U.S. SA-CCR Supervisory Factors for Energy Derivatives A 10% Energy SF would align with credit risk evidence

• Supervisory factors should represent the period of risk being managed. As a result, is more appropriate for the calibration of supervisory factors

Energy asset class front month contract market volatility Energy asset class front two years forward market volatility

VolNG VolOil VolPJM VolNG VolOil VolPJM 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% Vol Vol 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%

• Electricity and Natural Gas, over the historical period have demonstrated relatively low volatility when Standard deviation of Asset Calendar year of forward markets in Implied Supervisory measured using forward market history. category greatest volatility calendar year of Factor greatest volatility • Using historical data, MS provided data and calculations Electricity 1/1/08-12/31/08 24% 6% to support a 10% calibration in our public comment Oil 1/1/08-12/31/08 47% 13% Natural Gas 1/1/09-12/31/09 32% 9% letter

1 U.S. SA-CCR Supervisory Factors for Energy Derivatives A 10% Energy SF would align with credit risk in energy transactions

1. Cal18 WTI Pricing: Notional BBLs x Cal18 Prices 2. Cal18 WTI MTM vs SA-CCR vs Mean Positive Exposure 150 90 Oil 1 0 /12 450 1 /10 80 1 1 100 /11 /8 1 1 350 /9 /6 70 1 1 /7 /4 1 1 50 /5 /2 60 250 1 1 /3 50

- $MM 150 $MM

40 $/BBL 50 (50) 30

20 -50 (100) 10 -150 (150) 0

Cal18 MTM SA-CCR RWA Exposure at 40% SF

Cal18 MTM ($MM) Notional Quantity (BBLs) * SA-CCR RWA Exposure at 10% SF Max Mean Positive Exposure Cal18 Price ($/BBL) 1/# Spot Contribution to MTM • Energy derivative counterparty credit risk exposures decline, • A 10% Supervisory Factor correctly aligns SA-CCR month by month, as the transaction nears maturity since the credit risk measurements with other reliable counterparty remaining total notional quantity declines credit risk measures (i.e. max mean positive exposure)

• A bank’s counterparty credit risk exposure is determined with • This alignment remains accurate during both positive reference primarily to obligations across the remaining and negative mark-to-market periods months—not spot market volatility in the current month • A 40% Supervisory Factor would materially diverge from • If a counterparty defaults before transaction maturity, the bank other reliable counterparty credit risk measures calculates its close-out exposure with reference to forward contract prices for each of the remaining months (i.e., a *The notional amount in this example is 1 million Barrels of Oil (BBL) per month for 1 counterparty default does not result in a bank being exposed to year, or 12 million BBL at execution. The notional value is constant for the first year and then declines by 1 million BBL per month in the second year. The notional value spot market prices at close-out) does not correspond to the vertical axis amounts but is included to show the relationship between notional value, market prices and mark-to-market (MTM) values.

2 U.S. SA-CCR Supervisory Factors for Energy Derivatives A 10% Energy SF would align with credit risk in energy derivative transactions

1. Cal17 Henry Hub Swap Pricing: Notional MMBTU x Cal17 Prices 2. Cal17 Henry Hub MTM vs SA-CCR vs Mean Positive Exposure Natural Gas 15 4.5 45

1 13 0 /12 4 40 1 11 /10 35 1 3.5 /11 1 /8 30 9 1 9 3 / 1 7 /6 25 1 /7 1 2.5 1 /4 5 /5 20 $MM $MM 1 /2 2 1 15 3 /3 1 1.5 $/mmBTU 1 10 1 5 *Same notional (1) principles as prior (3) 0.5 0 slide. In this (5) 0 -5 example, the notional amount is 100 lots (1 million British Thermal Cal17 MTM SA-CCR RWA Exposure at 40% SF Units (mmBTU) per Cal17 MTM ($MM) Notional Quantity (mmBtu) * month for 1 year. Cal17 Price ($/mmbtu) 1/# Spot Contribution to MTM SA-CCR RWA Exposure at 10% SF Max Mean Positive Exposure 3. Cal18 PJM Peak Swap Pricing: Notional MWHs x Cal18 prices 4. Cal18 PJM Peak MTM vs SA-CCR vs Mean Positive Exposure 50 Electricity 9 70 0 7 1 40 /12 1 /10 60 1 1 5 /11 /8 1 1 /6 /9 1 50 30 /7 1 3 1 /4 /5 1 /3 1 40 1 1 20 /2 $MM $/MWH $MM (1) 30 10 (3) †Same notional 20 (5) principles as prior 0 10 slide. In this (7) example, the -10 (9) 0 notional amount is 170 thousand megawatt hours † (MWHs) per month Cal18 MTM ($MM) Notional Quantity (MWHs) Cal18 MTM SA-CCR RWA Exposure at 40% SF for 1 year Cal18 Price ($/MWH) 1/# Spot Contribution to MTM SA-CCR RWA Exposure at 10% SF Max Mean Positive Exposure

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