[Federal Register Volume 85, Number 16 (Friday, January 24, 2020)]
[Rules and Regulations]
[Pages 4362-4444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27249]
[[Page 4361]]
Vol. 85
Friday,
No. 16
January 24, 2020
Part II
Department of the Treasury
-----------------------------------------------------------------------
Office of the Comptroller of the Currency
-----------------------------------------------------------------------
12 CFR Parts 3 and 32
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Part 217
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Parts 324 and 327
Standardized Approach for Calculating the Exposure Amount of Derivative
Contracts; Final Rule
Federal Register / Vol. 85 , No. 16 / Friday, January 24, 2020 /
Rules and Regulations
[[Page 4362]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 32
[Docket ID OCC-2018-0030]
RIN 1557-AE44
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket No. R-1629]
RIN 7100-AF22
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 324 and 327
RIN 3064-AE80
Standardized Approach for Calculating the Exposure Amount of
Derivative Contracts
AGENCY: The Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; and the Federal
Deposit Insurance Corporation.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation are issuing a final rule to implement a new
approach--the standardized approach for counterparty credit risk (SA-
CCR)--for calculating the exposure amount of derivative contracts under
these agencies' regulatory capital rule. Under the final rule, an
advanced approaches banking organization may use SA-CCR or the internal
models methodology to calculate its advanced approaches total risk-
weighted assets, and must use SA-CCR, instead of the current exposure
methodology, to calculate its standardized total risk-weighted assets.
A non-advanced approaches banking organization may use the current
exposure methodology or SA-CCR to calculate its standardized total
risk-weighted assets. The final rule also implements SA-CCR in other
aspects of the capital rule. Notably, the final rule requires an
advanced approaches banking organization to use SA-CCR to determine the
exposure amount of derivative contracts included in the banking
organization's total leverage exposure, the denominator of the
supplementary leverage ratio. In addition, the final rule incorporates
SA-CCR into the cleared transactions framework and makes other
amendments, generally with respect to cleared transactions.
DATES: Effective date: April 1, 2020. Mandatory compliance date:
January 1, 2022, for advanced approaches banking organizations.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Director or Guowei Zhang, Risk Expert,
Capital Policy, (202) 649-7106; Kevin Korzeniewski, Counsel, or Ron
Shimabukuro, Senior Counsel, Chief Counsel's Office, (202) 649-5490;
or, for persons who are deaf or hearing impaired, TTY, (202) 649-5597.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; David Lynch, Deputy Associate Director, (202) 452-2081; Elizabeth
MacDonald, Manager, (202) 475-6316; Michael Pykhtin, Manager, (202)
912-4312; Mark Handzlik, Lead Financial Institutions Policy Analyst,
(202) 475-6636; Sara Saab, Senior Financial Institutions Policy Analyst
II, (202) 872-4936; or Cecily Boggs, Senior Financial Institutions
Policy Analyst II, (202) 530-6209; Division of Supervision and
Regulation; or Mark Buresh, Senior Counsel, (202) 452-5270; Gillian
Burgess, Senior Counsel (202) 736-5564; or Andrew Hartlage, Counsel,
(202) 452-6483; Legal Division, Board of Governors of the Federal
Reserve System, 20th and C Streets NW, Washington, DC 20551. For the
hearing impaired only, Telecommunication Device for the Deaf, (202)
263-4869.
FDIC: Bobby R. Bean, Associate Director, [email protected]; Irina
Leonova, Senior Policy Analyst, [email protected]; Peter Yen, Senior
Policy Analyst, [email protected], Capital Markets Branch, Division of Risk
Management Supervision, (202) 898-6888; or Michael Phillips, Counsel,
[email protected]; Catherine Wood, Counsel, [email protected];
Supervision Branch, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction and Overview of the Proposal
A. Overview of Derivative Contracts
B. The Basel Committee Standard on SA-CCR
C. Overview of the Proposal
II. Overview of the Final Rule
A. Scope and Application of the Final Rule
B. Effective Date and Compliance Deadline
C. Final Rule's Interaction With Agency Requirements and Other
Proposals
III. Mechanics of the Standardized Approach for Counterparty Credit
Risk
A. Exposure Amount
B. Definition of Netting Sets and Treatment of Financial
Collateral
C. Replacement Cost
D. Potential Future Exposure
IV. Revisions to the Cleared Transactions Framework
A. Trade Exposure Amount
B. Treatment of Default Fund Contributions
V. Revisions to the Supplementary Leverage Ratio
VI. Technical Amendments
A. Receivables Due From a QCCP
B. Treatment of Client Financial Collateral Held by a CCP
C. Clearing Member Exposure When CCP Performance Is Not
Guaranteed
D. Bankruptcy Remoteness of Collateral
E. Adjusted Collateral Haircuts for Derivative Contracts
F. OCC Revisions to Lending Limits
G. Other Clarifications and Technical Amendments From the
Proposal to the Final Rule
VII. Impact of the Final Rule
VIII. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. Riegle Community Development and Regulatory Improvement Act
of 1994
E. OCC Unfunded Mandates Reform Act of 1995 Determination
F. The Congressional Review Act
I. Introduction and Overview of the Proposal
A. Overview of Derivative Contracts
In general, derivative contracts represent agreements between
parties either to make or receive payments or to buy or sell an
underlying asset on a certain date (or dates) in the future. Parties
generally use derivative contracts to mitigate risk, although such
transactions may serve other purposes. For example, an interest rate
derivative contract allows a party to manage the risk associated with a
change in interest rates, while a commodity derivative contract allows
a party to fix commodity prices in the future and thereby minimize any
exposure attributable to unfavorable movements in those prices.
The value of a derivative contract, and thus a party's exposure to
its counterparty, changes over the life of the contract based on
movements in the value of the reference rates, assets, indicators or
indices underlying the contract (reference exposures). A party with a
positive current exposure expects to receive a payment or other
beneficial transfer from the counterparty and is considered to be ``in
the money.'' A party that is in the money is subject to the risk that
the counterparty will default on its obligations and fail to pay the
amount owed under the transaction, which is referred to as counterparty
credit risk. In contrast, a party with a zero or negative current
exposure does not expect to receive a payment or beneficial transfer
from the counterparty
[[Page 4363]]
and is considered to be ``at the money'' or ``out of the money.'' A
party that has no current exposure to counterparty credit risk may have
exposure to counterparty credit risk in the future if the derivative
contract becomes ``in the money.''
Parties to a derivative contract often exchange collateral to
mitigate counterparty credit risk. If a counterparty defaults, the non-
defaulting party can sell the collateral to offset its exposure. In the
derivatives context, collateral may include variation margin and
initial margin (also known as independent collateral). Parties exchange
variation margin on a periodic basis during the term of a derivative
contract, as typically specified in a variation margin agreement or by
regulation.\1\ Variation margin offsets changes in the market value of
a derivative contract and thereby covers the potential loss arising
from the default of a counterparty. Variation margin may not always be
sufficient to cover a party's positive exposure (e.g., due to delays in
receiving collateral), and thus parties may exchange initial margin.
Parties typically exchange initial margin at the outset of the
derivative contract and in amounts that are expected to reduce the
likelihood of a positive exposure amount for the derivative contract in
the event of the counterparty's default, resulting in
overcollateralization.
---------------------------------------------------------------------------
\1\ See, e.g., 12 CFR part 45 (OCC); 12 CFR part 237 (Board);
and 12 CFR part 349 (FDIC).
---------------------------------------------------------------------------
To facilitate the exchange of collateral, parties may enter into
variation margin agreements that typically provide for a threshold
amount and a minimum transfer amount. The threshold amount is the
maximum amount by which the market value of the derivative contract can
change before a party must collect or post variation margin (in other
words, the threshold amount specifies an acceptable amount of under-
collateralization). The minimum transfer amount is the smallest amount
of collateral that a party must transfer when it is required to
exchange collateral under the variation margin agreement. Parties
generally apply a discount (also known as a haircut) to non-cash
collateral to account for a potential reduction in the value of the
collateral during the period between the last exchange of collateral
before the close out of the derivative contract (as in the case of
default of the counterparty) and replacement of the contract on the
market. This period is known as the margin period of risk (MPOR).
Two parties often will enter into a large number of derivative
contracts together. In such cases, the parties may enter into a netting
agreement to allow for the offsetting of the derivative contracts under
the agreement in the event that one of the parties default and to
streamline certain aspects of the transactions, including the exchange
of collateral. Netting multiple contracts against each other can
substantially reduce the exposure if one of the parties were to
default. A netting set reflects those derivative contracts that are
subject to the same master netting agreement.\2\
---------------------------------------------------------------------------
\2\ ``Qualifying master netting agreement'' is defined in
Sec. Sec. _.2 and _.3(d) of the capital rule. See 12 CFR 3.2 and
3.3(d) (OCC); 12 CFR 217.2 and 217.3(d) (Board); and 12 CFR 324.2
and 324.3(d) (FDIC).
---------------------------------------------------------------------------
Parties to a derivative contract may also clear their derivative
contract through a central counterparty (CCP). The use of central
clearing is designed to reduce the risk of engaging in derivative
transactions through the multilateral netting of exposures,
establishment and enforcement of collateral requirements, and the
promotion of market transparency. A party engages with a CCP either as
a clearing member or as a clearing member client. A clearing member is
a member of, or a direct participant in, a CCP that has authority to
enter into transactions with the CCP. A clearing member may act as a
financial intermediary with respect to the clearing member client and
either take one position with the client and an offsetting position
with the CCP (the principal model of clearing) or guarantee the
performance of the clearing member client to the CCP (the agency model
of clearing). With respect to the latter type of clearing, the clearing
member generally is responsible for fulfilling initial and variation
margin calls from the CCP on behalf of its client, irrespective of the
client's ability to post such collateral.
The capital rule of the Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (Board),
and the Federal Deposit Insurance Corporation (FDIC) (together, the
agencies) requires a banking organization to hold regulatory capital
based on the exposure amount of its derivative contracts.\3\ The
capital rule prescribes different approaches for measuring the exposure
amount of derivative contracts based on the size and risk profile of a
banking organization. All banking organizations are currently required
to use the current exposure method (CEM) to determine the exposure
amount of a derivative contract for purposes of calculating
standardized total risk-weighted assets.\4\ Certain large banking
organizations may use CEM or the internal models methodology (IMM) to
determine the exposure amount of a derivative contract for advanced
approaches risk-weighted assets. In contrast to CEM, IMM is an
internal-models-based approach that requires supervisory approval. The
capital rule also requires certain large banking organizations to meet
a supplementary leverage ratio, measured as the banking organization's
tier 1 capital relative to its total leverage exposure.\5\ The total
leverage exposure measure captures both on- and off-balance sheet
assets, including the exposure amount of a banking organization's
derivative contracts as determined under CEM.\6\
---------------------------------------------------------------------------
\3\ 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part
324 (FDIC). The agencies have codified the capital rule in different
parts of title 12 of the CFR, but the internal structure of the
sections within each agency's rule are identical. All references to
sections in the capital rule or the proposal are intended to refer
to the corresponding sections in the capital rule of each agency.
Banking organizations subject to the agencies' capital rule include
national banks, state member banks, insured state nonmember banks,
savings associations, and top-tier bank holding companies and
savings and loan holding companies domiciled in the United States,
but exclude banking organizations subject to the Board's Small Bank
Holding Company and Savings and Loan Holding Company Policy
Statement (12 CFR part 225, appendix C), and certain savings and
loan holding companies that are substantially engaged in insurance
underwriting or commercial activities or that are estate trusts, and
bank holding companies and savings and loan holding companies that
are employee stock ownership plans. The agencies recently adopted a
final rule to implement a community bank leverage ratio framework
that is applicable, on an optional basis to depository institutions
and depository institution holding companies with less than $10
billion in total consolidated assets and that meet certain other
criteria. Such banking organizations that opt into the community
bank leverage ratio framework will be deemed compliant with the
capital rule's generally applicable requirements and are not
required to calculate risk-based capital ratios. See 84 FR 61776
(November 13, 2019).
\4\ CEM and IMM are also applied in other parts of the capital
rule. For example, advanced approaches banking organizations must
use CEM to determine the exposure amount of derivative contracts
included in total leverage exposure, the denominator of the
supplementary leverage ratio. In addition, the capital rule
incorporates CEM into the cleared transactions framework and makes
other amendments, generally with respect to cleared transactions.
See section II.C. of this SUPPLEMENTARY INFORMATION for further
discussion.
\5\ See infra note 23. Banking organizations subject to Category
I, Category II, or Category III standards are subject to the
supplementary leverage ratio.
\6\ See 12 CFR 3.10(c)(4) (OCC); 12 CFR 217.10(c)(4) (Board);
and 12 CFR 324.10(c)(4) (FDIC).
---------------------------------------------------------------------------
[[Page 4364]]
B. The Basel Committee Standard on SA-CCR
In 2014, the Basel Committee on Banking Supervision released a new
approach for calculating the exposure amount of a derivative contract
called the standardized approach for counterparty credit risk (SA-CCR)
(the Basel Committee standard).\7\ Under the Basel Committee standard,
a banking organization calculates the exposure amount of its derivative
contracts at the netting set level, meaning, those contracts that the
standard permits to be netted against each other because they are
subject to the same qualifying master netting agreement (QMNA), which
must meet certain operational requirements.\8\ The exposure amount of a
derivative contract not subject to a QMNA is calculated individually,
and thus the derivative contract constitutes a netting set of one.
---------------------------------------------------------------------------
\7\ See ``The standardized approach for measuring counterparty
credit risk exposures,'' Basel Committee on Banking Supervision
(March 2014, rev. April 2014), https://www.bis.org/publ/bcbs279.pdf.
\8\ See e.g. supra note 2.
---------------------------------------------------------------------------
The exposure amount of each netting set is equal to an alpha factor
of 1.4 multiplied by the sum of the replacement cost of the netting set
and the potential future exposure (PFE) of the netting set:
exposure amount = 1.4 * (replacement cost + PFE)
For netting sets that are not subject to a variation margin
agreement, replacement cost reflects a banking organization's current
on-balance-sheet credit exposure to its counterparty measured as the
maximum of the fair value of the derivative contracts within the
netting set less the applicable collateral or zero. For netting sets
that are subject to a variation margin agreement, the replacement cost
of a netting set reflects the maximum possible unsecured exposure
amount of the netting set that would not trigger a variation margin
call. For the replacement cost calculation, a banking organization
recognizes the collateral amount on a dollar-for-dollar basis, subject
to any applicable haircuts.
PFE reflects a measure of potential changes in a banking
organization's counterparty exposure for a netting set over a specified
period. The PFE calculation allows a banking organization to fully or
partially offset derivative contracts within the same netting set that
share similar risk factors, based on the concept of hedging sets. Under
the Basel Committee standard, derivative contracts form a hedging set
if they share the same primary risk factor, and therefore, are within
the same asset class--interest rate, exchange rate, credit, equity, or
commodities. As derivatives within the same asset class are highly
correlated and thus have an economic relationship,\9\ under the Basel
Committee standard, derivative contracts within the same hedging set
may be able to fully or partially offset each other.
---------------------------------------------------------------------------
\9\ Derivative contracts within the same asset class share the
same primary risk factor, which implies a closer alignment between
all of the underlying risk factors and a higher correlation factor.
For a directional portfolio, greater alignment between the risk
factors would result in a more concentrated risk, leading to a
higher exposure amount. For a balanced portfolio, greater alignment
between the risk factors would result in more offsetting of risk,
leading to a lower exposure amount.
---------------------------------------------------------------------------
To obtain the PFE for each netting set, a banking organization sums
the adjusted derivative contract amount of all hedging sets within the
netting set using an asset-class specific aggregation formula and
multiples that amount by the PFE multiplier. The PFE multiplier
decreases exponentially from a value of one as the value of the
financial collateral held by the banking organization exceeds the net
fair value of the derivative contracts within the netting set, subject
to a floor of five percent. Thus, the PFE multiplier accounts for both
over-collateralization and the negative fair value amount of the
derivative contracts within the netting set.
For purposes of calculating the hedging set amount, a banking
organization calculates the adjusted notional amount of a derivative
contract and multiplies that amount by a corresponding supervisory
factor, maturity factor, and supervisory delta to determine a
conservative estimate of effective expected positive exposure (EEPE),
assuming zero fair value and zero collateral.\10\ The Basel Committee
standard uses supervisory factors that reflect the volatilities
observed in the derivatives markets during the financial crisis. The
supervisory factors reflect the potential variability of the primary
risk factor of the derivative contract over a one-year horizon. The
maturity factor scales down the default one-year risk horizon of the
supervisory factor to the risk horizon appropriate for the derivative
contract. For the supervisory delta adjustment, a banking organization
applies a positive sign to the derivative contract amount if the
derivative contract is long the risk factor and a negative sign if the
derivative contract is short the risk factor. A derivative contract is
long the primary risk factor if the fair value of the instrument
increases when the value of the primary risk factor increases. A
derivative contract is short the primary risk factor if the fair value
of the instrument decreases when the value of the primary risk factor
increases. The assumptions of zero fair value and zero collateral allow
for recognition of offsetting and diversification benefits between
derivative contracts that share similar risk factors (i.e., long and
short derivative contracts within the same hedging set could fully or
partially offset one another).
---------------------------------------------------------------------------
\10\ Under IMM, an advanced approaches banking organization uses
its own internal models to determine the exposure amount of its
derivative contracts. The exposure amount under IMM is calculated as
the product of the EEPE for a netting set, which is the time-
weighted average of the effective expected exposures (EE) profile
over a one-year horizon, and an alpha factor. For the purposes of
regulatory capital calculations, the resulting exposure amount is
treated as a loan equivalent exposure, which is the amount
effectively loaned by the banking organization to the counterparty
under the derivative contract. A banking organization arrives at the
exposure amount by first determining the EE profile for each netting
set. In general, EE profile is determined by computing exposure
distributions over a set of future dates using Monte Carlo
simulations, and the expectation of exposure at each date is the
simple average of all positive Monte Carlo simulated exposures for
each date. The expiration of short-term trades can cause the EE
profile to decrease, even though a banking organization is likely to
replace short-term trades with new trades (i.e., rollover). To
account for rollover, a banking organization converts the EE profile
for each netting set into an effective EE profile by applying a
nondecreasing constraint to the corresponding EE profile over the
first year. The nondecreasing constraint prevents the effective EE
profile from declining with time by replacing the EE amount at a
given future date with the maximum of the EE amounts across this and
all prior simulation dates. The EEPE for a netting set is the time-
weighted average of the effective EE profile over a one-year
horizon. EEPE would be the appropriate loan equivalent exposure in a
credit risk capital calculation if the following assumptions were
true: There is no concentration risk, systematic market risk, and
wrong-way risk (i.e., the size of an exposure is positively
correlated with the counterparty's probability of default). However,
these conditions nearly never exist with respect to a derivative
contract. Thus, to account for these risks, IMM requires a banking
organization to multiply EEPE by 1.4.
---------------------------------------------------------------------------
C. Overview of the Proposal
On October 30, 2018, the agencies published a notice of proposed
rulemaking (proposal) to implement SA-CCR \11\ in order to provide
important improvements to risk sensitivity and calibration relative to
CEM.\12\ In particular, the implementation of SA-CCR is responsive to
concerns that CEM has not kept pace with certain market practices that
have been adopted, particularly by large banking organizations that are
[[Page 4365]]
active in the derivatives market.\13\ The agencies also proposed SA-CCR
to provide a method that is less complex and involves less discretion
than IMM, which allows banking organizations to use their own internal
models to determine the exposure amount of their derivative
contracts.\14\ Although IMM is more risk-sensitive than CEM, IMM is
significantly more complex and requires prior supervisory approval.\15\
The agencies based the core elements of the proposal on the Basel
Committee SA-CCR standard.\16\
---------------------------------------------------------------------------
\11\ See 83 FR 64660 (December 17, 2018).
\12\ The Supplementary Information set forth in the proposal
includes a description of CEM. See id. at 64664.
\13\ The agencies initially adopted CEM in 1989. See 54 FR 4168
(January 27, 1989) (Board and OCC); 54 FR 11500 (March 21, 1989)
(FDIC). The last significant update to CEM was in 1995. See 60 FR
46170 (September 5, 1995).
\14\ The Supplementary Information set forth in the proposal
includes a description of IMM. See 83 FR at 64665.
\15\ See 12 CFR 3.122 (OCC); 12 CFR 217.122 (Board); and 12 CFR
324.122 (FDIC).
\16\ See supra note 7.
---------------------------------------------------------------------------
The agencies received approximately 58 comments on the proposal
from interested parties, including banking organizations, trade groups,
members of Congress, and advocacy organizations. Banking organizations
and trade groups offered widespread support for the implementation of
SA-CCR although they also suggested modifications to various components
of the proposal largely to address concerns regarding its calibration.
Commenters who supported the proposal also expressed concerns with its
proposed implementation schedule and potential interaction with certain
other U.S. laws and regulations. Other commenters, including some
commercial entities that use derivative contracts to manage risks
arising from their business operations (commercial end-users), opposed
the proposal or elements of the proposal. Specifically, these
commenters expressed concern that the proposal could indirectly
increase the fees they pay to enter into derivative transactions to
manage commercial risks in order to help offset the regulatory capital
costs of such derivative contracts for banking organizations. The
commenters asserted that any such effect would be in contravention of
separate public policy objectives designed to support the ability of
commercial end-users to engage in derivative transactions for risk-
management purposes.\17\ By contrast, other commenters that opposed the
proposal expressed concerns that it could reduce capital held against
derivative contracts.
---------------------------------------------------------------------------
\17\ See, e.g., The Commodity Exchange Act and the Securities
Exchange Act of 1934, as amended by sections 731 and 764,
respectively, of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376, 1703-12, 1784-96
(2010), require the agencies to, in establishing capital and margin
requirements for non-cleared swaps, provide an exemption for certain
types of counterparties (e.g., counterparties that are not financial
entities and are using swaps to hedge or mitigate commercial risks)
from the mandatory clearing requirement. See 7 U.S.C. 6s(e)(3)(C);
15 U.S.C. 78o-10(e)(3)(C); see also 12 CFR part 45 (OCC); 12 CFR
part 237 (Board); and 12 CFR part 349 (FDIC) (swap margin rule).
---------------------------------------------------------------------------
As discussed in detail below, the agencies are finalizing the
proposal with some modifications to address certain concerns raised by
commenters. In particular, the final rule removes the alpha factor of
1.4 from the exposure amount calculation for derivative contracts with
commercial end-user counterparties. This change will reduce the
exposure amount of such derivative contracts by roughly 29 percent, in
comparison to similar derivative contracts with a counterparty that is
not a commercial end-user.
Commenters also raised concerns regarding the proposed netting
treatment for settled-to-market derivative contracts.\18\ The final
rule allows a banking organization to elect, at the netting set level,
to treat all such contracts within the same netting set as
collateralized-to-market, thus allowing netting of settled-to-market
derivative contracts with collateralized-to-market derivative contracts
within the same netting set. In order to make the election, a banking
organization must treat the settled-to-market derivative contracts as
collateralized-to-market derivative contracts for all purposes under
the SA-CCR calculation, including by applying the MPOR treatment
applicable to collateralized-to-market derivative transactions.\19\
---------------------------------------------------------------------------
\18\ Settled-to-market derivatives contracts are those entered
into between a central counterparty and a banking organization,
under which the central counterparty's rulebook considers daily
payments of variation margin as a settlement payment for the
exposure that arises from marking the derivative contract to fair
value. These payments are similar to traditional exchanges of
variation margin, except that the receiving party takes title to the
payment from the transferring party rather than holding the assets
as collateral, and thus effectively settles the contract.
\19\ Banking organizations that make such an election would
apply the maturity factor applicable to margined transactions under
the final rule. See also section III.D.4. of this Supplementary
Information.
---------------------------------------------------------------------------
Commenters also criticized the proposal's approach to the
recognition of collateral provided to support a derivative contract for
purposes of the supplementary leverage ratio. In response to
commenters' concerns, and consistent with changes to the Basel
Committee leverage ratio standard that occurred during the comment
period, the final rule allows for greater recognition of collateral in
the calculation of total leverage exposure relating to client-cleared
derivative contracts.\20\
---------------------------------------------------------------------------
\20\ See ``Leverage ratio treatment of client cleared
derivatives,'' Basel Committee on Banking Supervision, June 2019,
https://www.bis.org/bcbs/publ/d467.pdf. See also section V of this
Supplementary Information.
---------------------------------------------------------------------------
II. Overview of the Final Rule
Figure 1 below provides a high-level overview of SA-CCR under the
Final Rule.
---------------------------------------------------------------------------
\21\ A counterparty's maximum exposure to a netting set subject
to a varation margin agreement equals the threshold amount plus
minimum transfer amount.
\22\ Net independent collateral amount (NICA), as described in
section III. B of this Supplementary Information.
Figure 1--Overview of SA-CCR Under the Final Rule
------------------------------------------------------------------------
------------------------------------------------------------------------
Purpose........................... The final rule implements
the standardized approach for
counterparty-credit risk, in a
manner consistent with the core
elements of the Basel Committee
standard.
A banking organization uses
SA-CCR (either on a mandatory or an
optional basis) to determine the
capital requirements for its
derivative contracts.
SA-CCR Mechanics.................. Under the final rule, a banking
organization using SA-CCR
determines the exposure amount for
a netting set of derivative
contracts as follows:
Exposure amount = alpha factor x
(replacement cost + potential
future exposure)
------------------------------------------------------------------------
Key Elements of the SA-CCR Formula
------------------------------------------------------------------------
Replacement Cost.................. The replacement cost of a derivative
contract reflects the amount that
it would cost a banking
organization to replace the
derivative contract if the
counterparty were to immediately
default. Under SA-CCR, replacement
cost is based on the fair value of
a derivative contract under U.S.
GAAP, with adjustments to reflect
the exchange of collateral for
margined transactions.
[[Page 4366]]
For un-margined transactions: RC =
max{V - C; 0{time} , where
replacement cost (RC) equals the
maximum of the fair value of the
derivative contract (after
excluding any valuation
adjustments) (V) less the net
amount of any collateral (C)
received from the counterparty and
zero.
For margined transactions: RC =
max{V - C; TH + MTA - NICA; 0{time}
, where replacement cost equals the
maximum of (1) the sum of the fair
values (after excluding any
valuation adjustments) of the
derivative contracts within the
netting set less the net amount of
collateral applicable to such
derivative contracts; (2) the
counterparty's maximum exposure to
the netting set under the variation
margin agreement (TH + MTA),\21\
less the net collateral amount
applicable to such derivative
contracts (NICA \22\); or (3) zero.
Potential Future Exposure......... The potential future exposure of a
derivative contract reflects the
possibility of changes in the value
of the derivative contract over a
specified period. Under SA-CCR, the
potential future exposure amount is
based on the notional amount and
maturity of the derivative
contract, volatilities observed
during the financial crisis for
different classes of derivative
contracts (i.e., interest rate,
exchange rate, credit, equity, and
commodity), the exchange of
collateral, and full or partial
offsetting among derivative
contracts that share an economic
relationship.
PFE = multiplier x aggregated
amount, where the PFE multiplier
decreases exponentially from a
value of 1 to recognize the amount
of any excess collateral and the
negative fair values of derivative
contracts within the netting set.
The aggregated amount accounts for
full or partial offsetting among
derivative contracts within a
hedging set that share an economic
relationship, as well as observed
volatilities in the reference
asset, the maturity of the
derivative contract, and the
correlation between the derivative
contract and the reference exposure
(i.e., long or short).
Alpha Factor...................... The alpha factor is a measure of
conservatism that is designed to
address risks that are not directly
captured under SA-CCR, and to
ensure that the capital requirement
for a derivative contract under SA-
CCR is generally not lower than the
one produced under IMM.
For most derivative contracts, the
alpha factor equals 1.4; however,
no alpha factor applies to
derivative contracts with
commercial end-user counterparties.
------------------------------------------------------------------------
A. Scope and Application of the Final Rule
1. Scoping Criteria
The capital rule provides two methodologies for determining total
risk-weighted assets: The standardized approach, which applies to all
banking organizations, and the advanced approaches, which apply only to
``advanced approaches banking organizations,'' (or banking
organizations subject to Category I or Category II standards) \23\ as
defined under the capital rule.\24\ Both the standardized approach and
the advanced approaches require a banking organization to determine the
exposure amount for derivative contracts transacted through a central
counterparty (i.e., cleared transactions) and derivative contracts that
are not cleared transactions (i.e., noncleared derivative contracts,
otherwise known as over-the-counter derivative contracts).\25\ As part
of the cleared transactions framework, a banking organization also must
determine the risk-weighted asset amounts of any contributions or
commitments it may have to mutualized loss sharing agreements with
central counterparties (i.e., default fund contributions).\26\
---------------------------------------------------------------------------
\23\ The agencies recently adopted a final rule to revise the
criteria for determining the applicability of regulatory capital and
liquidity requirements for large U.S. and foreign banking
organizations (tailoring final rule). Under the tailoring final
rule, an advanced approaches banking organization means a banking
organization subject to Category I or Category II standards.
Category I standards apply to U.S. global systemically important
bank holding companies (U.S. GSIBs) and their depository institution
subsidiaries, as identified based on the methodology in the Board's
U.S. GSIB surcharge rule. Category II standards apply to banking
organizations that are not subject to Category I standards and that
have $700 billion or more in total consolidated assets or $75
billion or more in cross-jurisdictional activity and to their
depository institution subsidiaries. Category III standards apply to
banking organizations that are not subject to Category I or II
standards and that have $250 billion or more in total consolidated
assets or $75 billion or more in any of nonbank assets, weighted
short-term wholesale funding, or off-balance-sheet exposure.
Category III standards also apply to depository institution
subsidiaries of any holding company subject to Category III
standards. Category IV standards apply to banking organizations with
total consolidated assets of $100 billion or more, and their
depositiory institution subsidiaries, that do not meet any of the
criteria for a higher category of standards. See ``Changes to
Applicabiltiy Thresholds for Regulatory Capital and Liquidity
Requirements,'' 84 FR 59230 (November 1, 2019).
\24\ Standardized total risk-weighted assets serve as a floor
for advanced approaches total risk-weighted assets. Advanced
approaches banking organizations must therefore calculate total
risk-weighted assets under both approaches and use the result that
produces a more binding capital requirement. Total risk-weighted
assets are the denominator of the risk-based capital ratios;
regulatory capital is the numerator.
\25\ Under the standardized approach, the risk-weighted asset
amount for a derivative contract currently is the product of the
exposure amount of the derivative contract calculated under CEM and
the risk weight for the type of counterparty as set forth in the
capital rule. See generally 12 CFR 3.35 (OCC); 12 CFR 217.35
(Board); and 12 CFR 324.35 (FDIC). Under the advanced approaches,
the risk-weighted asset amount for a derivative contract currently
is derived using either CEM or the internal models methodology,
which multiplies the exposure amount (or exposure at default amount)
of the derivative contract by a models-based formula that uses risk
parameters determined by a banking organization's internal
methodologies. See generally 12 CFR 3.132 (OCC); 12 CFR 217.132
(Board); and 12 CFR 324.132 (FDIC).
\26\ See 12 CFR 3.35(d) and 3.133(d) (OCC); 12 CFR 217.35(d) and
217.133(d) (Board); and 12 CFR 324.35(d) and 324.133(d) (FDIC).
---------------------------------------------------------------------------
The proposal would have replaced CEM with SA-CCR in the capital
rule for advanced approaches banking organizations. Thus, for purposes
of the advanced approaches, an advanced approaches banking organization
would have been required to use either SA-CCR or IMM to calculate the
exposure amount of its noncleared and cleared derivative contracts and
to use SA-CCR to determine the risk-weighted asset amount of its
default fund contributions. For purposes of the standardized approach,
an advanced approaches banking organization would have been required to
use SA-CCR (instead of CEM) to calculate the exposure amount of its
noncleared and cleared derivative contracts and to determine the risk-
weighted asset amount of its default fund contributions. The proposal
also would have revised the total leverage exposure measure of the
supplementary leverage ratio by replacing CEM with a modified version
of SA-CCR.
Banking organizations that are not advanced approaches banking
organizations \27\ would have had to choose either CEM or SA-CCR to
calculate the exposure amount of
[[Page 4367]]
noncleared and cleared derivative contracts and to determine the risk-
weighted asset amount of default fund contributions under the
standardized approach.
---------------------------------------------------------------------------
\27\ Under this final rule, banking organizations that are not
advanced approaches banking organizations (i.e., banking
organizations subject to Category III or Category IV standards) are
permitted to choose either CEM or SA-CCR for purposes of determining
standardized risk-weighted assets. See supra note 23.
---------------------------------------------------------------------------
Some commenters raised concerns with the proposal's use of multiple
methods--CEM, SA-CCR, and IMM--to determine the exposure amount of
derivative contracts. Specifically, commenters stated that including
multiple approaches for calculating the exposure amount of derivative
contracts in the capital rule creates regulatory burden and increases
the potential for competitive inequalities. The commenters asked the
agencies to adopt one methodology that all banking organizations would
be required to use to determine the exposure amount of derivative
contracts or, short of that, to allow all banking organizations (i.e.,
both advanced approaches and non-advanced approaches banking
organizations) to elect to use any approach--CEM, SA-CCR, or IMM--to
determine the exposure amount for all derivative contracts, as long as
the approach is permitted or required under any of the agencies' rules
to calculate the exposure amount of derivative contracts. Other
commenters, however, supported allowing advanced approaches banking
organizations the option to use IMM for noncleared and cleared
derivative contracts to facilitate closer alignment with internal risk-
management practices of banking organizations because, according to the
commenters, SA-CCR may not adapt dynamically to changes in market
conditions.
Some commenters also requested changes to the applicability
criteria for a particular methodology under the capital rule.
Specifically, commenters asked the agencies to allow advanced
approaches banking organizations to use IMM to calculate the exposure
amount of derivative contracts under the standardized approach. Some of
these commenters also asked the agencies to tailor the application of
SA-CCR based on the composition of a banking organization's derivatives
portfolio, rather than solely based on whether the banking organization
meets the definition of an advanced approaches banking organization.
Limiting all banking organizations to a single methodology would be
inconsistent with the agencies' efforts to tailor the application of
the capital rule to the risk profiles of banking organizations.\28\ In
particular, while SA-CCR offers several improvements to the regulatory
capital treatment for derivative contracts relative to CEM, it also
requires internal systems enhancements and other operational
modifications that could be particularly burdensome for smaller, less
complex banking organizations. Moreover, allowing banking organizations
to use IMM for purposes of determining standardized total risk-weighted
assets would be inconsistent with an intended purpose of the
standardized approach, which is to serve as a floor to model-derived
outcomes under the advanced approaches.
---------------------------------------------------------------------------
\28\ See id.
---------------------------------------------------------------------------
The proposal to require advanced approaches banking organizations
to use either SA-CCR or IMM to determine the exposure amount of their
noncleared and cleared derivative contracts under the advanced
approaches provides meaningful flexibility, promotes consistency for
banking organizations that have substantial operations in multiple
jurisdictions, and facilitates regulatory reporting and the supervisory
assessment of an advanced approaches banking organization's capital
management program. An approach that tailors the applicability of SA-
CCR based solely on the composition of a banking organization's
derivatives portfolio, as suggested by commenters, would be
inconsistent with these objectives.
Consistent with the proposal, the final rule includes CEM, SA-CCR,
and IMM as methodologies for banking organizations to use to determine
the exposure amount of derivative contracts and prescribes which
approach a banking organization must use based on the category of
standards applicable to the banking organization.\29\ As under the
capital rule currently, the final rule does not permit advanced
approaches banking organizations to use IMM to calculate the exposure
amount of derivative contracts under the standardized approach.
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
Under the final rule and as reflected further in Table 1, an
advanced approaches banking organization generally may use SA-CCR or
IMM for purposes of determining advanced approaches total risk-weighted
assets,\30\ and must use SA-CCR for purposes of determining
standardized total risk-weighted assets as well as the supplementary
leverage ratio. A non-advanced approaches banking organization may
continue to use CEM or elect to use SA-CCR for purposes of the
standardized approach and supplementary leverage ratio (as
applicable).\31\ Where a banking organization has the option to choose
among the approaches applicable to such banking organization under the
capital rule, it must use the same approach for all purposes. As
discussed in section II.C of this Supplementary Information, the
agencies will continue to consider the extent to which SA-CCR should be
incorporated into areas of the regulatory framework that are not
addressed under this final rule in the context of separate rulemakings.
---------------------------------------------------------------------------
\30\ As reflected in Table 1, an advanced approaches banking
organization must use SA-CCR to determine its exposure to default
fund contributions under the advanced approaches.
\31\ The tailoring final rule revised the scope of applicability
of the supplementary leverage ratio, such that it applies to U.S.
and foreign banking organizations subject to Category I, Category
II, or Category III standards. See supra notes 5 and 23. The use of
SA-CCR for purposes of the supplementary leverage ratio is discussed
in greater detail in section V of this Supplementary Information.
Table 1--Scope and Applicability of the Final Rule
----------------------------------------------------------------------------------------------------------------
Noncleared derivative Cleared transactions Default fund
contracts framework contribution
----------------------------------------------------------------------------------------------------------------
Advanced approaches banking Option to use SA-CCR or Must use the same Must use SA-CCR.
organizations, advanced approaches IMM. approach selected for
total risk-weighted assets. purposes of noncleared
derivative contracts.
Advanced approaches banking Must use SA-CCR........ Must use SA-CCR........ Must use SA-CCR.
organizations, total risk-weighted
assets under the standardized
approach.
[[Page 4368]]
Non-advanced approaches banking Option to use CEM or SA- Must use the same Must use the same
organizations, total risk-weighted CCR. approach selected for approach selected for
assets under the standardized purposes of noncleared purposes of noncleared
approach. derivative contracts. derivative contracts.
----------------------------------------------------------------------------------------------------------------
Advanced approaches banking Must use SA-CCR to determine the exposure amount of derivative contracts
organizations, supplementary for total leverage exposure.
leverage ratio.
----------------------------------------------------------------------------------------------------------------
Banking organizations subject to Option to use CEM or SA-CCR to determine the exposure amount of
Category III capital standards, derivative contracts for total leverage exposure. A banking organization
supplementary leverage ratio. must use the same approach, CEM or SA-CCR, for purposes of both
standardized total risk-weighted assets and the supplementary leverage
ratio.
----------------------------------------------------------------------------------------------------------------
2. Applicability to Certain Derivative Contracts
The proposal would have required a banking organization to
calculate the exposure amount for all derivative contracts to which the
banking organization has an exposure. Commenters raised concerns
regarding the treatment of certain derivative contracts under the
proposal. Specifically, several commenters asked the agencies to
exclude from banking organizations' regulatory capital calculations
derivative contracts with commercial end-user counterparties, while
other commenters suggested that the final rule should exclude
physically settled forward contracts. Other commenters requested that
the agencies allow advanced approaches banking organizations to
continue to use CEM to calculate the exposure amount of their
derivative contracts with commercial end-user counterparties.
Excluding certain derivative contracts from the application of the
capital rule, as suggested by commenters, would exclude a material
source of credit risk from a banking organization's regulatory capital
requirements. Moreover, requiring a banking organization to use the
same approach for its entire derivative portfolio when calculating
either its standardized or advanced approaches total risk-weighted
assets promotes consistency in the regulatory capital treatment of
derivative contracts, and facilitates the supervisory assessment of a
banking organization's capital management program.\32\ Therefore,
consistent with the proposal, the final rule does not provide an
exclusion for specific types of derivative contracts nor does it permit
the use of different methodologies based on the type of derivative
contract or counterparty.
---------------------------------------------------------------------------
\32\ The final rule does not revise the FR Y-15 report to
reflect SA-CCR, as discussed further in section II.C of this
Supplementary Information.
---------------------------------------------------------------------------
3. Application to New Derivative Contracts and Immaterial Exposures
Under the current capital rule, an advanced approaches banking
organization can use CEM for a period of 180 days for material
portfolios of new derivative contracts and without time limitations for
immaterial portfolios of new derivative contracts to satisfy the
requirement that the total exposure amount calculated under IMM must be
at least equal to the greater of the expected positive exposure amount
under either the modelled stress scenario or the modelled un-stressed
scenario multiplied by 1.4.\33\ Some commenters noted that the proposal
did not replace CEM with SA-CCR for these purposes and suggested
providing advanced approaches banking organizations the option to
consider SA-CCR, in place of CEM, to satisfy the same conservatism
requirements. The agencies recognize that an advanced approaches
banking organization may need time to develop systems and collect
sufficient data to appropriately model the exposure amount for material
portfolios of new derivatives under IMM. Therefore, under the final
rule, an advanced approaches banking organization that elects to use
IMM to calculate the exposure amount of its derivative contracts under
the advanced approaches may use SA-CCR for a period of 180 days for
material portfolios of new derivative contracts and for immaterial
portfolios of such contracts without time limitations.\34\ This
treatment is consistent with the current capital rule.
---------------------------------------------------------------------------
\33\ See 12 CFR 3.132(d)(10) (OCC); 12 CFR 217.132(d)(10)
(Board); and 12 CFR 324.132(d)(10) (FDIC).
\34\ Similar to CEM, as a standardized framework, SA-CCR is
designed to produce sufficiently conservative exposure amounts,
compared to those calculated under IMM, that satisfy the
conservatism requirement under Sec. __.132(d)(10)(i). The final
rule also makes similar conforming changes elsewhere in Sec.
__.132(d) and (e) to incorporate SA-CCR in the place of CEM.
---------------------------------------------------------------------------
B. Effective Date and Compliance Deadline
The proposal included a transition period, until July 1, 2020, by
which time all advanced approaches banking organizations would have
been required to implement SA-CCR; however, both advanced approaches
and non-advanced approaches banking organizations would have been able
to adopt SA-CCR as of the effective date of the final rule.
Several commenters asked the agencies to delay adoption of the
final rule. Specifically, some of these commenters asked that the
agencies delay adoption until completion of a comprehensive study on
the effect of the proposal, including the effect of SA-CCR on
commercial end-user counterparties. Other commenters also asked the
agencies to delay adoption of SA-CCR, or alternatively, the mandatory
compliance date, in order to align its implementation with potential
forthcoming changes to the U.S. regulatory capital framework that might
be implemented through separate rulemakings.\35\ These commenters
expressed concern that the interaction between SA-CCR and related
aspects of the U.S. regulatory capital framework could result in
increased capital requirements for banking organizations that are not
reflective of underlying risk. In addition, some of these commenters
specifically urged the agencies to pair the adoption of SA-CCR with the
implementation of the Basel Committee's revised comprehensive approach
for securities financing transactions.\36\ These commenters argued that
banking organizations could use derivative transactions as a substitute
for securities financing
[[Page 4369]]
transactions and, therefore, adopting SA-CCR without implementing the
revised comprehensive approach for securities financing transactions
could lead to further concentration in the derivatives market and
decreases in the liquidity of the securities financing transactions
market. Alternatively, other commenters urged the agencies to set the
mandatory compliance date as of January 2022 to align with other
anticipated changes to the U.S. regulatory capital framework, and
supported allowing banking organizations to adopt SA-CCR or portions of
SA-CCR as early as the issuance of the final rule.
---------------------------------------------------------------------------
\35\ For example, the commenters noted potential changes to the
regulatory framework as a result of the Basel Committee's December
2017 release. See ``Basel III: Finalising post-crisis reforms,''
Basel Committee on Banking Supervision, December 2017, https://www.bis.org/bcbs/publ/d424.pdf.
\36\ Id.
---------------------------------------------------------------------------
Additionally, several commenters asked the agencies to align U.S.
implementation of SA-CCR with its implementation schedule in other
jurisdictions, so as not to disadvantage U.S. banking organizations and
their U.S. clients relative to foreign firms. These commenters argued
that a mandatory compliance date of January 2022 would ensure
internationally consistent implementation of SA-CCR across
jurisdictions and allow banking organizations ample time to implement
SA-CCR for purposes of both existing regulatory capital requirements
and any anticipated forthcoming changes to the U.S. regulatory capital
framework. Other commenters suggested extending the mandatory
compliance date to January 2022 for banking organizations that use CEM
currently and do not have extensive derivatives portfolios.
Conversely, several commenters asked the agencies to adopt the
proposal as a final rule without delay and to retain the proposed July
2020 mandatory compliance date. Of these, some commenters suggested
that the effective date for implementation of SA-CCR should be earlier
than July 2020 for the entirety or portions of the SA-CCR rule. These
commenters also asked the agencies to provide interim relief through a
reduction in risk weights for certain financial products, such as
options, if the implementation of SA-CCR is delayed.
The agencies anticipate that the final rule will not materially
change the amount of capital in the banking system, and that any change
in a particular banking organization's capital requirements, through
either an increase or a decrease in regulatory capital, would reflect
the enhanced risk sensitivity of SA-CCR relative to CEM, as well as
market conditions.\37\ In addition, SA-CCR provides important
improvements to risk sensitivity and calibration relative to CEM and is
responsive to concerns that CEM has not kept pace with market practices
used by large banking organizations that are active in the derivatives
market. Therefore, the agencies are not delaying adoption of the final
rule. The agencies intend to monitor the implementation of SA-CCR as
part of their ongoing assessment of the effectiveness of the overall
U.S. regulatory capital framework to determine whether there are
opportunities to reduce burden and improve its efficiency in a manner
that continues to support the safety and soundness of banking
organizations and U.S. financial stability.
---------------------------------------------------------------------------
\37\ The estimated impact of the final rule is described in
greater detail in section VII of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
However, the agencies recognize that the implementation of SA-CCR
requires advanced approaches banking organizations to augment existing
systems or develop new ones, as all such banking organizations must
adopt SA-CCR for the standardized approach even if they plan to
continue using IMM under the advanced approaches. Accordingly, the
final rule includes a mandatory compliance date for advanced approaches
banking organizations of January 1, 2022, to permit these banking
organizations additional time to adjust their systems, as needed, to
implement SA-CCR. The final rule also includes an effective date
shortly after publication that permits any banking organization to
elect to adopt SA-CCR prior to the mandatory compliance date. For this
reason, the agencies do not believe that it is necessary to provide any
interim adjustments to the current framework.
Advanced approaches and non-advanced approaches banking
organizations that adopt SA-CCR prior to the mandatory compliance date
must notify their appropriate Federal supervisor. Non-advanced
approaches banking organizations that adopt SA-CCR after the mandatory
compliance date also must notify their appropriate Federal supervisor.
As the final rule does not allow banking organizations to use SA-CCR
for a material subset of derivative exposures under either the
standardized or advanced approaches, a banking organization cannot
early adopt SA-CCR on a partial basis.\38\ In addition, the technical
revisions in the final rule, as described in section VI of this
Supplementary Information, are effective as of the effective date of
the final rule.
---------------------------------------------------------------------------
\38\ The final rule allows banking organizations that elect to
use SA-CCR to continue to use method 1 or method 2 under CEM to
calculate the risk-weighted asset amount for default fund
contributions until January 1, 2022. See section IV.B. of this
Supplementary Information for a more detailed discussion on the
treatment of default fund contributions under the final rule.
---------------------------------------------------------------------------
C. Final Rule's Interaction With Agency Requirements and Other
Proposals
The implementation of SA-CCR affects other parts of the regulatory
framework. Commenters asked that the agencies clarify the interaction
between SA-CCR and other existing aspects of the framework that would
be affected by the adoption of SA-CCR, including the FDIC's deposit
insurance assessment methodology, the Banking Organization Systemic
Risk Report (FR Y-15), the stress test projections in the Board's
Comprehensive Capital Analysis and Review (CCAR) process, and the OCC's
lending limits. Commenters also asked that the agencies clarify the
interaction between SA-CCR and potential future revisions to the U.S.
regulatory capital framework, including potential implementation of the
December 2017 Basel Committee release, Basel III: Finalising post-
crisis reforms (Basel III finalization standard),\39\ and the Board's
stress capital buffer proposal.
---------------------------------------------------------------------------
\39\ See supra note 35.
---------------------------------------------------------------------------
1. FDIC Deposit Insurance Assessment Methodology
Some commenters noted that the adoption of SA-CCR could affect the
FDIC assessment methodology. In response to this comment, the FDIC
notes that a lack of historical data on derivative exposure using SA-
CCR makes the FDIC unable to incorporate the SA-CCR methodology into
the deposit insurance assessment pricing methodology for highly complex
institutions \40\ upon the effective date of this rule. The FDIC plans
to review derivative exposure data reported using SA-CCR, and then
consider options for addressing the use of SA-CCR in the deposit
insurance assessment system. In the meantime, for purposes of reporting
counterparty exposures on Schedule RC-O, memorandum items 14 and 15,
[[Page 4370]]
highly complex institutions must continue to calculate derivative
exposures using CEM (as set forth in 12 CFR 324.34(b) under the final
rule), but without any reduction for collateral other than cash
collateral that is all or part of variation margin and that satisfies
the requirements of 12 CFR 324.10(c)(4)(ii)(C)(1)(ii) and (iii) and
324.10(c)(4)(ii)(C)(3)-(7) (as amended under the final rule).
Similarly, highly complex institutions must continue to report the
exposure amount associated with securities financing transactions,
including cleared transactions that are securities financing
transactions, using the standardized approach set forth in 12 CFR
324.37(b) or (c) (as amended under the final rule). The FDIC is making
technical amendments to its assessment regulations to update cross-
references to CEM and cash collateral requirements in 12 CFR part 324.
---------------------------------------------------------------------------
\40\ A ``highly complex institution'' is defined as: (1) An
insured depository institution (IDI) (excluding a credit card bank)
that has had $50 billion or more in total assets for at least four
consecutive quarters that either is controlled by a U.S. parent
holding company that has had $500 billion or more in total assets
for four consecutive quarters, or is controlled by one or more
intermediate U.S. parent holding companies that are controlled by a
U.S. holding company that has had $500 billion or more in assets for
four consecutive quarters; or (2) a processing bank or trust
company. A processing bank or trust company is an IDI whose last
three years' non-lending interest income, fiduciary revenues, and
investment banking fees, combined, exceed 50 percent of total
revenues (and its last three years fiduciary revenues are non-zero),
whose total fiduciary assets total $500 billion or more and whose
total assets for at least four consecutive quarters have been $10
billion or more. See 12 CFR 327.8(g) and (s).
---------------------------------------------------------------------------
2. The Banking Organization Systemic Risk Report (FR Y-15)
Some commenters noted that the adoption of SA-CCR could affect
reporting on the Banking Organization Systemic Risk Report (FR Y-15),
which must be filed by U.S. bank holding companies and certain savings
and loan holding companies with $100 billion or more in total
consolidated assets and foreign banking organizations with $100 billion
or more in combined U.S. assets.\41\ In particular, these commenters
requested that the agencies exclude the alpha factor from the exposure
amount calculation under SA-CCR for purposes of the interconnectedness
indicator under the FR Y-15. The Board expects to address the use of
SA-CCR for purposes of the FR Y-15 in a separate process. Until such
time, banking organizations that must report the FR Y-15 should
continue to use CEM to determine the potential future exposure of their
derivative contracts for purposes of completing line 11(b) of Schedule
B, consistent with the current instructions to the form.
---------------------------------------------------------------------------
\41\ See Reporting Form FR Y-15, Instructions for Preparation of
Banking Organization Systemic Risk Report (reissued December 2016).
The Board recently finalized modifications the reporting panel and
certain substantive requirements of Form FR Y-15 in connection with
the tailoring final rule adopted by the agencies. See 84 FR 59032
(November 1, 2019) (Board-only final rule to establish risk-based
categories for determining prudential standards to large U.S. and
foreign banking organizations (Board-only tailoring final rule));
see also supra note 23.
---------------------------------------------------------------------------
3. Stress Test Projections in CCAR
Commenters asked the Board to clarify how the implementation of SA-
CCR will interact with the supervisory stress-testing program. In
particular, some commenters asked the Board to clarify when a banking
organization must incorporate SA-CCR into any stress test projections
made for purposes of the Comprehensive Capital Analysis and Review
(CCAR) exercise relative to the timing of its implementation for
regulatory capital purposes. Consistent with past capital planning
practice, the Board expects to make revisions so as to not require a
banking organization to use SA-CCR for purposes of the CCAR exercise
prior to adopting SA-CCR to calculate its risk-based and supplementary
leverage capital requirements (as applicable) under the capital rule.
To promote comparability of stress test results across banking
organizations, for the 2020 stress test cycle all banking organizations
would continue to use CEM for the CCAR exercise. However, a banking
organization that has elected to adopt SA-CCR in 2020 would be required
to use SA-CCR for the CCAR exercise beginning with the 2021 stress test
cycle, and those who adopt in 2021 must use SA-CCR for the CCAR
exercise beginning with 2022 stress test cycle.\42\ Finally, a banking
organization that does not adopt SA-CCR until the mandatory compliance
date in 2022 would not be required to use SA-CCR for the CCAR exercise
until the 2023 and all subsequent stress test cycles. Prior to the time
of adoption in stress testing, the Board expects to update the Form FR
Y-14 to implement these changes and to provide any necessary
information on how to incorporate SA-CCR into a banking organization's
stress test results.\43\
---------------------------------------------------------------------------
\42\ For banking organizations subject to Category IV
supervisory stress test requirements, 2022 is an on-cycle year.
\43\ Banking organizations that report information on the FR Y-
14 under SA-CCR must do so for all schedules, including DFAST and
CCAR. The anticipated standards described in this section would
apply equally for purposes of DFAST and CCAR.
---------------------------------------------------------------------------
Commenters also suggested aligning certain aspects of the CCAR
exercise with SA-CCR. Specifically, commenters asked the Board to
revise the CCAR methodology for estimating losses under the largest
single counterparty default scenario to distinguish between margined
and unmargined counterparty relationships in a manner consistent with
SA-CCR. The methodologies for measuring counterparty exposure under SA-
CCR and supervisory stress testing are designed to capture different
types of risks. In particular, the largest single counterparty default
exercise seeks to ensure that a banking organization can absorb losses
associated with the default of any counterparty, in addition to losses
associated with adverse economic conditions, in an environment of
economic uncertainty. The Board regularly reviews its stress testing
models, and will continue to evaluate the appropriateness of
assumptions related to the largest counterparty default component.
4. Swap Margin Rule
Commenters noted that the agencies' margin and capital requirements
for covered swap entities rule (swap margin rule) uses a methodology
similar to CEM to quantify initial margin requirements for non-cleared
swaps and non-cleared security-based swaps.\44\ This final rule does
not affect the swap margin rule or the calculation of appropriate
margin and, therefore, the implementation of SA-CCR will not require a
banking organization to change the way it complies with those
requirements.
---------------------------------------------------------------------------
\44\ See supra note 17.
---------------------------------------------------------------------------
5. OCC Lending Limits
In the proposal, the OCC proposed to revise its lending limit rule
at 12 CFR part 32, to update cross-references to CEM in the
standardized approach and to permit SA-CCR as an option for calculation
of exposures under lending limits. Commenters generally supported the
OCC's proposal to align measurement of counterparty credit risk across
regulatory requirements. The OCC agrees with the commenters and
therefore the final rule adopts revisions to the lending limits rule as
proposed.
6. Single Counterparty Credit Limit (SCCL)
As noted in the proposal, the Board's single counterparty credit
limit (SCCL) rule authorizes a banking organization subject to the SCCL
to use any methodology that such a banking organization is authorized
to use under the capital rule to determine the credit exposure
associated with a derivative contract for purposes of the SCCL
rule.\45\ Thus, as under the proposal, as of the mandatory compliance
date for SA-CCR, to determine the credit exposure associated with a
derivative contract under the SCCL rule, an advanced approaches banking
organization must use SA-CCR or IMM and a banking organization subject
to Category III standards, which include the SCCL rule, must use
whichever of CEM or SA-CCR
[[Page 4371]]
that it uses to calculate its standardized total risk-weighted assets.
---------------------------------------------------------------------------
\45\ See 83 FR 38460 (August 6, 2018). The Board-only tailoring
final rule revised the scope of applicability of the SCCL rule, such
that it applies to U.S. and foreign banking organizations subject to
Category I, II, or III standards, as applicable, and foreign banking
organizations with global consolidated assets of $250 billion or
more. See supra note 41.
---------------------------------------------------------------------------
7. Potential Future Revisions to the Agencies' Rules
Commenters requested additional information on the interaction of
SA-CCR with other potential revisions that the agencies may make to
their respective regulatory capital rules. Potential revisions
identified by commenters included the implementation of the Basel III
finalization standard and the Board's proposal to integrate the capital
rule and CCAR and stress test rules published in April 2018.\46\ In
addition, the proposed net stable funding ratio rule would cross-
reference netting provisions of the agencies' supplementary leverage
ratio that are amended under the final rule.\47\ The agencies will
consider the calibration and operation of SA-CCR for purposes of any
such potential revisions through the rulemaking process.
---------------------------------------------------------------------------
\46\ See 83 FR 18160 (April 25, 2018).
\47\ See 81 FR 35124 (June 1, 2016).
---------------------------------------------------------------------------
III. Mechanics of the Standardized Approach for Counterparty Credit
Risk
A. Exposure Amount
Under the proposal, the exposure amount of a netting set would have
been equal to an alpha factor of 1.4 multiplied by the sum of the
replacement cost of the netting set and the PFE of the netting set. The
purposes of the alpha factor were to address certain risks that are not
captured under SA-CCR and to ensure that exposure amounts produced
under SA-CCR generally would not be lower than those under IMM, in
support of its use as a broadly applicable and standardized
methodology. In addition, the proposal would have set the exposure
amount at zero for a netting set that consists of only sold options in
which the counterparty to the options paid the premiums up front and
that the options within the netting set are not subject to a variation
margin agreement.
Commenters stated that the proposal would increase the exposure
amount of derivative contracts with commercial end-users, relative to
CEM, because commercial end-users often have directional, unmargined
derivative portfolios, which would not receive the benefits of
collateral recognition and netting under SA-CCR in the form of a
reduction to the replacement cost and PFE amounts. As a result,
commenters expressed concern that banking organizations would pass the
costs of higher capital to commercial end-users in the form of higher
fees or, alternatively, that banking organizations could be less
willing to engage in derivative contracts with commercial end-users who
may lack the capability and scale to provide financial collateral
recognized under the capital rule. Commenters also expressed concern
that any increase in hedging costs for commercial end-users could have
an adverse impact on the broader economy.
Commenters generally suggested that the agencies address these
issues through changes to the alpha factor, either by removing it for
all derivative contracts with commercial end-user counterparties, or
only for such contracts that are unmargined. Commenters asserted that
providing relief for derivative contracts with commercial end-user
counterparties would not undermine the goals of the proposal because
these transactions comprise a small percentage of outstanding
derivatives and may present less risk than other directional,
unmargined derivatives. In support of this assertion, commenters argued
that commercial end-users typically provide collateral that is not
recognized as financial collateral under the capital rule but
nonetheless reduces the counterparty credit risk of the underlying
transaction.\48\ Commenters also argued that removing or reducing the
alpha factor for such derivative contracts would be consistent with
congressional and regulatory efforts designed to facilitate the ability
of such counterparties to enter into derivative contracts to manage
commercial risks.\49\
---------------------------------------------------------------------------
\48\ The types of collateral that commercial end-users provide
that do not qualify as financial collateral under the capital rule
are discussed in further detail in section III.B. of this
SUPPLEMENTARY INFORMATION.
\49\ See supra note 17.
---------------------------------------------------------------------------
Some commenters argued that applying the alpha factor to derivative
contracts with commercial end-user counterparties is misaligned with
the risks that the alpha factor was intended to address under IMM, such
as wrong-way risk.\50\ Some commenters recommended reducing the alpha
factor to 0.65 for derivative contracts with investment grade
commercial end-user counterparties, or with non-investment grade
commercial end-user counterparties that are supported by a letter of
credit or provide a first-priority lien on assets that do not present
wrong-way risk with respect to the underlying derivative contract.
These commenters argued that reducing the alpha factor to 0.65 would
improve risk sensitivity and more closely align with the treatment of
investment-grade corporate exposures under the revised Basel III
finalization standard.\51\
---------------------------------------------------------------------------
\50\ Wrong way risk means that the size of an exposure is
positively correlated with the counterparty's probability of
default--that is, the exposure amount of the derivative contract
increases as the counterparty's probability of default increases.
\51\ See supra note 3555.
---------------------------------------------------------------------------
The agencies recognize that derivative contracts between banking
organizations and commercial end-users may include credit risk
mitigants that do not qualify as financial collateral under the capital
rule.\52\ In addition, and in contrast to derivative contracts with
financial end-users, derivative contracts with commercial end-users
have heightened potential to present right-way risk.\53\ The final rule
removes the alpha factor from the exposure amount formula for
derivative contracts with commercial end-user counterparties. The
agencies intend for this treatment to better align with the
counterparty credit risk presented by such exposures due to the
presence of credit risk mitigants and the potential for such
transactions to present right-way risk. In particular, the agencies
recognize that derivative exposures to commercial end-user
counterparties may be less likely to present the types of risks that
the alpha factor was designed to address, as discussed previously, and
therefore believe that removing the alpha factor for such exposures
improves the calibration of SA-CCR. The agencies note that this
approach also may mitigate the concerns of commenters regarding the
potential effects of the proposal relative to congressional and other
regulatory actions designed to mitigate the effect that post-crisis
derivatives market reforms have on the ability of these parties to
enter into derivative contracts to manage commercial risks. The
agencies intend to monitor the implementation of SA-CCR as part of
their ongoing assessment of the effectiveness of the overall U.S.
regulatory capital framework to determine whether there are
opportunities to improve the ability of commercial end-users to enter
into derivative contracts with banking organizations in a manner that
continues to support the safety and soundness of banking organizations
and U.S. financial stability.
---------------------------------------------------------------------------
\52\ Under Sec. _.2 of the capital rule, financial collateral
means cash or liquid and readily marketable securities, in which a
banking organization has a perfected first-priority security
interest in the collateral. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); and 12 CFR 324.2 (FDIC).
\53\ Right way risk means that the size of an exposure is
negatively correlated with the counterparty's probability of
default--that is, the exposure amount of the derivative contract
decreases as the counterparty's probability of default increases.
---------------------------------------------------------------------------
Beyond the concerns related to commercial end-users, commenters
[[Page 4372]]
recommended other changes to the alpha factor. Several commenters
suggested removing the alpha factor from the SA-CCR methodology
altogether, whereas other commenters suggested that the alpha factor
should apply only to the PFE component. Some commenters supported
reducing or eliminating the alpha factor as it applies to all or a
subset of derivative contracts.
Commenters that recommended removing the alpha factor argued that
the rationale for adopting the alpha factor for purposes of IMM does
not apply in the context of SA-CCR because, in contrast to IMM, SA-CCR
is a non-modelled approach and does not require an adjustment to
account for model risk. Similarly, other commenters noted that the
alpha factor is less meaningful in the United States because, under the
capital rule, the standardized approach serves as a floor to the
advanced approaches for total risk-weighted assets. Some of these
commenters also stated that the potential elimination of the advanced
approaches in connection with the U.S. implementation of the Basel III
finalization standard would eliminate use of IMM and undermine the need
for the alpha factor. Other commenters argued that because IMM
incorporates relatively higher stressed-volatility inputs while the
supervisory factors under SA-CCR are static, attempts to have SA-CCR
yield a more conservative exposure amount than IMM in all cases could
result in SA-CCR producing excessive capital requirements that are
disconnected from the actual risk of the underlying exposures.
Alternatively, other commenters recommended only applying the alpha
factor to PFE. These commenters argued that applying the alpha factor
to replacement cost would be inappropriate as the fair value of on-
balance sheet derivatives are not subject to model uncertainty.
Commenters that supported reducing the alpha factor recommended
revising the calibration to reflect the derivatives market reforms that
followed the financial crisis, such as mandatory clearing requirements
promulgated by the Commodity Futures Trading Commission (CFTC) \54\ and
the swap margin rule.\55\ Of these, some commenters supported applying
a lower alpha factor to heavily over-collateralized portfolios in order
to provide greater collateral recognition.
---------------------------------------------------------------------------
\54\ See 17 CFR part 50.
\55\ See supra note 17.
---------------------------------------------------------------------------
Additionally, some commenters expressed concern that the alpha
factor could adversely affect custody banking organizations. In
particular, the commenters asserted that custody banking organizations
do not maintain large portfolios of derivative contracts across a broad
range of tenors (i.e., the amount of time remaining before the end date
of the derivative contract) and asset classes and that the foreign
exchange derivative portfolio of a custody banking organization is
intended to serve the investment needs of the custody banking
organization's clients rather than to take on economic risk.
In contrast, some commenters who supported the alpha factor
suggested that concerns regarding its impact on the exposure amount
calculated under SA-CCR are overstated. Specifically, these commenters
argued that banking organizations have incentives to minimize estimates
of risk for regulatory capital purposes and that internal models failed
to account properly for risk during the crisis and have been criticized
in analyses conducted since then. In addition, these commenters stated
that although SA-CCR uses estimates of volatility for individual
positions that are based on observed, crisis period volatilities,
greater recognition of netting and margin under SA-CCR may fully offset
any conservatism resulting from the use of updated volatility
estimates.
As noted in the proposal, the alpha factor helps to instill an
appropriate level of conservatism and further support the use of SA-CCR
as a broadly applicable and standardized methodology. Additionally, the
alpha factor serves to capture certain risks (e.g., wrong-way risk,
non-granular risk exposures, etc.) that are not fully reflected under
either IMM or SA-CCR. Adopting commenters' recommendations could reduce
the efficacy of SA-CCR as a standardized approach that serves a floor
to internal models-based approaches. For large, internationally active
banking organizations, consistency with the Basel Committee standard
also helps to reduce operational burden and minimize any incentives
such banking organizations may have to book activities in legal
entities located in jurisdictions that provide relatively more
favorable regulatory capital treatment.
Accordingly, the final rule incorporates an alpha factor of 1.4 in
the exposure amount formula, except as it applies to derivative
contracts with commercial end-user counterparties for which the alpha
factor is removed under the final rule. The exposure amount formulas
are represented as follows:
exposure amount = 1.4 * (replacement cost + PFE).
However, for a derivative contract with a commercial end-user
counterparty, the exposure amount is represented as follows:
exposure amount = (replacement cost + PFE).
To operationalize the exposure amount formula for derivative
contracts with commercial end-user counterparties, the final rule
provides a definition of commercial end-user. Under the final rule, a
commercial end-user means a company that is using derivatives to hedge
or mitigate commercial risk, and is not a financial entity listed in
section 2(h)(7)(C)(i)(I) through (VIII) of the Commodity Exchange Act
\56\ or is not a financial entity listed in section 3C(g)(3)(A)(i)
through (viii) of the Securities Exchange Act.\57\ The definition also
includes an entity that qualifies for the exemption from clearing under
section 2(h)(7)(A) of the Commodity Exchange Act by virtue of section
2(h)(7)(D) of the Commodity Exchange Act, including entities that are
exempted from the definition of financial entity under section
2(h)(7)(C)(iii) of the Commodity Exchange Act; \58\ or qualifies for
the exemption from clearing under section 3C(g)(1) of the Securities
Exchange Act by virtue of section 3C(g)(4) of the Securities Exchange
Act.\59\ Including these entities within the commercial end-user
definition permits affiliates that hedge commercial risks on behalf of
a parent entity that is not a financial entity to qualify as a
commercial end-user, which would accommodate business organizations
that hedge commercial risks through transactions conducted by
affiliates rather than directly by the parent company. Overall, the
definition covers commercial end-users and generally excludes financial
entities.
---------------------------------------------------------------------------
\56\ 7 U.S.C. 2(h)(7)(C)(i)(I) through (VIII). The commercial
end-user definition also applies to transactions with affiliates of
entities that enter into derivative contracts on behalf of those
entities that meet the criteria under section 2(h)(7)(D) of the
Commodity Exchange Act.
\57\ 15 U.S.C. 78c-3(g)(3)(A)(i) through (viii).
\58\ 7 U.S.C. 2(h)(7)(A), (C)(iii), and (D).
\59\ 15 U.S.C. 78c-3(g)(1) and (4).
---------------------------------------------------------------------------
This definition has the advantage of being generally consistent
with other regulations promulgated by the agencies, including the swap
margin rule.\60\ Referencing provisions of the Commodities Exchange Act
or Securities Exchange Act promotes consistency with other regulations
and offers a significant compliance benefit to
[[Page 4373]]
institutions subject to the final rule.\61\ In addition, in the swap
margin rule context, the agencies observed that differences in risk
profiles justified distinguishing between financial end-users and non-
financial end-users, on the grounds that financial firms present a
higher level of risk than other types of counterparties and are more
likely to default during a period of financial stress, thus posing
greater risk to the safety and soundness of the counterparty and
systemic risk.\62\ While some commenters requested an exemption for
entities that was slightly narrower or broader than the definition the
agencies are adopting in the final rule, as noted above, the
distinction drawn by this definition is appropriate to differentiate
derivative transactions that have the potential to present right-way
risk from those that do not.\63\
---------------------------------------------------------------------------
\60\ See supra note 17.
\61\ The definition of a commercial end-user in the final rule
does not extend to an organization exempted by the CFTC pursuant to
section 2(h)(7)(C)(ii) of the Commodity Exchange Act (7 U.S.C.
2(h)(7)(C)(ii)) or exempted by the Securities and Exchange
Commission pursuant to section 3C(g)(3)(B) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c-3(g)(3)(B)).
\62\ See 80 FR 74839, 74853 (April 1, 2016).
\63\ Id.
---------------------------------------------------------------------------
Other commenters asked the agencies to clarify that the proposal
would apply an exposure amount of zero to sold options in which the
counterparty to the options has paid the premiums up front and that are
not subject to a variation margin agreement. Consistent with the
proposal, under the final rule, an exposure amount of zero applies to
sold options that are not subject to a variation margin agreement and
for which the counterparty has paid the premiums up front.\64\ This
treatment is appropriate because the counterparty to the option has no
future payment obligation under the derivative contract and the banking
organization, as the option seller, has no exposure to counterparty
credit risk.
---------------------------------------------------------------------------
\64\ See Sec. _.132(c)(5)(iii) of the final rule.
---------------------------------------------------------------------------
B. Definition of Netting Sets and Treatment of Financial Collateral
Under the capital rule, a netting set is currently defined as a
group of transactions with a single counterparty that are subject to a
qualifying master netting agreement (QMNA) or a qualifying cross-
product master netting agreement. The proposal would have revised the
definition of netting set to mean either one derivative contract
between a banking organization and a single counterparty, or a group of
derivative contracts between a banking organization and a single
counterparty that are subject to the same qualifying master netting
agreement or the same qualifying cross-product master netting
agreement. The proposal would have allowed a banking organization to
calculate the exposure amount of multiple derivative contracts under
the same netting set so long as each derivative contract is subject to
the same QMNA.
Some commenters raised concerns with the proposal's reliance on
netting to reduce exposure amounts on a point-in-time basis instead of
on a dynamic basis and suggested revising the proposal to account for
situations that may arise during stress periods that could disrupt the
availability of netting. As an example, the commenters noted that
during the financial crisis some banking organizations requested to
novate their ``in-the-money'' derivative contracts with another
counterparty, while leaving the banking organization's ``out-of-the-
money'' positions with the initial counterparty. The agencies believe
it is appropriate to allow for the netting of derivative contracts
under SA-CCR on a point-in-time basis, as allowing for netting on a
point-in-time basis under SA-CCR is consistent with U.S. generally
accepted accounting principles (U.S. GAAP) and facilitates
implementation of the final rule. The capital rule relies significantly
on banking organizations' U.S. GAAP balance sheets and thus requires
banking organizations to determine capital ratios on a point-in-time
basis. The risks related to stress events identified by the commenters
may be further addressed in the context of stress testing and
resolution planning. Thus, the agencies are adopting as final the
netting treatment under the proposal, with the exception of the
availability of netting among collateralized-to-market and settled-to-
market derivative contracts, which is discussed below in section
III.D.4. of this SUPPLEMENTARY INFORMATION.
Under the final rule, a group of derivative contracts subject to
the same QMNA are part of the same netting set.\65\ In general, a QMNA
means a netting agreement that permits a banking organization to
terminate, close-out on a net basis, and promptly liquidate or set off
collateral upon an event of default of the counterparty.\66\ To qualify
as a QMNA, the netting agreement must satisfy certain operational
requirements under Sec. _.3 of the capital rule.\67\
---------------------------------------------------------------------------
\65\ The definition of netting set also clarifies that a netting
set can be composed of a single derivative contract and retains
certain components of the definition that are specific to IMM.
\66\ See supra note 2. In 2017, the agencies adopted a final
rule that requires GSIBs and the U.S. operations of foreign GSIBs to
amend their qualified financial contracts to prevent their immediate
cancellation or termination if such a banking organization enters
bankruptcy or a resolution process. Qualified financial contracts
include derivative contracts, securities lending, and short-term
funding transactions such as repurchase agreements. Under the 2017
final rule, the agencies revised the definition of QMNA under the
capital rule such that qualified financial contracts could be
subject to a QMNA (notwithstanding other operational requirements).
See 82 FR 42882 (September 12, 2017).
\67\ See supra note 2.
---------------------------------------------------------------------------
Some commenters expressed concern that the proposed definition of
netting set could inadvertently affect the treatment for repo-style
transactions under other provisions of the capital rule. The proposed
definition was intended to reflect that under SA-CCR a banking
organization would determine the exposure amount for a derivative
contract at the netting set level, which would have included a single
derivative contract. However, to address the commenters' concern, the
agencies have revised the definition of netting set under the final
rule to mean a group of transactions with a single counterparty that
are subject to a QMNA and, with respect to derivative contracts only,
also includes a single derivative contract between a banking
organization and a counterparty.\68\ With respect to repo-style
transactions, this definition is consistent with the current capital
rule.
---------------------------------------------------------------------------
\68\ Consistent with the current definition of netting set, for
purposes of the internal models methodology in Sec. _.132(d) of the
capital rule, netting set also includes a qualifying cross-product
master netting agreement. See 12 CFR 3.132(d) (OCC); 12 CFR
217.132(d) (Board); and 12 CFR 324.132(d) (FDIC).
---------------------------------------------------------------------------
The proposal set forth definitions for variation margin, variation
margin amount, independent collateral, and net independent collateral
amount. The proposal would have defined variation margin as financial
collateral that is subject to a collateral agreement and provided by
one party to its counterparty to meet the performance of the first
party's obligations under one or more derivative contracts between the
parties as a result of a change in value of such obligations since the
last exchange of such collateral. The variation margin amount would
have been equal to the fair value amount of the variation margin that a
counterparty to a netting set has posted to a banking organization less
the fair value amount of the variation margin posted by the banking
organization to the counterparty.
The proposal would have required the variation margin amount to be
adjusted by the existing standard supervisory haircuts under Sec.
_.132(b)(2)(ii)(A)(1) of the capital rule. The standard supervisory
haircuts reflect potential
[[Page 4374]]
future changes in the value of the financial collateral by adjusting
for any potential decrease in the value of the financial collateral
received by a banking organization and any potential increase in the
value of the financial collateral posted by the banking organization
over supervisory-provided holding periods. The standard supervisory
haircuts are based on a ten-business-day holding period, and the
capital rule requires a banking organization to adjust, as applicable,
the standard supervisory haircuts to align with the associated
derivative contract (or repo-style transaction) according to the
formula in Sec. _.132(b)(2)(ii)(A)(4).\69\
---------------------------------------------------------------------------
\69\ As described in section III.D. of this SUPPLEMENTARY
INFORMATION, the final rule applies a five-day holding period for
the purpose of the margin period of risk to all derivative contracts
subject to a variation margin agreement that are client-facing
derivative transactions, as defined in the final rule, regardless of
the method the banking organization uses to calculate the exposure
amount of the derivative contract. As described in section VI.E. of
this SUPPLEMENTARY INFORMATION, the collateral haircuts for such
transactions similarly reflect a five-business-day holding period
under the final rule.
---------------------------------------------------------------------------
The proposal would have defined independent collateral as financial
collateral, other than variation margin, that is subject to a
collateral agreement, or in which a banking organization has a
perfected, first-priority security interest or, outside of the United
States, the legal equivalent thereof (with the exception of cash on
deposit and notwithstanding the prior security interest of any
custodial agent or any prior security interest granted to a CCP in
connection with collateral posted to that CCP), and the amount of which
does not change directly in response to the change in value of the
derivative contract or contracts that the financial collateral secures.
Net independent collateral amount would have been defined as the
fair value amount of the independent collateral that a counterparty to
a netting set has posted to a banking organization less the fair value
amount of the independent collateral posted by the banking organization
to the counterparty, excluding such amounts held in a bankruptcy-remote
manner,\70\ or posted to a qualifying central counterparty (QCCP) \71\
and held in conformance with the operational requirements in Sec. _.3
of the capital rule. As with the variation margin amount, the
independent collateral amount would have been subject to the standard
supervisory haircuts under Sec. _.132(b)(2)(ii)(A)(1) of the capital
rule.
---------------------------------------------------------------------------
\70\ ``Bankruptcy remote'' is defined in Sec. _.2 of the
capital rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR
324.2 (FDIC).
\71\ ``Qualifying central counterparty'' is defined in Sec. _.2
of the capital rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and
12 CFR 324.2 (FDIC).
---------------------------------------------------------------------------
The agencies did not receive comment on the proposed definitions of
variation margin, variation margin amount, independent collateral, and
independent collateral amount. Several commenters, however, advocated
for recognition of alternative collateral arrangements under SA-CCR to
address the potential impact of the proposal on derivative contracts
with certain counterparties, including commercial end-users. As noted
above, the commenters argued that SA-CCR could unduly increase capital
requirements for derivative exposures to commercial end-user
counterparties because they often do not provide collateral in the form
of cash or liquid and readily marketable securities. Commenters stated
that companies, including commercial end-users, regularly use
alternative security arrangements, such as liens on assets, a letter of
credit, or a parent company guarantee, to offset the counterparty
credit risk of their derivative contracts, and that banking
organizations should be able to recognize the credit risk-mitigating
benefits of such arrangements under SA-CCR.
In support of their recommendation, commenters noted that a line of
credit functions similarly to the exchange of margin because the line
of credit is available to be drawn upon by the banking organization in
advance of default as the counterparty's creditworthiness deteriorates.
Moreover, the line of credit can be structured so that its amount may
increase over the life of the derivative contract based on certain
credit quality metrics. Commenters added that common industry practice
allows banking organizations to accept these forms of collateral from
counterparties and to reflect their credit risk-mitigating benefits
when they calculate the exposure amount under IMM. Commenters also
argued that derivative contracts with commercial end-users may present
right-way risk for banking organizations, in contrast to derivative
contracts with financial institution counterparties, and that this
feature of these transactions supports recognition of alternative forms
of collateral.
The capital rule only recognizes certain forms of collateral that
qualify as ``financial collateral,'' as defined under the rule.\72\ In
general, the items that qualify as financial collateral under the
capital rule exhibit sufficient liquidity and asset quality to serve as
credit risk mitigants for risk-based capital purposes. Consistent with
the capital rule, the final rule does not recognize the alternative
collateral arrangements suggested by commenters. Liens and asset
pledges, by contrast, may not be rapidly available to support losses in
an event of default because the assets they attach to can be illiquid
and thus difficult to value and sell for cash after enforcement of a
security interest in the collateral or foreclosure, which is
inconsistent with the principle that derivatives should be able to be
closed out easily and quickly in an event of default.\73\ In addition,
recognizing letters of credit would add significant complexity to the
capital rule. In particular, recognition of letters of credit as
financial collateral would require the introduction of appropriate
qualification criteria, as well as a framework for considering the
counterparty credit risk of institutions providing the letters of
credit. The agencies also believe that the removal of the alpha factor
for derivative contract exposures to commercial end-users helps to
address commenters' concerns that the proposal would have resulted in
unduly high risk-weighted asset amounts for derivative contracts with
commercial end-user counterparties.
---------------------------------------------------------------------------
\72\ See supra note 52.
\73\ The Board and OCC issued the capital rule as a joint final
rule on October 11, 2013 (78 FR 62018) and the FDIC issued the
capital rule as a substantially identical interim final rule on
September 10, 2013 (78 FR 53340). In April 14, 2014, the FDIC issued
the interim final rule as a final rule with no substantive changes
(79 FR 20754).
---------------------------------------------------------------------------
Accordingly, the agencies are adopting without change the proposed
definitions for variation margin, independent collateral, variation
margin amount, and independent collateral amount, as well as the
proposed application of the standard supervisory haircuts under the
capital rule.
C. Replacement Cost
The proposal would have provided separate formulas to determine
replacement cost that apply depending on whether the counterparty to a
banking organization is required to post variation margin.
Specifically, the replacement cost for a netting set that is not
subject to a variation margin agreement would have equaled the greater
of (1) the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set, less
the net independent collateral amount applicable to such derivative
contracts, or (2) zero.\74\
---------------------------------------------------------------------------
\74\ Replacement cost is calculated based on the assumption that
the counterparty has defaulted. Therefore, this calculation cannot
include valuation adjustments based on counterparty's credit
quality, such as CVA, which reflect the discounted present value of
losses if the counterparty were to default in the future.
---------------------------------------------------------------------------
[[Page 4375]]
For a netting set that is subject to a variation margin agreement
where the counterparty is required to post variation margin,
replacement cost would have equaled the greater of (1) the sum of the
fair values (after excluding any valuation adjustments) of the
derivative contracts within the netting set, less the sum of the net
independent collateral amount and the variation margin amount
applicable to such derivative contracts; (2) the sum of the variation
margin threshold and the minimum transfer amount applicable to the
derivative contracts within the netting set, less the net independent
collateral amount applicable to such derivative contracts; or (3) zero.
As noted in the proposal, the formula to determine the replacement cost
of a netting set subject to a variation margin agreement would have
accounted for the maximum possible unsecured exposure amount of the
netting set that would not trigger a variation margin call. For
example, a netting set with a high variation margin threshold has a
higher replacement cost compared to an equivalent netting set with a
lower variation margin threshold. Therefore, the proposal would have
provided definitions for variation margin threshold and the minimum
transfer amount.
Under the proposal, the variation margin threshold would have meant
the maximum amount of a banking organization's credit exposure to its
counterparty that, if exceeded, would require the counterparty to post
variation margin to the banking organization. The minimum transfer
amount would have meant the smallest amount of variation margin that
may be transferred between counterparties to a netting set. The
proposal included this treatment to address transactions for which the
variation margin agreement includes a variation margin threshold that
is set at a level high enough to make the netting set effectively
unmargined. In such a case, the variation margin threshold would result
in an inappropriately high replacement cost, because it is not
reflective of the risk associated with the derivative contract but
rather the terms of the variation margin agreement. To address this
issue, the proposal would have provided that the exposure amount of a
netting set subject to a variation margin agreement could not exceed
the exposure amount of the same netting set calculated as if the
netting set were not subject to a variation margin agreement.\75\
---------------------------------------------------------------------------
\75\ There could be a situation unrelated to the value of the
variation margin threshold in which the exposure amount of a
margined netting set is greater than the exposure amount of an
equivalent unmargined netting set. For example, in the case of a
margined netting set composed of short-term transactions with a
residual maturity of ten business days or less, the risk horizon
equals the MPOR, which under the final rule is set to a minimum
floor of ten business days. The risk horizon for an equivalent
unmargined netting set also is set to ten business days because this
is the floor for the remaining maturity of such a netting set.
However, the maturity factor for the margined netting set is greater
than the one for the equivalent unmargined netting set because of
the application of a factor of 1.5 to margined derivative contracts.
In such an instance, the exposure amount of a margined netting set
is more than the exposure amount of an equivalent unmargined netting
set by a factor of 1.5, thus triggering the cap. In addition, in the
case of margin disputes, the MPOR of a margined netting set is
doubled, which could further increase the exposure amount of a
margined netting set comprised of short-term transactions with a
residual maturity of ten business days or less above an equivalent
unmargined netting set. The agencies believe, however, that such
instances rarely occur and thus would have minimal effect on banking
organizations' regulatory capital. Therefore, the final rule limits
the exposure amount of a margined netting set to no more than the
exposure amount of an equivalent unmargined netting set. However,
the agencies expect to monitor the application of this treatment
under the final rule.
---------------------------------------------------------------------------
In addition, the proposal would have provided adjustments for
determining the replacement cost of a netting set that is subject to
multiple variation margin agreements or a hybrid netting set, which is
a netting set composed of at least one derivative contract subject to a
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, and for multiple netting
sets subject to a single variation margin agreement.
Some commenters supported the proposed replacement cost calculation
and, in particular, the cap based on the margin exposure threshold and
minimum transfer amount. The commenters argued that the unmargined
exposure amount more accurately reflects the exposure amount for short-
dated trades subject to a higher MPOR, as the close-out period
reflected in MPOR cannot be increased beyond the maturity of the
transactions. Other commenters advocated subtracting incurred CVA from
the exposure amount of a netting set. In support of their
recommendation, the commenters noted that IMM allows incurred CVA to be
subtracted from EAD, and that the agencies previously extended such
treatment to advanced approaches banking organizations that use CEM to
calculate advanced approaches risk-weighted assets.
The final rule adopts the proposed replacement cost formulas and
related definitions, with one modification. The agencies recognize that
in determining the fair value of a derivative on a banking
organization's balance sheet, the recognized CVA on the netting set of
OTC derivative contracts is intended to reflect the credit quality of
the counterparty. The final rule permits advanced approaches banking
organizations to reduce EAD, calculated according to SA-CCR, by the
recognized CVA on the balance sheet, for the purposes of calculating
advanced approaches total risk-weighted assets. This treatment is
consistent with the recognition of CVA under CEM as it applies to
advanced approaches banking organizations that use CEM for purposes of
determining advanced approaches total risk-weighted assets.\76\
---------------------------------------------------------------------------
\76\ See 80 FR 41409 (July 15, 2015).
---------------------------------------------------------------------------
The final rule otherwise adopts without change the proposed
replacement cost formulas and related definitions, as well as the
proposed treatment to cap the exposure amount for a margined netting
set at the maximum exposure amount for an unmargined, but otherwise
identical, netting set.
Under Sec. _.132(c)(6)(ii) of the final rule, the replacement cost
of a netting set that is not subject to a variation margin agreement is
represented as follows:
replacement cost = max{V-C; 0{time} ,
Where:
V is the fair values (after excluding any valuation adjustments) of
the derivative contracts within the netting set; and
C is the net independent collateral amount applicable to such
derivative contracts.
The same requirement applies to a netting set that is subject to a
variation margin agreement under which the counterparty is not required
to post variation margin. For such a netting set, C also includes the
negative amount of the variation margin that the banking organization
posted to the counterparty (thus increasing replacement cost).
For netting sets subject to a variation margin agreement under
which the counterparty must post variation margin, the replacement cost
formula is provided under Sec. _.132(c)(6)(i) of the final rule and is
represented as follows:
replacement cost = max{V-C; VMT + MTA-NICA; 0{time} ,
Where:
V is the fair values (after excluding any valuation adjustments) of
the derivative contracts within the netting set;
[[Page 4376]]
C is the sum of the net independent collateral amount and the
variation margin amount applicable to such derivative contracts;
VMT is the variation margin threshold applicable to the derivative
contracts within the netting set; and
MTA is the minimum transfer amount applicable to the derivative
contracts within the netting set.
NICA is the net independent collateral amount applicable to such
derivative contracts.
For a netting set that is subject to multiple variation margin
agreements, or a hybrid netting set, a banking organization must
determine replacement cost using the methodology described in Sec.
_.132(c)(11)(i) of the final rule. Under this paragraph, a banking
organization must use the standard replacement cost formula (described
in Sec. _.132(c)(6)(i) for a netting set subject to a variation margin
agreement), except that the variation margin threshold equals the sum
of the variation margin thresholds of all the 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.
For multiple netting sets subject to a single variation margin
agreement, a banking organization must assign a single replacement cost
to the multiple netting sets according to the following formula, as
provided under Sec. _.132(c)(10)(i) of the final rule:
Replacement Cost = max{[Sigma]NS max{VNS; 0{time} -max{CMA; 0{time} ;
0{time} + max{[Sigma]NS min{VNS; 0{time} -min{CMA; 0{time} ; 0{time} ,
Where:
NS is each netting set subject to the variation margin agreement MA;
VNS is the sum of the fair values (after excluding any
valuation adjustments) of the derivative contracts within the
netting set NS; and
CMA is the sum of the net independent collateral amount
and the variation margin amount applicable to the derivative
contracts within the netting sets subject to the single variation
margin agreement.
The component max{[Sigma]NS max{VNS; 0{time} -max{CMA; 0{time} ;
0{time} reflects the exposure amount produced by netting sets that
have current positive market value. Variation margin and independent
collateral collected from the counterparty to the transaction can
offset the current positive market value of these netting sets (i.e.,
this component contributes to replacement cost only in instances when
CMA is positive). However, netting sets that have current
negative market value are not allowed to offset the exposure amount.
The component max{[Sigma]NS min{VNS; 0{time} -min{CMA; 0{time} ;
0{time} reflects the exposure amount produced when the banking
organization posts variation margin and independent collateral to its
counterparty (i.e., this component contributes to replacement cost only
in instances when CMA is negative).
D. Potential Future Exposure
Under the proposal, the PFE for a netting set would have equaled
the product of the PFE multiplier and the aggregated amount. To
determine the aggregated amount, a banking organization would have been
required to determine the hedging set amounts for the derivative
contracts within a netting set, where a hedging set is comprised of
derivative contracts that share similar risk factors based on asset
class (i.e., interest rate, exchange rate, credit, equity, and
commodity). The aggregated amount would have equaled the sum of all
hedging set amounts within a netting set.
Under the proposal, a banking organization would have used a two-
step process to determine the hedging set amount for an asset class.
First, a banking organization would have determined the composition of
a hedging set using the asset class definitions set forth in the
proposal. Second, the banking organization would have determined
hedging set amount using asset class specific formulas. The hedging set
amount formulas require a banking organization to determine an adjusted
derivative contract amount for each derivative contract, and to
aggregate those amounts to arrive at the hedging set amount for an
asset class.\77\
---------------------------------------------------------------------------
\77\ Section III.D.1. of this SUPPLEMENTARY INFORMATION
discusses the methodology for determining the composition of a
hedging set using the asset class distinctions set forth in the
final rule. Section III.D.2. of this SUPPLEMENTARY INFORMATION
discusses the methodology for determining the adjusted derivative
contract amount for each derivative contract. Section III.D.3. of
this SUPPLEMENTARY INFORMATION discusses the PFE multiplier. Section
III.D.4. of this SUPPLEMENTARY INFORMATION discusses the PFE
calculation for nonstandard margin agreements.
---------------------------------------------------------------------------
The final rule adopts the formula for determining PFE as proposed.
Under Sec. _.132(c)(7) of the final rule, the PFE of a netting set
equals the product of the PFE multiplier and the aggregated amount. The
final rule defines the aggregated amount as the sum of all hedging set
amounts within the netting set. This formula is represented in the
final rule as follows:
PFE = PFE multiplier * aggregated amount,
Where aggregated amount is the sum of each hedging set amount
within the netting set.
1. Hedging Set Amounts
Under the proposal, a banking organization would have determined
the hedging set amount by asset class. To specify each asset class, the
proposal would have maintained the existing definitions in the capital
rule for interest rate, exchange rate, credit, equity, and commodity
derivative contracts. The proposal would have provided hedging set
definitions for each asset class and sought comment on an alternative
approach for the definition and treatment of exchange rate derivative
contracts to recognize the economic relationships of exchange rate
chains (i.e., when more than one currency pair can offset the risk of
another). For example, a Yen/Dollar forward contract and a Dollar/Euro
forward contract, taken together, may be economically equivalent, with
properly set notional amounts, to a Yen/Euro forward contract when they
are subject to the same QMNA. The proposal also would have included
separate treatments for volatility derivative contracts and basis
derivative contracts.
Some commenters recommended that the agencies revise the
definitions for interest rate, exchange rate, equity, and commodity
derivative contracts for SA-CCR. In particular, the commenters noted
that there could be instances in which the existing definitions in the
capital rule are not aligned with the primary risk factor for a
derivative contract, and therefore would differ from the
classifications used under SA-CCR. To address this concern, commenters
requested allowing banking organizations to use the primary risk factor
for the derivative contract instead of one based on the asset class
definitions set forth in the proposal.
The final rule maintains the definitions of interest rate, exchange
rate, equity, and commodity derivative contracts, as the definitions
are largely aligned with existing derivative products and market
practices. In addition to being sufficiently broad to capture the
various types of derivative contracts, the existing asset class
definitions are well-established, well-understood, and generally have
functioned as intended in the capital rule. The final rule preserves
the ability of the primary Federal regulator to address derivative
contracts with multiple risk factors by requiring them to be included
in multiple hedging sets under Sec. _.132(c)(2)(iii)(H).\78\
---------------------------------------------------------------------------
\78\ The Board is the primary Federal regulator for bank holding
companies, savings and loan holding companies, intermediate holding
companies of foreign banks, and state member banks; the OCC is the
primary Federal regulator for all national banks and Federal savings
associations; and the FDIC is the primary Federal regulatory for all
state nonmember banks and savings associations.
---------------------------------------------------------------------------
[[Page 4377]]
Some commenters supported the alternative treatment for recognizing
the economic relationships of exchange rate chains described in the
proposal, but only if modified to address any potential overstatement
in the exposure amounts produced when creating separate hedging sets
for each foreign currency. The agencies believe that the alternative
treatment described in the proposal, if modified to incorporate
correlation parameters as suggested by commenters, would add a level of
complexity to the alternative treatment that would make it
inappropriate for use in a standardized framework that is intended for
potential implementation by all banking organizations. The agencies
further believe that the alternative treatment described in the
proposal, if modified to require the maximum of long or short risk
positions, would not add meaningful risk sensitivity by not taking into
account the correlations between currency risk factors. Therefore, the
agencies are adopting as final the asset class and hedging set
definitions as proposed.
To determine each hedging set amount, a banking organization first
must group into separate hedging sets derivative contracts that share
similar risk factors based on the following asset classes: Interest
rate, exchange rate, credit, equity, and commodity. Basis derivative
contracts and volatility derivative contracts require separate hedging
sets. A banking organization then must determine each hedging set
amount using asset-class specific formulas that allow for full or
partial offsetting. If the risk of a derivative contract materially
depends on more than one risk factor, whether interest rate, exchange
rate, credit, equity, or commodity risk factor, a banking
organization's primary Federal regulator may require the banking
organization to include the derivative contract in each appropriate
hedging set. Under the final rule, the hedging set amount of a hedging
set composed of a single derivative contract equals the absolute value
of the adjusted derivative contract amount of the derivative contract.
Section _.132(c)(2)(iii) of the final rule provides the respective
hedging set definitions. As noted, an exchange rate hedging set means
all exchange rate derivative contracts within a netting set that
reference the same currency pair. Thus, there could be as many exchange
rate hedging sets within a netting set as distinct currency pairs
referenced by the exchange rate derivative contracts. An interest rate
hedging set means all interest rate derivative contracts within a
netting set that reference the same reference currency. Thus, there
could be as many interest rate hedging sets in a netting set as
distinct currencies referenced by the interest rate derivative
contracts in the netting set. A credit hedging set would mean all
credit derivative contracts within a netting set. Similarly, an equity
hedging set means all equity derivative contracts within a netting set.
Consequently, there could be at most one equity hedging set and one
credit hedging set within a netting set. A commodity hedging set means
all commodity derivative contracts within a netting set that reference
one of the following commodity categories: Energy, metal, agricultural,
or other commodities. Therefore, there could be no more than four
commodity derivative contract hedging sets within a netting set.
Consistent with the proposal, the final rule sets forth separate
treatments for volatility derivative contracts and basis derivative
contracts. A basis derivative contract is a non-foreign exchange
derivative contract (i.e., the contract is denominated in a single
currency) in which the cash flows of the derivative contract depend on
the difference between two risk factors that are attributable solely to
one of the following derivative asset classes: Interest rate, credit,
equity, or commodity. A basis derivative contract hedging set means all
basis derivative contracts within a netting set that reference the same
pair of risk factors and are denominated in the same currency. In
contrast, a volatility derivative contract means a derivative contract
in which the payoff of the derivative contract explicitly depends on a
measure of volatility for the underlying risk factor of the derivative
contract. Examples of volatility derivative contracts include variance
and volatility swaps and options on realized or implied volatility. A
volatility derivative contract hedging set means all volatility
derivative contracts within a netting set that reference one of
interest rate, exchange rate, credit, equity, or commodity risk
factors, separated according to the requirements under Sec.
_.132(c)(2)(iii)(A)-(E) of the final rule.
a. Interest Rate Derivative Contracts
Under the proposal, the hedging set amount for a hedging set of
interest rate derivative contracts would have recognized that interest
rate derivative contracts with close tenors (i.e., the amount of time
remaining before the end date of the derivative contract) are generally
highly correlated, and thus would have provided a greater offset
relative to interest rate derivative contracts that do not have close
tenors. In particular, the proposed formula for determining the hedging
set amount for interest rate derivative contracts would have permitted
full offsetting within a tenor category and partial offsetting across
tenor categories, with tenor categories of less than one year, between
one and five years, and more than five years. The proposal would have
applied a correlation factor of 70 percent across adjacent tenor
categories and a correlation factor of 30 percent across nonadjacent
tenor categories. The tenor of a derivative contract would have been
based on the period between the present date and the end date of the
derivative contract, where end date would have meant the last date of
the period referenced by the derivative contract, or if the derivative
contract references another instrument, the period referenced by the
underlying instrument.
Some commenters asked the agencies to allow banking organizations
to recognize interest rate derivative contracts within the same QMNA as
belonging to the same interest rate hedging set, even if such
derivative contracts reference different currencies. According to the
commenters, such an approach would allow banking organizations to
recognize the diversification benefits of multi-currency interest rate
derivative portfolios. Some of these commenters also suggested
potential ways to implement this approach. Under one approach, a
banking organization would calculate the maximum exposure for the
interest rate derivative contracts within the QMNA under two scenarios
using a single-factor model. The first scenario would receive a
correlation factor of zero percent across interest rate exposures in
different currencies, while the second scenario would receive a
correlation factor of 70 percent. The former scenario would produce the
largest amount for portfolios balanced across net short and net long
currency exposures, while the latter scenario would produce the largest
amount for portfolios that primarily consist of net long or net short
currency positions. The second approach would use a single-factor model
to aggregate interest rate derivative contracts per currency type to
recognize correlations across currencies. Alternatively, other
commenters stated that yield curve correlations across major currencies
could be used to establish correlation
[[Page 4378]]
factors for interest rate derivative contracts that reference different
currencies. These commenters noted that the Basel Committee's standard
on minimum capital requirements for market risk incorporates a
correlation parameter to reflect diversification benefits across multi-
currency interest rate portfolios.\79\ These commenters also stated
that studies regarding the Basel Committee standard suggest that, by
not recognizing any hedging or diversification benefits across
currencies, the proposed method to calculate the hedging set amount for
interest rate derivatives under SA-CCR is overly conservative. Other
commenters criticized the proposal as not providing a sufficient
justification for the requirement that interest rate hedging sets must
be settled in the same currency to be included within the same hedging
set, in contrast to the proposed treatment for credit, commodity, and
equity derivative contracts.
---------------------------------------------------------------------------
\79\ See ``Minimum capital requirements for market risk,'' Basel
Committee on Banking Supervision (January 2019, rev. February 2019),
https://www.bis.org/bcbs/publ/d457.pdf.
---------------------------------------------------------------------------
The fact that a set of derivative contracts are subject to the same
QMNA is not determinative of whether hedging benefits across derivative
contracts actually exist. Interest rates in different currencies can
move in different directions, rendering correlations unstable. In
addition, adopting the commenters' recommendations could add
significant complexity to the final rule. The agencies therefore are
adopting as final the proposed treatment for determining the hedging
set amount of interest rate derivative contracts. Under Sec.
_.132(c)(8)(i) of the final rule, a banking organization must calculate
the hedging set amount for interest rate derivative contracts according
to the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.002
Where:
AddOnTB1IR equals the sum of the adjusted derivative
contract amounts within the hedging set with an end date of less
than one year from the present date;
AddOnTB2IR equals the sum of the adjusted derivative
contract amounts within the hedging set with an end date of one to
five years from the present date; and
AddOnTB3IR equals the sum of the adjusted derivative
contract amounts within the hedging set with an end date of more
than five years from the present date.
Consistent with the proposal, the final rule also includes a
simpler formula that does not provide an offset across tenor
categories. Under this approach, the hedging set amount for interest
rate derivative contracts equals the sum of the absolute amounts of
each tenor category, which is the sum of the adjusted derivative
contract amounts within each respective tenor category. The simpler
formula always results in a more conservative measure of the hedging
set amount for interest rate derivative contracts of different tenor
categories, but may be less burdensome for banking organizations with
smaller interest rate derivative contract portfolios. A banking
organization may use this simpler formula for some or all of its
interest rate derivative contracts.
b. Exchange Rate Derivative Contracts
Exchange rate derivative contracts that reference the same currency
pair generally are driven by the same market factor (i.e., the exchange
spot rate between these currencies) and thus are highly correlated.
Therefore, under the proposal, the formula for determining the hedging
set amount for exchange rate derivative contracts would have allowed
for full offsetting within the exchange rate derivative contract
hedging set. The agencies did not receive comment regarding the formula
for determining the hedging set amount for exchange rate derivative
contracts, and are adopting it as proposed. Under Sec. _.132(c)(8)(ii)
of the final rule, the hedging set amount for exchange rate derivative
contracts equals the absolute value of the sum of the adjusted
derivative contract amounts within the hedging set.
c. Credit Derivative Contracts and Equity Derivative Contracts
Under the proposal, a banking organization would have used the same
formula to determine the hedging set amount for both its credit
derivative contracts and equity derivative contracts. The formula would
allow full offsetting for credit or equity contracts that reference the
same entity, and partial offsetting when aggregating across distinct
reference entities. In addition, the proposal would have provided
supervisory correlation parameters for credit derivative contracts and
equity derivative contracts based on whether the derivative contract
referenced a single-name entity or an index.
A single-name derivative would have received a correlation factor
of 50 percent, while an index derivative contract would have received a
correlation factor of 80 percent to reflect partial diversification of
idiosyncratic risk within an index. As noted in the proposal, the
pairwise correlation between two entities is the product of the
corresponding correlation factors, so that the pairwise correlation
between two single-name derivatives is 25 percent, between one single-
name and one index derivative is 40 percent, and between two index
derivatives is 64 percent. The application of a higher correlation
factor does not necessarily result in a higher exposure amount because
the proposal generally would have yielded a lower exposure amount for
balanced portfolios relative to directional portfolios.
Several commenters asked the agencies to allow banking
organizations to decompose indices within credit and equity asset
classes to reflect the exposure of highly correlated net long and short
positions within an index. Under Sec. _.132(c)(5)(vi) of the final
rule, a banking organization may elect to decompose indices within
credit and equity asset classes, such that a banking organization would
treat each component of the index as a separate single-name derivative
contract. Thus, under this election, a banking organization would apply
the SA-CCR methodology to each component of the index as if it were a
separate single-name derivative contract instead of applying the SA-CCR
methodology to
[[Page 4379]]
the index derivative contract. This approach provides enhanced risk
sensitivity to the SA-CCR framework by allowing for recognition of the
hedging benefits provided by the components of an index. In addition,
this approach is similar to other aspects of the capital rule.\80\ The
agencies will monitor the application of the decomposition approach,
including the correlation assumptions between an index and its
components, to ensure that the approach is functioning as intended.
---------------------------------------------------------------------------
\80\ See e.g., 12 CFR 3.53 (OCC); 12 CFR 217.53 (Board); and 12
CFR 324.53 (FDIC).
---------------------------------------------------------------------------
Under the final rule, a banking organization must determine the
hedging set amount for its credit and equity derivative contracts set
forth in Sec. _.132(c)(8)(iii) of the final rule, as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.003
Where:
k is each reference entity within the hedging set;
K is the number of reference entities within the hedging set;
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts for all derivative contracts within the hedging set that
reference reference entity k; and
[rho]k equals the applicable supervisory correlation factor, as
provided in Table 2.
d. Commodity Derivative Contracts
The proposal would have required a banking organization to
determine the hedging set amount for commodity derivative contracts
based on the following four commodity categories: Energy, metal,
agricultural and other. The proposal would have permitted full
offsetting for all derivative contracts within the same commodity
category (i.e., within a hedging set) that reference the same commodity
type, and partial offsetting for all derivative contracts within the
same commodity category that reference different commodity types.
Under the proposal, a commodity type would have referred to a
specific commodity within one of the four commodity categories.
Additionally, the proposal would not have provided separate supervisory
factors for different commodity types within the energy commodity
category.\81\ For example, under the proposal, a hedging set could have
been composed of crude oil derivative contracts and electricity
derivative contracts, with each subject to the same supervisory factor.
A banking organization would have been able to fully offset all crude
oil derivative contracts against each other and all electricity
derivative contracts against each other (as they reference the same
commodity type). In addition, a banking organization would not have
been able to offset commodity derivative contracts that are included in
different commodity categories (i.e., a forward contract on crude oil
cannot hedge a forward contract on corn).
---------------------------------------------------------------------------
\81\ See section III.D.2.b. of this SUPPLEMENTARY INFORMATION
for a more detailed discussion on supervisory factors under the
final rule.
---------------------------------------------------------------------------
Several commenters asked the agencies to clarify the offsetting
treatment among the different types of contracts within the energy
category (e.g., electricity and oil/gas derivative contracts). Some
commenters asked the agencies to allow banking organizations to
decompose derivative contracts that reference commodity indices, such
that a banking organization would treat each component of the index as
a separate single-name derivative contract.
Consistent with the proposal, the final rule permits full
offsetting for all derivative contracts within a hedging set that
reference the same commodity type, and partial offsetting for all
derivative contracts within a hedging set that reference different
commodity types within the same commodity category.\82\ This treatment
applies consistently to each of the four commodity categories,
including energy. For example, electricity derivative contracts within
the same hedging set may fully offset each other, whereas electricity
derivative contracts and non-electricity derivate contracts (e.g., oil
derivative contracts) within the same hedging set may only partially
offset each other because they are different commodity types within the
same commodity category.
---------------------------------------------------------------------------
\82\ The final rule provides separate supervisory factors for
electricity derivative contracts and other types of commodity
derivative contracts within the energy category as discussed further
in section III.D.2.b.iii. of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
In an attempt to appropriately balance risk sensitivity with
operational burden, consistent with the proposal, the final rule allows
banking organizations to recognize commodity types without regard to
characteristics such as location or quality. For example, a banking
organization may recognize crude oil as a commodity type, and would not
need to distinguish further between West Texas Intermediate and Saudi
Light crude oil.
In response to comments, Sec. _.132(c)(5)(vi) of the final rule
allows a banking organization to elect to decompose commodity indices,
such that a banking organization would treat each component of the
index as a separate, single-name derivative contract. Thus, under this
election, a banking organization would apply the SA-CCR methodology to
each component of the index as if it were a separate, single-name
derivative contract, instead of applying the SA-CCR methodology to the
index derivative contract. This approach provides enhanced risk
sensitivity to the SA-CCR framework by allowing for better recognition
of hedging benefits provided by the components of an index. In
addition, this approach is similar to other aspects of the capital
rule.\83\
---------------------------------------------------------------------------
\83\ See supra note 80.
---------------------------------------------------------------------------
The agencies recognize that specifying separate commodity types is
operationally difficult; indeed, it is likely infeasible to
sufficiently specify all relevant distinctions between commodity types
in order to capture all basis risk. Therefore, the agencies will
monitor the commodity-type distinctions made within the industry for
purposes of both the full offset treatment for commodity derivative
contracts of the same type and the decomposition approach for commodity
indices, to ensure that they are being applied and functioning as
intended.
Consistent with the proposal, a banking organization must assign a
derivative contract to the ``other'' commodity category if the
derivative contract does not meet the criteria for the energy, metal or
agricultural commodity categories.
The hedging set amount for commodity derivative contracts would
[[Page 4380]]
be determined under Sec. _.132(c)(8)(iv) of the final rule, as
follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.004
Where:
k is each commodity type within the hedging set;
K is the number of commodity types within the hedging set;
AddOn(Typek) equals the sum of the adjusted derivative
contract amounts for all derivative contracts within the hedging set
that reference commodity type k; and
[rho] equals the applicable supervisory correlation factor, as
provided in Table 2 of the preamble.
2. Adjusted Derivative Contract Amount
Under the proposal, the adjusted derivative contract amount would
have represented a conservative estimate of effective expected positive
exposure (EEPE) \84\ for a netting set consisting of a single
derivative contract, assuming zero market value and zero collateral,
that is either positive (if a long position) or negative (if a short
position). A banking organization would have calculated the adjusted
derivative contract amount as a product of four components: The
adjusted notional amount, the applicable supervisory factor, the
applicable supervisory delta adjustment, and the applicable maturity
factor. The adjusted derivative contact amount for each asset class
would have been aggregated under the hedging set amount formulas for
each asset class, as described above. The agencies received no comments
on this aspect of the proposal, and are finalizing the formula for
determining the adjusted derivative contract amount as proposed under
Sec. _.132(c)(9) of the final rule.
---------------------------------------------------------------------------
\84\ See supra note 10.
---------------------------------------------------------------------------
The formula to determine the adjusted derivative contract amount is
represented as follows:
adjusted derivative contract amount = di * [delta]i * MFi * SFi.
Where:
di is the adjusted notional amount;
[delta]i is the applicable supervisory delta adjustment;
MFi is the applicable maturity factor; and
SFi is the applicable supervisory factor.
The adjusted notional amount accounts for the size of the
derivative contract and reflects the attributes of the most common
derivative contracts in each asset class. The supervisory factor
converts the adjusted notional amount of the derivative contract into
an EEPE based on the measured volatility specific to each asset class
over a one-year horizon.\85\ The supervisory delta adjustment accounts
for the sensitivity of a derivative contract (scaled to unit size) to
the underlying primary risk factor, including the correct sign
(positive or negative) to account for the direction of the derivative
contract amount relative to the primary risk factor.\86\ Finally, the
maturity factor scales down, if necessary, the derivative contract
amount from the standard one-year horizon used for supervisory factor
calibration to the risk horizon relevant for a given contract.
---------------------------------------------------------------------------
\85\ Specifically, the supervisory factors are intended to
reflect the EEPE of a single at-the-money linear trade of unit size,
zero market value and one-year maturity referencing a given risk
factor in the absence of collateral. See supra note 10.
\86\ Sensitivity of a derivative contract to a risk factor is
the ratio of the change in the market value of the derivative
contract caused by a small change in the risk factor to the value of
the change in the risk factor. In a linear derivative contract, the
payoff of the derivative contract moves at a constant rate with the
change in the value of the underlying risk factor. In a nonlinear
contract, the payoff of the derivative contract does not move at a
constant rate with the change in the value of the underlying risk
factor. The sensitivity is positive if the derivative contract is
long the risk factor and negative if the derivative contract is
short the risk factor.
---------------------------------------------------------------------------
a. Adjusted Notional Amount
i. Interest Rate and Credit Derivative Contracts
Under the proposal, a banking organization would have applied the
same formula to interest rate derivative contracts and credit
derivative contracts to arrive at the adjusted notional amount. For
such contracts, the adjusted notional amount would have equaled the
product of the notional amount of the derivative contract, as measured
in U.S. dollars, using the exchange rate on the date of the
calculation, and the supervisory duration. The supervisory duration
would have incorporated measures of the number of business days from
the present day until the start date for the derivative contract (S),
and the number of business days from the present day until the end date
for the derivative contract (E).
Some commenters argued that the standard notional definition would
not produce reasonably accurate exposure estimates of a banking
organization's closeout risk for all types of derivative contracts.
These commenters recommended allowing banking organizations to use
internal methodologies to determine the adjusted notional amount for
derivative contracts that are not specifically covered under the
formulas and methodologies set forth in the proposal.
The final rule maintains the formulas and methodologies for
determining the adjusted notional amount for interest rate and credit
derivative contracts, as generally one of these will be applicable for
most derivative contracts. However, the agencies recognize that such
approaches may not be applicable to all types of derivative contracts,
and that a different approach may be necessary to determine the
adjusted notional amount of a derivative contract. In such a case, a
banking organization must consult with its primary Federal regulator
prior to using an alternative approach to the formulas or methodologies
set forth in the final rule.
Some commenters suggested revising the proposal to provide a
separate measure of S for fixed-to-floating interest rate derivative
contracts where the floating rate is determined at the beginning of the
reset period and paid at the end, defined as the time period until the
earliest reset date, measured in years.
According to the commenters, the proposal could overestimate the
duration for such derivative contracts, as it would include the time
period for which the floating rate (and, therefore, the floating leg
payment) is captured in the supervisory duration. The commenters also
noted that such
[[Page 4381]]
treatment could significantly affect the adjusted notional amount for a
short-dated interest rate derivative portfolio.
Other commenters recommended changes to the measure of S for basis
derivative contracts, for which the floating rates on the reference
exposure are set at the beginning of the payment period. Some of these
commenters recommended measuring S as the period (in years) as the
earliest reset date of the two floating-rate components of the
contract, if the reset dates are different.
The treatment recommended by the commenters cannot be made
applicable to all interest rate derivatives; for example, it would not
be appropriate for in arrears swaps, in which the rate is set at the
end of the reset period instead of the beginning, and for forward rate
agreements. In addition, adopting the commenters' recommendations could
add significant complexity to the final rule because it would require
additional parameters in the adjusted notional amount formula that
would be used only in certain circumstances. Such an approach would
create additional burden for banking organizations that adopt SA-CCR
and could adversely affect the agencies' ability to use SA-CCR to
assess comparability across banking organizations. The agencies
therefore are adopting as final the proposed treatment for determining
the adjusted notional amount of interest rate and credit derivative
contracts.
Some commenters requested changes to address forward-settling
mortgage-backed securities traded in the to-be-announced (TBA) market.
Specifically, these commenters asked the agencies to recalibrate the
adjusted notional amount for TBA derivative contracts to account for
the term of the mortgage loans underlying the securities. Other
commenters recommended measuring S for TBA derivative contracts as the
time-weighted average term of the mortgages underlying the securities.
In response to commenter concerns, the agencies are clarifying that for
an interest rate derivative contract or credit derivative contract that
is a variable notional swap, including mortgage-backed securities
traded in the TBA market, 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.
Other commenters recommended measuring the adjusted notional amount
for basis derivative contracts as the product of the absolute value of
the spread between the two underlying risk factors (positive or
negative) and the number of units. According to these commenters, such
an approach would better reflect the risk of such transactions because
SA-CCR requires the use of floating notional values, and the notional
value may change after execution based on increases or decreases in the
spread. The commenters also argued that such an approach would be
consistent with guidance released by the CFTC regarding the notional
amount for locational basis derivative contracts.\87\ The final rule
does not incorporate the commenters' suggestion, as the purpose of the
proposed treatment is to obtain the absolute volatility of the contract
price, which is related to each risk factor rather than the spread.
---------------------------------------------------------------------------
\87\ See CFTC, Division of Swap Dealer and Intermediary
Oversight, FAQs About Swap Entities (Oct. 12, 2012), at 1.
---------------------------------------------------------------------------
The final rule adopts without change the proposed treatment for
determining the adjusted notional amount for credit and interest rate
derivative contracts. Under Sec. _.132(c)(9)(ii)(A) of the final rule,
the adjusted notional amount for such contracts equals the product of
the notional amount of the derivative contract, as measured in U.S.
dollars using the exchange rate on the date of the calculation, and the
supervisory duration. The formula to determine the supervisory duration
is as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.005
Where:
S is the number of business days from the present day until the
start date for the derivative contract, or zero if the start date
has already passed; and
E is the number of business days from the present day until the end
date for the derivative contract.
A banking organization must calculate the supervisory duration for
the period that starts at S and ends at E, where S equals the number of
business days between the present date and the start date for the
derivative contract, or zero if the start date has passed, and E equals
the number of business days from the present date until the end date
for the derivative contract. The supervisory duration recognizes that
interest rate derivative contracts and credit derivative contracts with
a longer tenor have a greater degree of variability than an identical
derivative contract with a shorter tenor for the same change in the
underlying risk factor (interest rate or credit spread), and is based
on the assumption of a continuous stream of equal payments and a
constant continuously compounded interest rate of 5 percent. The
exponential function provides discounting for S and E at 5 percent
continuously compounded. In all cases, the supervisory duration is
floored at ten business days (or 0.04, based on an average of 250
business days per year).
For an interest rate derivative contract or a credit derivative
contract that is a variable notional swap, the notional amount equals
the time-weighted average of the contract notional amounts of such a
swap over the remaining life of the swap. For an interest rate
derivative contract or a credit derivative contract that is a leveraged
swap, in which the notional amounts of all legs of the derivative
contract are divided by a factor and all rates of the derivative
contract are multiplied by the same factor, the notional amount equals
the notional amount of an equivalent unleveraged swap.
ii. Exchange Rate Derivative Contracts
Under the proposal, the adjusted notional amount for an exchange
rate derivative contract would have equaled the notional amount of the
non-U.S. denominated currency leg of the derivative contract, as
measured in U.S. dollars using the exchange rate on the date of the
calculation. In general, the non-U.S. dollar denominated currency leg
is the source of exchange rate volatility. If both legs of the exchange
rate derivative contract are denominated in currencies other than U.S.
dollars, the adjusted notional amount of the derivative contract would
have been the largest leg of the derivative contract, measured in U.S.
dollars. For an exchange rate derivative contract with multiple
exchanges of principal, the notional amount would have equaled
[[Page 4382]]
the notional amount of the derivative contract multiplied by the number
of exchanges of principal under the derivative contract. The agencies
received no comments on the proposed adjusted notional amount for
exchange rate derivative contracts, and are adopting it as final under
Sec. _.132(c)(9)(ii)(B) of the final rule.
iii. Equity and Commodity Derivative Contracts
Under the proposal, a banking organization would have applied the
same single-factor formula to equity derivative contracts and commodity
derivative contracts. For such contracts, the adjusted notional amount
would have equaled 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. By design, the
proposed treatment would have reflected the current price of the
underlying reference instrument. For example, if a banking organization
has a derivative contract that references 15,000 pounds of frozen
concentrated orange juice currently priced at $0.0005 a pound then the
adjusted notional amount would be $7.50. For an equity derivative
contract or a commodity derivative contract that is a volatility
derivative contract, a banking organization would have been required to
replace the unit price with the underlying volatility referenced by the
volatility derivative contract and replace the number of units with the
notional amount of the volatility derivative contract. By design, the
proposed treatment would have reflected that the payoff of a volatility
derivative contract generally is determined based on a notional amount
and the realized or implied volatility (or variance) referenced by the
derivative contract and not necessarily the unit price of the
underlying reference instrument. The agencies received no comments on
the proposed adjusted notional amount for equity and commodity
derivative contracts, including instances in which such a contract is a
volatility derivative contract, and are adopting it without change
under Sec. _.132(c)(9)(ii)(C) of the final rule.
b. Supervisory Factor
i. Credit Derivative Contracts
In contrast to the Basel Committee standard, the proposal would not
have provided for the use of credit ratings to determine the
supervisory factor for credit derivative contracts due to section 939A
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), which prohibits the use of credit ratings in Federal
regulations.\88\ As an alternative, the proposal would have introduced
an approach that satisfies section 939A of the Dodd-Frank Act while
allowing for a level of granularity among the supervisory factors
applicable to single-name credit derivatives that would have been
generally consistent with the Basel Committee standard.\89\ Under the
proposal for single-name credit derivative contracts, investment grade
derivative contracts would have received a supervisory factor of 0.5
percent, speculative grade derivative contracts would have received a
supervisory factor of 1.3 percent, and sub-speculative grade derivative
contracts would have received a supervisory factor of 6.0 percent. For
credit derivative contracts that reference an index, investment grade
derivative contracts would have received 0.38 percent and speculative
grade derivative contracts would have received 1.06 percent. The
proposal would have revised the capital rule to include definitions for
speculative grade and sub-speculative grade (the capital rule already
includes a definition for investment grade). The agencies received
several comments on the supervisory factors for credit derivative
contracts, but no comments on the proposed definitions of speculative
grade and sub-speculative grade.
---------------------------------------------------------------------------
\88\ See Public Law 111-203, 124 Stat. 1376 (2010), section
939A. This provision is codified as part of the Securities Exchange
Act of 1934 at 15 U.S.C. 78o-7.
\89\ Specifically, the supervisory factors in the Basel
Committee's SA-CCR standard are as follows (in percent): AAA and AA-
0.38, A-0.42; BBB-0.54; BB-1.06; B-1.6; CCC-6.0.
---------------------------------------------------------------------------
Several commenters encouraged the agencies to reconsider the
proposed methodology for determining the supervisory factors for
single-name credit derivative contracts. As an alternative, the
commenters recommended an approach that maps probability of default
(PD) bands to the credit rating categories and the corresponding
supervisory factors set forth in the Basel Committee standard for
single-name credit derivatives, consistent with the approach used to
assign a counterparty risk weight under the simple CVA approach in the
advanced approaches.\90\ According to the commenters, this approach
would more closely align with the granularity and the supervisory
factors provided under the Basel Committee standard, while meeting the
requirements of section 939A of the Dodd-Frank Act. Alternatively, if
the agencies declined to adopt the PD band-based approach for purposes
of the final rule, the commenters suggested lowering the proposed
supervisory factor for investment grade single-name credit derivatives
from 0.5 percent to 0.46 percent, to eliminate the impact of rounding
(to the nearest tenth) that was conducted for purposes of the proposal.
Other commenters suggested aligning the supervisory factor for
investment grade single-name credit derivatives to the lowest
supervisory factor under the Basel Committee standard, 0.38 percent,
based on the view that the most creditworthy issuers in the United
States are no more prone to default than the most creditworthy issuers
in other jurisdictions.
---------------------------------------------------------------------------
\90\ See 12 CFR 3.132(e)(5) (OCC); 12 CFR 217.132(e)(5) (Board);
and 12 CFR 324.132(e)(5) (FDIC).
---------------------------------------------------------------------------
SA-CCR is a standardized approach, and the use of PD bands to
assign supervisory factors to single-name credit derivatives would
require the use of internal models, which generally are not appropriate
for a standardized approach that is intended to be implementable by
banking organizations of all sizes. In addition, providing such
treatment as an option in SA-CCR could introduce more risk sensitivity
solely for more sophisticated banking organizations that currently
determine PD for purposes of the advanced approaches, and potentially
provide a competitive advantage to such firms and adversely affect the
use of SA-CCR to assess comparability across banking organizations. In
addition, lowering the supervisory factor for single-name investment
grade credit derivatives to 0.38 percent would fail to recognize the
meaningful differences in the risks captured by the investment grade
category under the proposal and the final rule, relative to the
category and supervisory factor that correspond solely to an AAA credit
rating under the Basel Committee standard. In response to comments,
however, the final rule applies a 0.46 percent supervisory factor to
investment grade single-name credit derivative contracts. This change
will enhance the precision and risk sensitivity of the final rule,
without introducing undue complexity or materially affecting the amount
of regulatory capital a banking organization must hold for such
derivative contracts relative to the proposal.
Therefore, the final rule adopts the supervisory factors for credit
derivative contracts, as proposed, with one modification to the
supervisory factor for investment grade single-name credit derivative
contracts as described above. In addition, the final rule maintains the
current definition of investment grade
[[Page 4383]]
in the capital rule, and adopts the proposed definitions for
``speculative grade'' and ``sub-speculative grade.'' The supervisory
factors are reflected in Table 2 of this SUPPLEMENTARY INFORMATION.
The investment grade category generally captures single-name credit
derivative contracts consistent with the three highest supervisory
factor categories under the Basel Committee standard. The capital rule
defines investment grade to mean that the entity to which the banking
organization is exposed through a loan or security, or the reference
entity with respect to a credit derivative contract, has adequate
capacity to meet financial commitments for the projected life of the
asset or exposure. Such an entity or reference entity has adequate
capacity to meet financial commitments, as the risk of its default is
low and the full and timely repayment of principal is expected.\91\
---------------------------------------------------------------------------
\91\ ``Investment grade'' is defined in Sec. _.2 of the capital
rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 324.2
(FDIC).
---------------------------------------------------------------------------
The speculative grade category generally captures single-name
credit derivative contracts consistent with the next two lower
supervisory factor categories under the Basel Committee standard. The
final rule defines the term speculative grade to mean that the
reference entity has adequate capacity to meet financial commitments in
the near term, but is vulnerable to adverse economic conditions, such
that should economic conditions deteriorate, the reference entity would
present elevated default risk. The sub-speculative grade category
corresponds to the lowest supervisory factor category under the Basel
Committee standard, with the term sub-speculative grade defined under
the final rule to mean that the reference entity depends on favorable
economic conditions to meet its financial commitments, such that should
economic conditions deteriorate, the reference entity likely would
default on its financial commitments. Each of these categories includes
exposures that perform largely in accordance with the performance
criteria that define each category under the final rule, and therefore
result in capital requirements that are broadly equivalent to those
resulting from application of the supervisory factors under the Basel
Committee standard.\92\
---------------------------------------------------------------------------
\92\ An empirical analysis for the supervisory factors applied
to the investment grade and speculative grade categories is set
forth in the SUPPLEMENTARY INFORMATION section of the proposal. See
83 FR 64660, 64675 (December 17, 2018).
---------------------------------------------------------------------------
The agencies expect that banking organizations would conduct their
own due diligence to determine the appropriate category for a single-
name credit derivative, in view of the performance criteria in the
definitions for each category under the final rule. A banking
organization may consider the credit rating for a single-name credit
derivative in making that determination as part of a multi-factor
analysis. In addition, the agencies expect a banking organization to
have and retain support for its analysis and assignment of the
respective credit categories.
ii. Equity Derivative Contracts
Under the proposal, single-name equity derivative contracts would
have received a supervisory factor of 32 percent and equity derivative
contracts that reference an index would have received a supervisory
factor of 20 percent. The agencies received several comments regarding
the proposed supervisory factors for equity derivative contracts. In
general, the commenters recommended various approaches to distinguish
among the risks of single-name equity derivative contracts and thereby
provide additional granularity in the supervisory factors that
correspond to such exposures. The approaches offered by the commenters
would distinguish among (1) investment grade and non-investment grade
issuers; (2) issuers in advanced and emerging markets; (3) issuers with
large market capitalizations and those with small market
capitalizations; and (4) issuers in different industry sectors. Some of
the approaches suggested by commenters align with the Basel Committee
market risk standard.\93\ Commenters also suggested various
permutations of these approaches (e.g., use of sector differentiation
in combination with a distinction for advanced and emerging markets).
Some commenters provided analysis suggesting that each of these
approaches could offer additional granularity and allow for lower
supervisory factors for investment grade, advanced markets, and large
cap issuers, relative to the supervisory factors under the proposal and
the Basel Committee standard. Commenters also suggested incorporating
one of the above distinctions into the supervisory factors for equity
indices.
---------------------------------------------------------------------------
\93\ See supra note 79.
---------------------------------------------------------------------------
The agencies acknowledge that certain aspects of the proposal could
be revised to enhance its risk sensitivity; however, any such revisions
must be balanced against the objectives of simplicity and ensuring
comparability among banking organizations that implement SA-CCR.
Attempting to define different categories of market types or allocating
exposures across the various alternate categories posed by commenters,
and then calibrating supervisory factors associated with each of those
sub-categories, would increase the complexity of applying SA-CCR and
reduce comparability among banking organizations. Further adjustments
to the supervisory factor for equity derivative contracts to align with
the revised Basel III market risk standard, as recommended by
commenters, potentially could be considered if that standard is
implemented in the United States in a future rulemaking. Therefore, the
final rule adopts as proposed the supervisory factors for equity
derivative contracts, as reflected in Table 2 of the final rule.
iii. Commodity Derivative Contracts
The proposal would have established four commodity categories:
Energy, metals, agriculture, and other. Energy derivative contracts
would have received a supervisory factor of 40 percent, whereas
derivative contracts in the non-energy commodity categories (i.e.,
metal, agricultural, and other) each would have received a supervisory
factor of 18 percent.
The agencies received a number of comments on the proposed
supervisory factors for commodity derivative contracts. Several
commenters encouraged the agencies to recalibrate the supervisory
factors for commodity derivative contracts to reflect the market price
of forward contracts, stating that this would better reflect the actual
volatility of the commodity derivatives market compared to the market
price of spot contracts. According to these commenters, such an
approach would reflect the widespread use of commodity derivative
contracts in the market, as a way to hedge commodity price risk for
months or years into the future. As an alternative to this
recommendation, commenters suggested full alignment with the
supervisory factors for commodity derivative contracts in the Basel
Committee standard, which applies a 40 percent supervisory factor to
electricity derivative contracts and an 18 percent supervisory factor
to oil/gas derivative contracts, each within the energy category.
Other commenters expressed concern that the proposed supervisory
factors for commodity derivative contracts were not sufficiently
granular. These commenters argued that each of the commodity categories
set forth in the proposal would include a wide range of commodity types
that present different levels of risk. As a result, the commenters
expressed concern that the
[[Page 4384]]
proposal would overstate the amount of capital that must be held for
certain lower-risk commodities, particularly natural gas and certain
types of agricultural commodities.\94\ Several commenters expressed
concern that the proposed supervisory factors for commodity derivative
contracts would indirectly increase the cost of such contracts for
commercial end-user counterparties, who may use commodity derivative
contracts to manage commercial risk.
---------------------------------------------------------------------------
\94\ See section III.D.1.d. of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
In response to comments, the final rule adopts a separate
supervisory factor of 18 percent for all energy derivative contracts
except for electricity derivative contracts, which receive a
supervisory factor of 40 percent. This treatment enhances the risk
sensitivity of the supervisory factors for derivative contract types
within the energy commodity category in a manner that aligns with the
Basel Committee standard.\95\ The final rule does not revise the other
supervisory factors proposed for commodity derivatives, or provide for
more granularity in the supervisory factors. In addition to presenting
significant challenges and materially increasing the complexity of the
framework (as noted in section III.D.1.d. of this SUPPLEMENTARY
INFORMATION), revising the proposal to include additional commodity
categories for specific commodity types could limit the full offset
treatment available to commodity types within the same category.
Recalibrating the supervisory factors for commodity derivative
contracts to reflect the volatility driven by forward prices also would
not be appropriate for all commodity derivative contracts because the
value of short-term derivative contracts--which also are prevalent
within the market--is driven by spot prices rather than forward prices.
Moreover, such an approach would materially deviate from the Basel
Committee standard and could create material inconsistencies in the
international treatment of derivative contracts across jurisdictions.
Any such inconsistencies could create regulatory compliance burdens for
large, internationally active banking organizations required to
determine capital requirements for derivative contracts under multiple
regulatory regimes, and could provide incentives for such banking
organizations to book commodity derivatives in an entity located in the
jurisdiction that provides for the most favorable treatment from a
regulatory capital perspective.
---------------------------------------------------------------------------
\95\ As described in section III.D.1.d. of this SUPPLEMENTARY
INFORMATION, for purposes of calculating the hedging set amount, the
final rule permits full offsetting for all derivative contracts
within a hedging set that reference the same commodity type, and
partial offsetting for all derivative contracts within a hedging set
that reference different commodity types within the same commodity
category.
---------------------------------------------------------------------------
Other commenters recommended revising the proposal to provide
separate recognition for derivative contracts that reference commodity
indices. According to these commenters, diversification across
different commodities significantly lowers the volatility of a
diversified index when compared to the undiversified volatilities of
the index constituents. The final rule does not include a specific
treatment for commodity indices because they are typically highly
heterogeneous depending on their compositions and maturities and, as a
result, a single calibration for such a broad asset class will not
provide for the risk sensitivity intended by SA-CCR.
Under the proposal, a banking organization would have been required
to treat a gold derivative contract as a commodity derivative contract
rather than an exchange rate derivative contract, and apply a
supervisory factor of 18 percent. Several commenters argued for
revising the proposal to recognize gold derivative contracts as a type
of exchange rate derivative contract. According to the commenters, such
treatment would be consistent with CEM, IMM, the Basel Committee's
Basel II accord issued in 2004 (Basel II),\96\ and industry practice.
The commenters also asserted that, similar to currencies, gold serves
as a macroeconomic hedge to dynamic market conditions including
declining equity prices, inflationary pressures, and political crises.
---------------------------------------------------------------------------
\96\ See ``International Convergence of Capital Measurement and
Capital Standards: A Revised Framework,'' Basel Committee on Banking
Supervision (June 2004), https://www.bis.org/publ/bcbs107.pdf.
---------------------------------------------------------------------------
Based on an analysis of price data for gold, silver, nickel and
platinum from January 2001 to January 2019, gold exhibits historical
volatility levels that are generally consistent with those observed for
other metals, and are nearly identical to the historical volatility
levels observed for platinum over the same period. Accordingly,
treating a gold derivative contract as an exchange rate derivative
contract would significantly understate the risk associated with such
exposures, notwithstanding their treatment under either Basel II, IMM
or CEM. Moreover, the supervisory factors under SA-CCR are calibrated
to volatilities observed in the primary risk factor, and are not based
on the purpose for which such a derivative contract may be entered
into. Therefore, consistent with the proposal, under the final rule a
banking organization must treat a gold derivative contract as a
commodity derivative contract, with a supervisory factor of 18 percent.
The final rule adopts the supervisory factors for commodity
derivative contracts, as proposed, with one modification to the
supervisory factor for energy derivative contracts that are not
electricity derivative contracts as discussed above. The supervisory
factors are reflected in Table 2 of this SUPPLEMENTARY INFORMATION and
Table 2 to Sec. _.132 of the final rule.
iv. Interest Rate Derivative Contracts
Under the proposal, interest rate derivative contracts would have
received a supervisory factor of 0.5 percent. The agencies did not
receive comments on this aspect of the proposal, and are adopting it as
proposed, as reflected in Table 2 of this SUPPLEMENTARY INFORMATION.
v. Exchange Rate Derivative Contracts
Under the proposal, exchange rate derivative contracts would have
received a supervisory factor of 4 percent. As noted in the discussion
on supervisory factors for commodity derivative contracts, several
commenters supported treating gold derivative contracts as a type of
exchange rate derivative contract. However, as noted previously,
treating a gold derivative as an exchange rate derivative contract
would significantly understate the risk associated with such exposures.
The agencies are therefore adopting as final the proposal to treat a
gold derivative contract as a commodity derivative contract. The
agencies did not receive comments on other aspects of the proposed
supervisory factors for exchange rate derivative contracts, and are
adopting them as final, as reflected in Table 2 of this SUPPLEMENTARY
INFORMATION.
vi. Volatility Derivative Contracts and Basis Derivative Contracts
For volatility derivative contracts, the proposal would have
required a banking organization to multiply the applicable supervisory
factor based on the asset class related to the volatility measure by a
factor of five. This treatment would have recognized that volatility
derivative contracts are inherently subject to more price volatility
than the underlying asset classes they reference.
For basis derivative contracts, the proposal would have required a
banking
[[Page 4385]]
organization to multiply the applicable supervisory factor based on the
asset class related to the basis measure by a factor of one half. This
treatment would have reflected that the volatility of a basis
derivative contract is based on the difference in volatilities of
highly correlated risk factors, which would have resulted in a lower
volatility than a derivative contract that is not a basis derivative
contract. The agencies did not receive comments on the proposed
supervisory factors for volatility derivative contracts and basis
derivative contracts, and the final rule adopts this aspect of the
proposal without change.
Table 2--Supervisory Option Volatility 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 N/A............ 100 50 1.3
grade.
Sub-speculative N/A............ 100 50 6.0
grade.
Credit, index................ Investment Grade N/A............ 80 80 0.38
Speculative N/A............ 80 80 1.06
Grade.
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 Table 2, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in Table 2.
c. Supervisory Delta Adjustment
Under the proposal, a banking organization would have applied the
supervisory delta adjustment to account for the sensitivity of a
derivative contract to the underlying primary risk factor, including
the correct sign (positive for long and negative for short) to account
for the direction of the derivative contract amount relative to the
primary risk factor. Because option contracts are nonlinear, the
proposal would have required a banking organization to use the Black-
Scholes Model to determine the supervisory delta adjustment.
Some commenters argued that use of the Black-Scholes Model is not
appropriate for certain path-dependent options, because their price is
not determined by a single price but instead is determined by the path
of the price for the underlying asset during the option's tenor. For
such path-dependent options, the commenters asked that banking
organizations instead be allowed to use existing internal models.
Similarly, other commenters requested allowing banking organizations to
use modeled volatilities for purposes of the supervisory delta
adjustment, rather than the volatilities prescribed by the proposal.
Conversely, other commenters supported the agencies' proposal with
respect to the calibration of supervisory deltas.
As generally noted above, SA-CCR is a standardized framework, and
the use of internal models to determine option volatility would
generally not be appropriate for a standardized approach that is
intended to be implementable by all banking organizations and used to
facilitate supervisory assessments of comparability across banking
organizations. Allowing banking organizations to use internal models
for purposes of the final rule would not support these objectives. The
agencies note that advanced approaches banking organizations may
continue to use IMM, which is a model-based approach, to determine the
exposure amount of derivative contracts for purposes of calculating
advanced approaches total risk-weighted assets.\97\
---------------------------------------------------------------------------
\97\ See supra note 25.
---------------------------------------------------------------------------
The final rule adopts the supervisory delta adjustment as proposed.
Under Sec. _.132(c)(9)(iii) of the final rule, the supervisory delta
adjustment for derivative contracts that are not options or
collateralized debt obligation tranches must account only for the
direction of the derivative contract (positive or negative) with
respect to the underlying risk factor, as such contracts are considered
to be linear in the primary risk factor. Accordingly, the supervisory
delta adjustment equals one if such a derivative contract is long the
primary risk factor and negative one if it is short the primary risk
factor.
As noted above, because options contracts are nonlinear, a banking
organization must use the Black-Scholes Model to determine the
supervisory delta adjustment for options contracts. However, because
the Black-Scholes Model assumes that the underlying risk factor is
greater than zero, consistent with the proposal, the final rule
incorporates a parameter, lambda ([lgr]), so that the Black-Scholes
Model may be used where the underlying risk factor has a negative
value. In particular, the Black Scholes formula provides a ratio, P/K,
as an input to the natural logarithm function. P is the fair value of
the underlying instrument and K is the strike price. The natural
logarithm function can be defined only for amounts greater than zero,
and therefore, a reference risk factor with a negative value (e.g.,
negative interest rates) would make the supervisory delta adjustment
inoperable.
---------------------------------------------------------------------------
\98\ Under the final rule, a banking organization must represent
binary options with strike K as the combination of one bought
European option and one sold European option of the same type as the
original option (put or call) with the strike prices set equal to
0.95 * K and 1.05 * K. The size of the position in the European
options must be such that the payoff of the binary option is
reproduced exactly outside the region between the two strikes. The
absolute value of the sum of the adjusted derivative contract
amounts of the bought and sold options is capped at the payoff
amount of the binary option.
---------------------------------------------------------------------------
[[Page 4386]]
[GRAPHIC] [TIFF OMITTED] TR24JA20.006
Where:
[PHgr] is the standard normal cumulative distribution function;
P equals the current fair value of the instrument or risk factor, as
applicable, underlying the option;
K equals the strike price of the option;
T equals the number of business days until the latest contractual
exercise date of the option; and
[lgr] equals zero for all derivative contracts, except that for
interest rate options that reference currencies currently associated
with negative interest rates [lgr] must be equal to max {-L + 0.1%;
0{time} ; \99\ and
---------------------------------------------------------------------------
\99\ The same value of [lgr]i must be used for all
interest rate options that are denominated in the same currency. The
value of [lgr]i for a given currency would be equal to
the lowest value L of Pi and Ki of all
interest rate options in a given currency that the banking
organization has with all counterparties.
---------------------------------------------------------------------------
[sigma] equals the supervisory option volatility, determined in
accordance with Table 2 of the preamble.
Consistent with the proposal, under the final rule, 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),\100\ a banking organization must treat
each standard option component as a separate derivative contract. For a
derivative contract that includes multiple-payment options (such as
interest rate caps and floors),\101\ a banking organization must
represent each payment option as a combination of effective single-
payment options (such as interest rate caplets and floorlets). A
banking organization cannot decompose linear derivative contracts (such
as swaps) into components.
---------------------------------------------------------------------------
\100\ A collar is a combination of a long position in the stock,
a long put option and a short call option, in which the investor
gives up the upside on the stock (by selling the call option) to
obtain downside protection (through the purchase of the put option).
A butterfly spread consists of a long put (call) with a low
exercise price, a long put (call) with a high exercise price, and
two short puts (calls) with an intermediate exercise price, in which
the investor earns a profit if the underlying asset equals the
intermediate exercise price of two short puts (calls) but has
limited their potential loss to no more than the low exercise price
of the long put (call).
A calendar spread consists of a short call (put) option and a
long call (put) option on the same underlying stock and with the
same exercise price, but with different maturities. If the investor
expects limited price movement on the stock in the near-term but a
significant longer-term price increase, the investor will sell the
short-dated call option and purchase the long-dated call option.
A straddle consists of a long (short) call option and long
(short) put option on the same underlying stock, with the same
exercise price and with the same maturity, in which the investor
pays (receives) two option premiums upfront. In a long straddle, the
investor pays two premiums upfront for the options in order to hedge
against expected large future stock price moves regardless of
direction. In a short straddle, the investor receives two option
premiums upfront based on their expectation of low future price
volatility.
A strangle consists of a call and put option on the same
underlying stock and with the same exercise date, but with different
exercise prices. The strategy is similar to the straddle, but the
investor is purchasing (selling) out-of-the-money options in a
strangle, while in a straddle, the investor is purchasing (selling)
at-the-money options.
\101\ An interest rate cap is a series of interest rate call
options (``caplets'') in which the option seller pays the option
buyer when the reference rate exceeds the predetermined level in the
contract. An interest rate floor is a series of interest rate put
options (``floorlets'') in which the option seller pays the options
buyer when the reference rate falls below the contractual floor.
---------------------------------------------------------------------------
For a derivative contract that is a collateralized debt obligation
tranche, a banking organization must determine the supervisory delta
adjustment according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.007
Where:
A is the attachment point, which equals the ratio of the notional
amounts of all underlying exposures that are subordinated to the
banking organization's exposure to the total notional amount of all
underlying exposures, expressed as a decimal value between zero and
one; \102\ and
---------------------------------------------------------------------------
\102\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the banking
organization's exposure and A = 0. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) notional
amounts of the underlying exposures are subordinated to the banking
organization's exposure.
---------------------------------------------------------------------------
D is the detachment point, which equals one minus the ratio of the
notional amounts of all underlying exposures that are senior to the
banking organization's exposure to the total notional amount of all
underlying exposures, expressed as a decimal value between zero and
one.
The final rule applies a positive sign to the resulting amount if
the banking organization purchased the collateralized debt obligation
tranche and applies a negative sign if the banking organization sold
the collateralized debt obligation tranche.
d. Maturity Factor
The proposal would have provided separate maturity factors based on
whether a derivative contract is subject to a variation margin
agreement. For derivative contracts subject to a variation margin
agreement, the maturity factor would have been based on the ratio of
the supervisory-provided MPOR applicable to the type of derivative
contract and 250 business days. The proposal would have defined MPOR as
the period from the most recent exchange of collateral under a
variation margin agreement with a defaulting counterparty until the
[[Page 4387]]
derivative contracts are closed out and the resulting market risk is
re-hedged. For derivative contracts subject to a variation margin
agreement that are not cleared transactions, MPOR would have been
floored at ten business days. For derivative contracts subject to a
variation margin agreement and that are cleared transactions, MPOR
would have been floored at five business days. For derivative contracts
not subject to a variation margin agreement, the maturity factor would
have been based on the ratio of the remaining maturity of the
derivative contract, capped at 250 business days, with the numerator
floored at ten business days.
Several commenters asked the agencies to clarify whether a five-
business-day MPOR floor would apply to the exposure of a clearing
member banking organization to its client that arises when the clearing
member banking organization is acting as a financial intermediary and
enters into an offsetting derivative contract with a CCP or when the
clearing member banking organization provides a guarantee to the CCP on
the performance of the client on a derivative contract with the CCP. In
response to comments, the final rule applies a five-business-day MPOR
floor to the exposure of a clearing member banking organization to its
client that arises when the clearing member banking organization is
acting as a financial intermediary and enters into an offsetting
derivative contract with a QCCP or when the clearing member banking
organization provides a guarantee to the QCCP on the performance of the
client on a derivative contract with the QCCP (defined under this final
rule as a ``client-facing derivative transaction,'' as described
below).\103\
---------------------------------------------------------------------------
\103\ Section 132(c)(9)(iv)(A)(2)(ii) of the proposed rule text
would have applied a five-business-day MPOR floor to cleared
transactions subject to a variation margin agreement. In order to
capture the longer close-out period required in the event of a
central counterparty failure, the final rule text at section
132(c)(9)(iv)(A)(1) provides that MPOR cannot be less than ten
business days for transactions subject to a variation margin
agreement that are not client-facing derivative transactions. The
final rule is consistent with the Basel Committee standard regarding
capital requirements for bank exposures to central counterparties
and with the treatment of these transactions under the agencies'
implementation of CEM. See infra note 116.
---------------------------------------------------------------------------
Some commenters noted that the criteria for doubling the MPOR under
the proposal is different from the existing criteria under the IMM.
Under the proposal, a banking organization would have been required to
double the applicable MPOR floor if the derivative contract is subject
to an outstanding dispute over margin. Under the IMM, a banking
organization must double the applicable MPOR only if over the two
previous quarters more than two margin disputes in a netting set have
occurred and lasted longer than the MPOR. The agencies are aligning the
treatment in the final rule with this approach. Therefore, a banking
organization must double the applicable MPOR only if over the two
previous quarters more than two margin disputes in a netting set have
occurred, and each margin dispute lasted longer than the MPOR.\104\
This approach is consistent with the treatment under IMM, which has
generally functioned as intended. In addition, alignment with IMM will
reduce operational burden for firms that are required to use SA-CCR for
calculating standardized risk-weighted assets, but have received prior
supervisory approval to use IMM to calculate risk-weighted assets under
the advanced approaches.
---------------------------------------------------------------------------
\104\ The adopted treatment is also consistent with the
application of the standard supervisory haircuts under Sec.
_.132(b)(2)(ii)(A)(4) of the final rule.
---------------------------------------------------------------------------
Other commenters requested revising the proposal to allow banking
organizations to treat all derivative contracts with a commercial end-
user counterparty as subject to a variation margin agreement and apply
a holding period of no more than ten business days, regardless of
whether the derivative contract is subject to a variation margin
agreement. The reasons provided by commenters for this request were to
help address the types of concerns raised by commenters regarding
exposures to commercial end-user counterparties, as discussed
previously. The final rule does not provide maturity factors based on
the type of counterparty to the derivative contract because the
agencies intend for the maturity factor to capture the time period to
close out a defaulted counterparty and the degree of legal certainty
with respect to such close-out period. With respect to comments
regarding the MPOR for exposures to commercial end-user counterparties,
removing the alpha factor for derivative contracts with such
counterparties should help to address the commenters' concerns.
Some commenters asked the agencies to replace the term ``exotic
derivative contracts'' \105\ under the proposal with ``derivative
contracts that are not easily replaceable'' in order to allow banking
organizations to rely on existing operational processes rather than
requiring the establishment of new ones to identify ``exotic derivative
contracts.'' These commenters noted that banking organizations have
already established the operational processes necessary for identifying
derivative contracts as ``not easily replaceable'' to comply with other
aspects of the capital rule. In response to commenters' concerns, the
agencies are replacing the term ``exotic derivative contract'' with
``derivative contract that cannot be easily replaced.''
---------------------------------------------------------------------------
\105\ Under the proposal, a banking organization would have been
required to use a MPOR of 20 business days 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 if a
netting set contains one or more trades involving illiquid
collateral or exotic derivative contracts.
---------------------------------------------------------------------------
For the reasons described above, the agencies are adopting as final
the proposed maturity factor adjustment under Sec. _.132(c)(9)(iv) of
the final rule, subject to the clarifications and revisions discussed
above. Under the final rule, for derivative contracts not subject to a
variation margin agreement, or derivative contracts subject to a
variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin to
the banking organization, a banking organization must determine the
maturity factor using the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.008
Where M equals the greater of ten business days and the remaining
maturity of the contract, as measured in business days.
For derivative contracts subject to a variation margin agreement
under which the counterparty must post variation margin, a banking
organization must determine the maturity factor using the following
formula:
[[Page 4388]]
[GRAPHIC] [TIFF OMITTED] TR24JA20.009
Where MPOR refers to the period from the most recent exchange of
collateral under a variation margin agreement with a defaulting
counterparty until the derivative contracts are closed out and the
resulting market risk is re-hedged.
The final rule introduces the term ``client-facing derivative
transactions'' to describe the exposure of a clearing member banking
organization to its client that arises when the clearing member banking
organization is either acting as a financial intermediary and enters
into an offsetting derivative contract with a QCCP or when the clearing
member banking organization provides a guarantee to the QCCP on the
performance of the client for a derivative contract with the QCCP.
Under the final rule, the agencies are clarifying that the MPOR is
floored at five business days for derivative contracts subject to a
variation margin agreement that are client-facing derivative
transactions. For all other derivative contracts subject to a variation
margin agreement, the MPOR is floored at ten business days. If over the
previous two quarters a netting set is subject to two or more
outstanding margin disputes that lasted longer than the MPOR, the
applicable MPOR is twice the MPOR provided for those transactions in
the absence of such disputes.\106\ 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 if a netting set
contains one or more transactions involving illiquid collateral or a
derivative contract that cannot be easily replaced, the MPOR is floored
at 20 business days.
---------------------------------------------------------------------------
\106\ In general, a party will not have violated its obligation
to collect or post variation margin from or to a counterparty if:
The counterparty has refused or otherwise failed to provide or
accept the required variation margin to or from the party; and the
party has made the necessary efforts to collect or post the required
variation margin, including the timely initiation and continued
pursuit of formal dispute resolution mechanisms; or has otherwise
demonstrated that it has made appropriate efforts to collect or post
the required variation margin; or commenced termination of the
derivative contract with the counterparty promptly following the
applicable cure period and notification requirements.
---------------------------------------------------------------------------
For a cleared derivative contract in which on specified dates any
outstanding exposure of the derivative contract is settled and the fair
value of the derivative contract is reset to zero, the remaining
maturity of the derivative contract is the period until the next reset
date.\107\ In addition, derivative contracts with daily settlement
would be treated as unmargined derivative contracts. However, as
discussed in section III.D.4. of this SUPPLEMENTARY INFORMATION, a
banking organization may elect to treat settled-to-market derivative
contracts as collateralized-to-market derivative contracts subject to a
variation margin agreement and apply the maturity factor for derivative
contracts subject to a variation margin agreement.
---------------------------------------------------------------------------
\107\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR
324.2 (FDIC).
---------------------------------------------------------------------------
3. PFE Multiplier
Under the proposal, the PFE multiplier would have recognized, if
present, the amount of excess collateral available and the negative
fair value of the derivative contracts within the netting set.
Specifically, the PFE multiplier would have decreased exponentially
from a value of one as the value of the financial collateral held
exceeds the net fair value of the derivative contracts within the
netting set, subject to a floor of 5 percent. This function accounted
for the fact that the proposed aggregated amount formula would not have
recognized financial collateral and would have assumed a zero market
value for all derivative contracts.
Several commenters argued that the PFE multiplier is too
conservative and does not appropriately account for the risk-reducing
effects of collateral. Some commenters argued that the calibration of
the aggregated amount for a netting set would result in an overly
conservative PFE multiplier amount, and that the aggregated amount in
the PFE multiplier should be divided by at least two to mitigate such
conservatism. Other commenters argued that because other factors under
SA-CCR already contribute to the conservative recognition of initial
margin (e.g., the calibration of the add-on, use of an exponential
function, and reflection of collateral volatility through haircuts that
do not allow any diversification across collateral), the agencies
should decrease the floor to 1 percent because initial margin
requirements for uncleared swaps under the swap margin rule generally
are calibrated to a 99 percent confidence level. Additionally, these
commenters argued that the floor should not be a component of the PFE
multiplier function but instead should act as an independent floor to
the recognition of collateral under the PFE function. According to
these comments, while these changes would result in more risk-sensitive
initial margin recognition for heavily overcollateralized netting sets,
the overall impact would remain conservative due to the overcalibration
of the add-on. Other commenters asked the agencies to recognize the
effect of collateral on a dollar-for-dollar basis, subject to haircuts,
similar to the recognition of collateral under the replacement cost
component of SA-CCR.
Relative to CEM, SA-CCR is more sensitive to the risk-reducing
benefits of collateral. However, the agencies recognize that as a
standardized framework, SA-CCR may not appropriately capture risks in
all cases (e.g., collateral haircuts may be less than those realized in
stress periods) and therefore believe it is appropriate to instill
conservatism. The combination of the exponential function and the floor
provides adequate recognition of collateral while maintaining a
sufficient level of conservatism by limiting decreases in PFE due to
large amounts of collateral and preventing PFE from reaching zero for
any amount of margin. This ensures that some amount of capital will be
maintained even in situations where the transaction is
overcollateralized. The commenters' recommendations could, in certain
circumstances, undermine these objectives. Therefore, the final rule
adopts the PFE multiplier as proposed.
Under the final rule, a banking organization must calculate the PFE
multiplier using the formula set forth in Sec. _.132(c)(7)(i) of the
final rule, as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.010
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
[[Page 4389]]
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
The PFE multiplier decreases as the net fair value of the
derivative contracts within the netting set less the amount of
collateral decreases below zero. Specifically, when the component V- C
is greater than zero, the multiplier is equal to one. When the
component V- C is less than zero, the multiplier is equal to an amount
less than one and decreases exponentially in value as the absolute
value of V- C increases. The PFE multiplier approaches a floor of 5
percent as the absolute value of V- C becomes very large as compared
with the aggregated amount of the netting set.
4. PFE Calculation for Nonstandard Margin Agreements
When a single variation margin agreement covers multiple netting
sets, the parties exchange variation margin based on the aggregated
market value of the netting sets--i.e., netting sets with positive and
negative market values can offset one another to reduce the amount of
variation margin that the parties are required to exchange. This can
result, however, in a situation in which margin exchanged between the
parties will be insufficient relative to the banking organization's
exposure amount for the netting sets.\108\ To address such a situation,
the proposal would have required a banking organization to assign a
single PFE to each netting set covered by a single variation margin
agreement, calculated as if none of the derivative contracts within the
netting set are subject to a variation margin agreement. The agencies
did not receive comments on this aspect of the proposal, and are
adopting it as proposed under Sec. _.132(c)(10)(ii) of the final rule.
---------------------------------------------------------------------------
\108\ For example, consider a variation margin agreement with a
zero threshold amount that covers two separate netting sets, one
with a positive market value of 100 and the other with a market
value of negative 100. The aggregate market value of the netting
sets would be zero and thus no variation margin would be exchanged.
However, the banking organization's aggregate exposure amount for
these netting sets would be equal to 100 because the negative market
value of the second netting set would not be available to offset the
positive market value of the first netting set. In the event of
default of the counterparty, the banking organization would pay the
counterparty 100 for the second netting set and would be exposed to
a loss of 100 on the first netting set.
---------------------------------------------------------------------------
The proposal also would have provided a separate calculation to
determine PFE for a situation in which a netting set is subject to more
than one variation margin agreement, or for a hybrid netting set. Under
the proposal, a banking organization would have divided the netting set
into sub-netting sets and calculated the aggregated amount for each
sub-netting set. In particular, all derivative contracts within the
netting set that are not subject to a variation margin agreement or
that are subject to a variation margin agreement under which the
counterparty is not required to post variation margin would have formed
a single sub-netting set. A banking organization would have been
required to calculate the aggregated amount for this sub-netting set as
if the netting set were not subject to a variation margin agreement.
All derivative contracts within the netting set that are subject to
variation margin agreements under which the counterparty must post
variation margin and that share the same MPOR value would have formed
another sub-netting set. A banking organization would have been
required to calculate the aggregated amount for this sub-netting set as
if the netting set were subject to a variation margin agreement, using
the MPOR value shared by the derivative contracts within the netting
set.
Several commenters asked the agencies to allow banking
organizations to net based solely on whether a QMNA that provides for
closeout netting per applicable law in the event of default is in
place. These commenters asserted that netting should not be limited to
derivative contracts with the same MPOR because the purpose of the MPOR
is to capture the risks associated with an extended closeout period
upon a counterparty's default and that differences in MPOR are
unrelated to the legal ability to net upon closeout, which should be
based only on legal certainty which is established under U.S. law if
the netting agreement is a QMNA. In particular, commenters were
concerned that the proposal would prohibit banking organizations from
being able to net settled-to-market \109\ derivative contracts with
collateralized-to-market derivative contracts,\110\ as well as futures-
style options and options with equity-style margining,\111\ even if
such contracts are within the same netting set.
---------------------------------------------------------------------------
\109\ See supra note 18.
\110\ In general, in a collateralized-to-market derivative
contract, title of transferred collateral stays with the posting
party.
\111\ In general, for margining for options, the buyer of the
option pays a premium upfront to the seller and there is no exchange
of variation margin. The buyer, however, may credit the net value of
the option against its initial margin requirements. The seller, in
turn, receives a debit against its initial margin requirement in the
amount of the net option value. The option is subject to daily
revaluation with increases and decreases to the net option value
resulting in adjustments to the buyer's and the seller's net option
value credits and debits. In addition, under U.S. GAAP, the option
is an asset and the banking organization could use it in the event
of a client's default to offset any other losses the buyer may have.
---------------------------------------------------------------------------
The proposal's distinction between margined and unmargined
derivative contracts would not have fully captured the relationship
between settled-to-market derivative contracts and collateralized-to-
market derivative contracts that are cleared transactions as defined
under Sec. _.2 of the capital rule. In particular, under both cleared
settled-to-market and cleared collateralized-to-market derivative
transactions a banking organization must either make a settlement
payment or exchange collateral to support its outstanding credit
obligation to the counterparty on a periodic basis. Such contracts are
functionally and economically similar from a credit risk perspective,
and therefore, the final rule allows a banking organization to elect,
at the netting set level, to treat all the settled-to-market derivative
contracts within the netting set that are cleared transactions as
subject to a variation margin agreement and receive the benefits of
netting with cleared collateralized-to-market derivative contracts.
That is, a banking organization that makes such election will treat
such cleared settled-to-market derivative contracts as cleared
collateralized-to-market derivative contracts, using the higher
maturity factor applicable to collateralized-to-market derivative
contracts.\112\
---------------------------------------------------------------------------
\112\ Sec. _.132(c)(9)(iv)(A) of the final rule. Similar to the
treatment under CEM, SA-CCR provides a lower maturity factor for
cleared settled-to-market derivative contracts that meet certain
criteria. See ``Regulatory Capital Treatment of Certain Centrally-
cleared Derivative Contracts Under Regulatory Capital Rules''
(August 14, 2017), OCC Bulletin: 2017-27; Board SR letter 07-17; and
FDIC Letter FIL-33-2017.
---------------------------------------------------------------------------
Similarly, for listed options, the agencies are clarifying that a
banking organization may elect to treat listed options on securities or
listed options on futures with equity-style margining that are cleared
transactions as margined derivatives. Under the final rule, a banking
organization may elect to treat all such transactions within the same
netting set as being subject to a variation margin agreement with a
zero threshold amount and a zero minimum transfer amount, given that
the daily net option value credits and debits are economically
equivalent to an exchange of variation margin under a zero threshold
and a zero minimum transfer amount. Consistent with the treatment
described above for settled-to-market derivative contracts that are
treated as collateralized-to-market, a banking
[[Page 4390]]
organization that elects to apply this treatment must apply the
maturity factor applicable to margined derivative contracts.
Except for the changes described above, the agencies are adopting
the proposed approach for netting sets subject to more than one
variation margin agreement, or for a hybrid netting set.\113\
---------------------------------------------------------------------------
\113\ Sec. _.132(c)(11)(ii) of the final rule.
---------------------------------------------------------------------------
IV. Revisions to the Cleared Transactions Framework
Under the capital rule, a banking organization must maintain
regulatory capital for its exposure to, and certain collateral posted
in connection with, a derivative contract that is a cleared transaction
(as defined under Sec. _.2 of the capital rule). A clearing member
banking organization also must hold risk-based capital for its default
fund contributions.\114\ The proposal would have revised the cleared
transactions framework under the capital rule by replacing CEM with SA-
CCR for advanced approaches banking organizations in both the advanced
approaches and standardized approach. Non-advanced approaches banking
organizations would have been permitted to elect to use SA-CCR or CEM
for noncleared and cleared derivative contracts, but would have been
required to use the same approach for both.\115\ In addition, the
proposal would have simplified the formula that a clearing member
banking organization must use to determine the risk-weighted asset
amount for its default fund contributions. The proposed revisions were
consistent with standards developed by the Basel Committee.\116\
---------------------------------------------------------------------------
\114\ A default fund contribution means the funds contributed or
commitments made by a clearing member banking organization to a
CCP's mutualized loss-sharing arrangement. See 12 CFR 3.2 (OCC); 12
CFR 217.2 (Board); and 12 CFR 324.2, (FDIC).
\115\ At the time of the proposal, an advanced approaches
banking organization meant a banking organization that has at least
$250 billion in total consolidated assets or if it has consolidated
on-balance sheet foreign exposures of at least $10 billion, or if it
is a subsidiary of a depository institution, bank holding company,
savings and loan holding company or intermediate holding company
that is an advanced approaches banking organization. Under the
tailoring proposals adopted by the agencies, the supplementary
leverage ratio also would have applied to banking organizations
subject to Category III. Banking organizations subject to Category
III standards would have been permitted to use CEM or a modified
version of SA-CCR for purposes of the supplementary leverage ratio,
but consistent with the proposal to implement SA-CCR, they would
have been required to use the same approach (CEM or SA-CCR) for all
purposes under the capital rule. See ``Proposed Changes to the
Applicability Thresholds for Regulatory Capital and Liquidity
Requirements,'' 83 FR 66024 (December 21, 2018) and ``Changes to
Applicability Thresholds for Regulatory Capital Requirements for
Certain U.S. Subsidiaries of Foreign Banking Organizations and
Application of Liquidity Requirements to Foreign Banking
Organizations, Certain U.S. Depository Instititution Holding
Companies, and Certain Depository Institution Subsidiaries,'' 84 FR
24296 (May 24, 2019).
\116\ See ``Capital requirements for bank exposures to central
counterparties,'' Basel Committee on Banking Supervision (April
2014), https://www.bis.org/publ/bcbs282.pdf.
---------------------------------------------------------------------------
A. Trade Exposure Amount
Under the proposal, an advanced approaches banking organization
that elected to use SA-CCR for purposes of determining the exposure
amount of a noncleared derivative contract under the advanced
approaches would have been required to also use SA-CCR (instead of IMM)
to determine the trade exposure amount for a cleared derivative
contract under the advanced approaches. In addition, an advanced
approaches banking organization would have been required to use SA-CCR
to determine the exposure amount for both its cleared and noncleared
derivative contracts under the standardized approach. A non-advanced
approaches banking organization that elected to use SA-CCR for purposes
of determining the exposure amount of a non-cleared derivative contract
would have been required to use SA-CCR (instead of CEM) to determine
the trade exposure amount for a cleared derivative contract.
Several commenters recommended providing advanced approaches
banking organizations the option to use SA-CCR or IMM for purposes of
the cleared transactions framework, regardless of the banking
organization's election to use SA-CCR or IMM to determine the exposure
amount of noncleared derivative contracts under the advanced
approaches. As discussed in section II.A. of this SUPPLEMENTARY
INFORMATION, the agencies believe that requiring an advanced approaches
banking organization to use one of either SA-CCR or IMM for both
cleared and noncleared derivative contracts under the advanced
approaches promotes consistency in the regulatory capital treatment of
derivative contracts and facilitates the supervisory assessment of a
banking organization's capital management program.
Some commenters asked the agencies to remove from the calculation
of trade exposure amount the requirement to include non-cash initial
margin posted to a CCP that is not held in a bankruptcy-remote manner.
According to commenters, this requirement would overstate the banking
organization's exposure to such collateral, because collateral posted
to a CCP remains on the balance sheet of the banking organization and
must be reflected in risk-weighted assets under the capital rule.
Collateral held in a manner that is not bankruptcy remote exposes a
banking organization to risk of loss should the CCP fail and the
banking organization is unable to recover its collateral. This
counterparty credit risk is separate from, and in addition to, the risk
inherent to the collateral itself. Thus, the final rule does not remove
from the calculation of trade exposure amount the requirement to
include non-cash initial margin posted to a CCP that is not held in a
bankruptcy remote manner.
Other commenters asked for clarification regarding the scope of
transactions that would be subject to the cleared transactions
framework. In particular, the commenters asked the agencies to clarify
the treatment of an exposure between a banking organization and a
clearing member where the banking organization acts as agent for its
client for a cleared transaction by providing a guarantee to the
clearing member of the QCCP for the performance of the client. The
final rule clarifies that, in such a situation, the banking
organization may treat its exposure to the transaction as if the
banking organization were the clearing member and directly facing the
QCCP (i.e., the banking organization would have no exposure to the
clearing member or the QCCP as long as it does not provide a guarantee
to the client on the performance of the clearing member or QCCP).\117\
Furthermore, in such a situation, the banking organization may treat
the exposure resulting from the guarantee of the client's performance
obligations with respect to the underlying derivative contract as a
client-facing derivative transaction.\118\ Similarly, under CEM, the
banking organization may adjust the exposure amount for the client-
facing derivative transaction by applying a scaling factor of the
square root of \1/2\ (which equals 0.707107) to such exposure or higher
if the banking organization determines a longer holding period is
appropriate.\119\
---------------------------------------------------------------------------
\117\ See 12 CFR 3.3(a) (OCC); 12 CFR 217.3(a) (Board); and 12
CFR 324.3(a) (FDIC).
\118\ As described in section III.D.2.d. of this Supplementary
Information, for the client-facing derivative transaction (i.e., the
banking organization's exposure to the client due to the guarantee),
the banking organization would treat the exposure as a non-cleared
derivative contract using the five-business-day minimum MPOR.
\119\ See 12 CFR 3.34(e) (OCC); 12 CFR 217.34(e) (Board); and 12
CFR 324.34(e) (FDIC).
---------------------------------------------------------------------------
Some commenters asked the agencies to clarify how a clearing member
banking organization that acts as agent on behalf of a client should
reflect its temporary exposure to the client for the
[[Page 4391]]
collateral posted by the clearing member banking organization to the
CCP, which the client subsequently will post to the clearing member
banking organization. The commenters stated that the collateral
advanced by the clearing member banking organization on behalf of the
client creates a receivable under U.S. GAAP until the clearing member
banking organization receives the collateral from the client.
Accordingly, the commenters sought clarification on whether the amount
of such receivables should be reflected in exposure amount of the
client-facing derivative transaction or treated as a separate exposure
to the client. Such receivables expose the clearing member banking
organization to risk of loss should the client fail to subsequently
post the collateral to the clearing member banking organization. This
credit risk is separate from, and in addition to, the counterparty
credit risk of the exposure arising from the client-facing derivative
transaction, which represents the guarantee the clearing member banking
organization provides for the client's performance on the underlying
derivative transaction. Thus, consistent with U.S. GAAP, a clearing
member banking organization must treat such a receivable as a credit
exposure to the client for purposes of the capital rule, separate from
the treatment applicable to the client-facing derivative transaction
under this final rule.
For the reasons discussed above, the agencies are adopting as final
under Sec. _.133(b) of the final rule the proposal to replace CEM with
SA-CCR for advanced approaches banking organizations in the capital
rule, with one modification to introduce the defined term ``client-
facing derivative transactions'' and clarify that such exposures
receive a five-business-day minimum MPOR under SA-CCR, as discussed
above. An advanced approaches banking organization that elects to use
SA-CCR for purposes of determining the exposure amount of its
noncleared derivative contracts under the advanced approaches must also
use SA-CCR (instead of IMM) to determine the trade exposure amount for
its cleared derivative contracts under the advanced approaches.\120\
---------------------------------------------------------------------------
\120\ As discussed in section II.A. of this Supplementary
Information, an advanced approaches banking organization must use
SA-CCR to determine the trade exposure amount for its cleared
derivative contracts and the exposure amount for its noncleared
derivative contracts under the standardized approach.
---------------------------------------------------------------------------
A non-advanced approaches banking organization may continue to use
CEM to determine the trade exposure amount for its cleared derivative
contracts under the standardized approach. However, a non-advanced
approaches banking organization that elects to use SA-CCR to calculate
the exposure amount for its noncleared derivative contracts must use
SA-CCR to calculate the trade exposure amount for its cleared
derivative contracts.
B. Treatment of Default Fund Contributions
The proposal would have revised certain of the approaches that a
banking organization could use to determine the risk-weighted asset
amount for its default fund contributions. Specifically, the proposal
would have eliminated method one and method two under section 133(d)(3)
of the capital rule, either of which may be used by a clearing member
banking organization to determine the risk-weighted asset amount for
its default fund contributions to a QCCP.\121\ In its place, the
proposal would have implemented a single approach for a clearing member
banking organization to determine the risk-weighted asset amount for
its default fund contributions to a QCCP, which would have been less
complex than method one but also more granular than method two. The
proposal would have maintained the approach by which a clearing member
banking organization determines its risk-weighted asset amount for its
default fund contributions to a CCP that is not a QCCP.\122\
---------------------------------------------------------------------------
\121\ Method one is a complex three-step approach that compares
the default fund of the QCCP to the capital the QCCP would be
required to hold if it were a banking organization and provides a
method to allocate the default fund deficit or excess back to the
clearing member. Method two is a simplified approach in which the
risk-weighted asset amount for a default fund contribution to a QCCP
equals 1,250 percent multiplied by the default fund contribution,
subject to a cap.
\122\ In that case, the risk-weighted asset amount is the sum of
the clearing member banking organization's default fund
contributions multiplied by 1,250 percent.
---------------------------------------------------------------------------
Some commenters asked the agencies to clarify that a banking
organization's commitment to enter into reverse repurchase agreements
with a CCP are not default fund contributions. Certain CCPs may require
clearing members to provide funding in the form of reverse repurchase
agreements in the event of a clearing member's default in order to
support the liquidity needs of the CCP. The capital rule defines
default fund contributions as the funds contributed to or commitments
made by a clearing member to a CCP's mutualized loss sharing
arrangements. The proposal did not contemplate changes to the
definition of default fund contributions and the final rule does not
revise this definition. Whether or not a particular arrangement meets
the definition in the regulation depends on the facts and circumstances
of the particular arrangement. The agencies may consider whether
revisions to the definition are necessary in connection with future
rulemakings if the definition is not functioning as intended.
Other commenters asked the Board to revise Regulation HH \123\ to
require QCCPs regulated by the Board to make available to clearing
member banking organizations the information required to calculate the
QCCP's hypothetical capital requirement. The commenters raised concerns
that while domestic QCCPs will likely be prepared to provide the
requisite data to calculate the hypothetical capital requirement, no
regulation requires them to do so, and that foreign QCCPs are not
subject to U.S. regulation and may not be prepared to provide the
requisite data. The commenters also encouraged the agencies to work
with the SEC and the CFTC to make similar revisions to their
regulations applicable to domestic QCCPs and with international
standard setters and foreign regulators to ensure that foreign QCCPs
will be capable of providing U.S. banking organizations with the data
required for the hypothetical capital calculations under the proposal.
Lastly, the commenters asked that the agencies clarify that banking
organizations may rely on the amount of a foreign QCCP's hypothetical
capital requirement produced under a Basel-compliant SA-CCR regime.
---------------------------------------------------------------------------
\123\ See 12 CFR part 234. Regulation HH relates to the
regulation of designated financial market utilities by the Board.
---------------------------------------------------------------------------
The proposal did not contemplate changes to Regulation HH and thus
the agencies view these comments as out of scope for this rulemaking.
In addition, the Board's Regulation HH serves a different purpose than
the capital rule and covers a different set of entities. However, the
agencies recognize the concerns raised by the commenters with respect
to potential difficulties for banking organizations in calculating the
hypothetical capital requirement of a QCCP and intend to monitor
whether banking organizations experience difficulties obtaining the
hypothetical capital requirement (or the requisite information required
to calculated it) from the QCCP to perform this calculation.\124\ In
recognition of these
[[Page 4392]]
concerns, the final rule allows banking organizations that elect to use
SA-CCR to continue to use method 1 or method 2 under CEM to calculate
the risk-weighted asset amount for default fund contributions until
January 1, 2022.\125\ This is intended to provide sufficient time for
clearing member banking organizations to coordinate with CCPs to obtain
the hypothetical capital requirement produced under SA-CCR (or the
requisite information to calculate it) from the CCPs, in order for such
entities to qualify as QCCPs after the mandatory compliance date. The
agencies are also clarifying that after January 1, 2022, the mandatory
compliance date, a banking organization that is using SA-CCR may only
consider a foreign CCP to be a QCCP for purposes of the capital rule if
the foreign CCP produces its hypothetical capital requirement under SA-
CCR (as implemented by the CCP's home country in a manner consistent
with the Basel Committee standard). The agencies intend to monitor
whether banking organizations experience difficulties obtaining the
hypothetical capital requirement (or alternatively, the required data)
after the January 1, 2022, mandatory compliance date. If, after January
2022, significant obstacles remain after a banking organization has
made best efforts to obtain the necessary information from CCPs (e.g.,
due to delays in the implementation of the Basel Committee standard in
other jurisdictions), its primary Federal regulator may permit the
banking organization to use method 2 of CEM to calculate risk-weighted
asset amounts for default fund contributions for a specified period.
---------------------------------------------------------------------------
\124\ Under the capital rule, if a CCP does not provide the
hypothetical capital requirement (or, alternatively, the required
data) the CCP is not a QCCP and a banking organization must apply a
risk weight of 1250 percent to its default fund contributions to the
CCP. See definition of ``qualifying central counterparty'' under
Sec. _.2 of the capital rule, 12 CFR 3.2 (OCC); 12 CFR 217.2
(Board); and 12 CFR 324.2 (FDIC).
\125\ In cases where a banking organization uses method 1 to
calculate the risk-weighted asset amount for a default fund
contribution, a QCCP that provides the banking organization its
hypothetical capital requirement produced using CEM would still
qualify as a QCCP until January 1, 2022.
---------------------------------------------------------------------------
The agencies otherwise are generally adopting without change the
proposed revisions to the risk-weighted asset calculation for default
fund contributions under Sec. _.133(d) of the final rule.\126\ Thus,
to determine the capital requirement for a default fund contribution to
a QCCP, a clearing member banking organization first calculates the
hypothetical capital requirement of the QCCP (KCCP), unless
the QCCP has already disclosed it, in which case the banking
organization must rely on that disclosed figure. In either case, a
banking organization may choose to use a higher amount of
KCCP than the minimum calculated under the formula or
disclosed by the QCCP if the banking organization has concerns about
the nature, structure, or characteristics of the QCCP. In effect,
KCCP serves as a consistent measure of a QCCP's default fund
amount.
---------------------------------------------------------------------------
\126\ In a nonsubstantive change, the agencies moved paragraphs
(i) and (ii) of Sec. _.133(d)(3) of the proposed rule text to
paragraphs (iv) and (v) under Sec. _.133(d)(6) of the final rule
text. The agencies made this change because these sections provide
instruction on calculating EAD for default fund contribution
accounts, which are covered under Sec. _.133(d)(6). In addition,
the agencies changed the reference to (e)(4) in Sec. _.133(d)(3) of
the proposed rule text to (d)(4).
---------------------------------------------------------------------------
Under the final rule, a clearing member banking organization must
calculate KCCP according to the following formula:
KCCP = [Sigma]CMi EADi * 1.6 percent,
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of the QCCP to each clearing
member of the QCCP, as determined under Sec. _.133(d)(6).\127\
---------------------------------------------------------------------------
\127\ Section 133(d)(6) of the proposed rule text would have
required a banking organization to sum the exposure amount of all
underlying transactions, the collateral held by the CCP, and any
prefunded default contributions. In a technical correction to the
proposal, and to recognize that collateral held by the QCCP and any
prefunded default fund contributions serve to mitigate this
exposure, the final rule text at section 133(d)(6) clarifies that
banking organizations under the final rule must subtract from the
exposure amount the value of collateral held by the QCCP and any
prefunded default contributions. The final rule is consistent with
the Basel Committee standard regarding capital requirements for bank
exposures to central counterparties. See supra note 116.
The component EADi includes both the clearing member banking
organization's own transactions, the client transactions guaranteed by
the clearing member, and all values of collateral held by the QCCP
(including the clearing member banking organization's pre-funded
default fund contribution) against these transactions. The 1.6 percent
amount represents the product of a capital ratio of 8 percent and a 20
percent risk weight of a clearing member banking organization.
Subject to the transitional provisions described above, as of
January 1, 2022, a banking organization that is required or elects to
use SA-CCR to determine the exposure amount for its derivative
contracts under the standardized approach must use a KCCP
calculated using SA-CCR for both the standardized approach and the
advanced approaches.\128\ For purposes of calculating KCCP,
the PFE multiplier includes collateral held by a QCCP in which the QCCP
has a legal claim in the event of the default of the member or client,
including default fund contributions of that member. In addition, the
QCCP must use a MPOR of ten business days in the maturity factor
adjustment. A banking organization that elects to use CEM to determine
the exposure amount of its derivative contracts under the standardized
approach must use a KCCP calculated using CEM.
---------------------------------------------------------------------------
\128\ The final rule does not revise the calculations for
determining the exposure amount of repo-style transactions for
purposes of determining the risk-weighted asset amount of a banking
organization's default fund contributions.
---------------------------------------------------------------------------
EAD must be calculated separately for each clearing member banking
organization's sub-client accounts and sub-house account (i.e., for the
clearing member's proprietary activities). If the clearing member
banking organization's collateral and its client's collateral are held
in the same account, then the EAD of that account would be the sum of
the EAD for the client-related transactions within the account and the
EAD of the house-related transactions within the account. In such a
case, for purposes of determining such EADs, the independent collateral
of the clearing member banking organization and its client must be
allocated in proportion to the respective total amount of independent
collateral posted by the clearing member banking organization to the
QCCP. This treatment protects against a clearing member banking
organization recognizing client collateral to offset the QCCP's
exposures to the clearing member banking organization's proprietary
activity in the calculation of KCCP.
In addition, if any account or sub-account contains both derivative
contracts and repo-style transactions, the EAD of that account is the
sum of the EAD for the derivative contracts within the account and the
EAD of the repo-style transactions within the account. If independent
collateral is held for an account containing both derivative contracts
and repo-style transactions, then such collateral must be allocated to
the derivative contracts and repo-style transactions in proportion to
the respective product-specific exposure amounts. The respective
product specific exposure amounts must be calculated, excluding the
effects of collateral, according to Sec. _.132(b) of the capital rule
for repo-style transactions and to Sec. _.132(c)(5) for derivative
contracts.
A clearing member banking organization also must calculate its
capital requirement (KCMi), which is the capital requirement for its
default fund contribution, subject to a floor equal to a 2 percent risk
weight multiplied by the clearing member banking
[[Page 4393]]
organization's prefunded default fund contribution to the QCCP and an 8
percent capital ratio. This calculation allocates KCCP on a
pro rata basis to each clearing member based on the clearing member's
share of the overall default fund contributions. Thus, a clearing
member banking organization's capital requirement increases as its
contribution to the default fund increases relative to the QCCP's own
prefunded amounts and the total prefunded default fund contributions
from all clearing members to the QCCP. In all cases, a clearing member
banking organization's capital requirement for its default fund
contribution to a QCCP may not exceed the capital requirement that
would apply if the same exposure were calculated as if it were to a CCP
that is not a QCCP.
A clearing member banking organization calculates according to the
following formula: \129\
---------------------------------------------------------------------------
\129\ The agencies are clarifying that KCMi must be multiplied
by 12.5 to arrive at the risk-weighted asset amount for a default
fund contribution.
[GRAPHIC] [TIFF OMITTED] TR24JA20.011
---------------------------------------------------------------------------
Where:
KCCP is the hypothetical capital requirement of the QCCP;
DFpref is the prefunded default fund contribution of the
clearing member banking organization to the QCCP;
DFCCP is the QCCP's own prefunded amounts (e.g.,
contributed capital, retained earnings) that are contributed to the
default fund waterfall and are junior or pari passu to the default
fund contribution of the members; and
DFCMpref is the total prefunded default fund
contributions from clearing members of the QCCP.
V. Revisions to the Supplementary Leverage Ratio
Under the capital rule, advanced approaches banking organizations
and banking organizations subject to Category III standards must
satisfy a minimum supplementary leverage ratio requirement of 3
percent.\130\ The supplementary leverage ratio is the ratio of tier 1
capital to total leverage exposure, where total leverage exposure
includes both on-balance sheet assets and certain off-balance sheet
exposures.\131\
---------------------------------------------------------------------------
\130\ See 12 CFR 3.10(a)(5) (OCC); 12 CFR 217.10(a)(5) (Board);
and 12 CFR 324.10(a)(5) (FDIC).
\131\ See supra note 6.
---------------------------------------------------------------------------
The proposal would have revised the capital rule to require
advanced approaches banking organizations to use a modified version of
SA-CCR, instead of CEM, to determine the on- and off-balance sheet
amounts of derivative contracts for purposes of calculating total
leverage exposure. The modified version of SA-CCR would have limited
the recognition of collateral to certain cash variation margin \132\ in
the replacement cost calculation, but would not have allowed for
recognition of any financial collateral in the PFE component.\133\
---------------------------------------------------------------------------
\132\ Consistent with CEM, the proposal would have permitted an
advanced approaches banking organization to recognize cash variation
margin in the on-balance component calculation only if (1) the cash
variation margin met the conditions under Sec. _.10(c)(4)(ii)(C)(3)
through (7) of the proposed rule; and (2) it had not been recognized
in the form of a reduction in the fair value of the derivative
contracts within the netting set under the advanced approaches
banking organization's operative accounting standard.
\133\ To determine the carrying value of derivative contracts,
U.S. GAAP provides a banking organization with the option to reduce
any positive fair value of a derivative contract by the amount of
any cash collateral received from the counterparty, provided the
relevant GAAP criteria for offsetting are met (the GAAP offset
option). Similarly, under the GAAP offset option, a banking
organization has the option to offset the negative mark-to-fair
value of a derivative contract with a counterparty. See Accounting
Standards Codification paragraphs 815-10-45-1 through 7 and 210-20-
45-1. Under the capital rule, a banking organization that applies
the GAAP offset option to determine the carrying value of its
derivative contracts would be required to reverse the effect of the
GAAP offset option for purposes of determining total leverage
exposure, unless the collateral is cash variation margin recognized
as settled with the derivative contract as a single unit of account
for balance sheet presentation and satisfies the conditions under
Sec. _.10(c)(4)(ii)(C)(1)(ii) through (iii) and Sec.
_.10(c)(4)(ii)(C)(3) through (7) of the capital rule.
---------------------------------------------------------------------------
The proposal sought comment on whether the agencies should broaden
the recognition of collateral in the supplementary leverage ratio to
also include collateral provided by a client to a clearing member
banking organization in connection with a cleared transaction (client
collateral), in recognition of recent policy efforts to support
migration of derivative transactions to CCPs, including an October 2018
consultative release by the Basel Committee on the treatment of client
collateral in the international leverage ratio standard.\134\ Several
commenters urged the agencies to recognize greater amounts of client
collateral, including margin, in either PFE or in both replacement cost
and PFE. Other commenters, however, argued that the agencies should not
recognize greater amounts of client collateral, including cash or non-
cash initial and variation margin, in connection with cleared
transactions entered into on behalf of clients or any amount of margin
collateral within the supplementary leverage ratio. In addition, some
commenters urged the agencies to assess the effectiveness of collateral
in offsetting the operational risks arising from the provision of
client clearing services.
---------------------------------------------------------------------------
\134\ See ``Consultative Document: Leverage ratio treatment of
client cleared derivatives,'' Basel Committee on Banking Supervision
(October 2018), https://www.bis.org/bcbs/publ/d451.pdf.
---------------------------------------------------------------------------
Commenters that supported greater recognition of client collateral
argued that such an approach would be consistent with the G20 mandate
to establish policies that support the use of central clearing for
derivative transactions,\135\ as it could decrease the regulatory
capital cost of providing clearing services and thereby improve access
to clearing services for clients, reduce concentration among clearing
member banking organizations, and improve the portability of client
positions to other clearing members, particularly in times of stress.
Other commenters argued that allowing an advanced approaches banking
organization to use the same SA-CCR methodology as proposed for the
risk-based framework would simplify the capital rule for advanced
approaches banking organizations.
---------------------------------------------------------------------------
\135\ The Group of Twenty (G20) was established in 1999 to bring
together industrialized and developing economies to discuss key
issues in the global economy. Members include finance ministers and
central bank governors from Argentina, Australia, Brazil, Canada,
China, France, Germany, India, Indonesia, Italy, Japan, Mexico,
Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the
United Kingdom, and the United States and the European Union. See
``Leaders' Statement: The Pittsburgh Summit,'' G-20 (September 24-
25, 2009), https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
---------------------------------------------------------------------------
Some commenters urged the agencies to consider the risk to
financial stability if implementation of SA-CCR further exacerbates the
trend towards concentration among clearing service providers or leads
to a reduction in access to clearing for non-clearing-member entities.
Of these, some commenters also argued that the proposed SA-CCR
methodology could
[[Page 4394]]
indirectly adversely affect clearing member clients with directional
and long-dated portfolios, such as pension funds, mutual funds, life
insurance companies and other end-users that use derivatives largely
for risk management purposes. Specifically, these commenters argued
that such entities have already experienced difficulty in obtaining and
maintaining access to central clearing from banking organizations due
to the treatment of client margin, which substantially increases the
capital requirements under the supplementary leverage ratio for banking
organizations that provide clearing services.
Other commenters argued that limiting the recognition of client
collateral in the supplementary leverage ratio could have pro-cyclical
effects that undermine the core objectives of the clearing framework.
These commenters asserted that CCPs typically increase collateral
requirements during stress periods, and therefore can cause clearing
member banking organizations to be bound, or further bound, by the
supplementary leverage ratio during that time. According to the
commenters, procyclicality in the capital requirements for a clearing
member could undermine the client-account portability objective of the
central clearing framework if the clearing member is unable to acquire
a book of cleared derivatives from another failing clearing member due
to the regulatory capital costs of such acquisition.
Furthermore, some commenters posited that greater recognition of
the risk-reducing effects of client collateral for purposes of the
supplementary leverage ratio would be appropriate due to the manner in
which clearing member banking organizations collect such collateral and
the protections such collateral receives under existing regulations.
Specifically, these commenters noted that CFTC regulations prohibit
rehypothecation of client collateral, and explicitly limit a clearing
member banking organization's use of collateral received from a client
to purposes that fulfil the clearing member's obligations to the CCP or
to cover losses in the event of that client's default.
By contrast, commenters who opposed greater recognition of the
risk-reducing effects of client collateral under the supplementary
leverage ratio expressed concern that such an approach would decrease
capital levels among clearing member banking organizations and
therefore could increase risks to both safety and soundness and U.S.
financial stability. In particular, some commenters noted that solvency
of clearing member banking organizations is critical to the stability
of CCPs and that broadening the recognition of client collateral under
the supplementary leverage ratio could undermine the advances made by
central clearing mandates in stabilizing global financial markets.
These commenters added that higher levels of regulatory capital at
clearing member banking organizations could improve their ability to
assume client positions from a defaulted clearing member in stress, and
that the agencies have authority to provide temporary relief to
leverage capital requirements if doing so would be necessary to allow a
banking organization to absorb the client positions of an insolvent
clearing member. With respect to concentration concerns, these
commenters argued that lowering capital requirements for clearing
member banking organizations would not reduce concentration in the
provision of clearing services; rather, any further reduction in
capital requirements for clearing member banking organizations would
only benefit banking organizations that already provide these services.
In addition, these commenters expressed concern regarding the
introduction of risk mitigants into the leverage capital requirements,
and stated that such a revision could blur the distinction between
leverage and risk-based capital requirements.
The final rule allows a clearing member banking organization to
recognize the risk-reducing effect of client collateral in replacement
cost and PFE for purposes of calculating total leverage exposure under
certain circumstances.\136\ This treatment applies to a banking
organization's exposure to its client-facing derivative transactions.
For such exposures, the banking organization would use SA-CCR, as
applied for risk-based capital purposes, which permits recognition of
both cash and non-cash margin received from a client in replacement
cost and PFE. The agencies believe that this treatment appropriately
recognizes recent developments in the use of central clearing and
maintains levels of capital consistent with safe and sound operations
of banking organizations engaged in these activities. Although there
are some risks associated with CCPs, the agencies believe that central
clearing through CCPs generally reduces the effective exposure of
derivative contracts through the multilateral netting of exposures,
establishment and enforcement of collateral requirements, and promotion
of market transparency. Also, this treatment is consistent with the G20
mandate to establish policies that support the use of central clearing,
and recent developments by the Basel Committee. Specifically, on June
26, 2019, the Basel Committee released a standard that revises the
leverage ratio treatment of client-cleared derivatives contracts to
generally align with the measurement of such exposures under SA-CCR as
used for risk-based capital purposes.\137\ The standard was designed to
balance the robustness of the supplementary leverage ratio as a non-
risk-based safeguard against unsustainable sources of leverage with the
policy objective set by G20 leaders to promote central clearing of
standardized derivative contracts as part of mitigating systemic risk
and making derivative markets safer. The final rule similarly maintains
the complementary purpose of risk-based and leverage capital
requirements, in a manner that is expected to have minimal impact on
overall capital levels, will reduce burden by reducing the number of
separate calculations required, and will not impede important policy
objectives regarding central clearing.
---------------------------------------------------------------------------
\136\ The recognition of client collateral provided under the
final rule only applies in the context of SA-CCR, not CEM.
\137\ See supra note 20.
---------------------------------------------------------------------------
Banking organizations subject to the supplementary leverage ratio
under Category III that continue to use CEM to determine the total
leverage exposure measure are not permitted to recognize the risk-
reducing effects of client collateral other than with respect to
certain transfers of cash variation margin in replacement cost.
Relative to CEM, SA-CCR is more sensitive to the recognition of
collateral, and therefore the commenters' concerns are more pronounced
in that context. Moreover, most clearing member banking organizations
are advanced approaches banking organizations that are required to use
SA-CCR or IMM for the cleared transactions framework, and extending
such treatment to CEM would have limited impact, if any, in the
aggregate.
Some commenters noted that section 34 of the capital rule allows a
banking organization subject to the supplementary leverage ratio to
exclude the PFE of all credit derivatives or other similar instruments
through which it provides credit protection, but without regard to
credit risk mitigation, provided that it does not adjust the net-to-
gross ratio. Under the capital rule, a banking organization subject to
the supplementary leverage ratio that chooses to exclude the PFE of
credit derivatives or other similar instruments through which it
provides credit
[[Page 4395]]
protection must do so consistently over time for the calculation of the
PFE for all such instruments. The agencies are clarifying that the same
treatment would apply under SA-CCR for purposes of the supplementary
leverage ratio.\138\ In particular, a banking organization subject to
the supplementary leverage ratio may choose to exclude from the PFE
component of the exposure amount calculation the portion of a written
credit derivative that is not offset according to Sec.
_.10(c)(4)(ii)(D)(1)-(2) and for which the effective notional amount of
the written credit derivative is included in total leverage exposure.
---------------------------------------------------------------------------
\138\ See 79 FR 57725, 57731-57732 (Sept. 26, 2014).
---------------------------------------------------------------------------
The agencies generally are adopting as final the proposed
requirement that a banking organization that is required to use SA-CCR
or elects to use SA-CCR to calculate the exposure amount of its
derivative contracts for purposes of the supplementary leverage ratio
must use the modified version of SA-CCR described in Sec.
_.10(c)(4)(ii) of the final rule, with a few revisions.\139\ For a
client-facing derivative transaction, however, the banking organization
calculates the exposure amount under Sec. _.132(c)(5).
---------------------------------------------------------------------------
\139\ Some commenters requested clarification regarding the
items to be summed under Sec. _.10(c)(4)(ii)(C)(1) of the proposed
rule. The agencies are clarifying that the items to be summed under
this paragraph (now located at Sec. _.10(c)(4)(ii)(C)(2)(i) of the
final rule) are the replacement cost of each derivative contract or
single product netting set of derivative contracts to which the
advanced approaches banking organization is a counterparty, as
described under 10(c)(4)(ii)(C)(2)(i) of the final rule. Section
_.10(c)(4)(ii)(C)(2)(ii) of the final rule serves to adjust, under
certain situations, the items to be summed under Sec.
_.10(c)(4)(ii)(C)(2)(i). In addition, these commenters requested
clarification of the application of Sec. _.10(c)(4)(ii)(C)(2) in
the proposal. The agencies are removing Sec. _.10(c)(4)(ii)(C)(2)
from the final rule, as this provision is captured under the
definition of the cash variation margin terms in the formula
described under Sec. _.10(c)(4)(ii)(C)(2)(i).
---------------------------------------------------------------------------
Consistent with the proposal, written options must be included in
total leverage exposure even though the final rule allows certain
written options to receive an exposure amount of zero for risk-based
capital purposes.\140\
---------------------------------------------------------------------------
\140\ Under the final rule, 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. See section
III.A. of this Supplementary Information for further discussion.
---------------------------------------------------------------------------
VI. Technical Amendments
The proposal would have made several technical corrections and
clarifications to the capital rule to address certain provisions that
warrant revision based on questions presented by banking organizations
and further review by the agencies. The agencies did not receive
comment on these technical amendments, and are finalizing them as
proposed. The agencies did receive several suggestions for other
clarifications and technical changes to the proposal. The agencies are
adopting many of these suggestions in the final rule. These changes are
described below.
A. Receivables Due From a QCCP
The final rule revises Sec. _.32 of the capital rule to clarify
that cash collateral posted by a clearing member banking organization
to a QCCP, and which could be considered a receivable due from the QCCP
under U.S. GAAP, should not be risk-weighted as a corporate exposure.
Instead, for a client-cleared trade the cash collateral posted to a
QCCP receives a risk weight of 2 percent, if the cash associated with
the trade meets the requirements under Sec. _.35(b)(3)(i)(A) or Sec.
_.133(b)(3)(i)(A) of the capital rule, or 4 percent, if the collateral
does not meet the requirements necessary to receive the 2 percent risk
weight. For a trade made on behalf of the clearing member's own
account, the cash collateral posted to a QCCP receives a 2 percent risk
weight. The agencies intend for this amendment to maintain incentives
for banking organizations to post cash collateral and recognize that a
receivable from a QCCP that arises in the context of a trade exposure
should not be treated as equivalent to a receivable that would arise
if, for example, a banking organization made a loan to a CCP.
B. Treatment of Client Financial Collateral Held by a CCP
Under Sec. _.2 of the capital rule, financial collateral means, in
part, collateral in which a banking organization has a perfected first-
priority security interest in the collateral. However, when a banking
organization is acting on behalf of a client, it generally is required
to post any client collateral to the CCP, in which case the CCP
establishes and maintains a perfected first-priority security interest
in the collateral instead of the clearing member. As a result, the
capital rule does not permit a clearing member banking organization to
recognize client collateral posted to a CCP as financial collateral.
Client collateral posted to a CCP remains available to mitigate the
risk of a credit loss on a derivative contract in the event of a client
default. Specifically, when a client defaults the CCP will use the
client collateral to offset its exposure to the client, and the
clearing member banking organization would be required to cover only
the amount of any deficiency between the liquidation value of the
collateral and the CCP's exposure to the client. However, were the
clearing member banking organization to enter into the derivative
contract directly with the client, the clearing member would establish
and maintain a perfected first-priority security interest in the
collateral, and the exposure of the clearing member to the client would
similarly be mitigated only to the extent the collateral is sufficient
to cover the exposure amount of the transaction at the time of default.
Therefore, the final rule revises the definition of financial
collateral to allow clearing member banking organizations to recognize
as financial collateral noncash client collateral posted to a CCP. In
this situation, the clearing member banking organization is not
required to establish and retain a first-priority security interest in
the collateral for it to qualify as financial collateral under Sec.
_.2 of the capital rule.
C. Clearing Member Exposure When CCP Performance Is Not Guaranteed
The final rule revises Sec. _.35(c)(3) of the capital rule to
align the capital requirements under the standardized approach for
client-cleared transactions with the treatment under Sec. _.133(c)(3)
of the advanced approaches. Specifically, the final rule allows a
clearing member banking organization that does not guarantee the
performance of the CCP to the clearing member's client to apply a zero
percent risk weight to the CCP-facing portion of the transaction. The
agencies previously implemented this treatment for purposes of the
advanced approaches.\141\
---------------------------------------------------------------------------
\141\ See 80 FR 41411 (July 15, 2015).
---------------------------------------------------------------------------
D. Bankruptcy Remoteness of Collateral
The final rule removes the requirement in Sec. _.35(b)(4)(i) of
the standardized approach and Sec. _.133(b)(4)(i) of the advanced
approaches that collateral posted by a clearing member client banking
organization to a clearing member banking organization must be
bankruptcy remote from a custodian in order for the client banking
organization to avoid the application of risk-based capital
requirements related to the collateral, and clarifies that a custodian
must be acting in its capacity as a custodian for this treatment to
apply.\142\
[[Page 4396]]
The agencies believe this revision is appropriate because the
collateral would generally be considered to be bankruptcy remote if the
custodian is acting in its capacity as a custodian with respect to the
collateral. Therefore, this revision applies only in cases where the
collateral is deposited with a third-party custodian, not in cases
where a clearing member banking organization offers ``self-custody''
arrangements with its clients. In addition, this revision makes the
collateral requirement for a clearing member client banking
organization consistent with the treatment of collateral posted by a
clearing member banking organization, which does not require that the
posted collateral be bankruptcy remote from the custodian, but requires
in each case that the custodian be acting in its capacity as a
custodian.
---------------------------------------------------------------------------
\142\ See 12 CFR 3.35(b)(4) and 3.133(b)(4) (OCC); 12 CFR
217.35(b)(4) and 217.133(b)(4) (Board); and 12 CFR 324.35(b)(4) and
324.133(b)(4) (FDIC).
---------------------------------------------------------------------------
E. Adjusted Collateral Haircuts for Derivative Contracts
For a cleared transaction, the clearing member banking organization
must determine the exposure amount for the client-facing derivative
transaction of the derivative contract using the collateralized
transactions framework under Sec. _.37(c)(3) of the capital rule or
the counterparty credit risk framework under Sec. _.132(b)(2)(ii) of
the capital rule. The clearing member banking organization may
recognize the credit risk-mitigation benefits of the collateral posted
by the client; however, under Sec. Sec. _.37(c) and _.132(b) of the
capital rule, the value of the collateral must be discounted by the
application of a standard supervisory haircut to reflect any market
price volatility in the value of the collateral over a ten-business-day
holding period. For a repo-style transaction, the capital rule applies
a scaling factor of the square root of \1/2\ (which equals 0.707107) to
the standard supervisory haircuts to reflect the limited risk to
collateral in those transactions and effectively reduce the holding
period to five business days. The proposal would have provided a
similar reduction in the haircuts for client-facing derivative
transactions, as they typically have a holding period of less than ten
business days. Some commenters requested clarification whether a five-
business-day holding period would apply for the purpose of calculating
collateral haircuts for client-facing derivatives under Sec.
_.132(b)(2)(ii)(A)(3) of the proposal. The final rule revises
Sec. Sec. _.37(c)(3)(iii) and _.132(b)(2)(ii)(A)(3) of the capital
rule to adjust the holding period for client-facing derivative
transactions by applying a scaling factor of 0.71, which represents a
five-business-day holding period. The final rule also requires a
banking organization to use a larger scaling factor for collateral
haircuts for client-facing derivatives when it determines a holding
period longer than five days is appropriate.
F. OCC Revisions to Lending Limits
The OCC proposed to revise its lending limit rule at 12 CFR part
32. The current lending limits rule references sections of CEM in the
OCC's advanced approaches capital rule as one available methodology for
calculating exposures to derivatives transactions. However, these
sections were proposed to be amended or replaced with SA-CCR in the
advanced approaches. Therefore, the OCC proposed to replace the
references to CEM in the advanced approaches with references to CEM in
the standardized approach. The OCC also proposed to adopt SA-CCR as an
option for calculation of exposures under lending limits.
The agencies received two comments supporting the OCC's proposal to
use SA-CCR to measure counterparty credit risk under both the capital
rules and other agency rules, including lending limits, as creating
less burden on institutions. The OCC agrees that it would be less
burdensome for institutions to use similar methodologies to measure
counterparty credit risk across OCC regulations, and therefore are
finalizing these revisions to the lending limits rule as proposed.
G. Other Clarifications and Technical Amendments From the Proposal to
the Final Rule
Some commenters suggested that the agencies make a revision to the
approaches for calculating capital requirements regarding CVAs under
Sec. _.132(e). Under the final rule, the agencies are clarifying that
for purposes of calculating the CVA capital requirements under Sec.
_.132(e)(5)(i)(C), (e)(6)(i)(B) and (e)(6)(viii), an advanced
approaches banking organization must use SA-CCR instead of CEM where
CEM was provided as an option. In addition, the final rule revises the
definition of CEM in Sec. _.2 to refer to Sec. _.34(b) instead of
Sec. _.34(a).
VII. Impact of the Final Rule
For the proposal, the agencies reviewed data provided by advanced
approaches banking organizations that represent a significant majority
of the derivatives market. In particular, the agencies analyzed the
change in exposure amount between CEM and SA-CCR, as well as the change
in risk-weighted assets as determined under the standardized
approach.\143\ The data cover diverse portfolios of derivative
contracts, both in terms of asset type and counterparty. In addition,
the data include firms that serve as clearing members, allowing the
agencies to consider the effect of the proposal under the cleared
transactions framework for both a direct exposure to a CCP and a
clearing member's exposure to its client with respect to client-facing
derivative transactions. As a result, the analysis provides a
reasonable proxy for the potential changes for all advanced approaches
banking organizations.
---------------------------------------------------------------------------
\143\ The agencies estimated that, on aggregate, exposure
amounts under SA-CCR would equal approximately 170 percent of the
exposure amounts for identical derivative contracts under IMM. Thus,
firms that use IMM currently would likely continue to use IMM to
determine the exposure amount of their derivative contracts to
determine advanced approaches total risk-weighted assets. However,
the standardized approach serves as a floor on advanced approaches
banking organizations' total risk-weighted assets. Thus, a firm
would only receive the benefit of IMM if the firm is not bound by
standardized total risk-weighted assets.
---------------------------------------------------------------------------
The agencies estimated that, under the proposal, the exposure
amount for derivative contracts held by advanced approaches banking
organizations would have decreased by approximately 7 percent. The
agencies also estimated that the proposal would have resulted in an
approximately 5 percent increase in advanced approaches banking
organizations' standardized risk-weighted assets associated with
derivative contract exposures.\144\ In addition, the proposal would
have resulted in an increase (approximately 30 basis points) in
advanced approaches banking organizations' supplementary leverage
ratios, on average.
---------------------------------------------------------------------------
\144\ Total risk-weighted assets are a function of the exposure
amount of the netting set and the applicable risk-weight of the
counterparty. Total risk-weighted assets increase under the analysis
while exposure amounts decrease because higher applicable risk
weights amplify increases in the exposure amount of certain
derivative contracts, which outweighs decreases in the exposure
amount of other derivative contracts.
---------------------------------------------------------------------------
The agencies made several changes to the SA-CCR methodology for the
final rule that could have a material effect on the impact of the final
rule. First, the final rule changes certain of the supervisory factors
for commodity derivative contracts to coincide with the supervisory
factors in the Basel Committee standard.\145\ Second, the
[[Page 4397]]
final rule removes the alpha factor for exposures to commercial end-
users. Third, the final rule allows a banking organization to treat
settled-to-market derivative contracts as subject to a variation margin
agreement, allowing such contracts to net with collateralized-to-market
derivative contracts of the same netting set. Lastly, the final rule
allows clearing member banking organizations to recognize client
collateral under the supplementary leverage ratio, to the same extent a
banking organization may recognize collateral for risk-based capital
purposes.
---------------------------------------------------------------------------
\145\ The change in the supervisory factors for commodity
derivative contracts will not result in a change in the agencies
initial estimate of the impact of the final rule. This is because
the data received from the advanced approach banking organizations
already reflected the supervisory factors for commodity derivative
contracts included in the Basel Standard, and the agencies did not
adjust the data to account for the proposed 40 percent supervisory
factor for all energy derivative contracts.
---------------------------------------------------------------------------
Using the same data set as used for the proposal, the agencies
found that the exposure amount for derivative contracts held by
advanced approaches banking organizations will decrease by
approximately 9 percent under the final rule. Generally speaking,
exposure amounts for interest rate, credit and foreign exchange
derivatives would be expected to decrease, and exposure amounts for
equities and commodities would be expected to increase. The agencies
estimate that the final rule will result in an approximately 4 percent
decrease in advanced approaches banking organizations' standardized
risk-weighted assets associated with derivative contract exposures and
that the final rule will result in an increase (approximately 37 basis
points) in advanced approaches banking organizations' reported
supplementary leverage ratios, on average. While too much precision
should not be attached to estimates regarding individual banking
organizations owing to variations in data quality, estimated changes in
individual banking organizations' supplementary leverage ratios range
from -5 basis points to 85 basis points.
In the proposal, the agencies found that the effects of the
proposed rule likely would be limited for non-advanced approaches
banking organizations. First, these banking organizations hold
relatively small derivative portfolios. Non-advanced approaches banking
organizations account for less than 9 percent of derivative contracts
of all banking organizations, even though they account for roughly 36
percent of total assets of all banking organizations.\146\ Second,
nearly all non-advanced approaches banking organizations are not
subject to supplementary leverage ratio requirements, and thus would
not be affected by any changes to the calculation of total leverage
exposure. These banking organizations retain the option of using CEM,
including for the supplementary leverage ratio, if applicable, and the
agencies anticipate that only those banking organizations that receive
a material net benefit from using SA-CCR would elect to use it.
Therefore, the agencies continue to find that the impact on non-
advanced approaches banking organizations under the final rule would be
limited.
---------------------------------------------------------------------------
\146\ According to data from the Consolidated Reports of
Condition and Income for a Bank with Domestic and Foreign Offices
(FFIEC report forms 031, 041, and 051), as of March 31, 2018.
---------------------------------------------------------------------------
VIII. Regulatory Analyses
A. Paperwork Reduction Act
The agencies' regulatory capital rule contains ``collections of
information'' within the meaning of the Paperwork Reduction Act (PRA)
of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of
the PRA, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently-valid Office of Management and Budget (OMB)
control number. The OMB control number for the OCC is 1557-0318, Board
is 7100-0313, and FDIC is 3064-0153. The information collections that
are part of the agencies' regulatory capital rule will not be affected
by this final rule and therefore no final submissions will be made by
the FDIC or OCC to OMB under section 3507(d) of the PRA (44 U.S.C.
3507(d)) or section 1320.11 of the OMB's implementing regulations (5
CFR 1320) in connection with this rulemaking.\147\
---------------------------------------------------------------------------
\147\ The OCC and FDIC submitted their information collections
to OMB at the proposed rule stage. However, these submissions were
done solely in an effort to apply a conforming methodology for
calculating the burden estimates and not due to the proposed rule.
OMB filed comments requesting that the agencies examine public
comment in response to the proposed rule and describe in the
supporting statement of its next collection any public comments
received regarding the collection as well as why (or why it did not)
incorporate the commenters' recommendation. In addition, OMB
requested that the OCC and the FDIC note the convergence of the
agencies on the single methodology. The agencies received no
comments on the information collection requirements. Since the
proposed rule stage, the agencies have conformed their respective
methodologies in a separate final rulemaking titled, ``Regulatory
Capital Rule: Implementation and Transition of the Current Expected
Credit Losses Methodology for Allowances and Related Adjustments to
the Regulatory Capital Rule and Conforming Amendments to Other
Regulations,'' 84 FR 4222 (February 14, 2019), and have had their
submissions approved through OMB. As a result, the agencies
information collections related to the regulatory capital rules are
currently aligned and therefore no submission will be made to OMB.
---------------------------------------------------------------------------
As a result of this final rule, the agencies have proposed to
clarify the reporting instructions for the Consolidated Reports of
Condition and Income (Call Reports) (FFIEC 031, FFIEC 041, and FFIEC
051) and Regulatory Capital Reporting for Institutions Subject to the
Advanced Capital Adequacy Framework (FFIEC 101).\148\ The OCC and FDIC
expect to clarify the reporting instructions for DFAST 14A, and the
Board expects to clarify the reporting instructions for the
Consolidated Financial Statements for Holding Companies (FR Y-9C),
Capital Assessments and Stress Testing (FR Y-14A and FR Y-14Q), and
Banking Organization Systemic Risk Report (FR Y-15) as appropriate to
reflect the changes to the regulatory capital rule related to this
final rule.
---------------------------------------------------------------------------
\148\ See 84 FR 53227 (October 4, 2019).
---------------------------------------------------------------------------
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency, in connection with a final rule, to prepare a Final
Regulatory Flexibility Analysis describing the impact of the rule on
small entities (defined by the Small Business Administration (SBA) for
purposes of the RFA to include commercial banks and savings
institutions with total assets of $600 million or less and trust
companies with total revenue of $41.5 million or less) or to certify
that the final rule would not have a significant economic impact on a
substantial number of small entities. As of December 31, 2018, the OCC
supervised 782 small entities. The rule would impose requirements on
all OCC supervised entities that are subject to the advanced approaches
risk-based capital rules, which typically have assets in excess of $250
billion, and therefore would not be small entities. While small
entities would have the option to adopt SA-CCR, the OCC does not expect
any small entities to elect that option. Therefore, the OCC estimates
the final rule would not generate any costs for small entities.
Therefore, the OCC certifies that the final rule would not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
FDIC: The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available for public comment a
final regulatory flexibility analysis describing the impact of the rule
on small entities.\149\ However, a regulatory flexibility analysis is
not required if the agency certifies that the final rule will not have
a significant economic impact on a substantial number of small
entities. The SBA has defined ``small entities'' to include banking
[[Page 4398]]
organizations with total assets of less than or equal to $600 million
that are independently owned and operated or owned by a holding company
with less than or equal to $600 million in total assets.\150\
Generally, the FDIC considers a significant effect to be a quantified
effect in excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions.
---------------------------------------------------------------------------
\149\ 5 U.S.C. 601 et seq.
\150\ The SBA defines a small banking organization as having
$600 million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
---------------------------------------------------------------------------
For the reasons described below, the FDIC believes that the final
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the FDIC has conducted and is
providing a final regulatory flexibility analysis.
1. The Need for, and Objectives of, the Rule
The policy objective of the final rule is to provide a new and more
risk-sensitive methodology for calculating the exposure amount for
derivative contracts. SA-CCR will replace the existing CEM methodology
for advanced approaches institutions. Non-advanced approaches banking
organizations will have the option of using SA-CCR in place of CEM.
2. The Significant Issues Raised by the Public Comments in Response to
the Initial Regulatory Flexibility Analysis
No significant issues were raised by the public comments in
response to the initial regulatory flexibility analysis.
3. Response of the Agency to Any Comments Filed by the Chief Counsel
for Advocacy of the Small Business Administration in Response to the
Proposed Rule
No comments were filed by the Chief Counsel for Advocacy of the
Small Business Administration in response to the proposed rule.
4. A Description of and an Estimate of the Number of Small Entities to
Which the Rule Will Apply or an Explanation of Why no Such Estimate Is
Available
As of June 30, 2019, the FDIC supervised 3,424 institutions, of
which 2,665 are considered small entities for the purposes of RFA.
These small IDIs hold $514 billion in assets, accounting for 16.6
percent of total assets held by FDIC-supervised institutions.\151\
---------------------------------------------------------------------------
\151\ Consolidated Reports of Condition and Income for the
quarter ending June 30, 2019.
---------------------------------------------------------------------------
The final rule will require advanced approaches institutions to use
either SA-CCR or IMM to calculate the exposure amount of its noncleared
and cleared derivative contracts under the advanced approaches. For
purposes of determining the exposure amount of its noncleared and
cleared derivative contracts under the standardized approach, an
advanced approaches institution must use SA-CCR. An advanced approaches
institution must use SA-CCR to determine the risk-weighted asset amount
of its default fund contributions under both the approaches. There are
no FDIC-supervised advanced approaches institutions that are considered
small entities for the purposes of RFA.\152\
---------------------------------------------------------------------------
\152\ Id.
---------------------------------------------------------------------------
The final rule will allow, but not require, non-advanced approaches
institutions to replace CEM with SA-CCR as the approach for calculating
EAD. While this allowance applies to all 2,665 small entities, only 401
(15 percent) report holding any volume of derivatives and would
therefore be affected by differences between CEM and SA-CCR. These 401
banks' holdings of derivatives account for only 7.6 percent of their
assets, so the effects of calculating the exposure amount of
derivatives using SA-CCR on their capital requirements would likely be
insignificant.\153\ Since adoption of SA-CCR is optional, these banks
would weigh the benefits of SA-CCR adoption against its costs. Given
that SA-CCR adoption necessitates internal systems enhancements and
other operational modifications that could be particularly burdensome
for smaller, less complex banking organizations, the FDIC expects that
no small institutions will likely adopt SA-CCR.
---------------------------------------------------------------------------
\153\ Id.
---------------------------------------------------------------------------
5. A Description of the Projected Reporting, Recordkeeping and Other
Compliance Requirements of the Rule
No small entity will be compelled to use SA-CCR, so the rule does
not impose any reporting, recordkeeping and other compliance
requirements onto small entities.
The FDIC does not expect any small entity to adopt SA-CCR, given
the internal systems enhancements and operational modifications needed
for SA-CCR adoption. A small institution will elect to use SA-CCR only
if the net benefits of doing so are positive. Thus, the FDIC expects
the proposed rule will not impose any net economic costs on these
entities.
6. A Description of the Steps the Agency Has Taken To Minimize the
Significant Economic Impact on Small Entities
As described above, the FDIC does not believe this rule will have a
significant economic impact on a substantial number of small entities.
Further, since adopting SA-CCR is voluntary, only entities that expect
to benefit from SA-CCR will adopt it.
Board: An initial regulatory flexibility analysis (IRFA) was
included in the proposal in accordance with section 603(a) of the
Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. In the IRFA, the
Board requested comment on the effect of the proposed rule on small
entities and on any significant alternatives that would reduce the
regulatory burden on small entities. The Board did not receive any
comments on the IRFA. The RFA requires an agency to prepare a final
regulatory flexibility analysis unless the agency certifies that the
rule will not, if promulgated, have a significant economic impact on a
substantial number of small entities. Based on its analysis, and for
the reasons stated below, the Board certifies that the rule will not
have a significant economic impact on a substantial number of small
entities.\154\
---------------------------------------------------------------------------
\154\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
Under regulations issued by the Small Business Administration, a
small entity includes a bank, bank holding company, or savings and loan
holding company with assets of $600 million or less and trust companies
with total assets of $41.5 million or less (small banking
organization).\155\ As of June 30, 2019, there were approximately 2,976
small bank holding companies, 133 small savings and loan holding
companies, and 537 small SMBs.
---------------------------------------------------------------------------
\155\ See 13 CFR 121.201. Effective August 19, 2019, the SBA
revised the size standards for banking organizations to $600 million
in assets from $550 million in assets. 84 FR 34261 (July 18, 2019).
---------------------------------------------------------------------------
As discussed in the SUPPLEMENTARY INFORMATION section, the final
rule revises the capital rule to provide a new and more risk-sensitive
methodology for calculating the exposure amount for derivative
contracts. For purposes of
[[Page 4399]]
calculating advanced approaches total risk-weighted assets, an advanced
approaches Board-regulated institution may use either SA-CCR or the
internal models methodology. For purposes of calculating standardized
total risk-weighted assets, an advanced approaches Board-regulated
institution must use SA-CCR and a non-advanced approaches Board-
regulated institution may elect either SA-CCR or CEM.\156\ In addition,
for purposes of the denominator of the supplementary leverage ratio,
the final rule integrates SA-CCR into the calculation of the
denominator, replacing CEM.\157\
---------------------------------------------------------------------------
\156\ Advanced approaches banking organizations include
depository institutions, bank holding companies, savings and loan
holding companies, or intermediate holding companies subject to
Category I or Category II standards. See supra note 23.
\157\ In general, the Board's capital rule only applies to bank
holding companies and savings and loan holding companies that are
not subject to the Board's Small Bank Holding Company and Savings
and Loan Holding Company Policy Statement, which applies to bank
holding companies and savings and loan holding companies with less
than $3 billion in total assets that also meet certain additional
criteria. In addition, the agencies recently adopted a final rule to
implement a community bank leverage ratio framework that is
applicable, on an optional basis to depository institutions and
depository institution holding companies with less than $10 billion
in total consolidated assets and that meet certain other criteria.
Such banking organizations that opt into the community bank leverage
ratio framework will be deemed compliant with the capital rule's
generally applicable requirements and are not required to calculate
risk-based capital ratios. See supra note 3. Very few bank holding
companies and savings and loan holding companies that are small
entities would be impacted by the final rule because very few such
entities are subject to the Board's capital rule.
---------------------------------------------------------------------------
The Board does not expect that the final rule will result in a
material change in the level of capital maintained by small banking
organizations or in the compliance burden on small banking
organizations because the framework is optional for non-advanced
approaches banking organizations. To the extent that small banking
organizations elect to adopt SA-CCR because it provides advantageous
regulatory capital treatment of derivatives, any implementation costs
or increased compliance costs associated with SA-CCR should be
outweighed by the capital impact of SA-CCR. In any event, small banking
organizations generally do not have substantial portfolios of
derivative contracts and therefore any impact of SA-CCR on capital
requirements is expected to be minimal. For these reasons, the Board
does not expect the rule to have a significant economic impact on a
substantial number of small entities.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \158\ requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The agencies have sought
to present the final rule in a simple and straightforward manner, and
did not receive comment on the use of plain language.
---------------------------------------------------------------------------
\158\ See Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\159\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements on IDIs generally to take effect
on the first day of a calendar quarter that begins on or after the date
on which the regulations are published in final form.\160\
---------------------------------------------------------------------------
\159\ 12 U.S.C. 4802(a).
\160\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
In accordance with these provisions of RCDRIA, the agencies
considered any administrative burdens, as well as benefits, that the
final rule would place on depository institutions and their customers
in determining the effective date and administrative compliance
requirements of the final rule. In conjunction with the requirements of
RCDRIA, the final rule is effective on April 1, 2020.
E. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the proposed rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under
this analysis, the OCC considered whether the final rule includes a
Federal mandate that may result in the expenditure by State, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). The OCC has
determined that this final rule would not result in expenditures by
State, local, and Tribal governments, or the private sector, of $100
million or more in any one year. Accordingly, the OCC has not prepared
a written statement to accompany this proposal.
F. The Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\161\ If a rule is deemed a ``major rule'' by the OMB, the
Congressional Review Act generally provides that the rule may not take
effect until at least 60 days following its publication.\162\
---------------------------------------------------------------------------
\161\ 5 U.S.C. 801 et seq.
\162\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in--(A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\163\ As required by the Congressional Review Act, the
agencies will submit the final rule and other appropriate reports to
Congress and the Government Accountability Office for review.
---------------------------------------------------------------------------
\163\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Risk.
12 CFR Part 32
National banks, Reporting and recordkeeping requirements.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies.
12 CFR Part 324
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Savings associations, State non-member banks.
[[Page 4400]]
12 CFR Part 327
Bank deposit insurance, Banks, Banking, Savings associations.
Office of the Comptroller of the Currency
For the reasons set out in the joint preamble, the OCC amends 12
CFR parts 3 and 32 as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
0
2. Section 3.2 is amended by:
0
a. Adding the definitions of ``Basis derivative contract,'' ``Client-
facing derivative transaction,'' and ``Commercial end-user'' in
alphabetical order;
0
b. Revising the definitions of ``Current exposure'' and ``Current
exposure methodology;''
0
c. Revising paragraph (2) of the definition of ``Financial
collateral;''
0
d. Adding the definitions of ``Independent collateral,'' ``Minimum
transfer amount,'' and ``Net independent collateral amount'' in
alphabetical order;
0
e. Revising the definition of ``Netting set;'' and
0
f. Adding the definitions of ``Speculative grade,'' ``Sub-speculative
grade,'' ``Variation margin,'' ``Variation margin agreement,''
``Variation margin amount,'' ``Variation margin threshold,'' and
``Volatility derivative contract'' in alphabetical order.
The additions and revisions read as follows:
Sec. 3.2 Definitions.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: Interest rate, credit,
equity, or commodity.
* * * * *
Client-facing derivative transaction means a derivative contract
that is not a cleared transaction where the national bank or Federal
savings association is either acting as a financial intermediary and
enters into an offsetting transaction with a qualifying central
counterparty (QCCP) or where the national bank or Federal savings
association provides a guarantee on the performance of a client on a
transaction between the client and a QCCP.
* * * * *
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)).
* * * * *
Current exposure means, with respect to a netting set, the larger
of zero or the fair value of a transaction or portfolio of transactions
within the netting set that would be lost upon default of the
counterparty, assuming no recovery on the value of the transactions.
Current exposure methodology means the method of calculating the
exposure amount for over-the-counter derivative contracts in Sec.
3.34(b).
* * * * *
Financial collateral * * *
(2) In which the national bank and Federal savings association has
a perfected, first-priority security interest or, outside of the United
States, the legal equivalent thereof (with the exception of cash on
deposit; and notwithstanding the prior security interest of any
custodial agent or any priority security interest granted to a CCP in
connection with collateral posted to that CCP).
* * * * *
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which a national bank and Federal savings association has a perfected,
first-priority security interest or, outside of the United States, the
legal equivalent thereof (with the exception of cash on deposit;
notwithstanding the prior security interest of any custodial agent or
any prior security interest granted to a CCP in connection with
collateral posted to that CCP), and the amount of which does not change
directly in response to the value of the derivative contract or
contracts that the financial collateral secures.
* * * * *
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set
pursuant to the variation margin agreement.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 3.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to a national bank or Federal
savings association less the fair value amount of the independent
collateral, as adjusted by the standard supervisory haircuts under
Sec. 3.132(b)(2)(ii), as applicable, posted by the national bank or
Federal savings association to the counterparty, excluding such amounts
held in a bankruptcy remote manner or posted to a QCCP and held in
conformance with the operational requirements in Sec. 3.3.
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement.
For derivative contracts, netting set also includes a single derivative
contract between a national bank or Federal savings association and a
single counterparty. For purposes of the internal model methodology
under Sec. 3.132(d), netting set also includes a group of transactions
with a single counterparty that are subject to a qualifying cross-
product master netting agreement and does not include a transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the national bank or Federal savings association has
identified specific wrong-way risk.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic conditions, such that should economic conditions
deteriorate, the reference entity would present an elevated default
risk.
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely
[[Page 4401]]
would default on its financial commitments.
* * * * *
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 3.132(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to a national bank or Federal savings
association less the fair value amount of the variation margin, as
adjusted by the standard supervisory haircuts under Sec.
3.132(b)(2)(ii), as applicable, posted by the national bank or Federal
savings association to the counterparty.
Variation margin threshold means the amount of credit exposure of a
national bank or Federal savings association to its counterparty that,
if exceeded, would require the counterparty to post variation margin to
the national bank or Federal savings association pursuant to the
variation margin agreement.
Volatility derivative contract means a derivative contract in which
the payoff of the derivative contract explicitly depends on a measure
of the volatility of an underlying risk factor to the derivative
contract.
* * * * *
0
3. Section 3.10 is amended by revising paragraphs (c)(4)(ii)(A)
through (C) to read as follows:
Sec. 3.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value of all of the national bank or
Federal savings association's on-balance sheet assets, plus the value
of securities sold under a repurchase transaction or a securities
lending transaction that qualifies for sales treatment under U.S. GAAP,
less amounts deducted from tier 1 capital under Sec. 3.22(a), (c), and
(d), and less the value of securities received in security-for-security
repo-style transactions, where the national bank or Federal savings
association acts as a securities lender and includes the securities
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received, and, for a national bank or
Federal savings association that uses the standardized approach for
counterparty credit risk under Sec. 3.132(c) for its standardized
risk-weighted assets, less the fair value of any derivative contracts;
(B)(1) For a national bank or Federal savings association that uses
the current exposure methodology under Sec. 3.34(b) for its
standardized risk-weighted assets, the potential future credit exposure
(PFE) for each derivative contract or each single-product netting set
of derivative contracts (including a cleared transaction except as
provided in paragraph (c)(4)(ii)(I) of this section and, at the
discretion of the national bank or Federal savings association,
excluding a forward agreement treated as a derivative contract that is
part of a repurchase or reverse repurchase or a securities borrowing or
lending transaction that qualifies for sales treatment under U.S.
GAAP), to which the national bank or Federal savings association is a
counterparty as determined under Sec. 3.34, but without regard to
Sec. 3.34(b), provided that:
(i) A national bank or Federal savings association 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. 3.34, but without regard to Sec. 3.34(b), provided that it
does not adjust the net-to-gross ratio (NGR); and
(ii) A national bank or Federal savings association that chooses to
exclude the PFE of credit derivatives or other similar instruments
through which it provides credit protection pursuant to paragraph
(c)(4)(ii)(B)(1) of this section must do so consistently over time for
the calculation of the PFE for all such instruments; or
(2)(i) For a national bank or Federal savings association that uses
the standardized approach for counterparty credit risk under section
Sec. 3.132(c) for its standardized risk-weighted assets, the PFE for
each netting set to which the national bank or Federal savings
association is a counterparty (including cleared transactions except as
provided in paragraph (c)(4)(ii)(I) of this section and, at the
discretion of the national bank or Federal savings association,
excluding a forward agreement treated as a derivative contract that is
part of a repurchase or reverse repurchase or a securities borrowing or
lending transaction that qualifies for sales treatment under U.S.
GAAP), as determined under Sec. 3.132(c)(7)(i), in which the term C in
Sec. 3.132(c)(7)(i) equals zero except as provided in paragraph
(c)(4)(ii)(B)(2)(ii) of this section, and, for any counterparty that is
not a commercial end-user, multiplied by 1.4; and
(ii) For purposes of paragraph (c)(4)(ii)(B)(2)(i) of this section,
a national bank or Federal savings association may set the value of the
term C in Sec. 3.132(c)(7)(i) equal to the amount of collateral posted
by a clearing member client of the national bank or Federal savings
association, in connection with the client-facing derivative
transactions within the netting set;
(C)(1)(i) For a national bank or Federal savings association that
uses the current exposure methodology under Sec. 3.34(b) for its
standardized risk-weighted assets, the amount of cash collateral that
is received from a counterparty to a derivative contract and that has
offset the mark-to-fair value of the derivative asset, or cash
collateral that is posted to a counterparty to a derivative contract
and that has reduced the national bank or Federal savings association's
on-balance sheet assets, unless such cash collateral is all or part of
variation margin that satisfies the conditions in paragraphs
(c)(4)(ii)(C)(3) through (7) of this section; and
(ii) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
3.34(b), and not the PFE; and
(iii) For the purpose of the calculation of the NGR described in
Sec. 3.34(b)(2)(ii)(B), variation margin described in paragraph
(c)(4)(ii)(C)(1)(ii) of this section may not reduce the net current
credit exposure or the gross current credit exposure; or
(2)(i) For a national bank or Federal savings association that uses
the standardized approach for counterparty credit risk under Sec.
3.132(c) for its standardized risk-weighted assets, the replacement
cost of each derivative contract or single product netting set of
derivative contracts to which the national bank or Federal savings
association is a counterparty, calculated according to the following
formula, and, for any counterparty that is not a commercial end-user,
multiplied by 1.4:
Replacement Cost = max{V-CVMr + CVMp;0{time}
Where:
V equals the fair value for each derivative contract or each single-
product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (c)(4)(ii)(I) of this
section and, at the discretion of the national bank or Federal
savings association, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or
[[Page 4402]]
reverse repurchase or a securities borrowing or lending transaction
that qualifies for sales treatment under U.S. GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section, or, in the case of a client-facing derivative transaction,
the amount of collateral received from the clearing member client;
and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section, or, in the case of a client-facing derivative transaction,
the amount of collateral posted to the clearing member client;
(ii) Notwithstanding paragraph (c)(4)(ii)(C)(2)(i) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a national bank or Federal savings association must apply
the formula for replacement cost provided in Sec. 3.132(c)(10)(i), in
which the term CMA may only include cash collateral that
satisfies the conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of
this section; and
(iii) For purposes of paragraph (c)(4)(ii)(C)(2)(i), a national
bank or Federal savings association 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 national bank or
Federal savings association elected to treat the derivative contract as
multiple derivative contracts under Sec. 3.132(c)(5)(vi);
(3) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation, or an agreement with the counterparty);
(4) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(5) 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;
(6) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master netting
agreement, or in the governing rules for a cleared transaction; and
(7) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
* * * * *
0
4. Section 3.32 is amended by revising paragraph (f) to read as
follows:
Sec. 3.32 General risk weights.
* * * * *
(f) Corporate exposures. (1) A national bank or Federal savings
association must assign a 100 percent risk weight to all its corporate
exposures, except as provided in paragraph (f)(2) of this section.
(2) A national bank or Federal savings association must assign a 2
percent risk weight to an exposure to a QCCP arising from the national
bank or Federal savings association posting cash collateral to the QCCP
in connection with a cleared transaction that meets the requirements of
Sec. 3.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a
QCCP arising from the national bank or Federal savings association
posting cash collateral to the QCCP in connection with a cleared
transaction that meets the requirements of Sec. 3.35(b)(3)(i)(B).
(3) A national bank or Federal savings association must assign a 2
percent risk weight to an exposure to a QCCP arising from the national
bank or Federal savings association posting cash collateral to the QCCP
in connection with a cleared transaction that meets the requirements of
Sec. 3.35(c)(3)(i).
* * * * *
0
5. Section 3.34 is revised to read as follows:
Sec. 3.34 Derivative contracts.
(a) Exposure amount for derivative contracts--(1) National bank or
Federal savings association that is not an advanced approaches national
bank or Federal savings association. (i) A national bank or Federal
savings association that is not an advanced approaches national bank or
Federal savings association must use the current exposure methodology
(CEM) described in paragraph (b) of this section to calculate the
exposure amount for all its OTC derivative contracts, unless the
national bank or Federal savings association makes the election
provided in paragraph (a)(1)(ii) of this section.
(ii) A national bank or Federal savings association that is not an
advanced approaches national bank or Federal savings association may
elect to calculate the exposure amount for all its OTC derivative
contracts under the standardized approach for counterparty credit risk
(SA-CCR) in Sec. 3.132(c) by notifying the OCC, rather than
calculating the exposure amount for all its derivative contracts using
CEM. A national bank or Federal savings association that elects under
this paragraph (a)(1)(ii) to calculate the exposure amount for its OTC
derivative contracts under SA-CCR must apply the treatment of cleared
transactions under Sec. 3.133 to its derivative contracts that are
cleared transactions and to all default fund contributions associated
with such derivative contracts, rather than applying Sec. 3.35. A
national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association must use the
same methodology to calculate the exposure amount for all its
derivative contracts and, if a national bank or Federal savings
association has elected to use SA-CCR under this paragraph (a)(1)(ii),
the national bank or Federal savings association may change its
election only with prior approval of the OCC.
(2) Advanced approaches national bank or Federal savings
association. An advanced approaches national bank or Federal savings
association must calculate the exposure amount for all its derivative
contracts using SA-CCR in Sec. 3.132(c) for purposes of standardized
total risk-weighted assets. An advanced approaches national bank or
Federal savings association must apply the treatment of cleared
transactions under Sec. 3.133 to its derivative contracts that are
cleared transactions and to all default fund contributions associated
with such derivative contracts for purposes of standardized total risk-
weighted assets.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to
[[Page 4403]]
a qualifying master netting agreement is equal to the sum of the
national bank's or Federal savings association's current credit
exposure and potential future credit exposure (PFE) on the OTC
derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
this section.
(B) For purposes of calculating either the PFE under this paragraph
(b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this
section for exchange rate contracts and other similar contracts in
which the notional principal amount is equivalent to the cash flows,
notional principal amount is the net receipts to each party falling due
on each value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to this section, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A national bank or Federal savings association must use an OTC
derivative contract's effective notional principal amount (that is, the
apparent or stated notional principal amount multiplied by any
multiplier in the OTC derivative contract) rather than the apparent or
stated notional principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 1 to Sec. 3.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals (except Other
and gold reference reference gold)
asset) \3\ asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A national bank or Federal savings association must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative
whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A national bank or
Federal savings association must use the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x
Agross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the NGR,
the gross current credit exposure equals the sum of the positive
current credit exposures (as determined under paragraph (b)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) A national bank or Federal savings
association using CEM under paragraph (b) of this section may recognize
the credit risk mitigation benefits of financial collateral that
secures an OTC derivative contract or multiple OTC derivative contracts
subject to a qualifying master netting agreement (netting set) by using
the simple approach in Sec. 3.37(b).
(2) As an alternative to the simple approach, a national bank or
Federal savings association using CEM under paragraph (b) of this
section may recognize the credit risk mitigation benefits of financial
collateral that secures such a contract or netting set if the financial
collateral is marked-to-fair value on a daily basis and subject to a
daily margin maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 3.37(c). The national bank or
Federal savings association must substitute the exposure amount
calculated under paragraph (b)(1) or (2) of this section for [Sigma]E
in the equation in Sec. 3.37(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. A national bank or Federal savings association that
purchases a credit derivative that is recognized under Sec. 3.36 as a
credit risk mitigant for an exposure that is not a covered position
under subpart F of this part is not required to compute a separate
counterparty credit risk capital requirement under this subpart
provided that the national bank or Federal savings association does so
consistently for all such credit derivatives. The national bank or
Federal savings association must either include all or exclude all such
credit derivatives that are subject to a qualifying master netting
agreement from any measure used to determine counterparty credit risk
exposure to all relevant counterparties for risk-based capital
purposes.
(2) Protection providers. (i) A national bank or Federal savings
association that is the protection provider under a credit derivative
must treat the credit derivative as an exposure to the underlying
reference asset. The national bank or Federal savings association is
[[Page 4404]]
not required to compute a counterparty credit risk capital requirement
for the credit derivative under this subpart, provided that this
treatment is applied consistently for all such credit derivatives. The
national bank or Federal savings association must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes unless the national bank
or Federal savings association is treating the credit derivative as a
covered position under subpart F of this part, in which case the
national bank or Federal savings association must compute a
supplemental counterparty credit risk capital requirement under this
section.
(e) Counterparty credit risk for equity derivatives. (1) A national
bank or Federal savings association must treat an equity derivative
contract as an equity exposure and compute a risk-weighted asset amount
for the equity derivative contract under Sec. Sec. 3.51 through 3.53
(unless the national bank or Federal savings association is treating
the contract as a covered position under subpart F of this part).
(2) In addition, the national bank or Federal savings association
must also calculate a risk-based capital requirement for the
counterparty credit risk of an equity derivative contract under this
section if the national bank or Federal savings association is treating
the contract as a covered position under subpart F of this part.
(3) If the national bank or Federal savings association risk
weights the contract under the Simple Risk-Weight Approach (SRWA) in
Sec. 3.52, the national bank or Federal savings association may choose
not to hold risk-based capital against the counterparty credit risk of
the equity derivative contract, as long as it does so for all such
contracts. Where the equity derivative contracts are subject to a
qualified master netting agreement, a national bank or Federal savings
association using the SRWA must either include all or exclude all of
the contracts from any measure used to determine counterparty credit
risk exposure.
(f) Clearing member national bank's or Federal savings
association's exposure amount. The exposure amount of a clearing member
national bank or Federal savings association using CEM under paragraph
(b) of this section for a client-facing derivative transaction or
netting set of client-facing derivative transactions equals the
exposure amount calculated according to paragraph (b)(1) or (2) of this
section multiplied by the scaling factor of the square root of \1/2\
(which equals 0.707107). If the national bank or Federal savings
association determines that a longer period is appropriate, the
national bank or Federal savings association must use a larger scaling
factor to adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.012
Where H = the holding period greater than or equal to five days.
Additionally, the OCC may require the national bank or Federal
savings association to set a longer holding period if the OCC
determines that a longer period is appropriate due to the nature,
structure, or characteristics of the transaction or is commensurate
with the risks associated with the transaction.
0
6. Section 3.35 is amended by adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding paragraph (c)(3)(iii) to read as
follows:
Sec. 3.35 Cleared transactions.
(a) * * *
(3) Alternate requirements. Notwithstanding any other provision of
this section, an advanced approaches national bank or Federal savings
association or a national bank or Federal savings association that is
not an advanced approaches national bank or Federal savings association
and that has elected to use SA-CCR under Sec. 3.34(a)(1) must apply
Sec. 3.133 to its derivative contracts that are cleared transactions
rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other requirements in this section,
collateral posted by a clearing member client national bank or Federal
savings association that is held by a custodian (in its capacity as
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member national bank or Federal savings association
may apply a risk weight of zero percent to the trade exposure amount
for a cleared transaction with a CCP where the clearing member national
bank or Federal savings association is acting as a financial
intermediary on behalf of a clearing member client, the transaction
offsets another transaction that satisfies the requirements set forth
in Sec. 3.3(a), and the clearing member national bank or Federal
savings association is not obligated to reimburse the clearing member
client in the event of the CCP default.
* * * * *
0
7. Section 3.37 is amended by revising paragraphs (c)(3)(iii),
(c)(3)(iv)(A) and (C), (c)(4)(i)(B) introductory text, and
(c)(4)(i)(B)(1) to read as follows:
Sec. 3.37 Collateralized transactions.
* * * * *
(c) * * *
(3) * * *
(iii) For repo-style transactions and client-facing derivative
transactions, a national bank or Federal savings association may
multiply the standard supervisory haircuts provided in paragraphs
(c)(3)(i) and (ii) of this section by the square root of \1/2\ (which
equals 0.707107). For client-facing derivative transactions, if a
larger scaling factor is applied under Sec. 3.34(f), the same factor
must be used to adjust the supervisory haircuts.
(iv) * * *
(A) 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;
* * * * *
(C) 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.
* * * * *
(4) * * *
(i) * * *
(B) The minimum holding period for a repo-style transaction and
client-facing derivative transaction is five business days and for an
eligible margin loan and a derivative contract other than a client-
facing derivative transaction is ten business days except for
transactions or netting sets for which paragraph (c)(4)(i)(C) of this
section applies. When a national bank or Federal savings association
calculates an own-estimates haircut on a TN-day holding
period, which is different from the minimum holding period for the
transaction type, the applicable haircut
[[Page 4405]]
(HM) is calculated using the following square root of time
formula:
* * * * *
(1) TM equals 5 for repo-style transactions and client-
facing derivative transactions and 10 for eligible margin loans and
derivative contracts other than client-facing derivative transactions;
* * * * *
Sec. Sec. 3.134, 3.202, and 3.210 [Amended]
0
8. For each section listed in the following table, the footnote number
listed in the ``Old footnote number'' column is redesignated as the
footnote number listed in the ``New footnote number'' column as
follows:
------------------------------------------------------------------------
Old footnote New footnote
Section number number
------------------------------------------------------------------------
3.134(d)(3)............................. 30 31
3.202, paragraph (1) introductory text 31 32
of the definition of ``Covered
position''.............................
3.202, paragraph (1)(i) of the 32 33
definition of ``Covered position''.....
3.210(e)(1)............................. 33 34
------------------------------------------------------------------------
0
9. Section 3.132 is amended by:
0
a. Revising paragraphs (b)(2)(ii)(A)(3) through (5);
0
b. Adding paragraphs (b)(2)(ii)(A)(6) and (7);
0
c. Revising paragraphs (c) heading and (c)(1) and (2) and (5) through
(8);
0
d. Adding paragraphs (c)(9) through (11);
0
e. Revising paragraph (d)(10)(i);
0
f. In paragraphs (e)(5)(i)(A) and (H), removing ``Table 3 to Sec.
3.132'' and adding in its place ``Table 4 to this section'';
0
g. In paragraphs (e)(5)(i)(C) and (e)(6)(i)(B), removing ``current
exposure methodology'' and adding in its place ``standardized approach
for counterparty credit risk methodology'' wherever it appears;
0
h. Redesignating Table 3 to Sec. 3.132 following paragraph (e)(5)(ii)
as Table 4 to Sec. 3.132; and
0
i. Revising paragraph (e)(6)(viii).
The revisions and additions read as follows:
Sec. 3.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and client-facing derivative
transactions, a national bank or Federal savings association may
multiply the supervisory haircuts provided in paragraphs
(b)(2)(ii)(A)(1) and (2) of this section by the square root of \1/2\
(which equals 0.707107). If the national bank or Federal savings
association 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)(A)(6) of this section.
(4) A national bank or Federal savings association must adjust the
supervisory haircuts upward on the basis of a holding period longer
than ten business days (for eligible margin loans) or five business
days (for repo-style transactions), using the formula provided in
paragraph (b)(2)(ii)(A)(6) of this section where the conditions in this
paragraph (b)(2)(ii)(A)(4) apply. If the number of trades in a netting
set exceeds 5,000 at any time during a quarter, a national bank or
Federal savings association must adjust the supervisory haircuts upward
on the basis of a minimum holding period of twenty business days for
the following quarter (except when a national bank or Federal savings
association is calculating EAD for a cleared transaction under Sec.
3.133). If a netting set contains one or more trades involving illiquid
collateral, a national bank or Federal savings association must adjust
the supervisory haircuts upward on the basis of a 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 national bank or Federal
savings association 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.
(5)(i) A national bank or Federal savings association must adjust
the supervisory haircuts upward on the basis of a holding period longer
than ten business days for collateral associated with derivative
contracts (five business days for client-facing derivative contracts)
using the formula provided in paragraph (b)(2)(ii)(A)(6) of this
section where the conditions in this paragraph (b)(2)(ii)(A)(5)(i)
apply. For collateral associated with a derivative contract that is
within a netting set that is composed of more than 5,000 derivative
contracts that are not cleared transactions, a national bank or Federal
savings association must use a 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, a national bank or Federal savings association must use a
minimum holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or
(b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a
derivative contract in a netting set under which more than two margin
disputes that lasted longer than the holding period occurred during the
previous two quarters, the minimum holding period is twice the amount
provided under paragraph (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section.
(6) A national bank or Federal savings association must adjust the
standard supervisory haircuts upward, pursuant to the adjustments
provided in paragraphs (b)(2)(ii)(A)(3) through (5) of this section,
using the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.013
Where:
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
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.
(7) If the instrument a national bank or Federal savings
association has lent, sold subject to repurchase, or posted as
collateral does not meet the definition of
[[Page 4406]]
financial collateral, the national bank or Federal savings association
must use a 25.0 percent haircut for market price volatility
(HS).
* * * * *
(c) EAD for derivative contracts--(1) Options for determining EAD.
A national bank or Federal savings association must determine the EAD
for a derivative contract using the standardized approach for
counterparty credit risk (SA-CCR) under paragraph (c)(5) of this
section or using the internal models methodology described in paragraph
(d) of this section. If a national bank or Federal savings association
elects to use SA-CCR for one or more derivative contracts, the exposure
amount determined under SA-CCR is the EAD for the derivative contract
or derivative contracts. A national bank or Federal savings association
must use the same methodology to calculate the exposure amount for all
its derivative contracts and may change its election only with prior
approval of the OCC. A national bank or Federal savings association may
reduce the EAD calculated according to paragraph (c)(5) of this section
by the credit valuation adjustment that the national bank or Federal
savings association 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 national bank's or Federal savings association'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) of this
section, the following definitions apply:
(i) End date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument,
except as otherwise provided in paragraph (c) of this section.
(ii) Start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument, except as otherwise provided in paragraph (c) of this
section.
(iii) Hedging set means:
(A) With respect to interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity categories: Energy, metal, agricultural, or other
commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, the OCC may require a national bank or Federal savings
association to include the derivative contract in each appropriate
hedging set under paragraphs (c)(2)(iii)(A) through (E) of this
section.
* * * * *
(5) Exposure amount. (i) The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section.
(ii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set
calculated under paragraph (c)(5)(i) of this section and the exposure
amount of the netting set calculated as if the netting set were not
subject to a variation margin agreement.
(iii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set that consists of
only sold options in which the premiums have been fully paid by the
counterparty to the options and where the options are not subject to a
variation margin agreement is zero.
(iv) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set in which the
counterparty is a commercial end-user is equal to the sum of
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, a national bank or Federal savings association may
elect, at the netting set level, 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 a national bank or Federal
savings association 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, a national bank or Federal savings association 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
[[Page 4407]]
variation margin amount applicable to such derivative contracts;
(B) The sum of the variation margin threshold and the minimum
transfer amount applicable to the derivative contracts within the
netting set less the net independent collateral amount applicable to
such derivative contracts; or
(C) Zero.
(ii) Netting sets not subject to a variation margin agreement under
which the counterparty must post variation margin. The replacement cost
of a netting set that is not subject to a variation margin agreement
under which the counterparty must post variation margin to the national
bank or Federal savings association is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the 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] TR24JA20.014
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the potential future exposure for purposes
of total leverage exposure under Sec. 3.10(c)(4)(ii)(B), the potential
future exposure for multiple netting sets subject to a single variation
margin agreement must be calculated according to paragraph (c)(10)(ii)
of this section.
(iv) 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 total leverage exposure under Sec. 3.10(c)(4)(ii)(B), the
potential future exposure for a netting set subject to multiple
variation margin agreements or a hybrid netting set must be calculated
according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, a national bank or Federal savings association
may use either of the formulas provided in paragraphs (c)(8)(i)(A) and
(B) of this section:
(A) Formula 1 is as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.015
(B) Formula 2 is as follows:
Hedging set amount = [bond]AddOnTB1IR[bond] +
[bond]AddOnTB2IR[bond] + [bond]AddOnTB3IR[bond].
Where in paragraphs (c)(8)(i)(A) and (B) of this section:
AddOnTB1IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section,
within the hedging set with an end date of less than one year from
the present date;
AddOnTB2IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section,
within the hedging set with an end date of one to five years from
the present date; and
AddOnTB3IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section,
within the hedging set with an end date of more than five years from
the present date.
(ii) Exchange rate derivative contracts. For an exchange rate
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:
[[Page 4408]]
[GRAPHIC] [TIFF OMITTED] TR24JA20.016
Where:
k is each reference entity within the hedging set.
K is the number of reference entities within the hedging set.
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference entity k.
[rho]k equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.017
Where:
k is each commodity type within the hedging set.
K is the number of commodity types within the hedging set.
AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference commodity type k.
[rho] equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a
national bank or Federal savings association must calculate a separate
hedging set amount for each basis derivative contract hedging set and
each volatility derivative contract hedging set. A national bank or
Federal savings association must calculate such hedging set amounts
using one of the formulas under paragraphs (c)(8)(i) through (iv) of
this section that corresponds to the primary risk factor of the hedging
set being calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, a
national bank or Federal savings association must determine the
adjusted notional amount of derivative contract, pursuant to paragraph
(c)(9)(ii) of this section, and multiply the adjusted notional amount
by each of the supervisory delta adjustment, pursuant to paragraph
(c)(9)(iii) of this section, the maturity factor, pursuant to paragraph
(c)(9)(iv) of this section, and the applicable supervisory factor, as
provided in Table 2 to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.018
Where:
S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
E is the number of business days from the present day until the end
date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount is equal
to the time-weighted average of the contractual notional amounts of
such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a factor
and all rates of the derivative contract are multiplied by the same
factor, the notional amount is equal to the notional amount of an
equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. If both legs of
the exchange rate derivative contract are denominated in currencies
other than U.S. dollars, the adjusted notional amount of the derivative
contract is the largest leg of the derivative contract, as measured in
U.S. dollars using the exchange rate on the date of the calculation.
(2) Notwithstanding paragraph (c)(9)(ii)(B)(1) of this section, for
an exchange rate derivative contract with multiple exchanges of
principal, the national bank or Federal savings
[[Page 4409]]
association must set the adjusted notional amount of the derivative
contract equal to the notional amount of the derivative contract
multiplied by the number of exchanges of principal under the derivative
contract.
(C)(1) For an equity derivative contract or a commodity derivative
contract, the adjusted notional amount is the product of the fair value
of one unit of the reference instrument underlying the derivative
contract and the number of such units referenced by the derivative
contract.
(2) Notwithstanding paragraph (c)(9)(ii)(C)(1) of this section,
when calculating the adjusted notional amount for an equity derivative
contract or a commodity derivative contract that is a volatility
derivative contract, the national bank or Federal savings association
must replace the unit price with the underlying volatility referenced
by the volatility derivative contract and replace the number of units
with the notional amount of the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract
that is not an option contract or collateralized debt obligation
tranche, the supervisory delta adjustment is 1 if the fair value of the
derivative contract increases when the value of the primary risk factor
increases and -1 if the fair value of the derivative contract decreases
when the value of the primary risk factor increases.
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following formulas,
as applicable:
[GRAPHIC] [TIFF OMITTED] TR24JA20.019
(2) As used in the formulas in Table 2 to this section:
(i) [Phi] is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) [lgr] equals zero for all derivative contracts except interest
rate options for the currencies where interest rates have negative
values. The same value of [lgr] must be used for all interest rate
options that are denominated in the same currency. To determine the
value of [lgr] for a given currency, a national bank or Federal savings
association must find the lowest value L of P and K of all interest
rate options in a given currency that the national bank or Federal
savings association has with all counterparties. Then, [lgr] is set
according to this formula: [lgr] = max{-L + 0.1%, 0{time} ; and
(vi) [sigma] equals the supervisory option volatility, as provided
in Table 3 to of this section.
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined by
the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.020
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this
section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated to
the national bank's or Federal savings association's exposure to the
total notional amount of all underlying exposures, expressed as a
decimal value between zero and one; \30\
---------------------------------------------------------------------------
\30\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the national
bank's or Federal savings association's exposure. In the case of a
second-or-subsequent-to-default credit derivative, the smallest (n-
1) notional amounts of the underlying exposures are subordinated to
the national bank's or Federal savings association's exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio of
the notional amounts of all underlying exposures that are senior to the
national bank's or Federal savings association's exposure to the total
notional amount of all underlying exposures, expressed as a decimal
value between zero and one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the
national bank or Federal savings association and is designated with a
negative sign if the collateralized debt obligation tranche was sold by
the national bank or Federal savings association.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract
[[Page 4410]]
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] TR24JA20.021
Where MPOR refers to the period from the most recent exchange of
collateral covering a netting set of derivative contracts with a
defaulting counterparty until the derivative contracts are closed out
and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a 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, MPOR cannot be less than five business days plus the
periodicity of re-margining expressed in business days minus one
business day; and
(iii) For a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, 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 two or more outstanding disputes
over margin that lasted longer than the MPOR over the previous two
quarters, the applicable floor is twice the amount provided in
(c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts under
which the counterparty is not required to post variation margin, is
determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.022
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 a
national bank or Federal savings association 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
national bank or Federal savings association 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.
A national bank or Federal savings association must separate a
derivative contract into separate derivative contracts, according to
the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must be
treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must be
represented as the combination of one bought European option and one
sold European option of the same type as the original option (put or
call) with the strikes set equal to 0.95 * K and 1.05 * K so that the
payoff of the binary option is reproduced exactly outside the region
between the two strikes. The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold options is capped at
the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), a national bank or
Federal savings association 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), a national bank or
Federal savings association may represent each payment option as a
combination of effective single-payment options (such as interest rate
caplets and floorlets).
(D) A national bank or Federal savings association 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, a national bank or Federal savings association
shall assign a single replacement cost to multiple netting sets that
are subject to a single variation margin agreement under which the
counterparty must post variation margin, calculated according to the
following formula:
Replacement Cost = max{[Sigma]NS max{VNS; 0{time} - max{CMA; 0{time} ;
0{time} + max{[Sigma]NS min{VNS; 0{time} - min{CMA; 0{time} ;
0{time}
Where:
NS is each netting set subject to the variation margin agreement MA.
VNS is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set NS.
CMA is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting sets subject to the single variation margin
agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, a national bank or Federal savings
association shall assign a single potential future exposure to multiple
netting sets that are subject to a single variation margin agreement
under which the counterparty must post variation margin equal to the
sum of the potential future exposure of each such netting set, each
calculated according to paragraph (c)(7) of this section as if such
nettings sets were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(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
[[Page 4411]]
must post variation margin and at least one derivative contract that is
not subject to such a variation margin agreement, a national bank or
Federal savings association must divide the netting set into sub-
netting sets (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 3 to Sec. 3.132--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 N/A............ 100 50 1.3
grade.
Sub-speculative N/A............ 100 50 6.0
grade.
Credit, index................ Investment Grade N/A............ 80 80 0.38
Speculative N/A............ 80 80 1.06
Grade.
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 3, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this Table 3.
(d) * * *
(10) * * *
(i) With prior written approval of the OCC, a national bank or
Federal savings association may set EAD equal to a measure of
counterparty credit risk exposure, such as peak EAD, that is more
conservative than an alpha of 1.4 times the larger of
EPEunstressed and EPEstressed for every
counterparty whose EAD will be measured under the alternative measure
of counterparty exposure. The national bank or Federal savings
association must demonstrate the conservatism of the measure of
counterparty credit risk exposure used for EAD. With respect to
paragraph (d)(10)(i) of this section:
(A) For material portfolios of new OTC derivative products, the
national bank or Federal savings association may assume that the
standardized approach for counterparty credit risk pursuant to
paragraph (c) of this section meets the conservatism requirement of
this section for a period not to exceed 180 days.
(B) For immaterial portfolios of OTC derivative contracts, the
national bank or Federal savings association generally may assume that
the standardized approach for counterparty credit risk pursuant to
paragraph (c) of this section meets the conservatism requirement of
this section.
* * * * *
(e) * * *
(6) * * *
(viii) If a national bank or Federal savings association uses the
standardized approach for counterparty credit risk pursuant to
paragraph (c) of this section to calculate the EAD for any immaterial
portfolios of OTC derivative contracts, the national bank or Federal
savings association must use that EAD as a constant EE in the formula
for the calculation of CVA with the maturity equal to the maximum of:
(A) Half of the longest maturity of a transaction in the netting
set; and
(B) The notional weighted average maturity of all transactions in
the netting set.
10. Section 3.133 is amended by revising paragraphs (a), (b)(1)
through (3), (b)(4)(i), (c)(1) thorough (3), (c)(4)(i), and (d) to read
as follows:
Sec. 3.133 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A national
bank or Federal savings association that is a clearing member client
must use the methodologies described in paragraph (b) of this section
to calculate risk-weighted assets for a cleared transaction.
(2) Clearing members. A national bank or Federal savings
association that is a clearing member must use the methodologies
described in paragraph (c) of this section to calculate its risk-
weighted assets for a cleared transaction and paragraph (d) of this
section to calculate its risk-weighted assets for its default fund
contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a national
bank or Federal savings association that is a clearing member client
must multiply the trade exposure amount for the cleared transaction,
calculated in accordance with paragraph (b)(2) of this section, by the
risk weight appropriate for the
[[Page 4412]]
cleared transaction, determined in accordance with paragraph (b)(3) of
this section.
(ii) A clearing member client national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is
the sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or a netting set of derivative contracts, trade
exposure amount equals the EAD for the derivative contract or netting
set of derivative contracts calculated using the methodology used to
calculate EAD for derivative contracts set forth in Sec. 3.132(c) or
(d), plus the fair value of the collateral posted by the clearing
member client national bank or Federal savings association and held by
the CCP or a clearing member in a manner that is not bankruptcy remote.
When the national bank or Federal savings association calculates EAD
for the cleared transaction using the methodology in Sec. 3.132(d),
EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 3.132(b)(2) or (3) or (d), plus the fair value of
the collateral posted by the clearing member client national bank or
Federal savings association and held by the CCP or a clearing member in
a manner that is not bankruptcy remote. When the national bank or
Federal savings association calculates EAD for the cleared transaction
under Sec. 3.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client national bank or Federal savings
association must apply a risk weight of:
(A) 2 percent if the collateral posted by the national bank or
Federal savings association to the QCCP or clearing member is subject
to an arrangement that prevents any loss to the clearing member client
national bank or Federal savings association due to the joint default
or a concurrent insolvency, liquidation, or receivership proceeding of
the clearing member and any other clearing member clients of the
clearing member; and the clearing member client national bank or
Federal savings association has conducted sufficient legal review to
conclude with a well-founded basis (and maintains sufficient written
documentation of that legal review) that in the event of a legal
challenge (including one resulting from an event of default or from
liquidation, insolvency, or receivership proceedings) the relevant
court and administrative authorities would find the arrangements to be
legal, valid, binding, and enforceable under the law of the relevant
jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client national bank or Federal savings association
must apply the risk weight applicable to the CCP under subpart D of
this part.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client national bank or Federal
savings association that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a clearing
member national bank or Federal savings association must multiply the
trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (c)(2) of this section by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (c)(3) of this section.
(ii) A clearing member national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is
the sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. A clearing member national bank or
Federal savings association must calculate its trade exposure amount
for a cleared transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 3.132(c) or (d), plus the fair
value of the collateral posted by the clearing member national bank or
Federal savings association and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member national bank or Federal
savings association calculates EAD for the cleared transaction using
the methodology in Sec. 3.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 3.132(b)(2) or (3) or (d), plus the fair
value of the collateral posted by the clearing member national bank or
Federal savings association and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member national bank or Federal
savings association calculates EAD for the cleared transaction under
Sec. 3.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member
national bank or Federal savings association must apply a risk weight
of 2 percent to the trade exposure amount for a cleared transaction
with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member national bank or Federal savings association must apply
the risk weight applicable to the CCP according to subpart D of this
part.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member national bank or Federal savings association
may apply a risk weight of zero percent to the trade exposure amount
for a cleared transaction with a QCCP where the clearing member
national bank or Federal savings association is acting as a financial
intermediary on behalf of a clearing member client, the transaction
offsets another transaction that satisfies the requirements set forth
in Sec. 3.3(a), and the clearing member national bank or Federal
savings association is not obligated to reimburse the clearing member
client in the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member national bank or Federal savings
association that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(d) Default fund contributions--(1) General requirement. A clearing
member national bank or Federal savings association must determine the
risk-weighted asset amount for a default fund contribution to a CCP at
least quarterly, or more frequently if, in the opinion of the national
bank or Federal savings association or the OCC, there is a material
change in the financial condition of the CCP.
[[Page 4413]]
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member national bank's or Federal
savings association's risk-weighted asset amount for default fund
contributions to CCPs that are not QCCPs equals the sum of such default
fund contributions multiplied by 1,250 percent, or an amount determined
by the OCC, based on factors such as size, structure, and membership
characteristics of the CCP and riskiness of its transactions, in cases
where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member national bank's or Federal savings
association's risk-weighted asset amount for default fund contributions
to QCCPs equals the sum of its capital requirement, KCM for
each QCCP, as calculated under the methodology set forth in paragraph
(d)(4) of this section, multiplied by 12.5.
(4) Capital requirement for default fund contributions to a QCCP. A
clearing member national bank's or Federal savings association's
capital requirement for its default fund contribution to a QCCP
(KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TR24JA20.023
Where:
KCCP is the hypothetical capital requirement of the QCCP, as
determined under paragraph (d)(5) of this section;
DFpref is the prefunded default fund contribution of the clearing
member national bank or Federal savings association to the QCCP;
DFCCP is the QCCP's own prefunded amounts that are contributed to
the default waterfall and are junior or pari passu with prefunded
default fund contributions of clearing members of the CCP; and
DFCMpref 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, a national bank or Federal savings
association must rely on such disclosed figure instead of calculating
KCCP under this paragraph (d)(5), unless the national bank
or Federal savings association determines that a more conservative
figure is appropriate based on the nature, structure, or
characteristics of the QCCP. The hypothetical capital requirement of a
QCCP (KCCP), as determined by the national bank or Federal savings
association, is equal to:
KCCP = [Sigma]CMi EADi * 1.6 percent
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of the QCCP to
the QCCP, as determined under paragraph (d)(6) of this section.
(6) EAD of a clearing member national bank or Federal savings
association to a QCCP. (i) The EAD of a clearing member national bank
or Federal savings association to a QCCP is equal to the sum of the EAD
for derivative contracts determined under paragraph (d)(6)(ii) of this
section and the EAD for repo-style transactions determined under
paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the national
bank or Federal savings association and the CCP that are cleared
transactions and any guarantees that the national bank or Federal
savings association has provided to the CCP with respect to performance
of a clearing member client on a derivative contract, the EAD is equal
to the exposure amount for all such derivative contracts and guarantees
of derivative contracts calculated under SA-CCR in Sec. 3.132(c) (or,
with respect to a CCP 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.
3.132(c)(9)(iv); less the value of all collateral held by the CCP
posted by the clearing member national bank or Federal savings
association or a clearing member client of the national bank or Federal
savings association in connection with a derivative contract for which
the national bank or Federal savings association has provided a
guarantee to the CCP and the amount of the prefunded default fund
contribution of the national bank or Federal savings association to the
CCP.
(iii) With respect to any repo-style transactions between the
national bank or Federal savings association and the CCP that are
cleared transactions, EAD is equal to:
EAD = max{EBRM - IM - DF; 0{time}
Where:
EBRM is the sum of the exposure amounts of each repo-style
transaction between the national bank or Federal savings association
and the CCP as determined under Sec. 3.132(b)(2) and without
recognition of any collateral securing the repo-style transactions;
IM is the initial margin collateral posted by the national bank or
Federal savings association to the CCP with respect to the repo-
style transactions; and
DF is the prefunded default fund contribution of the national bank
or Federal savings association to the CCP 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. 3.132(b) for repo-style
transactions and to Sec. 3.132(c)(5) for derivative contracts.
(vi) Notwithstanding any other provision of paragraph (d) of this
section, with the prior approval of the OCC, a national bank or Federal
savings association may determine the risk-weighted asset amount for a
default fund contribution to a QCCP according to Sec. 3.35(d)(3)(ii).
0
10. Section 3.173 is amended in Table 13 to Sec. 3.173 by revising
line 4 under Part 2, Derivative exposures, to read as follows:
[[Page 4414]]
Sec. 3.173 Disclosures by certain advanced approaches national banks
or Federal savings associations and Category III national banks or
Federal savings associations.
* * * * *
Table 13 to Sec. 3.173--Supplementary Leverage Ratio
----------------------------------------------------------------------------------------------------------------
Dollar amounts in thousands
---------------------------------------------------
Tril Bil Mil Thou
----------------------------------------------------------------------------------------------------------------
* * * * * * *
----------------------------------------------------------------------------------------------------------------
Part 2: Supplementary leverage ratio
----------------------------------------------------------------------------------------------------------------
* * * * * * *
----------------------------------------------------------------------------------------------------------------
Derivative exposures
----------------------------------------------------------------------------------------------------------------
* * * * * * *
4 Current exposure for derivative exposures (that is, net of
cash variation margin).....................................
* * * * * * *
----------------------------------------------------------------------------------------------------------------
0
11. Section 3.300 is amended by adding paragraphs (g) and (h) to read
as follows:
Sec. 3.300 Transitions.
* * * * *
(g) SA-CCR. An advanced approaches national bank or Federal savings
association may use CEM rather than SA-CCR for purposes of Sec. Sec.
3.34(a) and 3.132(c) until January 1, 2022. An advanced approaches
national bank or Federal savings association must provide prior notice
to the OCC if it decides to begin using SA-CCR before January 1, 2022.
On January 1, 2022, and thereafter, an advanced approaches national
bank or Federal savings association must use SA-CCR for purposes of
Sec. Sec. 3.34(a), 3.132(c), and 3.133(d). Once an advanced approaches
national bank or Federal savings association has begun to use SA-CCR,
the advanced approaches national bank or Federal savings association
may not change to use CEM.
(h) Default fund contributions. Prior to January 1, 2022, a
national bank or Federal savings association that calculates the
exposure amounts of its derivative contracts under the standardized
approach for counterparty credit risk in Sec. 3.132(c) may calculate
the risk-weighted asset amount for a default fund contribution to a
QCCP under either method 1 under Sec. 3.35(d)(3)(i) or method 2 under
Sec. 3.35(d)(3)(ii), rather than under Sec. 3.133(d).
PART 32--LENDING LIMITS
0
12. The authority citation for part 32 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463,
1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h.
0
13. Section 32.9 is amended by revising paragraph (b)(1)(iii) and
adding paragraph (b)(1)(iv) to read as follows:
Sec. 32.9 Credit exposure arising from derivative and securities
financing transactions.
* * * * *
(b) * * *
(1) * * *
(iii) Current Exposure Method. The credit exposure arising from a
derivative transaction (other than a credit derivative transaction)
under the Current Exposure Method shall be calculated pursuant to 12
CFR 3.34(b)(1) and (2) and (c) or 324.34(b)(1) and (2) and (c), as
appropriate.
(iv) Standardized Approach for Counterparty Credit Risk Method. The
credit exposure arising from a derivative transaction (other than a
credit derivative transaction) under the Standardized Approach for
Counterparty Credit Risk Method shall be calculated pursuant to 12 CFR
3.132(c)(5) or 324.132(c)(5), as appropriate.
* * * * *
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is amended as set forth below:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
14. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371, and 5371 note.
0
15. Section 217.2 is amended by:
0
a. Adding the definitions of ``Basis derivative contract,'' ``Client-
facing derivative transaction,'' and ``Commercial end-user'' in
alphabetical order;
0
b. Revising the definitions of ``Current exposure'' and ``Current
exposure methodology;''
0
c. Revising paragraph (2) of the definition of ``Financial
collateral;''
0
d. Adding the definitions of ``Independent collateral,'' ``Minimum
transfer amount,'' and ``Net independent collateral amount'' in
alphabetical order;
0
e. Revising the definition of ``Netting set;'' and
[[Page 4415]]
0
f. Adding the definitions of ``Speculative grade,'' ``Sub-speculative
grade,'' ``Variation margin,'' ``Variation margin agreement,''
``Variation margin amount,'' ``Variation margin threshold,'' and
``Volatility derivative contract'' in alphabetical order.
The additions and revisions read as follows:
Sec. 217.2 Definitions.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: Interest rate, credit,
equity, or commodity.
* * * * *
Client-facing derivative transaction means a derivative contract
that is not a cleared transaction where the Board-regulated institution
is either acting as a financial intermediary and enters into an
offsetting transaction with a qualifying central counterparty (QCCP) or
where the Board-regulated institution provides a guarantee on the
performance of a client on a transaction between the client and a QCCP.
* * * * *
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)).
* * * * *
Current exposure means, with respect to a netting set, the larger
of zero or the fair value of a transaction or portfolio of transactions
within the netting set that would be lost upon default of the
counterparty, assuming no recovery on the value of the transactions.
Current exposure methodology means the method of calculating the
exposure amount for over-the-counter derivative contracts in Sec.
217.34(b).
* * * * *
Financial collateral * * *
(2) In which the Board-regulated institution has a perfected,
first-priority security interest or, outside of the United States, the
legal equivalent thereof, (with the exception of cash on deposit; and
notwithstanding the prior security interest of any custodial agent or
any priority security interest granted to a CCP in connection with
collateral posted to that CCP).
* * * * *
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which a Board-regulated institution has a perfected, first-priority
security interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on deposit;
notwithstanding the prior security interest of any custodial agent or
any prior security interest granted to a CCP in connection with
collateral posted to that CCP), and the amount of which does not change
directly in response to the value of the derivative contract or
contracts that the financial collateral secures.
* * * * *
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set
pursuant to the variation margin agreement.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 217.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to a Board-regulated
institution less the fair value amount of the independent collateral,
as adjusted by the standard supervisory haircuts under Sec.
217.132(b)(2)(ii), as applicable, posted by the Board-regulated
institution to the counterparty, excluding such amounts held in a
bankruptcy remote manner or posted to a QCCP and held in conformance
with the operational requirements in Sec. 217.3.
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement.
For derivative contracts, netting set also includes a single derivative
contract between a Board-regulated institution and a single
counterparty. For purposes of the internal model methodology under
Sec. 217.132(d), netting set also includes a group of transactions
with a single counterparty that are subject to a qualifying cross-
product master netting agreement and does not include a transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the Board-regulated institution has identified specific
wrong-way risk.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic conditions, such that should economic conditions
deteriorate, the reference entity would present an elevated default
risk.
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely would default on its financial commitments.
* * * * *
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 217.132(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to a Board-regulated institution less the fair
value amount of the variation margin, as adjusted by the standard
supervisory haircuts under Sec. 217.132(b)(2)(ii), as applicable,
posted by the Board-regulated institution to the counterparty.
Variation margin threshold means the amount of credit exposure of a
Board-regulated institution to its counterparty that, if exceeded,
would require the counterparty to post variation margin to the Board-
regulated institution pursuant to the variation margin agreement.
Volatility derivative contract means a derivative contract in which
the payoff
[[Page 4416]]
of the derivative contract explicitly depends on a measure of the
volatility of an underlying risk factor to the derivative contract.
* * * * *
0
16. Section 217.10 is amended by revising paragraphs (c)(4)(ii)(A)
through (C) to read as follows:
Sec. 217.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value of all of the Board-regulated
institution's on-balance sheet assets, plus the value of securities
sold under a repurchase transaction or a securities lending transaction
that qualifies for sales treatment under U.S. GAAP, less amounts
deducted from tier 1 capital under Sec. 217.22(a), (c), and (d), and
less the value of securities received in security-for-security repo-
style transactions, where the Board-regulated institution acts as a
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities
received, and, for a Board-regulated institution that uses the
standardized approach for counterparty credit risk under Sec.
217.132(c) for its standardized risk-weighted assets, less the fair
value of any derivative contracts;
(B)(1) For a Board-regulated institution that uses the current
exposure methodology under Sec. 217.34(b) for its standardized risk-
weighted assets, the potential future credit exposure (PFE) for each
derivative contract or each single-product netting set of derivative
contracts (including a cleared transaction except as provided in
paragraph (c)(4)(ii)(I) of this section and, at the discretion of the
Board-regulated institution, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse repurchase
or a securities borrowing or lending transaction that qualifies for
sales treatment under U.S. GAAP), to which the Board-regulated
institution is a counterparty as determined under Sec. 217.34, but
without regard to Sec. 217.34(b), provided that:
(i) A Board-regulated institution 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. 217.34,
but without regard to Sec. 217.34(b), provided that it does not adjust
the net-to-gross ratio (NGR); and
(ii) A Board-regulated institution that chooses to exclude the PFE
of credit derivatives or other similar instruments through which it
provides credit protection pursuant to paragraph (c)(4)(ii)(B)(1) of
this section must do so consistently over time for the calculation of
the PFE for all such instruments; or
(2)(i) For a Board-regulated institution that uses the standardized
approach for counterparty credit risk under section Sec. 217.132(c)
for its standardized risk-weighted assets, the PFE for each netting set
to which the Board-regulated institution is a counterparty (including
cleared transactions except as provided in paragraph (c)(4)(ii)(I) of
this section and, at the discretion of the Board-regulated institution,
excluding a forward agreement treated as a derivative contract that is
part of a repurchase or reverse repurchase or a securities borrowing or
lending transaction that qualifies for sales treatment under U.S.
GAAP), as determined under Sec. 217.132(c)(7), in which the term C in
Sec. 217.132(c)(7)(i) equals zero except as provided in paragraph
(c)(4)(ii)(B)(2)(ii) of this section, and, for any counterparty that is
not a commercial end-user, multiplied by 1.4; and
(ii) For purposes of paragraph (c)(4)(ii)(B)(2)(i) of this section,
a Board-regulated institution may set the value of the term C in Sec.
217.132(c)(7)(i) equal to the amount of collateral posted by a clearing
member client of the Board-regulated institution in connection with the
client-facing derivative transactions within the netting set;
(C)(1)(i) For a Board-regulated institution that uses the current
exposure methodology under Sec. 217.34(b) for its standardized risk-
weighted assets, the amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
Board-regulated institution's on-balance sheet assets, unless such cash
collateral is all or part of variation margin that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
and
(ii) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
217.34(b), and not the PFE; and
(iii) For the purpose of the calculation of the NGR described in
Sec. 217.34(b)(2)(ii)(B), variation margin described in paragraph
(c)(4)(ii)(C)(1)(ii) of this section may not reduce the net current
credit exposure or the gross current credit exposure; or
(2)(i) For a Board-regulated institution that uses the standardized
approach for counterparty credit risk under Sec. 217.132(c) for its
standardized risk-weighted assets, the replacement cost of each
derivative contract or single product netting set of derivative
contracts to which the Board-regulated institution is a counterparty,
calculated according to the following formula, and, for any
counterparty that is not a commercial end-user, multiplied by 1.4:
Replacement Cost = max{V-CVMr + CVMp; 0{time}
Where:
V equals the fair value for each derivative contract or each single-
product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (c)(4)(ii)(I) of this
section and, at the discretion of the Board-regulated institution,
excluding a forward agreement treated as a derivative contract that
is part of a repurchase or reverse repurchase or a securities
borrowing or lending transaction that qualifies for sales treatment
under U.S. GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section, or, in the case of a client-facing derivative transaction,
the amount of collateral received from the clearing member client;
and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section, or, in the case of a client-facing derivative transaction,
the amount of collateral posted to the clearing member client;
(ii) Notwithstanding paragraph (c)(4)(ii)(C)(2)(i) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a Board-regulated institution must apply the formula for
replacement cost provided in Sec. 217.132(c)(10)(i), in which the term
CMA may only include cash collateral that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
and
(iii) For purposes of paragraph (c)(4)(ii)(C)(2)(i), a Board-
regulated institution 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 Board-regulated institution elected
to treat the derivative contract as multiple derivative contracts under
Sec. 217.132(c)(5)(vi);
(3) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law,
[[Page 4417]]
regulation, or an agreement with the counterparty);
(4) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(5) 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;
(6) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master netting
agreement, or in the governing rules for a cleared transaction; and
(7) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
* * * * *
0
17. Section 217.32 is amended by revising paragraph (f) to read as
follows:
Sec. 217.32 General risk weights.
* * * * *
(f) Corporate exposures. (1) A Board-regulated institution must
assign a 100 percent risk weight to all its corporate exposures, except
as provided in paragraph (f)(2) of this section.
(2) A Board-regulated institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the Board-regulated
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
217.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP
arising from the Board-regulated institution posting cash collateral to
the QCCP in connection with a cleared transaction that meets the
requirements of Sec. 217.35(b)(3)(i)(B).
(3) A Board-regulated institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the Board-regulated
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
217.35(c)(3)(i).
* * * * *
0
18. Section 217.34 is revised to read as follows:
Sec. 217.34 Derivative contracts.
(a) Exposure amount for derivative contracts--(1) Board-regulated
institution that is not an advanced approaches Board-regulated
institution. (i) A Board-regulated institution that is not an advanced
approaches Board-regulated institution must use the current exposure
methodology (CEM) described in paragraph (b) of this section to
calculate the exposure amount for all its OTC derivative contracts,
unless the Board-regulated institution makes the election provided in
paragraph (a)(1)(ii) of this section.
(ii) A Board-regulated institution that is not an advanced
approaches Board-regulated institution may elect to calculate the
exposure amount for all its OTC derivative contracts under the
standardized approach for counterparty credit risk (SA-CCR) in Sec.
217.132(c) by notifying the Board, rather than calculating the exposure
amount for all its derivative contracts using CEM. A Board-regulated
institution that elects under this paragraph (a)(1)(ii) to calculate
the exposure amount for its OTC derivative contracts under SA-CCR must
apply the treatment of cleared transactions under Sec. 217.133 to its
derivative contracts that are cleared transactions and to all default
fund contributions associated with such derivative contracts, rather
than applying Sec. 217.35. A Board-regulated institution that is not
an advanced approaches Board-regulated institution must use the same
methodology to calculate the exposure amount for all its derivative
contracts and, if a Board-regulated institution has elected to use SA-
CCR under this paragraph (a)(1)(ii), the Board-regulated institution
may change its election only with prior approval of the Board.
(2) Advanced approaches Board-regulated institution. An advanced
approaches Board-regulated institution must calculate the exposure
amount for all its derivative contracts using SA-CCR in Sec.
217.132(c) for purposes of standardized total risk-weighted assets. An
advanced approaches Board-regulated institution must apply the
treatment of cleared transactions under Sec. 217.133 to its derivative
contracts that are cleared transactions and to all default fund
contributions associated with such derivative contracts for purposes of
standardized total risk-weighted assets.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to a qualifying master netting agreement is equal to the
sum of the Board-regulated institution's current credit exposure and
potential future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
this section.
(B) For purposes of calculating either the PFE under this paragraph
(b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this
section for exchange rate contracts and other similar contracts in
which the notional principal amount is equivalent to the cash flows,
notional principal amount is the net receipts to each party falling due
on each value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to this section, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A Board-regulated institution must use an OTC derivative
contract's effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
OTC derivative contract) rather than the apparent or stated notional
principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
[[Page 4418]]
Table 1 to Sec. 217.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals (except Other
and gold reference reference gold)
asset) \3\ asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A Board-regulated institution must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference
asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A Board-regulated institution must use
the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x
Agross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the NGR,
the gross current credit exposure equals the sum of the positive
current credit exposures (as determined under paragraph (b)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) A Board-regulated institution using CEM under
paragraph (b) of this section may recognize the credit risk mitigation
benefits of financial collateral that secures an OTC derivative
contract or multiple OTC derivative contracts subject to a qualifying
master netting agreement (netting set) by using the simple approach in
Sec. 217.37(b).
(2) As an alternative to the simple approach, a Board-regulated
institution using CEM under paragraph (b) of this section may recognize
the credit risk mitigation benefits of financial collateral that
secures such a contract or netting set if the financial collateral is
marked-to-fair value on a daily basis and subject to a daily margin
maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 217.37(c). The Board-regulated
institution must substitute the exposure amount calculated under
paragraph (b)(1) or (2) of this section for [Sigma]E in the equation in
Sec. 217.37(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. A Board-regulated institution that purchases a credit
derivative that is recognized under Sec. 217.36 as a credit risk
mitigant for an exposure that is not a covered position under subpart F
of this part is not required to compute a separate counterparty credit
risk capital requirement under this subpart provided that the Board-
regulated institution does so consistently for all such credit
derivatives. The Board-regulated institution must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) A Board-regulated institution that is
the protection provider under a credit derivative must treat the credit
derivative as an exposure to the underlying reference asset. The Board-
regulated institution is not required to compute a counterparty credit
risk capital requirement for the credit derivative under this subpart,
provided that this treatment is applied consistently for all such
credit derivatives. The Board-regulated institution must either include
all or exclude all such credit derivatives that are subject to a
qualifying master netting agreement from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes unless the Board-
regulated institution is treating the credit derivative as a covered
position under subpart F of this part, in which case the Board-
regulated institution must compute a supplemental counterparty credit
risk capital requirement under this section.
(e) Counterparty credit risk for equity derivatives. (1) A Board-
regulated institution must treat an equity derivative contract as an
equity exposure and compute a risk-weighted asset amount for the equity
derivative contract under Sec. Sec. 217.51 through 217.53 (unless the
Board-regulated institution is treating the contract as a covered
position under subpart F of this part).
(2) In addition, the Board-regulated institution must also
calculate a risk-based capital requirement for the counterparty credit
risk of an equity derivative contract under this section if the Board-
regulated institution is treating the contract as a covered position
under subpart F of this part.
(3) If the Board-regulated institution risk weights the contract
under the Simple Risk-Weight Approach (SRWA) in Sec. 217.52, the
Board-regulated institution may choose not to hold risk-based capital
against the counterparty credit risk of the equity derivative contract,
as long as it does so for all such contracts. Where the equity
derivative contracts are subject to a qualified master netting
agreement, a Board-regulated institution using the SRWA must either
include all or
[[Page 4419]]
exclude all of the contracts from any measure used to determine
counterparty credit risk exposure.
(f) Clearing member Board-regulated institution's exposure amount.
The exposure amount of a clearing member Board-regulated institution
using CEM under paragraph (b) of this section for a client-facing
derivative transaction or netting set of client-facing derivative
transactions equals the exposure amount calculated according to
paragraph (b)(1) or (2) of this section multiplied by the scaling
factor the square root of \1/2\ (which equals 0.707107). If the Board-
regulated institution determines that a longer period is appropriate,
the Board-regulated institution must use a larger scaling factor to
adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.024
Where H = the holding period greater than or equal to five days.
Additionally, the Board may require the Board-regulated institution
to set a longer holding period if the Board determines that a longer
period is appropriate due to the nature, structure, or characteristics
of the transaction or is commensurate with the risks associated with
the transaction.
0
19. Section 217.35 is amended by adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding paragraph (c)(3)(iii) to read as
follows:
Sec. 217.35 Cleared transactions.
(a) * * *
(3) Alternate requirements. Notwithstanding any other provision of
this section, an advanced approaches Board-regulated institution or a
Board-regulated institution that is not an advanced approaches Board-
regulated institution and that has elected to use SA-CCR under Sec.
217.34(a)(1) must apply Sec. 217.133 to its derivative contracts that
are cleared transactions rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other requirements in this section,
collateral posted by a clearing member client Board-regulated
institution that is held by a custodian (in its capacity as custodian)
in a manner that is bankruptcy remote from the CCP, clearing member,
and other clearing member clients of the clearing member, is not
subject to a capital requirement under this section.
* * * * *
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Board-regulated institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a CCP where the clearing member Board-regulated
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 217.3(a), and the
clearing member Board-regulated institution is not obligated to
reimburse the clearing member client in the event of the CCP default.
* * * * *
0
20. Section 217.37 is amended by revising paragraphs (c)(3)(iii),
(c)(3)(iv)(A) and (C), (c)(4)(i)(B) introductory text, and
(c)(4)(i)(B)(1) to read as follows:
Sec. 217.37 Collateralized transactions.
* * * * *
(c) * * *
(3) * * *
(iii) For repo-style transactions and client-facing derivative
transactions, a Board-regulated institution may multiply the standard
supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this
section by the square root of \1/2\ (which equals 0.707107). For
client-facing derivative transactions, if a larger scaling factor is
applied under Sec. 217.34(f), the same factor must be used to adjust
the supervisory haircuts.
(iv) * * *
(A) 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;
* * * * *
(C) 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.
* * * * *
(4) * * *
(i) * * *
(B) The minimum holding period for a repo-style transaction and
client-facing derivative transaction is five business days and for an
eligible margin loan and a derivative contract other than a client-
facing derivative transaction is ten business days except for
transactions or netting sets for which paragraph (c)(4)(i)(C) of this
section applies. When a Board-regulated institution calculates an own-
estimates haircut on a TN-day holding period, which is
different from the minimum holding period for the transaction type, the
applicable haircut (HM) is calculated using the following
square root of time formula:
* * * * *
(1) TM equals 5 for repo-style transactions and client-
facing derivative transactions and 10 for eligible margin loans and
derivative contracts other than client-facing derivative transactions;
* * * * *
Sec. Sec. 217.134, 217.202, and 217.210 [Amended]
0
21. For each section listed in the following table, the footnote number
listed in the ``Old footnote number'' column is redesignated as the
footnote number listed in the ``New footnote number'' column as
follows:
------------------------------------------------------------------------
Old footnote New footnote
Section number number
------------------------------------------------------------------------
217.134(d)(3)........................... 30 31
217.202, paragraph (1) introductory text 31 32
of the definition of ``Covered
position''.............................
217.202, paragraph (1)(i) of the 32 33
definition of ``Covered position''.....
217.210(e)(1)........................... 33 34
------------------------------------------------------------------------
0
22. Section 217.132 is amended by:
0
a. Revising paragraphs (b)(2)(ii)(A)(3) through (5);
0
b. Adding paragraphs (b)(2)(ii)(A)(6) and (7);
0
c. Revising paragraphs (c) heading and (c)(1) and (2) and (5) through
(8);
0
d. Adding paragraphs (c)(9) through (11);
0
e. Revising paragraph (d)(10)(i);
0
f. In paragraphs (e)(5)(i)(A) and (H), removing ``Table 3 to Sec.
217.132'' and adding in its place ``Table 4 to this section'';
[[Page 4420]]
0
g. In paragraphs (e)(5)(i)(C) and (e)(6)(i)(B), removing ``current
exposure methodology'' and adding in its place ``standardized approach
to counterparty credit risk'' wherever it appears;
0
h. Redesignating Table 3 to Sec. 217.132 following paragraph
(e)(5)(ii) as Table 4 to Sec. 217.132; and
0
i. Revising paragraph (e)(6)(viii).
The revisions and additions read as follows:
Sec. 217.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and client-facing derivative
transactions, a Board-regulated institution may multiply the
supervisory haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) of
this section by the square root of \1/2\ (which equals 0.707107). If
the Board-regulated institution 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)(A)(6) of this section.
(4) A Board-regulated institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days (for eligible margin loans) or five business days (for
repo-style transactions), using the formula provided in paragraph
(b)(2)(ii)(A)(6) of this section where the conditions in this paragraph
(b)(2)(ii)(A)(4) apply. If the number of trades in a netting set
exceeds 5,000 at any time during a quarter, a Board-regulated
institution must adjust the supervisory haircuts upward on the basis of
a minimum holding period of twenty business days for the following
quarter (except when a Board-regulated institution is calculating EAD
for a cleared transaction under Sec. 217.133). If a netting set
contains one or more trades involving illiquid collateral, a Board-
regulated institution must adjust the supervisory haircuts upward on
the basis of a 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
Board-regulated institution 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.
(5)(i) A Board-regulated institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days for collateral associated with derivative contracts (five
business days for client-facing derivative contracts) using the formula
provided in paragraph (b)(2)(ii)(A)(6) of this section where the
conditions in this paragraph (b)(2)(ii)(A)(5)(i) apply. For collateral
associated with a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, a Board-regulated institution must use a 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, a Board-regulated institution must use
a minimum holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or
(b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a
derivative contract 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)(1) or (3) or (b)(2)(ii)(A)(5)(i)
of this section.
(6) A Board-regulated institution must adjust the standard
supervisory haircuts upward, pursuant to the adjustments provided in
paragraphs (b)(2)(ii)(A)(3) through (5) of this section, using the
following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.025
Where:
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
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.
(7) If the instrument a Board-regulated institution has lent, sold
subject to repurchase, or posted as collateral does not meet the
definition of financial collateral, the Board-regulated institution
must use a 25.0 percent haircut for market price volatility (Hs).
* * * * *
(c) EAD for derivative contracts--(1) Options for determining EAD.
A Board-regulated institution must determine the EAD for a derivative
contract using the standardized approach for counterparty credit risk
(SA-CCR) under paragraph (c)(5) of this section or using the internal
models methodology described in paragraph (d) of this section. If a
Board-regulated institution elects to use SA-CCR for one or more
derivative contracts, the exposure amount determined under SA-CCR is
the EAD for the derivative contract or derivatives contracts. A Board-
regulation institution must use the same methodology to calculate the
exposure amount for all its derivative contracts and may change its
election only with prior approval of the Board. A Board-regulated
institution may reduce the EAD calculated according to paragraph (c)(5)
of this section by the credit valuation adjustment that the Board-
regulated institution 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 Board-regulated institution'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) of this
section, the following definitions apply:
(i) End date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument,
except as otherwise provided in paragraph (c) of this section.
(ii) Start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument, except as otherwise provided in paragraph (c) of this
section.
(iii) Hedging set means:
(A) With respect to interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
[[Page 4421]]
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity categories: Energy, metal, agricultural, or other
commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, the Board may require a Board-regulated institution to
include the derivative contract in each appropriate hedging set under
paragraphs (c)(1)(iii)(A) through (E) of this section.
* * * * *
(5) Exposure amount. (i) The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section.
(ii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set
calculated under paragraph (c)(5)(i) of this section and the exposure
amount of the netting set calculated under paragraph (c)(5)(i) of this
section as if the netting set were not subject to a variation margin
agreement.
(iii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set that consists of
only sold options in which the premiums have been fully paid by the
counterparty to the options and where the options are not subject to a
variation margin agreement is zero.
(iv) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set in which the
counterparty is a commercial end-user is equal to the sum of
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, a Board-regulated institution 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 a
Board-regulated institution 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, a Board-regulated institution 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 Board-
regulated institution is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the 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] TR24JA20.026
[[Page 4422]]
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the potential future exposure for purposes
of total leverage exposure under Sec. 217.10(c)(4)(ii)(B)(2), 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 total leverage exposure under Sec. 217.10(c)(4)(ii)(B)(2),
the potential future exposure for a netting set subject to multiple
variation margin agreements or a hybrid netting set must be calculated
according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, a Board-regulated institution may use either of
the formulas provided in paragraphs (c)(8)(i)(A) and (B) of this
section:
(A) Formula 1 is as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.027
(B) Formula 2 is as follows:
Hedging set amount = [verbar]AddOnIRTB1[verbar] +
[verbar]AddOnIRTB2[verbar] + [verbar]AddOnIRTB3[verbar].
Where in paragraphs (c)(8)(i)(A) and (B) of this section:
AddOnIRTB1 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;
AddOnIRTB2 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
AddOnIRTB3 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] TR24JA20.028
Where:
k is each reference entity within the hedging set.
K is the number of reference entities within the hedging set.
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference entity k.
[rho]k equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[[Page 4423]]
[GRAPHIC] [TIFF OMITTED] TR24JA20.029
Where:
k is each commodity type within the hedging set.
K is the number of commodity types within the hedging set.
AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference commodity type.
[rho] equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a
Board-regulated institution must calculate a separate hedging set
amount for each basis derivative contract hedging set and each
volatility derivative contract hedging set. A Board-regulated
institution must calculate such hedging set amounts using one of the
formulas under paragraphs (c)(8)(i) through (iv) that corresponds to
the primary risk factor of the hedging set being calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, a
Board-regulated institution must determine the adjusted notional amount
of derivative contract, pursuant to paragraph (c)(9)(ii) of this
section, and multiply the adjusted notional amount by each of the
supervisory delta adjustment, pursuant to paragraph (c)(9)(iii) of this
section, the maturity factor, pursuant to paragraph (c)(9)(iv) of this
section, and the applicable supervisory factor, as provided in Table 2
to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.030
Where:
S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
E is the number of business days from the present day until the end
date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount is equal
to the time-weighted average of the contractual notional amounts of
such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a factor
and all rates of the derivative contract are multiplied by the same
factor, the notional amount is equal to the notional amount of an
equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. If both legs of
the exchange rate derivative contract are denominated in currencies
other than U.S. dollars, the adjusted notional amount of the derivative
contract is the largest leg of the derivative contract, as measured in
U.S. dollars using the exchange rate on the date of the calculation.
(2) Notwithstanding paragraph (c)(9)(ii)(B)(1) of this section, for
an exchange rate derivative contract with multiple exchanges of
principal, the Board-regulated institution must set the adjusted
notional amount of the derivative contract equal to the notional amount
of the derivative contract multiplied by the number of exchanges of
principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity derivative
contract, the adjusted notional amount is the product of the fair value
of one unit of the reference instrument underlying the derivative
contract and the number of such units referenced by the derivative
contract.
(2) Notwithstanding paragraph (c)(9)(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 Board-regulated institution must replace the
unit price with the underlying volatility referenced by the volatility
derivative contract and replace the number of units with the notional
amount of the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract
that is not an option contract or collateralized debt obligation
tranche, the supervisory delta adjustment is 1 if the fair value of the
derivative contract increases when the value of the primary risk factor
increases and -1 if the fair value of the derivative contract decreases
when the value of the primary risk factor increases.
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following formulas,
as applicable:
[[Page 4424]]
[GRAPHIC] [TIFF OMITTED] TR24JA20.031
(2) As used in the formulas in Table 2 to this section:
(i) [PHgr] is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) [lgr] equals zero for all derivative contracts except interest
rate options for the currencies where interest rates have negative
values. The same value of [lgr] must be used for all interest rate
options that are denominated in the same currency. To determine the
value of [lgr] for a given currency, a Board-regulated institution must
find the lowest value L of P and K of all interest rate options in a
given currency that the Board-regulated institution has with all
counterparties. Then, [lgr] is set according to this formula: [lgr] =
max{-L + 0.1%, 0{time} ; and
(vi) [sigma] equals the supervisory option volatility, as provided
in Table 3 to this section.
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined by
the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.032
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this
section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated to
the Board-regulated institution's exposure to the total notional amount
of all underlying exposures, expressed as a decimal value between zero
and one; \30\
---------------------------------------------------------------------------
\30\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the Board-
regulated institution's exposure. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) notional
amounts of the underlying exposures are subordinated to the Board-
regulated institution's exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio of
the notional amounts of all underlying exposures that are senior to the
Board-regulated institution's exposure to the total notional amount of
all underlying exposures, expressed as a decimal value between zero and
one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the Board-
regulated institution and is designated with a negative sign if the
collateralized debt obligation tranche was sold by the Board-regulated
institution.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract that is subject to a variation margin agreement, excluding
derivative contracts that are subject to a variation margin agreement
under which the counterparty is not required to post variation margin,
is determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.033
Where MPOR refers to the period from the most recent exchange of
collateral covering a netting set of derivative contracts with a
defaulting counterparty until the derivative contracts are closed out
and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a 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 two or more outstanding disputes
over margin that lasted longer than the MPOR over the previous two
quarters, the applicable floor is twice the amount provided in
(c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts under
which the counterparty
[[Page 4425]]
is not required to post variation margin, is determined by the
following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.034
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 a
Board-regulated institution 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 Board-regulated
institution 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.
A Board-regulated institution must separate a derivative contract into
separate derivative contracts, according to the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must be
treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must be
represented as the combination of one bought European option and one
sold European option of the same type as the original option (put or
call) with the strikes set equal to 0.95 * K and 1.05 * K so that the
payoff of the binary option is reproduced exactly outside the region
between the two strikes. The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold options is capped at
the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), a Board-regulated
institution 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), a Board-regulated
institution may represent each payment option as a combination of
effective single-payment options (such as interest rate caplets and
floorlets).
(D) A Board-regulated institution 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, a Board-regulated institution shall assign a
single replacement cost to multiple netting sets that are subject to a
single variation margin agreement under which the counterparty must
post variation margin, calculated according to the following formula:
Replacement Cost = max{[Sigma]NSmax{VNS; 0{time} - max{CMA; 0{time} ;
0{time} + max{[Sigma]NSmin{VNS; 0{time} - min{CMA; 0{time} ; 0{time}
Where:
NS is each netting set subject to the variation margin agreement MA;
VNS is the sum of the fair values (after excluding any
valuation adjustments) of the derivative contracts within the
netting set NS; and
CMA is the sum of the net independent collateral amount
and the variation margin amount applicable to the derivative
contracts within the netting sets subject to the single variation
margin agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, a Board-regulated institution shall
assign a single potential future exposure to multiple netting sets that
are subject to a single variation margin agreement under which the
counterparty must post variation margin equal to the sum of the
potential future exposure of each such netting set, each calculated
according to paragraph (c)(7) of this section as if such nettings sets
were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
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, a
Board-regulated institution 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.
[[Page 4426]]
Table 3 to Sec. 217.132--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 N/A............ 100 50 1.3
grade.
Sub-speculative N/A............ 100 50 6.0
grade.
Credit, index................ Investment Grade N/A............ 80 80 0.38
Speculative N/A............ 80 80 1.06
Grade.
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 3, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this Table 3.
(d) * * *
(10) * * *
(i) With prior written approval of the Board, a Board-regulated
institution may set EAD equal to a measure of counterparty credit risk
exposure, such as peak EAD, that is more conservative than an alpha of
1.4 times the larger of EPEunstressed and
EPEstressed for every counterparty whose EAD will be
measured under the alternative measure of counterparty exposure. The
Board-regulated institution must demonstrate the conservatism of the
measure of counterparty credit risk exposure used for EAD. With respect
to paragraph (d)(10)(i) of this section:
(A) For material portfolios of new OTC derivative products, the
Board-regulated institution may assume that the standardized approach
for counterparty credit risk pursuant to paragraph (c) of this section
meets the conservatism requirement of this section for a period not to
exceed 180 days.
(B) For immaterial portfolios of OTC derivative contracts, the
Board-regulated institution generally may assume that the standardized
approach for counterparty credit risk pursuant to paragraph (c) of this
section meets the conservatism requirement of this section.
* * * * *
(e) * * *
(6) * * *
(viii) If a Board-regulated institution uses the standardized
approach for counterparty credit risk pursuant to paragraph (c) of this
section to calculate the EAD for any immaterial portfolios of OTC
derivative contracts, the Board-regulated institution must use that EAD
as a constant EE in the formula for the calculation of CVA with the
maturity equal to the maximum of:
(A) Half of the longest maturity of a transaction in the netting
set; and
(B) The notional weighted average maturity of all transactions in
the netting set.
0
23. Section 217.133 is amended by revising paragraphs (a), (b)(1)
through (3), (b)(4)(i), (c)(1) through (3), (c)(4)(i), and (d) to read
as follows:
Sec. 217.133 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A Board-
regulated institution that is a clearing member client must use the
methodologies described in paragraph (b) of this section to calculate
risk-weighted assets for a cleared transaction.
(2) Clearing members. A Board-regulated institution that is a
clearing member must use the methodologies described in paragraph (c)
of this section to calculate its risk-weighted assets for a cleared
transaction and paragraph (d) of this section to calculate its risk-
weighted assets for its default fund contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a Board-
regulated institution that is a clearing member client must multiply
the trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (b)(2) of this section, by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client Board-regulated institution's total
risk-weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or a netting set of derivative contracts, trade
exposure amount equals the EAD for the derivative contract or netting
set of derivative contracts calculated using the methodology used to
calculate EAD for derivative contracts set forth in Sec. 217.132(c) or
(d), plus the fair value of the collateral posted by the clearing
member client Board-regulated institution and held by the CCP or a
clearing member in a manner that is not bankruptcy remote. When the
Board-regulated institution calculates EAD for the cleared transaction
using the methodology in Sec. 217.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 217.132(b)(2) or (3) or (d), plus the fair value of
the collateral posted by the clearing member client Board-regulated
institution and held by the CCP or a clearing member in a manner that
is not bankruptcy remote. When the Board-regulated institution
calculates EAD for the cleared transaction under Sec. 217.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client Board-regulated institution must
apply a risk weight of:
[[Page 4427]]
(A) 2 percent if the collateral posted by the Board-regulated
institution to the QCCP or clearing member is subject to an arrangement
that prevents any loss to the clearing member client Board-regulated
institution due to the joint default or a concurrent insolvency,
liquidation, or receivership proceeding of the clearing member and any
other clearing member clients of the clearing member; and the clearing
member client Board-regulated institution has conducted sufficient
legal review to conclude with a well-founded basis (and maintains
sufficient written documentation of that legal review) that in the
event of a legal challenge (including one resulting from an event of
default or from liquidation, insolvency, or receivership proceedings)
the relevant court and administrative authorities would find the
arrangements to be legal, valid, binding, and enforceable under the law
of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client Board-regulated institution must apply the risk
weight applicable to the CCP under subpart D of this part.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client Board-regulated
institution that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a clearing
member Board-regulated institution must multiply the trade exposure
amount for the cleared transaction, calculated in accordance with
paragraph (c)(2) of this section by the risk weight appropriate for the
cleared transaction, determined in accordance with paragraph (c)(3) of
this section.
(ii) A clearing member Board-regulated institution's total risk-
weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member Board-regulated
institution must calculate its trade exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 217.132(c) or (d), plus the
fair value of the collateral posted by the clearing member Board-
regulated institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member Board-regulated institution
calculates EAD for the cleared transaction using the methodology in
Sec. 217.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 217.132(b)(2) or (3) or (d), plus the
fair value of the collateral posted by the clearing member Board-
regulated institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member Board-regulated institution
calculates EAD for the cleared transaction under Sec. 217.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member Board-
regulated institution must apply a risk weight of 2 percent to the
trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member Board-regulated institution must apply the risk weight
applicable to the CCP according to subpart D of this part.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Board-regulated institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a QCCP where the clearing member Board-regulated
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 217.3(a), and the
clearing member Board-regulated institution is not obligated to
reimburse the clearing member client in the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member Board-regulated institution that
is held by a custodian (in its capacity as a custodian) in a manner
that is bankruptcy remote from the CCP, clearing member, and other
clearing member clients of the clearing member, is not subject to a
capital requirement under this section.
* * * * *
(d) Default fund contributions--(1) General requirement. A clearing
member Board-regulated institution must determine the risk-weighted
asset amount for a default fund contribution to a CCP at least
quarterly, or more frequently if, in the opinion of the Board-regulated
institution or the Board, there is a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member Board-regulated institution's
risk-weighted asset amount for default fund contributions to CCPs that
are not QCCPs equals the sum of such default fund contributions
multiplied by 1,250 percent, or an amount determined by the Board,
based on factors such as size, structure, and membership
characteristics of the CCP and riskiness of its transactions, in cases
where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member Board-regulated institution's risk-weighted
asset amount for default fund contributions to QCCPs equals the sum of
its capital requirement, KCM for each QCCP, as calculated
under the methodology set forth in paragraph (d)(4) of this section,
multiplied by 12.5.
(4) Capital requirement for default fund contributions to a QCCP. A
clearing member Board-regulated institution's capital requirement for
its default fund contribution to a QCCP (KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TR24JA20.035
[[Page 4428]]
Where:
KCCP is the hypothetical capital requirement of the QCCP, as
determined under paragraph (d)(5) of this section;
DFpref is the prefunded default fund contribution of the clearing
member Board-regulated institution to the QCCP;
DFCCP is the QCCP's own prefunded amounts that are contributed to
the default waterfall and are junior or pari passu with prefunded
default fund contributions of clearing members of the CCP; and
DFCMpref 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, a Board-regulated institution must rely
on such disclosed figure instead of calculating KCCP under
this paragraph (d)(5), unless the Board-regulated institution
determines that a more conservative figure is appropriate based on the
nature, structure, or characteristics of the QCCP. The hypothetical
capital requirement of a QCCP (KCCP), as determined by the Board-
regulated institution, is equal to:
KCCP = [Sigma]CMi EADi * 1.6 percent
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of the QCCP to
the QCCP, as determined under paragraph (d)(6) of this section.
(6) EAD of a clearing member Board-regulated institution to a QCCP.
(i) The EAD of a clearing member Board-regulated institution to a QCCP
is equal to the sum of the EAD for derivative contracts determined
under paragraph (d)(6)(ii) of this section and the EAD for repo-style
transactions determined under paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the Board-
regulated institution and the CCP that are cleared transactions and any
guarantees that the Board-regulated institution has provided to the CCP
with respect to performance of a clearing member client on a derivative
contract, the EAD is equal to the exposure amount for all such
derivative contracts and guarantees of derivative contracts calculated
under SA-CCR in Sec. 217.132(c) (or, with respect to a CCP 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. 217.132(c)(9)(iv); less the value of all collateral
held by the CCP posted by the clearing member Board-regulated
institution or a clearing member client of the Board-regulated
institution in connection with a derivative contract for which the
Board-regulated institution has provided a guarantee to the CCP and the
amount of the prefunded default fund contribution of the Board-
regulated institution to the CCP.
(iii) With respect to any repo-style transactions between the
Board-regulated institution and the CCP that are cleared transactions,
EAD is equal to:
EAD = max{EBRM-IM-DF; 0{time}
Where:
EBRM is the sum of the exposure amounts of each repo-style
transaction between the Board-regulated institution and the CCP as
determined under Sec. 217.132(b)(2) and without recognition of any
collateral securing the repo-style transactions;
IM is the initial margin collateral posted by the Board-regulated
institution to the CCP with respect to the repo-style transactions;
and
DF is the prefunded default fund contribution of the Board-regulated
institution to the CCP that is not already deducted in Sec.
217.133(d)(6)(ii).
(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. 217.132(b) for repo-style
transactions and to Sec. 217.132(c)(5) for derivative contracts.
(vi) Notwithstanding any other provision of paragraph (d) of this
section, with the prior approval of the Board, a Board-regulated
institution may determine the risk-weighted asset amount for a default
fund contribution to a QCCP according to Sec. 217.35(d)(3)(ii).
0
24. Section 217.173 is amended in Table 13 to Sec. 217.173 by revising
line 4 under Part 2, Derivative exposures, to read as follows:
Sec. 217.173 Disclosures by certain advanced approaches Board-
regulated institutions and Category III Board-regulated institutions.
* * * * *
Table 13 to Sec. 217.173--Supplementary Leverage Ratio
----------------------------------------------------------------------------------------------------------------
Dollar amounts in thousands
---------------------------------------------------
Tril Bil Mil Thou
----------------------------------------------------------------------------------------------------------------
* * * * * * *
----------------------------------------------------------------------------------------------------------------
Part 2: Supplementary leverage ratio
----------------------------------------------------------------------------------------------------------------
* * * * * * *
----------------------------------------------------------------------------------------------------------------
Derivative exposures
----------------------------------------------------------------------------------------------------------------
* * * * * * *
4 Current exposure for derivative exposures (that is, net of
cash variation margin).....................................
[[Page 4429]]
* * * * * * *
----------------------------------------------------------------------------------------------------------------
0
25. Section 217.300 is amended by adding paragraph (h) and (i) to read
as follows:
Sec. 217.300 Transitions.
* * * * *
(h) SA-CCR. An advanced approaches Board-regulated institution may
use CEM rather than SA-CCR for purposes of Sec. Sec. 217.34(a) and
217.132(c) until January 1, 2022. A Board-regulated institution must
provide prior notice to the Board if it decides to begin using SA-CCR
before January 1, 2022. On January 1, 2022, and thereafter, an advanced
approaches Board-regulated institution must use SA-CCR for purposes of
Sec. Sec. 217.34(a), 217.132(c), and 217.135(d). Once an advanced
approaches Board-regulated institution has begun to use SA-CCR, the
advanced approaches Board-regulated institution may not change to use
CEM.
(i) Default fund contributions. Prior to January 1, 2022, a Board-
regulated institution that calculates the exposure amounts of its
derivative contracts under the standardized approach for counterparty
credit risk in Sec. 217.132(c) may calculate the risk-weighted asset
amount for a default fund contribution to a QCCP under either method 1
under Sec. 217.35(d)(3)(i) or method 2 under Sec. 217.35(d)(3)(ii),
rather than under Sec. 217.133(d).
FEDERAL DEPOSIT INSURANCE CORPORATION
For the reasons forth out in the preamble, 12 CFR parts 324 and 327
are amended as set forth below.
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
26. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
27. Section 324.2 is amended by:
0
a. Adding the definitions of ``Basis derivative contract,'' ``Client-
facing derivative transaction,'' and ``Commercial end-user'' in
alphabetical order;
0
b. Revising the definition of ``Current exposure'' and ``Current
exposure methodology;''
0
c. Revising paragraph (2) of the definition of ``Financial
collateral;''
0
d. Adding the definitions of ``Independent collateral,'' ``Minimum
transfer amount,'' and ``Net independent collateral amount'' in
alphabetical order;
0
e. Revising the definition of ``Netting set;'' and
0
f. Adding the definitions of ``Speculative grade,'' ``Sub-speculative
grade,'' ``Variation margin,'' ``Variation margin agreement,''
``Variation margin amount,'' ``Variation margin threshold,'' and
``Volatility derivative contract'' in alphabetical order.
The additions and revisions read as follows:
Sec. 324.2 Definitions.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: Interest rate, credit,
equity, or commodity.
* * * * *
Client-facing derivative transaction means a derivative contract
that is not a cleared transaction where the FDIC-supervised institution
is either acting as a financial intermediary and enters into an
offsetting transaction with a qualifying central counterparty (QCCP) or
where the FDIC-supervised institution provides a guarantee to the QCCP
on the performance of a client on a transaction between the client and
a QCCP.
* * * * *
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)).
* * * * *
Current exposure means, with respect to a netting set, the larger
of zero or the fair value of a transaction or portfolio of transactions
within the netting set that would be lost upon default of the
counterparty, assuming no recovery on the value of the transactions.
Current exposure methodology means the method of calculating the
exposure amount for over-the-counter derivative contracts in Sec.
324.34(b).
* * * * *
Financial collateral * * *
(2) In which the FDIC-supervised institution has a perfected,
first-priority security interest or, outside of the United States, the
legal equivalent thereof (with the exception of cash on deposit; and
notwithstanding the prior security interest of any custodial agent or
any priority security interest granted to a CCP in connection with
collateral posted to that CCP).
* * * * *
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which a FDIC-supervised institution has a perfected, first-priority
security interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on
[[Page 4430]]
deposit; notwithstanding the prior security interest of any custodial
agent or any prior security interest granted to a CCP in connection
with collateral posted to that CCP), and the amount of which does not
change directly in response to the value of the derivative contract or
contracts that the financial collateral secures.
* * * * *
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set
pursuant to the variation margin agreement.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 324.132(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to a FDIC-supervised
institution less the fair value amount of the independent collateral,
as adjusted by the standard supervisory haircuts under Sec.
324.132(b)(2)(ii), as applicable, posted by the FDIC-supervised
institution to the counterparty, excluding such amounts held in a
bankruptcy remote manner or posted to a QCCP and held in conformance
with the operational requirements in Sec. 324.3.
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement.
For derivative contracts, netting set also includes a single derivative
contract between a FDIC-supervised institution and a single
counterparty. For purposes of the internal model methodology under
Sec. 324.132(d), netting set also includes a group of transactions
with a single counterparty that are subject to a qualifying cross-
product master netting agreement and does not include a transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the FDIC-supervised institution has identified specific
wrong-way risk.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic conditions, such that should economic conditions
deteriorate, the reference entity would present an elevated default
risk.
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely would default on its financial commitments.
* * * * *
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 324.132(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to a FDIC-supervised institution less the fair
value amount of the variation margin, as adjusted by the standard
supervisory haircuts under Sec. 324.132(b)(2)(ii), as applicable,
posted by the FDIC-supervised institution to the counterparty.
Variation margin threshold means the amount of credit exposure of a
FDIC-supervised institution to its counterparty that, if exceeded,
would require the counterparty to post variation margin to the FDIC-
supervised institution pursuant to the variation margin agreement.
Volatility derivative contract means a derivative contract in which
the payoff of the derivative contract explicitly depends on a measure
of the volatility of an underlying risk factor to the derivative
contract.
* * * * *
0
28. Section 324.10 is amended by revising paragraphs (c)(4)(ii)(A)
through (C) to read as follows:
Sec. 324.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) * * *
(ii) * * *
(A) The balance sheet carrying value of all of the FDIC-supervised
institution's on-balance sheet assets, plus the value of securities
sold under a repurchase transaction or a securities lending transaction
that qualifies for sales treatment under U.S. GAAP, less amounts
deducted from tier 1 capital under Sec. 324.22(a), (c), and (d), and
less the value of securities received in security-for-security repo-
style transactions, where the FDIC-supervised institution acts as a
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities
received, and, for a FDIC-supervised institution that uses the
standardized approach for counterparty credit risk under Sec.
324.132(c) for its standardized risk-weighted assets, less the fair
value of any derivative contracts;
(B)(1) For a FDIC-supervised institution that uses the current
exposure methodology under Sec. 324.34(b) for its standardized risk-
weighted assets, the potential future credit exposure (PFE) for each
derivative contract or each single-product netting set of derivative
contracts (including a cleared transaction except as provided in
paragraph (c)(4)(ii)(I) of this section and, at the discretion of the
FDIC-supervised institution, excluding a forward agreement treated as a
derivative contract that is part of a repurchase or reverse repurchase
or a securities borrowing or lending transaction that qualifies for
sales treatment under U.S. GAAP), to which the FDIC-supervised
institution is a counterparty as determined under Sec. 324.34, but
without regard to Sec. 324.34(b), provided that:
(i) A FDIC-supervised institution 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. 324.34,
but without regard to Sec. 324.34(b), provided that it does not adjust
the net-to-gross ratio (NGR); and
(ii) A FDIC-supervised institution that chooses to exclude the PFE
of credit derivatives or other similar instruments through which it
provides credit protection pursuant to paragraph (c)(4)(ii)(B)(1) of
this section must do so consistently over time for the calculation of
the PFE for all such instruments; or
(2)(i) For a FDIC-supervised institution that uses the standardized
approach for counterparty credit risk under section Sec. 324.132(c)
for its standardized risk-weighted assets, the PFE for each netting set
to which the FDIC-supervised institution is a counterparty (including
cleared transactions except as provided in paragraph (c)(4)(ii)(I) of
this section and, at the discretion of the FDIC-supervised institution,
excluding a forward agreement treated as a derivative contract that is
part of a repurchase or reverse repurchase or a securities borrowing or
lending transaction that qualifies for sales treatment under U.S.
GAAP), as determined under Sec. 324.132(c)(7), in which the term C in
Sec. 324.132(c)(7)(i) equals zero except as provided in paragraph
(c)(4)(ii)(B)(2)(ii) of this section, and, for any counterparty
[[Page 4431]]
that is not a commercial end-user, multiplied by 1.4; and
(ii) For purposes of paragraph (c)(4)(ii)(B)(2)(i) of this section,
a FDIC-supervised institution may set the value of the term C in Sec.
324.132(c)(7)(i) equal to the amount of collateral posted by a clearing
member client of the FDIC-supervised institution in connection with the
client-facing derivative transactions within the netting set;
(C)(1)(i) For a FDIC-supervised institution that uses the current
exposure methodology under Sec. 324.34(b) for its standardized risk-
weighted assets, the amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
FDIC-supervised institution's on-balance sheet assets, unless such cash
collateral is all or part of variation margin that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
and
(ii) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
324.34(b), and not the PFE; and
(iii) For the purpose of the calculation of the NGR described in
Sec. 324.34(b)(2)(ii)(B), variation margin described in paragraph
(c)(4)(ii)(C)(1)(ii) of this section may not reduce the net current
credit exposure or the gross current credit exposure; or
(2)(i) For a FDIC-supervised institution that uses the standardized
approach for counterparty credit risk under Sec. 324.132(c) for its
standardized risk-weighted assets, the replacement cost of each
derivative contract or single product netting set of derivative
contracts to which the FDIC-supervised institution is a counterparty,
calculated according to the following formula, and, for any
counterparty that is not a commercial end-user, multiplied by 1.4:
Replacement Cost = max{V-CVMr + CVMp; 0{time}
Where:
V equals the fair value for each derivative contract or each single-
product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (c)(4)(ii)(I) of this
section and, at the discretion of the FDIC-supervised institution,
excluding a forward agreement treated as a derivative contract that
is part of a repurchase or reverse repurchase or a securities
borrowing or lending transaction that qualifies for sales treatment
under U.S. GAAP);
CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section, or, in the case of a client-facing derivative transaction
on behalf of a clearing member client, the amount of collateral
received from the clearing member client; and
CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the
fair value of the derivative contract and that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this
section, or, in the case of a client-facing derivative transaction
on behalf of a clearing member client, the amount of collateral
posted to the clearing member client;
(ii) Notwithstanding paragraph (c)(4)(ii)(C)(2)(i) of this section,
where multiple netting sets are subject to a single variation margin
agreement, a FDIC-supervised institution must apply the formula for
replacement cost provided in Sec. 324.132(c)(10)(i), in which the term
CMA may only include cash collateral that satisfies the
conditions in paragraphs (c)(4)(ii)(C)(3) through (7) of this section;
and
(iii) For purposes of paragraph (c)(4)(ii)(C)(2)(i), a FDIC-
supervised institution 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 FDIC-supervised institution elected
to treat the derivative contract as multiple derivative contracts under
Sec. 324.132(c)(5)(vi);
(3) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation, or an agreement with the counterparty);
(4) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(5) 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;
(6) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph
(c)(4)(ii)(C)(6), currency of settlement means any currency for
settlement specified in the governing qualifying master netting
agreement and the credit support annex to the qualifying master netting
agreement, or in the governing rules for a cleared transaction; and
(7) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
* * * * *
0
29. Section 324.32 is amended by revising paragraph (f) to read as
follows:
Sec. 324.32 General risk weights.
* * * * *
(f) Corporate exposures. (1) A FDIC-supervised institution must
assign a 100 percent risk weight to all its corporate exposures, except
as provided in paragraph (f)(2) of this section.
(2) A FDIC-supervised institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the FDIC-supervised
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
324.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP
arising from the FDIC-supervised institution posting cash collateral to
the QCCP in connection with a cleared transaction that meets the
requirements of Sec. 324.35(b)(3)(i)(B).
(3) A FDIC-supervised institution must assign a 2 percent risk
weight to an exposure to a QCCP arising from the FDIC-supervised
institution posting cash collateral to the QCCP in connection with a
cleared transaction that meets the requirements of Sec.
324.35(c)(3)(i).
* * * * *
0
30. Section 324.34 is revised to read as follows:
Sec. 324.34 Derivative contracts.
(a) Exposure amount for derivative contracts--(1) FDIC-supervised
institution that is not an advanced approaches FDIC-supervised
institution. (i) A FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution must use the current exposure
methodology (CEM) described in paragraph (b) of this section to
calculate the exposure amount for all its OTC derivative contracts,
unless the FDIC-supervised
[[Page 4432]]
institution makes the election provided in paragraph (a)(1)(ii) of this
section.
(ii) A FDIC-supervised institution that is not an advanced
approaches FDIC-supervised institution may elect to calculate the
exposure amount for all its OTC derivative contracts under the
standardized approach for counterparty credit risk (SA-CCR) in Sec.
324.132(c) by notifying the FDIC, rather than calculating the exposure
amount for all its derivative contracts using CEM. A FDIC-supervised
institution that elects under this paragraph (a)(1)(ii) to calculate
the exposure amount for its OTC derivative contracts under SA-CCR must
apply the treatment of cleared transactions under Sec. 324.133 to its
derivative contracts that are cleared transactions and to all default
fund contributions associated with such derivative contracts, rather
than applying Sec. 324.35. A FDIC-supervised institution that is not
an advanced approaches FDIC-supervised institution must use the same
methodology to calculate the exposure amount for all its derivative
contracts and, if a FDIC-supervised institution has elected to use SA-
CCR under this paragraph (a)(1)(ii), the FDIC-supervised institution
may change its election only with prior approval of the FDIC.
(2) Advanced approaches FDIC-supervised institution. An advanced
approaches FDIC-supervised institution must calculate the exposure
amount for all its derivative contracts using SA-CCR in Sec.
324.132(c) for purposes of standardized total risk-weighted assets. An
advanced approaches FDIC-supervised institution must apply the
treatment of cleared transactions under Sec. 324.133 to its derivative
contracts that are cleared transactions and to all default fund
contributions associated with such derivative contracts for purposes of
standardized total risk-weighted assets.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to a qualifying master netting agreement is equal to the
sum of the FDIC-supervised institution's current credit exposure and
potential future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
this section.
(B) For purposes of calculating either the PFE under this paragraph
(b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this
section for exchange rate contracts and other similar contracts in
which the notional principal amount is equivalent to the cash flows,
notional principal amount is the net receipts to each party falling due
on each value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to this section, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A FDIC-supervised institution must use an OTC derivative
contract's effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
OTC derivative contract) rather than the apparent or stated notional
principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 1 to Sec. 324.34--Conversion Factor Matrix for Derivative Contracts 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity 2 Interest rate exchange rate grade grade Equity metals Other
and gold reference reference (except gold)
asset) 3 asset)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................ 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or 0.005 0.05 0.05 0.10 0.08 0.07 0.12
equal to five years....................
Greater than five years................. 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A FDIC-supervised institution must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative whose reference
asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A FDIC-supervised institution must use
the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x
Agross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the NGR,
the gross current credit exposure equals the sum of the positive
current credit exposures (as determined under paragraph (b)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) A FDIC-supervised institution using CEM under
paragraph (b) of this section may recognize the credit risk mitigation
benefits of financial collateral that
[[Page 4433]]
secures an OTC derivative contract or multiple OTC derivative contracts
subject to a qualifying master netting agreement (netting set) by using
the simple approach in Sec. 324.37(b).
(2) As an alternative to the simple approach, a FDIC-supervised
institution using CEM under paragraph (b) of this section may recognize
the credit risk mitigation benefits of financial collateral that
secures such a contract or netting set if the financial collateral is
marked-to-fair value on a daily basis and subject to a daily margin
maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 324.37(c). The FDIC-supervised
institution must substitute the exposure amount calculated under
paragraph (b)(1) or (2) of this section for [Sigma]E in the equation in
Sec. 324.37(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. A FDIC-supervised institution that purchases a credit
derivative that is recognized under Sec. 324.36 as a credit risk
mitigant for an exposure that is not a covered position under subpart F
of this part is not required to compute a separate counterparty credit
risk capital requirement under this subpart provided that the FDIC-
supervised institution does so consistently for all such credit
derivatives. The FDIC-supervised institution must either include all or
exclude all such credit derivatives that are subject to a qualifying
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(2) Protection providers. (i) A FDIC-supervised institution that is
the protection provider under a credit derivative must treat the credit
derivative as an exposure to the underlying reference asset. The FDIC-
supervised institution is not required to compute a counterparty credit
risk capital requirement for the credit derivative under this subpart,
provided that this treatment is applied consistently for all such
credit derivatives. The FDIC-supervised institution must either include
all or exclude all such credit derivatives that are subject to a
qualifying master netting agreement from any measure used to determine
counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes unless the FDIC-
supervised institution is treating the credit derivative as a covered
position under subpart F of this part, in which case the FDIC-
supervised institution must compute a supplemental counterparty credit
risk capital requirement under this section.
(e) Counterparty credit risk for equity derivatives. (1) A FDIC-
supervised institution must treat an equity derivative contract as an
equity exposure and compute a risk-weighted asset amount for the equity
derivative contract under Sec. Sec. 324.51 through 324.53 (unless the
FDIC-supervised institution is treating the contract as a covered
position under subpart F of this part).
(2) In addition, the FDIC-supervised institution must also
calculate a risk-based capital requirement for the counterparty credit
risk of an equity derivative contract under this section if the FDIC-
supervised institution is treating the contract as a covered position
under subpart F of this part.
(3) If the FDIC-supervised institution risk weights the contract
under the Simple Risk-Weight Approach (SRWA) in Sec. 324.52, the FDIC-
supervised institution may choose not to hold risk-based capital
against the counterparty credit risk of the equity derivative contract,
as long as it does so for all such contracts. Where the equity
derivative contracts are subject to a qualified master netting
agreement, a FDIC-supervised institution using the SRWA must either
include all or exclude all of the contracts from any measure used to
determine counterparty credit risk exposure.
(f) Clearing member FDIC-supervised institution's exposure amount.
The exposure amount of a clearing member FDIC-supervised institution
using CEM under paragraph (b) of this section for a client-facing
derivative transaction or netting set of client-facing derivative
transactions equals the exposure amount calculated according to
paragraph (b)(1) or (2) of this section multiplied by the scaling
factor the square root of \1/2\ (which equals 0.707107). If the FDIC-
supervised institution determines that a longer period is appropriate,
the FDIC-supervised institution must use a larger scaling factor to
adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.036
Where H = the holding period greater than or equal to five days.
Additionally, the FDIC may require the FDIC-supervised institution to
set a longer holding period if the FDIC determines that a longer period
is appropriate due to the nature, structure, or characteristics of the
transaction or is commensurate with the risks associated with the
transaction.
0
31. Section 324.35 is amended by adding paragraph (a)(3), revising
paragraph (b)(4)(i), and adding paragraph (c)(3)(iii) to read as
follows:
Sec. 324.35 Cleared transactions.
(a) * * *
(3) Alternate requirements. Notwithstanding any other provision of
this section, an advanced approaches FDIC-supervised institution or a
FDIC-supervised institution that is not an advanced approaches FDIC-
supervised institution and that has elected to use SA-CCR under Sec.
324.34(a)(1) must apply Sec. 324.133 to its derivative contracts that
are cleared transactions rather than this section.
(b) * * *
(4) * * *
(i) Notwithstanding any other requirements in this section,
collateral posted by a clearing member client FDIC-supervised
institution that is held by a custodian (in its capacity as custodian)
in a manner that is bankruptcy remote from the CCP, clearing member,
and other clearing member clients of the clearing member, is not
subject to a capital requirement under this section.
* * * * *
(c) * * *
(3) * * *
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member FDIC-supervised institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a CCP where the clearing member FDIC-supervised
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 324.3(a), and the
clearing member FDIC-supervised institution is not obligated to
reimburse the clearing member client in the event of the CCP default.
* * * * *
0
32. Section 324.37 is amended by revising paragraphs (c)(3)(iii),
(c)(3)(iv)(A) and (C), (c)(4)(i)(B) introductory text, and
(c)(4)(i)(B)(1) to read as follows:
Sec. 324.37 Collateralized transactions.
* * * * *
(c) * * *
(3) * * *
(iii) For repo-style transactions and client-facing derivative
transactions, a
[[Page 4434]]
FDIC-supervised institution may multiply the standard supervisory
haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by
the square root of \1/2\ (which equals 0.707107). For client-facing
derivative transactions, if a larger scaling factor is applied under
Sec. 324.34(f), the same factor must be used to adjust the supervisory
haircuts.
(iv) * * *
(A) 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;
* * * * *
(C) 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.
* * * * *
(4) * * *
(i) * * *
(B) The minimum holding period for a repo-style transaction and
client-facing derivative transaction is five business days and for an
eligible margin loan and a derivative contract other than a client-
facing derivative transaction is ten business days except for
transactions or netting sets for which paragraph (c)(4)(i)(C) of this
section applies. When a FDIC-supervised institution calculates an own-
estimates haircut on a TN-day holding period, which is
different from the minimum holding period for the transaction type, the
applicable haircut (HM) is calculated using the following
square root of time formula:
* * * * *
(1) TM equals 5 for repo-style transactions and client-
facing derivative transactions and 10 for eligible margin loans and
derivative contracts other than client-facing derivative transactions;
* * * * *
Sec. Sec. 324.134, 324.202, and 324.210 [Amended]
0
33. For each section listed in the following table, the footnote number
listed in the ``Old footnote number'' column is redesignated as the
footnote number listed in the ``New footnote number'' column as
follows:
------------------------------------------------------------------------
Old footnote New footnote
Section number number
------------------------------------------------------------------------
324.134(d)(3)........................... 30 31
324.202, paragraph (1) introductory text 31 32
of the definition of ``Covered
position''.............................
324.202, paragraph (1)(i) of the 32 33
definition of ``Covered position''.....
324.210(e)(1)........................... 33 34
------------------------------------------------------------------------
0
34. Section 324.132 is amended by:
0
a. Revising paragraphs (b)(2)(ii)(A)(3) through (5);
0
b. Adding paragraphs (b)(2)(ii)(A)(6) and (7);
0
c. Revising paragraphs (c) heading and (c)(1) and (2) and (5) through
(8);
0
d. Adding paragraphs (c)(9) through (11);
0
e. Revising paragraph (d)(10)(i);
0
f. In paragraphs (e)(5)(i)(A) and (H), removing ``Table 3 to Sec.
324.132'' and adding in its pace ``Table 4 to this section'';
0
g. In paragraphs (e)(5)(i)(C) and (e)(6)(i)(B), removing ``current
exposure methodology'' and adding in its place ``standardized approach
for counterparty credit risk'' wherever it appears;
0
h. Redesignating Table 3 to Sec. 324.132 following paragraph
(e)(5)(ii) as Table 4 to Sec. 324.132; and
0
i. Revising paragraph (e)(6)(viii).
The revisions and additions read as follows:
Sec. 324.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(A) * * *
(3) For repo-style transactions and client-facing derivative
transactions, a FDIC-supervised institution may multiply the
supervisory haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) of
this section by the square root of \1/2\ (which equals 0.707107). If
the FDIC-supervised institution 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)(A)(6) of this section.
(4) A FDIC-supervised institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days (for eligible margin loans) or five business days (for
repo-style transactions), using the formula provided in paragraph
(b)(2)(ii)(A)(6) of this section where the conditions in this paragraph
(b)(2)(ii)(A)(4) apply. If the number of trades in a netting set
exceeds 5,000 at any time during a quarter, a FDIC-supervised
institution must adjust the supervisory haircuts upward on the basis of
a minimum holding period of twenty business days for the following
quarter (except when a FDIC-supervised institution is calculating EAD
for a cleared transaction under Sec. 324.133). If a netting set
contains one or more trades involving illiquid collateral, a FDIC-
supervised institution must adjust the supervisory haircuts upward on
the basis of a 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
FDIC-supervised institution 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.
(5)(i) A FDIC-supervised institution must adjust the supervisory
haircuts upward on the basis of a holding period longer than ten
business days for collateral associated with derivative contracts (five
business days for client-facing derivative contracts) using the formula
provided in paragraph (b)(2)(ii)(A)(6) of this section where the
conditions in this paragraph (b)(2)(ii)(A)(5)(i) apply. For collateral
associated with a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, a FDIC-supervised institution must use a 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, a FDIC-supervised institution must use
a minimum holding period of twenty business days.
(ii) Notwithstanding paragraph (b)(2)(ii)(A)(1) or (3) or
(b)(2)(ii)(A)(5)(i) of this section, for collateral associated with a
derivative contract 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
[[Page 4435]]
period is twice the amount provided under paragraph (b)(2)(ii)(A)(1) or
(3) or (b)(2)(ii)(A)(5)(i) of this section.
(6) A FDIC-supervised institution must adjust the standard
supervisory haircuts upward, pursuant to the adjustments provided in
paragraphs (b)(2)(ii)(A)(3) through (5) of this section, using the
following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.037
Where:
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
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.
(7) If the instrument a FDIC-supervised institution has lent, sold
subject to repurchase, or posted as collateral does not meet the
definition of financial collateral, the FDIC-supervised institution
must use a 25.0 percent haircut for market price volatility (Hs).
* * * * *
(c) EAD for derivative contracts--(1) Options for determining EAD.
A FDIC-supervised institution must determine the EAD for a derivative
contract using the standardized approach for counterparty credit risk
(SA-CCR) under paragraph (c)(5) of this section or using the internal
models methodology described in paragraph (d) of this section. If a
FDIC-supervised institution elects to use SA-CCR for one or more
derivative contracts, the exposure amount determined under SA-CCR is
the EAD for the derivative contract or derivatives contracts. A FDIC-
supervised institution must use the same methodology to calculate the
exposure amount for all its derivative contracts and may change its
election only with prior approval of the FDIC. A FDIC-supervised
institution may reduce the EAD calculated according to paragraph (c)(5)
of this section by the credit valuation adjustment that the FDIC-
supervised institution 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 FDIC-supervised institution'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) of this
section, the following definitions apply:
(i) End date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument,
except as otherwise provided in paragraph (c) of this section.
(ii) Start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument, except as otherwise provided in paragraph (c) of this
section.
(iii) Hedging set means:
(A) With respect to interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity categories: Energy, metal, agricultural, or other
commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, the FDIC may require a FDIC-supervised institution to
include the derivative contract in each appropriate hedging set under
paragraphs (c)(2)(iii)(A) through (E) of this section.
* * * * *
(5) Exposure amount. (i) The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section.
(ii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set
calculated under paragraph (c)(5)(i) of this section and the exposure
amount of the netting set calculated as if the netting set were not
subject to a variation margin agreement.
(iii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set that consists of
only sold options in which the premiums have been fully paid by the
counterparty to the options and where the options are not subject to a
variation margin agreement is zero.
(iv) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set in which the
counterparty is a commercial end-user is equal to the sum of
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, a FDIC-supervised institution may elect, at the
netting set level, 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 a FDIC-supervised institution 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
[[Page 4436]]
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, a FDIC-supervised institution 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 FDIC-
supervised institution is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the 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] TR24JA20.038
Where:
V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting set; and
A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the potential future exposure for purposes
of total leverage exposure under Sec. 324.10(c)(4)(ii)(B), the
potential future exposure for multiple netting sets subject to a single
variation margin agreement must be calculated according to paragraph
(c)(10)(ii) of this section.
(iv) 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 total leverage exposure under Sec. 324.10(c)(4)(ii)(B),
the potential future exposure for a netting set subject to multiple
variation margin agreements or a hybrid netting set must be calculated
according to paragraph (c)(11)(ii) of this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, a FDIC-supervised institution may use either of
the formulas provided in paragraphs (c)(8)(i)(A) and (B) of this
section:
(A) Formula 1 is as follows:
[GRAPHIC] [TIFF OMITTED] TR24JA20.039
(B) Formula 2 is as follows:
Hedging set amount = [bond]AddOnTB1IR[bond] +
[bond]AddOnTB2IR + [bond]AddOnTB3IR[bond].
Where in paragraphs (c)(8)(i)(A) and (B) of this section:
AddOnTB1IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section,
within the hedging set with an end date of less than one year from
the present date;
AddOnTB2IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section,
within the hedging set with an end date of one to five years from
the present date; and
[[Page 4437]]
AddOnTB3IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section,
within the hedging set with an end date of more than five years from
the present date.
(ii) Exchange rate derivative contracts. For an exchange rate
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] TR24JA20.040
Where:
k is each reference entity within the hedging set.
K is the number of reference entities within the hedging set.
AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
reference entity k.
[rho]k equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.041
Where:
k is each commodity type within the hedging set.
K is the number of commodity types within the hedging set.
AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for
all derivative contracts within the hedging set that reference
commodity type k.
[rho] equals the applicable supervisory correlation factor, as
provided in Table 2 to this section.
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, a
FDIC-supervised institution must calculate a separate hedging set
amount for each basis derivative contract hedging set and each
volatility derivative contract hedging set. A FDIC-supervised
institution must calculate such hedging set amounts using one of the
formulas under paragraphs (c)(8)(i) through (iv) that corresponds to
the primary risk factor of the hedging set being calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, a
FDIC-supervised institution must determine the adjusted notional amount
of derivative contract, pursuant to paragraph (c)(9)(ii) of this
section, and multiply the adjusted notional amount by each of the
supervisory delta adjustment, pursuant to paragraph (c)(9)(iii) of this
section, the maturity factor, pursuant to paragraph (c)(9)(iv) of this
section, and the applicable supervisory factor, as provided in Table 2
to this section.
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.042
Where:
S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
E is the number of business days from the present day until the end
date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount is equal
to the time-weighted average of the contractual notional amounts of
such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a factor
and all rates of the derivative contract are multiplied by the same
factor, the notional amount is equal to the notional amount of an
equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. If both legs of
the exchange rate derivative contract are denominated in currencies
other than
[[Page 4438]]
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 FDIC-supervised institution must set the adjusted
notional amount of the derivative contract equal to the notional amount
of the derivative contract multiplied by the number of exchanges of
principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity derivative
contract, the adjusted notional amount is the product of the fair value
of one unit of the reference instrument underlying the derivative
contract and the number of such units referenced by the derivative
contract.
(2) Notwithstanding paragraph (c)(9)(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 FDIC-supervised institution must replace the
unit price with the underlying volatility referenced by the volatility
derivative contract and replace the number of units with the notional
amount of the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract
that is not an option contract or collateralized debt obligation
tranche, the supervisory delta adjustment is 1 if the fair value of the
derivative contract increases when the value of the primary risk factor
increases and -1 if the fair value of the derivative contract decreases
when the value of the primary risk factor increases.
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following formulas,
as applicable:
[GRAPHIC] [TIFF OMITTED] TR24JA20.043
(2) As used in the formulas in Table 2 to this section:
(i) [Phi] is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) [lgr] equals zero for all derivative contracts except interest
rate options for the currencies where interest rates have negative
values. The same value of [lgr] must be used for all interest rate
options that are denominated in the same currency. To determine the
value of [lgr] for a given currency, a FDIC-supervised institution must
find the lowest value L of P and K of all interest rate options in a
given currency that the FDIC-supervised institution has with all
counterparties. Then, [lgr] is set according to this formula: [lgr] =
max{-L + 0.1%, 0{time} ; and
(vi) [sigma] equals the supervisory option volatility, as provided
in Table 3 to this section.
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined by
the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.044
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this
section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated to
the FDIC-supervised institution's exposure to the total notional amount
of all underlying exposures, expressed as a decimal value between zero
and one; \30\
---------------------------------------------------------------------------
\30\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the FDIC-
supervised institution's exposure. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) notional
amounts of the underlying exposures are subordinated to the FDIC-
supervised institution's exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio of
the notional amounts of all underlying exposures that are senior to the
FDIC-supervised institution's exposure to the total notional amount of
all underlying exposures, expressed as a decimal value between zero and
one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the FDIC-
supervised institution and is designated with a negative sign if the
collateralized debt obligation tranche was sold by the FDIC-supervised
institution.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract that is subject to a variation margin agreement, excluding
derivative contracts that are subject to a variation
[[Page 4439]]
margin agreement under which the counterparty is not required to post
variation margin, is determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.045
Where MPOR refers to the period from the most recent exchange of
collateral covering a netting set of derivative contracts with a
defaulting counterparty until the derivative contracts are closed out
and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a 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, MPOR cannot be less than five business days plus the
periodicity of re-margining expressed in business days minus one
business day; and
(iii) For a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, 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 two or more outstanding disputes
over margin that lasted longer than the MPOR over the previous two
quarters, the applicable floor is twice the amount provided in
(c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts under
which the counterparty is not required to post variation margin, is
determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TR24JA20.046
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 a
FDIC-supervised institution 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 Board-regulated
institution 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.
A FDIC-supervised institution must separate a derivative contract into
separate derivative contracts, according to the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must be
treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must be
represented as the combination of one bought European option and one
sold European option of the same type as the original option (put or
call) with the strikes set equal to 0.95 * K and 1.05 * K so that the
payoff of the binary option is reproduced exactly outside the region
between the two strikes. The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold options is capped at
the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), a FDIC-supervised
institution must treat each standard option component must be treated
as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment
options, (such as interest rate caps and floors), a FDIC-supervised
institution may represent each payment option as a combination of
effective single-payment options (such as interest rate caplets and
floorlets).
(D) A FDIC-supervised institution 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, a FDIC-supervised institution shall assign a
single replacement cost to multiple netting sets that are subject to a
single variation margin agreement under which the counterparty must
post variation margin, calculated according to the following formula:
Replacement Cost = max{[Sigma]NS max{VNS; 0{time} - max{CMA; 0{time} ;
0{time} + max{[Sigma]NS min{VNS; 0{time} - min{CMA; 0{time} ;
0{time}
Where:
NS is each netting set subject to the variation margin agreement MA;
VNS is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set NS;
and
CMA is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts
within the netting sets subject to the single variation margin
agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, a FDIC-supervised institution shall
assign a single potential future exposure to multiple netting sets that
are subject to a single variation margin agreement under which the
counterparty must post variation margin equal to the sum of the
potential future exposure of each such netting set, each calculated
according to paragraph (c)(7) of this section as if such nettings sets
were not subject to a variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(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, a
FDIC-supervised institution must divide the netting set
[[Page 4440]]
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 3 to Sec. 324.132--Supervisory Option Volatility, Supervisory Correlation Parameters, and Supervisory
Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
option correlation Supervisory
Asset class Subclass 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 N/A............ 100 50 1.3
grade.
Sub-speculative N/A............ 100 50 6.0
grade.
Credit, index................ Investment Grade N/A............ 80 80 0.38
Speculative N/A............ 80 80 1.06
Grade.
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 3, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this Table 3.
(d) * * *
(10) * * *
(i) With prior written approval of the FDIC, a FDIC-supervised
institution may set EAD equal to a measure of counterparty credit risk
exposure, such as peak EAD, that is more conservative than an alpha of
1.4 times the larger of EPEunstressed and
EPEstressed for every counterparty whose EAD will be
measured under the alternative measure of counterparty exposure. The
FDIC-supervised institution must demonstrate the conservatism of the
measure of counterparty credit risk exposure used for EAD. With respect
to paragraph (d)(10)(i) of this section:
(A) For material portfolios of new OTC derivative products, the
FDIC-supervised institution may assume that the standardized approach
for counterparty credit risk pursuant to paragraph (c) of this section
meets the conservatism requirement of this section for a period not to
exceed 180 days.
(B) For immaterial portfolios of OTC derivative contracts, the
FDIC-supervised institution generally may assume that the standardized
approach for counterparty credit risk pursuant to paragraph (c) of this
section meets the conservatism requirement of this section.
* * * * *
(e) * * *
(6) * * *
(viii) If a FDIC-supervised institution uses the standardized
approach for counterparty credit risk pursuant to paragraph (c) of this
section to calculate the EAD for any immaterial portfolios of OTC
derivative contracts, the FDIC-supervised institution must use that EAD
as a constant EE in the formula for the calculation of CVA with the
maturity equal to the maximum of:
(A) Half of the longest maturity of a transaction in the netting
set; and
(B) The notional weighted average maturity of all transactions in
the netting set.
0
35. Section 324.133 is amended by revising paragraphs (a), (b)(1)
through (3), (b)(4)(i), (c)(1) through (3), (c)(4)(i), and (d) to read
as follows:
Sec. 324.133 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A FDIC-
supervised institution that is a clearing member client must use the
methodologies described in paragraph (b) of this section to calculate
risk-weighted assets for a cleared transaction.
(2) Clearing members. A FDIC-supervised institution that is a
clearing member must use the methodologies described in paragraph (c)
of this section to calculate its risk-weighted assets for a cleared
transaction and paragraph (d) of this section to calculate its risk-
weighted assets for its default fund contribution to a CCP.
(b) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a FDIC-
supervised institution that is a clearing member client must multiply
the trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (b)(2) of this section, by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client FDIC-supervised institution's total
risk-weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
[[Page 4441]]
(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. 324.132(c) or
(d), plus the fair value of the collateral posted by the clearing
member client FDIC-supervised institution and held by the CCP or a
clearing member in a manner that is not bankruptcy remote. When the
FDIC-supervised institution calculates EAD for the cleared transaction
using the methodology in Sec. 324.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 324.132(b)(2) or (3) or (d), plus the fair value of
the collateral posted by the clearing member client FDIC-supervised
institution and held by the CCP or a clearing member in a manner that
is not bankruptcy remote. When the FDIC-supervised institution
calculates EAD for the cleared transaction under Sec. 324.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client FDIC-supervised institution must
apply a risk weight of:
(A) 2 percent if the collateral posted by the FDIC-supervised
institution to the QCCP or clearing member is subject to an arrangement
that prevents any loss to the clearing member client FDIC-supervised
institution due to the joint default or a concurrent insolvency,
liquidation, or receivership proceeding of the clearing member and any
other clearing member clients of the clearing member; and the clearing
member client FDIC-supervised institution has conducted sufficient
legal review to conclude with a well-founded basis (and maintains
sufficient written documentation of that legal review) that in the
event of a legal challenge (including one resulting from an event of
default or from liquidation, insolvency, or receivership proceedings)
the relevant court and administrative authorities would find the
arrangements to be legal, valid, binding, and enforceable under the law
of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client FDIC-supervised institution must apply the risk
weight applicable to the CCP under subpart D of this part.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member client FDIC-supervised
institution that is held by a custodian (in its capacity as a
custodian) in a manner that is bankruptcy remote from the CCP, clearing
member, and other clearing member clients of the clearing member, is
not subject to a capital requirement under this section.
* * * * *
(c) * * *
(1) Risk-weighted assets for cleared transactions. (i) To determine
the risk-weighted asset amount for a cleared transaction, a clearing
member FDIC-supervised institution must multiply the trade exposure
amount for the cleared transaction, calculated in accordance with
paragraph (c)(2) of this section by the risk weight appropriate for the
cleared transaction, determined in accordance with paragraph (c)(3) of
this section.
(ii) A clearing member FDIC-supervised institution's total risk-
weighted assets for cleared transactions is the sum of the risk-
weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member FDIC-supervised
institution must calculate its trade exposure amount for a cleared
transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 324.132(c) or (d), plus the
fair value of the collateral posted by the clearing member FDIC-
supervised institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member FDIC-supervised institution
calculates EAD for the cleared transaction using the methodology in
Sec. 324.132(d), EAD equals EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 324.132(b)(2) or (3) or (d), plus the
fair value of the collateral posted by the clearing member FDIC-
supervised institution and held by the CCP in a manner that is not
bankruptcy remote. When the clearing member FDIC-supervised institution
calculates EAD for the cleared transaction under Sec. 324.132(d), EAD
equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member FDIC-
supervised institution must apply a risk weight of 2 percent to the
trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member FDIC-supervised institution must apply the risk weight
applicable to the CCP according to subpart D of this part.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member FDIC-supervised institution may apply a risk
weight of zero percent to the trade exposure amount for a cleared
transaction with a QCCP where the clearing member FDIC-supervised
institution is acting as a financial intermediary on behalf of a
clearing member client, the transaction offsets another transaction
that satisfies the requirements set forth in Sec. 324.3(a), and the
clearing member FDIC-supervised institution is not obligated to
reimburse the clearing member client in the event of the QCCP default.
(4) * * *
(i) Notwithstanding any other requirement of this section,
collateral posted by a clearing member FDIC-supervised institution that
is held by a custodian (in its capacity as a custodian) in a manner
that is bankruptcy remote from the CCP, clearing member, and other
clearing member clients of the clearing member, is not subject to a
capital requirement under this section.
* * * * *
(d) Default fund contributions--(1) General requirement. A clearing
member FDIC-supervised institution must determine the risk-weighted
asset amount for a default fund contribution to a CCP at least
quarterly, or more frequently if, in the opinion of the FDIC-supervised
institution or the FDIC, there is a material change in the financial
condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member FDIC-supervised institution's
risk-weighted asset amount for default fund contributions to CCPs that
are not QCCPs equals the sum of such default fund contributions
multiplied by 1,250 percent, or an amount determined by the FDIC, based
on factors such as size, structure, and membership characteristics of
the CCP and riskiness of its transactions, in cases where such default
fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member FDIC-supervised institution's risk-weighted
asset amount
[[Page 4442]]
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 FDIC-supervised institution's capital requirement for
its default fund contribution to a QCCP (KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TR24JA20.047
Where:
KCCP is the hypothetical capital requirement of the QCCP, as
determined under paragraph (d)(5) of this section;
DFpref is the prefunded default fund contribution of the clearing
member FDIC-supervised institution to the QCCP;
DFCCP is the QCCP's own prefunded amounts that are contributed to
the default waterfall and are junior or pari passu with prefunded
default fund contributions of clearing members of the CCP; and
DFCMpref 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, a FDIC-supervised institution must rely
on such disclosed figure instead of calculating KCCP under
this paragraph (d)(5), unless the FDIC-supervised institution
determines that a more conservative figure is appropriate based on the
nature, structure, or characteristics of the QCCP. The hypothetical
capital requirement of a QCCP (KCCP), as determined by the FDIC-
supervised institution, is equal to:
KCCP = [Sigma]CMi EADi * 1.6 percent
Where:
CMi is each clearing member of the QCCP; and
EADi is the exposure amount of each clearing member of the QCCP to
the QCCP, as determined under paragraph (d)(6) of this section.
(6) EAD of a clearing member FDIC-supervised institution to a QCCP.
(i) The EAD of a clearing member FDIC-supervised institution to a QCCP
is equal to the sum of the EAD for derivative contracts determined
under paragraph (d)(6)(ii) of this section and the EAD for repo-style
transactions determined under paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the FDIC-
supervised institution and the CCP that are cleared transactions and
any guarantees that the FDIC-supervised institution has provided to the
CCP with respect to performance of a clearing member client on a
derivative contract, the EAD is equal to the exposure amount for all
such derivative contracts and guarantees of derivative contracts
calculated under SA-CCR in Sec. 324.132(c) (or, with respect to a CCP
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. 324.132(c)(9)(iv); less the value of all
collateral held by the CCP posted by the clearing member FDIC-
supervised institution or a clearing member client of the FDIC-
supervised institution in connection with a derivative contract for
which the FDIC-supervised institution has provided a guarantee to the
CCP and the amount of the prefunded default fund contribution of the
FDIC-supervised institution to the CCP.
(iii) With respect to any repo-style transactions between the FDIC-
supervised institution and the CCP that are cleared transactions, EAD
is equal to:
EAD = max{EBRM - IM - DF; 0{time}
Where:
EBRM is the sum of the exposure amounts of each repo-style
transaction between the FDIC-supervised institution and the CCP as
determined under Sec. 324.132(b)(2) and without recognition of any
collateral securing the repo-style transactions;
IM is the initial margin collateral posted by the FDIC-supervised
institution to the CCP with respect to the repo-style transactions;
and
DF is the prefunded default fund contribution of the FDIC-supervised
institution to the CCP 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. 324.132(b) for repo-style
transactions and to Sec. 324.132(c)(5) for derivative contracts.
(vi) Notwithstanding any other provision of paragraph (d) of this
section, with the prior approval of the FDIC, a FDIC-supervised
institution may determine the risk-weighted asset amount for a default
fund contribution to a QCCP according to Sec. 324.35(d)(3)(ii).
0
36. Section 324.173 is amended in Table 13 to Sec. 324.173 by revising
line 4 under Part 2, Derivative exposures, to read as follows:
Sec. 324.173 Disclosures by certain advanced approaches FDIC-
supervised institutions and Category III FDIC-supervised institutions.
* * * * *
[[Page 4443]]
Table 13 to Sec. 324.173--Supplementary Leverage Ratio
----------------------------------------------------------------------------------------------------------------
Dollar amounts in thousands
---------------------------------------------------
Tril Bil Mil Thou
----------------------------------------------------------------------------------------------------------------
* * * * * * *
----------------------------------------------------------------------------------------------------------------
Part 2: Supplementary leverage ratio
----------------------------------------------------------------------------------------------------------------
* * * * * * *
----------------------------------------------------------------------------------------------------------------
Derivative exposures
----------------------------------------------------------------------------------------------------------------
* * * * * *
4 Current exposure for derivative exposures (that is, net of
cash variation margin).....................................
* * * * * * *
----------------------------------------------------------------------------------------------------------------
0
37. Section 324.300 is amended by adding paragraphs (g) and (h) to read
as follows:
Sec. 324.300 Transitions.
* * * * *
(g) SA-CCR. An advanced approaches FDIC-supervised institution may
use CEM rather than SA-CCR for purposes of Sec. Sec. 324.34(a) and
324.132(c) until January 1, 2022. A FDIC-supervised institution must
provide prior notice to the FDIC if it decides to begin using SA-CCR
before January 1, 2022. On January 1, 2022, and thereafter, an advanced
approaches FDIC-supervised institution must use SA-CCR for purposes of
Sec. Sec. 324.34(a), 324.132(c), and 324.133(d). Once an advanced
approaches FDIC-supervised institution has begun to use SA-CCR, the
advanced approaches FDIC-supervised institution may not change to use
CEM.
(h) Default fund contributions. Prior to January 1, 2022, a FDIC-
supervised institution that calculates the exposure amounts of its
derivative contracts under the standardized approach for counterparty
credit risk in Sec. 324.132(c) may calculate the risk-weighted asset
amount for a default fund contribution to a QCCP under either method 1
under Sec. 324.35(d)(3)(i) or method 2 under Sec. 324.35(d)(3)(ii),
rather than under Sec. 324.133(d).
PART 327--ASSESSMENTS
0
38. The authority citation for part 327 continues to read as follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.
0
39. Appendix A to subpart A of part 327 is amended in section VI by
revising the entries ``(2) Top 20 Counterparty Exposure/Tier 1 Capital
and Reserves'' and ``(3) Largest Counterparty Exposure/Tier 1 Capital
and Reserves'' to read as follows:
Appendix A to Subpart A of Part 327--Method To Derive Pricing
Multipliers and Uniform Amount
* * * * *
VI. Description of Scorecard Measures
------------------------------------------------------------------------
Scorecard measures \1\ Description
------------------------------------------------------------------------
* * * * * * *
(2) Top 20 Counterparty Sum of the 20 largest total exposure
Exposure/Tier 1 Capital and amounts to counterparties divided by
Reserves. Tier 1 capital and reserves. The total
exposure amount is equal to the sum of
the institution's exposure amounts to
one counterparty (or borrower) for
derivatives, securities financing
transactions (SFTs), and cleared
transactions, and its gross lending
exposure (including all unfunded
commitments) to that counterparty (or
borrower). A counterparty includes an
entity's own affiliates. Exposures to
entities that are affiliates of each
other are treated as exposures to one
counterparty (or borrower). Counterparty
exposure excludes all counterparty
exposure to the U.S. Government and
departments or agencies of the U.S.
Government that is unconditionally
guaranteed by the full faith and credit
of the United States. The exposure
amount for derivatives, including OTC
derivatives, cleared transactions that
are derivative contracts, and netting
sets of derivative contracts, must be
calculated using the methodology set
forth in 12 CFR 324.34(b), but without
any reduction for collateral other than
cash collateral that is all or part of
variation margin and that satisfies the
requirements of 12 CFR
324.10(c)(4)(ii)(C)(1)(ii) and (iii) and
324.10(c)(4)(ii)(C)(3) through (7). The
exposure amount associated with SFTs,
including cleared transactions that are
SFTs, must be calculated using the
standardized approach set forth in 12
CFR 324.37(b) or (c). For both
derivatives and SFT exposures, the
exposure amount to central
counterparties must also include the
default fund contribution.\2\
[[Page 4444]]
(3) Largest Counterparty The largest total exposure amount to one
Exposure/Tier 1 Capital and counterparty divided by Tier 1 capital
Reserves. and reserves. The total exposure amount
is equal to the sum of the institution's
exposure amounts to one counterparty (or
borrower) for derivatives, SFTs, and
cleared transactions, and its gross
lending exposure (including all unfunded
commitments) to that counterparty (or
borrower). A counterparty includes an
entity's own affiliates. Exposures to
entities that are affiliates of each
other are treated as exposures to one
counterparty (or borrower). Counterparty
exposure excludes all counterparty
exposure to the U.S. Government and
departments or agencies of the U.S.
Government that is unconditionally
guaranteed by the full faith and credit
of the United States. The exposure
amount for derivatives, including OTC
derivatives, cleared transactions that
are derivative contracts, and netting
sets of derivative contracts, must be
calculated using the methodology set
forth in 12 CFR 324.34(b), but without
any reduction for collateral other than
cash collateral that is all or part of
variation margin and that satisfies the
requirements of 12 CFR
324.10(c)(4)(ii)(C)(1)(ii) and (iii) and
324.10(c)(4)(ii)(C)(3) through (7). The
exposure amount associated with SFTs,
including cleared transactions that are
SFTs, must be calculated using the
standardized approach set forth in 12
CFR 324.37(b) or (c). For both
derivatives and SFT exposures, the
exposure amount to central
counterparties must also include the
default fund contribution.\2\
* * * * * * *
------------------------------------------------------------------------
\1\ The FDIC retains the flexibility, as part of the risk-based
assessment system, without the necessity of additional notice-and-
comment rulemaking, to update the minimum and maximum cutoff values
for all measures used in the scorecard. The FDIC may update the
minimum and maximum cutoff values for the higher-risk assets to Tier 1
capital and reserves ratio in order to maintain an approximately
similar distribution of higher-risk assets to Tier 1 capital and
reserves ratio scores as reported prior to April 1, 2013, or to avoid
changing the overall amount of assessment revenue collected. 76 FR
10672, 10700 (February 25, 2011). The FDIC will review changes in the
distribution of the higher-risk assets to Tier 1 capital and reserves
ratio scores and the resulting effect on total assessments and risk
differentiation between banks when determining changes to the cutoffs.
The FDIC may update the cutoff values for the higher-risk assets to
Tier 1 capital and reserves ratio more frequently than annually. The
FDIC will provide banks with a minimum one quarter advance notice of
changes in the cutoff values for the higher-risk assets to Tier 1
capital and reserves ratio with their quarterly deposit insurance
invoice.
\2\ EAD and SFTs are defined and described in the compilation issued by
the Basel Committee on Banking Supervision in its June 2006 document,
``International Convergence of Capital Measurement and Capital
Standards.'' The definitions are described in detail in Annex 4 of the
document. Any updates to the Basel II capital treatment of
counterparty credit risk would be implemented as they are adopted.
http://www.bis.org/publ/bcbs128.pdf.
* * * * *
Dated: November 18, 2019.
Morris R. Morgan,
First Deputy Comptroller, Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, November 19, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on November 19, 2019.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2019-27249 Filed 1-23-20; 8:45 am]
BILLING CODE 4810-33-P