Enterprise Regulatory Capital Framework-Commingled Securities, Multifamily Government Subsidy, Derivatives, and Other Enhancements, 83467-83492 [2023-26078]

Agencies

• FEDERAL HOUSING FINANCE AGENCY

[Federal Register Volume 88, Number 229 (Thursday, November 30, 2023)]
[Rules and Regulations]
[Pages 83467-83492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-26078]



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Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 

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Federal Register / Vol. 88, No. 229 / Thursday, November 30, 2023 / 
Rules and Regulations

[[Page 83467]]



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: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is 
adopting a final rule that amends 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 final rule 
includes modifications related to guarantees on commingled securities, 
multifamily mortgage exposures secured by government-subsidized 
properties, and derivatives and cleared transactions, among other 
items.

DATES: This final rule is effective on April 1, 2024, except for the 
amendments to Sec. Sec.  1240.36, 1240.37, and 1240.39, which are 
effective on January 1, 2026.

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:

Table of Contents

I. Introduction
II. Overview of the Final Rule
III. General Overview of Comments on the Proposed Rule
IV. Final Rule Requirements
    A. Guarantees on Commingled Securities
    B. Multifamily Government Subsidy Risk Multiplier
    C. Derivatives and Cleared Transactions
    D. Original Credit Scores for Single-Family Mortgage Exposures 
Without a Representative Original Credit Score
    E. Guarantee Assets
    F. Mortgage Servicing Assets
    G. Time-Based Calls for CRT Exposures
    H. Interest-Only Mortgage-Backed Securities
    I. Single-Family Countercyclical Adjustment
    J. Stability Capital Buffer
    K. Advanced Approaches
V. Representative Credit Scores for Single-Family Mortgage Exposures
VI. Effective Dates
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act
IX. Congressional Review Act

I. Introduction

    On March 13, 2023, FHFA published in the Federal Register a notice 
of proposed rulemaking \1\ (proposed rule) seeking comments on 
amendments to the ERCF \2\ that would modify various regulatory capital 
requirements for the Enterprises. The proposed rule included 
modifications 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.
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    \1\ 88 FR 15306.
    \2\ 12 CFR part 1240.
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    FHFA proposed these amendments to implement lessons learned through 
the continued application of the ERCF and to better reflect the risks 
faced by the Enterprises in operating their businesses. Regulatory 
capital requirements that properly account for risk will allow the 
Enterprises to build capital to enhance their safety and soundness and 
protect U.S. taxpayers against financial losses. FHFA is now adopting 
in this final rule many of the proposed amendments, with minor 
modifications as discussed in the relevant sections of this preamble. 
FHFA currently is not adopting the proposed amendment related to 
calculating the representative credit score for a single-family 
mortgage exposure when multiple credit scores are present. The 
amendments in the final rule will bolster the ERCF as it aims to ensure 
that each Enterprise operates in a safe and sound manner and is 
positioned to fulfill its statutory mission to provide stability and 
ongoing assistance to the secondary mortgage market throughout the 
economic cycle, in particular during periods of financial stress.

II. Overview of the Final Rule

    FHFA continuously monitors the risks faced by the Enterprises and 
reviews the appropriateness of the ERCF's capital requirements and 
buffers to mitigate those risks. After carefully considering the 
comments on the proposed rule, FHFA has determined that the amendments 
in the final rule will enhance the ERCF, contribute to the Enterprises' 
safety and soundness, and better enable the Enterprises to fulfill 
their statutory mission throughout the economic cycle. Specifically, 
the final rule will:
     Reduce the risk weight and credit conversion factor for 
guarantees on commingled securities to 5 percent and 50 percent, 
respectively,
     Introduce a risk multiplier of 0.6 for multifamily 
mortgage exposures secured by properties with certain government 
subsidies,
     Replace the current exposure methodology (CEM) with the 
standardized approach for counterparty credit risk (SA-CCR) as the 
method for computing exposure and risk-weighted asset amounts for 
derivatives and cleared transactions,
     Update the credit score assumption to 680 for single-
family mortgage exposures originated without a representative credit 
score,
     Introduce a risk weight of 20 percent for guarantee 
assets,
     Align the timing of the first application of the single-
family countercyclical adjustment with the first property value 
adjustment, and

[[Page 83468]]

     Delay the compliance date for the advanced approaches to 
January 1, 2028.
    FHFA has also identified several aspects of the ERCF where 
modifications will clarify and enhance the usefulness of the framework. 
Therefore, the final rule will also:
     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, subject to certain restrictions,
     Amend the risk weights for IO MBS to 0 percent, 20 
percent, and 100 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.

III. General Overview of Comments on the Proposed Rule

    FHFA received 23 public comment letters on the proposed rule from a 
variety of interested parties, including private individuals, trade 
associations, consumer advocacy groups, and financial institutions.\3\ 
In general, and as discussed in greater detail in the relevant sections 
of this preamble, commenters were supportive of FHFA's proposed 
amendments to the ERCF.
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    \3\ See comments on Enterprise Regulatory Capital Framework--
Commingled Securities, Multifamily Government Subsidy, Derivatives, 
and Other Enhancements, available at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=754. The 
comment period for the proposed rule closed on May 12, 2023.
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    One commenter recommended that FHFA consider climate-related 
financial risks in relation to most topics covered in the proposed 
rule. FHFA recognizes that climate change poses a serious threat to the 
U.S. housing finance system and the Agency has been actively working to 
ensure that its regulated entities are accounting for the risks 
associated with climate change and natural disasters.\4\ Outside of 
this rulemaking, FHFA will continue to evaluate how the ERCF can better 
account for climate-related financial risks.
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    \4\ More information on the steps FHFA has taken to evaluate and 
address climate-related risks can be found on FHFA's website, 
available at https://www.fhfa.gov/PolicyProgramsResearch/Programs/Pages/Climate-Change-and-ESG.aspx.
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    In addition to the feedback FHFA received on elements of the 
proposed rule, FHFA also received comments on many issues that are 
outside the scope of this rulemaking. In these letters, commenters 
offered views on important topics such as single-family and multifamily 
base risk weights, a multifamily countercyclical adjustment, a risk 
multiplier for multifamily senior housing, defeased loans, early 
redemption features in senior-subordinated CRT structures, the CRT 
risk-weight floor, the calculation of the stability capital buffer, the 
commingling fee, pricing for single-family loans originated by third-
parties, the alternative credit score implementation timeline, and the 
Enterprises' exits from conservatorships. FHFA acknowledges the 
importance of these topics and will thoroughly consider the public's 
feedback on these issues when relevant rulemakings and policy decisions 
are under consideration.

IV. Final Rule Requirements

A. Guarantees on Commingled Securities

    The proposed rule would reduce the risk weight under the 
standardized approach for guarantees on commingled securities from 20 
percent to 5 percent and the credit conversion factor for guarantees on 
commingled securities from 100 percent to 50 percent. A commingled 
security is a security issued by one Enterprise that is backed, in 
whole or in part, by collateral issued by the other Enterprise, subject 
to certain restrictions. FHFA posited that 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.
    Many commenters supported FHFA's proposal to lower the risk weight 
and credit conversion factor for guarantees on commingled securities. 
Several commenters supported the proposed 5 percent risk weight and 50 
percent credit conversion factor. Others expressed the view that 
guarantees on commingled securities should have a risk weight and 
credit conversion factor lower than 5 percent and 50 percent, 
respectively, stating that lower capital requirements would enhance the 
liquidity of the common MBS known as the Uniform Mortgage-Backed 
Security (UMBS) and foster the stability and liquidity of the secondary 
mortgage market. Several commenters recommended that FHFA eliminate all 
capital requirements for guarantees on commingled securities, 
suggesting that any provisions in the ERCF that might deter commingling 
activity by hindering the fungibility of the Enterprises' MBS or by 
driving commingling fees should be removed. One commenter opposed any 
non-zero risk weight because in the commenter's view, it results in a 
double capital charge on the securities underlying the UMBS, as each 
Enterprise is already required to hold capital for the underlying 
securities it guarantees.
    The final rule adopts FHFA's proposal to reduce the risk weight for 
guarantees on commingled securities from 20 percent to 5 percent and 
the credit conversion factor for guarantees on commingled securities 
from 100 percent to 50 percent. FHFA is adopting a non-zero risk weight 
and a non-zero credit conversion factor because a key tenet of the ERCF 
is that all exposures with risk, however small, are capitalized. The 
Enterprises' obligations do not have an unlimited explicit guarantee of 
the full faith and credit of the United States, despite the current 
support of the U.S. Department of the Treasury under the senior 
preferred stock purchase agreements (PSPAs). Therefore, the 
counterparty credit risk arising from guarantees on commingled 
securities is unique to the guaranteeing Enterprise and is not a double 
counting of the borrower credit risk on the underlying mortgage 
exposures.
    FHFA is retaining the 5 percent risk weight as proposed because the 
credit exposures arising out of these guarantees and the resultant 
losses 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. FHFA will continue to monitor the impact 
of a non-zero risk weight on the performance of the UMBS in keeping 
with the intent and purpose of the Single Security Initiative. 
Conceptually, the risk weight for guarantees on commingled securities 
in the final rule aligns with the risk-weight floor for retained CRT 
exposures. In addition, the final rule's 50 percent credit conversion 
factor for guarantees on commingled securities aligns with the 
prevailing regulatory capital treatment for off-balance sheet undrawn 
commitments with an original maturity of more than one year that are 
not unconditionally cancelable by the Enterprise.

B. Multifamily Government Subsidy Risk Multiplier

    The proposed rule would introduce a risk multiplier under the 
standardized approach equal to 0.6 for any multifamily mortgage 
exposures secured by one or more properties each with at

[[Page 83469]]

least one applicable government subsidy, subject to certain 
affordability criteria. Under the proposed rule, the applicable 
government subsidies would be limited to the following three primary 
subsidy programs: (i) Low-Income Housing Tax Credit (LIHTC),\5\ (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 the income of the 
renter is less than or equal to 80 percent of area median income (AMI).
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    \5\ Section 42 of the Internal Revenue Code (26 U.S.C.A. Sec.  
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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    The current rule does not differentiate between multifamily 
mortgage exposures secured by properties with a government subsidy and 
by properties without a government subsidy. Properties with government 
subsidies represent an important segment of the Enterprises' 
multifamily business models, and 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.
    Many commenters expressed support for FHFA's proposal to introduce 
a government subsidy 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. Many commenters supported the 0.6 risk multiplier as proposed, 
while a few commenters recommended that FHFA adopt a multiplier smaller 
than 0.6. One commenter recommended that FHFA consider a pro-rated risk 
multiplier scaled between 0.6 and 1.0 when a multifamily mortgage 
exposure is secured by multiple properties and some but not all of the 
properties have an applicable government subsidy.
    One commenter recommended that FHFA require an Enterprise to 
measure the percentage of affordable units at each property only at 
acquisition rather than on a quarterly basis, which the commenter 
understood was FHFA's intent, to avoid operational constraints and be 
consistent with the application of the housing goals regulation. 
Multiple commenters recommended that FHFA expand the affordability 
criteria to allow for exceptions in high-cost and very-high-cost 
markets. For example, one commenter suggested that an 80 percent of AMI 
threshold could be used in standard markets, while thresholds of 100 
percent of AMI and 120 percent of AMI could be used high-cost and very-
high-cost markets, respectively. Several commenters recommended that 
FHFA expand the list of applicable government subsidies, with suggested 
additions including the rural rental housing program under Section 515 
of the Housing Act of 1949 (Section 515 Rural Rental Housing Loans), 
Fannie Mae's Sponsor-Initiated Affordability (SIA) and Freddie Mac's 
Tenant Advancement Commitment (TAC) programs, block grant programs such 
as HOME Investment Partnerships or Community Development Block Grants, 
and tax-exempt private activity bonds used for multifamily housing.
    The final rule adopts a multifamily government subsidy risk 
multiplier that is scaled between 0.6 and 1.0 depending on the 
properties securing the multifamily mortgage exposure. When some but 
not all properties securing a multifamily mortgage exposure have an 
applicable government subsidy, each property with an applicable 
government subsidy will receive a property multiplier of 0.6 and each 
property without an applicable government subsidy will receive a 
property multiplier of 1.0, and the government subsidy risk multiplier 
for the multifamily mortgage exposure will be calculated as a weighted 
average of the property multipliers using the total number of units per 
building as weights.
    In addition, the final rule adopts the affordability criteria and 
list of applicable government subsidies substantially as proposed, with 
the addition of Section 515 Rural Rental Housing Loans as an applicable 
government subsidy. Section 515 Rural Rental Housing Loans are direct 
loans made by the United States Department of Agriculture (USDA) to 
finance affordable rental housing for low- to moderate-income (50 
percent to 80 percent of AMI) renters in rural communities. This 
program is analogous to Section 8 project-based rental assistance, and 
as with LIHTC and Section 8, affordability is required for the life of 
the loan and accompanied by a use restriction. For these reasons, the 
final rule includes Section 515 Rural Housing Loans as an applicable 
government subsidy.
    To ensure that the applicable subsidy programs meet the 
affordability criteria without creating ongoing compliance and 
operational burdens for the Enterprises, the final rule requires that 
at least 20 percent of the property's units are restricted to be 
affordable units per a regulatory agreement, recorded use restriction, 
a housing-assistance payments contract, or other restrictions codified 
in loan agreements. Each program included in the list of applicable 
government subsidies has its own requirements that ensure the subsidies 
are significant, long-term, and continuous. By requiring the 
affordability criteria to be included in contractual provisions, FHFA 
believes it is not necessary for the final rule to specify that the 
percentage of affordable units be measured only at acquisition. FHFA 
expects an Enterprise to validate that a property is receiving a valid 
government subsidy at acquisition in order for the multifamily mortgage 
exposure secured by that property to receive a government subsidy risk 
multiplier less than 1.0, and subsequently not to undertake additional 
compliance exercises on top of what is required by the subsidy programs 
themselves.
    The final rule does not include a government subsidy risk 
multiplier less than 0.6. In a data-driven exercise, FHFA determined 
that a 40 percent decrease in regulatory capital appropriately captures 
the lower credit risk associated with multifamily mortgage exposures 
secured by properties with a significant, long-term, and continuous 
government subsidy. The final rule does not include exceptions for 
high-cost and very-high-cost markets in order to mitigate the 
operational complexity of applying the government subsidy risk 
multiplier, as rental costs and income levels within metro areas change 
over time.
    Finally, the final rule does not include the Enterprises' voluntary 
rent restriction programs (SIA and TAC), block grant programs, or tax-
exempt private activity bonds as applicable government subsidies. While 
these programs do often support affordable housing and provide benefits 
to lenders, FHFA sought to include as applicable government subsidies 
programs administered by the Federal or a State government that span 
most of the

[[Page 83470]]

Enterprises' affordable businesses and that have significant 
performance data available. Many of the additional programs identified 
by commenters as recommended inclusions are either non-governmental, 
are used as a layer in a financing stack in conjunction with an already 
applicable government subsidy, do not have performance data readily 
available for FHFA to assess, or are not specifically oriented to the 
creation or preservation of affordable rental housing.

C. Derivatives and Cleared Transactions

    The proposed rule would require an Enterprise to calculate risk-
weighted assets for the standardized approach based on the exposure 
amounts of its over-the-counter (OTC) derivative contracts, cleared 
derivative contracts, and contributions of commitments to mutualized 
loss sharing agreements with central counterparties (i.e., default fund 
contributions) calculated using SA-CCR. The proposed rule would also 
require an Enterprise to use these same exposure amounts for inclusion 
in adjusted total assets. The current regulation requires an Enterprise 
to use the CEM to determine the exposure amounts of its OTC derivative 
contracts and cleared derivative contracts and the risk-weighted assets 
amounts of its default fund contributions.
    The proposed rule would require an Enterprise to apply SA-CCR in 
the following ways:
1. Netting Sets
    The proposed rule would require an Enterprise to 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).
2. Hedging Sets
    To calculate potential future exposure (PFE), the proposed rule 
would require an Enterprise to fully or partially net derivative 
contracts within the same netting set that share similar risk factors. 
This approach would recognize that derivative contracts with similar 
risk factors share economically meaningful relationships with close 
correlations that make netting appropriate.
    Under SA-CCR, a hedging set means those derivative contracts within 
the same netting set that share similar risk factors. The proposed rule 
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
    The proposed rule would require an Enterprise to 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 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 omit exposure 
calculations related to internal model methodology to reduce reliance 
on the Enterprises' internal model results.
    The proposed rule would maintain the current collateral haircut 
approach and standard supervisory haircuts for collateralized 
transactions. However, the proposed rule would remove the current 
simple approach and add the U.S. banking framework's simple value-at-
risk (VaR) methodology.
    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 to reduce reliance on the Enterprises' internal model 
results.
    Two commenters supported FHFA's proposal to replace CEM with SA-
CCR, with certain revisions. Both commenters recommended an 
implementation timeline of no less than 24 months due to the complexity 
of implementing SA-CCR and to be generally consistent with the 
transition period offered to large U.S. banking organizations when they 
implemented similar financial regulatory reforms.\6\ One commenter 
recommended that FHFA provide optionality allowing an Enterprise to use 
either CEM or SA-CCR after any regulatory transition period. The 
commenter stated that Enterprise derivative portfolios more closely 
resemble the derivative portfolios of U.S. banking organizations 
subject to the standardized approach than those subject to the advanced 
approaches, so CEM might be more appropriate.
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    \6\ See 85 FR 4362 (Jan. 24, 2020).
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    The final rule adopts the requirements that an Enterprise must 
determine the exposure amounts of its OTC derivative contracts, cleared 
derivative contracts, and default fund contributions, for use in 
calculating risk-weighted assets under the standardized approach and 
adjusted total assets, using SA-CCR substantially as proposed, with a

[[Page 83471]]

transition period resulting in an effective date of January 1, 2026. 
FHFA continues to believe that relative to CEM, SA-CCR provides 
important improvements to risk sensitivity and calibration, including 
by differentiating between margined and unmargined derivative contracts 
and recognizing the benefits of netting agreements, resulting in more 
appropriate capital requirements for derivative contracts. The final 
rule also adopts the requirement to add CVA risk-weighted assets to the 
calculation of standardized total risk-weighted assets.
    FHFA agrees with commenters that a 24-month transition period will 
allow the Enterprises a suitable amount of time to update their systems 
and processes to implement SA-CCR. During the transition period, the 
Enterprises must continue to use CEM to calculate exposure amounts for 
derivatives and cleared transactions, as provided in prior Sec. Sec.  
1240.36, 1240.37, and 1240.39.\7\ On January 1, 2026, an Enterprise 
must calculate exposure amounts for derivates and cleared transactions 
using SA-CCR as detailed in this Sec. Sec.  1240.36, 1240.37, and 
1240.39.
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    \7\ See 85 FR 82150 (Dec. 17, 2020).
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    Regarding the commenter's suggestion to make SA-CCR an optional 
requirement, although the Enterprises' derivatives portfolios are 
relatively uncomplicated today, that may not be the case after the 
Enterprises exit their conservatorships. Furthermore, in constructing 
the ERCF, FHFA has consistently developed requirements similar to those 
applicable to banking organizations subject to the advanced approaches 
rather than those subject to the standardized approach. For example, 
the ERCF includes a stability capital buffer (analogous to surcharge 
for global systemically important banks), a leverage buffer, market 
risk capital requirements, and operational risk capital requirements, 
none of which are applicable to banking organizations subject to the 
standardized approach. Following this reasoning, and to limit certain 
capital arbitrage opportunities between Enterprises and between the 
Enterprises and large banking organizations, the final rule does not 
include CEM as an option for calculating regulatory capital ratios 
after the transition period.

D. Original Credit Scores for Single-Family Mortgage Exposures Without 
a Representative Original Credit Score

    The proposed rule would require an Enterprise to assign an original 
credit score of 680 under the standardized approach to a single-family 
mortgage exposure without a permissible credit score at origination 
(unscored), subject to Enterprise verification that none of the 
borrowers have a credit score at one of the repositories. The current 
regulation requires an Enterprise to assign a credit score of 600 to 
any single-family mortgage exposure that is unscored. The current 
regulation's 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.
    Four commenters expressed full support for FHFA's proposal to 
increase the assigned original credit score for unscored single-family 
mortgage exposures from 600 to 680. Therefore, to reflect 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,\8\ the final rule 
adopts the requirement to assign an original credit score of 680 to 
unscored single-family mortgage exposures without a permissible credit 
score, subject to Enterprise verification that none of the borrowers 
have a credit score at one of the repositories, as proposed.
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    \8\ 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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E. Guarantee Assets

    The proposed rule would introduce a 20 percent risk weight under 
the standardized approach for an Enterprise's 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 currently required to assign a 100 percent risk weight 
(Sec.  1240.32(i)(5)) to guarantee assets.
    One commenter supported FHFA's proposed 20 percent credit risk 
weight for guarantee assets. In addition, in response to a question 
posed in the proposed rule, the commenter recommended that FHFA not 
include guarantee assets in the definition of covered positions subject 
to market risk capital requirements. The commenter expressed the view 
that because guarantee assets are not positions held for the purpose of 
short-term resale or with the intent of benefitting from short-term 
price movements, the positions do not contribute to an Enterprise's 
interest rate risk.
    The final rule adopts the risk weight of 20 percent for guarantee 
assets as proposed. In addition, and in consideration of the feedback 
FHFA received, the final rule does not include guarantee assets in the 
definition of covered positions subject to market risk capital 
requirements.

F. Mortgage Servicing Assets

    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. 
Currently, the ERCF defines an MSA as the contractual right to service 
for a fee mortgage loans that are owned by others. Therefore, this 
definition omits MSAs created when an Enterprise acquires servicing 
rights on mortgage loans already owned by the Enterprise, bifurcating 
the capital treatment for MSAs by the owner of the underlying loans.
    One commenter supported FHFA's proposal to expand the definition of 
MSA to include servicing rights on mortgage loans owned by the 
acquiring Enterprise. No commenters raised objections or provided 
alternative recommendations to the proposal. The final rule adopts the 
definition of MSA as proposed.

G. Time-Based Calls for CRT Exposures

    The proposed rule would amend the ERCF to permit eligible time-
based calls for CRT exposures under the standardized approach, defining 
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

[[Page 83472]]

de minimis credit protection to the securitization; and
    (iii) Is only exercisable five years after the securitization 
exposure's issuance date.
    Under the current regulation, 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 in the credit risk transfer approach.\9\
---------------------------------------------------------------------------

    \9\ 12 CFR 1240.44.
---------------------------------------------------------------------------

    Three commenters supported FHFA's proposal to permit eligible time-
based calls for CRT exposures. One commenter recommended that FHFA 
modify the proposed definition of time-based calls to be a contractual 
provision that permits an originating Enterprise to redeem a 
securitization or credit risk transfer exposure on or after a specified 
redemption or cancellation date to clarify FHFA's intent that eligible 
time-based calls will be permitted for all CRT exposures. While this is 
FHFA's intent, the Agency believes that the proposed definition without 
the phrase ``or credit risk transfer'' is sufficient because the 
definition of a securitization exposure in Sec.  1240.2 explicitly 
includes both retained CRT and acquired CRT exposures. Further, the 
proposed rule would only modify the operational criteria for credit 
risk transfers (Sec.  1240.2(c)), implying that the only securitization 
exposures that would be affected by the amendment are CRT exposures. 
One commenter recommended that FHFA modify proposed restriction (i) to 
be ``is exercisable no less than five years after the securitization or 
credit risk transfer issuance or effective date,'' because the 
commenter expressed the view that adding ``or effective date'' would 
clarify FHFA's intent that eligible time-based calls will be permitted 
for CRT that do not involve securitizations, such as reinsurance 
transactions. Finally, one commenter recommended that for CRT involving 
single-family mortgage exposures with terms less than or equal to 20 
years, the proposed five-year exercise restriction be shortened to four 
years.
    The final rule adopts the ERCF amendment permitting eligible time-
based calls for CRT exposures substantially as proposed, with revisions 
reflecting two commenter suggestions. First, the final rule adopts the 
suggested clarification that an eligible time-based call is one that is 
exercisable no less than a certain number of years after the 
securitization or CRT issuance or effective date. This revision 
reflects FHFA's intent that eligible time-based calls will be permitted 
for CRT that do not involve securitizations. Second, the final rule 
adopts the suggested modification to shorten the exercise restriction 
for CRT involving single-family mortgage exposures with terms less than 
or equal to 20 years to no less than four years after the CRT issuance 
or effective date. This revision reflects the risk reduction associated 
with the faster amortization of shorter-term loans relative to longer-
term loans.

H. Interest-Only Mortgage-Backed Securities

    The proposed rule would clarify that, under the standardized 
approach, an Enterprise must assign a zero percent risk weight to an IO 
MBS issued and guaranteed by the Enterprise, a 20 percent risk weight 
to an IO MBS issued and guaranteed by the other Enterprise, and a 100 
percent risk weight to an IO MBS issued by a non-Enterprise entity. 
Currently, the ERCF contains conflicting requirements that an 
Enterprise must assign a zero percent risk weight to any MBS guaranteed 
by the Enterprise (other than any retained CRT exposure), but also that 
the risk weight for a non-credit-enhancing IO MBS must not be less than 
100 percent.
    One commenter supported FHFA's proposal to amend the risk weights 
for IO MBS to clarify which risk weight must be applied when an IO MBS 
is issued and guaranteed by the Enterprise versus when an IO MBS is 
issued by a non-Enterprise entity. No commenters raised objections or 
provided alternative recommendations to the proposal. The final rule 
adopts the updated IO MBS risk weights as proposed.

I. Single-Family Countercyclical Adjustment

    The proposed rule would require under the standardized approach an 
Enterprise to apply to a single-family mortgage exposure's loan-to-
value ratio (LTV) the first single-family countercyclical adjustment 
simultaneously with the first property value adjustment, six months 
after acquisition. Currently, an Enterprise is required to apply the 
first single-family countercyclical adjustment after acquisition 
without delay, while the Enterprise is required to apply the first 
property value adjustment after a six-month delay to allow for a rate 
of change to be computed following the quarterly release of FHFA's 
Purchase-only State-level House Price Index.
    One commenter supported FHFA's proposal to align the timing between 
the application of the first single-family countercyclical adjustment 
and the first property value adjustment. However, the commenter 
recommended that both adjustments be applied immediately rather than 
after a six-month delay. The commenter did not provide analytical 
support for this recommendation.
    The final rule adopts the timing adjustment to the application of 
the first single-family countercyclical adjustment as proposed. FHFA 
believes this modification will 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.

J. Stability Capital Buffer

    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. Under the ERCF, increases in the 
stability capital buffer are implemented with a two-year delay, while 
decreases are implemented with a one-year delay. This delay difference 
potentially creates a situation where an increase and a decrease in the 
stability capital buffer are scheduled to become effective at the same 
time.
    One commenter supported FHFA's proposed clarification to the 
calculation of the stability capital buffer. No commenters raised 
objections or provided alternative recommendations to the proposal. The 
final rule adopts the clarification as proposed.

K. Advanced Approaches

    The proposed rule would extend the compliance date for an 
Enterprise's advanced approaches from January 1, 2025, to January 1, 
2028. The ERCF's advanced approaches for determining risk-weighted 
assets rely on an Enterprise's internal models, and 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.
    Commenters fully supported FHFA's proposal to extend the compliance 
date of the advanced approaches. One commenter expressed the view that 
the advanced approaches are exceptionally burdensome and undermine the 
capital visibility provided by the ERCF's standardized approach.

[[Page 83473]]

    The final rule extends the compliance date for an Enterprise's 
advanced approaches to January 1, 2028, as proposed. In the proposed 
rule, FHFA discussed how U.S. banking regulators were signaling 
potential changes in the U.S. banking framework that would further 
strengthen capital rules by reducing reliance on internal bank models. 
To this end, the OCC, Federal Reserve Board, and the Federal Deposit 
Insurance Corporation (FDIC) recently issued a notice of proposed 
rulemaking \10\ that would substantially revise the regulatory capital 
framework for banking organizations with total assets of $100 billion 
or more and banking organizations with significant trading activity, 
including by replacing the advanced approaches with a new expanded 
risk-based approach.
---------------------------------------------------------------------------

    \10\ See 88 FR 64028 (Sept. 18, 2023).
---------------------------------------------------------------------------

V. Representative Credit Scores for Single-Family Mortgage Exposures

    FHFA currently is not adopting the proposed modification to the 
procedure for selecting a representative credit score for a single-
family mortgage exposure when multiple credit scores have been 
submitted for at least one borrower. The proposed methodology would 
have required an Enterprise to use an average credit score for each 
borrower whenever multiple scores are present as opposed to the current 
methodology which requires an Enterprise to select the median borrower 
credit score when three scores are present or the lower borrower credit 
score when two scores are present.
    FHFA proposed this modification to prevent a downward shift in 
representative credit scores under the current methodology once the 
Enterprises require a minimum of two, rather than three, credit reports 
(bi-merge credit score requirement) from the repositories.\11\ While 
the implementation date for the bi-merge credit score requirement has 
yet to be announced, the proposed modification would have positioned 
the Enterprises to account for the new requirement upon implementation.
---------------------------------------------------------------------------

    \11\ FHFA Announces Validation of FICO 10T and VantageScore 4.0 
for Use by Fannie Mae and Freddie Mac [verbar] 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.
---------------------------------------------------------------------------

    Many commenters supported FHFA's proposal to modify the current 
procedure for selecting a representative credit score for single-family 
mortgage exposures. However, other commenters expressed concern over 
the proposed change. Several commenters stated that it is difficult or 
impossible to evaluate the proposed change without additional data and 
when the eventual effects of the bi-merge credit score requirement and 
the transition to alternative credit scores are not yet known. Others 
expressed concern that changes to the ERCF could lead to policy changes 
at the Enterprises that would front-run the implementation of the bi-
merge credit score requirement and the transition to alternative credit 
scores. FHFA also received a number of comments on the bi-merge credit 
score requirement and on the use of alternative credit scores more 
generally, but those initiatives are outside the scope of this 
rulemaking.
    One commenter provided empirical support for FHFA's proposal to use 
the average credit score when multiple scores are present rather than 
the median/lower score. However, the commenter also suggested that FHFA 
should require a third score when the two submitted scores are more 
than 30 points apart to minimize the impact of outliers. In addition, 
the commenter requested further analysis on, among other things, the 
potential impact of the bi-merge credit score requirement on race, 
gender, and geographic location for high-LTV loans with bi-merge 
representative credit scores greater than or equal to 10 points higher 
or lower than the score derived under the tri-merge process. Several 
commenters expressed the view that they could not comment on the 
appropriateness of the representative credit score proposal until FHFA 
or the Enterprises released additional data on the bi-merge credit 
score requirement under Classic FICO scores and under the new 
alternative credit scoring models. Several commenters also expressed 
criticism that FHFA's analysis only considered Classic FICO scores, 
suggesting that the results of the analysis might differ after the 
Enterprises begin accepting alternative credit scores.
    FHFA proposed this narrow change to the calculation of a 
representative credit scores to prepare the ERCF for the eventual 
transition to the bi-merge credit score requirement. In March 2023, 
FHFA and the Enterprises announced plans for stakeholder input on 
proposed milestones as the Enterprises work to replace the Classic FICO 
credit score model with the FICO 10T and the VantageScore 4.0 credit 
score models and transition from the tri-merge requirement to the bi-
merge requirement.\12\ In September 2023, FHFA announced additional 
opportunities for ongoing public engagement to facilitate the 
transition to updated credit score models and credit report 
requirements for loans acquired by the Enterprises, and also that the 
Agency expects the implementation date for the bi-merge requirement to 
occur later than the first quarter of 2024, as was initially 
proposed.\13\ In consideration of the delayed implementation date for 
the bi-merge requirement and the ongoing public engagement related to 
credit scores, FHFA has determined to not adopt the proposed change to 
the calculation of representative credit scores at this time.
---------------------------------------------------------------------------

    \12\ See https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Public-Engagement-Process-for-Implementation-of-Updated-Credit-Score-Requirements.aspx.
    \13\ See https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Next-Phase-of-Public-Engagement-Process-for-Updated-Credit-Score-Requirements.aspx.
---------------------------------------------------------------------------

    FHFA may, in the future, finalize this aspect of the proposed rule. 
The Agency's options for doing so include adopting the changes 
substantially as proposed without another notice and comment period, 
reopening the comment period for the proposed change, or reproposing 
this item in another notice of proposed rulemaking.

VI. Effective Dates

    Under the rule establishing the ERCF published on December 17, 
2020, 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. With the 
exception of the amendments related to derivatives and cleared 
transactions, the effective date for the amendments in this final rule 
will be April 1, 2024. The effective date for the amendments 
implementing SA-CCR and for the other amendments to Sec. Sec.  1240.36, 
1240.37, and 1240.39 will be January 1, 2026.

VII. 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 final 
rule contains no such collection of information requiring OMB approval 
under the PRA. Therefore, no information has been submitted to OMB for 
review.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (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

[[Page 83474]]

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 final rule under the RFA. FHFA certifies 
that the final rule will not have a significant economic impact on a 
substantial number of small entities because the final rule is 
applicable only to the Enterprises, which are not small entities for 
purposes of the RFA.

IX. Congressional Review Act

    In accordance with the Congressional Review Act (5 U.S.C. 801 et 
seq.), FHFA has determined that this final rule is a major rule and has 
verified this determination with the Office of Information and 
Regulatory Affairs of OMB.

List of Subjects for 12 CFR Part 1240

    Capital, Credit, Enterprise, Investments, Reporting and 
recordkeeping requirements.

    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 
amends part 1240 of subchapter C of title 12 of the Code of Federal 
Regulations chapter XII, 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. Effective April 1, 2024, 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 definitions for ``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 a definition for ``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'';
0
g. Adding in alphabetical order definitions for ``Guarantee asset'' and 
``Independent collateral'';
0
h. Revising the definition of ``Mortgage servicing assets (MSAs)'';
0
i. Adding in alphabetical order a definition for ``Net independent 
collateral amount'';
0
j. Revising the definition of ``Netting set'';
0
k. Adding in alphabetical order definitions for ``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 (i)(viii); and
0
m. Adding in alphabetical order definitions for ``Sub-speculative 
grade'', ``Time-based call'', ``Uniform Mortgage-backed Security'', 
``Value-at-Risk'', ``Variation margin'', ``Variation margin amount'', 
and ``Volatility derivative contract''.
    The revisions and additions 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

[[Page 83475]]

    (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 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 or effective date, where the 
underlying collateral is mortgage exposures with amortization terms 
greater than 20 years.
    (4) Is exercisable no less than four years after the securitization 
or credit risk transfer issuance date or effective date, where the 
underlying collateral is mortgage exposures with amortization terms of 
20 years or less.
* * * * *
    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

[[Page 83476]]

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.
* * * * *
    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. Effective April 1, 2024, amend Sec.  1240.4 in paragraph (c) by 
removing the year ``2025'' and adding in its place the year ``2028''.

0
4. Effective April 1, 2024, amend Sec.  1240.31 by:
0
a. In paragraph (a)(1)(iv) removing the word ``or'' after the 
semicolon;
0
b. In paragraph (a)(1)(v) removing the period after ``1240.52'' and 
adding ``; or'' in its place; and
0
c. Adding paragraph (a)(1)(vi).
    The addition reads 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. Effective April 1, 2024, 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. Effective April 1, 2024, amend Sec.  1240.33 in paragraph (a) 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.
* * * * *

[[Page 83477]]



                    Table 1 to Paragraph (a)--Permissible Values and Additional Instructions
----------------------------------------------------------------------------------------------------------------
            Defined term                       Permissible values                  Additional instructions
----------------------------------------------------------------------------------------------------------------
Cohort burnout.....................  ``No burnout,'' if the single-family   High if unable to determine.
                                      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 <= 100   0 percent if outside of permissible
                                      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.
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..  If there are credit scores from
                                                                             multiple credit repositories for a
                                                                             borrower, use the following logic
                                                                             to determine a single original
                                                                             credit score:
                                                                                If there are credit
                                                                                scores from two repositories,
                                                                                take the lower credit score.
                                                                                If there are credit
                                                                                scores from three repositories,
                                                                                use the middle credit score.
                                                                                If there are credit
                                                                                scores from three repositories
                                                                                and two of the credit scores are
                                                                                identical, use the identical
                                                                                credit score.
                                                                               If there are multiple borrowers,
                                                                                use the following logic to
                                                                                determine a single original
                                                                                credit score:
                                                                                Using the logic above,
                                                                                determine a single credit score
                                                                                for each borrower.
                                                                                Select the lowest single
                                                                                credit score across all
                                                                                borrowers.
                                                                            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.
                                                                            600 if outside of permissible range
                                                                             or unable to determine.
Origination channel................  Retail, third-party origination (TPO)  TPO includes broker and
                                                                             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
                                      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 <= 850.  If there are credit scores from
                                                                             multiple credit repositories for a
                                                                             borrower, use the following logic
                                                                             to determine a single refreshed
                                                                             credit score:

[[Page 83478]]

 
                                                                                If there are credit
                                                                                scores from two repositories,
                                                                                take the lower credit score.
                                                                                If there are credit
                                                                                scores from three repositories,
                                                                                use the middle credit score.
                                                                                If there are credit
                                                                                scores from three repositories
                                                                                and two of the credit scores are
                                                                                identical, use the identical
                                                                                credit score.
                                                                               If there are multiple borrowers,
                                                                                use the following logic to
                                                                                determine a single Refreshed
                                                                                Credit Score:
                                                                                Using the logic above,
                                                                                determine a single credit score
                                                                                for each borrower.
                                                                                Select the lowest single
                                                                                credit score across all
                                                                                borrowers.
                                                                               600 if outside of permissible
                                                                                range or unable to determine.
Streamlined refi...................  Yes, no..............................  No if unable to determine.
Subordination......................  0 percent <= Subordination <= 80       80 percent if outside permissible
                                      percent.                               range.
----------------------------------------------------------------------------------------------------------------

* * * * *

0
7. Effective April 1, 2024, amend Sec.  1240.34 by:
0
a. Adding in alphabetical order definitions for ``Affordable unit'' and 
``Government subsidy'' in paragraph (a); and
0
b. Revising table 1 to paragraph (a) and 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:
    (i) At least 20 percent of the property's units are restricted to 
be affordable units per a regulatory agreement, recorded use 
restriction, a housing-assistance payments contract, or other 
restrictions codified in loan agreements; and
    (ii) The property benefits from one of the following government 
programs:
    (A) Low Income Housing Tax Credits (LIHTC);
    (B) Section 8 project-based rental assistance;
    (C) Section 515 Rural Rental Housing Loans; or
    (D) State/Local affordable housing programs that require the 
provision of affordable housing for the life of the loan.
* * * * *
BILLING CODE 8070-01-P

Table 1 to Paragraph (a)--Permissible Values and Additional 
Instructions

[[Page 83479]]

[GRAPHIC] [TIFF OMITTED] TR30NO23.028

* * * * *
    (d) * * *

Table 4 to Paragraph (d)--Multifamily Risk Multipliers

[[Page 83480]]

[GRAPHIC] [TIFF OMITTED] TR30NO23.029

BILLING CODE 8070-01-C
    \1\ If a multifamily mortgage exposure is collateralized by 
multiple properties, calculate a weighted average government subsidy 
multiplier by assigning a 0.6 multiplier to each property with a 
government subsidy and 1.0 multiplier to each property without a 
government subsidy, and using the total number of units in a 
property as weights.


0
8. Effective April 1, 2024, 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:

[[Page 83481]]

    (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. Effective January 1, 2026, 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 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 this paragraph (c), 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 this paragraph (c).
    (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 this paragraph (c).
    (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 contracts, 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 (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 this paragraph (c), 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) as if 
the netting set

[[Page 83482]]

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 
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:
[GRAPHIC] [TIFF OMITTED] TR30NO23.030

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:

[[Page 83483]]

[GRAPHIC] [TIFF OMITTED] TR30NO23.031

    (B) Formula 2 is as follows:
    [GRAPHIC] [TIFF OMITTED] TR30NO23.032
    
Where in paragraphs (c)(8)(i)(A) and (B) of this section:

(1) AddOn TB1 IR 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) AddOn TB2 IR 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) AddOn TB3 IR 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 
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] TR30NO23.033

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) [rho]kPkequals 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] TR30NO23.034

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 (Type k) equals the sum of the adjusted 
derivative contract amounts, as determined under paragraph (c)(9) of 
this section, for all derivative contracts within the hedging set 
that reference commodity type.
(D) P 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

[[Page 83484]]

supervisory duration, as calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TR30NO23.035

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 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:

Table 1 to Paragraph (c)(9)(iii)(B)(1)--Supervisory Delta Adjustment 
for Options Contracts
[GRAPHIC] [TIFF OMITTED] TR30NO23.036

    (2) As used in the formulas in table 1 to paragraph 
(c)(9)(iii)(B)(1):
    (i) E 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).


[[Page 83485]]


    (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] TR30NO23.037

    (2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this 
section:
    (i) A is the attachment point, which equals the ratio of the 
notional amounts of all underlying exposures that are subordinated to 
the 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:
[GRAPHIC] [TIFF OMITTED] TR30NO23.038

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] TR30NO23.039

Where M equals the greater of 10 business days and the remaining 
maturity of the contract, as measured in business days.

    (C) For purposes of paragraph (c)(9)(iv) of this section, 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;
VNS is the sum of the fair values (after excluding any 
valuation adjustments) of the derivative contracts within the 
netting set NS; and
(B) CMA is the sum of the net independent collateral 
amount and the variation margin amount applicable to the

[[Page 83486]]

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 
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 grade.......  N/A............................             100              50             6.0
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 nth-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.

[[Page 83487]]

    (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] TR30NO23.040

Where:

A = [Sigma]i 0.75 x wi2 x (Mi x EADitotal-Mihedge x 
Bi)2

(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
------------------------------------------------------------------------
                                                           Weight wi (in
                Internal PD (in percent)                     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. Effective January 1, 2026, 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

[[Page 83488]]

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 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] TR30NO23.041

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) DFCCPCMpref 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:
[GRAPHIC] [TIFF OMITTED] TR30NO23.042

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.

[[Page 83489]]

    (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 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. Effective January 1, 2026, 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 83490]]



                              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 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).
    (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] TR30NO23.043

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; Hs equals the standard supervisory haircut; 
and
(2) 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 an own-estimates haircut on a TN-day holding 
period, which is different from

[[Page 83491]]

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] TR30NO23.044

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. Effective April 1, 2024, amend Sec.  1240.41 by revising paragraph 
(c)(5), redesignating paragraph (c)(6) as paragraph (c)(7), and adding 
new paragraph (c)(6).
    The revision and addition 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. Effective April 1, 2024, 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

[[Page 83492]]

that are not subject to Sec.  1240.32(c), the risk weight may not be 
less than 100 percent.
* * * * *

0
14. Effective April 1, 2024, amend Sec.  1240.400 by revising paragraph 
(c)(1) and removing paragraph (d).
    The revision reads 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) shall take effect.
* * * * *

Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2023-26078 Filed 11-29-23; 8:45 am]
BILLING CODE 8070-01-P