the Regulatory Flexibility Act.
List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.
Accordingly, for the reasons stated in the Preamble, under the
authority of 12 U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-
4612, 4631-36, FHFA proposes to amend part 1240 of title 12 of the Code
of Federal Regulations as follows:
PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
0
1. The authority citation for part 1240 continues to read as follows:
Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
4611-4612, 4631-36.
0
2. Amend Sec. 1240.2 by:
0
a. Revising paragraphs (1) through (3) in the definition of ``Adjusted
total assets'';
0
b. Adding in alphabetical order the definitions of ``Backtesting,''
``Basis derivative contract,'' ``Commercial end-user,'' ``Commingled
security,'' ``Credit default swap,'' and ``Credit valuation
adjustment'';
0
c. Removing the definitions of ``Current exposure'' and ``Current
exposure methodology'';
0
d. Adding in alphabetical order the definition of ``Eligible time-based
call'';
0
e. In the definition of ``Exposure amount'':
0
i. In paragraph (1), removing the words ``; an OTC derivative
contract'' and adding in their place the words ``(other than an OTC
derivative contract''; and
0
ii. In paragraph (3), adding the words ``or exposure at default (EAD)''
after the word ``amount'';
0
f. Revising paragraph (2) in the definition of ``Financial
collateral'';
[[Page 15316]]
0
g. Adding in alphabetical order the definitions of ``Guarantee asset,''
and ``Independent collateral'';
0
h. Revising the definition of ``Mortgage servicing assets'';
0
i. Adding in alphabetical order the definition of ``Net independent
collateral amount'';
0
j. Revising the definition of ``Netting set'';
0
k. Adding in alphabetical order the definitions of ``Qualifying cross-
product master netting agreement,'' and ``Speculative grade'';
0
l. In the definition of ``Standardized total risk-weighted assets'',
redesignating paragraphs (1)(vi) and (1)(vii) as paragraphs (1)(vii)
and (1)(viii), adding new paragraph (1)(vi), and revising newly
designated paragraph (1)(viii); and
0
m. Adding in alphabetical order the definitions of ``Sub-speculative
grade,'' ``Time-based call,'' ``Uniform Mortgage-backed Security,''
``Value-at-Risk,'' ``Variation margin,'' ``Variation margin amount,''
and ``Volatility derivative contract'';
The additions and revisions read as follows:
Sec. 1240.2 Definitions.
* * * * *
Adjusted total assets * * *
(1) The balance sheet carrying value of all of the Enterprise'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 Generally Accepted Accounting
Principles (GAAP), less amounts deducted from tier 1 capital under
Sec. 1240.22(a), (c), and (d), and less the value of securities
received in security-for-security repo-style transactions, where the
Enterprise 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, less the fair value of any
derivative contracts;
(2)(i) The potential future exposure (PFE) for each netting set to
which the Enterprise is a counterparty (including cleared transactions
except as provided in paragraph (9) of this definition and, at the
discretion of the Enterprise, 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 GAAP), as determined under Sec.
1240.36(c)(7), in which the term C in Sec. 1240.36(c)(7)(i) equals
zero, and, for any counterparty that is not a commercial end-user,
multiplied by 1.4. For purposes of this paragraph, an Enterprise may
set the value of the term C in Sec. 1240.36(c)(7)(i) equal to the
amount of collateral posted by a clearing member client of the
Enterprise in connection with the client-facing derivative transactions
within the netting set; and
(ii) An Enterprise may choose to exclude the PFE of all credit
derivatives or other similar instruments through which it provides
credit protection when calculating the PFE under Sec. 1240.36(c),
provided that it does so consistently over time for the calculation of
the PFE for all such instruments;
(3)(i)(A) The replacement cost of each derivative contract or
single product netting set of derivative contracts to which the
Enterprise is a counterparty, calculated according to the following
formula, and, for any counterparty that is not a commercial end-user,
multiplied by 1.4:
Replacement Cost = max {V-CVMr + CVMp;0{time}
Where:
(1) 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 (9) of this definition and,
at the discretion of the Enterprise, 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 GAAP);
(2) CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the conditions
in paragraphs (3)(ii) through (vi) of this definition, or, in the case
of a client-facing derivative transaction, the amount of collateral
received from the clearing member client; and
(3) 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 (3)(ii) through (vi) of this definition, or, in the case of
a client-facing derivative transaction, the amount of collateral posted
to the clearing member client;
(B) Notwithstanding paragraph (3)(i)(A) of this definition, where
multiple netting sets are subject to a single variation margin
agreement, an Enterprise must apply the formula for replacement cost
provided in Sec. 1240.36(c)(10)(i), in which the term CMA
may only include cash collateral that satisfies the conditions in
paragraphs (3)(ii) through (vi) of this definition; and
(C) For purposes of paragraph (3)(i)(A) of this definition, an
Enterprise must treat a derivative contract that references an index as
if it were multiple derivative contracts each referencing one component
of the index if the Enterprise elected to treat the derivative contract
as multiple derivative contracts under Sec. 1240.36(c)(5)(vi);
(ii) 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);
(iii) Variation margin is calculated and transferred on a daily
basis based on the mark-to-fair value of the derivative contract;
(iv) The variation margin transferred under the derivative contract
or the governing rules of the CCP or QCCP 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;
(v) 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
(vi) 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;
* * * * *
Backtesting means the comparison of an Enterprise's internal
estimates with actual outcomes during a sample period not used in model
development. In this
[[Page 15317]]
context, backtesting is one form of out-of-sample testing.
* * * * *
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.
* * * * *
Commercial end-user means an entity that:
(1)(i) Is using derivative contracts to hedge or mitigate
commercial risk; and
(ii)(A) Is not an entity described in section 2(h)(7)(C)(i)(I)
through (VIII) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(C)(i)(I)
through (VIII)); or
(B) Is not a ``financial entity'' for purposes of section 2(h)(7)
of the Commodity Exchange Act (7 U.S.C. 2(h)) by virtue of section
2(h)(7)(C)(iii) of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or
(2)(i) Is using derivative contracts to hedge or mitigate
commercial risk; and
(ii) Is not an entity described in section 3C(g)(3)(A)(i) through
(viii) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-
3(g)(3)(A)(i) through (viii)); or
(3) Qualifies for the exemption in section 2(h)(7)(A) of the
Commodity Exchange Act (7 U.S.C. 2(h)(7)(A)) by virtue of section
2(h)(7)(D) of the Act (7 U.S.C. 2(h)(7)(D)); or
(4) Qualifies for an exemption in section 3C(g)(1) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) by virtue of
section 3C(g)(4) of the Act (15 U.S.C. 78c-3(g)(4)).
Commingled security means a resecuritization of UMBS in which one
or more of the underlying exposures is a UMBS guaranteed by the other
Enterprise or is a resecuritization of UMBS guaranteed by the other
Enterprise.
* * * * *
Credit default swap (CDS) means a financial contract executed under
standard industry documentation that allows one party (the protection
purchaser) to transfer the credit risk of one or more exposures
(reference exposure(s)) to another party (the protection provider) for
a certain period of time.
* * * * *
Credit valuation adjustment (CVA) means the fair value adjustment
to reflect counterparty credit risk in valuation of OTC derivative
contracts.
* * * * *
Eligible time-based call means a time-based call that:
(1) Is exercisable solely at the discretion of the originating
Enterprise, provided the Enterprise obtains FHFA's non-objection prior
to exercising the time-based call;
(2) Is not structured to avoid allocating credit losses to
investors or otherwise structured to provide at most de minimis credit
protection to the securitization or credit risk transfer; and
(3) Is exercisable no less than five years after the securitization
or credit risk transfer issuance date.
* * * * *
Financial collateral * * *
(2) In which the Enterprise 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).
* * * * *
Guarantee asset means the present value of a future consideration
to be received for providing a financial guarantee on a portfolio of
mortgage exposures not recognized on the balance sheet.
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which an Enterprise 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.
* * * * *
Mortgage servicing assets (MSAs) means the contractual rights to
service mortgage loans for a fee.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 1240.39(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to an Enterprise less the fair
value amount of the independent collateral, as adjusted by the standard
supervisory haircuts under Sec. 1240.39(b)(2)(ii), as applicable,
posted by the Enterprise 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. 1240.3.
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement
or a qualifying cross-product master netting agreement. For derivative
contracts, netting set also includes a single derivative contract
between an Enterprise and a single counterparty.
* * * * *
Qualifying cross-product master netting agreement means a
qualifying master netting agreement that provides for termination and
close-out netting across multiple types of financial transactions or
qualifying master netting agreements in the event of a counterparty's
default, provided that the underlying financial transactions are OTC
derivative contracts, eligible margin loans, or repo-style
transactions. In order to treat an agreement as a qualifying cross-
product master netting agreement for purposes of this subpart, an
Enterprise must comply with the requirements of Sec. 1240.3(c) with
respect to that 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.
* * * * *
Standardized total risk-weighted assets * * *
(1) * * *
(vi) Credit valuation adjustment (CVA) risk-weighted assets as
calculated under Sec. 1240.36(d);
* * * * *
(viii) Standardized market risk-weighted assets, as calculated
under Sec. 1240.204; minus
* * * * *
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.
* * * * *
Time-based call means a contractual provision that permits an
originating Enterprise to redeem a securitization exposure on or after
a specified redemption or cancellation date.
* * * * *
[[Page 15318]]
Uniform Mortgage-backed Security (UMBS) means the same as that
defined in Sec. 1248.1.
Value-at-Risk (VaR) means the estimate of the maximum amount that
the value of one or more exposures could decline due to market price or
rate movements during a fixed holding period within a stated confidence
interval.
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 amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 1240.39(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to an Enterprise less the fair value amount of
the variation margin, as adjusted by the standard supervisory haircuts
under Sec. 1240.39(b)(2)(ii), as applicable, posted by the Enterprise
to the counterparty.
* * * * *
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.
* * * * *
Sec. 1240.4 [Amended]
0
3. Amend Sec. 1240.4(c) by removing the year ``2025'' and adding, in
its place, the year ``2028''.
0
4. Amend Sec. 1240.31 by:
0
a. In paragraph (a)(1)(iv) removing the word ``or'' after the ``;'';
0
b. In paragraph (a)(1)(v) removing the ``.'' after ``1240.52'' and
adding ``; or'' in its place; and
0
c. Adding paragraph (a)(1)(vi) to read as follows:
Sec. 1240.31 Mechanics for calculating risk-weighted assets for
general credit risk.
(a) * * *
(1) * * *
(vi) CVA risk-weighted assets subject to Sec. 1240.36(d).
* * * * *
0
5. Amend Sec. 1240.32 by:
0
a. Redesignating paragraph (c)(2) as paragraph (c)(3), adding new
paragraph (c)(2), and revising redesignated paragraph (c)(3); and
0
b. Redesignating paragraph (i)(5) as paragraph (i)(6) and adding new
paragraph (i)(5).
The additions and revision read as follows:
Sec. 1240.32 General risk weights.
(c) * * *
(2) An Enterprise must assign a 5 percent risk weight to an
exposure to the other Enterprise in a commingled security.
(3) An Enterprise must assign a 20 percent risk weight to an
exposure to another GSE, including an MBS guaranteed by the other
Enterprise, except for exposures under paragraph (c)(2) of this
section.
* * * * *
(i) * * *
(5) An Enterprise must assign a 20 percent risk weight to guarantee
assets.
* * * * *
0
6. Amend Sec. 1240.33 by:
0
a. Revising paragraph (ii) in the definition of ``Adjusted MTMLTV'';
and
0
b. Revising table 1 to paragraph (a).
The revisions read as follows:
Sec. 1240.33 Single-family mortgage exposures.
(a) * * *
Adjusted MTMLTV * * *
(ii) The amount equal to 1 plus either:
(A) The single-family countercyclical adjustment available at the
time of the exposure's origination if the loan age of the single-family
mortgage exposure is less than or equal to 5; or
(B) The single-family countercyclical adjustment available as of
that time if the loan age of the single-family mortgage exposure is
greater than or equal to 6.
* * * * *
Table 1 to Paragraph (a)--Permissible Values and Additional Instructions
----------------------------------------------------------------------------------------------------------------
Defined term Permissible values Additional instructions
----------------------------------------------------------------------------------------------------------------
Cohort burnout........................ ``No burnout,'' if the single- High if unable to determine.
family mortgage exposure has not
had a refinance opportunity since
the loan age of the single-family
mortgage exposure was 6.
``Low,'' if the single-family
mortgage exposure has had 12 or
fewer refinance opportunities
since the loan age of the single-
family mortgage exposure was 6.
``Medium,'' if the single-family
mortgage exposure has had between
13 and 24 refinance opportunities
since the loan age of the single-
family mortgage exposure was 6.
``High,'' if the single-family
mortgage exposure has had more
than 24 refinance opportunities
since the loan age of the single-
family mortgage exposure was 6.
Coverage percent...................... 0 percent <= coverage percent <= 0 percent if outside of permissible
100 percent. range or unable to determine.
Days past due......................... Non-negative integer............... 210 if negative or unable to
determine.
Debt-to-income (DTI) ratio............ 0 percent < DTI < 100 percent...... 42 percent if outside of
permissible range or unable to
determine.
Interest-only (IO).................... Yes, no............................ Yes if unable to determine.
Loan age.............................. 0 <= loan age <= 500............... 500 if outside of permissible range
or unable to determine.
Loan documentation.................... None, low, full.................... None if unable to determine.
Loan purpose.......................... Purchase, cashout refinance, rate/ Cashout refinance if unable to
term refinance. determine.
MTMLTV................................ 0 percent < MTMLTV <= 300 percent.. If the property securing the single-
family mortgage exposure is
located in Puerto Rico or the U.S.
Virgin Islands, use the FHFA House
Price Index of the United States.
If the property securing the single-
family mortgage exposure is
located in Hawaii, use the FHFA
Purchase-only State-level House
Price Index of Guam.
If the single-family mortgage
exposure was originated before
1991, use the Enterprise's
proprietary housing price index.
Use geometric interpolation to
convert quarterly housing price
index data to monthly data.
300 percent if outside of
permissible range or unable to
determine.
Mortgage concentration risk........... High, not high..................... High if unable to determine.
[[Page 15319]]
MI cancellation feature............... Cancellable mortgage insurance, non- Cancellable mortgage insurance, if
cancellable mortgage insurance. unable to determine.
Occupancy type........................ Investment, owner-occupied, second Investment if unable to determine.
home.
OLTV.................................. 0 percent < OLTV <= 300 percent.... 300 percent if outside of
permissible range or unable to
determine.
Original credit score................. 300 <= original credit score <= 850 The original credit score for the
single-family mortgage exposure is
determined based on the original
credit scores of each borrower on
the exposure using the following
procedure.
Determine the borrower credit score
for each borrower:
If there are original
credit scores from multiple
credit repositories for a
borrower, the borrower credit
score is the mean across the
borrower's original credit
scores.
If there is only one
original credit score for the
borrower from one repository,
the borrower credit score is
the one available original
credit score.
Determine the original credit score
for the single-family mortgage
exposure:
If there is only one
borrower, the borrower credit
score is the original credit
score for the single-family
mortgage exposure.
If there are multiple
borrowers, the lowest borrower
credit score across all
borrowers is the original
credit score for the single-
family mortgage exposure.
If a borrower does not
have a borrower credit score,
determine the original credit
score for the single-family
mortgage exposure based on the
borrower credit scores of the
other borrowers on the loan.
The original credit score for the
single-family mortgage exposure is
680 if the Enterprise has verified
that no borrower has a credit
score at any of the three
repositories.
The original credit score for the
single-family mortgage exposure is
600 if (i) an Enterprise is unable
to determine the original credit
score using the above procedure or
(ii) the original credit score
calculated using the procedure
falls outside of the permissible
range.
Origination channel................... Retail, third-party origination TPO includes broker and
(TPO). correspondent channels.
TPO if unable to determine.
Payment change from modification...... -80 percent < payment change from If the single-family mortgage
modification < 50 percent. exposure initially had an
adjustable or step-rate feature,
the monthly payment after a
permanent modification is
calculated using the initial
modified rate.
0 percent if unable to determine.
-79 percent if less than or equal
to -80 percent.
49 percent if greater than or equal
to 50 percent.
Previous maximum days past due........ Non-negative integer............... 181 months if negative or unable to
determine.
Product type.......................... ``FRM30'' means a fixed-rate single- Product types other than FRM30,
family mortgage exposure with an FRM20, FRM15 or ARM 1/1 should be
original amortization term greater assigned to FRM30.
than 309 months and less than or Use the post-modification product
equal to 429 months. type for modified mortgage
``FRM20'' means a fixed-rate single- exposures.
family mortgage exposure with an ARM 1/1 if unable to determine.
original amortization term greater
than 189 months and less than or
equal to 309 months.
``FRM15'' means a fixed-rate single-
family mortgage exposure with an
original amortization term less
than or equal to 189 months.
``ARM1/1'' is an adjustable-rate
single-family mortgage exposure
that has a mortgage rate and
required payment that adjust
annually.
Property type......................... 1-unit, 2-4 units, condominium, Use condominium for cooperatives.
manufactured home. 2-4 units if unable to determine.
Refreshed credit score................ 300 <= refreshed credit score <= The refreshed credit score for the
850. single-family mortgage exposure is
determined based on the refreshed
credit scores of each borrower on
the exposure using the following
procedure.
Determine the borrower credit score
for each borrower:
If the Enterprise
acquires refreshed credit
scores from multiple
repositories for a borrower,
the borrower credit score is
the mean across the borrower's
refreshed credit scores.
If the Enterprise
acquires only one refreshed
credit score for the borrower
from one repository, the
borrower credit score is the
one available refreshed credit
score.
If the Enterprise does
not acquire refreshed credit
scores, the borrower's
refreshed credit score is the
borrower's most recently
available credit score, which
could be the borrower's
original credit score.
Determine the refreshed credit
score for the single-family
mortgage exposure:
If there is only one
borrower, the borrower credit
score is the refreshed credit
score for the single-family
mortgage exposure.
If there are multiple
borrowers, the lowest borrower
credit score across all
borrowers is the refreshed
credit score for the single-
family mortgage exposure. If a
borrower does not have a
borrower credit score,
determine the refreshed credit
score for the single-family
mortgage exposure based on the
borrower credit scores of the
other borrowers on the loan.
[[Page 15320]]
If no refreshed credit
scores are available for any
borrowers on the loan, then the
refreshed credit score for the
single-family mortgage exposure
is the same as the original
credit score for the single-
family mortgage exposure.
Streamlined refi...................... Yes, no............................ No if unable to determine.
Subordination......................... 0 percent <= Subordination <= 80 80 percent if outside permissible
percent. range.
----------------------------------------------------------------------------------------------------------------
* * * * *
0
7. Amend Sec. 1240.34 by:
0
a. Adding in alphabetical order the definition of ``Affordable unit'';
0
b. Adding in alphabetical order the definition of ``Government
subsidy'';
0
c. Revising table 1 to paragraph (a); and
0
d. Revising table 4 to paragraph (d).
The additions and revisions read as follows:
Sec. 1240.34 Multifamily mortgage exposures.
(a) * * *
Affordable unit means a unit within a property securing a
multifamily mortgage exposure that can be rented by occupants with
income less than or equal to 80 percent of the area median income where
the property resides.
* * * * *
Government subsidy means that the property satisfies both of the
following criteria:
(1) at least 20 percent of the property's units are restricted to
be affordable units; and
(2) the property benefits from one of the following three
government programs:
(i) Low Income Housing Tax Credits (LIHTC);
(ii) Section 8 project-based rental assistance; or
(iii) State/Local affordable housing programs that require the
provision of affordable housing for the life of the loan.
* * * * *
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TP13MR23.019
* * * * *
[[Page 15321]]
[GRAPHIC] [TIFF OMITTED] TP13MR23.020
BILLING CODE 4910-13-C
0
8. Amend Sec. 1240.35 by revising paragraphs (b)(3) and (b)(4)(i) to
read as follows:
Sec. 1240.35 Off-balance sheet exposures.
* * * * *
(b) * * *
(3) 50 percent CCF. An Enterprise must apply a 50 percent CCF to:
(i) The amount of commitments with an original maturity of more
than one year that are not unconditionally cancelable by the
Enterprise; and
(ii) Guarantees on exposures to the other Enterprise in commingled
securities.
(4) * * *
(i) Guarantees, except guarantees included in paragraph (b)(3)(ii)
of this section;
* * * * *
0
9. Revise Sec. 1240.36 to read as follows:
Sec. 1240.36 Derivative contracts.
(a) Exposure amount for derivative contracts. An Enterprise must
calculate the exposure amount or EAD for all its
[[Page 15322]]
derivative contracts using the standardized approach for counterparty
credit risk (SA-CCR) in paragraph (c) of this section for purposes of
standardized total risk-weighted assets. An Enterprise must apply the
treatment of cleared transactions under Sec. 1240.37 to its derivative
contracts that are cleared transactions and to all default fund
contributions associated with such derivative contracts for purposes of
standardized total risk-weighted assets.
(b) Methodologies for collateral recognition. (1) An Enterprise may
use the methodologies under Sec. 1240.39 to recognize the benefits of
financial collateral in mitigating the counterparty credit risk of
repo-style transactions, eligible margin loans, collateralized OTC
derivative contracts and single product netting sets of such
transactions.
(2) An Enterprise must use the methodology in paragraph (c) of this
section to calculate EAD for an OTC derivative contract or a set of OTC
derivative contracts subject to a qualifying master netting agreement.
(3) An Enterprise must also use the methodology in paragraph (d) of
this section to calculate the risk-weighted asset amounts for CVA for
OTC derivatives.
(c) EAD for derivative contracts--(1) Options for determining EAD.
An Enterprise must determine the EAD for a derivative contract using
SA-CCR under paragraph (c)(5) of this section. The exposure amount
determined under SA-CCR is the EAD for the derivative contract or
derivatives contracts. An Enterprise must use the same methodology to
calculate the exposure amount for all its derivative contracts. An
Enterprise may reduce the EAD calculated according to paragraph (c)(5)
of this section by the credit valuation adjustment that the Enterprise
has recognized in its balance sheet valuation of any derivative
contracts in the netting set. For purposes of this paragraph (c)(1),
the credit valuation adjustment does not include any adjustments to
common equity tier 1 capital attributable to changes in the fair value
of the Enterprise's liabilities that are due to changes in its own
credit risk since the inception of the transaction with the
counterparty.
(2) Definitions. For purposes of paragraph (c) of this section, the
following definitions apply:
(i) 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,
except as otherwise provided in paragraph (c) of this section.
(ii) 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, except as otherwise provided in paragraph (c) of this
section.
(iii) Hedging set means:
(A) With respect to 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 categories: 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, FHFA may require an Enterprise to include the derivative
contract in each appropriate hedging set under paragraphs
(c)(2)(iii)(A) through (E) of this section.
(3) Credit derivatives. Notwithstanding paragraphs (c)(1) and
(c)(2) of this section:
(i) An Enterprise that purchases a credit derivative that is
recognized under Sec. 1240.38 as a credit risk mitigant for an
exposure is not required to calculate a separate counterparty credit
risk capital requirement under this section so long as the Enterprise
does so consistently for all such credit derivatives and either
includes or excludes all such credit derivatives that are subject to a
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(ii) An Enterprise that is the protection provider in a credit
derivative must treat the credit derivative as an exposure to the
reference obligor and is not required to calculate a counterparty
credit risk capital requirement for the credit derivative under this
section, so long as it does so consistently for all such credit
derivatives and either includes all or excludes all such credit
derivatives that are subject to a master netting agreement from any
measure used to determine counterparty credit risk exposure to all
relevant counterparties for risk-based capital purposes.
(4) Equity derivatives. An Enterprise must treat an equity
derivative contract as an equity exposure and compute a risk-weighted
asset amount for the equity derivative contract under Sec. 1240.51. In
addition, if an Enterprise is treating the contract as a covered
position under subpart F of this part, the Enterprise must also
calculate a risk-based capital requirement for the counterparty credit
risk of an equity derivative contract under this section.
(5) Exposure amount. (i) 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.
(ii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, 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
calculated under paragraph (c)(5)(i) of this section and the exposure
amount of the netting set calculated under paragraph (c)(5)(i) of this
section as if the netting set were not subject to a variation margin
agreement.
(iii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set that consists of
only sold options in which the premiums have been fully paid by the
counterparty to the options and where the options are not subject to a
variation margin agreement is zero.
(iv) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set in which the
counterparty is a commercial end-user is equal to the sum of
[[Page 15323]]
replacement cost, 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.
(v) For purposes of the exposure amount calculated under paragraph
(c)(5)(i) of this section and all calculations that are part of that
exposure amount, an Enterprise may elect to treat a derivative contract
that is a cleared transaction that is not subject to a variation margin
agreement as one that is subject to a variation margin agreement, if
the derivative contract is subject to a requirement that the
counterparties make daily cash payments to each other to account for
changes in the fair value of the derivative contract and to reduce the
net position of the contract to zero. If an Enterprise makes an
election under this paragraph (c)(5)(v) for one derivative contract, it
must treat all other derivative contracts within the same netting set
that are eligible for an election under this paragraph (c)(5)(v) as
derivative contracts that are subject to a variation margin agreement.
(vi) For purposes of the exposure amount calculated under paragraph
(c)(5)(i) of this section and all calculations that are part of that
exposure amount, an Enterprise may elect to treat a credit derivative
contract, equity derivative contract, or commodity derivative contract
that references an index as if it were multiple derivative contracts
each referencing one component of the index.
(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
Enterprise 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 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) Netting set 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:
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TP13MR23.021
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; and
(C) 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 potential future exposure for purposes
of adjusted total assets, 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) Netting set 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 potential future exposure for
purposes of adjusted total assets, 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, an Enterprise may use either of the formulas
provided in paragraphs (c)(8)(i)(A) and (B) of this section:
(A) Formula 1 is as follows:
Hedging set amount = [(AddOnTB1IR)2 +
AddOnTB2IR)2 + 1.4 * AddOnTB1IR * AddOnTB2IR + 1.4 *
AddOnTB2IR * AddOnTB3IR + 0.6 * AddOnTB1IR *
AddOnTB3IR]\1/2\; or
(B) Formula 2 is as follows:
Hedging set amount = [verbar]AddOnTB1IR[verbar] +
[verbar]AddOnTB2IR[verbar] + [verbar]AddOnTB3IR[verbar].
Where in paragraphs (c)(8)(i)(A) and (B) of this section:
(1) AddOnTB1IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section, within
the hedging set with an end date of less than one year from the present
date;
(2) AddOnTB2IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section, within
the hedging set with an end date of one to five years from the present
date; and
(3) AddOnTB3IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section, within
the hedging set with an end date of more than five years from the
present date.
(ii) Exchange rate derivative contracts. For an exchange rate
[[Page 15324]]
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] TP13MR23.022
Where:
(A) k is each reference entity within the hedging set.
(B) K is the number of reference entities within the hedging set.
(C) 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.
(D) rk equals the applicable supervisory correlation factor, as
provided in table 2 to paragraph (c)(11)(ii)(B)(2).
(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] TP13MR23.023
Where:
(A) k is each commodity type within the hedging set.
(B) K is the number of commodity types within the hedging set.
(C) 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.
(D) [rho] equals the applicable supervisory correlation factor, as
provided in table 2 to paragraph (c)(11)(ii)(B)(2).
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, an
Enterprise must calculate a separate hedging set amount for each basis
derivative contract hedging set and each volatility derivative contract
hedging set. An Enterprise 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, an
Enterprise 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 paragraph
(c)(11)(ii)(B)(2).
(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] TP13MR23.024
Where:
(i) 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
(ii) 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)(ii)(B)(1) of this section, for
an exchange rate derivative contract with
[[Page 15325]]
multiple exchanges of principal, the Enterprise 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 Enterprise 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] TP13MR23.025
(2) As used in the formulas in table 1 to paragraph
(c)(9)(iii)(B)(1):
(i) [PHgr] 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) [lambda] equals zero for all derivative contracts except
interest rate options for the currencies where interest rates have
negative values. The same value of [lambda] must be used for all
interest rate options that are denominated in the same currency. To
determine the value of [lambda] for a given currency, an Enterprise
must find the lowest value L of P and K of all interest rate options in
a given currency that the Enterprise has with all counterparties. Then,
[lambda] is set according to this formula:
[lambda] = max{-L + 0.1%, 0{time} ; and
(vi) [sigma] equals the supervisory option volatility, as provided
in table 2 to paragraph (c)(11)(ii)(B)(2).
(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] TP13MR23.026
(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 Enterprise's exposure to the total notional amount of all
underlying exposures, expressed as a decimal value between zero and
one; \1\
---------------------------------------------------------------------------
\1\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the
Enterprise'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 Enterprise'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
Enterprise'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
Enterprise and is designated with a negative sign if the collateralized
debt obligation tranche was sold by the Enterprise.
(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 15326]]
[GRAPHIC] [TIFF OMITTED] TP13MR23.027
Where Margin Period of Risk (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 client-facing
derivative 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 client-facing derivative
transaction, 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, or a netting set that contains one or more trades
involving illiquid collateral or a derivative contract that cannot be
easily replaced, MPOR cannot be less than twenty business days.
(3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this
section, for a netting set subject to more than two outstanding
disputes over margin that lasted longer than the MPOR over the previous
two quarters, the applicable floor is twice the amount provided in
paragraphs (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] TP13MR23.028
BILLING CODE 4910-13-C
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, if an
Enterprise has elected pursuant to paragraph (c)(5)(v) of this section
to treat a derivative contract that is a cleared transaction that is
not subject to a variation margin agreement as one that is subject to a
variation margin agreement, the Enterprise must treat the derivative
contract as subject to a variation margin agreement with maturity
factor as determined according to (c)(9)(iv)(A) of this section, 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.
An Enterprise 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), an Enterprise must
treat each standard option component as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment
options, (such as interest rate caps and floors), an Enterprise may
represent each payment option as a combination of effective single-
payment options (such as interest rate caplets and floorlets).
(D) An Enterprise may not decompose linear derivative contracts
(such as swaps) into components.
(10) Multiple netting sets subject to a single variation margin
agreement--(i) Calculating replacement cost. Notwithstanding paragraph
(c)(6) of this section, an Enterprise 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:
(A) NS is each netting set subject to the variation margin
agreement MA;
(B) VNS is the sum of the fair values (after excluding
any valuation adjustments) of the derivative contracts within the
netting set NS; and
(C) 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, an Enterprise 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 15327]]
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(i) 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, an
Enterprise must divide the netting set into sub-netting sets (as
described in paragraph (c)(11)(ii)(B) of this section) 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.
Table 2 to Paragraph (c)(11)(ii)(B)(2)--Supervisory Option Volatility, Supervisory Correlation Parameters, and
Supervisory Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
option correlation Supervisory
Asset class Category Type volatility factor factor \1\
(percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Interest rate................. N/A.............. N/A................ 50 N/A 0.50
Exchange rate................. N/A.............. N/A................ 15 N/A 4.0
Credit, single name........... Investment grade. N/A................ 100 50 0.46
Speculative grade N/A................ 100 50 1.3
Sub-speculative N/A................ 100 50 6.0
grade.
Credit, index................. Investment Grade. N/A................ 80 80 0.38
Speculative Grade N/A................ 80 80 1.06
Equity, single name........... N/A.............. N/A................ 120 50 32
Equity, index................. N/A.............. N/A................ 75 80 20
Commodity..................... Energy........... Electricity........ 150 40 40
Other.............. 70 40 18
Metals........... N/A................ 70 40 18
Agricultural..... N/A................ 70 40 18
Other............ N/A................ 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.
(d) Credit valuation adjustment (CVA) risk-weighted assets--(1) In
general. With respect to its OTC derivative contracts, an Enterprise
must calculate a CVA risk-weighted asset amount for its portfolio of
OTC derivative transactions that are subject to the CVA capital
requirement using the simple CVA approach described in paragraph (d)(5)
of this section.
(2) [Reserved]
(3) Recognition of hedges. (i) An Enterprise may recognize a single
name CDS, single name contingent CDS, any other equivalent hedging
instrument that references the counterparty directly, and index credit
default swaps (CDSind) as a CVA hedge under paragraph
(d)(5)(ii) of this section or paragraph (d)(6) of this section,
provided that the position is managed as a CVA hedge in accordance with
the Enterprise's hedging policies.
(ii) An Enterprise shall not recognize as a CVA hedge any tranched
or n\th\-to-default credit derivative.
(4) Total CVA risk-weighted assets. Total CVA risk-weighted assets
is the CVA capital requirement, KCVA, calculated for an
Enterprise's entire portfolio of OTC derivative counterparties that are
subject to the CVA capital requirement, multiplied by 12.5.
(5) Simple CVA approach. (i) Under the simple CVA approach, the CVA
capital requirement, KCVA, is calculated according to the
following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.029
[[Page 15328]]
Where:
[GRAPHIC] [TIFF OMITTED] TP13MR23.030
(A) wi = the weight applicable to counterparty i under
table 3 to paragraph (d)(5)(ii);
(B) Mi = the EAD-weighted average of the effective
maturity of each netting set with counterparty i (where each netting
set's effective maturity can be no less than one year.)
(C) EADitotal = the sum of the EAD for all netting sets of OTC
derivative contracts with counterparty i calculated using the
standardized approach to counterparty credit risk described in
paragraph (c) of this section. When the Enterprise calculates EAD under
paragraph (c) of this section, such EAD may be adjusted for purposes of
calculating EADitotal by multiplying EAD by (1-exp(-0.05 x
Mi))/(0.05 x Mi), where ``exp'' is the
exponential function.
(D) Mihedge = the notional weighted average maturity of the hedge
instrument.
(E) Bi = the sum of the notional amounts of any
purchased single name CDS referencing counterparty i that is used to
hedge CVA risk to counterparty i multiplied by (1-exp(-0.05 x
Mihedge))/(0.05 x Mihedge).
(F) Mind = the maturity of the CDSind or the
notional weighted average maturity of any CDSind purchased
to hedge CVA risk of counterparty i.
(G) Bind = the notional amount of one or more
CDSind purchased to hedge CVA risk for counterparty i
multiplied by (1-exp(-0.05 x Mind))/(0.05 x Mind)
(H) wind = the weight applicable to the
CDSind based on the average weight of the underlying
reference names that comprise the index under table 3 to paragraph
(d)(5)(ii).
(ii) The Enterprise may treat the notional amount of the index
attributable to a counterparty as a single name hedge of counterparty i
(Bi,) when calculating KCVA, and subtract the
notional amount of Bi from the notional amount of the
CDSind. An Enterprise must treat the CDSind hedge
with the notional amount reduced by Bi as a CVA hedge.
Table 3 to Paragraph (d)(5)(ii)--Assignment of Counterparty Weight
------------------------------------------------------------------------
Internal PD (in percent) Weight w (in percent)
------------------------------------------------------------------------
0.00-0.07 0.70
>0.070-0.15 0.80
>0.15-0.40 1.00
>0.40-2.00 2.00
>2.00-6.00 3.00
>6.00 10.00
------------------------------------------------------------------------
0
10. Revise Sec. 1240.37 to read as follows:
Sec. 1240.37 Cleared transactions.
(a) General requirements--(1) Clearing member clients. An
Enterprise 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. An Enterprise 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 (b) of this section to calculate its risk-weighted assets for
its default fund contribution to a CCP.
(b) Clearing member client Enterprises--(1) Risk-weighted assets
for cleared transactions. (i) To determine the risk-weighted asset
amount for a cleared transaction, an Enterprise 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 Enterprise'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. 1240.36(c),
plus the fair value of the collateral posted by the clearing member
client Enterprise and held by the CCP or a clearing member in a manner
that is not bankruptcy remote.
(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. 1240.39(b)(2) or (3), plus the fair value of the
collateral posted by the clearing member client Enterprise and held by
the CCP or a clearing member in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client Enterprise must apply a risk
weight of:
(A) 2 percent if the collateral posted by the Enterprise to the
QCCP or clearing member is subject to an arrangement that prevents any
loss to the clearing member client Enterprise 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 Enterprise 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 Enterprise must apply the risk weight applicable
to the CCP under this subpart D.
(4) Collateral. (i) Notwithstanding any other requirement of this
section, collateral posted by a clearing member client Enterprise 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.
(ii) A clearing member client Enterprise 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
accordance with requirements under this subpart D, as applicable.
(c) Clearing member Enterprise--(1) Risk-weighted assets for
cleared transactions. (i) To determine the risk-weighted asset amount
for a cleared transaction, a clearing member
[[Page 15329]]
Enterprise 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 Enterprise'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 Enterprise 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. 1240.36(c), plus the fair value
of the collateral posted by the clearing member Enterprise and held by
the CCP in a manner that is not bankruptcy remote.
(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. 1240.39(b)(2) or (3), plus the fair
value of the collateral posted by the clearing member Enterprise and
held by the CCP in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) A clearing member
Enterprise 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 Enterprise must apply the risk weight applicable to the
CCP according to this subpart D.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Enterprise may apply a risk weight of zero
percent to the trade exposure amount for a cleared transaction with a
QCCP where the clearing member Enterprise 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. 1240.3(a), and the clearing member Enterprise is not obligated
to reimburse the clearing member client in the event of the QCCP
default.
(4) Collateral. (i) Notwithstanding any other requirement of this
section, collateral posted by a clearing member Enterprise 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.
(ii) A clearing member Enterprise 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 accordance with
requirements under this subpart D.
(d) Default fund contributions--(1) General requirement. A clearing
member Enterprise 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 Enterprise or FHFA, 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 Enterprise'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 FHFA, 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 Enterprise'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 (d)(4) of this section, multiplied
by 12.5.
(4) Capital requirement for default fund contributions to a QCCP. A
clearing member Enterprise's capital requirement for its default fund
contribution to a QCCP (KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TP13MR23.031
Where:
(i) KCCP is the hypothetical capital requirement of the QCCP, as
determined under paragraph (d)(5) of this section;
(ii) DFpref is prefunded default fund contribution of the clearing
member Enterprise to the QCCP;
(iii) DFCCP is the QCCP's own prefunded amount that are contributed
to the default waterfall and are junior or pari passu with prefunded
default fund contributions of clearing members of the QCCP; and
(iv) DFprefCCPCM is the total prefunded default fund contributions
from clearing members of the QCCP to the QCCP.
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has
provided its KCCP, an Enterprise must rely on such disclosed
figure instead of calculating KCCP under this paragraph
(d)(5), unless the Enterprise 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 Enterprise, is equal to:
KCCP = [Sigma]CMi EADi * 1.6 percent
Where:
(i) CMi is each clearing member of the QCCP; and
(ii) EADi is the exposure amount of the QCCP to each
clearing member of the QCCP, as determined under paragraph (d)(6) of
this section.
(6) EAD of a QCCP to a clearing member. (i) The EAD of a QCCP to a
clearing member 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 QCCP and
the clearing member that are cleared transactions and any guarantees
that the clearing member has provided to the QCCP with respect to
performance of a clearing member client on a derivative contract, the
EAD is equal to the exposure amount of the QCCP to the clearing member
for all such derivative contracts and guarantees of derivative
contracts calculated under SA-CCR in Sec. 1240.36(c) (or, with respect
to a QCCP located outside the United States, under a substantially
identical methodology in effect in the jurisdiction) using a value of
10 business days for purposes of Sec. 1240.36(c)(9)(iv); less the
value of all collateral held by the QCCP posted by the clearing member
or a client of the clearing member in connection with a derivative
contract for which the
[[Page 15330]]
clearing member has provided a guarantee to the QCCP and the amount of
the prefunded default fund contribution of the clearing member to the
QCCP.
(iii) With respect to any repo-style transactions between the QCCP
and a clearing member that are cleared transactions, EAD is equal to:
EADi = max{EBRMi-IMi-
DFi;0{time}
Where:
(A) EBRMi is the exposure amount of the QCCP to each
clearing member for all repo-style transactions between the QCCP and
the clearing member, as determined under Sec. 1240.39(b)(2) and
without recognition of the initial margin collateral posted by the
clearing member to the QCCP with respect to the repo-style transactions
or the prefunded default fund contribution of the clearing member
institution to the QCCP;
(B) IMi is the initial margin collateral posted by each
clearing member to the QCCP with respect to the repo-style
transactions; and
(C) DFi is the prefunded default fund contribution of
each clearing member to the
(D) QCCP that is not already deducted in paragraph (d)(6)(ii) of
this section.
(iv) EAD must be calculated separately for each clearing member's
sub-client accounts and sub-house account (i.e., for the clearing
member's proprietary 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.
(v) 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. 1240.39(b) for repo-style
transactions and to Sec. 1240.36(c)(5) for derivative contracts.
0
11. Revise Sec. 1240.39 to read as follows:
Sec. 1240.39 Collateralized transactions.
(a) General. (1) An Enterprise may use the following methodologies
to recognize the benefits of financial collateral (other than with
respect to a retained CRT exposure) in mitigating the counterparty
credit risk of repo-style transactions, eligible margin loans,
collateralized OTC derivative contracts and single product netting sets
of such transactions:
(i) The collateral haircut approach set forth in paragraph (b)(2)
of this section; and
(ii) For single product netting sets of repo-style transactions and
eligible margin loans, the simple VaR methodology set forth in
paragraph (b)(3) of this section.
(2) An Enterprise may use any combination of the two methodologies
for collateral recognition; however, it must use the same methodology
for similar exposures or transactions.
(b) EAD for eligible margin loans and repo-style transactions--(1)
General. An Enterprise may recognize the credit risk mitigation
benefits of financial collateral that secures an eligible margin loan,
repo-style transaction, or single-product netting set of such
transactions by determining the EAD of the exposure using:
(i) The collateral haircut approach described in paragraph (b)(2)
of this section; or
(ii) For netting sets only, the simple VaR methodology described in
paragraph (b)(3) of this section.
(2) Collateral haircut approach--(i) EAD equation. An Enterprise
may determine EAD for an eligible margin loan, repo-style transaction,
or netting set by setting EAD equal to
max{0, [([Sigma]E - [Sigma]C) + [Sigma](Es x Hs)
+ [Sigma](Efx x Hfx)]{time} ,
Where:
(A) [Sigma]E equals the value of the exposure (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has lent, sold subject to repurchase, or posted as collateral to the
counterparty under the transaction (or netting set));
(B) [Sigma]C equals the value of the collateral (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has borrowed, purchased subject to resale, or taken as collateral from
the counterparty under the transaction (or netting set));
(C) Es equals the absolute value of the net position in
a given instrument or in gold (where the net position in a given
instrument or in gold equals the sum of the current fair values of the
instrument or gold the Enterprise has lent, sold subject to repurchase,
or posted as collateral to the counterparty minus the sum of the
current fair values of that same instrument or gold the Enterprise has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty);
(D) Hs equals the market price volatility haircut
appropriate to the instrument or gold referenced in Es;
(E) Efx equals the absolute value of the net position of
instruments and cash in a currency that is different from the
settlement currency (where the net position in a given currency equals
the sum of the current fair values of any instruments or cash in the
currency the Enterprise has lent, sold subject to repurchase, or posted
as collateral to the counterparty minus the sum of the current fair
values of any instruments or cash in the currency the Enterprise has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty); and
(F) Hfx equals the haircut appropriate to the mismatch
between the currency referenced in Efx and the settlement
currency.
(ii) Standard supervisory haircuts. Under the standard supervisory
haircuts approach:
(A) An Enterprise must use the haircuts for market price volatility
(Hs) in table 1 to paragraph (b)(2)(ii)(A) as adjusted in
certain circumstances as provided in paragraphs (b)(2)(ii)(C) and (D)
of this section;
[[Page 15331]]
Table 1 to Paragraph (b)(2)(ii)(A)--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Haircut (in percent) assigned based on:
------------------------------------------------------------------
Sovereign issuers risk weight Non-sovereign issuers risk Investment grade
Residual maturity under Sec. 1240.32 \2\ (in weight under Sec. 1240.32 (in securitization
percent) percent) exposures (in
------------------------------------------------------------------ percent)
Zero 20 or 50 100 20 50 100
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year..................................... 0.5 1.0 15.0 1.0 2.0 4.0 4.0
Greater than 1 year and less than or equal to 5 years............ 2.0 3.0 15.0 4.0 6.0 8.0 12.0
Greater than 5 years............................................. 4.0 6.0 15.0 8.0 12.0 16.0 24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold............................15.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds)..........................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mutual funds.......................................................Highest haircut applicable to any security
in which the fund can invest.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash collateral held..................................................................Zero........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other exposure types..................................................................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in this table 1 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
(B) For currency mismatches, an Enterprise must use a haircut for
foreign exchange rate volatility (Hfx) of 8 percent, as
adjusted in certain circumstances as provided in paragraphs
(b)(2)(ii)(C) and (D) of this section.
(C) For repo-style transactions and client-facing derivative
transactions, an Enterprise may multiply the supervisory haircuts
provided in paragraphs (b)(2)(ii)(A) and (B) of this section by the
square root of \1/2\ (which equals 0.707107). If the Enterprise
determines that a longer holding period is appropriate for client-
facing derivative transactions, then it must use a larger scaling
factor to adjust for the longer holding period pursuant to paragraph
(b)(2)(ii)(F) of this section.
(D) An Enterprise 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 provided in paragraph (b)(2)(ii)(F) of
this section where the conditions in this paragraph (b)(2)(ii)(D)
apply. If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must adjust the supervisory
haircuts upward on the basis of a minimum holding period of twenty
business days for the following quarter (except when an Enterprise is
calculating EAD for a cleared transaction under Sec. 1240.37). If a
netting set contains one or more trades involving illiquid collateral,
an Enterprise must adjust the supervisory haircuts upward on the basis
of a minimum 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 longer than the holding period, then the
Enterprise must adjust the supervisory haircuts upward for that netting
set on the basis of a minimum holding period that is at least two times
the minimum holding period for that netting set.
(E)(1) An Enterprise must adjust the supervisory haircuts upward on
the basis of a holding period longer than ten business days for
collateral associated with derivative contracts (five business days for
client-facing derivative contracts) using the formula provided in
paragraph (b)(2)(ii)(F) of this section where the conditions in this
paragraph (b)(2)(ii)(E)(1) 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,
an Enterprise must use a minimum 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, an
Enterprise must use a minimum holding period of twenty business days.
(2) Notwithstanding paragraph (b)(2)(ii)(A) or (C) or
(b)(2)(ii)(E)(1) of this section, for collateral associated with a
derivative contract in a netting set under which more than two margin
disputes that lasted longer than the holding period occurred during the
two previous quarters, the minimum holding period is twice the amount
provided under paragraph (b)(2)(ii)(A) or (C) or (b)(2)(ii)(E)(1) of
this section.
(F) An Enterprise must adjust the standard supervisory haircuts
upward, pursuant to the adjustments provided in paragraphs
(b)(2)(ii)(C) through (E) of this section, using the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.032
Where:
(1) TM equals a holding period of longer than 10
business days for eligible margin loans and derivative contracts other
than client-facing derivative transactions or longer than 5 business
days for repo-style transactions and client-facing derivative
transactions;
(2) Hs equals the standard supervisory haircut; and
(3) Ts equals 10 business days for eligible margin loans
and derivative contracts other than client-facing derivative
transactions or 5 business days for repo-style transactions and client-
facing derivative transactions.
(G) If the instrument an Enterprise has lent, sold subject to
repurchase, or posted as collateral does not meet the definition of
financial collateral, the Enterprise must use a 25.0 percent haircut
for market price volatility (Hs).
(iii) Own internal estimates for haircuts. With the prior written
notice to FHFA, an Enterprise may calculate haircuts (Hs and
Hfx) using its own internal estimates of the volatilities of
market prices and foreign exchange rates.
(A) To use its own internal estimates, an Enterprise must satisfy
the following minimum quantitative standards:
(1) An Enterprise must use a 99th percentile one-tailed confidence
interval.
(2) The minimum holding period for a repo-style transaction is five
business days and for an eligible margin loan is ten business days
except for transactions or netting sets for which paragraph
(b)(2)(iii)(A)(3) of this section applies. When an Enterprise
calculates
[[Page 15332]]
an own-estimates haircut on a TN-day holding period, which
is different from the minimum holding period for the transaction type,
the applicable haircut (HM) is calculated using the
following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.033
Where:
(i) TM equals 5 for repo-style transactions and 10 for
eligible margin loans;
(ii) TN equals the holding period used by the Enterprise
to derive HN; and
(iii) HN equals the haircut based on the holding period
TN
(3) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must calculate the haircut using a
minimum holding period of twenty business days for the following
quarter (except when an Enterprise is calculating EAD for a cleared
transaction under Sec. 1240.37). If a netting set contains one or more
trades involving illiquid collateral or an OTC derivative that cannot
be easily replaced, an Enterprise must calculate the haircut using a
minimum 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 Enterprise
must calculate the haircut for transactions in that netting set on the
basis of a holding period that is at least two times the minimum
holding period for that netting set.
(4) An Enterprise is required to calculate its own internal
estimates with inputs calibrated to historical data from a continuous
12-month period that reflects a period of significant financial stress
appropriate to the security or category of securities.
(5) An Enterprise must have policies and procedures that describe
how it determines the period of significant financial stress used to
calculate the Enterprise's own internal estimates for haircuts under
this section and must be able to provide empirical support for the
period used. The Enterprise must obtain the prior approval of FHFA for,
and notify FHFA if the Enterprise makes any material changes to, these
policies and procedures.
(6) Nothing in this section prevents FHFA from requiring an
Enterprise to use a different period of significant financial stress in
the calculation of own internal estimates for haircuts.
(7) An Enterprise must update its data sets and calculate haircuts
no less frequently than quarterly and must also reassess data sets and
haircuts whenever market prices change materially.
(B) With respect to debt securities that are investment grade, an
Enterprise may calculate haircuts for categories of securities. For a
category of securities, the Enterprise must calculate the haircut on
the basis of internal volatility estimates for securities in that
category that are representative of the securities in that category
that the Enterprise has lent, sold subject to repurchase, posted as
collateral, borrowed, purchased subject to resale, or taken as
collateral. In determining relevant categories, the Enterprise must at
a minimum take into account:
(1) The type of issuer of the security;
(2) The credit quality of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the security.
(C) With respect to debt securities that are not investment grade
and equity securities, an Enterprise must calculate a separate haircut
for each individual security.
(D) Where an exposure or collateral (whether in the form of cash or
securities) is denominated in a currency that differs from the
settlement currency, the Enterprise must calculate a separate currency
mismatch haircut for its net position in each mismatched currency based
on estimated volatilities of foreign exchange rates between the
mismatched currency and the settlement currency.
(E) An Enterprise's own estimates of market price and foreign
exchange rate volatilities may not take into account the correlations
among securities and foreign exchange rates on either the exposure or
collateral side of a transaction (or netting set) or the correlations
among securities and foreign exchange rates between the exposure and
collateral sides of the transaction (or netting set).
(3) Simple VaR methodology. With the prior written notice to FHFA,
an Enterprise may estimate EAD for a netting set using a VaR model that
meets the requirements in paragraph (b)(3)(iii) of this section. In
such event, the Enterprise must set EAD equal to max {0, [([Sigma]E -
[Sigma]C) + PFE]{time} , where:
(i) [Sigma]E equals the value of the exposure (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has lent, sold subject to repurchase, or posted as collateral to the
counterparty under the netting set);
(ii) [Sigma]C equals the value of the collateral (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has borrowed, purchased subject to resale, or taken as collateral from
the counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the Enterprise's
empirically based best estimate of the 99th percentile, one-tailed
confidence interval for an increase in the value of ([Sigma]E -
[Sigma]C) over a five-business-day holding period for repo-style
transactions, or over a ten-business-day holding period for eligible
margin loans except for netting sets for which paragraph (b)(3)(iv) of
this section applies using a minimum one-year historical observation
period of price data representing the instruments that the Enterprise
has lent, sold subject to repurchase, posted as collateral, borrowed,
purchased subject to resale, or taken as collateral. The Enterprise
must validate its VaR model by establishing and maintaining a rigorous
and regular backtesting regime.
(iv) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must use a twenty-business-day
holding period for the following quarter (except when an Enterprise is
calculating EAD for a cleared transaction under Sec. 1240.37). If a
netting set contains one or more trades involving illiquid collateral,
an Enterprise must use a twenty-business-day holding period. 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
Enterprise must set its PFE for that netting set equal to an estimate
over a holding period that is at least two times the minimum holding
period for that netting set.
0
12. Amend Sec. 1240.41 by revising paragraph (c)(5), redesignating
paragraph (c)(6) as paragraph (c)(7), and adding new paragraph (c)(6)
to read as follows:
Sec. 1240.41 Operational requirements for CRT and other
securitization exposures.
* * * * *
(c) * * *
(5) Any clean-up calls relating to the credit risk transfer are
eligible clean-up calls;
(6) Any time-based calls relating to the credit risk transfer are
eligible time-based calls; and
* * * * *
0
13. Amend Sec. 1240.42 by revising paragraph (f) to read as follows:
Sec. 1240.42 Risk-weighted assets for CRT and other securitization
exposures.
* * * * *
(f) Interest-only mortgage-backed securities. For non-credit-
enhancing interest-only mortgage-backed securities that are not subject
to Sec. 1240.32(c), the
[[Page 15333]]
risk weight may not be less than 100 percent.
* * * * *
0
14. Amend Sec. 1240.400 by revising paragraph (c)(1), and removing
paragraph (d) to read as follows:
Sec. 1240.400 Stability capital buffer.
* * * * *
(c) * * *
(1) Increase in stability capital buffer. An increase in the
stability capital buffer of an Enterprise under this section will take
effect (i.e., be incorporated into the maximum payout ratio under table
1 to paragraph (b)(5) in Sec. 1240.11) on January 1 of the year that
is one full calendar year after the increased stability capital buffer
was calculated, provided that where a stability capital buffer under
paragraph (c)(2) of this section is calculated to be a decrease in the
stability capital buffer from the previously calculated scheduled
increase applicable on the same January 1, the decreased stability
capital buffer under paragraph (c)(2) of this section shall take
effect.
* * * * *
Clinton Jones,
General Counsel, Federal Housing Finance Agency.
[FR Doc. 2023-04041 Filed 3-10-23; 8:45 am]
BILLING CODE 8070-01-P
