Federal Register/Vol. 85, No. 16/Friday, January 24, 2020/Rules

4362 Federal Register / Vol. 85, No. 16 / Friday, January 24, 2020 / Rules and Regulations

DEPARTMENT OF THE TREASURY amendments, generally with respect to D. Potential Future Exposure cleared transactions. IV. Revisions to the Cleared Transactions Framework Office of the Comptroller of the DATES: Effective date: April 1, 2020. Currency A. Trade Exposure Amount Mandatory compliance date: January 1, B. Treatment of Default Fund 2022, for advanced approaches banking 12 CFR Parts 3 and 32 Contributions organizations. V. Revisions to the Supplementary Leverage [Docket ID OCC–2018–0030] FOR FURTHER INFORMATION CONTACT: Ratio OCC: Margot Schwadron, Director or VI. Technical Amendments RIN 1557–AE44 Guowei Zhang, Risk Expert, Capital A. Receivables Due From a QCCP B. Treatment of Client Financial Collateral FEDERAL RESERVE SYSTEM Policy, (202) 649–7106; Kevin Korzeniewski, Counsel, or Ron Held by a CCP Shimabukuro, Senior Counsel, Chief C. Clearing Member Exposure When CCP 12 CFR Part 217 Performance Is Not Guaranteed Counsel’s Office, (202) 649–5490; or, for D. Bankruptcy Remoteness of Collateral [Docket No. R–1629] persons who are deaf or hearing E. Adjusted Collateral Haircuts for RIN 7100–AF22 impaired, TTY, (202) 649–5597. Derivative Contracts Board: Constance M. Horsley, Deputy F. OCC Revisions to Lending Limits FEDERAL DEPOSIT INSURANCE Associate Director, (202) 452–5239; G. Other Clarifications and Technical CORPORATION David Lynch, Deputy Associate Amendments From the Proposal to the Director, (202) 452–2081; Elizabeth Final Rule VII. Impact of the Final Rule 12 CFR Parts 324 and 327 MacDonald, Manager, (202) 475–6316; Michael Pykhtin, Manager, (202) 912– VIII. Regulatory Analyses RIN 3064–AE80 A. Paperwork Reduction Act 4312; Mark Handzlik, Lead Financial B. Regulatory Flexibility Act Institutions Policy Analyst, (202) 475– Standardized Approach for Calculating C. Plain Language 6636; Sara Saab, Senior Financial the Exposure Amount of Derivative D. Riegle Community Development and Institutions Policy Analyst II, (202) 872– Contracts Regulatory Improvement Act of 1994 4936; or Cecily Boggs, Senior Financial E. OCC Unfunded Mandates Reform Act of AGENCY: The Office of the Comptroller Institutions Policy Analyst II, (202) 530– 1995 Determination of the Currency, Treasury; the Board of 6209; Division of Supervision and F. The Congressional Review Act Governors of the Federal Reserve Regulation; or Mark Buresh, Senior I. Introduction and Overview of the System; and the Federal Deposit Counsel, (202) 452–5270; Gillian Proposal Insurance Corporation. Burgess, Senior Counsel (202) 736– A. Overview of Derivative Contracts ACTION: Final rule. 5564; or Andrew Hartlage, Counsel, (202) 452–6483; Legal Division, Board of In general, derivative contracts SUMMARY: The Office of the Comptroller Governors of the Federal Reserve represent agreements between parties of the Currency, the Board of Governors System, 20th and C Streets NW, either to make or receive payments or to of the Federal Reserve System, and the Washington, DC 20551. For the hearing buy or sell an underlying asset on a Federal Deposit Insurance Corporation impaired only, Telecommunication certain date (or dates) in the future. are issuing a final rule to implement a Device for the Deaf, (202) 263–4869. Parties generally use derivative new approach—the standardized FDIC: Bobby R. Bean, Associate contracts to mitigate risk, although such approach for counterparty credit risk Director, [email protected]; Irina Leonova, transactions may serve other purposes. (SA–CCR)—for calculating the exposure Senior Policy Analyst, For example, an interest rate derivative amount of derivative contracts under [email protected]; Peter Yen, Senior contract allows a party to manage the these agencies’ regulatory capital rule. Policy Analyst, [email protected], Capital risk associated with a change in interest Under the final rule, an advanced Markets Branch, Division of Risk rates, while a commodity derivative approaches banking organization may Management Supervision, (202) 898– contract allows a party to fix commodity use SA–CCR or the internal models 6888; or Michael Phillips, Counsel, prices in the future and thereby methodology to calculate its advanced [email protected]; Catherine Wood, minimize any exposure attributable to approaches total risk-weighted assets, Counsel, [email protected]; Supervision unfavorable movements in those prices. and must use SA–CCR, instead of the Branch, Legal Division, Federal Deposit The value of a derivative contract, and current exposure methodology, to Insurance Corporation, 550 17th Street thus a party’s exposure to its calculate its standardized total risk- NW, Washington, DC 20429. counterparty, changes over the life of weighted assets. A non-advanced SUPPLEMENTARY INFORMATION: the contract based on movements in the approaches banking organization may Table of Contents value of the reference rates, assets, use the current exposure methodology indicators or indices underlying the or SA–CCR to calculate its standardized I. Introduction and Overview of the Proposal contract (reference exposures). A party total risk-weighted assets. The final rule A. Overview of Derivative Contracts with a positive current exposure expects B. The Basel Committee Standard on SA– also implements SA–CCR in other CCR to receive a payment or other beneficial aspects of the capital rule. Notably, the C. Overview of the Proposal transfer from the counterparty and is final rule requires an advanced II. Overview of the Final Rule considered to be ‘‘in the money.’’ A approaches banking organization to use A. Scope and Application of the Final Rule party that is in the money is subject to SA–CCR to determine the exposure B. Effective Date and Compliance Deadline the risk that the counterparty will amount of derivative contracts included C. Final Rule’s Interaction With Agency default on its obligations and fail to pay in the banking organization’s total Requirements and Other Proposals the amount owed under the transaction, leverage exposure, the denominator of III. Mechanics of the Standardized Approach which is referred to as counterparty for Counterparty Credit Risk the supplementary leverage ratio. In A. Exposure Amount credit risk. In contrast, a party with a addition, the final rule incorporates SA– B. Definition of Netting Sets and Treatment zero or negative current exposure does CCR into the cleared transactions of Financial Collateral not expect to receive a payment or framework and makes other C. Replacement Cost beneficial transfer from the counterparty

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and is considered to be ‘‘at the money’’ Two parties often will enter into a rule prescribes different approaches for or ‘‘out of the money.’’ A party that has large number of derivative contracts measuring the exposure amount of no current exposure to counterparty together. In such cases, the parties may derivative contracts based on the size credit risk may have exposure to enter into a netting agreement to allow and risk profile of a banking counterparty credit risk in the future if for the offsetting of the derivative organization. All banking organizations the derivative contract becomes ‘‘in the contracts under the agreement in the are currently required to use the current money.’’ event that one of the parties default and exposure method (CEM) to determine Parties to a derivative contract often to streamline certain aspects of the the exposure amount of a derivative exchange collateral to mitigate transactions, including the exchange of contract for purposes of calculating counterparty credit risk. If a collateral. Netting multiple contracts standardized total risk-weighted assets.4 counterparty defaults, the non- against each other can substantially Certain large banking organizations may defaulting party can sell the collateral to reduce the exposure if one of the parties use CEM or the internal models offset its exposure. In the derivatives were to default. A netting set reflects methodology (IMM) to determine the context, collateral may include variation those derivative contracts that are margin and initial margin (also known subject to the same master netting exposure amount of a derivative as independent collateral). Parties agreement.2 contract for advanced approaches risk- exchange variation margin on a periodic Parties to a derivative contract may weighted assets. In contrast to CEM, basis during the term of a derivative also clear their derivative contract IMM is an internal-models-based contract, as typically specified in a through a central counterparty (CCP). approach that requires supervisory variation margin agreement or by The use of central clearing is designed approval. The capital rule also requires regulation.1 Variation margin offsets to reduce the risk of engaging in certain large banking organizations to changes in the market value of a derivative transactions through the meet a supplementary leverage ratio, derivative contract and thereby covers multilateral netting of exposures, measured as the banking organization’s the potential loss arising from the establishment and enforcement of tier 1 capital relative to its total leverage default of a counterparty. Variation collateral requirements, and the exposure.5 The total leverage exposure margin may not always be sufficient to promotion of market transparency. A measure captures both on- and off- cover a party’s positive exposure (e.g., party engages with a CCP either as a balance sheet assets, including the due to delays in receiving collateral), clearing member or as a clearing exposure amount of a banking and thus parties may exchange initial member client. A clearing member is a organization’s derivative contracts as margin. Parties typically exchange member of, or a direct participant in, a determined under CEM.6 initial margin at the outset of the CCP that has authority to enter into derivative contract and in amounts that transactions with the CCP. A clearing are expected to reduce the likelihood of member may act as a financial a positive exposure amount for the intermediary with respect to the include national banks, state member banks, derivative contract in the event of the clearing member client and either take insured state nonmember banks, savings counterparty’s default, resulting in one position with the client and an associations, and top-tier bank holding companies overcollateralization. and savings and loan holding companies domiciled offsetting position with the CCP (the in the United States, but exclude banking To facilitate the exchange of principal model of clearing) or collateral, parties may enter into organizations subject to the Board’s Small Bank guarantee the performance of the Holding Company and Savings and Loan Holding variation margin agreements that clearing member client to the CCP (the Company Policy Statement (12 CFR part 225, typically provide for a threshold amount agency model of clearing). With respect appendix C), and certain savings and loan holding companies that are substantially engaged in and a minimum transfer amount. The to the latter type of clearing, the clearing threshold amount is the maximum insurance underwriting or commercial activities or member generally is responsible for that are estate trusts, and bank holding companies amount by which the market value of fulfilling initial and variation margin and savings and loan holding companies that are the derivative contract can change calls from the CCP on behalf of its employee stock ownership plans. The agencies recently adopted a final rule to implement a before a party must collect or post client, irrespective of the client’s ability variation margin (in other words, the community bank leverage ratio framework that is to post such collateral. applicable, on an optional basis to depository threshold amount specifies an The capital rule of the Office of the institutions and depository institution holding acceptable amount of under- Comptroller of the Currency (OCC), the companies with less than $10 billion in total collateralization). The minimum Board of Governors of the Federal consolidated assets and that meet certain other transfer amount is the smallest amount criteria. Such banking organizations that opt into Reserve System (Board), and the Federal the community bank leverage ratio framework will of collateral that a party must transfer Deposit Insurance Corporation (FDIC) be deemed compliant with the capital rule’s when it is required to exchange (together, the agencies) requires a generally applicable requirements and are not collateral under the variation margin banking organization to hold regulatory required to calculate risk-based capital ratios. See agreement. Parties generally apply a 84 FR 61776 (November 13, 2019). capital based on the exposure amount of 4 CEM and IMM are also applied in other parts discount (also known as a haircut) to 3 its derivative contracts. The capital of the capital rule. For example, advanced non-cash collateral to account for a approaches banking organizations must use CEM to potential reduction in the value of the 2 ‘‘Qualifying master netting agreement’’ is determine the exposure amount of derivative collateral during the period between the defined in §§ l.2 and l.3(d) of the capital rule. contracts included in total leverage exposure, the last exchange of collateral before the See 12 CFR 3.2 and 3.3(d) (OCC); 12 CFR 217.2 and denominator of the supplementary leverage ratio. In close out of the derivative contract (as 217.3(d) (Board); and 12 CFR 324.2 and 324.3(d) addition, the capital rule incorporates CEM into the (FDIC). cleared transactions framework and makes other in the case of default of the 3 12 CFR part 3 (OCC); 12 CFR part 217 (Board); amendments, generally with respect to cleared counterparty) and replacement of the 12 CFR part 324 (FDIC). The agencies have codified transactions. See section II.C. of this contract on the market. This period is the capital rule in different parts of title 12 of the SUPPLEMENTARY INFORMATION for further discussion. known as the margin period of risk CFR, but the internal structure of the sections 5 See infra note 23. Banking organizations subject within each agency’s rule are identical. All to Category I, Category II, or Category III standards (MPOR). references to sections in the capital rule or the are subject to the supplementary leverage ratio. proposal are intended to refer to the corresponding 6 See 12 CFR 3.10(c)(4) (OCC); 12 CFR 1 See, e.g., 12 CFR part 45 (OCC); 12 CFR part 237 sections in the capital rule of each agency. Banking 217.10(c)(4) (Board); and 12 CFR 324.10(c)(4) (Board); and 12 CFR part 349 (FDIC). organizations subject to the agencies’ capital rule (FDIC).

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B. The Basel Committee Standard on factor, and therefore, are within the standard uses supervisory factors that SA–CCR same asset class—interest rate, exchange reflect the volatilities observed in the In 2014, the Basel Committee on rate, credit, equity, or commodities. As derivatives markets during the financial Banking Supervision released a new derivatives within the same asset class crisis. The supervisory factors reflect the approach for calculating the exposure are highly correlated and thus have an potential variability of the primary risk amount of a derivative contract called economic relationship,9 under the Basel factor of the derivative contract over a the standardized approach for Committee standard, derivative one-year horizon. The maturity factor counterparty credit risk (SA–CCR) (the contracts within the same hedging set scales down the default one-year risk Basel Committee standard).7 Under the may be able to fully or partially offset horizon of the supervisory factor to the Basel Committee standard, a banking each other. risk horizon appropriate for the organization calculates the exposure To obtain the PFE for each netting set, derivative contract. For the supervisory amount of its derivative contracts at the a banking organization sums the delta adjustment, a banking organization netting set level, meaning, those adjusted derivative contract amount of applies a positive sign to the derivative contracts that the standard permits to be all hedging sets within the netting set contract amount if the derivative netted against each other because they using an asset-class specific aggregation contract is long the risk factor and a are subject to the same qualifying master formula and multiples that amount by negative sign if the derivative contract is netting agreement (QMNA), which must the PFE multiplier. The PFE multiplier short the risk factor. A derivative meet certain operational requirements.8 decreases exponentially from a value of contract is long the primary risk factor The exposure amount of a derivative one as the value of the financial if the fair value of the instrument contract not subject to a QMNA is collateral held by the banking increases when the value of the primary calculated individually, and thus the organization exceeds the net fair value risk factor increases. A derivative derivative contract constitutes a netting of the derivative contracts within the contract is short the primary risk factor set of one. netting set, subject to a floor of five if the fair value of the instrument The exposure amount of each netting percent. Thus, the PFE multiplier decreases when the value of the primary set is equal to an alpha factor of 1.4 accounts for both over-collateralization risk factor increases. The assumptions of multiplied by the sum of the and the negative fair value amount of zero fair value and zero collateral allow replacement cost of the netting set and the derivative contracts within the for recognition of offsetting and the potential future exposure (PFE) of netting set. diversification benefits between the netting set: For purposes of calculating the derivative contracts that share similar exposure amount = 1.4 * (replacement hedging set amount, a banking risk factors (i.e., long and short cost + PFE) organization calculates the adjusted derivative contracts within the same For netting sets that are not subject to notional amount of a derivative contract hedging set could fully or partially a variation margin agreement, and multiplies that amount by a offset one another). replacement cost reflects a banking corresponding supervisory factor, C. Overview of the Proposal organization’s current on-balance-sheet maturity factor, and supervisory delta to determine a conservative estimate of credit exposure to its counterparty On October 30, 2018, the agencies effective expected positive exposure measured as the maximum of the fair published a notice of proposed (EEPE), assuming zero fair value and value of the derivative contracts within rulemaking (proposal) to implement zero collateral.10 The Basel Committee the netting set less the applicable SA–CCR 11 in order to provide collateral or zero. For netting sets that important improvements to risk are subject to a variation margin 9 Derivative contracts within the same asset class share the same primary risk factor, which implies sensitivity and calibration relative to agreement, the replacement cost of a a closer alignment between all of the underlying CEM.12 In particular, the netting set reflects the maximum risk factors and a higher correlation factor. For a implementation of SA–CCR is possible unsecured exposure amount of directional portfolio, greater alignment between the responsive to concerns that CEM has not the netting set that would not trigger a risk factors would result in a more concentrated risk, leading to a higher exposure amount. For a kept pace with certain market practices variation margin call. For the balanced portfolio, greater alignment between the that have been adopted, particularly by replacement cost calculation, a banking risk factors would result in more offsetting of risk, large banking organizations that are organization recognizes the collateral leading to a lower exposure amount. amount on a dollar-for-dollar basis, 10 Under IMM, an advanced approaches banking organization uses its own internal models to profile for each netting set into an effective EE subject to any applicable haircuts. determine the exposure amount of its derivative profile by applying a nondecreasing constraint to PFE reflects a measure of potential contracts. The exposure amount under IMM is the corresponding EE profile over the first year. The changes in a banking organization’s calculated as the product of the EEPE for a netting nondecreasing constraint prevents the effective EE counterparty exposure for a netting set set, which is the time-weighted average of the profile from declining with time by replacing the EE amount at a given future date with the maximum over a specified period. The PFE effective expected exposures (EE) profile over a one- year horizon, and an alpha factor. For the purposes of the EE amounts across this and all prior calculation allows a banking of regulatory capital calculations, the resulting simulation dates. The EEPE for a netting set is the organization to fully or partially offset exposure amount is treated as a loan equivalent time-weighted average of the effective EE profile derivative contracts within the same exposure, which is the amount effectively loaned by over a one-year horizon. EEPE would be the appropriate loan equivalent exposure in a credit netting set that share similar risk factors, the banking organization to the counterparty under the derivative contract. A banking organization risk capital calculation if the following assumptions based on the concept of hedging sets. arrives at the exposure amount by first determining were true: There is no concentration risk, Under the Basel Committee standard, the EE profile for each netting set. In general, EE systematic market risk, and wrong-way risk (i.e., the derivative contracts form a hedging set profile is determined by computing exposure size of an exposure is positively correlated with the counterparty’s probability of default). However, if they share the same primary risk distributions over a set of future dates using Monte Carlo simulations, and the expectation of exposure these conditions nearly never exist with respect to at each date is the simple average of all positive a derivative contract. Thus, to account for these 7 See ‘‘The standardized approach for measuring Monte Carlo simulated exposures for each date. The risks, IMM requires a banking organization to counterparty credit risk exposures,’’ Basel expiration of short-term trades can cause the EE multiply EEPE by 1.4. Committee on Banking Supervision (March 2014, profile to decrease, even though a banking 11 See 83 FR 64660 (December 17, 2018). rev. April 2014), https://www.bis.org/publ/ organization is likely to replace short-term trades 12 The SUPPLEMENTARY INFORMATION set forth in bcbs279.pdf. with new trades (i.e., rollover). To account for the proposal includes a description of CEM. See id. 8 See e.g. supra note 2. rollover, a banking organization converts the EE at 64664.

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active in the derivatives market.13 The these commenters expressed concern allows a banking organization to elect, agencies also proposed SA–CCR to that the proposal could indirectly at the netting set level, to treat all such provide a method that is less complex increase the fees they pay to enter into contracts within the same netting set as and involves less discretion than IMM, derivative transactions to manage collateralized-to-market, thus allowing which allows banking organizations to commercial risks in order to help offset netting of settled-to-market derivative use their own internal models to the regulatory capital costs of such contracts with collateralized-to-market determine the exposure amount of their derivative contracts for banking derivative contracts within the same derivative contracts.14 Although IMM is organizations. The commenters asserted netting set. In order to make the more risk-sensitive than CEM, IMM is that any such effect would be in election, a banking organization must significantly more complex and requires contravention of separate public policy treat the settled-to-market derivative prior supervisory approval.15 The objectives designed to support the contracts as collateralized-to-market agencies based the core elements of the ability of commercial end-users to derivative contracts for all purposes proposal on the Basel Committee SA– engage in derivative transactions for under the SA–CCR calculation, CCR standard.16 risk-management purposes.17 By including by applying the MPOR The agencies received approximately contrast, other commenters that treatment applicable to collateralized-to- 58 comments on the proposal from opposed the proposal expressed market derivative transactions.19 interested parties, including banking concerns that it could reduce capital Commenters also criticized the organizations, trade groups, members of held against derivative contracts. Congress, and advocacy organizations. As discussed in detail below, the proposal’s approach to the recognition Banking organizations and trade groups agencies are finalizing the proposal with of collateral provided to support a offered widespread support for the some modifications to address certain derivative contract for purposes of the implementation of SA–CCR although concerns raised by commenters. In supplementary leverage ratio. In they also suggested modifications to particular, the final rule removes the response to commenters’ concerns, and various components of the proposal alpha factor of 1.4 from the exposure consistent with changes to the Basel largely to address concerns regarding its amount calculation for derivative Committee leverage ratio standard that calibration. Commenters who supported contracts with commercial end-user occurred during the comment period, the proposal also expressed concerns counterparties. This change will reduce the final rule allows for greater with its proposed implementation the exposure amount of such derivative recognition of collateral in the schedule and potential interaction with contracts by roughly 29 percent, in calculation of total leverage exposure certain other U.S. laws and regulations. comparison to similar derivative relating to client-cleared derivative 20 Other commenters, including some contracts with a counterparty that is not contracts. commercial entities that use derivative a commercial end-user. II. Overview of the Final Rule contracts to manage risks arising from Commenters also raised concerns their business operations (commercial regarding the proposed netting Figure 1 below provides a high-level end-users), opposed the proposal or treatment for settled-to-market overview of SA–CCR under the Final elements of the proposal. Specifically, derivative contracts.18 The final rule Rule.

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 × (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.

13 The agencies initially adopted CEM in 1989. certain types of counterparties (e.g., counterparties 19 Banking organizations that make such an See 54 FR 4168 (January 27, 1989) (Board and OCC); that are not financial entities and are using swaps election would apply the maturity factor applicable 54 FR 11500 (March 21, 1989) (FDIC). The last to hedge or mitigate commercial risks) from the to margined transactions under the final rule. See significant update to CEM was in 1995. See 60 FR mandatory clearing requirement. See 7 U.S.C. also section III.D.4. of this SUPPLEMENTARY 46170 (September 5, 1995). 6s(e)(3)(C); 15 U.S.C. 78o–10(e)(3)(C); see also 12 INFORMATION. 14 The SUPPLEMENTARY INFORMATION set forth in CFR part 45 (OCC); 12 CFR part 237 (Board); and 20 the proposal includes a description of IMM. See 83 12 CFR part 349 (FDIC) (swap margin rule). See ‘‘Leverage ratio treatment of client cleared FR at 64665. 18 Settled-to-market derivatives contracts are derivatives,’’ Basel Committee on Banking 15 See 12 CFR 3.122 (OCC); 12 CFR 217.122 those entered into between a central counterparty Supervision, June 2019, https://www.bis.org/bcbs/ (Board); and 12 CFR 324.122 (FDIC). and a banking organization, under which the publ/d467.pdf. See also section V of this 16 See supra note 7. central counterparty’s rulebook considers daily SUPPLEMENTARY INFORMATION. 17 See, e.g., The Commodity Exchange Act and the payments of variation margin as a settlement 21 A counterparty’s maximum exposure to a Securities Exchange Act of 1934, as amended by payment for the exposure that arises from marking netting set subject to a varation margin agreement sections 731 and 764, respectively, of the Dodd- the derivative contract to fair value. These equals the threshold amount plus minimum transfer payments are similar to traditional exchanges of Frank Wall Street Reform and Consumer Protection amount. Act, Public Law 111–203, 124 Stat. 1376, 1703–12, variation margin, except that the receiving party 22 1784–96 (2010), require the agencies to, in takes title to the payment from the transferring Net independent collateral amount (NICA), as establishing capital and margin requirements for party rather than holding the assets as collateral, described in section III. B of this SUPPLEMENTARY non-cleared swaps, provide an exemption for and thus effectively settles the contract. INFORMATION.

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FIGURE 1—OVERVIEW OF SA–CCR UNDER THE FINAL RULE—Continued For un-margined transactions: RC = max{V ¥ C; 0}, 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}, 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 × 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 under the capital rule.24 Both the agreements with central counterparties Rule standardized approach and the (i.e., default fund contributions).26 The proposal would have replaced 1. Scoping Criteria advanced approaches require a banking organization to determine the exposure CEM with SA–CCR in the capital rule The capital rule provides two amount for derivative contracts for advanced approaches banking methodologies for determining total transacted through a central organizations. Thus, for purposes of the risk-weighted assets: The standardized counterparty (i.e., cleared transactions) advanced approaches, an advanced approach, which applies to all banking and derivative contracts that are not approaches banking organization would have been required to use either SA– organizations, and the advanced cleared transactions (i.e., noncleared approaches, which apply only to CCR or IMM to calculate the exposure derivative contracts, otherwise known ‘‘advanced approaches banking amount of its noncleared and cleared as over-the-counter derivative organizations,’’ (or banking derivative contracts and to use SA–CCR contracts).25 As part of the cleared organizations subject to Category I or to determine the risk-weighted asset Category II standards) 23 as defined transactions framework, a banking amount of its default fund organization also must determine the contributions. For purposes of the risk-weighted asset amounts of any 23 The agencies recently adopted a final rule to standardized approach, an advanced revise the criteria for determining the applicability contributions or commitments it may approaches banking organization would of regulatory capital and liquidity requirements for have to mutualized loss sharing have been required to use SA–CCR large U.S. and foreign banking organizations (instead of CEM) to calculate the (tailoring final rule). Under the tailoring final rule, 24 an advanced approaches banking organization Standardized total risk-weighted assets serve as exposure amount of its noncleared and means a banking organization subject to Category I a floor for advanced approaches total risk-weighted cleared derivative contracts and to or Category II standards. Category I standards apply assets. Advanced approaches banking organizations determine the risk-weighted asset to U.S. global systemically important bank holding must therefore calculate total risk-weighted assets amount of its default fund companies (U.S. GSIBs) and their depository under both approaches and use the result that institution subsidiaries, as identified based on the produces a more binding capital requirement. Total contributions. The proposal also would methodology in the Board’s U.S. GSIB surcharge risk-weighted assets are the denominator of the risk- have revised the total leverage exposure rule. Category II standards apply to banking based capital ratios; regulatory capital is the measure of the supplementary leverage organizations that are not subject to Category I numerator. ratio by replacing CEM with a modified standards and that have $700 billion or more in 25 total consolidated assets or $75 billion or more in Under the standardized approach, the risk- version of SA–CCR. cross-jurisdictional activity and to their depository weighted asset amount for a derivative contract Banking organizations that are not institution subsidiaries. Category III standards currently is the product of the exposure amount of advanced approaches banking apply to banking organizations that are not subject the derivative contract calculated under CEM and organizations 27 would have had to to Category I or II standards and that have $250 the risk weight for the type of counterparty as set choose either CEM or SA–CCR to billion or more in total consolidated assets or $75 forth in the capital rule. See generally 12 CFR 3.35 billion or more in any of nonbank assets, weighted (OCC); 12 CFR 217.35 (Board); and 12 CFR 324.35 calculate the exposure amount of short-term wholesale funding, or off-balance-sheet (FDIC). Under the advanced approaches, the risk- exposure. Category III standards also apply to weighted asset amount for a derivative contract 26 See 12 CFR 3.35(d) and 3.133(d) (OCC); 12 CFR depository institution subsidiaries of any holding currently is derived using either CEM or the 217.35(d) and 217.133(d) (Board); and 12 CFR company subject to Category III standards. Category internal models methodology, which multiplies the 324.35(d) and 324.133(d) (FDIC). IV standards apply to banking organizations with 27 exposure amount (or exposure at default amount) of Under this final rule, banking organizations total consolidated assets of $100 billion or more, that are not advanced approaches banking the derivative contract by a models-based formula and their depositiory institution subsidiaries, that organizations (i.e., banking organizations subject to do not meet any of the criteria for a higher category that uses risk parameters determined by a banking Category III or Category IV standards) are permitted of standards. See ‘‘Changes to Applicabiltiy organization’s internal methodologies. See generally to choose either CEM or SA–CCR for purposes of Thresholds for Regulatory Capital and Liquidity 12 CFR 3.132 (OCC); 12 CFR 217.132 (Board); and determining standardized risk-weighted assets. See Requirements,’’ 84 FR 59230 (November 1, 2019). 12 CFR 324.132 (FDIC). supra note 23.

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noncleared and cleared derivative IMM to calculate the exposure amount based solely on the composition of a contracts and to determine the risk- of derivative contracts under the banking organization’s derivatives weighted asset amount of default fund standardized approach. Some of these portfolio, as suggested by commenters, contributions under the standardized commenters also asked the agencies to would be inconsistent with these approach. tailor the application of SA–CCR based objectives. Some commenters raised concerns on the composition of a banking Consistent with the proposal, the final with the proposal’s use of multiple organization’s derivatives portfolio, rule includes CEM, SA–CCR, and IMM methods—CEM, SA–CCR, and IMM—to rather than solely based on whether the as methodologies for banking determine the exposure amount of banking organization meets the organizations to use to determine the derivative contracts. Specifically, definition of an advanced approaches exposure amount of derivative contracts commenters stated that including banking organization. and prescribes which approach a multiple approaches for calculating the Limiting all banking organizations to banking organization must use based on exposure amount of derivative contracts a single methodology would be the category of standards applicable to in the capital rule creates regulatory inconsistent with the agencies’ efforts to the banking organization.29 As under burden and increases the potential for tailor the application of the capital rule the capital rule currently, the final rule competitive inequalities. The to the risk profiles of banking does not permit advanced approaches commenters asked the agencies to adopt organizations.28 In particular, while banking organizations to use IMM to one methodology that all banking SA–CCR offers several improvements to calculate the exposure amount of organizations would be required to use the regulatory capital treatment for derivative contracts under the to determine the exposure amount of derivative contracts relative to CEM, it standardized approach. derivative contracts or, short of that, to also requires internal systems Under the final rule and as reflected allow all banking organizations (i.e., enhancements and other operational further in Table 1, an advanced both advanced approaches and non- modifications that could be particularly approaches banking organization advanced approaches banking burdensome for smaller, less complex generally may use SA–CCR or IMM for organizations) to elect to use any banking organizations. Moreover, purposes of determining advanced approach—CEM, SA–CCR, or IMM—to allowing banking organizations to use approaches total risk-weighted assets,30 determine the exposure amount for all IMM for purposes of determining and must use SA–CCR for purposes of derivative contracts, as long as the standardized total risk-weighted assets determining standardized total risk- approach is permitted or required under would be inconsistent with an intended weighted assets as well as the any of the agencies’ rules to calculate purpose of the standardized approach, supplementary leverage ratio. A non- the exposure amount of derivative which is to serve as a floor to model- advanced approaches banking contracts. Other commenters, however, derived outcomes under the advanced organization may continue to use CEM supported allowing advanced approaches. or elect to use SA–CCR for purposes of approaches banking organizations the The proposal to require advanced the standardized approach and option to use IMM for noncleared and approaches banking organizations to use supplementary leverage ratio (as cleared derivative contracts to facilitate either SA–CCR or IMM to determine the applicable).31 Where a banking closer alignment with internal risk- exposure amount of their noncleared organization has the option to choose management practices of banking and cleared derivative contracts under among the approaches applicable to organizations because, according to the the advanced approaches provides such banking organization under the commenters, SA–CCR may not adapt meaningful flexibility, promotes capital rule, it must use the same dynamically to changes in market consistency for banking organizations approach for all purposes. As discussed conditions. that have substantial operations in in section II.C of this SUPPLEMENTARY Some commenters also requested multiple jurisdictions, and facilitates INFORMATION, the agencies will continue changes to the applicability criteria for regulatory reporting and the supervisory to consider the extent to which SA–CCR a particular methodology under the assessment of an advanced approaches should be incorporated into areas of the capital rule. Specifically, commenters banking organization’s capital regulatory framework that are not asked the agencies to allow advanced management program. An approach that addressed under this final rule in the approaches banking organizations to use tailors the applicability of SA–CCR context of separate rulemakings.

TABLE 1—SCOPE AND APPLICABILITY OF THE FINAL RULE

Noncleared derivative contracts Cleared transactions framework Default fund contribution

Advanced approaches banking or- Option to use SA–CCR or IMM .... Must use the same approach se- Must use SA–CCR. ganizations, advanced ap- lected for purposes of non- proaches total risk-weighted as- cleared derivative contracts. sets. Advanced approaches banking or- Must use SA–CCR ...... Must use SA–CCR ...... Must use SA–CCR. ganizations, total risk-weighted assets under the standardized approach.

28 See id. to determine its exposure to default fund Category III standards. See supra notes 5 and 23. 29 Id. contributions under the advanced approaches. The use of SA–CCR for purposes of the 31 30 As reflected in Table 1, an advanced The tailoring final rule revised the scope of supplementary leverage ratio is discussed in greater applicability of the supplementary leverage ratio, approaches banking organization must use SA–CCR detail in section V of this SUPPLEMENTARY such that it applies to U.S. and foreign banking INFORMATION. organizations subject to Category I, Category II, or

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TABLE 1—SCOPE AND APPLICABILITY OF THE FINAL RULE—Continued

Noncleared derivative contracts Cleared transactions framework Default fund contribution

Non-advanced approaches bank- Option to use CEM or SA–CCR ... Must use the same approach se- Must use the same approach se- ing organizations, total risk- lected for purposes of non- lected for purposes of non- weighted assets under the cleared derivative contracts. cleared derivative contracts. standardized approach.

Advanced approaches banking or- Must use SA–CCR to determine the exposure amount of derivative contracts for total leverage exposure. ganizations, supplementary leverage ratio.

Banking organizations subject to Option to use CEM or SA–CCR to determine the exposure amount of derivative contracts for total leverage Category III capital standards, exposure. A banking organization must use the same approach, CEM or SA–CCR, for purposes of supplementary leverage ratio. both standardized total risk-weighted assets and the supplementary leverage ratio.

2. Applicability to Certain Derivative 3. Application to New Derivative B. Effective Date and Compliance Contracts Contracts and Immaterial Exposures Deadline The proposal would have required a Under the current capital rule, an The proposal included a transition banking organization to calculate the advanced approaches banking period, until July 1, 2020, by which time exposure amount for all derivative organization can use CEM for a period all advanced approaches banking contracts to which the banking of 180 days for material portfolios of organizations would have been required organization has an exposure. new derivative contracts and without to implement SA–CCR; however, both Commenters raised concerns regarding time limitations for immaterial advanced approaches and non-advanced the treatment of certain derivative portfolios of new derivative contracts to approaches banking organizations contracts under the proposal. satisfy the requirement that the total would have been able to adopt SA–CCR Specifically, several commenters asked exposure amount calculated under IMM as of the effective date of the final rule. the agencies to exclude from banking must be at least equal to the greater of Several commenters asked the organizations’ regulatory capital the expected positive exposure amount agencies to delay adoption of the final calculations derivative contracts with under either the modelled stress rule. Specifically, some of these commercial end-user counterparties, scenario or the modelled un-stressed commenters asked that the agencies while other commenters suggested that scenario multiplied by 1.4.33 Some delay adoption until completion of a the final rule should exclude physically commenters noted that the proposal did comprehensive study on the effect of the settled forward contracts. Other not replace CEM with SA–CCR for these proposal, including the effect of SA– commenters requested that the agencies purposes and suggested providing CCR on commercial end-user allow advanced approaches banking advanced approaches banking counterparties. Other commenters also organizations to continue to use CEM to organizations the option to consider asked the agencies to delay adoption of calculate the exposure amount of their SA–CCR, in place of CEM, to satisfy the SA–CCR, or alternatively, the derivative contracts with commercial same conservatism requirements. The mandatory compliance date, in order to end-user counterparties. agencies recognize that an advanced align its implementation with potential Excluding certain derivative contracts approaches banking organization may forthcoming changes to the U.S. from the application of the capital rule, need time to develop systems and regulatory capital framework that might as suggested by commenters, would collect sufficient data to appropriately be implemented through separate 35 exclude a material source of credit risk model the exposure amount for material rulemakings. These commenters from a banking organization’s regulatory portfolios of new derivatives under expressed concern that the interaction capital requirements. Moreover, IMM. Therefore, under the final rule, an between SA–CCR and related aspects of requiring a banking organization to use advanced approaches banking the U.S. regulatory capital framework the same approach for its entire organization that elects to use IMM to could result in increased capital derivative portfolio when calculating calculate the exposure amount of its requirements for banking organizations either its standardized or advanced derivative contracts under the advanced that are not reflective of underlying risk. approaches total risk-weighted assets approaches may use SA–CCR for a In addition, some of these commenters promotes consistency in the regulatory period of 180 days for material specifically urged the agencies to pair capital treatment of derivative contracts, portfolios of new derivative contracts the adoption of SA–CCR with the and facilitates the supervisory and for immaterial portfolios of such implementation of the Basel 34 assessment of a banking organization’s contracts without time limitations. Committee’s revised comprehensive capital management program.32 This treatment is consistent with the approach for securities financing 36 Therefore, consistent with the proposal, current capital rule. transactions. These commenters the final rule does not provide an argued that banking organizations could 33 exclusion for specific types of derivative See 12 CFR 3.132(d)(10) (OCC); 12 CFR use derivative transactions as a 217.132(d)(10) (Board); and 12 CFR 324.132(d)(10) substitute for securities financing contracts nor does it permit the use of (FDIC). different methodologies based on the 34 Similar to CEM, as a standardized framework, type of derivative contract or SA–CCR is designed to produce sufficiently 35 For example, the commenters noted potential counterparty. conservative exposure amounts, compared to those changes to the regulatory framework as a result of calculated under IMM, that satisfy the conservatism the Basel Committee’s December 2017 release. See requirement under § __.132(d)(10)(i). The final rule ‘‘Basel III: Finalising post-crisis reforms,’’ Basel 32 The final rule does not revise the FR Y–15 also makes similar conforming changes elsewhere Committee on Banking Supervision, December report to reflect SA–CCR, as discussed further in in § __.132(d) and (e) to incorporate SA–CCR in the 2017, https://www.bis.org/bcbs/publ/d424.pdf. section II.C of this SUPPLEMENTARY INFORMATION. place of CEM. 36 Id.

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transactions and, therefore, adopting improvements to risk sensitivity and effective as of the effective date of the SA–CCR without implementing the calibration relative to CEM and is final rule. revised comprehensive approach for responsive to concerns that CEM has not C. Final Rule’s Interaction With Agency securities financing transactions could kept pace with market practices used by Requirements and Other Proposals lead to further concentration in the large banking organizations that are derivatives market and decreases in the active in the derivatives market. The implementation of SA–CCR liquidity of the securities financing Therefore, the agencies are not delaying affects other parts of the regulatory transactions market. Alternatively, other adoption of the final rule. The agencies framework. Commenters asked that the commenters urged the agencies to set intend to monitor the implementation of agencies clarify the interaction between the mandatory compliance date as of SA–CCR as part of their ongoing SA–CCR and other existing aspects of January 2022 to align with other assessment of the effectiveness of the the framework that would be affected by anticipated changes to the U.S. overall U.S. regulatory capital the adoption of SA–CCR, including the regulatory capital framework, and framework to determine whether there FDIC’s deposit insurance assessment supported allowing banking are opportunities to reduce burden and methodology, the Banking Organization organizations to adopt SA–CCR or improve its efficiency in a manner that Systemic Risk Report (FR Y–15), the portions of SA–CCR as early as the continues to support the safety and stress test projections in the Board’s issuance of the final rule. soundness of banking organizations and Comprehensive Capital Analysis and Additionally, several commenters U.S. financial stability. Review (CCAR) process, and the OCC’s asked the agencies to align U.S. However, the agencies recognize that lending limits. Commenters also asked implementation of SA–CCR with its the implementation of SA–CCR requires that the agencies clarify the interaction implementation schedule in other advanced approaches banking between SA–CCR and potential future jurisdictions, so as not to disadvantage organizations to augment existing revisions to the U.S. regulatory capital U.S. banking organizations and their systems or develop new ones, as all framework, including potential U.S. clients relative to foreign firms. such banking organizations must adopt implementation of the December 2017 These commenters argued that a SA–CCR for the standardized approach Basel Committee release, Basel III: mandatory compliance date of January even if they plan to continue using IMM Finalising post-crisis reforms (Basel III 2022 would ensure internationally under the advanced approaches. finalization standard),39 and the Board’s consistent implementation of SA–CCR Accordingly, the final rule includes a stress capital buffer proposal. across jurisdictions and allow banking mandatory compliance date for 1. FDIC Deposit Insurance Assessment organizations ample time to implement advanced approaches banking Methodology SA–CCR for purposes of both existing organizations of January 1, 2022, to Some commenters noted that the regulatory capital requirements and any permit these banking organizations adoption of SA–CCR could affect the anticipated forthcoming changes to the additional time to adjust their systems, FDIC assessment methodology. In U.S. regulatory capital framework. Other as needed, to implement SA–CCR. The response to this comment, the FDIC commenters suggested extending the final rule also includes an effective date notes that a lack of historical data on mandatory compliance date to January shortly after publication that permits derivative exposure using SA–CCR 2022 for banking organizations that use any banking organization to elect to makes the FDIC unable to incorporate CEM currently and do not have adopt SA–CCR prior to the mandatory the SA–CCR methodology into the extensive derivatives portfolios. compliance date. For this reason, the Conversely, several commenters asked agencies do not believe that it is deposit insurance assessment pricing the agencies to adopt the proposal as a necessary to provide any interim methodology for highly complex 40 final rule without delay and to retain adjustments to the current framework. institutions upon the effective date of the proposed July 2020 mandatory Advanced approaches and non- this rule. The FDIC plans to review compliance date. Of these, some advanced approaches banking derivative exposure data reported using commenters suggested that the effective organizations that adopt SA–CCR prior SA–CCR, and then consider options for date for implementation of SA–CCR to the mandatory compliance date must addressing the use of SA–CCR in the should be earlier than July 2020 for the notify their appropriate Federal deposit insurance assessment system. In entirety or portions of the SA–CCR rule. supervisor. Non-advanced approaches the meantime, for purposes of reporting These commenters also asked the banking organizations that adopt SA– counterparty exposures on Schedule agencies to provide interim relief CCR after the mandatory compliance RC–O, memorandum items 14 and 15, through a reduction in risk weights for date also must notify their appropriate 39 certain financial products, such as Federal supervisor. As the final rule See supra note 35. 40 A ‘‘highly complex institution’’ is defined as: options, if the implementation of SA– does not allow banking organizations to (1) An insured depository institution (IDI) CCR is delayed. use SA–CCR for a material subset of (excluding a credit card bank) that has had $50 The agencies anticipate that the final derivative exposures under either the billion or more in total assets for at least four rule will not materially change the standardized or advanced approaches, a consecutive quarters that either is controlled by a U.S. parent holding company that has had $500 amount of capital in the banking system, banking organization cannot early adopt billion or more in total assets for four consecutive and that any change in a particular SA–CCR on a partial basis.38 In quarters, or is controlled by one or more banking organization’s capital addition, the technical revisions in the intermediate U.S. parent holding companies that requirements, through either an increase final rule, as described in section VI of are controlled by a U.S. holding company that has had $500 billion or more in assets for four SUPPLEMENTARY INFORMATION or a decrease in regulatory capital, this , are consecutive quarters; or (2) a processing bank or would reflect the enhanced risk trust company. A processing bank or trust company sensitivity of SA–CCR relative to CEM, 38 The final rule allows banking organizations that is an IDI whose last three years’ non-lending as well as market conditions.37 In elect to use SA–CCR to continue to use method 1 interest income, fiduciary revenues, and investment or method 2 under CEM to calculate the risk- banking fees, combined, exceed 50 percent of total addition, SA–CCR provides important weighted asset amount for default fund revenues (and its last three years fiduciary revenues contributions until January 1, 2022. See section are non-zero), whose total fiduciary assets total 37 The estimated impact of the final rule is IV.B. of this SUPPLEMENTARY INFORMATION for a more $500 billion or more and whose total assets for at described in greater detail in section VII of this detailed discussion on the treatment of default fund least four consecutive quarters have been $10 SUPPLEMENTARY INFORMATION. contributions under the final rule. billion or more. See 12 CFR 327.8(g) and (s).

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highly complex institutions must some commenters asked the Board to losses associated with adverse economic continue to calculate derivative clarify when a banking organization conditions, in an environment of exposures using CEM (as set forth in 12 must incorporate SA–CCR into any economic uncertainty. The Board CFR 324.34(b) under the final rule), but stress test projections made for purposes regularly reviews its stress testing without any reduction for collateral of the Comprehensive Capital Analysis models, and will continue to evaluate other than cash collateral that is all or and Review (CCAR) exercise relative to the appropriateness of assumptions part of variation margin and that the timing of its implementation for related to the largest counterparty satisfies the requirements of 12 CFR regulatory capital purposes. Consistent default component. 324.10(c)(4)(ii)(C)(1)(ii) and (iii) and with past capital planning practice, the 324.10(c)(4)(ii)(C)(3)–(7) (as amended Board expects to make revisions so as to 4. Swap Margin Rule under the final rule). Similarly, highly not require a banking organization to Commenters noted that the agencies’ complex institutions must continue to use SA–CCR for purposes of the CCAR margin and capital requirements for report the exposure amount associated exercise prior to adopting SA–CCR to covered swap entities rule (swap margin with securities financing transactions, calculate its risk-based and rule) uses a methodology similar to CEM including cleared transactions that are supplementary leverage capital to quantify initial margin requirements securities financing transactions, using requirements (as applicable) under the for non-cleared swaps and non-cleared the standardized approach set forth in capital rule. To promote comparability security-based swaps.44 This final rule 12 CFR 324.37(b) or (c) (as amended of stress test results across banking does not affect the swap margin rule or under the final rule). The FDIC is organizations, for the 2020 stress test the calculation of appropriate margin making technical amendments to its cycle all banking organizations would and, therefore, the implementation of assessment regulations to update cross- continue to use CEM for the CCAR SA–CCR will not require a banking references to CEM and cash collateral exercise. However, a banking organization to change the way it requirements in 12 CFR part 324. organization that has elected to adopt complies with those requirements. SA–CCR in 2020 would be required to 2. The Banking Organization Systemic use SA–CCR for the CCAR exercise 5. OCC Lending Limits Risk Report (FR Y–15) beginning with the 2021 stress test In the proposal, the OCC proposed to Some commenters noted that the cycle, and those who adopt in 2021 revise its lending limit rule at 12 CFR adoption of SA–CCR could affect must use SA–CCR for the CCAR exercise part 32, to update cross-references to reporting on the Banking Organization beginning with 2022 stress test cycle.42 CEM in the standardized approach and Systemic Risk Report (FR Y–15), which Finally, a banking organization that to permit SA–CCR as an option for must be filed by U.S. bank holding does not adopt SA–CCR until the calculation of exposures under lending companies and certain savings and loan mandatory compliance date in 2022 limits. Commenters generally supported holding companies with $100 billion or would not be required to use SA–CCR the OCC’s proposal to align more in total consolidated assets and for the CCAR exercise until the 2023 measurement of counterparty credit risk foreign banking organizations with $100 and all subsequent stress test cycles. across regulatory requirements. The billion or more in combined U.S. Prior to the time of adoption in stress OCC agrees with the commenters and assets.41 In particular, these commenters testing, the Board expects to update the therefore the final rule adopts revisions requested that the agencies exclude the Form FR Y–14 to implement these to the lending limits rule as proposed. alpha factor from the exposure amount changes and to provide any necessary 6. Single Counterparty Credit Limit calculation under SA–CCR for purposes information on how to incorporate SA– (SCCL) of the interconnectedness indicator CCR into a banking organization’s stress under the FR Y–15. The Board expects test results.43 As noted in the proposal, the Board’s to address the use of SA–CCR for Commenters also suggested aligning single counterparty credit limit (SCCL) purposes of the FR Y–15 in a separate certain aspects of the CCAR exercise rule authorizes a banking organization process. Until such time, banking with SA–CCR. Specifically, commenters subject to the SCCL to use any organizations that must report the FR Y– asked the Board to revise the CCAR methodology that such a banking 15 should continue to use CEM to methodology for estimating losses under organization is authorized to use under determine the potential future exposure the largest single counterparty default the capital rule to determine the credit of their derivative contracts for purposes scenario to distinguish between exposure associated with a derivative of completing line 11(b) of Schedule B, margined and unmargined counterparty contract for purposes of the SCCL rule.45 consistent with the current instructions relationships in a manner consistent Thus, as under the proposal, as of the to the form. with SA–CCR. The methodologies for mandatory compliance date for SA– 3. Stress Test Projections in CCAR measuring counterparty exposure under CCR, to determine the credit exposure SA–CCR and supervisory stress testing associated with a derivative contract Commenters asked the Board to are designed to capture different types under the SCCL rule, an advanced clarify how the implementation of SA– of risks. In particular, the largest single approaches banking organization must CCR will interact with the supervisory counterparty default exercise seeks to use SA–CCR or IMM and a banking stress-testing program. In particular, ensure that a banking organization can organization subject to Category III absorb losses associated with the default standards, which include the SCCL rule, 41 See Reporting Form FR Y–15, Instructions for of any counterparty, in addition to must use whichever of CEM or SA–CCR Preparation of Banking Organization Systemic Risk Report (reissued December 2016). The Board recently finalized modifications the reporting panel 42 For banking organizations subject to Category 44 See supra note 17. and certain substantive requirements of Form FR Y– IV supervisory stress test requirements, 2022 is an 45 See 83 FR 38460 (August 6, 2018). The Board- 15 in connection with the tailoring final rule on-cycle year. only tailoring final rule revised the scope of adopted by the agencies. See 84 FR 59032 43 Banking organizations that report information applicability of the SCCL rule, such that it applies (November 1, 2019) (Board-only final rule to on the FR Y–14 under SA–CCR must do so for all to U.S. and foreign banking organizations subject to establish risk-based categories for determining schedules, including DFAST and CCAR. The Category I, II, or III standards, as applicable, and prudential standards to large U.S. and foreign anticipated standards described in this section foreign banking organizations with global banking organizations (Board-only tailoring final would apply equally for purposes of DFAST and consolidated assets of $250 billion or more. See rule)); see also supra note 23. CCAR. supra note 41.

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that it uses to calculate its standardized could be less willing to engage in more closely align with the treatment of total risk-weighted assets. derivative contracts with commercial investment-grade corporate exposures end-users who may lack the capability under the revised Basel III finalization 7. Potential Future Revisions to the and scale to provide financial collateral standard.51 Agencies’ Rules recognized under the capital rule. The agencies recognize that derivative Commenters requested additional Commenters also expressed concern contracts between banking organizations information on the interaction of SA– that any increase in hedging costs for and commercial end-users may include CCR with other potential revisions that commercial end-users could have an credit risk mitigants that do not qualify the agencies may make to their adverse impact on the broader economy. as financial collateral under the capital respective regulatory capital rules. Commenters generally suggested that rule.52 In addition, and in contrast to Potential revisions identified by the agencies address these issues derivative contracts with financial end- commenters included the through changes to the alpha factor, users, derivative contracts with implementation of the Basel III either by removing it for all derivative commercial end-users have heightened finalization standard and the Board’s contracts with commercial end-user potential to present right-way risk.53 proposal to integrate the capital rule and counterparties, or only for such The final rule removes the alpha factor CCAR and stress test rules published in contracts that are unmargined. from the exposure amount formula for April 2018.46 In addition, the proposed Commenters asserted that providing derivative contracts with commercial net stable funding ratio rule would relief for derivative contracts with end-user counterparties. The agencies cross-reference netting provisions of the commercial end-user counterparties intend for this treatment to better align agencies’ supplementary leverage ratio would not undermine the goals of the with the counterparty credit risk that are amended under the final rule.47 proposal because these transactions presented by such exposures due to the The agencies will consider the comprise a small percentage of presence of credit risk mitigants and the calibration and operation of SA–CCR for outstanding derivatives and may present potential for such transactions to purposes of any such potential revisions less risk than other directional, present right-way risk. In particular, the through the rulemaking process. unmargined derivatives. In support of agencies recognize that derivative III. Mechanics of the Standardized this assertion, commenters argued that exposures to commercial end-user Approach for Counterparty Credit Risk commercial end-users typically provide counterparties may be less likely to collateral that is not recognized as present the types of risks that the alpha A. Exposure Amount financial collateral under the capital factor was designed to address, as Under the proposal, the exposure rule but nonetheless reduces the discussed previously, and therefore amount of a netting set would have been counterparty credit risk of the believe that removing the alpha factor equal to an alpha factor of 1.4 underlying transaction.48 Commenters for such exposures improves the multiplied by the sum of the also argued that removing or reducing calibration of SA–CCR. The agencies replacement cost of the netting set and the alpha factor for such derivative note that this approach also may the PFE of the netting set. The purposes contracts would be consistent with mitigate the concerns of commenters of the alpha factor were to address congressional and regulatory efforts regarding the potential effects of the certain risks that are not captured under designed to facilitate the ability of such proposal relative to congressional and SA–CCR and to ensure that exposure counterparties to enter into derivative other regulatory actions designed to amounts produced under SA–CCR contracts to manage commercial risks.49 mitigate the effect that post-crisis generally would not be lower than those Some commenters argued that derivatives market reforms have on the under IMM, in support of its use as a applying the alpha factor to derivative ability of these parties to enter into broadly applicable and standardized contracts with commercial end-user derivative contracts to manage methodology. In addition, the proposal counterparties is misaligned with the commercial risks. The agencies intend would have set the exposure amount at risks that the alpha factor was intended to monitor the implementation of SA– zero for a netting set that consists of to address under IMM, such as wrong- CCR as part of their ongoing assessment only sold options in which the way risk.50 Some commenters of the effectiveness of the overall U.S. counterparty to the options paid the recommended reducing the alpha factor regulatory capital framework to premiums up front and that the options to 0.65 for derivative contracts with determine whether there are within the netting set are not subject to investment grade commercial end-user opportunities to improve the ability of a variation margin agreement. counterparties, or with non-investment commercial end-users to enter into Commenters stated that the proposal grade commercial end-user derivative contracts with banking would increase the exposure amount of counterparties that are supported by a organizations in a manner that derivative contracts with commercial letter of credit or provide a first-priority continues to support the safety and end-users, relative to CEM, because lien on assets that do not present wrong- soundness of banking organizations and commercial end-users often have way risk with respect to the underlying U.S. financial stability. directional, unmargined derivative derivative contract. These commenters Beyond the concerns related to portfolios, which would not receive the argued that reducing the alpha factor to commercial end-users, commenters benefits of collateral recognition and 0.65 would improve risk sensitivity and netting under SA–CCR in the form of a 51 See supra note 3555. reduction to the replacement cost and 48 The types of collateral that commercial end- 52 Under § l.2 of the capital rule, financial PFE amounts. As a result, commenters users provide that do not qualify as financial collateral means cash or liquid and readily collateral under the capital rule are discussed in marketable securities, in which a banking expressed concern that banking further detail in section III.B. of this SUPPLEMENTARY organization has a perfected first-priority security organizations would pass the costs of INFORMATION. interest in the collateral. See 12 CFR 3.2 (OCC); 12 higher capital to commercial end-users 49 See supra note 17. CFR 217.2 (Board); and 12 CFR 324.2 (FDIC). in the form of higher fees or, 50 Wrong way risk means that the size of an 53 Right way risk means that the size of an exposure is positively correlated with the exposure is negatively correlated with the alternatively, that banking organizations counterparty’s probability of default—that is, the counterparty’s probability of default—that is, the exposure amount of the derivative contract exposure amount of the derivative contract 46 See 83 FR 18160 (April 25, 2018). increases as the counterparty’s probability of decreases as the counterparty’s probability of 47 See 81 FR 35124 (June 1, 2016). default increases. default increases.

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recommended other changes to the commenters asserted that custody exposure amount = 1.4 * (replacement alpha factor. Several commenters banking organizations do not maintain cost + PFE). suggested removing the alpha factor large portfolios of derivative contracts However, for a derivative contract from the SA–CCR methodology across a broad range of tenors (i.e., the with a commercial end-user altogether, whereas other commenters amount of time remaining before the counterparty, the exposure amount is suggested that the alpha factor should end date of the derivative contract) and represented as follows: apply only to the PFE component. Some asset classes and that the foreign exposure amount = (replacement cost + commenters supported reducing or exchange derivative portfolio of a PFE). eliminating the alpha factor as it applies custody banking organization is To operationalize the exposure to all or a subset of derivative contracts. intended to serve the investment needs amount formula for derivative contracts Commenters that recommended of the custody banking organization’s with commercial end-user removing the alpha factor argued that clients rather than to take on economic counterparties, the final rule provides a the rationale for adopting the alpha risk. factor for purposes of IMM does not definition of commercial end-user. apply in the context of SA–CCR In contrast, some commenters who Under the final rule, a commercial end- because, in contrast to IMM, SA–CCR is supported the alpha factor suggested user means a company that is using a non-modelled approach and does not that concerns regarding its impact on derivatives to hedge or mitigate require an adjustment to account for the exposure amount calculated under commercial risk, and is not a financial model risk. Similarly, other commenters SA–CCR are overstated. Specifically, entity listed in section 2(h)(7)(C)(i)(I) noted that the alpha factor is less these commenters argued that banking through (VIII) of the Commodity meaningful in the United States organizations have incentives to Exchange Act 56 or is not a financial because, under the capital rule, the minimize estimates of risk for regulatory entity listed in section 3C(g)(3)(A)(i) standardized approach serves as a floor capital purposes and that internal through (viii) of the Securities Exchange to the advanced approaches for total models failed to account properly for Act.57 The definition also includes an risk-weighted assets. Some of these risk during the crisis and have been entity that qualifies for the exemption commenters also stated that the criticized in analyses conducted since from clearing under section 2(h)(7)(A) of potential elimination of the advanced then. In addition, these commenters the Commodity Exchange Act by virtue approaches in connection with the U.S. stated that although SA–CCR uses of section 2(h)(7)(D) of the Commodity implementation of the Basel III estimates of volatility for individual Exchange Act, including entities that are finalization standard would eliminate positions that are based on observed, exempted from the definition of use of IMM and undermine the need for crisis period volatilities, greater financial entity under section the alpha factor. Other commenters recognition of netting and margin under 2(h)(7)(C)(iii) of the Commodity argued that because IMM incorporates SA–CCR may fully offset any Exchange Act; 58 or qualifies for the relatively higher stressed-volatility conservatism resulting from the use of exemption from clearing under section inputs while the supervisory factors updated volatility estimates. 3C(g)(1) of the Securities Exchange Act under SA–CCR are static, attempts to As noted in the proposal, the alpha by virtue of section 3C(g)(4) of the have SA–CCR yield a more conservative factor helps to instill an appropriate Securities Exchange Act.59 Including exposure amount than IMM in all cases level of conservatism and further these entities within the commercial could result in SA–CCR producing support the use of SA–CCR as a broadly end-user definition permits affiliates excessive capital requirements that are applicable and standardized that hedge commercial risks on behalf of disconnected from the actual risk of the methodology. Additionally, the alpha a parent entity that is not a financial underlying exposures. Alternatively, factor serves to capture certain risks entity to qualify as a commercial end- other commenters recommended only (e.g., wrong-way risk, non-granular risk user, which would accommodate applying the alpha factor to PFE. These exposures, etc.) that are not fully business organizations that hedge commenters argued that applying the reflected under either IMM or SA–CCR. commercial risks through transactions alpha factor to replacement cost would Adopting commenters’ conducted by affiliates rather than be inappropriate as the fair value of on- recommendations could reduce the directly by the parent company. Overall, balance sheet derivatives are not subject efficacy of SA–CCR as a standardized the definition covers commercial end- to model uncertainty. approach that serves a floor to internal users and generally excludes financial Commenters that supported reducing models-based approaches. For large, entities. the alpha factor recommended revising internationally active banking This definition has the advantage of the calibration to reflect the derivatives organizations, consistency with the being generally consistent with other market reforms that followed the Basel Committee standard also helps to regulations promulgated by the financial crisis, such as mandatory reduce operational burden and agencies, including the swap margin clearing requirements promulgated by minimize any incentives such banking rule.60 Referencing provisions of the the Commodity Futures Trading organizations may have to book Commodities Exchange Act or Commission (CFTC) 54 and the swap Securities Exchange Act promotes 55 activities in legal entities located in margin rule. Of these, some jurisdictions that provide relatively consistency with other regulations and commenters supported applying a lower more favorable regulatory capital offers a significant compliance benefit to alpha factor to heavily over- treatment. collateralized portfolios in order to 56 7 U.S.C. 2(h)(7)(C)(i)(I) through (VIII). The provide greater collateral recognition. Accordingly, the final rule commercial end-user definition also applies to Additionally, some commenters incorporates an alpha factor of 1.4 in the transactions with affiliates of entities that enter into expressed concern that the alpha factor exposure amount formula, except as it derivative contracts on behalf of those entities that meet the criteria under section 2(h)(7)(D) of the could adversely affect custody banking applies to derivative contracts with Commodity Exchange Act. organizations. In particular, the commercial end-user counterparties for 57 15 U.S.C. 78c–3(g)(3)(A)(i) through (viii). which the alpha factor is removed under 58 7 U.S.C. 2(h)(7)(A), (C)(iii), and (D). 54 See 17 CFR part 50. the final rule. The exposure amount 59 15 U.S.C. 78c–3(g)(1) and (4). 55 See supra note 17. formulas are represented as follows: 60 See supra note 17.

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institutions subject to the final rule.61 In qualifying cross-product master netting To qualify as a QMNA, the netting addition, in the swap margin rule agreement. The proposal would have agreement must satisfy certain context, the agencies observed that allowed a banking organization to operational requirements under § l.3 of differences in risk profiles justified calculate the exposure amount of the capital rule.67 distinguishing between financial end- multiple derivative contracts under the Some commenters expressed concern users and non-financial end-users, on same netting set so long as each that the proposed definition of netting the grounds that financial firms present derivative contract is subject to the same set could inadvertently affect the a higher level of risk than other types of QMNA. treatment for repo-style transactions counterparties and are more likely to Some commenters raised concerns under other provisions of the capital default during a period of financial with the proposal’s reliance on netting rule. The proposed definition was stress, thus posing greater risk to the to reduce exposure amounts on a point- intended to reflect that under SA–CCR safety and soundness of the in-time basis instead of on a dynamic a banking organization would determine counterparty and systemic risk.62 While basis and suggested revising the the exposure amount for a derivative some commenters requested an proposal to account for situations that contract at the netting set level, which exemption for entities that was slightly may arise during stress periods that would have included a single derivative narrower or broader than the definition could disrupt the availability of netting. contract. However, to address the the agencies are adopting in the final As an example, the commenters noted commenters’ concern, the agencies have rule, as noted above, the distinction that during the financial crisis some revised the definition of netting set drawn by this definition is appropriate banking organizations requested to under the final rule to mean a group of to differentiate derivative transactions novate their ‘‘in-the-money’’ derivative transactions with a single counterparty that have the potential to present right- contracts with another counterparty, that are subject to a QMNA and, with way risk from those that do not.63 while leaving the banking organization’s respect to derivative contracts only, also Other commenters asked the agencies ‘‘out-of-the-money’’ positions with the includes a single derivative contract to clarify that the proposal would apply initial counterparty. The agencies between a banking organization and a an exposure amount of zero to sold believe it is appropriate to allow for the counterparty.68 With respect to repo- options in which the counterparty to the netting of derivative contracts under style transactions, this definition is options has paid the premiums up front SA–CCR on a point-in-time basis, as consistent with the current capital rule. and that are not subject to a variation allowing for netting on a point-in-time The proposal set forth definitions for margin agreement. Consistent with the basis under SA–CCR is consistent with variation margin, variation margin proposal, under the final rule, an U.S. generally accepted accounting amount, independent collateral, and net exposure amount of zero applies to sold principles (U.S. GAAP) and facilitates independent collateral amount. The options that are not subject to a implementation of the final rule. The proposal would have defined variation variation margin agreement and for capital rule relies significantly on margin as financial collateral that is which the counterparty has paid the banking organizations’ U.S. GAAP subject to a collateral agreement and 64 premiums up front. This treatment is balance sheets and thus requires provided by one party to its appropriate because the counterparty to banking organizations to determine counterparty to meet the performance of the option has no future payment capital ratios on a point-in-time basis. the first party’s obligations under one or obligation under the derivative contract The risks related to stress events more derivative contracts between the and the banking organization, as the identified by the commenters may be parties as a result of a change in value option seller, has no exposure to further addressed in the context of stress of such obligations since the last counterparty credit risk. testing and resolution planning. Thus, exchange of such collateral. The the agencies are adopting as final the B. Definition of Netting Sets and variation margin amount would have netting treatment under the proposal, Treatment of Financial Collateral been equal to the fair value amount of with the exception of the availability of Under the capital rule, a netting set is the variation margin that a counterparty netting among collateralized-to-market to a netting set has posted to a banking currently defined as a group of and settled-to-market derivative transactions with a single counterparty organization less the fair value amount contracts, which is discussed below in of the variation margin posted by the that are subject to a qualifying master SUPPLEMENTARY section III.D.4. of this banking organization to the netting agreement (QMNA) or a INFORMATION. qualifying cross-product master netting counterparty. Under the final rule, a group of The proposal would have required the agreement. The proposal would have derivative contracts subject to the same revised the definition of netting set to variation margin amount to be adjusted QMNA are part of the same netting by the existing standard supervisory mean either one derivative contract 65 set. In general, a QMNA means a haircuts under § l.132(b)(2)(ii)(A)(1) of between a banking organization and a netting agreement that permits a single counterparty, or a group of the capital rule. The standard banking organization to terminate, supervisory haircuts reflect potential derivative contracts between a banking close-out on a net basis, and promptly organization and a single counterparty liquidate or set off collateral upon an term funding transactions such as repurchase 66 that are subject to the same qualifying event of default of the counterparty. agreements. Under the 2017 final rule, the agencies master netting agreement or the same revised the definition of QMNA under the capital 65 The definition of netting set also clarifies that rule such that qualified financial contracts could be 61 The definition of a commercial end-user in the a netting set can be composed of a single derivative subject to a QMNA (notwithstanding other final rule does not extend to an organization contract and retains certain components of the operational requirements). See 82 FR 42882 exempted by the CFTC pursuant to section definition that are specific to IMM. (September 12, 2017). 2(h)(7)(C)(ii) of the Commodity Exchange Act (7 66 See supra note 2. In 2017, the agencies adopted 67 See supra note 2. U.S.C. 2(h)(7)(C)(ii)) or exempted by the Securities a final rule that requires GSIBs and the U.S. 68 Consistent with the current definition of and Exchange Commission pursuant to section operations of foreign GSIBs to amend their qualified netting set, for purposes of the internal models 3C(g)(3)(B) of the Securities Exchange Act of 1934 financial contracts to prevent their immediate methodology in § l.132(d) of the capital rule, (15 U.S.C. 78c–3(g)(3)(B)). cancellation or termination if such a banking netting set also includes a qualifying cross-product 62 See 80 FR 74839, 74853 (April 1, 2016). organization enters bankruptcy or a resolution master netting agreement. See 12 CFR 3.132(d) 63 Id. process. Qualified financial contracts include (OCC); 12 CFR 217.132(d) (Board); and 12 CFR 64 See § l.132(c)(5)(iii) of the final rule. derivative contracts, securities lending, and short- 324.132(d) (FDIC).

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future changes in the value of the standard supervisory haircuts under purposes. Consistent with the capital financial collateral by adjusting for any § l.132(b)(2)(ii)(A)(1) of the capital rule, the final rule does not recognize potential decrease in the value of the rule. the alternative collateral arrangements financial collateral received by a The agencies did not receive comment suggested by commenters. Liens and banking organization and any potential on the proposed definitions of variation asset pledges, by contrast, may not be increase in the value of the financial margin, variation margin amount, rapidly available to support losses in an collateral posted by the banking independent collateral, and event of default because the assets they organization over supervisory-provided independent collateral amount. Several attach to can be illiquid and thus holding periods. The standard commenters, however, advocated for difficult to value and sell for cash after supervisory haircuts are based on a ten- recognition of alternative collateral enforcement of a security interest in the business-day holding period, and the arrangements under SA–CCR to address collateral or foreclosure, which is capital rule requires a banking the potential impact of the proposal on inconsistent with the principle that organization to adjust, as applicable, the derivative contracts with certain derivatives should be able to be closed standard supervisory haircuts to align counterparties, including commercial out easily and quickly in an event of with the associated derivative contract end-users. As noted above, the default.73 In addition, recognizing (or repo-style transaction) according to commenters argued that SA–CCR could letters of credit would add significant the formula in § l.132(b)(2)(ii)(A)(4).69 unduly increase capital requirements for complexity to the capital rule. In The proposal would have defined derivative exposures to commercial end- particular, recognition of letters of credit independent collateral as financial user counterparties because they often as financial collateral would require the collateral, other than variation margin, do not provide collateral in the form of introduction of appropriate qualification that is subject to a collateral agreement, cash or liquid and readily marketable criteria, as well as a framework for or in which a banking organization has securities. Commenters stated that considering the counterparty credit risk a perfected, first-priority security companies, including commercial end- of institutions providing the letters of interest or, outside of the United States, users, regularly use alternative security credit. The agencies also believe that the the legal equivalent thereof (with the arrangements, such as liens on assets, a removal of the alpha factor for exception of cash on deposit and letter of credit, or a parent company derivative contract exposures to notwithstanding the prior security guarantee, to offset the counterparty commercial end-users helps to address interest of any custodial agent or any credit risk of their derivative contracts, commenters’ concerns that the proposal prior security interest granted to a CCP and that banking organizations should would have resulted in unduly high in connection with collateral posted to be able to recognize the credit risk- risk-weighted asset amounts for that CCP), and the amount of which mitigating benefits of such arrangements derivative contracts with commercial does not change directly in response to under SA–CCR. end-user counterparties. the change in value of the derivative In support of their recommendation, Accordingly, the agencies are contract or contracts that the financial commenters noted that a line of credit adopting without change the proposed collateral secures. functions similarly to the exchange of definitions for variation margin, Net independent collateral amount margin because the line of credit is independent collateral, variation margin would have been defined as the fair available to be drawn upon by the amount, and independent collateral value amount of the independent banking organization in advance of amount, as well as the proposed collateral that a counterparty to a default as the counterparty’s application of the standard supervisory netting set has posted to a banking creditworthiness deteriorates. Moreover, haircuts under the capital rule. the line of credit can be structured so organization less the fair value amount C. Replacement Cost of the independent collateral posted by that its amount may increase over the the banking organization to the life of the derivative contract based on The proposal would have provided counterparty, excluding such amounts certain credit quality metrics. separate formulas to determine held in a bankruptcy-remote manner,70 Commenters added that common replacement cost that apply depending or posted to a qualifying central industry practice allows banking on whether the counterparty to a counterparty (QCCP) 71 and held in organizations to accept these forms of banking organization is required to post conformance with the operational collateral from counterparties and to variation margin. Specifically, the requirements in § l.3 of the capital reflect their credit risk-mitigating replacement cost for a netting set that is rule. As with the variation margin benefits when they calculate the not subject to a variation margin amount, the independent collateral exposure amount under IMM. agreement would have equaled the amount would have been subject to the Commenters also argued that derivative greater of (1) the sum of the fair values contracts with commercial end-users (after excluding any valuation 69 As described in section III.D. of this may present right-way risk for banking adjustments) of the derivative contracts SUPPLEMENTARY INFORMATION, the final rule applies organizations, in contrast to derivative within the netting set, less the net a five-day holding period for the purpose of the contracts with financial institution independent collateral amount margin period of risk to all derivative contracts counterparties, and that this feature of subject to a variation margin agreement that are applicable to such derivative contracts, 74 client-facing derivative transactions, as defined in these transactions supports recognition or (2) zero. the final rule, regardless of the method the banking of alternative forms of collateral. organization uses to calculate the exposure amount The capital rule only recognizes 73 The Board and OCC issued the capital rule as of the derivative contract. As described in section certain forms of collateral that qualify as a joint final rule on October 11, 2013 (78 FR 62018) VI.E. of this SUPPLEMENTARY INFORMATION, the ‘‘financial collateral,’’ as defined under and the FDIC issued the capital rule as a collateral haircuts for such transactions similarly substantially identical interim final rule on 72 reflect a five-business-day holding period under the the rule. In general, the items that September 10, 2013 (78 FR 53340). In April 14, final rule. qualify as financial collateral under the 2014, the FDIC issued the interim final rule as a 70 ‘‘Bankruptcy remote’’ is defined in § l.2 of the capital rule exhibit sufficient liquidity final rule with no substantive changes (79 FR capital rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2 and asset quality to serve as credit risk 20754). (Board); and 12 CFR 324.2 (FDIC). 74 Replacement cost is calculated based on the 71 ‘‘Qualifying central counterparty’’ is defined in mitigants for risk-based capital assumption that the counterparty has defaulted. § l.2 of the capital rule. See 12 CFR 3.2 (OCC); 12 Therefore, this calculation cannot include valuation CFR 217.2 (Board); and 12 CFR 324.2 (FDIC). 72 See supra note 52. adjustments based on counterparty’s credit quality,

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For a netting set that is subject to a the netting set were not subject to a The final rule adopts the proposed variation margin agreement where the variation margin agreement.75 replacement cost formulas and related counterparty is required to post In addition, the proposal would have definitions, with one modification. The variation margin, replacement cost provided adjustments for determining agencies recognize that in determining would have equaled the greater of (1) the replacement cost of a netting set that the fair value of a derivative on a the sum of the fair values (after is subject to multiple variation margin banking organization’s balance sheet, excluding any valuation adjustments) of agreements or a hybrid netting set, the recognized CVA on the netting set the derivative contracts within the which is a netting set composed of at of OTC derivative contracts is intended netting set, less the sum of the net least one derivative contract subject to to reflect the credit quality of the independent collateral amount and the a variation margin agreement under counterparty. The final rule permits variation margin amount applicable to which the counterparty must post advanced approaches banking such derivative contracts; (2) the sum of variation margin and at least one organizations to reduce EAD, calculated the variation margin threshold and the derivative contract that is not subject to according to SA–CCR, by the recognized minimum transfer amount applicable to such a variation margin agreement, and CVA on the balance sheet, for the the derivative contracts within the for multiple netting sets subject to a purposes of calculating advanced netting set, less the net independent single variation margin agreement. approaches total risk-weighted assets. collateral amount applicable to such Some commenters supported the This treatment is consistent with the derivative contracts; or (3) zero. As proposed replacement cost calculation recognition of CVA under CEM as it noted in the proposal, the formula to and, in particular, the cap based on the applies to advanced approaches banking determine the replacement cost of a margin exposure threshold and organizations that use CEM for purposes minimum transfer amount. The of determining advanced approaches netting set subject to a variation margin 76 agreement would have accounted for the commenters argued that the unmargined total risk-weighted assets. maximum possible unsecured exposure exposure amount more accurately The final rule otherwise adopts reflects the exposure amount for short- amount of the netting set that would not without change the proposed dated trades subject to a higher MPOR, trigger a variation margin call. For replacement cost formulas and related as the close-out period reflected in example, a netting set with a high definitions, as well as the proposed MPOR cannot be increased beyond the variation margin threshold has a higher treatment to cap the exposure amount maturity of the transactions. Other replacement cost compared to an for a margined netting set at the commenters advocated subtracting maximum exposure amount for an equivalent netting set with a lower incurred CVA from the exposure variation margin threshold. Therefore, unmargined, but otherwise identical, amount of a netting set. In support of netting set. the proposal would have provided their recommendation, the commenters definitions for variation margin Under § l.132(c)(6)(ii) of the final noted that IMM allows incurred CVA to rule, the replacement cost of a netting threshold and the minimum transfer be subtracted from EAD, and that the amount. set that is not subject to a variation agencies previously extended such margin agreement is represented as Under the proposal, the variation treatment to advanced approaches follows: margin threshold would have meant the banking organizations that use CEM to { ¥ } maximum amount of a banking calculate advanced approaches risk- replacement cost = max V C; 0 , organization’s credit exposure to its weighted assets. Where: counterparty that, if exceeded, would V is the fair values (after excluding any require the counterparty to post 75 There could be a situation unrelated to the valuation adjustments) of the derivative variation margin to the banking value of the variation margin threshold in which contracts within the netting set; and the exposure amount of a margined netting set is organization. The minimum transfer C is the net independent collateral amount greater than the exposure amount of an equivalent applicable to such derivative contracts. amount would have meant the smallest unmargined netting set. For example, in the case of amount of variation margin that may be a margined netting set composed of short-term The same requirement applies to a transferred between counterparties to a transactions with a residual maturity of ten business days or less, the risk horizon equals the netting set that is subject to a variation netting set. The proposal included this MPOR, which under the final rule is set to a margin agreement under which the treatment to address transactions for minimum floor of ten business days. The risk counterparty is not required to post which the variation margin agreement horizon for an equivalent unmargined netting set variation margin. For such a netting set, also is set to ten business days because this is the includes a variation margin threshold floor for the remaining maturity of such a netting C also includes the negative amount of that is set at a level high enough to make set. However, the maturity factor for the margined the variation margin that the banking the netting set effectively unmargined. netting set is greater than the one for the equivalent organization posted to the counterparty In such a case, the variation margin unmargined netting set because of the application (thus increasing replacement cost). of a factor of 1.5 to margined derivative contracts. threshold would result in an In such an instance, the exposure amount of a For netting sets subject to a variation inappropriately high replacement cost, margined netting set is more than the exposure margin agreement under which the because it is not reflective of the risk amount of an equivalent unmargined netting set by counterparty must post variation a factor of 1.5, thus triggering the cap. In addition, associated with the derivative contract in the case of margin disputes, the MPOR of a margin, the replacement cost formula is but rather the terms of the variation margined netting set is doubled, which could provided under § l.132(c)(6)(i) of the margin agreement. To address this issue, further increase the exposure amount of a margined final rule and is represented as follows: netting set comprised of short-term transactions the proposal would have provided that replacement cost = max{V¥C; VMT + the exposure amount of a netting set with a residual maturity of ten business days or less above an equivalent unmargined netting set. The MTA¥NICA; 0}, subject to a variation margin agreement agencies believe, however, that such instances could not exceed the exposure amount rarely occur and thus would have minimal effect on Where: of the same netting set calculated as if banking organizations’ regulatory capital. Therefore, V is the fair values (after excluding any the final rule limits the exposure amount of a valuation adjustments) of the derivative margined netting set to no more than the exposure contracts within the netting set; such as CVA, which reflect the discounted present amount of an equivalent unmargined netting set. value of losses if the counterparty were to default However, the agencies expect to monitor the in the future. application of this treatment under the final rule. 76 See 80 FR 41409 (July 15, 2015).

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C is the sum of the net independent collateral min{VNS; 0}¥min{CMA; 0}; 0} reflects 1. Hedging Set Amounts amount and the variation margin amount the exposure amount produced when Under the proposal, a banking applicable to such derivative contracts; the banking organization posts variation VMT is the variation margin threshold organization would have determined the applicable to the derivative contracts margin and independent collateral to its hedging set amount by asset class. To within the netting set; and counterparty (i.e., this component specify each asset class, the proposal MTA is the minimum transfer amount contributes to replacement cost only in would have maintained the existing applicable to the derivative contracts instances when CMA is negative). definitions in the capital rule for within the netting set. D. Potential Future Exposure interest rate, exchange rate, credit, NICA is the net independent collateral equity, and commodity derivative amount applicable to such derivative Under the proposal, the PFE for a contracts. contracts. The proposal would have netting set would have equaled the provided hedging set definitions for For a netting set that is subject to product of the PFE multiplier and the each asset class and sought comment on multiple variation margin agreements, aggregated amount. To determine the an alternative approach for the or a hybrid netting set, a banking aggregated amount, a banking definition and treatment of exchange organization must determine organization would have been required rate derivative contracts to recognize the replacement cost using the methodology to determine the hedging set amounts economic relationships of exchange rate described in § l.132(c)(11)(i) of the for the derivative contracts within a chains (i.e., when more than one final rule. Under this paragraph, a netting set, where a hedging set is currency pair can offset the risk of banking organization must use the comprised of derivative contracts that another). For example, a Yen/Dollar standard replacement cost formula share similar risk factors based on asset forward contract and a Dollar/Euro (described in § l.132(c)(6)(i) for a class (i.e., interest rate, exchange rate, forward contract, taken together, may be netting set subject to a variation margin credit, equity, and commodity). The economically equivalent, with properly agreement), except that the variation aggregated amount would have equaled set notional amounts, to a Yen/Euro margin threshold equals the sum of the the sum of all hedging set amounts forward contract when they are subject variation margin thresholds of all the within a netting set. to the same QMNA. The proposal also variation margin agreements within the Under the proposal, a banking would have included separate netting set and the minimum transfer organization would have used a two- treatments for volatility derivative amount equals the sum of the minimum step process to determine the hedging contracts and basis derivative contracts. transfer amounts of all the variation set amount for an asset class. First, a Some commenters recommended that margin agreements within the netting banking organization would have the agencies revise the definitions for set. determined the composition of a interest rate, exchange rate, equity, and For multiple netting sets subject to a hedging set using the asset class commodity derivative contracts for SA– single variation margin agreement, a definitions set forth in the proposal. CCR. In particular, the commenters banking organization must assign a Second, the banking organization would noted that there could be instances in single replacement cost to the multiple have determined hedging set amount which the existing definitions in the netting sets according to the following using asset class specific formulas. The capital rule are not aligned with the formula, as provided under hedging set amount formulas require a primary risk factor for a derivative § l.132(c)(10)(i) of the final rule: banking organization to determine an contract, and therefore would differ { { Replacement Cost = max SNS max VNS; adjusted derivative contract amount for from the classifications used under SA– }¥ { } } { 0 max CMA; 0 ; 0 + max SNS each derivative contract, and to CCR. To address this concern, { }¥ { } } min VNS; 0 min CMA; 0 ; 0 , aggregate those amounts to arrive at the commenters requested allowing banking Where: hedging set amount for an asset class.77 organizations to use the primary risk NS is each netting set subject to the variation The final rule adopts the formula for factor for the derivative contract instead margin agreement MA; determining PFE as proposed. Under of one based on the asset class VNS is the sum of the fair values (after § l.132(c)(7) of the final rule, the PFE definitions set forth in the proposal. excluding any valuation adjustments) of of a netting set equals the product of the The final rule maintains the the derivative contracts within the PFE multiplier and the aggregated definitions of interest rate, exchange netting set NS; and amount. The final rule defines the rate, equity, and commodity derivative CMA is the sum of the net independent collateral amount and the variation aggregated amount as the sum of all contracts, as the definitions are largely margin amount applicable to the hedging set amounts within the netting aligned with existing derivative derivative contracts within the netting set. This formula is represented in the products and market practices. In sets subject to the single variation margin final rule as follows: addition to being sufficiently broad to agreement. PFE = PFE multiplier * aggregated capture the various types of derivative The component max{SNS max{VNS; amount, contracts, the existing asset class }¥ { } } 0 max CMA; 0 ; 0 reflects the Where aggregated amount is the sum definitions are well-established, well- exposure amount produced by netting of each hedging set amount within the understood, and generally have sets that have current positive market netting set. functioned as intended in the capital value. Variation margin and rule. The final rule preserves the ability independent collateral collected from 77 Section III.D.1. of this SUPPLEMENTARY of the primary Federal regulator to the counterparty to the transaction can INFORMATION discusses the methodology for address derivative contracts with offset the current positive market value determining the composition of a hedging set using multiple risk factors by requiring them the asset class distinctions set forth in the final rule. to be included in multiple hedging sets of these netting sets (i.e., this SUPPLEMENTARY INFORMATION Section III.D.2. of this 78 component contributes to replacement discusses the methodology for determining the under § l.132(c)(2)(iii)(H). cost only in instances when CMA is adjusted derivative contract amount for each positive). However, netting sets that derivative contract. Section III.D.3. of this 78 The Board is the primary Federal regulator for have current negative market value are SUPPLEMENTARY INFORMATION discusses the PFE bank holding companies, savings and loan holding multiplier. Section III.D.4. of this SUPPLEMENTARY companies, intermediate holding companies of not allowed to offset the exposure INFORMATION discusses the PFE calculation for foreign banks, and state member banks; the OCC is amount. The component max{SNS nonstandard margin agreements. the primary Federal regulator for all national banks

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Some commenters supported the exchange rate derivative contracts. An end date of the derivative contract) are alternative treatment for recognizing the interest rate hedging set means all generally highly correlated, and thus economic relationships of exchange rate interest rate derivative contracts within would have provided a greater offset chains described in the proposal, but a netting set that reference the same relative to interest rate derivative only if modified to address any reference currency. Thus, there could be contracts that do not have close tenors. potential overstatement in the exposure as many interest rate hedging sets in a In particular, the proposed formula for amounts produced when creating netting set as distinct currencies determining the hedging set amount for separate hedging sets for each foreign referenced by the interest rate derivative interest rate derivative contracts would currency. The agencies believe that the contracts in the netting set. A credit have permitted full offsetting within a alternative treatment described in the hedging set would mean all credit tenor category and partial offsetting proposal, if modified to incorporate derivative contracts within a netting set. across tenor categories, with tenor correlation parameters as suggested by Similarly, an equity hedging set means categories of less than one year, between commenters, would add a level of all equity derivative contracts within a one and five years, and more than five complexity to the alternative treatment netting set. Consequently, there could years. The proposal would have applied that would make it inappropriate for use be at most one equity hedging set and a correlation factor of 70 percent across in a standardized framework that is one credit hedging set within a netting adjacent tenor categories and a intended for potential implementation set. A commodity hedging set means all correlation factor of 30 percent across by all banking organizations. The commodity derivative contracts within a nonadjacent tenor categories. The tenor agencies further believe that the netting set that reference one of the of a derivative contract would have been alternative treatment described in the following commodity categories: based on the period between the present proposal, if modified to require the Energy, metal, agricultural, or other date and the end date of the derivative maximum of long or short risk commodities. Therefore, there could be contract, where end date would have positions, would not add meaningful no more than four commodity derivative meant the last date of the period risk sensitivity by not taking into contract hedging sets within a netting referenced by the derivative contract, or account the correlations between set. if the derivative contract references currency risk factors. Therefore, the Consistent with the proposal, the final another instrument, the period agencies are adopting as final the asset rule sets forth separate treatments for referenced by the underlying class and hedging set definitions as volatility derivative contracts and basis instrument. derivative contracts. A basis derivative proposed. Some commenters asked the agencies To determine each hedging set contract is a non-foreign exchange to allow banking organizations to amount, a banking organization first derivative contract (i.e., the contract is recognize interest rate derivative must group into separate hedging sets denominated in a single currency) in contracts within the same QMNA as derivative contracts that share similar which the cash flows of the derivative belonging to the same interest rate risk factors based on the following asset contract depend on the difference hedging set, even if such derivative classes: Interest rate, exchange rate, between two risk factors that are contracts reference different currencies. credit, equity, and commodity. Basis attributable solely to one of the According to the commenters, such an derivative contracts and volatility following derivative asset classes: approach would allow banking derivative contracts require separate Interest rate, credit, equity, or organizations to recognize the hedging sets. A banking organization commodity. A basis derivative contract diversification benefits of multi- then must determine each hedging set hedging set means all basis derivative currency interest rate derivative amount using asset-class specific contracts within a netting set that portfolios. Some of these commenters formulas that allow for full or partial reference the same pair of risk factors also suggested potential ways to offsetting. If the risk of a derivative and are denominated in the same implement this approach. Under one contract materially depends on more currency. In contrast, a volatility approach, a banking organization would than one risk factor, whether interest derivative contract means a derivative calculate the maximum exposure for the rate, exchange rate, credit, equity, or contract in which the payoff of the interest rate derivative contracts within commodity risk factor, a banking derivative contract explicitly depends the QMNA under two scenarios using a organization’s primary Federal regulator on a measure of volatility for the single-factor model. The first scenario may require the banking organization to underlying risk factor of the derivative would receive a correlation factor of include the derivative contract in each contract. Examples of volatility zero percent across interest rate appropriate hedging set. Under the final derivative contracts include variance exposures in different currencies, while rule, the hedging set amount of a and volatility swaps and options on the second scenario would receive a hedging set composed of a single realized or implied volatility. A correlation factor of 70 percent. The derivative contract equals the absolute volatility derivative contract hedging set former scenario would produce the value of the adjusted derivative contract means all volatility derivative contracts largest amount for portfolios balanced amount of the derivative contract. within a netting set that reference one across net short and net long currency Section l.132(c)(2)(iii) of the final of interest rate, exchange rate, credit, exposures, while the latter scenario rule provides the respective hedging set equity, or commodity risk factors, would produce the largest amount for definitions. As noted, an exchange rate separated according to the requirements portfolios that primarily consist of net hedging set means all exchange rate under § l.132(c)(2)(iii)(A)–(E) of the long or net short currency positions. derivative contracts within a netting set final rule. The second approach would use a that reference the same currency pair. a. Interest Rate Derivative Contracts single-factor model to aggregate interest Thus, there could be as many exchange Under the proposal, the hedging set rate derivative contracts per currency rate hedging sets within a netting set as amount for a hedging set of interest rate type to recognize correlations across distinct currency pairs referenced by the derivative contracts would have currencies. Alternatively, other and Federal savings associations; and the FDIC is recognized that interest rate derivative commenters stated that yield curve the primary Federal regulatory for all state contracts with close tenors (i.e., the correlations across major currencies nonmember banks and savings associations. amount of time remaining before the could be used to establish correlation

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factors for interest rate derivative interest rate derivatives under SA–CCR currencies can move in different contracts that reference different is overly conservative. Other directions, rendering correlations currencies. These commenters noted commenters criticized the proposal as unstable. In addition, adopting the that the Basel Committee’s standard on not providing a sufficient justification commenters’ recommendations could minimum capital requirements for for the requirement that interest rate add significant complexity to the final market risk incorporates a correlation hedging sets must be settled in the same rule. The agencies therefore are parameter to reflect diversification currency to be included within the same adopting as final the proposed treatment benefits across multi-currency interest hedging set, in contrast to the proposed for determining the hedging set amount 79 rate portfolios. These commenters also treatment for credit, commodity, and of interest rate derivative contracts. stated that studies regarding the Basel equity derivative contracts. Under § l.132(c)(8)(i) of the final rule, Committee standard suggest that, by not The fact that a set of derivative a banking organization must calculate recognizing any hedging or contracts are subject to the same QMNA the hedging set amount for interest rate diversification benefits across is not determinative of whether hedging currencies, the proposed method to benefits across derivative contracts derivative contracts according to the calculate the hedging set amount for actually exist. Interest rates in different following formula:

Where: highly correlated. Therefore, under the percent, while an index derivative IR AddOnTB1 equals the sum of the adjusted proposal, the formula for determining contract would have received a derivative contract amounts within the the hedging set amount for exchange correlation factor of 80 percent to reflect hedging set with an end date of less than rate derivative contracts would have partial diversification of idiosyncratic one year from the present date; IR allowed for full offsetting within the risk within an index. As noted in the AddOnTB2 equals the sum of the adjusted exchange rate derivative contract proposal, the pairwise correlation derivative contract amounts within the hedging set with an end date of one to hedging set. The agencies did not between two entities is the product of five years from the present date; and receive comment regarding the formula the corresponding correlation factors, so IR AddOnTB3 equals the sum of the adjusted for determining the hedging set amount that the pairwise correlation between derivative contract amounts within the for exchange rate derivative contracts, two single-name derivatives is 25 hedging set with an end date of more and are adopting it as proposed. Under percent, between one single-name and than five years from the present date. § l.132(c)(8)(ii) of the final rule, the one index derivative is 40 percent, and Consistent with the proposal, the final hedging set amount for exchange rate between two index derivatives is 64 rule also includes a simpler formula that derivative contracts equals the absolute percent. The application of a higher does not provide an offset across tenor value of the sum of the adjusted correlation factor does not necessarily categories. Under this approach, the derivative contract amounts within the result in a higher exposure amount hedging set amount for interest rate hedging set. because the proposal generally would have yielded a lower exposure amount derivative contracts equals the sum of c. Credit Derivative Contracts and for balanced portfolios relative to the absolute amounts of each tenor Equity Derivative Contracts category, which is the sum of the directional portfolios. adjusted derivative contract amounts Under the proposal, a banking Several commenters asked the within each respective tenor category. organization would have used the same agencies to allow banking organizations The simpler formula always results in a formula to determine the hedging set to decompose indices within credit and more conservative measure of the amount for both its credit derivative equity asset classes to reflect the hedging set amount for interest rate contracts and equity derivative exposure of highly correlated net long derivative contracts of different tenor contracts. The formula would allow full and short positions within an index. categories, but may be less burdensome offsetting for credit or equity contracts Under § l.132(c)(5)(vi) of the final rule, for banking organizations with smaller that reference the same entity, and a banking organization may elect to interest rate derivative contract partial offsetting when aggregating decompose indices within credit and portfolios. A banking organization may across distinct reference entities. In equity asset classes, such that a banking use this simpler formula for some or all addition, the proposal would have organization would treat each of its interest rate derivative contracts. provided supervisory correlation component of the index as a separate parameters for credit derivative single-name derivative contract. Thus, b. Exchange Rate Derivative Contracts contracts and equity derivative contracts under this election, a banking Exchange rate derivative contracts based on whether the derivative organization would apply the SA–CCR that reference the same currency pair contract referenced a single-name entity methodology to each component of the generally are driven by the same market or an index. index as if it were a separate single- factor (i.e., the exchange spot rate A single-name derivative would have name derivative contract instead of between these currencies) and thus are received a correlation factor of 50 applying the SA–CCR methodology to

79 See ‘‘Minimum capital requirements for market (January 2019, rev. February 2019), https:// risk,’’ Basel Committee on Banking Supervision www.bis.org/bcbs/publ/d457.pdf.

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the index derivative contract. This rule.80 The agencies will monitor the Under the final rule, a banking approach provides enhanced risk application of the decomposition organization must determine the sensitivity to the SA–CCR framework by approach, including the correlation hedging set amount for its credit and allowing for recognition of the hedging assumptions between an index and its equity derivative contracts set forth in benefits provided by the components of components, to ensure that the § l.132(c)(8)(iii) of the final rule, as an index. In addition, this approach is approach is functioning as intended. follows: similar to other aspects of the capital

Where: contracts that are included in different Texas Intermediate and Saudi Light k is each reference entity within the hedging commodity categories (i.e., a forward crude oil. set; contract on crude oil cannot hedge a In response to comments, K is the number of reference entities within forward contract on corn). § l.132(c)(5)(vi) of the final rule allows the hedging set; Several commenters asked the a banking organization to elect to AddOn(Refk) equals the sum of the adjusted decompose commodity indices, such derivative contract amounts for all agencies to clarify the offsetting derivative contracts within the hedging treatment among the different types of that a banking organization would treat set that reference reference entity k; and contracts within the energy category each component of the index as a rk equals the applicable supervisory (e.g., electricity and oil/gas derivative separate, single-name derivative correlation factor, as provided in Table 2. contracts). Some commenters asked the contract. Thus, under this election, a banking organization would apply the d. Commodity Derivative Contracts agencies to allow banking organizations to decompose derivative contracts that SA–CCR methodology to each The proposal would have required a reference commodity indices, such that component of the index as if it were a banking organization to determine the a banking organization would treat each separate, single-name derivative hedging set amount for commodity component of the index as a separate contract, instead of applying the SA– derivative contracts based on the single-name derivative contract. CCR methodology to the index following four commodity categories: derivative contract. This approach Consistent with the proposal, the final Energy, metal, agricultural and other. provides enhanced risk sensitivity to the rule permits full offsetting for all The proposal would have permitted full SA–CCR framework by allowing for derivative contracts within a hedging set offsetting for all derivative contracts better recognition of hedging benefits that reference the same commodity type, within the same commodity category provided by the components of an (i.e., within a hedging set) that reference and partial offsetting for all derivative index. In addition, this approach is the same commodity type, and partial contracts within a hedging set that similar to other aspects of the capital offsetting for all derivative contracts reference different commodity types 83 82 rule. within the same commodity category within the same commodity category. The agencies recognize that specifying that reference different commodity This treatment applies consistently to separate commodity types is types. each of the four commodity categories, operationally difficult; indeed, it is Under the proposal, a commodity including energy. For example, likely infeasible to sufficiently specify type would have referred to a specific electricity derivative contracts within all relevant distinctions between commodity within one of the four the same hedging set may fully offset commodity types in order to capture all commodity categories. Additionally, the each other, whereas electricity basis risk. Therefore, the agencies will proposal would not have provided derivative contracts and non-electricity monitor the commodity-type separate supervisory factors for different derivate contracts (e.g., oil derivative distinctions made within the industry commodity types within the energy contracts) within the same hedging set for purposes of both the full offset commodity category.81 For example, may only partially offset each other treatment for commodity derivative under the proposal, a hedging set could because they are different commodity contracts of the same type and the have been composed of crude oil types within the same commodity decomposition approach for commodity derivative contracts and electricity category. indices, to ensure that they are being derivative contracts, with each subject In an attempt to appropriately balance applied and functioning as intended. to the same supervisory factor. A risk sensitivity with operational burden, Consistent with the proposal, a banking organization would have been consistent with the proposal, the final banking organization must assign a able to fully offset all crude oil rule allows banking organizations to derivative contract to the ‘‘other’’ derivative contracts against each other recognize commodity types without commodity category if the derivative and all electricity derivative contracts regard to characteristics such as location contract does not meet the criteria for against each other (as they reference the or quality. For example, a banking the energy, metal or agricultural same commodity type). In addition, a organization may recognize crude oil as commodity categories. banking organization would not have a commodity type, and would not need The hedging set amount for been able to offset commodity derivative to distinguish further between West commodity derivative contracts would

80 See e.g., 12 CFR 3.53 (OCC); 12 CFR 217.53 82 The final rule provides separate supervisory 83 See supra note 80. (Board); and 12 CFR 324.53 (FDIC). factors for electricity derivative contracts and other 81 See section III.D.2.b. of this SUPPLEMENTARY types of commodity derivative contracts within the INFORMATION for a more detailed discussion on energy category as discussed further in section supervisory factors under the final rule. III.D.2.b.iii. of this SUPPLEMENTARY INFORMATION.

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be determined under § l.132(c)(8)(iv) of the final rule, as follows:

Where: contract and reflects the attributes of the duration would have incorporated k is each commodity type within the hedging most common derivative contracts in measures of the number of business set; each asset class. The supervisory factor days from the present day until the start K is the number of commodity types within converts the adjusted notional amount date for the derivative contract (S), and the hedging set; of the derivative contract into an EEPE the number of business days from the AddOn(Typek) equals the sum of the adjusted based on the measured volatility present day until the end date for the derivative contract amounts for all derivative contracts within the hedging specific to each asset class over a one- derivative contract (E). set that reference commodity type k; and year horizon.85 The supervisory delta Some commenters argued that the r equals the applicable supervisory adjustment accounts for the sensitivity standard notional definition would not correlation factor, as provided in Table 2 of a derivative contract (scaled to unit produce reasonably accurate exposure of the preamble. size) to the underlying primary risk estimates of a banking organization’s 2. Adjusted Derivative Contract Amount factor, including the correct sign closeout risk for all types of derivative (positive or negative) to account for the contracts. These commenters Under the proposal, the adjusted direction of the derivative contract recommended allowing banking derivative contract amount would have amount relative to the primary risk organizations to use internal represented a conservative estimate of factor.86 Finally, the maturity factor methodologies to determine the effective expected positive exposure scales down, if necessary, the derivative adjusted notional amount for derivative (EEPE) 84 for a netting set consisting of contract amount from the standard one- contracts that are not specifically a single derivative contract, assuming year horizon used for supervisory factor covered under the formulas and zero market value and zero collateral, calibration to the risk horizon relevant methodologies set forth in the proposal. that is either positive (if a long position) for a given contract. The final rule maintains the formulas or negative (if a short position). A and methodologies for determining the banking organization would have a. Adjusted Notional Amount adjusted notional amount for interest calculated the adjusted derivative i. Interest Rate and Credit Derivative rate and credit derivative contracts, as contract amount as a product of four Contracts generally one of these will be applicable components: The adjusted notional Under the proposal, a banking for most derivative contracts. However, amount, the applicable supervisory organization would have applied the the agencies recognize that such factor, the applicable supervisory delta same formula to interest rate derivative approaches may not be applicable to all adjustment, and the applicable maturity contracts and credit derivative contracts types of derivative contracts, and that a factor. The adjusted derivative contact to arrive at the adjusted notional different approach may be necessary to amount for each asset class would have amount. For such contracts, the adjusted determine the adjusted notional amount been aggregated under the hedging set of a derivative contract. In such a case, amount formulas for each asset class, as notional amount would have equaled the product of the notional amount of a banking organization must consult described above. The agencies received with its primary Federal regulator prior no comments on this aspect of the the derivative contract, as measured in U.S. dollars, using the exchange rate on to using an alternative approach to the proposal, and are finalizing the formula formulas or methodologies set forth in for determining the adjusted derivative the date of the calculation, and the supervisory duration. The supervisory the final rule. contract amount as proposed under Some commenters suggested revising § l.132(c)(9) of the final rule. the proposal to provide a separate The formula to determine the adjusted 85 Specifically, the supervisory factors are intended to reflect the EEPE of a single at-the- measure of S for fixed-to-floating derivative contract amount is money linear trade of unit size, zero market value interest rate derivative contracts where represented as follows: and one-year maturity referencing a given risk the floating rate is determined at the factor in the absence of collateral. See supra note adjusted derivative contract amount = di beginning of the reset period and paid 10. * di * MFi * SFi. 86 Sensitivity of a derivative contract to a risk at the end, defined as the time period Where: factor is the ratio of the change in the market value until the earliest reset date, measured in of the derivative contract caused by a small change di is the adjusted notional amount; years. in the risk factor to the value of the change in the di is the applicable supervisory delta According to the commenters, the risk factor. In a linear derivative contract, the payoff adjustment; of the derivative contract moves at a constant rate proposal could overestimate the MFi is the applicable maturity factor; and with the change in the value of the underlying risk duration for such derivative contracts, SFi is the applicable supervisory factor. factor. In a nonlinear contract, the payoff of the as it would include the time period for The adjusted notional amount derivative contract does not move at a constant rate which the floating rate (and, therefore, with the change in the value of the underlying risk accounts for the size of the derivative factor. The sensitivity is positive if the derivative the floating leg payment) is captured in contract is long the risk factor and negative if the the supervisory duration. The 84 See supra note 10. derivative contract is short the risk factor. commenters also noted that such

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treatment could significantly affect the banking organizations. The agencies factors (positive or negative) and the adjusted notional amount for a short- therefore are adopting as final the number of units. According to these dated interest rate derivative portfolio. proposed treatment for determining the commenters, such an approach would Other commenters recommended adjusted notional amount of interest rate better reflect the risk of such changes to the measure of S for basis and credit derivative contracts. transactions because SA–CCR requires derivative contracts, for which the Some commenters requested changes the use of floating notional values, and floating rates on the reference exposure to address forward-settling mortgage- the notional value may change after are set at the beginning of the payment backed securities traded in the to-be- execution based on increases or period. Some of these commenters announced (TBA) market. Specifically, decreases in the spread. The recommended measuring S as the these commenters asked the agencies to commenters also argued that such an period (in years) as the earliest reset recalibrate the adjusted notional amount approach would be consistent with date of the two floating-rate components for TBA derivative contracts to account guidance released by the CFTC of the contract, if the reset dates are for the term of the mortgage loans regarding the notional amount for different. underlying the securities. Other locational basis derivative contracts.87 The treatment recommended by the commenters recommended measuring S The final rule does not incorporate the commenters cannot be made applicable for TBA derivative contracts as the time- commenters’ suggestion, as the purpose to all interest rate derivatives; for weighted average term of the mortgages of the proposed treatment is to obtain example, it would not be appropriate for underlying the securities. In response to the absolute volatility of the contract in arrears swaps, in which the rate is set commenter concerns, the agencies are price, which is related to each risk at the end of the reset period instead of clarifying that for an interest rate factor rather than the spread. the beginning, and for forward rate derivative contract or credit derivative The final rule adopts without change agreements. In addition, adopting the contract that is a variable notional swap, the proposed treatment for determining commenters’ recommendations could including mortgage-backed securities the adjusted notional amount for credit add significant complexity to the final traded in the TBA market, the notional and interest rate derivative contracts. rule because it would require additional amount is equal to the time-weighted Under § l.132(c)(9)(ii)(A) of the final parameters in the adjusted notional average of the contractual notional rule, the adjusted notional amount for amount formula that would be used amounts of such a swap over the such contracts equals the product of the only in certain circumstances. Such an remaining life of the swap. notional amount of the derivative approach would create additional Other commenters recommended contract, as measured in U.S. dollars burden for banking organizations that measuring the adjusted notional amount using the exchange rate on the date of adopt SA–CCR and could adversely for basis derivative contracts as the the calculation, and the supervisory affect the agencies’ ability to use SA– product of the absolute value of the duration. The formula to determine the CCR to assess comparability across spread between the two underlying risk supervisory duration is as follows:

Where: credit spread), and is based on the factor, the notional amount equals the S is the number of business days from the assumption of a continuous stream of notional amount of an equivalent present day until the start date for the equal payments and a constant unleveraged swap. derivative contract, or zero if the start continuously compounded interest rate date has already passed; and ii. Exchange Rate Derivative Contracts E is the number of business days from the of 5 percent. The exponential function provides discounting for S and E at 5 Under the proposal, the adjusted present day until the end date for the notional amount for an exchange rate derivative contract. percent continuously compounded. In all cases, the supervisory duration is derivative contract would have equaled A banking organization must calculate floored at ten business days (or 0.04, the notional amount of the non-U.S. the supervisory duration for the period based on an average of 250 business denominated currency leg of the that starts at S and ends at E, where S days per year). derivative contract, as measured in U.S. equals the number of business days dollars using the exchange rate on the between the present date and the start For an interest rate derivative contract date of the calculation. In general, the date for the derivative contract, or zero or a credit derivative contract that is a non-U.S. dollar denominated currency if the start date has passed, and E equals variable notional swap, the notional leg is the source of exchange rate the number of business days from the amount equals the time-weighted volatility. If both legs of the exchange present date until the end date for the average of the contract notional amounts rate derivative contract are denominated derivative contract. The supervisory of such a swap over the remaining life in currencies other than U.S. dollars, the duration recognizes that interest rate of the swap. For an interest rate adjusted notional amount of the derivative contracts and credit derivative contract or a credit derivative derivative contract would have been the derivative contracts with a longer tenor contract that is a leveraged swap, in largest leg of the derivative contract, have a greater degree of variability than which the notional amounts of all legs measured in U.S. dollars. For an an identical derivative contract with a of the derivative contract are divided by exchange rate derivative contract with shorter tenor for the same change in the a factor and all rates of the derivative multiple exchanges of principal, the underlying risk factor (interest rate or contract are multiplied by the same notional amount would have equaled

87 See CFTC, Division of Swap Dealer and Intermediary Oversight, FAQs About Swap Entities (Oct. 12, 2012), at 1.

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the notional amount of the derivative Act (Dodd-Frank Act), which prohibits Alternatively, if the agencies declined to contract multiplied by the number of the use of credit ratings in Federal adopt the PD band-based approach for exchanges of principal under the regulations.88 As an alternative, the purposes of the final rule, the derivative contract. The agencies proposal would have introduced an commenters suggested lowering the received no comments on the proposed approach that satisfies section 939A of proposed supervisory factor for adjusted notional amount for exchange the Dodd-Frank Act while allowing for investment grade single-name credit rate derivative contracts, and are a level of granularity among the derivatives from 0.5 percent to 0.46 adopting it as final under supervisory factors applicable to single- percent, to eliminate the impact of § l.132(c)(9)(ii)(B) of the final rule. name credit derivatives that would have rounding (to the nearest tenth) that was been generally consistent with the Basel conducted for purposes of the proposal. iii. Equity and Commodity Derivative Committee standard.89 Under the Other commenters suggested aligning Contracts proposal for single-name credit the supervisory factor for investment Under the proposal, a banking derivative contracts, investment grade grade single-name credit derivatives to organization would have applied the derivative contracts would have the lowest supervisory factor under the same single-factor formula to equity received a supervisory factor of 0.5 Basel Committee standard, 0.38 percent, derivative contracts and commodity percent, speculative grade derivative based on the view that the most derivative contracts. For such contracts, contracts would have received a creditworthy issuers in the United the adjusted notional amount would supervisory factor of 1.3 percent, and States are no more prone to default than have equaled the product of the fair sub-speculative grade derivative the most creditworthy issuers in other value of one unit of the reference contracts would have received a jurisdictions. instrument underlying the derivative supervisory factor of 6.0 percent. For SA–CCR is a standardized approach, contract and the number of such units credit derivative contracts that reference and the use of PD bands to assign referenced by the derivative contract. By an index, investment grade derivative supervisory factors to single-name credit design, the proposed treatment would contracts would have received 0.38 derivatives would require the use of have reflected the current price of the percent and speculative grade derivative internal models, which generally are not underlying reference instrument. For contracts would have received 1.06 appropriate for a standardized approach example, if a banking organization has percent. The proposal would have that is intended to be implementable by a derivative contract that references revised the capital rule to include banking organizations of all sizes. In 15,000 pounds of frozen concentrated definitions for speculative grade and addition, providing such treatment as an orange juice currently priced at $0.0005 sub-speculative grade (the capital rule option in SA–CCR could introduce more a pound then the adjusted notional already includes a definition for risk sensitivity solely for more amount would be $7.50. For an equity investment grade). The agencies sophisticated banking organizations that derivative contract or a commodity received several comments on the currently determine PD for purposes of derivative contract that is a volatility supervisory factors for credit derivative the advanced approaches, and derivative contract, a banking contracts, but no comments on the potentially provide a competitive organization would have been required proposed definitions of speculative advantage to such firms and adversely to replace the unit price with the grade and sub-speculative grade. affect the use of SA–CCR to assess underlying volatility referenced by the Several commenters encouraged the comparability across banking volatility derivative contract and replace agencies to reconsider the proposed organizations. In addition, lowering the the number of units with the notional methodology for determining the supervisory factor for single-name amount of the volatility derivative supervisory factors for single-name investment grade credit derivatives to contract. By design, the proposed credit derivative contracts. As an 0.38 percent would fail to recognize the treatment would have reflected that the alternative, the commenters meaningful differences in the risks payoff of a volatility derivative contract recommended an approach that maps captured by the investment grade generally is determined based on a probability of default (PD) bands to the category under the proposal and the notional amount and the realized or credit rating categories and the final rule, relative to the category and implied volatility (or variance) corresponding supervisory factors set supervisory factor that correspond referenced by the derivative contract forth in the Basel Committee standard solely to an AAA credit rating under the and not necessarily the unit price of the for single-name credit derivatives, Basel Committee standard. In response consistent with the approach used to to comments, however, the final rule underlying reference instrument. The assign a counterparty risk weight under applies a 0.46 percent supervisory factor agencies received no comments on the the simple CVA approach in the to investment grade single-name credit proposed adjusted notional amount for advanced approaches.90 According to derivative contracts. This change will equity and commodity derivative the commenters, this approach would enhance the precision and risk contracts, including instances in which more closely align with the granularity sensitivity of the final rule, without such a contract is a volatility derivative and the supervisory factors provided introducing undue complexity or contract, and are adopting it without under the Basel Committee standard, materially affecting the amount of change under § l.132(c)(9)(ii)(C) of the while meeting the requirements of regulatory capital a banking final rule. section 939A of the Dodd-Frank Act. organization must hold for such b. Supervisory Factor derivative contracts relative to the 88 See Public Law 111–203, 124 Stat. 1376 (2010), proposal. i. Credit Derivative Contracts section 939A. This provision is codified as part of Therefore, the final rule adopts the the Securities Exchange Act of 1934 at 15 U.S.C. In contrast to the Basel Committee 78o–7. supervisory factors for credit derivative standard, the proposal would not have 89 Specifically, the supervisory factors in the contracts, as proposed, with one provided for the use of credit ratings to Basel Committee’s SA–CCR standard are as follows modification to the supervisory factor determine the supervisory factor for (in percent): AAA and AA–0.38, A–0.42; BBB–0.54; for investment grade single-name credit credit derivative contracts due to BB–1.06; B–1.6; CCC–6.0. derivative contracts as described above. 90 See 12 CFR 3.132(e)(5) (OCC); 12 CFR section 939A of the Dodd-Frank Wall 217.132(e)(5) (Board); and 12 CFR 324.132(e)(5) In addition, the final rule maintains the Street Reform and Consumer Protection (FDIC). current definition of investment grade

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in the capital rule, and adopts the due diligence to determine the types or allocating exposures across the proposed definitions for ‘‘speculative appropriate category for a single-name various alternate categories posed by grade’’ and ‘‘sub-speculative grade.’’ credit derivative, in view of the commenters, and then calibrating The supervisory factors are reflected in performance criteria in the definitions supervisory factors associated with each Table 2 of this SUPPLEMENTARY for each category under the final rule. A of those sub-categories, would increase INFORMATION. banking organization may consider the the complexity of applying SA–CCR and The investment grade category credit rating for a single-name credit reduce comparability among banking generally captures single-name credit derivative in making that determination organizations. Further adjustments to derivative contracts consistent with the as part of a multi-factor analysis. In the supervisory factor for equity three highest supervisory factor addition, the agencies expect a banking derivative contracts to align with the categories under the Basel Committee organization to have and retain support revised Basel III market risk standard, as standard. The capital rule defines for its analysis and assignment of the recommended by commenters, investment grade to mean that the entity respective credit categories. potentially could be considered if that standard is implemented in the United to which the banking organization is ii. Equity Derivative Contracts exposed through a loan or security, or States in a future rulemaking. Therefore, the reference entity with respect to a Under the proposal, single-name the final rule adopts as proposed the credit derivative contract, has adequate equity derivative contracts would have supervisory factors for equity derivative capacity to meet financial commitments received a supervisory factor of 32 contracts, as reflected in Table 2 of the for the projected life of the asset or percent and equity derivative contracts final rule. that reference an index would have exposure. Such an entity or reference iii. Commodity Derivative Contracts entity has adequate capacity to meet received a supervisory factor of 20 financial commitments, as the risk of its percent. The agencies received several The proposal would have established default is low and the full and timely comments regarding the proposed four commodity categories: Energy, repayment of principal is expected.91 supervisory factors for equity derivative metals, agriculture, and other. Energy The speculative grade category contracts. In general, the commenters derivative contracts would have generally captures single-name credit recommended various approaches to received a supervisory factor of 40 derivative contracts consistent with the distinguish among the risks of single- percent, whereas derivative contracts in next two lower supervisory factor name equity derivative contracts and the non-energy commodity categories categories under the Basel Committee thereby provide additional granularity (i.e., metal, agricultural, and other) each standard. The final rule defines the term in the supervisory factors that would have received a supervisory speculative grade to mean that the correspond to such exposures. The factor of 18 percent. reference entity has adequate capacity to approaches offered by the commenters The agencies received a number of meet financial commitments in the near would distinguish among (1) investment comments on the proposed supervisory term, but is vulnerable to adverse grade and non-investment grade issuers; factors for commodity derivative economic conditions, such that should (2) issuers in advanced and emerging contracts. Several commenters economic conditions deteriorate, the markets; (3) issuers with large market encouraged the agencies to recalibrate reference entity would present elevated capitalizations and those with small the supervisory factors for commodity default risk. The sub-speculative grade market capitalizations; and (4) issuers in derivative contracts to reflect the market price of forward contracts, stating that category corresponds to the lowest different industry sectors. Some of the this would better reflect the actual supervisory factor category under the approaches suggested by commenters volatility of the commodity derivatives Basel Committee standard, with the align with the Basel Committee market 93 market compared to the market price of term sub-speculative grade defined risk standard. Commenters also spot contracts. According to these under the final rule to mean that the suggested various permutations of these commenters, such an approach would reference entity depends on favorable approaches (e.g., use of sector reflect the widespread use of economic conditions to meet its differentiation in combination with a commodity derivative contracts in the financial commitments, such that distinction for advanced and emerging markets). Some commenters provided market, as a way to hedge commodity should economic conditions deteriorate, analysis suggesting that each of these price risk for months or years into the the reference entity likely would default approaches could offer additional future. As an alternative to this on its financial commitments. Each of granularity and allow for lower recommendation, commenters suggested these categories includes exposures that supervisory factors for investment full alignment with the supervisory perform largely in accordance with the grade, advanced markets, and large cap factors for commodity derivative performance criteria that define each issuers, relative to the supervisory contracts in the Basel Committee category under the final rule, and factors under the proposal and the Basel standard, which applies a 40 percent therefore result in capital requirements Committee standard. Commenters also supervisory factor to electricity that are broadly equivalent to those suggested incorporating one of the derivative contracts and an 18 percent resulting from application of the above distinctions into the supervisory supervisory factor to oil/gas derivative supervisory factors under the Basel factors for equity indices. contracts, each within the energy Committee standard.92 The agencies acknowledge that category. The agencies expect that banking certain aspects of the proposal could be Other commenters expressed concern organizations would conduct their own revised to enhance its risk sensitivity; that the proposed supervisory factors for however, any such revisions must be commodity derivative contracts were 91 ‘‘Investment grade’’ is defined in § l.2 of the capital rule. See 12 CFR 3.2 (OCC); 12 CFR 217.2 balanced against the objectives of not sufficiently granular. These (Board); and 12 CFR 324.2 (FDIC). simplicity and ensuring comparability commenters argued that each of the 92 An empirical analysis for the supervisory among banking organizations that commodity categories set forth in the factors applied to the investment grade and implement SA–CCR. Attempting to proposal would include a wide range of speculative grade categories is set forth in the commodity types that present different SUPPLEMENTARY INFORMATION section of the define different categories of market proposal. See 83 FR 64660, 64675 (December 17, levels of risk. As a result, the 2018). 93 See supra note 79. commenters expressed concern that the

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proposal would overstate the amount of contracts under multiple regulatory the primary risk factor, and are not capital that must be held for certain regimes, and could provide incentives based on the purpose for which such a lower-risk commodities, particularly for such banking organizations to book derivative contract may be entered into. natural gas and certain types of commodity derivatives in an entity Therefore, consistent with the proposal, agricultural commodities.94 Several located in the jurisdiction that provides under the final rule a banking commenters expressed concern that the for the most favorable treatment from a organization must treat a gold derivative proposed supervisory factors for regulatory capital perspective. contract as a commodity derivative commodity derivative contracts would Other commenters recommended contract, with a supervisory factor of 18 indirectly increase the cost of such revising the proposal to provide percent. contracts for commercial end-user separate recognition for derivative The final rule adopts the supervisory counterparties, who may use contracts that reference commodity factors for commodity derivative commodity derivative contracts to indices. According to these commenters, contracts, as proposed, with one manage commercial risk. diversification across different modification to the supervisory factor In response to comments, the final commodities significantly lowers the for energy derivative contracts that are rule adopts a separate supervisory factor volatility of a diversified index when not electricity derivative contracts as of 18 percent for all energy derivative compared to the undiversified discussed above. The supervisory contracts except for electricity volatilities of the index constituents. factors are reflected in Table 2 of this derivative contracts, which receive a The final rule does not include a SUPPLEMENTARY INFORMATION and Table supervisory factor of 40 percent. This specific treatment for commodity 2 to § l.132 of the final rule. treatment enhances the risk sensitivity indices because they are typically of the supervisory factors for derivative highly heterogeneous depending on iv. Interest Rate Derivative Contracts contract types within the energy their compositions and maturities and, Under the proposal, interest rate commodity category in a manner that as a result, a single calibration for such derivative contracts would have aligns with the Basel Committee a broad asset class will not provide for received a supervisory factor of 0.5 standard.95 The final rule does not the risk sensitivity intended by SA– percent. The agencies did not receive revise the other supervisory factors CCR. comments on this aspect of the proposed for commodity derivatives, or Under the proposal, a banking proposal, and are adopting it as provide for more granularity in the organization would have been required proposed, as reflected in Table 2 of this supervisory factors. In addition to to treat a gold derivative contract as a SUPPLEMENTARY INFORMATION. presenting significant challenges and commodity derivative contract rather v. Exchange Rate Derivative Contracts materially increasing the complexity of than an exchange rate derivative the framework (as noted in section contract, and apply a supervisory factor Under the proposal, exchange rate III.D.1.d. of this SUPPLEMENTARY of 18 percent. Several commenters derivative contracts would have INFORMATION), revising the proposal to argued for revising the proposal to received a supervisory factor of 4 include additional commodity recognize gold derivative contracts as a percent. As noted in the discussion on categories for specific commodity types type of exchange rate derivative supervisory factors for commodity could limit the full offset treatment contract. According to the commenters, derivative contracts, several available to commodity types within the such treatment would be consistent commenters supported treating gold same category. Recalibrating the with CEM, IMM, the Basel Committee’s derivative contracts as a type of supervisory factors for commodity Basel II accord issued in 2004 (Basel exchange rate derivative contract. derivative contracts to reflect the II),96 and industry practice. The However, as noted previously, treating a volatility driven by forward prices also commenters also asserted that, similar gold derivative as an exchange rate would not be appropriate for all to currencies, gold serves as a derivative contract would significantly commodity derivative contracts because macroeconomic hedge to dynamic understate the risk associated with such the value of short-term derivative market conditions including declining exposures. The agencies are therefore contracts—which also are prevalent equity prices, inflationary pressures, adopting as final the proposal to treat a within the market—is driven by spot and political crises. gold derivative contract as a commodity prices rather than forward prices. Based on an analysis of price data for derivative contract. The agencies did Moreover, such an approach would gold, silver, nickel and platinum from not receive comments on other aspects materially deviate from the Basel January 2001 to January 2019, gold of the proposed supervisory factors for Committee standard and could create exhibits historical volatility levels that exchange rate derivative contracts, and material inconsistencies in the are generally consistent with those are adopting them as final, as reflected international treatment of derivative observed for other metals, and are in Table 2 of this SUPPLEMENTARY contracts across jurisdictions. Any such nearly identical to the historical INFORMATION. inconsistencies could create regulatory volatility levels observed for platinum compliance burdens for large, over the same period. Accordingly, vi. Volatility Derivative Contracts and internationally active banking treating a gold derivative contract as an Basis Derivative Contracts organizations required to determine exchange rate derivative contract would For volatility derivative contracts, the capital requirements for derivative significantly understate the risk proposal would have required a banking associated with such exposures, organization to multiply the applicable 94 See section III.D.1.d. of this SUPPLEMENTARY notwithstanding their treatment under supervisory factor based on the asset INFORMATION. either Basel II, IMM or CEM. Moreover, class related to the volatility measure by 95 As described in section III.D.1.d. of this the supervisory factors under SA–CCR a factor of five. This treatment would SUPPLEMENTARY INFORMATION, for purposes of calculating the hedging set amount, the final rule are calibrated to volatilities observed in have recognized that volatility permits full offsetting for all derivative contracts derivative contracts are inherently within a hedging set that reference the same 96 See ‘‘International Convergence of Capital subject to more price volatility than the commodity type, and partial offsetting for all Measurement and Capital Standards: A Revised derivative contracts within a hedging set that Framework,’’ Basel Committee on Banking underlying asset classes they reference. reference different commodity types within the Supervision (June 2004), https://www.bis.org/publ/ For basis derivative contracts, the same commodity category. bcbs107.pdf. proposal would have required a banking

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organization to multiply the applicable difference in volatilities of highly supervisory factors for volatility supervisory factor based on the asset correlated risk factors, which would derivative contracts and basis derivative class related to the basis measure by a have resulted in a lower volatility than contracts, and the final rule adopts this factor of one half. This treatment would a derivative contract that is not a basis aspect of the proposal without change. have reflected that the volatility of a derivative contract. The agencies did basis derivative contract is based on the not receive comments on the proposed

TABLE 2—SUPERVISORY OPTION VOLATILITY AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS

Supervisory Supervisory option correlation Supervisory Asset class Category Type factor 1 volatility factor (percent) (percent) (percent)

Interest rate ...... N/A ...... N/A ...... 50 N/A 0.50 Exchange rate ...... N/A ...... N/A ...... 15 N/A 4.0 Credit, single name ...... Investment grade ...... N/A ...... 100 50 0.46 Speculative grade ...... N/A ...... 100 50 1.3 Sub-speculative grade ...... N/A ...... 100 50 6.0 Credit, index ...... Investment Grade ...... N/A ...... 80 80 0.38 Speculative Grade ...... N/A ...... 80 80 1.06 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 As generally noted above, SA–CCR is As noted above, because options a standardized framework, and the use contracts are nonlinear, a banking Under the proposal, a banking of internal models to determine option organization must use the Black-Scholes organization would have applied the volatility would generally not be Model to determine the supervisory supervisory delta adjustment to account appropriate for a standardized approach delta adjustment for options contracts. for the sensitivity of a derivative that is intended to be implementable by However, because the Black-Scholes contract to the underlying primary risk all banking organizations and used to Model assumes that the underlying risk factor, including the correct sign facilitate supervisory assessments of factor is greater than zero, consistent (positive for long and negative for short) comparability across banking with the proposal, the final rule to account for the direction of the organizations. Allowing banking incorporates a parameter, lambda (l), so derivative contract amount relative to organizations to use internal models for that the Black-Scholes Model may be the primary risk factor. Because option purposes of the final rule would not used where the underlying risk factor support these objectives. The agencies contracts are nonlinear, the proposal has a negative value. In particular, the note that advanced approaches banking would have required a banking Black Scholes formula provides a ratio, organization to use the Black-Scholes organizations may continue to use IMM, which is a model-based approach, to P/K, as an input to the natural logarithm Model to determine the supervisory function. P is the fair value of the delta adjustment. determine the exposure amount of derivative contracts for purposes of underlying instrument and K is the Some commenters argued that use of calculating advanced approaches total strike price. The natural logarithm the Black-Scholes Model is not risk-weighted assets.97 function can be defined only for appropriate for certain path-dependent The final rule adopts the supervisory amounts greater than zero, and options, because their price is not delta adjustment as proposed. Under therefore, a reference risk factor with a determined by a single price but instead § l.132(c)(9)(iii) of the final rule, the negative value (e.g., negative interest is determined by the path of the price supervisory delta adjustment for rates) would make the supervisory delta for the underlying asset during the derivative contracts that are not options adjustment inoperable. option’s tenor. For such path-dependent or collateralized debt obligation options, the commenters asked that tranches must account only for the banking organizations instead be direction of the derivative contract 98 Under the final rule, a banking organization allowed to use existing internal models. (positive or negative) with respect to the must represent binary options with strike K as the Similarly, other commenters requested underlying risk factor, as such contracts combination of one bought European option and allowing banking organizations to use are considered to be linear in the one sold European option of the same type as the modeled volatilities for purposes of the original option (put or call) with the strike prices primary risk factor. Accordingly, the set equal to 0.95 * K and 1.05 * K. The size of the supervisory delta adjustment, rather supervisory delta adjustment equals one position in the European options must be such that than the volatilities prescribed by the if such a derivative contract is long the the payoff of the binary option is reproduced proposal. Conversely, other commenters primary risk factor and negative one if exactly outside the region between the two strikes. supported the agencies’ proposal with The absolute value of the sum of the adjusted it is short the primary risk factor. derivative contract amounts of the bought and sold respect to the calibration of supervisory options is capped at the payoff amount of the binary deltas. 97 See supra note 25. option.

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Where: s equals the supervisory option volatility, (such as interest rate caps and floors),101 F is the standard normal cumulative determined in accordance with Table 2 a banking organization must represent distribution function; of the preamble. each payment option as a combination P equals the current fair value of the Consistent with the proposal, under of effective single-payment options instrument or risk factor, as applicable, the final rule, for a derivative contract (such as interest rate caplets and underlying the option; that can be represented as a floorlets). A banking organization K equals the strike price of the option; combination of standard option payoffs cannot decompose linear derivative T equals the number of business days until (such as collar, butterfly spread, contracts (such as swaps) into the latest contractual exercise date of the components. option; and calendar spread, straddle, and 100 l equals zero for all derivative contracts, strangle), a banking organization For a derivative contract that is a except that for interest rate options that must treat each standard option collateralized debt obligation tranche, a reference currencies currently associated component as a separate derivative banking organization must determine with negative interest rates l must be contract. For a derivative contract that the supervisory delta adjustment equal to max {¥L + 0.1%; 0}; 99 and includes multiple-payment options according to the following formula:

Where: all underlying exposures, expressed as a whether a derivative contract is subject A is the attachment point, which equals the decimal value between zero and one. to a variation margin agreement. For ratio of the notional amounts of all The final rule applies a positive sign derivative contracts subject to a underlying exposures that are to the resulting amount if the banking variation margin agreement, the subordinated to the banking organization purchased the maturity factor would have been based organization’s exposure to the total collateralized debt obligation tranche on the ratio of the supervisory-provided notional amount of all underlying and applies a negative sign if the MPOR applicable to the type of exposures, expressed as a decimal value derivative contract and 250 business 102 banking organization sold the between zero and one; and days. The proposal would have defined D is the detachment point, which equals one collateralized debt obligation tranche. MPOR as the period from the most minus the ratio of the notional amounts d. Maturity Factor of all underlying exposures that are recent exchange of collateral under a senior to the banking organization’s The proposal would have provided variation margin agreement with a exposure to the total notional amount of separate maturity factors based on defaulting counterparty until the

99 The same value of li must be used for all A calendar spread consists of a short call (put) is similar to the straddle, but the investor is interest rate options that are denominated in the option and a long call (put) option on the same purchasing (selling) out-of-the-money options in a same currency. The value of li for a given currency underlying stock and with the same exercise price, strangle, while in a straddle, the investor is would be equal to the lowest value L of Pi and Ki but with different maturities. If the investor expects purchasing (selling) at-the-money options. of all interest rate options in a given currency that limited price movement on the stock in the near- 101 the banking organization has with all term but a significant longer-term price increase, An interest rate cap is a series of interest rate counterparties. the investor will sell the short-dated call option and call options (‘‘caplets’’) in which the option seller 100 A collar is a combination of a long position purchase the long-dated call option. pays the option buyer when the reference rate in the stock, a long put option and a short call A straddle consists of a long (short) call option exceeds the predetermined level in the contract. An option, in which the investor gives up the upside and long (short) put option on the same underlying interest rate floor is a series of interest rate put on the stock (by selling the call option) to obtain stock, with the same exercise price and with the options (‘‘floorlets’’) in which the option seller pays downside protection (through the purchase of the same maturity, in which the investor pays (receives) the options buyer when the reference rate falls put option). two option premiums upfront. In a long straddle, below the contractual floor. the investor pays two premiums upfront for the A butterfly spread consists of a long put (call) 102 In the case of a first-to-default credit with a low exercise price, a long put (call) with a options in order to hedge against expected large derivative, there are no underlying exposures that high exercise price, and two short puts (calls) with future stock price moves regardless of direction. In are subordinated to the banking organization’s an intermediate exercise price, in which the a short straddle, the investor receives two option investor earns a profit if the underlying asset equals premiums upfront based on their expectation of low exposure and A = 0. In the case of a second-or- the intermediate exercise price of two short puts future price volatility. subsequent-to-default credit derivative, the smallest (calls) but has limited their potential loss to no A strangle consists of a call and put option on the (n¥1) notional amounts of the underlying more than the low exercise price of the long put same underlying stock and with the same exercise exposures are subordinated to the banking (call). date, but with different exercise prices. The strategy organization’s exposure.

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derivative contracts are closed out and the proposal is different from the type of counterparty to the derivative the resulting market risk is re-hedged. existing criteria under the IMM. Under contract because the agencies intend for For derivative contracts subject to a the proposal, a banking organization the maturity factor to capture the time variation margin agreement that are not would have been required to double the period to close out a defaulted cleared transactions, MPOR would have applicable MPOR floor if the derivative counterparty and the degree of legal been floored at ten business days. For contract is subject to an outstanding certainty with respect to such close-out derivative contracts subject to a dispute over margin. Under the IMM, a period. With respect to comments variation margin agreement and that are banking organization must double the regarding the MPOR for exposures to cleared transactions, MPOR would have applicable MPOR only if over the two commercial end-user counterparties, been floored at five business days. For previous quarters more than two margin removing the alpha factor for derivative derivative contracts not subject to a disputes in a netting set have occurred contracts with such counterparties variation margin agreement, the and lasted longer than the MPOR. The should help to address the commenters’ maturity factor would have been based agencies are aligning the treatment in concerns. on the ratio of the remaining maturity of the final rule with this approach. Some commenters asked the agencies the derivative contract, capped at 250 Therefore, a banking organization must to replace the term ‘‘exotic derivative business days, with the numerator double the applicable MPOR only if contracts’’ 105 under the proposal with floored at ten business days. over the two previous quarters more ‘‘derivative contracts that are not easily Several commenters asked the than two margin disputes in a netting replaceable’’ in order to allow banking agencies to clarify whether a five- set have occurred, and each margin organizations to rely on existing business-day MPOR floor would apply dispute lasted longer than the MPOR.104 operational processes rather than to the exposure of a clearing member This approach is consistent with the requiring the establishment of new ones banking organization to its client that treatment under IMM, which has to identify ‘‘exotic derivative contracts.’’ arises when the clearing member generally functioned as intended. In These commenters noted that banking banking organization is acting as a addition, alignment with IMM will organizations have already established financial intermediary and enters into reduce operational burden for firms that the operational processes necessary for an offsetting derivative contract with a are required to use SA–CCR for identifying derivative contracts as ‘‘not CCP or when the clearing member calculating standardized risk-weighted easily replaceable’’ to comply with other banking organization provides a assets, but have received prior guarantee to the CCP on the aspects of the capital rule. In response supervisory approval to use IMM to performance of the client on a derivative to commenters’ concerns, the agencies calculate risk-weighted assets under the contract with the CCP. In response to are replacing the term ‘‘exotic derivative advanced approaches. comments, the final rule applies a five- contract’’ with ‘‘derivative contract that business-day MPOR floor to the Other commenters requested revising cannot be easily replaced.’’ exposure of a clearing member banking the proposal to allow banking For the reasons described above, the organization to its client that arises organizations to treat all derivative agencies are adopting as final the when the clearing member banking contracts with a commercial end-user proposed maturity factor adjustment organization is acting as a financial counterparty as subject to a variation under § l.132(c)(9)(iv) of the final rule, intermediary and enters into an margin agreement and apply a holding subject to the clarifications and offsetting derivative contract with a period of no more than ten business revisions discussed above. Under the QCCP or when the clearing member days, regardless of whether the final rule, for derivative contracts not banking organization provides a derivative contract is subject to a subject to a variation margin agreement, guarantee to the QCCP on the variation margin agreement. The reasons or derivative contracts subject to a performance of the client on a derivative provided by commenters for this request variation margin agreement under contract with the QCCP (defined under were to help address the types of which the counterparty to the variation this final rule as a ‘‘client-facing concerns raised by commenters margin agreement is not required to post derivative transaction,’’ as described regarding exposures to commercial end- variation margin to the banking below).103 user counterparties, as discussed organization, a banking organization Some commenters noted that the previously. The final rule does not must determine the maturity factor criteria for doubling the MPOR under provide maturity factors based on the using the following formula:

Where M equals the greater of ten For derivative contracts subject to a must determine the maturity factor business days and the remaining variation margin agreement under using the following formula: maturity of the contract, as measured in which the counterparty must post business days. variation margin, a banking organization

103 Section 132(c)(9)(iv)(A)(2)(ii) of the proposed The final rule is consistent with the Basel 105 Under the proposal, a banking organization rule text would have applied a five-business-day Committee standard regarding capital requirements would have been required to use a MPOR of 20 MPOR floor to cleared transactions subject to a for bank exposures to central counterparties and business days for a derivative contract that is within variation margin agreement. In order to capture the with the treatment of these transactions under the a netting set that is composed of more than 5,000 longer close-out period required in the event of a agencies’ implementation of CEM. See infra note derivative contracts that are not cleared central counterparty failure, the final rule text at section 132(c)(9)(iv)(A)(1) provides that MPOR 116. transactions, or if a netting set contains one or more cannot be less than ten business days for 104 The adopted treatment is also consistent with trades involving illiquid collateral or exotic transactions subject to a variation margin agreement the application of the standard supervisory haircuts derivative contracts. that are not client-facing derivative transactions. under § l.132(b)(2)(ii)(A)(4) of the final rule.

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contract is the period until the next the floor to 1 percent because initial reset date.107 In addition, derivative margin requirements for uncleared contracts with daily settlement would swaps under the swap margin rule Where MPOR refers to the period be treated as unmargined derivative generally are calibrated to a 99 percent from the most recent exchange of contracts. However, as discussed in confidence level. Additionally, these collateral under a variation margin section III.D.4. of this SUPPLEMENTARY commenters argued that the floor should agreement with a defaulting INFORMATION, a banking organization not be a component of the PFE counterparty until the derivative may elect to treat settled-to-market multiplier function but instead should contracts are closed out and the derivative contracts as collateralized-to- act as an independent floor to the resulting market risk is re-hedged. market derivative contracts subject to a recognition of collateral under the PFE The final rule introduces the term variation margin agreement and apply function. According to these comments, ‘‘client-facing derivative transactions’’ the maturity factor for derivative while these changes would result in to describe the exposure of a clearing contracts subject to a variation margin more risk-sensitive initial margin member banking organization to its agreement. recognition for heavily overcollateralized netting sets, the client that arises when the clearing 3. PFE Multiplier member banking organization is either overall impact would remain acting as a financial intermediary and Under the proposal, the PFE conservative due to the overcalibration enters into an offsetting derivative multiplier would have recognized, if of the add-on. Other commenters asked contract with a QCCP or when the present, the amount of excess collateral the agencies to recognize the effect of clearing member banking organization available and the negative fair value of collateral on a dollar-for-dollar basis, provides a guarantee to the QCCP on the the derivative contracts within the subject to haircuts, similar to the performance of the client for a netting set. Specifically, the PFE recognition of collateral under the derivative contract with the QCCP. multiplier would have decreased replacement cost component of SA– Under the final rule, the agencies are exponentially from a value of one as the CCR. clarifying that the MPOR is floored at value of the financial collateral held Relative to CEM, SA–CCR is more five business days for derivative exceeds the net fair value of the sensitive to the risk-reducing benefits of contracts subject to a variation margin derivative contracts within the netting collateral. However, the agencies agreement that are client-facing set, subject to a floor of 5 percent. This recognize that as a standardized derivative transactions. For all other function accounted for the fact that the framework, SA–CCR may not derivative contracts subject to a proposed aggregated amount formula appropriately capture risks in all cases variation margin agreement, the MPOR would not have recognized financial (e.g., collateral haircuts may be less than is floored at ten business days. If over collateral and would have assumed a those realized in stress periods) and the previous two quarters a netting set zero market value for all derivative therefore believe it is appropriate to is subject to two or more outstanding contracts. instill conservatism. The combination of margin disputes that lasted longer than Several commenters argued that the the exponential function and the floor the MPOR, the applicable MPOR is PFE multiplier is too conservative and provides adequate recognition of twice the MPOR provided for those does not appropriately account for the collateral while maintaining a sufficient transactions in the absence of such risk-reducing effects of collateral. Some level of conservatism by limiting disputes.106 For a derivative contract commenters argued that the calibration decreases in PFE due to large amounts that is within a netting set that is of the aggregated amount for a netting of collateral and preventing PFE from composed of more than 5,000 derivative set would result in an overly reaching zero for any amount of margin. contracts that are not cleared conservative PFE multiplier amount, This ensures that some amount of transactions, or if a netting set contains and that the aggregated amount in the capital will be maintained even in one or more transactions involving PFE multiplier should be divided by at situations where the transaction is illiquid collateral or a derivative least two to mitigate such conservatism. overcollateralized. The commenters’ contract that cannot be easily replaced, Other commenters argued that because recommendations could, in certain the MPOR is floored at 20 business other factors under SA–CCR already circumstances, undermine these days. contribute to the conservative objectives. Therefore, the final rule For a cleared derivative contract in recognition of initial margin (e.g., the adopts the PFE multiplier as proposed. which on specified dates any calibration of the add-on, use of an Under the final rule, a banking outstanding exposure of the derivative exponential function, and reflection of organization must calculate the PFE contract is settled and the fair value of collateral volatility through haircuts that multiplier using the formula set forth in the derivative contract is reset to zero, do not allow any diversification across §l.132(c)(7)(i) of the final rule, as the remaining maturity of the derivative collateral), the agencies should decrease follows:

Where: V is the sum of the fair values (after the derivative contracts within the excluding any valuation adjustments) of netting set;

106 In general, a party will not have violated its required variation margin, including the timely with the counterparty promptly following the obligation to collect or post variation margin from initiation and continued pursuit of formal dispute applicable cure period and notification or to a counterparty if: The counterparty has refused resolution mechanisms; or has otherwise requirements. or otherwise failed to provide or accept the required demonstrated that it has made appropriate efforts to 107 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); variation margin to or from the party; and the party collect or post the required variation margin; or has made the necessary efforts to collect or post the commenced termination of the derivative contract and 12 CFR 324.2 (FDIC).

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C is the sum of the net independent collateral a banking organization would have such contracts are within the same amount and the variation margin amount divided the netting set into sub-netting netting set. applicable to the derivative contracts sets and calculated the aggregated The proposal’s distinction between within the netting set; and amount for each sub-netting set. In margined and unmargined derivative A is the aggregated amount of the netting set. particular, all derivative contracts contracts would not have fully captured The PFE multiplier decreases as the within the netting set that are not the relationship between settled-to- net fair value of the derivative contracts subject to a variation margin agreement market derivative contracts and within the netting set less the amount of or that are subject to a variation margin collateralized-to-market derivative collateral decreases below zero. agreement under which the contracts that are cleared transactions as ¥ Specifically, when the component V C counterparty is not required to post defined under § l.2 of the capital rule. is greater than zero, the multiplier is variation margin would have formed a In particular, under both cleared settled- ¥ equal to one. When the component V single sub-netting set. A banking to-market and cleared collateralized-to- C is less than zero, the multiplier is organization would have been required market derivative transactions a banking equal to an amount less than one and to calculate the aggregated amount for organization must either make a decreases exponentially in value as the settlement payment or exchange ¥ this sub-netting set as if the netting set absolute value of V C increases. The were not subject to a variation margin collateral to support its outstanding PFE multiplier approaches a floor of 5 credit obligation to the counterparty on ¥ agreement. All derivative contracts percent as the absolute value of V C within the netting set that are subject to a periodic basis. Such contracts are becomes very large as compared with variation margin agreements under functionally and economically similar the aggregated amount of the netting set. which the counterparty must post from a credit risk perspective, and 4. PFE Calculation for Nonstandard variation margin and that share the therefore, the final rule allows a banking Margin Agreements same MPOR value would have formed organization to elect, at the netting set another sub-netting set. A banking level, to treat all the settled-to-market When a single variation margin derivative contracts within the netting agreement covers multiple netting sets, organization would have been required to calculate the aggregated amount for set that are cleared transactions as the parties exchange variation margin subject to a variation margin agreement based on the aggregated market value of this sub-netting set as if the netting set were subject to a variation margin and receive the benefits of netting with the netting sets—i.e., netting sets with cleared collateralized-to-market positive and negative market values can agreement, using the MPOR value shared by the derivative contracts derivative contracts. That is, a banking offset one another to reduce the amount organization that makes such election of variation margin that the parties are within the netting set. Several commenters asked the will treat such cleared settled-to-market required to exchange. This can result, derivative contracts as cleared however, in a situation in which margin agencies to allow banking organizations to net based solely on whether a QMNA collateralized-to-market derivative exchanged between the parties will be contracts, using the higher maturity insufficient relative to the banking that provides for closeout netting per applicable law in the event of default is factor applicable to collateralized-to- organization’s exposure amount for the market derivative contracts.112 netting sets.108 To address such a in place. These commenters asserted that netting should not be limited to Similarly, for listed options, the situation, the proposal would have agencies are clarifying that a banking required a banking organization to derivative contracts with the same MPOR because the purpose of the organization may elect to treat listed assign a single PFE to each netting set options on securities or listed options covered by a single variation margin MPOR is to capture the risks associated with an extended closeout period upon on futures with equity-style margining agreement, calculated as if none of the that are cleared transactions as derivative contracts within the netting a counterparty’s default and that differences in MPOR are unrelated to margined derivatives. Under the final set are subject to a variation margin rule, a banking organization may elect to agreement. The agencies did not receive the legal ability to net upon closeout, which should be based only on legal treat all such transactions within the comments on this aspect of the same netting set as being subject to a proposal, and are adopting it as certainty which is established under U.S. law if the netting agreement is a variation margin agreement with a zero proposed under § l.132(c)(10)(ii) of the threshold amount and a zero minimum final rule. QMNA. In particular, commenters were concerned that the proposal would transfer amount, given that the daily net The proposal also would have option value credits and debits are provided a separate calculation to prohibit banking organizations from being able to net settled-to-market 109 economically equivalent to an exchange determine PFE for a situation in which of variation margin under a zero a netting set is subject to more than one derivative contracts with collateralized- to-market derivative contracts,110 as threshold and a zero minimum transfer variation margin agreement, or for a amount. Consistent with the treatment hybrid netting set. Under the proposal, well as futures-style options and options with equity-style margining,111 even if described above for settled-to-market derivative contracts that are treated as 108 For example, consider a variation margin 109 collateralized-to-market, a banking agreement with a zero threshold amount that covers See supra note 18. two separate netting sets, one with a positive 110 In general, in a collateralized-to-market market value of 100 and the other with a market derivative contract, title of transferred collateral addition, under U.S. GAAP, the option is an asset value of negative 100. The aggregate market value stays with the posting party. and the banking organization could use it in the of the netting sets would be zero and thus no 111 In general, for margining for options, the buyer event of a client’s default to offset any other losses variation margin would be exchanged. However, the of the option pays a premium upfront to the seller the buyer may have. banking organization’s aggregate exposure amount and there is no exchange of variation margin. The 112 § l.132(c)(9)(iv)(A) of the final rule. Similar to for these netting sets would be equal to 100 because buyer, however, may credit the net value of the the treatment under CEM, SA–CCR provides a the negative market value of the second netting set option against its initial margin requirements. The lower maturity factor for cleared settled-to-market would not be available to offset the positive market seller, in turn, receives a debit against its initial derivative contracts that meet certain criteria. See value of the first netting set. In the event of default margin requirement in the amount of the net option ‘‘Regulatory Capital Treatment of Certain Centrally- of the counterparty, the banking organization would value. The option is subject to daily revaluation cleared Derivative Contracts Under Regulatory pay the counterparty 100 for the second netting set with increases and decreases to the net option value Capital Rules’’ (August 14, 2017), OCC Bulletin: and would be exposed to a loss of 100 on the first resulting in adjustments to the buyer’s and the 2017–27; Board SR letter 07–17; and FDIC Letter netting set. seller’s net option value credits and debits. In FIL–33–2017.

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organization that elects to apply this must use to determine the risk-weighted organization and must be reflected in treatment must apply the maturity factor asset amount for its default fund risk-weighted assets under the capital applicable to margined derivative contributions. The proposed revisions rule. Collateral held in a manner that is contracts. were consistent with standards not bankruptcy remote exposes a Except for the changes described developed by the Basel Committee.116 banking organization to risk of loss above, the agencies are adopting the should the CCP fail and the banking proposed approach for netting sets A. Trade Exposure Amount organization is unable to recover its subject to more than one variation Under the proposal, an advanced collateral. This counterparty credit risk margin agreement, or for a hybrid approaches banking organization that is separate from, and in addition to, the netting set.113 elected to use SA–CCR for purposes of risk inherent to the collateral itself. IV. Revisions to the Cleared determining the exposure amount of a Thus, the final rule does not remove Transactions Framework noncleared derivative contract under from the calculation of trade exposure the advanced approaches would have amount the requirement to include non- Under the capital rule, a banking been required to also use SA–CCR cash initial margin posted to a CCP that organization must maintain regulatory (instead of IMM) to determine the trade is not held in a bankruptcy remote capital for its exposure to, and certain exposure amount for a cleared manner. collateral posted in connection with, a derivative contract under the advanced Other commenters asked for derivative contract that is a cleared approaches. In addition, an advanced clarification regarding the scope of transaction (as defined under § l.2 of approaches banking organization would transactions that would be subject to the the capital rule). A clearing member have been required to use SA–CCR to cleared transactions framework. In banking organization also must hold determine the exposure amount for both particular, the commenters asked the risk-based capital for its default fund its cleared and noncleared derivative agencies to clarify the treatment of an 114 contributions. The proposal would contracts under the standardized exposure between a banking have revised the cleared transactions approach. A non-advanced approaches organization and a clearing member framework under the capital rule by banking organization that elected to use where the banking organization acts as replacing CEM with SA–CCR for SA–CCR for purposes of determining agent for its client for a cleared advanced approaches banking the exposure amount of a non-cleared transaction by providing a guarantee to organizations in both the advanced derivative contract would have been the clearing member of the QCCP for the approaches and standardized approach. required to use SA–CCR (instead of performance of the client. The final rule Non-advanced approaches banking CEM) to determine the trade exposure clarifies that, in such a situation, the organizations would have been amount for a cleared derivative contract. banking organization may treat its permitted to elect to use SA–CCR or Several commenters recommended exposure to the transaction as if the CEM for noncleared and cleared providing advanced approaches banking banking organization were the clearing derivative contracts, but would have organizations the option to use SA–CCR member and directly facing the QCCP been required to use the same approach or IMM for purposes of the cleared (i.e., the banking organization would for both.115 In addition, the proposal transactions framework, regardless of have no exposure to the clearing would have simplified the formula that the banking organization’s election to member or the QCCP as long as it does a clearing member banking organization use SA–CCR or IMM to determine the not provide a guarantee to the client on exposure amount of noncleared the performance of the clearing member 113 § l.132(c)(11)(ii) of the final rule. 117 derivative contracts under the advanced or QCCP). Furthermore, in such a 114 A default fund contribution means the funds situation, the banking organization may contributed or commitments made by a clearing approaches. As discussed in section member banking organization to a CCP’s II.A. of this SUPPLEMENTARY treat the exposure resulting from the mutualized loss-sharing arrangement. See 12 CFR INFORMATION, the agencies believe that guarantee of the client’s performance 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 324.2, requiring an advanced approaches obligations with respect to the (FDIC). underlying derivative contract as a 115 banking organization to use one of At the time of the proposal, an advanced client-facing derivative transaction.118 approaches banking organization meant a banking either SA–CCR or IMM for both cleared organization that has at least $250 billion in total and noncleared derivative contracts Similarly, under CEM, the banking consolidated assets or if it has consolidated on- organization may adjust the exposure balance sheet foreign exposures of at least $10 under the advanced approaches promotes consistency in the regulatory amount for the client-facing derivative billion, or if it is a subsidiary of a depository transaction by applying a scaling factor institution, bank holding company, savings and capital treatment of derivative contracts of the square root of 1⁄2 (which equals loan holding company or intermediate holding and facilitates the supervisory company that is an advanced approaches banking 0.707107) to such exposure or higher if assessment of a banking organization’s organization. Under the tailoring proposals adopted the banking organization determines a by the agencies, the supplementary leverage ratio capital management program. 119 also would have applied to banking organizations longer holding period is appropriate. Some commenters asked the agencies Some commenters asked the agencies subject to Category III. Banking organizations to remove from the calculation of trade subject to Category III standards would have been to clarify how a clearing member permitted to use CEM or a modified version of SA– exposure amount the requirement to banking organization that acts as agent CCR for purposes of the supplementary leverage include non-cash initial margin posted on behalf of a client should reflect its ratio, but consistent with the proposal to implement to a CCP that is not held in a temporary exposure to the client for the SA–CCR, they would have been required to use the bankruptcy-remote manner. According same approach (CEM or SA–CCR) for all purposes under the capital rule. See ‘‘Proposed Changes to to commenters, this requirement would 117 See 12 CFR 3.3(a) (OCC); 12 CFR 217.3(a) the Applicability Thresholds for Regulatory Capital overstate the banking organization’s (Board); and 12 CFR 324.3(a) (FDIC). and Liquidity Requirements,’’ 83 FR 66024 exposure to such collateral, because 118 As described in section III.D.2.d. of this (December 21, 2018) and ‘‘Changes to Applicability collateral posted to a CCP remains on SUPPLEMENTARY INFORMATION, for the client-facing Thresholds for Regulatory Capital Requirements for derivative transaction (i.e., the banking Certain U.S. Subsidiaries of Foreign Banking the balance sheet of the banking organization’s exposure to the client due to the Organizations and Application of Liquidity guarantee), the banking organization would treat the Requirements to Foreign Banking Organizations, 116 See ‘‘Capital requirements for bank exposures exposure as a non-cleared derivative contract using Certain U.S. Depository Instititution Holding to central counterparties,’’ Basel Committee on the five-business-day minimum MPOR. Companies, and Certain Depository Institution Banking Supervision (April 2014), https:// 119 See 12 CFR 3.34(e) (OCC); 12 CFR 217.34(e) Subsidiaries,’’ 84 FR 24296 (May 24, 2019). www.bis.org/publ/bcbs282.pdf. (Board); and 12 CFR 324.34(e) (FDIC).

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collateral posted by the clearing member the standardized approach. However, a definition. Whether or not a particular banking organization to the CCP, which non-advanced approaches banking arrangement meets the definition in the the client subsequently will post to the organization that elects to use SA–CCR regulation depends on the facts and clearing member banking organization. to calculate the exposure amount for its circumstances of the particular The commenters stated that the noncleared derivative contracts must arrangement. The agencies may consider collateral advanced by the clearing use SA–CCR to calculate the trade whether revisions to the definition are member banking organization on behalf exposure amount for its cleared necessary in connection with future of the client creates a receivable under derivative contracts. rulemakings if the definition is not U.S. GAAP until the clearing member functioning as intended. banking organization receives the B. Treatment of Default Fund Other commenters asked the Board to collateral from the client. Accordingly, Contributions revise Regulation HH 123 to require the commenters sought clarification on The proposal would have revised QCCPs regulated by the Board to make whether the amount of such receivables certain of the approaches that a banking available to clearing member banking should be reflected in exposure amount organization could use to determine the organizations the information required of the client-facing derivative risk-weighted asset amount for its to calculate the QCCP’s hypothetical transaction or treated as a separate default fund contributions. Specifically, capital requirement. The commenters exposure to the client. Such receivables the proposal would have eliminated raised concerns that while domestic expose the clearing member banking method one and method two under QCCPs will likely be prepared to organization to risk of loss should the section 133(d)(3) of the capital rule, provide the requisite data to calculate client fail to subsequently post the either of which may be used by a the hypothetical capital requirement, no collateral to the clearing member clearing member banking organization regulation requires them to do so, and banking organization. This credit risk is to determine the risk-weighted asset that foreign QCCPs are not subject to separate from, and in addition to, the amount for its default fund U.S. regulation and may not be prepared counterparty credit risk of the exposure contributions to a QCCP.121 In its place, to provide the requisite data. The arising from the client-facing derivative the proposal would have implemented a commenters also encouraged the transaction, which represents the single approach for a clearing member agencies to work with the SEC and the guarantee the clearing member banking banking organization to determine the CFTC to make similar revisions to their organization provides for the client’s risk-weighted asset amount for its regulations applicable to domestic performance on the underlying default fund contributions to a QCCP, QCCPs and with international standard derivative transaction. Thus, consistent which would have been less complex setters and foreign regulators to ensure with U.S. GAAP, a clearing member than method one but also more granular that foreign QCCPs will be capable of banking organization must treat such a than method two. The proposal would providing U.S. banking organizations receivable as a credit exposure to the have maintained the approach by which with the data required for the client for purposes of the capital rule, a clearing member banking organization hypothetical capital calculations under separate from the treatment applicable determines its risk-weighted asset the proposal. Lastly, the commenters to the client-facing derivative amount for its default fund asked that the agencies clarify that transaction under this final rule. contributions to a CCP that is not a banking organizations may rely on the For the reasons discussed above, the QCCP.122 amount of a foreign QCCP’s agencies are adopting as final under Some commenters asked the agencies hypothetical capital requirement § l.133(b) of the final rule the proposal to clarify that a banking organization’s produced under a Basel-compliant SA– to replace CEM with SA–CCR for commitment to enter into reverse CCR regime. advanced approaches banking repurchase agreements with a CCP are The proposal did not contemplate organizations in the capital rule, with not default fund contributions. Certain changes to Regulation HH and thus the one modification to introduce the CCPs may require clearing members to agencies view these comments as out of defined term ‘‘client-facing derivative provide funding in the form of reverse scope for this rulemaking. In addition, transactions’’ and clarify that such repurchase agreements in the event of a the Board’s Regulation HH serves a exposures receive a five-business-day clearing member’s default in order to different purpose than the capital rule minimum MPOR under SA–CCR, as support the liquidity needs of the CCP. and covers a different set of entities. discussed above. An advanced The capital rule defines default fund However, the agencies recognize the approaches banking organization that contributions as the funds contributed concerns raised by the commenters with elects to use SA–CCR for purposes of to or commitments made by a clearing respect to potential difficulties for determining the exposure amount of its member to a CCP’s mutualized loss banking organizations in calculating the noncleared derivative contracts under sharing arrangements. The proposal did hypothetical capital requirement of a the advanced approaches must also use not contemplate changes to the QCCP and intend to monitor whether SA–CCR (instead of IMM) to determine definition of default fund contributions banking organizations experience the trade exposure amount for its and the final rule does not revise this difficulties obtaining the hypothetical cleared derivative contracts under the capital requirement (or the requisite 120 advanced approaches. 121 Method one is a complex three-step approach information required to calculated it) A non-advanced approaches banking that compares the default fund of the QCCP to the from the QCCP to perform this capital the QCCP would be required to hold if it organization may continue to use CEM calculation.124 In recognition of these to determine the trade exposure amount were a banking organization and provides a method to allocate the default fund deficit or excess back for its cleared derivative contracts under to the clearing member. Method two is a simplified 123 See 12 CFR part 234. Regulation HH relates to approach in which the risk-weighted asset amount the regulation of designated financial market 120 As discussed in section II.A. of this for a default fund contribution to a QCCP equals utilities by the Board. SUPPLEMENTARY INFORMATION, an advanced 1,250 percent multiplied by the default fund 124 Under the capital rule, if a CCP does not approaches banking organization must use SA–CCR contribution, subject to a cap. provide the hypothetical capital requirement (or, to determine the trade exposure amount for its 122 In that case, the risk-weighted asset amount is alternatively, the required data) the CCP is not a cleared derivative contracts and the exposure the sum of the clearing member banking QCCP and a banking organization must apply a risk amount for its noncleared derivative contracts organization’s default fund contributions multiplied weight of 1250 percent to its default fund under the standardized approach. by 1,250 percent. Continued

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concerns, the final rule allows banking contribution to a QCCP, a clearing calculating KCCP, the PFE multiplier organizations that elect to use SA–CCR member banking organization first includes collateral held by a QCCP in to continue to use method 1 or method calculates the hypothetical capital which the QCCP has a legal claim in the 2 under CEM to calculate the risk- requirement of the QCCP (KCCP), unless event of the default of the member or weighted asset amount for default fund the QCCP has already disclosed it, in client, including default fund contributions until January 1, 2022.125 which case the banking organization contributions of that member. In This is intended to provide sufficient must rely on that disclosed figure. In addition, the QCCP must use a MPOR of time for clearing member banking either case, a banking organization may ten business days in the maturity factor organizations to coordinate with CCPs choose to use a higher amount of KCCP adjustment. A banking organization that to obtain the hypothetical capital than the minimum calculated under the elects to use CEM to determine the requirement produced under SA–CCR formula or disclosed by the QCCP if the exposure amount of its derivative (or the requisite information to calculate banking organization has concerns contracts under the standardized it) from the CCPs, in order for such about the nature, structure, or approach must use a KCCP calculated entities to qualify as QCCPs after the characteristics of the QCCP. In effect, using CEM. mandatory compliance date. The KCCP serves as a consistent measure of EAD must be calculated separately for agencies are also clarifying that after a QCCP’s default fund amount. each clearing member banking January 1, 2022, the mandatory Under the final rule, a clearing organization’s sub-client accounts and compliance date, a banking organization member banking organization must sub-house account (i.e., for the clearing that is using SA–CCR may only consider calculate KCCP according to the member’s proprietary activities). If the a foreign CCP to be a QCCP for purposes following formula: clearing member banking organization’s collateral and its client’s collateral are of the capital rule if the foreign CCP KCCP = SCM EADi * 1.6 percent, i held in the same account, then the EAD produces its hypothetical capital Where: requirement under SA–CCR (as of that account would be the sum of the CM is each clearing member of the QCCP; implemented by the CCP’s home i EAD for the client-related transactions and within the account and the EAD of the country in a manner consistent with the EADi is the exposure amount of the QCCP to Basel Committee standard). The each clearing member of the QCCP, as house-related transactions within the agencies intend to monitor whether determined under § l.133(d)(6).127 account. In such a case, for purposes of banking organizations experience determining such EADs, the The component EADi includes both difficulties obtaining the hypothetical independent collateral of the clearing the clearing member banking member banking organization and its capital requirement (or alternatively, the organization’s own transactions, the required data) after the January 1, 2022, client must be allocated in proportion to client transactions guaranteed by the the respective total amount of mandatory compliance date. If, after clearing member, and all values of January 2022, significant obstacles independent collateral posted by the collateral held by the QCCP (including clearing member banking organization remain after a banking organization has the clearing member banking made best efforts to obtain the necessary to the QCCP. This treatment protects organization’s pre-funded default fund against a clearing member banking information from CCPs (e.g., due to contribution) against these transactions. delays in the implementation of the organization recognizing client The 1.6 percent amount represents the collateral to offset the QCCP’s exposures Basel Committee standard in other product of a capital ratio of 8 percent jurisdictions), its primary Federal to the clearing member banking and a 20 percent risk weight of a organization’s proprietary activity in the regulator may permit the banking clearing member banking organization. organization to use method 2 of CEM to calculation of KCCP. Subject to the transitional provisions In addition, if any account or sub- calculate risk-weighted asset amounts described above, as of January 1, 2022, account contains both derivative for default fund contributions for a a banking organization that is required contracts and repo-style transactions, specified period. or elects to use SA–CCR to determine The agencies otherwise are generally the EAD of that account is the sum of the exposure amount for its derivative the EAD for the derivative contracts adopting without change the proposed contracts under the standardized revisions to the risk-weighted asset within the account and the EAD of the approach must use a KCCP calculated repo-style transactions within the calculation for default fund using SA–CCR for both the standardized account. If independent collateral is contributions under § l.133(d) of the approach and the advanced 126 held for an account containing both final rule. Thus, to determine the 128 approaches. For purposes of derivative contracts and repo-style capital requirement for a default fund transactions, then such collateral must 127 Section 133(d)(6) of the proposed rule text be allocated to the derivative contracts contributions to the CCP. See definition of would have required a banking organization to sum ‘‘qualifying central counterparty’’ under § l.2 of the exposure amount of all underlying transactions, and repo-style transactions in the capital rule, 12 CFR 3.2 (OCC); 12 CFR 217.2 the collateral held by the CCP, and any prefunded proportion to the respective product- (Board); and 12 CFR 324.2 (FDIC). default contributions. In a technical correction to specific exposure amounts. The 125 In cases where a banking organization uses the proposal, and to recognize that collateral held respective product specific exposure method 1 to calculate the risk-weighted asset by the QCCP and any prefunded default fund amount for a default fund contribution, a QCCP that contributions serve to mitigate this exposure, the amounts must be calculated, excluding provides the banking organization its hypothetical final rule text at section 133(d)(6) clarifies that the effects of collateral, according to capital requirement produced using CEM would banking organizations under the final rule must § l.132(b) of the capital rule for repo- still qualify as a QCCP until January 1, 2022. subtract from the exposure amount the value of style transactions and to § l.132(c)(5) 126 In a nonsubstantive change, the agencies collateral held by the QCCP and any prefunded for derivative contracts. moved paragraphs (i) and (ii) of § l.133(d)(3) of the default contributions. The final rule is consistent proposed rule text to paragraphs (iv) and (v) under with the Basel Committee standard regarding A clearing member banking § l.133(d)(6) of the final rule text. The agencies capital requirements for bank exposures to central organization also must calculate its

made this change because these sections provide counterparties. See supra note 116. capital requirement (KCMi), which is the instruction on calculating EAD for default fund 128 The final rule does not revise the calculations capital requirement for its default fund contribution accounts, which are covered under for determining the exposure amount of repo-style § l.133(d)(6). In addition, the agencies changed the transactions for purposes of determining the risk- contribution, subject to a floor equal to reference to (e)(4) in § l.133(d)(3) of the proposed weighted asset amount of a banking organization’s a 2 percent risk weight multiplied by rule text to (d)(4). default fund contributions. the clearing member banking

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organization’s prefunded default fund requirement increases as its default fund contribution to a QCCP contribution to the QCCP and an 8 contribution to the default fund may not exceed the capital requirement percent capital ratio. This calculation increases relative to the QCCP’s own that would apply if the same exposure allocates KCCP on a pro rata basis to each prefunded amounts and the total were calculated as if it were to a CCP clearing member based on the clearing prefunded default fund contributions that is not a QCCP. member’s share of the overall default from all clearing members to the QCCP. A clearing member banking fund contributions. Thus, a clearing In all cases, a clearing member banking organization calculates according to the member banking organization’s capital organization’s capital requirement for its following formula: 129

Where: version of SA–CCR would have limited agencies to assess the effectiveness of KCCP is the hypothetical capital requirement the recognition of collateral to certain collateral in offsetting the operational of the QCCP; cash variation margin 132 in the risks arising from the provision of client DFpref is the prefunded default fund replacement cost calculation, but would clearing services. contribution of the clearing member not have allowed for recognition of any banking organization to the QCCP; Commenters that supported greater financial collateral in the PFE recognition of client collateral argued DFCCP is the QCCP’s own prefunded amounts 133 (e.g., contributed capital, retained component. that such an approach would be earnings) that are contributed to the The proposal sought comment on consistent with the G20 mandate to default fund waterfall and are junior or whether the agencies should broaden establish policies that support the use of pari passu to the default fund the recognition of collateral in the central clearing for derivative contribution of the members; and supplementary leverage ratio to also transactions,135 as it could decrease the DF pref is the total prefunded default fund CM include collateral provided by a client regulatory capital cost of providing contributions from clearing members of clearing services and thereby improve the QCCP. to a clearing member banking organization in connection with a access to clearing services for clients, V. Revisions to the Supplementary cleared transaction (client collateral), in reduce concentration among clearing Leverage Ratio recognition of recent policy efforts to member banking organizations, and Under the capital rule, advanced support migration of derivative improve the portability of client approaches banking organizations and transactions to CCPs, including an positions to other clearing members, banking organizations subject to October 2018 consultative release by the particularly in times of stress. Other Category III standards must satisfy a Basel Committee on the treatment of commenters argued that allowing an minimum supplementary leverage ratio client collateral in the international advanced approaches banking requirement of 3 percent.130 The leverage ratio standard.134 Several organization to use the same SA–CCR supplementary leverage ratio is the ratio commenters urged the agencies to methodology as proposed for the risk- of tier 1 capital to total leverage recognize greater amounts of client based framework would simplify the exposure, where total leverage exposure collateral, including margin, in either capital rule for advanced approaches includes both on-balance sheet assets PFE or in both replacement cost and banking organizations. and certain off-balance sheet PFE. Other commenters, however, Some commenters urged the agencies exposures.131 argued that the agencies should not to consider the risk to financial stability The proposal would have revised the recognize greater amounts of client if implementation of SA–CCR further capital rule to require advanced collateral, including cash or non-cash exacerbates the trend towards approaches banking organizations to use initial and variation margin, in concentration among clearing service a modified version of SA–CCR, instead connection with cleared transactions providers or leads to a reduction in of CEM, to determine the on- and off- entered into on behalf of clients or any access to clearing for non-clearing- balance sheet amounts of derivative amount of margin collateral within the member entities. Of these, some contracts for purposes of calculating supplementary leverage ratio. In commenters also argued that the total leverage exposure. The modified addition, some commenters urged the proposed SA–CCR methodology could

129 The agencies are clarifying that KCMi must be organization with the option to reduce any positive § l.10(c)(4)(ii)(C)(1)(ii) through (iii) and multiplied by 12.5 to arrive at the risk-weighted fair value of a derivative contract by the amount of § l.10(c)(4)(ii)(C)(3) through (7) of the capital rule. asset amount for a default fund contribution. any cash collateral received from the counterparty, 134 See ‘‘Consultative Document: Leverage ratio 130 See 12 CFR 3.10(a)(5) (OCC); 12 CFR provided the relevant GAAP criteria for offsetting treatment of client cleared derivatives,’’ Basel 217.10(a)(5) (Board); and 12 CFR 324.10(a)(5) are met (the GAAP offset option). Similarly, under Committee on Banking Supervision (October 2018), (FDIC). the GAAP offset option, a banking organization has https://www.bis.org/bcbs/publ/d451.pdf. 131 See supra note 6. the option to offset the negative mark-to-fair value 135 The Group of Twenty (G20) was established in 132 Consistent with CEM, the proposal would of a derivative contract with a counterparty. See 1999 to bring together industrialized and have permitted an advanced approaches banking Accounting Standards Codification paragraphs 815– developing economies to discuss key issues in the organization to recognize cash variation margin in 10–45–1 through 7 and 210–20–45–1. Under the global economy. Members include finance ministers the on-balance component calculation only if (1) capital rule, a banking organization that applies the and central bank governors from Argentina, the cash variation margin met the conditions under Australia, Brazil, Canada, China, France, Germany, GAAP offset option to determine the carrying value § l.10(c)(4)(ii)(C)(3) through (7) of the proposed India, Indonesia, Italy, Japan, Mexico, Russia, Saudi rule; and (2) it had not been recognized in the form of its derivative contracts would be required to Arabia, South Africa, Republic of Korea, Turkey, of a reduction in the fair value of the derivative reverse the effect of the GAAP offset option for the United Kingdom, and the United States and the contracts within the netting set under the advanced purposes of determining total leverage exposure, European Union. See ‘‘Leaders’ Statement: The approaches banking organization’s operative unless the collateral is cash variation margin Pittsburgh Summit,’’ G–20 (September 24–25, accounting standard. recognized as settled with the derivative contract as 2009), https://www.treasury.gov/resource-center/ 133 To determine the carrying value of derivative a single unit of account for balance sheet international/g7-g20/Documents/ contracts, U.S. GAAP provides a banking presentation and satisfies the conditions under pittsburgh_summit_leaders_statement_250909.pdf.

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indirectly adversely affect clearing that solvency of clearing member enforcement of collateral requirements, member clients with directional and banking organizations is critical to the and promotion of market transparency. long-dated portfolios, such as pension stability of CCPs and that broadening Also, this treatment is consistent with funds, mutual funds, life insurance the recognition of client collateral under the G20 mandate to establish policies companies and other end-users that use the supplementary leverage ratio could that support the use of central clearing, derivatives largely for risk management undermine the advances made by and recent developments by the Basel purposes. Specifically, these central clearing mandates in stabilizing Committee. Specifically, on June 26, commenters argued that such entities global financial markets. These 2019, the Basel Committee released a have already experienced difficulty in commenters added that higher levels of standard that revises the leverage ratio obtaining and maintaining access to regulatory capital at clearing member treatment of client-cleared derivatives central clearing from banking banking organizations could improve contracts to generally align with the organizations due to the treatment of their ability to assume client positions measurement of such exposures under client margin, which substantially from a defaulted clearing member in SA–CCR as used for risk-based capital increases the capital requirements under stress, and that the agencies have purposes.137 The standard was designed the supplementary leverage ratio for authority to provide temporary relief to to balance the robustness of the banking organizations that provide leverage capital requirements if doing so supplementary leverage ratio as a non- clearing services. would be necessary to allow a banking risk-based safeguard against Other commenters argued that organization to absorb the client unsustainable sources of leverage with limiting the recognition of client positions of an insolvent clearing the policy objective set by G20 leaders collateral in the supplementary leverage member. With respect to concentration to promote central clearing of ratio could have pro-cyclical effects that concerns, these commenters argued that standardized derivative contracts as part undermine the core objectives of the lowering capital requirements for of mitigating systemic risk and making clearing framework. These commenters clearing member banking organizations derivative markets safer. The final rule asserted that CCPs typically increase would not reduce concentration in the similarly maintains the complementary collateral requirements during stress provision of clearing services; rather, purpose of risk-based and leverage periods, and therefore can cause any further reduction in capital capital requirements, in a manner that is clearing member banking organizations requirements for clearing member expected to have minimal impact on to be bound, or further bound, by the banking organizations would only overall capital levels, will reduce supplementary leverage ratio during benefit banking organizations that burden by reducing the number of that time. According to the commenters, already provide these services. In separate calculations required, and will procyclicality in the capital addition, these commenters expressed not impede important policy objectives requirements for a clearing member concern regarding the introduction of regarding central clearing. could undermine the client-account risk mitigants into the leverage capital Banking organizations subject to the portability objective of the central requirements, and stated that such a supplementary leverage ratio under clearing framework if the clearing revision could blur the distinction Category III that continue to use CEM to member is unable to acquire a book of between leverage and risk-based capital determine the total leverage exposure cleared derivatives from another failing requirements. measure are not permitted to recognize clearing member due to the regulatory The final rule allows a clearing the risk-reducing effects of client capital costs of such acquisition. member banking organization to collateral other than with respect to Furthermore, some commenters recognize the risk-reducing effect of certain transfers of cash variation posited that greater recognition of the client collateral in replacement cost and margin in replacement cost. Relative to risk-reducing effects of client collateral PFE for purposes of calculating total CEM, SA–CCR is more sensitive to the for purposes of the supplementary leverage exposure under certain recognition of collateral, and therefore leverage ratio would be appropriate due circumstances.136 This treatment the commenters’ concerns are more to the manner in which clearing applies to a banking organization’s pronounced in that context. Moreover, member banking organizations collect exposure to its client-facing derivative most clearing member banking such collateral and the protections such transactions. For such exposures, the organizations are advanced approaches collateral receives under existing banking organization would use SA– banking organizations that are required regulations. Specifically, these CCR, as applied for risk-based capital to use SA–CCR or IMM for the cleared commenters noted that CFTC purposes, which permits recognition of transactions framework, and extending regulations prohibit rehypothecation of both cash and non-cash margin received such treatment to CEM would have client collateral, and explicitly limit a from a client in replacement cost and limited impact, if any, in the aggregate. clearing member banking organization’s PFE. The agencies believe that this Some commenters noted that section use of collateral received from a client treatment appropriately recognizes 34 of the capital rule allows a banking to purposes that fulfil the clearing recent developments in the use of organization subject to the member’s obligations to the CCP or to central clearing and maintains levels of supplementary leverage ratio to exclude cover losses in the event of that client’s capital consistent with safe and sound the PFE of all credit derivatives or other default. operations of banking organizations similar instruments through which it By contrast, commenters who engaged in these activities. Although provides credit protection, but without opposed greater recognition of the risk- there are some risks associated with regard to credit risk mitigation, reducing effects of client collateral CCPs, the agencies believe that central provided that it does not adjust the net- under the supplementary leverage ratio clearing through CCPs generally reduces to-gross ratio. Under the capital rule, a expressed concern that such an the effective exposure of derivative banking organization subject to the approach would decrease capital levels contracts through the multilateral supplementary leverage ratio that among clearing member banking netting of exposures, establishment and chooses to exclude the PFE of credit organizations and therefore could derivatives or other similar instruments increase risks to both safety and 136 The recognition of client collateral provided through which it provides credit soundness and U.S. financial stability. under the final rule only applies in the context of In particular, some commenters noted SA–CCR, not CEM. 137 See supra note 20.

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protection must do so consistently over by banking organizations and further clearing member banking organization time for the calculation of the PFE for review by the agencies. The agencies would be required to cover only the all such instruments. The agencies are did not receive comment on these amount of any deficiency between the clarifying that the same treatment would technical amendments, and are liquidation value of the collateral and apply under SA–CCR for purposes of finalizing them as proposed. The the CCP’s exposure to the client. the supplementary leverage ratio.138 In agencies did receive several suggestions However, were the clearing member particular, a banking organization for other clarifications and technical banking organization to enter into the subject to the supplementary leverage changes to the proposal. The agencies derivative contract directly with the ratio may choose to exclude from the are adopting many of these suggestions client, the clearing member would PFE component of the exposure amount in the final rule. These changes are establish and maintain a perfected first- calculation the portion of a written described below. priority security interest in the credit derivative that is not offset A. Receivables Due From a QCCP collateral, and the exposure of the according to § l.10(c)(4)(ii)(D)(1)–(2) clearing member to the client would and for which the effective notional The final rule revises § l.32 of the similarly be mitigated only to the extent amount of the written credit derivative capital rule to clarify that cash collateral the collateral is sufficient to cover the is included in total leverage exposure. posted by a clearing member banking exposure amount of the transaction at The agencies generally are adopting as organization to a QCCP, and which the time of default. Therefore, the final final the proposed requirement that a could be considered a receivable due rule revises the definition of financial banking organization that is required to from the QCCP under U.S. GAAP, collateral to allow clearing member use SA–CCR or elects to use SA–CCR to should not be risk-weighted as a banking organizations to recognize as calculate the exposure amount of its corporate exposure. Instead, for a client- financial collateral noncash client derivative contracts for purposes of the cleared trade the cash collateral posted collateral posted to a CCP. In this supplementary leverage ratio must use to a QCCP receives a risk weight of 2 situation, the clearing member banking the modified version of SA–CCR percent, if the cash associated with the organization is not required to establish described in § l.10(c)(4)(ii) of the final trade meets the requirements under and retain a first-priority security l l rule, with a few revisions.139 For a § .35(b)(3)(i)(A) or § .133(b)(3)(i)(A) interest in the collateral for it to qualify client-facing derivative transaction, of the capital rule, or 4 percent, if the as financial collateral under § l.2 of the however, the banking organization collateral does not meet the capital rule. calculates the exposure amount under requirements necessary to receive the 2 percent risk weight. For a trade made on C. Clearing Member Exposure When § l.132(c)(5). behalf of the clearing member’s own CCP Performance Is Not Guaranteed Consistent with the proposal, written account, the cash collateral posted to a options must be included in total The final rule revises § l.35(c)(3) of QCCP receives a 2 percent risk weight. leverage exposure even though the final the capital rule to align the capital The agencies intend for this amendment rule allows certain written options to requirements under the standardized to maintain incentives for banking receive an exposure amount of zero for approach for client-cleared transactions organizations to post cash collateral and risk-based capital purposes.140 with the treatment under § l.133(c)(3) recognize that a receivable from a QCCP of the advanced approaches. VI. Technical Amendments that arises in the context of a trade Specifically, the final rule allows a The proposal would have made exposure should not be treated as clearing member banking organization several technical corrections and equivalent to a receivable that would that does not guarantee the performance clarifications to the capital rule to arise if, for example, a banking of the CCP to the clearing member’s address certain provisions that warrant organization made a loan to a CCP. client to apply a zero percent risk revision based on questions presented B. Treatment of Client Financial weight to the CCP-facing portion of the Collateral Held by a CCP transaction. The agencies previously 138 See 79 FR 57725, 57731–57732 (Sept. 26, Under § l.2 of the capital rule, implemented this treatment for 2014). purposes of the advanced 139 financial collateral means, in part, Some commenters requested clarification approaches.141 regarding the items to be summed under collateral in which a banking § l.10(c)(4)(ii)(C)(1) of the proposed rule. The organization has a perfected first- D. Bankruptcy Remoteness of Collateral agencies are clarifying that the items to be summed priority security interest in the under this paragraph (now located at The final rule removes the collateral. However, when a banking § l.10(c)(4)(ii)(C)(2)(i) of the final rule) are the requirement in § l.35(b)(4)(i) of the replacement cost of each derivative contract or organization is acting on behalf of a standardized approach and single product netting set of derivative contracts to client, it generally is required to post § l.133(b)(4)(i) of the advanced which the advanced approaches banking any client collateral to the CCP, in organization is a counterparty, as described under approaches that collateral posted by a which case the CCP establishes and 10(c)(4)(ii)(C)(2)(i) of the final rule. Section clearing member client banking l.10(c)(4)(ii)(C)(2)(ii) of the final rule serves to maintains a perfected first-priority organization to a clearing member adjust, under certain situations, the items to be security interest in the collateral instead l banking organization must be summed under § .10(c)(4)(ii)(C)(2)(i). In addition, of the clearing member. As a result, the these commenters requested clarification of the bankruptcy remote from a custodian in capital rule does not permit a clearing application of § l.10(c)(4)(ii)(C)(2) in the proposal. order for the client banking organization The agencies are removing § l.10(c)(4)(ii)(C)(2) member banking organization to to avoid the application of risk-based from the final rule, as this provision is captured recognize client collateral posted to a capital requirements related to the under the definition of the cash variation margin CCP as financial collateral. terms in the formula described under Client collateral posted to a CCP collateral, and clarifies that a custodian § l.10(c)(4)(ii)(C)(2)(i). must be acting in its capacity as a 140 remains available to mitigate the risk of Under the final rule, the exposure amount of custodian for this treatment to apply.142 a netting set that consists of only sold options in a credit loss on a derivative contract in which the premiums have been fully paid by the the event of a client default. counterparty to the options and where the options 141 See 80 FR 41411 (July 15, 2015). are not subject to a variation margin agreement is Specifically, when a client defaults the 142 See 12 CFR 3.35(b)(4) and 3.133(b)(4) (OCC); zero. See section III.A. of this SUPPLEMENTARY CCP will use the client collateral to 12 CFR 217.35(b)(4) and 217.133(b)(4) (Board); and INFORMATION for further discussion. offset its exposure to the client, and the 12 CFR 324.35(b)(4) and 324.133(b)(4) (FDIC).

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The agencies believe this revision is period. The final rule also requires a standardized approach.143 The data appropriate because the collateral banking organization to use a larger cover diverse portfolios of derivative would generally be considered to be scaling factor for collateral haircuts for contracts, both in terms of asset type bankruptcy remote if the custodian is client-facing derivatives when it and counterparty. In addition, the data acting in its capacity as a custodian with determines a holding period longer than include firms that serve as clearing respect to the collateral. Therefore, this five days is appropriate. members, allowing the agencies to revision applies only in cases where the consider the effect of the proposal under collateral is deposited with a third-party F. OCC Revisions to Lending Limits the cleared transactions framework for custodian, not in cases where a clearing The OCC proposed to revise its both a direct exposure to a CCP and a member banking organization offers lending limit rule at 12 CFR part 32. The clearing member’s exposure to its client ‘‘self-custody’’ arrangements with its current lending limits rule references with respect to client-facing derivative clients. In addition, this revision makes sections of CEM in the OCC’s advanced transactions. As a result, the analysis the collateral requirement for a clearing approaches capital rule as one available provides a reasonable proxy for the member client banking organization methodology for calculating exposures potential changes for all advanced consistent with the treatment of to derivatives transactions. However, approaches banking organizations. collateral posted by a clearing member these sections were proposed to be The agencies estimated that, under banking organization, which does not amended or replaced with SA–CCR in the proposal, the exposure amount for require that the posted collateral be the advanced approaches. Therefore, the derivative contracts held by advanced bankruptcy remote from the custodian, OCC proposed to replace the references approaches banking organizations but requires in each case that the to CEM in the advanced approaches would have decreased by approximately custodian be acting in its capacity as a with references to CEM in the 7 percent. The agencies also estimated custodian. standardized approach. The OCC also that the proposal would have resulted in proposed to adopt SA–CCR as an option an approximately 5 percent increase in E. Adjusted Collateral Haircuts for advanced approaches banking Derivative Contracts for calculation of exposures under lending limits. organizations’ standardized risk- For a cleared transaction, the clearing The agencies received two comments weighted assets associated with member banking organization must 144 supporting the OCC’s proposal to use derivative contract exposures. In determine the exposure amount for the SA–CCR to measure counterparty credit addition, the proposal would have client-facing derivative transaction of risk under both the capital rules and resulted in an increase (approximately the derivative contract using the other agency rules, including lending 30 basis points) in advanced approaches collateralized transactions framework limits, as creating less burden on banking organizations’ supplementary under § l.37(c)(3) of the capital rule or institutions. The OCC agrees that it leverage ratios, on average. the counterparty credit risk framework The agencies made several changes to would be less burdensome for under § l.132(b)(2)(ii) of the capital the SA–CCR methodology for the final institutions to use similar rule. The clearing member banking rule that could have a material effect on methodologies to measure counterparty organization may recognize the credit the impact of the final rule. First, the risk-mitigation benefits of the collateral credit risk across OCC regulations, and final rule changes certain of the posted by the client; however, under therefore are finalizing these revisions supervisory factors for commodity §§ l.37(c) and l.132(b) of the capital to the lending limits rule as proposed. derivative contracts to coincide with the rule, the value of the collateral must be G. Other Clarifications and Technical supervisory factors in the Basel discounted by the application of a Amendments From the Proposal to the Committee standard.145 Second, the standard supervisory haircut to reflect Final Rule any market price volatility in the value 143 The agencies estimated that, on aggregate, of the collateral over a ten-business-day Some commenters suggested that the exposure amounts under SA–CCR would equal agencies make a revision to the approximately 170 percent of the exposure amounts holding period. For a repo-style for identical derivative contracts under IMM. Thus, transaction, the capital rule applies a approaches for calculating capital requirements regarding CVAs under firms that use IMM currently would likely continue scaling factor of the square root of 1⁄2 to use IMM to determine the exposure amount of (which equals 0.707107) to the standard § l.132(e). Under the final rule, the their derivative contracts to determine advanced supervisory haircuts to reflect the agencies are clarifying that for purposes approaches total risk-weighted assets. However, the standardized approach serves as a floor on limited risk to collateral in those of calculating the CVA capital l advanced approaches banking organizations’ total transactions and effectively reduce the requirements under § .132(e)(5)(i)(C), risk-weighted assets. Thus, a firm would only holding period to five business days. (e)(6)(i)(B) and (e)(6)(viii), an advanced receive the benefit of IMM if the firm is not bound The proposal would have provided a approaches banking organization must by standardized total risk-weighted assets. 144 similar reduction in the haircuts for use SA–CCR instead of CEM where CEM Total risk-weighted assets are a function of the was provided as an option. In addition, exposure amount of the netting set and the client-facing derivative transactions, as applicable risk-weight of the counterparty. Total they typically have a holding period of the final rule revises the definition of risk-weighted assets increase under the analysis less than ten business days. Some CEM in § l.2 to refer to § l.34(b) while exposure amounts decrease because higher commenters requested clarification instead of § l.34(a). applicable risk weights amplify increases in the exposure amount of certain derivative contracts, whether a five-business-day holding VII. Impact of the Final Rule which outweighs decreases in the exposure amount period would apply for the purpose of of other derivative contracts. calculating collateral haircuts for client- For the proposal, the agencies 145 The change in the supervisory factors for facing derivatives under reviewed data provided by advanced commodity derivative contracts will not result in a l approaches banking organizations that change in the agencies initial estimate of the impact § .132(b)(2)(ii)(A)(3) of the proposal. of the final rule. This is because the data received The final rule revises §§ l.37(c)(3)(iii) represent a significant majority of the from the advanced approach banking organizations and l.132(b)(2)(ii)(A)(3) of the capital derivatives market. In particular, the already reflected the supervisory factors for rule to adjust the holding period for agencies analyzed the change in commodity derivative contracts included in the exposure amount between CEM and Basel Standard, and the agencies did not adjust the client-facing derivative transactions by data to account for the proposed 40 percent applying a scaling factor of 0.71, which SA–CCR, as well as the change in risk- supervisory factor for all energy derivative represents a five-business-day holding weighted assets as determined under the contracts.

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final rule removes the alpha factor for affected by any changes to the Income (Call Reports) (FFIEC 031, exposures to commercial end-users. calculation of total leverage exposure. FFIEC 041, and FFIEC 051) and Third, the final rule allows a banking These banking organizations retain the Regulatory Capital Reporting for organization to treat settled-to-market option of using CEM, including for the Institutions Subject to the Advanced derivative contracts as subject to a supplementary leverage ratio, if Capital Adequacy Framework (FFIEC variation margin agreement, allowing applicable, and the agencies anticipate 101).148 The OCC and FDIC expect to such contracts to net with that only those banking organizations clarify the reporting instructions for collateralized-to-market derivative that receive a material net benefit from DFAST 14A, and the Board expects to contracts of the same netting set. Lastly, using SA–CCR would elect to use it. clarify the reporting instructions for the the final rule allows clearing member Therefore, the agencies continue to find Consolidated Financial Statements for banking organizations to recognize that the impact on non-advanced Holding Companies (FR Y–9C), Capital client collateral under the approaches banking organizations under Assessments and Stress Testing (FR Y– supplementary leverage ratio, to the the final rule would be limited. 14A and FR Y–14Q), and Banking Organization Systemic Risk Report (FR same extent a banking organization may VIII. Regulatory Analyses recognize collateral for risk-based Y–15) as appropriate to reflect the capital purposes. A. Paperwork Reduction Act changes to the regulatory capital rule Using the same data set as used for The agencies’ regulatory capital rule related to this final rule. the proposal, the agencies found that the contains ‘‘collections of information’’ B. Regulatory Flexibility Act exposure amount for derivative within the meaning of the Paperwork OCC: The Regulatory Flexibility Act, contracts held by advanced approaches Reduction Act (PRA) of 1995 (44 U.S.C. 5 U.S.C. 601 et seq. (RFA), requires an banking organizations will decrease by 3501–3521). In accordance with the agency, in connection with a final rule, approximately 9 percent under the final requirements of the PRA, the agencies to prepare a Final Regulatory Flexibility rule. Generally speaking, exposure may not conduct or sponsor, and the Analysis describing the impact of the amounts for interest rate, credit and respondent is not required to respond rule on small entities (defined by the foreign exchange derivatives would be to, an information collection unless it Small Business Administration (SBA) expected to decrease, and exposure displays a currently-valid Office of for purposes of the RFA to include amounts for equities and commodities Management and Budget (OMB) control commercial banks and savings would be expected to increase. The number. The OMB control number for institutions with total assets of $600 agencies estimate that the final rule will the OCC is 1557–0318, Board is 7100– million or less and trust companies with result in an approximately 4 percent 0313, and FDIC is 3064–0153. The total revenue of $41.5 million or less) or decrease in advanced approaches information collections that are part of to certify that the final rule would not banking organizations’ standardized the agencies’ regulatory capital rule will have a significant economic impact on risk-weighted assets associated with not be affected by this final rule and a substantial number of small entities. derivative contract exposures and that therefore no final submissions will be As of December 31, 2018, the OCC the final rule will result in an increase made by the FDIC or OCC to OMB under supervised 782 small entities. The rule (approximately 37 basis points) in section 3507(d) of the PRA (44 U.S.C. would impose requirements on all OCC advanced approaches banking 3507(d)) or section 1320.11 of the supervised entities that are subject to organizations’ reported supplementary OMB’s implementing regulations (5 CFR the advanced approaches risk-based leverage ratios, on average. While too 1320) in connection with this capital rules, which typically have much precision should not be attached rulemaking.147 assets in excess of $250 billion, and to estimates regarding individual As a result of this final rule, the therefore would not be small entities. banking organizations owing to agencies have proposed to clarify the While small entities would have the variations in data quality, estimated reporting instructions for the option to adopt SA–CCR, the OCC does changes in individual banking Consolidated Reports of Condition and not expect any small entities to elect organizations’ supplementary leverage that option. Therefore, the OCC ratios range from ¥5 basis points to 85 147 The OCC and FDIC submitted their estimates the final rule would not basis points. information collections to OMB at the proposed rule stage. However, these submissions were done generate any costs for small entities. In the proposal, the agencies found solely in an effort to apply a conforming that the effects of the proposed rule Therefore, the OCC certifies that the methodology for calculating the burden estimates final rule would not have a significant likely would be limited for non- and not due to the proposed rule. OMB filed advanced approaches banking comments requesting that the agencies examine economic impact on a substantial public comment in response to the proposed rule number of OCC-supervised small organizations. First, these banking and describe in the supporting statement of its next organizations hold relatively small entities. collection any public comments received regarding FDIC: The RFA generally requires derivative portfolios. Non-advanced the collection as well as why (or why it did not) that, in connection with a final approaches banking organizations incorporate the commenters’ recommendation. In addition, OMB requested that the OCC and the rulemaking, an agency prepare and account for less than 9 percent of FDIC note the convergence of the agencies on the make available for public comment a derivative contracts of all banking single methodology. The agencies received no final regulatory flexibility analysis organizations, even though they account comments on the information collection describing the impact of the rule on for roughly 36 percent of total assets of requirements. Since the proposed rule stage, the agencies have conformed their respective small entities.149 However, a regulatory all banking organizations.146 Second, methodologies in a separate final rulemaking titled, flexibility analysis is not required if the nearly all non-advanced approaches ‘‘Regulatory Capital Rule: Implementation and agency certifies that the final rule will banking organizations are not subject to Transition of the Current Expected Credit Losses not have a significant economic impact supplementary leverage ratio Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and on a substantial number of small requirements, and thus would not be Conforming Amendments to Other Regulations,’’ 84 entities. The SBA has defined ‘‘small FR 4222 (February 14, 2019), and have had their entities’’ to include banking 146 According to data from the Consolidated submissions approved through OMB. As a result, Reports of Condition and Income for a Bank with the agencies information collections related to the Domestic and Foreign Offices (FFIEC report forms regulatory capital rules are currently aligned and 148 See 84 FR 53227 (October 4, 2019). 031, 041, and 051), as of March 31, 2018. therefore no submission will be made to OMB. 149 5 U.S.C. 601 et seq.

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organizations with total assets of less 4. A Description of and an Estimate of and other compliance requirements onto than or equal to $600 million that are the Number of Small Entities to Which small entities. independently owned and operated or the Rule Will Apply or an Explanation The FDIC does not expect any small owned by a holding company with less of Why no Such Estimate Is Available entity to adopt SA–CCR, given the internal systems enhancements and than or equal to $600 million in total As of June 30, 2019, the FDIC assets.150 Generally, the FDIC considers operational modifications needed for supervised 3,424 institutions, of which SA–CCR adoption. A small institution a significant effect to be a quantified 2,665 are considered small entities for effect in excess of 5 percent of total will elect to use SA–CCR only if the net the purposes of RFA. These small IDIs benefits of doing so are positive. Thus, annual salaries and benefits per hold $514 billion in assets, accounting the FDIC expects the proposed rule will institution, or 2.5 percent of total non- for 16.6 percent of total assets held by not impose any net economic costs on 151 interest expenses. The FDIC believes FDIC-supervised institutions. these entities. that effects in excess of these thresholds The final rule will require advanced typically represent significant effects for approaches institutions to use either 6. A Description of the Steps the Agency FDIC-supervised institutions. SA–CCR or IMM to calculate the Has Taken To Minimize the Significant Economic Impact on Small Entities For the reasons described below, the exposure amount of its noncleared and FDIC believes that the final rule will not cleared derivative contracts under the As described above, the FDIC does not have a significant economic impact on advanced approaches. For purposes of believe this rule will have a significant determining the exposure amount of its a substantial number of small entities. economic impact on a substantial noncleared and cleared derivative Nevertheless, the FDIC has conducted number of small entities. Further, since contracts under the standardized adopting SA–CCR is voluntary, only and is providing a final regulatory approach, an advanced approaches entities that expect to benefit from SA– flexibility analysis. institution must use SA–CCR. An CCR will adopt it. 1. The Need for, and Objectives of, the advanced approaches institution must Board: An initial regulatory flexibility Rule use SA–CCR to determine the risk- analysis (IRFA) was included in the weighted asset amount of its default proposal in accordance with section The policy objective of the final rule fund contributions under both the 603(a) of the Regulatory Flexibility Act is to provide a new and more risk- approaches. There are no FDIC- (RFA), 5 U.S.C. 601 et seq. In the IRFA, sensitive methodology for calculating supervised advanced approaches the Board requested comment on the the exposure amount for derivative institutions that are considered small effect of the proposed rule on small contracts. SA–CCR will replace the entities for the purposes of RFA.152 entities and on any significant existing CEM methodology for advanced The final rule will allow, but not alternatives that would reduce the approaches institutions. Non-advanced require, non-advanced approaches regulatory burden on small entities. The approaches banking organizations will institutions to replace CEM with SA– Board did not receive any comments on have the option of using SA–CCR in CCR as the approach for calculating the IRFA. The RFA requires an agency place of CEM. EAD. While this allowance applies to all to prepare a final regulatory flexibility 2,665 small entities, only 401 (15 analysis unless the agency certifies that 2. The Significant Issues Raised by the percent) report holding any volume of the rule will not, if promulgated, have Public Comments in Response to the derivatives and would therefore be a significant economic impact on a Initial Regulatory Flexibility Analysis affected by differences between CEM substantial number of small entities. and SA–CCR. These 401 banks’ holdings Based on its analysis, and for the No significant issues were raised by of derivatives account for only 7.6 reasons stated below, the Board certifies the public comments in response to the percent of their assets, so the effects of that the rule will not have a significant initial regulatory flexibility analysis. calculating the exposure amount of economic impact on a substantial derivatives using SA–CCR on their number of small entities.154 3. Response of the Agency to Any Under regulations issued by the Small Comments Filed by the Chief Counsel capital requirements would likely be 153 Business Administration, a small entity for Advocacy of the Small Business insignificant. Since adoption of SA– CCR is optional, these banks would includes a bank, bank holding company, Administration in Response to the or savings and loan holding company Proposed Rule weigh the benefits of SA–CCR adoption against its costs. Given that SA–CCR with assets of $600 million or less and trust companies with total assets of No comments were filed by the Chief adoption necessitates internal systems enhancements and other operational $41.5 million or less (small banking Counsel for Advocacy of the Small 155 modifications that could be particularly organization). As of June 30, 2019, Business Administration in response to there were approximately 2,976 small the proposed rule. burdensome for smaller, less complex banking organizations, the FDIC expects bank holding companies, 133 small savings and loan holding companies, 150 The SBA defines a small banking organization that no small institutions will likely adopt SA–CCR. and 537 small SMBs. as having $600 million or less in assets, where an As discussed in the SUPPLEMENTARY organization’s ‘‘assets are determined by averaging 5. A Description of the Projected INFORMATION the assets reported on its four quarterly financial section, the final rule statements for the preceding year.’’ See 13 CFR Reporting, Recordkeeping and Other revises the capital rule to provide a new 121.201 (as amended by 84 FR 34261, effective Compliance Requirements of the Rule and more risk-sensitive methodology for August 19, 2019). In its determination, the ‘‘SBA No small entity will be compelled to calculating the exposure amount for counts the receipts, employees, or other measure of use SA–CCR, so the rule does not derivative contracts. For purposes of size of the concern whose size is at issue and all impose any reporting, recordkeeping of its domestic and foreign affiliates.’’ See 13 CFR 154 5 U.S.C. 605(b). 121.103. Following these regulations, the FDIC uses 155 See 13 CFR 121.201. Effective August 19, a covered entity’s affiliated and acquired assets, 151 Consolidated Reports of Condition and Income 2019, the SBA revised the size standards for averaged over the preceding four quarters, to for the quarter ending June 30, 2019. banking organizations to $600 million in assets determine whether the covered entity is ‘‘small’’ for 152 Id. from $550 million in assets. 84 FR 34261 (July 18, the purposes of RFA. 153 Id. 2019).

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calculating advanced approaches total C. Plain Language in any one year (adjusted for inflation). risk-weighted assets, an advanced Section 722 of the Gramm-Leach- The OCC has determined that this final approaches Board-regulated institution Bliley Act 158 requires the Federal rule would not result in expenditures by may use either SA–CCR or the internal banking agencies to use plain language State, local, and Tribal governments, or models methodology. For purposes of in all proposed and final rules the private sector, of $100 million or calculating standardized total risk- published after January 1, 2000. The more in any one year. Accordingly, the weighted assets, an advanced agencies have sought to present the final OCC has not prepared a written approaches Board-regulated institution rule in a simple and straightforward statement to accompany this proposal. must use SA–CCR and a non-advanced manner, and did not receive comment F. The Congressional Review Act approaches Board-regulated institution on the use of plain language. may elect either SA–CCR or CEM.156 In For purposes of Congressional Review D. Riegle Community Development and addition, for purposes of the Act, the OMB makes a determination as Regulatory Improvement Act of 1994 denominator of the supplementary to whether a final rule constitutes a leverage ratio, the final rule integrates Pursuant to section 302(a) of the ‘‘major’’ rule.161 If a rule is deemed a SA–CCR into the calculation of the Riegle Community Development and ‘‘major rule’’ by the OMB, the denominator, replacing CEM.157 Regulatory Improvement Act Congressional Review Act generally (RCDRIA),159 in determining the provides that the rule may not take The Board does not expect that the effective date and administrative effect until at least 60 days following its final rule will result in a material compliance requirements for new publication.162 change in the level of capital regulations that impose additional The Congressional Review Act defines maintained by small banking reporting, disclosure, or other a ‘‘major rule’’ as any rule that the organizations or in the compliance requirements on IDIs, each Federal Administrator of the Office of burden on small banking organizations banking agency must consider, Information and Regulatory Affairs of because the framework is optional for consistent with principles of safety and the OMB finds has resulted in or is non-advanced approaches banking soundness and the public interest, any likely to result in—(A) an annual effect organizations. To the extent that small administrative burdens that such on the economy of $100,000,000 or banking organizations elect to adopt regulations would place on depository more; (B) a major increase in costs or SA–CCR because it provides institutions, including small depository prices for consumers, individual advantageous regulatory capital institutions, and customers of industries, Federal, State, or local treatment of derivatives, any depository institutions, as well as the government agencies or geographic implementation costs or increased benefits of such regulations. In addition, regions, or (C) significant adverse effects compliance costs associated with SA– section 302(b) of RCDRIA requires new on competition, employment, CCR should be outweighed by the regulations and amendments to investment, productivity, innovation, or capital impact of SA–CCR. In any event, regulations that impose additional on the ability of United States-based small banking organizations generally reporting, disclosures, or other new enterprises to compete with foreign- do not have substantial portfolios of requirements on IDIs generally to take based enterprises in domestic and derivative contracts and therefore any effect on the first day of a calendar export markets.163 As required by the impact of SA–CCR on capital quarter that begins on or after the date Congressional Review Act, the agencies requirements is expected to be minimal. on which the regulations are published will submit the final rule and other For these reasons, the Board does not in final form.160 appropriate reports to Congress and the expect the rule to have a significant In accordance with these provisions Government Accountability Office for economic impact on a substantial of RCDRIA, the agencies considered any review. number of small entities. administrative burdens, as well as benefits, that the final rule would place List of Subjects 156 Advanced approaches banking organizations on depository institutions and their 12 CFR Part 3 include depository institutions, bank holding customers in determining the effective companies, savings and loan holding companies, or date and administrative compliance Administrative practice and intermediate holding companies subject to Category requirements of the final rule. In procedure, Capital, National banks, I or Category II standards. See supra note 23. Risk. 157 In general, the Board’s capital rule only conjunction with the requirements of applies to bank holding companies and savings and RCDRIA, the final rule is effective on 12 CFR Part 32 loan holding companies that are not subject to the April 1, 2020. Board’s Small Bank Holding Company and Savings National banks, Reporting and and Loan Holding Company Policy Statement, E. OCC Unfunded Mandates Reform Act recordkeeping requirements. which applies to bank holding companies and of 1995 Determination savings and loan holding companies with less than 12 CFR Part 217 $3 billion in total assets that also meet certain The OCC analyzed the proposed rule additional criteria. In addition, the agencies under the factors set forth in the Administrative practice and recently adopted a final rule to implement a Unfunded Mandates Reform Act of 1995 procedure, Banks, Banking, Capital, community bank leverage ratio framework that is Federal Reserve System, Holding applicable, on an optional basis to depository (UMRA) (2 U.S.C. 1532). Under this institutions and depository institution holding analysis, the OCC considered whether companies. companies with less than $10 billion in total the final rule includes a Federal 12 CFR Part 324 consolidated assets and that meet certain other mandate that may result in the criteria. Such banking organizations that opt into Administrative practice and the community bank leverage ratio framework will expenditure by State, local, and Tribal be deemed compliant with the capital rule’s governments, in the aggregate, or by the procedure, Banks, Banking, Capital generally applicable requirements and are not private sector, of $100 million or more adequacy, Savings associations, State required to calculate risk-based capital ratios. See non-member banks. supra note 3. Very few bank holding companies and savings and loan holding companies that are small 158 See Public Law 106–102, section 722, 113 Stat. entities would be impacted by the final rule because 1338, 1471 (1999). 161 5 U.S.C. 801 et seq. very few such entities are subject to the Board’s 159 12 U.S.C. 4802(a). 162 5 U.S.C. 801(a)(3). capital rule. 160 12 U.S.C. 4802. 163 5 U.S.C. 804(2).

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12 CFR Part 327 guarantee on the performance of a client prior security interest of any custodial Bank deposit insurance, Banks, on a transaction between the client and agent or any prior security interest Banking, Savings associations. a QCCP. granted to a CCP in connection with * * * * * collateral posted to that CCP), and the Office of the Comptroller of the Commercial end-user means an entity amount of which does not change Currency that: directly in response to the value of the For the reasons set out in the joint (1)(i) Is using derivative contracts to derivative contract or contracts that the preamble, the OCC amends 12 CFR parts hedge or mitigate commercial risk; and financial collateral secures. 3 and 32 as follows: (ii)(A) Is not an entity described in * * * * * section 2(h)(7)(C)(i)(I) through (VIII) of Minimum transfer amount means the PART 3—CAPITAL ADEQUACY the Commodity Exchange Act (7 U.S.C. smallest amount of variation margin that STANDARDS 2(h)(7)(C)(i)(I) through (VIII)); or may be transferred between (B) Is not a ‘‘financial entity’’ for counterparties to a netting set pursuant ■ 1. The authority citation for part 3 purposes of section 2(h)(7) of the to the variation margin agreement. continues to read as follows: Commodity Exchange Act (7 U.S.C. * * * * * Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 2(h)) by virtue of section 2(h)(7)(C)(iii) Net independent collateral amount 1463, 1464, 1818, 1828(n), 1828 note, 1831n of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or means the fair value amount of the note, 1835, 3907, 3909, and 5412(b)(2)(B). (2)(i) Is using derivative contracts to independent collateral, as adjusted by ■ 2. Section 3.2 is amended by: hedge or mitigate commercial risk; and the standard supervisory haircuts under ■ a. Adding the definitions of ‘‘Basis (ii) Is not an entity described in § 3.132(b)(2)(ii), as applicable, that a derivative contract,’’ ‘‘Client-facing section 3C(g)(3)(A)(i) through (viii) of counterparty to a netting set has posted derivative transaction,’’ and the Securities Exchange Act of 1934 (15 to a national bank or Federal savings ‘‘Commercial end-user’’ in alphabetical U.S.C. 78c–3(g)(3)(A)(i) through (viii)); association less the fair value amount of order; or the independent collateral, as adjusted ■ b. Revising the definitions of ‘‘Current (3) Qualifies for the exemption in by the standard supervisory haircuts exposure’’ and ‘‘Current exposure section 2(h)(7)(A) of the Commodity under § 3.132(b)(2)(ii), as applicable, methodology;’’ Exchange Act (7 U.S.C. 2(h)(7)(A)) by posted by the national bank or Federal ■ c. Revising paragraph (2) of the virtue of section 2(h)(7)(D) of the Act (7 savings association to the counterparty, definition of ‘‘Financial collateral;’’ U.S.C. 2(h)(7)(D)); or excluding such amounts held in a (4) Qualifies for an exemption in ■ d. Adding the definitions of bankruptcy remote manner or posted to section 3C(g)(1) of the Securities ‘‘Independent collateral,’’ ‘‘Minimum a QCCP and held in conformance with Exchange Act of 1934 (15 U.S.C. 78c– transfer amount,’’ and ‘‘Net independent the operational requirements in § 3.3. 3(g)(1)) by virtue of section 3C(g)(4) of collateral amount’’ in alphabetical Netting set means a group of the Act (15 U.S.C. 78c–3(g)(4)). order; transactions with a single counterparty ■ e. Revising the definition of ‘‘Netting * * * * * that are subject to a qualifying master set;’’ and Current exposure means, with respect netting agreement. For derivative ■ f. Adding the definitions of to a netting set, the larger of zero or the contracts, netting set also includes a ‘‘Speculative grade,’’ ‘‘Sub-speculative fair value of a transaction or portfolio of single derivative contract between a grade,’’ ‘‘Variation margin,’’ ‘‘Variation transactions within the netting set that national bank or Federal savings margin agreement,’’ ‘‘Variation margin would be lost upon default of the association and a single counterparty. amount,’’ ‘‘Variation margin threshold,’’ counterparty, assuming no recovery on For purposes of the internal model and ‘‘Volatility derivative contract’’ in the value of the transactions. methodology under § 3.132(d), netting alphabetical order. Current exposure methodology means set also includes a group of transactions The additions and revisions read as the method of calculating the exposure with a single counterparty that are follows: amount for over-the-counter derivative subject to a qualifying cross-product contracts in § 3.34(b). master netting agreement and does not § 3.2 Definitions. * * * * * include a transaction: * * * * * Financial collateral *** (1) That is not subject to such a master Basis derivative contract means a non- (2) In which the national bank and netting agreement; or foreign-exchange derivative contract Federal savings association has a (2) Where the national bank or (i.e., the contract is denominated in a perfected, first-priority security interest Federal savings association has single currency) in which the cash flows or, outside of the United States, the legal identified specific wrong-way risk. of the derivative contract depend on the equivalent thereof (with the exception * * * * * difference between two risk factors that of cash on deposit; and notwithstanding Speculative grade means the reference are attributable solely to one of the the prior security interest of any entity has adequate capacity to meet following derivative asset classes: custodial agent or any priority security financial commitments in the near term, Interest rate, credit, equity, or interest granted to a CCP in connection but is vulnerable to adverse economic commodity. with collateral posted to that CCP). conditions, such that should economic * * * * * * * * * * conditions deteriorate, the reference Client-facing derivative transaction Independent collateral means entity would present an elevated default means a derivative contract that is not financial collateral, other than variation risk. a cleared transaction where the national margin, that is subject to a collateral * * * * * bank or Federal savings association is agreement, or in which a national bank Sub-speculative grade means the either acting as a financial intermediary and Federal savings association has a reference entity depends on favorable and enters into an offsetting transaction perfected, first-priority security interest economic conditions to meet its with a qualifying central counterparty or, outside of the United States, the legal financial commitments, such that (QCCP) or where the national bank or equivalent thereof (with the exception should such economic conditions Federal savings association provides a of cash on deposit; notwithstanding the deteriorate the reference entity likely

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would default on its financial hypothecated the securities received, paragraph (c)(4)(ii)(B)(2)(ii) of this commitments. and, for a national bank or Federal section, and, for any counterparty that is * * * * * savings association that uses the not a commercial end-user, multiplied Variation margin means financial standardized approach for counterparty by 1.4; and collateral that is subject to a collateral credit risk under § 3.132(c) for its (ii) For purposes of paragraph agreement provided by one party to its standardized risk-weighted assets, less (c)(4)(ii)(B)(2)(i) of this section, a counterparty to meet the performance of the fair value of any derivative national bank or Federal savings the first party’s obligations under one or contracts; association may set the value of the term more transactions between the parties as (B)(1) For a national bank or Federal C in § 3.132(c)(7)(i) equal to the amount a result of a change in value of such savings association that uses the current of collateral posted by a clearing obligations since the last time such exposure methodology under § 3.34(b) member client of the national bank or financial collateral was provided. for its standardized risk-weighted assets, Federal savings association, in Variation margin agreement means an the potential future credit exposure connection with the client-facing agreement to collect or post variation (PFE) for each derivative contract or derivative transactions within the margin. each single-product netting set of netting set; Variation margin amount means the derivative contracts (including a cleared (C)(1)(i) For a national bank or Federal fair value amount of the variation transaction except as provided in savings association that uses the current margin, as adjusted by the standard paragraph (c)(4)(ii)(I) of this section and, exposure methodology under § 3.34(b) supervisory haircuts under at the discretion of the national bank or for its standardized risk-weighted assets, § 3.132(b)(2)(ii), as applicable, that a Federal savings association, excluding a the amount of cash collateral that is counterparty to a netting set has posted forward agreement treated as a received from a counterparty to a to a national bank or Federal savings derivative contract that is part of a derivative contract and that has offset association less the fair value amount of repurchase or reverse repurchase or a the mark-to-fair value of the derivative the variation margin, as adjusted by the securities borrowing or lending asset, or cash collateral that is posted to standard supervisory haircuts under transaction that qualifies for sales a counterparty to a derivative contract treatment under U.S. GAAP), to which § 3.132(b)(2)(ii), as applicable, posted by and that has reduced the national bank the national bank or Federal savings the national bank or Federal savings or Federal savings association’s on- association is a counterparty as association to the counterparty. balance sheet assets, unless such cash determined under § 3.34, but without Variation margin threshold means the collateral is all or part of variation regard to § 3.34(b), provided that: amount of credit exposure of a national margin that satisfies the conditions in (i) A national bank or Federal savings paragraphs (c)(4)(ii)(C)(3) through (7) of bank or Federal savings association to association may choose to exclude the its counterparty that, if exceeded, would this section; and PFE of all credit derivatives or other (ii) The variation margin is used to require the counterparty to post similar instruments through which it variation margin to the national bank or reduce the current credit exposure of provides credit protection when the derivative contract, calculated as Federal savings association pursuant to calculating the PFE under § 3.34, but the variation margin agreement. described in § 3.34(b), and not the PFE; without regard to § 3.34(b), provided and Volatility derivative contract means a that it does not adjust the net-to-gross derivative contract in which the payoff (iii) For the purpose of the calculation ratio (NGR); and of the NGR described in of the derivative contract explicitly (ii) A national bank or Federal savings depends on a measure of the volatility § 3.34(b)(2)(ii)(B), variation margin association that chooses to exclude the described in paragraph (c)(4)(ii)(C)(1)(ii) of an underlying risk factor to the PFE of credit derivatives or other similar derivative contract. of this section may not reduce the net instruments through which it provides current credit exposure or the gross * * * * * credit protection pursuant to paragraph current credit exposure; or ■ 3. Section 3.10 is amended by revising (c)(4)(ii)(B)(1) of this section must do so (2)(i) For a national bank or Federal paragraphs (c)(4)(ii)(A) through (C) to consistently over time for the savings association that uses the read as follows: calculation of the PFE for all such standardized approach for counterparty instruments; or credit risk under § 3.132(c) for its § 3.10 Minimum capital requirements. (2)(i) For a national bank or Federal standardized risk-weighted assets, the * * * * * savings association that uses the replacement cost of each derivative (c) * * * standardized approach for counterparty contract or single product netting set of (4) * * * credit risk under section § 3.132(c) for derivative contracts to which the (ii) * * * its standardized risk-weighted assets, national bank or Federal savings (A) The balance sheet carrying value the PFE for each netting set to which the association is a counterparty, calculated of all of the national bank or Federal national bank or Federal savings according to the following formula, and, savings association’s on-balance sheet association is a counterparty (including for any counterparty that is not a assets, plus the value of securities sold cleared transactions except as provided commercial end-user, multiplied by 1.4: under a repurchase transaction or a in paragraph (c)(4)(ii)(I) of this section Replacement Cost = max{V¥CVMr + securities lending transaction that and, at the discretion of the national CVMp;0} qualifies for sales treatment under U.S. bank or Federal savings association, GAAP, less amounts deducted from tier excluding a forward agreement treated Where: 1 capital under § 3.22(a), (c), and (d), as a derivative contract that is part of a V equals the fair value for each derivative and less the value of securities received repurchase or reverse repurchase or a contract or each single-product netting in security-for-security repo-style securities borrowing or lending set of derivative contracts (including a transactions, where the national bank or transaction that qualifies for sales cleared transaction except as provided in paragraph (c)(4)(ii)(I) of this section and, Federal savings association acts as a treatment under U.S. GAAP), as at the discretion of the national bank or securities lender and includes the determined under § 3.132(c)(7)(i), in Federal savings association, excluding a securities received in its on-balance which the term C in § 3.132(c)(7)(i) forward agreement treated as a derivative sheet assets but has not sold or re- equals zero except as provided in contract that is part of a repurchase or

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reverse repurchase or a securities derivative contract, provided that for the Federal savings association. (i) A borrowing or lending transaction that purposes of this paragraph national bank or Federal savings qualifies for sales treatment under U.S. (c)(4)(ii)(C)(6), currency of settlement association that is not an advanced GAAP); means any currency for settlement approaches national bank or Federal CVMr equals the amount of cash collateral savings association must use the current received from a counterparty to a specified in the governing qualifying derivative contract and that satisfies the master netting agreement and the credit exposure methodology (CEM) described conditions in paragraphs (c)(4)(ii)(C)(3) support annex to the qualifying master in paragraph (b) of this section to through (7) of this section, or, in the case netting agreement, or in the governing calculate the exposure amount for all its of a client-facing derivative transaction, rules for a cleared transaction; and OTC derivative contracts, unless the the amount of collateral received from (7) The derivative contract and the national bank or Federal savings the clearing member client; and variation margin are governed by a association makes the election provided CVMp equals the amount of cash collateral qualifying master netting agreement in paragraph (a)(1)(ii) of this section. that is posted to a counterparty to a between the legal entities that are the (ii) A national bank or Federal savings derivative contract and that has not counterparties to the derivative contract association that is not an advanced offset the fair value of the derivative approaches national bank or Federal contract and that satisfies the conditions or by the governing rules for a cleared in paragraphs (c)(4)(ii)(C)(3) through (7) transaction, and the qualifying master savings association may elect to of this section, or, in the case of a client- netting agreement or the governing rules calculate the exposure amount for all its facing derivative transaction, the amount for a cleared transaction must explicitly OTC derivative contracts under the of collateral posted to the clearing stipulate that the counterparties agree to standardized approach for counterparty member client; settle any payment obligations on a net credit risk (SA–CCR) in § 3.132(c) by notifying the OCC, rather than (ii) Notwithstanding paragraph basis, taking into account any variation calculating the exposure amount for all (c)(4)(ii)(C)(2)(i) of this section, where margin received or provided under the its derivative contracts using CEM. A multiple netting sets are subject to a contract if a credit event involving national bank or Federal savings single variation margin agreement, a either counterparty occurs; association that elects under this national bank or Federal savings * * * * * paragraph (a)(1)(ii) to calculate the association must apply the formula for ■ 4. Section 3.32 is amended by revising exposure amount for its OTC derivative replacement cost provided in paragraph (f) to read as follows: contracts under SA–CCR must apply the § 3.132(c)(10)(i), in which the term CMA § 3.32 General risk weights. treatment of cleared transactions under may only include cash collateral that § 3.133 to its derivative contracts that * * * * * satisfies the conditions in paragraphs are cleared transactions and to all (f) Corporate exposures. (1) A national (c)(4)(ii)(C)(3) through (7) of this section; default fund contributions associated bank or Federal savings association and with such derivative contracts, rather must assign a 100 percent risk weight to (iii) For purposes of paragraph than applying § 3.35. A national bank or all its corporate exposures, except as (c)(4)(ii)(C)(2)(i), a national bank or Federal savings association that is not provided in paragraph (f)(2) of this Federal savings association must treat a an advanced approaches national bank section. derivative contract that references an or Federal savings association must use (2) A national bank or Federal savings index as if it were multiple derivative the same methodology to calculate the association must assign a 2 percent risk contracts each referencing one exposure amount for all its derivative weight to an exposure to a QCCP arising component of the index if the national contracts and, if a national bank or from the national bank or Federal bank or Federal savings association Federal savings association has elected elected to treat the derivative contract as savings association posting cash to use SA–CCR under this paragraph multiple derivative contracts under collateral to the QCCP in connection (a)(1)(ii), the national bank or Federal § 3.132(c)(5)(vi); with a cleared transaction that meets the savings association may change its (3) For derivative contracts that are requirements of § 3.35(b)(3)(i)(A) and a election only with prior approval of the not cleared through a QCCP, the cash 4 percent risk weight to an exposure to OCC. collateral received by the recipient a QCCP arising from the national bank (2) Advanced approaches national counterparty is not segregated (by law, or Federal savings association posting bank or Federal savings association. An regulation, or an agreement with the cash collateral to the QCCP in advanced approaches national bank or counterparty); connection with a cleared transaction Federal savings association must (4) Variation margin is calculated and that meets the requirements of calculate the exposure amount for all its transferred on a daily basis based on the § 3.35(b)(3)(i)(B). derivative contracts using SA–CCR in mark-to-fair value of the derivative (3) A national bank or Federal savings § 3.132(c) for purposes of standardized contract; association must assign a 2 percent risk total risk-weighted assets. An advanced (5) The variation margin transferred weight to an exposure to a QCCP arising approaches national bank or Federal under the derivative contract or the from the national bank or Federal savings association must apply the governing rules of the CCP or QCCP for savings association posting cash treatment of cleared transactions under a cleared transaction is the full amount collateral to the QCCP in connection § 3.133 to its derivative contracts that that is necessary to fully extinguish the with a cleared transaction that meets the are cleared transactions and to all net current credit exposure to the requirements of § 3.35(c)(3)(i). default fund contributions associated counterparty of the derivative contracts, * * * * * with such derivative contracts for subject to the threshold and minimum ■ 5. Section 3.34 is revised to read as purposes of standardized total risk- transfer amounts applicable to the follows: weighted assets. counterparty under the terms of the (b) Current exposure methodology derivative contract or the governing § 3.34 Derivative contracts. exposure amount—(1) Single OTC rules for a cleared transaction; (a) Exposure amount for derivative derivative contract. Except as modified (6) The variation margin is in the form contracts—(1) National bank or Federal by paragraph (c) of this section, the of cash in the same currency as the savings association that is not an exposure amount for a single OTC currency of settlement set forth in the advanced approaches national bank or derivative contract that is not subject to

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a qualifying master netting agreement is derivative contract by the appropriate section, the PFE must be calculated equal to the sum of the national bank’s conversion factor in Table 1 to this using the appropriate ‘‘other’’ or Federal savings association’s current section. conversion factor. credit exposure and potential future (B) For purposes of calculating either (D) A national bank or Federal savings credit exposure (PFE) on the OTC the PFE under this paragraph (b)(1)(ii) association must use an OTC derivative derivative contract. or the gross PFE under paragraph contract’s effective notional principal (i) Current credit exposure. The (b)(2)(ii)(A) of this section for exchange amount (that is, the apparent or stated current credit exposure for a single OTC rate contracts and other similar notional principal amount multiplied by derivative contract is the greater of the contracts in which the notional any multiplier in the OTC derivative fair value of the OTC derivative contract principal amount is equivalent to the contract) rather than the apparent or or zero. cash flows, notional principal amount is stated notional principal amount in (ii) PFE. (A) The PFE for a single OTC the net receipts to each party falling due calculating PFE. derivative contract, including an OTC on each value date in each currency. (E) The PFE of the protection provider derivative contract with a negative fair (C) For an OTC derivative contract of a credit derivative is capped at the value, is calculated by multiplying the that does not fall within one of the net present value of the amount of notional principal amount of the OTC specified categories in Table 1 to this unpaid premiums. TABLE 1 TO § 3.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1

Credit Credit (non- Foreign (investment investment- Precious Remaining maturity 2 Interest rate exchange grade Equity metals Other rate and gold reference grade (except gold) 3 reference asset) 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 equal to five years ...... 0.005 0.05 0.05 0.10 0.08 0.07 0.12 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 positive current credit exposures (as association must substitute the exposure subject to a qualifying master netting determined under paragraph (b)(1)(i) of amount calculated under paragraph agreement. Except as modified by this section) of all individual derivative (b)(1) or (2) of this section for SE in the paragraph (c) of this section, the contracts subject to the qualifying equation in § 3.37(c)(2). exposure amount for multiple OTC master netting agreement. (d) Counterparty credit risk for credit derivative contracts subject to a (c) Recognition of credit risk derivatives—(1) Protection purchasers. qualifying master netting agreement is mitigation of collateralized OTC A national bank or Federal savings equal to the sum of the net current derivative contracts. (1) A national bank association that purchases a credit credit exposure and the adjusted sum of or Federal savings association using derivative that is recognized under the PFE amounts for all OTC derivative CEM under paragraph (b) of this section § 3.36 as a credit risk mitigant for an contracts subject to the qualifying may recognize the credit risk mitigation exposure that is not a covered position master netting agreement. benefits of financial collateral that under subpart F of this part is not (i) Net current credit exposure. The secures an OTC derivative contract or required to compute a separate net current credit exposure is the greater multiple OTC derivative contracts counterparty credit risk capital of the net sum of all positive and subject to a qualifying master netting requirement under this subpart negative fair values of the individual agreement (netting set) by using the provided that the national bank or OTC derivative contracts subject to the simple approach in § 3.37(b). Federal savings association does so qualifying master netting agreement or (2) As an alternative to the simple consistently for all such credit zero. approach, a national bank or Federal derivatives. The national bank or (ii) Adjusted sum of the PFE amounts. savings association using CEM under Federal savings association must either The adjusted sum of the PFE amounts, paragraph (b) of this section may include all or exclude all such credit Anet, is calculated as Anet = (0.4 × recognize the credit risk mitigation derivatives that are subject to a Agross) + (0.6 × NGR × Agross), where: benefits of financial collateral that qualifying master netting agreement (A) Agross = the gross PFE (that is, the secures such a contract or netting set if from any measure used to determine sum of the PFE amounts as determined the financial collateral is marked-to-fair counterparty credit risk exposure to all under paragraph (b)(1)(ii) of this section value on a daily basis and subject to a relevant counterparties for risk-based for each individual derivative contract daily margin maintenance requirement capital purposes. subject to the qualifying master netting by applying a risk weight to the (2) Protection providers. (i) A national agreement); and uncollateralized portion of the bank or Federal savings association that (B) Net-to-gross Ratio (NGR) = the exposure, after adjusting the exposure is the protection provider under a credit ratio of the net current credit exposure amount calculated under paragraph derivative must treat the credit to the gross current credit exposure. In (b)(1) or (2) of this section using the derivative as an exposure to the calculating the NGR, the gross current collateral haircut approach in § 3.37(c). underlying reference asset. The national credit exposure equals the sum of the The national bank or Federal savings bank or Federal savings association is

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not required to compute a counterparty transactions equals the exposure clearing member national bank or credit risk capital requirement for the amount calculated according to Federal savings association is acting as credit derivative under this subpart, paragraph (b)(1) or (2) of this section a financial intermediary on behalf of a provided that this treatment is applied multiplied by the scaling factor of the clearing member client, the transaction consistently for all such credit square root of 1⁄2 (which equals offsets another transaction that satisfies derivatives. The national bank or 0.707107). If the national bank or the requirements set forth in § 3.3(a), Federal savings association must either Federal savings association determines and the clearing member national bank include all or exclude all such credit that a longer period is appropriate, the or Federal savings association is not derivatives that are subject to a national bank or Federal savings obligated to reimburse the clearing qualifying master netting agreement association must use a larger scaling member client in the event of the CCP from any measure used to determine factor to adjust for a longer holding default. counterparty credit risk exposure. period as follows: * * * * * (ii) The provisions of this paragraph (d)(2) apply to all relevant ■ 7. Section 3.37 is amended by revising counterparties for risk-based capital paragraphs (c)(3)(iii), (c)(3)(iv)(A) and purposes unless the national bank or (C), (c)(4)(i)(B) introductory text, and Federal savings association is treating (c)(4)(i)(B)(1) to read as follows: Where H = the holding period greater than the credit derivative as a covered § 3.37 Collateralized transactions. position under subpart F of this part, in or equal to five days. which case the national bank or Federal Additionally, the OCC may require * * * * * savings association must compute a the national bank or Federal savings (c) * * * supplemental counterparty credit risk association to set a longer holding (3) * * * capital requirement under this section. period if the OCC determines that a (iii) For repo-style transactions and (e) Counterparty credit risk for equity longer period is appropriate due to the client-facing derivative transactions, a derivatives. (1) A national bank or nature, structure, or characteristics of national bank or Federal savings Federal savings association must treat the transaction or is commensurate with association may multiply the standard an equity derivative contract as an the risks associated with the transaction. supervisory haircuts provided in equity exposure and compute a risk- ■ 6. Section 3.35 is amended by adding paragraphs (c)(3)(i) and (ii) of this weighted asset amount for the equity paragraph (a)(3), revising paragraph section by the square root of 1⁄2 (which derivative contract under §§ 3.51 (b)(4)(i), and adding paragraph (c)(3)(iii) equals 0.707107). For client-facing through 3.53 (unless the national bank to read as follows: derivative transactions, if a larger or Federal savings association is treating scaling factor is applied under § 3.34(f), § 3.35 Cleared transactions. the contract as a covered position under the same factor must be used to adjust subpart F of this part). (a) * * * the supervisory haircuts. (2) In addition, the national bank or (3) Alternate requirements. Federal savings association must also Notwithstanding any other provision of (iv) * * * calculate a risk-based capital this section, an advanced approaches (A) TM equals a holding period of requirement for the counterparty credit national bank or Federal savings longer than 10 business days for eligible risk of an equity derivative contract association or a national bank or Federal margin loans and derivative contracts under this section if the national bank savings association that is not an other than client-facing derivative or Federal savings association is treating advanced approaches national bank or transactions or longer than 5 business the contract as a covered position under Federal savings association and that has days for repo-style transactions and subpart F of this part. elected to use SA–CCR under client-facing derivative transactions; (3) If the national bank or Federal § 3.34(a)(1) must apply § 3.133 to its * * * * * savings association risk weights the derivative contracts that are cleared (C) TS equals 10 business days for contract under the Simple Risk-Weight transactions rather than this section. eligible margin loans and derivative Approach (SRWA) in § 3.52, the (b) * * * contracts other than client-facing national bank or Federal savings (4) * * * derivative transactions or 5 business association may choose not to hold risk- (i) Notwithstanding any other days for repo-style transactions and based capital against the counterparty requirements in this section, collateral client-facing derivative transactions. posted by a clearing member client credit risk of the equity derivative * * * * * contract, as long as it does so for all national bank or Federal savings such contracts. Where the equity association that is held by a custodian (4) * * * derivative contracts are subject to a (in its capacity as custodian) in a (i) * * * qualified master netting agreement, a manner that is bankruptcy remote from (B) The minimum holding period for national bank or Federal savings the CCP, clearing member, and other a repo-style transaction and client- association using the SRWA must either clearing member clients of the clearing facing derivative transaction is five include all or exclude all of the member, is not subject to a capital business days and for an eligible margin contracts from any measure used to requirement under this section. loan and a derivative contract other than determine counterparty credit risk * * * * * a client-facing derivative transaction is exposure. (c) * * * ten business days except for (f) Clearing member national bank’s (3) * * * transactions or netting sets for which or Federal savings association’s (iii) Notwithstanding paragraphs paragraph (c)(4)(i)(C) of this section exposure amount. The exposure amount (c)(3)(i) and (ii) of this section, a applies. When a national bank or of a clearing member national bank or clearing member national bank or Federal savings association calculates Federal savings association using CEM Federal savings association may apply a an own-estimates haircut on a TN-day under paragraph (b) of this section for risk weight of zero percent to the trade holding period, which is different from a client-facing derivative transaction or exposure amount for a cleared the minimum holding period for the netting set of client-facing derivative transaction with a CCP where the transaction type, the applicable haircut

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(HM) is calculated using the following than client-facing derivative listed in the ‘‘Old footnote number’’ square root of time formula: transactions; column is redesignated as the footnote * * * * * * * * * * number listed in the ‘‘New footnote (1) TM equals 5 for repo-style number’’ column as follows: transactions and client-facing derivative § § 3.134, 3.202, and 3.210 [Amended] transactions and 10 for eligible margin ■ 8. For each section listed in the loans and derivative contracts other following table, the footnote number

Old footnote New footnote Section number number

3.134(d)(3) ...... 30 31 3.202, paragraph (1) introductory text of the definition of ‘‘Covered position’’ ...... 31 32 3.202, paragraph (1)(i) of the definition of ‘‘Covered position’’ ...... 32 33 3.210(e)(1) ...... 33 34

■ 9. Section 3.132 is amended by: holding period longer than ten business business days. If a netting set contains ■ a. Revising paragraphs (b)(2)(ii)(A)(3) days (for eligible margin loans) or five one or more trades involving illiquid through (5); business days (for repo-style collateral or a derivative contract that ■ b. Adding paragraphs (b)(2)(ii)(A)(6) transactions), using the formula cannot be easily replaced, a national and (7); provided in paragraph (b)(2)(ii)(A)(6) of bank or Federal savings association ■ c. Revising paragraphs (c) heading and this section where the conditions in this must use a minimum holding period of (c)(1) and (2) and (5) through (8); paragraph (b)(2)(ii)(A)(4) apply. If the twenty business days. ■ d. Adding paragraphs (c)(9) through number of trades in a netting set (ii) Notwithstanding paragraph (11); exceeds 5,000 at any time during a (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) ■ e. Revising paragraph (d)(10)(i); quarter, a national bank or Federal of this section, for collateral associated ■ f. In paragraphs (e)(5)(i)(A) and (H), savings association must adjust the with a derivative contract in a netting removing ‘‘Table 3 to § 3.132’’ and supervisory haircuts upward on the set under which more than two margin adding in its place ‘‘Table 4 to this basis of a minimum holding period of disputes that lasted longer than the section’’; twenty business days for the following holding period occurred during the ■ g. In paragraphs (e)(5)(i)(C) and quarter (except when a national bank or previous two quarters, the minimum (e)(6)(i)(B), removing ‘‘current exposure Federal savings association is holding period is twice the amount methodology’’ and adding in its place calculating EAD for a cleared provided under paragraph ‘‘standardized approach for transaction under § 3.133). If a netting (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) counterparty credit risk methodology’’ set contains one or more trades of this section. wherever it appears; involving illiquid collateral, a national (6) A national bank or Federal savings ■ h. Redesignating Table 3 to § 3.132 bank or Federal savings association association must adjust the standard following paragraph (e)(5)(ii) as Table 4 must adjust the supervisory haircuts supervisory haircuts upward, pursuant to § 3.132; and upward on the basis of a minimum to the adjustments provided in ■ i. Revising paragraph (e)(6)(viii). holding period of twenty business days. paragraphs (b)(2)(ii)(A)(3) through (5) of The revisions and additions read as If over the two previous quarters more this section, using the following follows: than two margin disputes on a netting formula: § 3.132 Counterparty credit risk of repo- set have occurred that lasted longer than style transactions, eligible margin loans, the holding period, then the national and OTC derivative contracts. bank or Federal savings association * * * * * must adjust the supervisory haircuts (b) * * * upward for that netting set on the basis (2) * * * of a minimum holding period that is at (ii) * * * least two times the minimum holding (A) * * * period for that netting set. Where: (3) For repo-style transactions and (5)(i) A national bank or Federal TM equals a holding period of longer than 10 client-facing derivative transactions, a savings association must adjust the business days for eligible margin loans national bank or Federal savings supervisory haircuts upward on the and derivative contracts other than association may multiply the basis of a holding period longer than ten client-facing derivative transactions or supervisory haircuts provided in business days for collateral associated longer than 5 business days for repo- paragraphs (b)(2)(ii)(A)(1) and (2) of this with derivative contracts (five business style transactions and client-facing derivative transactions; section by the square root of 1⁄2 (which days for client-facing derivative HS equals the standard supervisory haircut; equals 0.707107). If the national bank or contracts) using the formula provided in and Federal savings association determines paragraph (b)(2)(ii)(A)(6) of this section TS equals 10 business days for eligible that a longer holding period is where the conditions in this paragraph margin loans and derivative contracts appropriate for client-facing derivative (b)(2)(ii)(A)(5)(i) apply. For collateral other than client-facing derivative transactions, then it must use a larger associated with a derivative contract transactions or 5 business days for repo- scaling factor to adjust for the longer that is within a netting set that is style transactions and client-facing holding period pursuant to paragraph composed of more than 5,000 derivative derivative transactions. (b)(2)(ii)(A)(6) of this section. contracts that are not cleared (7) If the instrument a national bank (4) A national bank or Federal savings transactions, a national bank or Federal or Federal savings association has lent, association must adjust the supervisory savings association must use a sold subject to repurchase, or posted as haircuts upward on the basis of a minimum holding period of twenty collateral does not meet the definition of

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financial collateral, the national bank or (B) With respect to exchange rate options in which the premiums have Federal savings association must use a derivative contracts, all such contracts been fully paid by the counterparty to 25.0 percent haircut for market price within a netting set that reference the the options and where the options are volatility (HS). same currency pair; not subject to a variation margin * * * * * (C) With respect to credit derivative agreement is zero. (c) EAD for derivative contracts—(1) contract, all such contracts within a (iv) Notwithstanding the requirements Options for determining EAD. A netting set; of paragraph (c)(5)(i) of this section, the national bank or Federal savings (D) With respect to equity derivative exposure amount of a netting set in association must determine the EAD for contracts, all such contracts within a which the counterparty is a commercial a derivative contract using the netting set; end-user is equal to the sum of standardized approach for counterparty (E) With respect to a commodity replacement cost, as calculated under credit risk (SA–CCR) under paragraph derivative contract, all such contracts paragraph (c)(6) of this section, and the (c)(5) of this section or using the within a netting set that reference one potential future exposure of the netting internal models methodology described of the following commodity categories: set, as calculated under paragraph (c)(7) in paragraph (d) of this section. If a Energy, metal, agricultural, or other of this section. (v) For purposes of the exposure national bank or Federal savings commodities; amount calculated under paragraph association elects to use SA–CCR for (F) With respect to basis derivative (c)(5)(i) of this section and all one or more derivative contracts, the contracts, all such contracts within a calculations that are part of that exposure amount determined under netting set that reference the same pair exposure amount, a national bank or SA–CCR is the EAD for the derivative of risk factors and are denominated in the same currency; or Federal savings association may elect, at contract or derivative contracts. A the netting set level, to treat a derivative national bank or Federal savings (G) With respect to volatility derivative contracts, all such contracts contract that is a cleared transaction that association must use the same is not subject to a variation margin methodology to calculate the exposure within a netting set that reference one of interest rate, exchange rate, credit, agreement as one that is subject to a amount for all its derivative contracts variation margin agreement, if the and may change its election only with equity, or commodity risk factors, separated according to the requirements derivative contract is subject to a prior approval of the OCC. A national requirement that the counterparties bank or Federal savings association may under paragraphs (c)(2)(iii)(A) through (E) of this section. make daily cash payments to each other reduce the EAD calculated according to to account for changes in the fair value paragraph (c)(5) of this section by the (H) If the risk of a derivative contract materially depends on more than one of of the derivative contract and to reduce credit valuation adjustment that the the net position of the contract to zero. interest rate, exchange rate, credit, national bank or Federal savings If a national bank or Federal savings equity, or commodity risk factors, the association has recognized in its balance association makes an election under this OCC may require a national bank or sheet valuation of any derivative paragraph (c)(5)(v) for one derivative Federal savings association to include contracts in the netting set. For contract, it must treat all other the derivative contract in each purposes of this paragraph (c)(1), the derivative contracts within the same appropriate hedging set under credit valuation adjustment does not netting set that are eligible for an paragraphs (c)(2)(iii)(A) through (E) of include any adjustments to common election under this paragraph (c)(5)(v) as this section. equity tier 1 capital attributable to derivative contracts that are subject to a changes in the fair value of the national * * * * * variation margin agreement. bank’s or Federal savings association’s (5) Exposure amount. (i) The exposure (vi) For purposes of the exposure liabilities that are due to changes in its amount of a netting set, as calculated amount calculated under paragraph own credit risk since the inception of under paragraph (c) of this section, is (c)(5)(i) of this section and all the transaction with the counterparty. equal to 1.4 multiplied by the sum of calculations that are part of that (2) Definitions. For purposes of this the replacement cost of the netting set, exposure amount, a national bank or paragraph (c) of this section, the as calculated under paragraph (c)(6) of Federal savings association may elect to following definitions apply: this section, and the potential future treat a credit derivative contract, equity (i) End date means the last date of the exposure of the netting set, as calculated derivative contract, or commodity period referenced by an interest rate or under paragraph (c)(7) of this section. derivative contract that references an credit derivative contract or, if the (ii) Notwithstanding the requirements index as if it were multiple derivative derivative contract references another of paragraph (c)(5)(i) of this section, the contracts each referencing one instrument, by the underlying exposure amount of a netting set subject component of the index. instrument, except as otherwise to a variation margin agreement, (6) Replacement cost of a netting set— provided in paragraph (c) of this excluding a netting set that is subject to (i) Netting set subject to a variation section. a variation margin agreement under margin agreement under which the (ii) Start date means the first date of which the counterparty to the variation counterparty must post variation the period referenced by an interest rate margin agreement is not required to post margin. The replacement cost of a or credit derivative contract or, if the variation margin, is equal to the lesser netting set subject to a variation margin derivative contract references the value of the exposure amount of the netting agreement, excluding a netting set that of another instrument, by underlying set calculated under paragraph (c)(5)(i) is subject to a variation margin instrument, except as otherwise of this section and the exposure amount agreement under which the provided in paragraph (c) of this of the netting set calculated as if the counterparty is not required to post section. netting set were not subject to a variation margin, is the greater of: (iii) Hedging set means: variation margin agreement. (A) The sum of the fair values (after (A) With respect to interest rate (iii) Notwithstanding the excluding any valuation adjustments) of derivative contracts, all such contracts requirements of paragraph (c)(5)(i) of the derivative contracts within the within a netting set that reference the this section, the exposure amount of a netting set less the sum of the net same reference currency; netting set that consists of only sold independent collateral amount and the

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variation margin amount applicable to Federal savings association is the greater (iv) Netting set subject to multiple such derivative contracts; of: variation margin agreements or a hybrid (B) The sum of the variation margin (A) The sum of the fair values (after netting set. Notwithstanding paragraphs threshold and the minimum transfer excluding any valuation adjustments) of (c)(6)(i) and (ii) of this section, the amount applicable to the derivative the derivative contracts within the replacement cost for a netting set subject contracts within the netting set less the netting set less the sum of the net to multiple variation margin agreements net independent collateral amount independent collateral amount and or a hybrid netting set must be applicable to such derivative contracts; variation margin amount applicable to calculated according to paragraph or such derivative contracts; or (c)(11)(i) of this section. (C) Zero. (B) Zero. (ii) Netting sets not subject to a (iii) Multiple netting sets subject to a (7) Potential future exposure of a variation margin agreement under single variation margin agreement. netting set. The potential future which the counterparty must post Notwithstanding paragraphs (c)(6)(i) exposure of a netting set is the product variation margin. The replacement cost and (ii) of this section, the replacement of the PFE multiplier and the aggregated of a netting set that is not subject to a cost for multiple netting sets subject to amount. variation margin agreement under a single variation margin agreement (i) PFE multiplier. The PFE multiplier which the counterparty must post must be calculated according to is calculated according to the following variation margin to the national bank or paragraph (c)(10)(i) of this section. formula:

Where: (iii) Multiple netting sets subject to a for purposes of total leverage exposure V is the sum of the fair values (after single variation margin agreement. under § 3.10(c)(4)(ii)(B), the potential excluding any valuation adjustments) of Notwithstanding paragraphs (c)(7)(i) future exposure for a netting set subject the derivative contracts within the and (ii) of this section and when to multiple variation margin agreements netting set; calculating the potential future exposure or a hybrid netting set must be C is the sum of the net independent collateral for purposes of total leverage exposure calculated according to paragraph amount and the variation margin amount under § 3.10(c)(4)(ii)(B), the potential (c)(11)(ii) of this section. applicable to the derivative contracts future exposure for multiple netting sets (8) Hedging set amount—(i) Interest within the netting set; and subject to a single variation margin rate derivative contracts. To calculate A is the aggregated amount of the netting set. agreement must be calculated according the hedging set amount of an interest to paragraph (c)(10)(ii) of this section. rate derivative contract hedging set, a (ii) Aggregated amount. The (iv) Netting set subject to multiple national bank or Federal savings aggregated amount is the sum of all variation margin agreements or a hybrid association may use either of the hedging set amounts, as calculated netting set. Notwithstanding paragraphs formulas provided in paragraphs under paragraph (c)(8) of this section, (c)(7)(i) and (ii) of this section and when (c)(8)(i)(A) and (B) of this section: within a netting set. calculating the potential future exposure (A) Formula 1 is as follows:

(B) Formula 2 is as follows: calculated under paragraph (c)(9) of this hedging set amount equals the absolute IR section, within the hedging set with an Hedging set amount = |AddOnTB1 | + value of the sum of the adjusted IR IR end date of one to five years from the |AddOnTB2 | + |AddOnTB3 |. derivative contract amounts, as present date; and calculated under paragraph (c)(9) of this IR Where in paragraphs (c)(8)(i)(A) and (B) of AddOnTB3 is the sum of the adjusted section, within the hedging set. this section: derivative contract amounts, as IR (iii) Credit derivative contracts and AddOnTB1 is the sum of the adjusted calculated under paragraph (c)(9) of this derivative contract amounts, as section, within the hedging set with an equity derivative contracts. The hedging calculated under paragraph (c)(9) of this end date of more than five years from the set amount of a credit derivative section, within the hedging set with an present date. contract hedging set or equity derivative contract hedging set within a netting set end date of less than one year from the (ii) Exchange rate derivative present date; is calculated according to the following IR contracts. For an exchange rate AddOnTB2 is the sum of the adjusted formula: derivative contract amounts, as derivative contract hedging set, the

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Where: determined under paragraph (c)(9) of this (iv) Commodity derivative contracts. k is each reference entity within the hedging section, for all derivative contracts The hedging set amount of a commodity set. within the hedging set that reference derivative contract hedging set within a K is the number of reference entities within reference entity k. netting set is calculated according to the the hedging set. rk equals the applicable supervisory following formula: AddOn(Refk) equals the sum of the adjusted correlation factor, as provided in Table 2 derivative contract amounts, as to this section.

Where: amount for each basis derivative by each of the supervisory delta k is each commodity type within the hedging contract hedging set and each volatility adjustment, pursuant to paragraph set. derivative contract hedging set. A (c)(9)(iii) of this section, the maturity K is the number of commodity types within national bank or Federal savings factor, pursuant to paragraph (c)(9)(iv) the hedging set. association must calculate such hedging of this section, and the applicable AddOn(Typek) equals the sum of the adjusted set amounts using one of the formulas derivative contract amounts, as supervisory factor, as provided in Table determined under paragraph (c)(9) of this under paragraphs (c)(8)(i) through (iv) of 2 to this section. this section that corresponds to the section, for all derivative contracts (ii) Adjusted notional amount. (A)(1) within the hedging set that reference primary risk factor of the hedging set reference commodity type k. being calculated. For an interest rate derivative contract r equals the applicable supervisory (9) Adjusted derivative contract or a credit derivative contract, the correlation factor, as provided in Table 2 amount—(i) Summary. To calculate the adjusted notional amount equals the to this section. adjusted derivative contract amount of a product of the notional amount of the (v) Basis derivative contracts and derivative contract, a national bank or derivative contract, as measured in U.S. volatility derivative contracts. Federal savings association must dollars using the exchange rate on the Notwithstanding paragraphs (c)(8)(i) determine the adjusted notional amount date of the calculation, and the through (iv) of this section, a national of derivative contract, pursuant to supervisory duration, as calculated by bank or Federal savings association paragraph (c)(9)(ii) of this section, and the following formula: must calculate a separate hedging set multiply the adjusted notional amount

Where: notional amounts of such a swap over derivative contract, as measured in U.S. S is the number of business days from the the remaining life of the swap; and dollars using the exchange rate on the present day until the start date of the (ii) For an interest rate derivative date of the calculation. If both legs of derivative contract, or zero if the start contract or a credit derivative contract the exchange rate derivative contract are date has already passed; and that is a leveraged swap, in which the denominated in currencies other than E is the number of business days from the notional amount of all legs of the U.S. dollars, the adjusted notional present day until the end date of the derivative contract are divided by a amount of the derivative contract is the derivative contract. factor and all rates of the derivative largest leg of the derivative contract, as contract are multiplied by the same measured in U.S. dollars using the (2) For purposes of paragraph factor, the notional amount is equal to exchange rate on the date of the (c)(9)(ii)(A)(1) of this section: the notional amount of an equivalent calculation. (i) For an interest rate derivative unleveraged swap. (2) Notwithstanding paragraph contract or credit derivative contract (B)(1) For an exchange rate derivative (c)(9)(ii)(B)(1) of this section, for an that is a variable notional swap, the contract, the adjusted notional amount exchange rate derivative contract with notional amount is equal to the time- is the notional amount of the non-U.S. multiple exchanges of principal, the weighted average of the contractual denominated currency leg of the national bank or Federal savings

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association must set the adjusted (2) Notwithstanding paragraph an option contract or collateralized debt notional amount of the derivative (c)(9)(ii)(C)(1) of this section, when obligation tranche, the supervisory delta contract equal to the notional amount of calculating the adjusted notional adjustment is 1 if the fair value of the the derivative contract multiplied by the amount for an equity derivative contract derivative contract increases when the number of exchanges of principal under or a commodity derivative contract that value of the primary risk factor the derivative contract. is a volatility derivative contract, the increases and ¥1 if the fair value of the national bank or Federal savings derivative contract decreases when the (C)(1) For an equity derivative association must replace the unit price contract or a commodity derivative value of the primary risk factor with the underlying volatility increases. contract, the adjusted notional amount referenced by the volatility derivative is the product of the fair value of one contract and replace the number of units (B)(1) For a derivative contract that is unit of the reference instrument with the notional amount of the an option contract, the supervisory delta underlying the derivative contract and volatility derivative contract. adjustment is determined by the the number of such units referenced by (iii) Supervisory delta adjustments. following formulas, as applicable: the derivative contract. (A) For a derivative contract that is not

(2) As used in the formulas in Table (v) l equals zero for all derivative that the national bank or Federal savings 2 to this section: contracts except interest rate options for association has with all counterparties. (i) F is the standard normal the currencies where interest rates have Then, l is set according to this formula: cumulative distribution function; negative values. The same value of l l = max{¥L + 0.1%, 0}; and (ii) P equals the current fair value of must be used for all interest rate options (vi) s equals the supervisory option the instrument or risk factor, as that are denominated in the same volatility, as provided in Table 3 to of applicable, underlying the option; currency. To determine the value of l (iii) K equals the strike price of the this section. for a given currency, a national bank or option; (C)(1) For a derivative contract that is (iv) T equals the number of business Federal savings association must find a collateralized debt obligation tranche, days until the latest contractual exercise the lowest value L of P and K of all the supervisory delta adjustment is date of the option; interest rate options in a given currency determined by the following formula:

(2) As used in the formula in (ii) D is the detachment point, which decimal value between zero and one; paragraph (c)(9)(iii)(C)(1) of this section: equals one minus the ratio of the and (i) A is the attachment point, which notional amounts of all underlying (iii) The resulting amount is equals the ratio of the notional amounts exposures that are senior to the national designated with a positive sign if the of all underlying exposures that are bank’s or Federal savings association’s collateralized debt obligation tranche subordinated to the national bank’s or exposure to the total notional amount of was purchased by the national bank or Federal savings association’s exposure all underlying exposures, expressed as a Federal savings association and is to the total notional amount of all designated with a negative sign if the underlying exposures, expressed as a savings association’s exposure. In the case of a collateralized debt obligation tranche 30 decimal value between zero and one; second-or-subsequent-to-default credit derivative, was sold by the national bank or Federal the smallest (n¥1) notional amounts of the savings association. 30 In the case of a first-to-default credit derivative, underlying exposures are subordinated to the there are no underlying exposures that are national bank’s or Federal savings association’s (iv) Maturity factor. (A)(1) The subordinated to the national bank’s or Federal exposure. maturity factor of a derivative contract

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that is subject to a variation margin is not subject to a variation margin margin, calculated according to the agreement, excluding derivative agreement as one that is subject to a following formula: contracts that are subject to a variation variation margin agreement, the national Replacement Cost = max{SNS max{VNS; margin agreement under which the bank or Federal savings association 0} ¥ max{CMA; 0}; 0} + max{SNS counterparty is not required to post must treat the derivative contract as min{VNS; 0} ¥ min{CMA; 0}; 0} variation margin, is determined by the subject to a variation margin agreement Where: following formula: with maturity factor as determined NS is each netting set subject to the variation according to (c)(9)(iv)(A) of this section, margin agreement MA. and daily settlement does not change VNS is the sum of the fair values (after the end date of the period referenced by excluding any valuation adjustments) of the derivative contract. the derivative contracts within the Where MPOR refers to the period (v) Derivative contract as multiple netting set NS. from the most recent exchange of effective derivative contracts. A national CMA is the sum of the net independent collateral covering a netting set of bank or Federal savings association collateral amount and the variation derivative contracts with a defaulting margin amount applicable to the must separate a derivative contract into derivative contracts within the netting counterparty until the derivative separate derivative contracts, according contracts are closed out and the sets subject to the single variation margin to the following rules: agreement. resulting market risk is re-hedged. (A) For an option where the (2) Notwithstanding paragraph (ii) Calculating potential future counterparty pays a predetermined (c)(9)(iv)(A)(1) of this section: exposure. Notwithstanding paragraph amount if the value of the underlying (i) For a derivative contract that is not (c)(5) of this section, a national bank or asset is above or below the strike price a client-facing derivative transaction, Federal savings association shall assign and nothing otherwise (binary option), MPOR cannot be less than ten business a single potential future exposure to the option must be treated as two days plus the periodicity of re- multiple netting sets that are subject to separate options. For purposes of margining expressed in business days a single variation margin agreement paragraph (c)(9)(iii)(B) of this section, a minus one business day; under which the counterparty must post (ii) For a derivative contract that is a binary option with strike K must be variation margin equal to the sum of the client-facing derivative transaction, represented as the combination of one potential future exposure of each such MPOR cannot be less than five business bought European option and one sold netting set, each calculated according to days plus the periodicity of re- European option of the same type as the paragraph (c)(7) of this section as if such margining expressed in business days original option (put or call) with the nettings sets were not subject to a minus one business day; and strikes set equal to 0.95 * K and 1.05 * variation margin agreement. (iii) For a derivative contract that is K so that the payoff of the binary option (11) Netting set subject to multiple within a netting set that is composed of is reproduced exactly outside the region variation margin agreements or a hybrid more than 5,000 derivative contracts between the two strikes. The absolute netting set—(i) Calculating replacement that are not cleared transactions, or a value of the sum of the adjusted cost. To calculate replacement cost for netting set that contains one or more derivative contract amounts of the either a netting set subject to multiple trades involving illiquid collateral or a bought and sold options is capped at the variation margin agreements under derivative contract that cannot be easily payoff amount of the binary option. which the counterparty to each replaced, MPOR cannot be less than (B) For a derivative contract that can variation margin agreement must post twenty business days. be represented as a combination of variation margin, or a netting set (3) Notwithstanding paragraphs standard option payoffs (such as collar, composed of at least one derivative (c)(9)(iv)(A)(1) and (2) of this section, for butterfly spread, calendar spread, contract subject to variation margin a netting set subject to two or more straddle, and strangle), a national bank agreement under which the outstanding disputes over margin that or Federal savings association must treat counterparty must post variation margin lasted longer than the MPOR over the each standard option component as a and at least one derivative contract that previous two quarters, the applicable separate derivative contract. is not subject to such a variation margin floor is twice the amount provided in (C) For a derivative contract that agreement, the calculation for (c)(9)(iv)(A)(1) and (2) of this section. includes multiple-payment options, replacement cost is provided under (B) The maturity factor of a derivative (such as interest rate caps and floors), a paragraph (c)(6)(i) of this section, except contract that is not subject to a variation national bank or Federal savings that the variation margin threshold margin agreement, or derivative association may represent each payment equals the sum of the variation margin contracts under which the counterparty option as a combination of effective thresholds of all variation margin is not required to post variation margin, single-payment options (such as interest agreements within the netting set and is determined by the following formula: rate caplets and floorlets). the minimum transfer amount equals (D) A national bank or Federal savings the sum of the minimum transfer association may not decompose linear amounts of all the variation margin derivative contracts (such as swaps) into agreements within the netting set. components. (ii) Calculating potential future Where M equals the greater of 10 (10) Multiple netting sets subject to a exposure. (A) To calculate potential business days and the remaining single variation margin agreement—(i) future exposure for a netting set subject maturity of the contract, as measured in Calculating replacement cost. to multiple variation margin agreements business days. Notwithstanding paragraph (c)(6) of this under which the counterparty to each (C) For purposes of paragraph section, a national bank or Federal variation margin agreement must post (c)(9)(iv) of this section, if a national savings association shall assign a single variation margin, or a netting set bank or Federal savings association has replacement cost to multiple netting sets composed of at least one derivative elected pursuant to paragraph (c)(5)(v) that are subject to a single variation contract subject to variation margin of this section to treat a derivative margin agreement under which the agreement under which the contract that is a cleared transaction that counterparty must post variation counterparty to the derivative contract

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must post variation margin and at least (B) For purposes of paragraph (2) All derivative contracts within the one derivative contract that is not (c)(11)(ii)(A) of this section, the netting netting set that are subject to variation subject to such a variation margin set must be divided into sub-netting sets margin agreements in which the agreement, a national bank or Federal as follows: counterparty must post variation margin savings association must divide the (1) All derivative contracts within the and that share the same value of the netting set into sub-netting sets (as netting set that are not subject to a MPOR form a single sub-netting set. The described in paragraph (c)(11)(ii)(B) of variation margin agreement or that are aggregated amount for this sub-netting this section) and calculate the subject to a variation margin agreement set is calculated as if the netting set is aggregated amount for each sub-netting under which the counterparty is not subject to a variation margin agreement, set. The aggregated amount for the required to post variation margin form using the MPOR value shared by the netting set is calculated as the sum of a single sub-netting set. The aggregated derivative contracts within the netting the aggregated amounts for the sub- amount for this sub-netting set is set. netting sets. The multiplier is calculated calculated as if the netting set is not for the entire netting set. subject to a variation margin agreement.

TABLE 3 TO § 3.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS

Supervisory Supervisory option correlation Supervisory Asset class Category Type factor 1 volatility factor (percent) (percent) (percent)

Interest rate ...... N/A ...... N/A ...... 50 N/A 0.50 Exchange rate ...... N/A ...... N/A ...... 15 N/A 4.0 Credit, single name ...... Investment grade ...... N/A ...... 100 50 0.46 Speculative grade ...... N/A ...... 100 50 1.3 Sub-speculative grade ...... N/A ...... 100 50 6.0 Credit, index ...... Investment Grade ...... N/A ...... 80 80 0.38 Speculative Grade ...... N/A ...... 80 80 1.06 Equity, single name ...... N/A ...... N/A ...... 120 50 32 Equity, index ...... N/A ...... N/A ...... 75 80 20 Commodity ...... Energy ...... Electricity ...... 150 40 40 Other ...... 70 40 18 Metals ...... N/A ...... 70 40 18 Agricultural ...... N/A ...... 70 40 18 Other ...... N/A ...... 70 40 18 1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table 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) * * * may assume that the standardized § 3.133 Cleared transactions. (10) * * * approach for counterparty credit risk (a) General requirements—(1) (i) With prior written approval of the pursuant to paragraph (c) of this section Clearing member clients. A national OCC, a national bank or Federal savings meets the conservatism requirement of bank or Federal savings association that association may set EAD equal to a this section. is a clearing member client must use the measure of counterparty credit risk * * * * * methodologies described in paragraph exposure, such as peak EAD, that is (e) * * * (b) of this section to calculate risk- more conservative than an alpha of 1.4 (6) * * * weighted assets for a cleared times the larger of EPEunstressed and transaction. (viii) If a national bank or Federal EPEstressed for every counterparty whose (2) Clearing members. A national bank savings association uses the EAD will be measured under the or Federal savings association that is a standardized approach for counterparty alternative measure of counterparty clearing member must use the credit risk pursuant to paragraph (c) of exposure. The national bank or Federal methodologies described in paragraph this section to calculate the EAD for any savings association must demonstrate (c) of this section to calculate its risk- immaterial portfolios of OTC derivative the conservatism of the measure of weighted assets for a cleared transaction contracts, the national bank or Federal counterparty credit risk exposure used and paragraph (d) of this section to savings association must use that EAD for EAD. With respect to paragraph calculate its risk-weighted assets for its as a constant EE in the formula for the (d)(10)(i) of this section: default fund contribution to a CCP. (A) For material portfolios of new calculation of CVA with the maturity (b) * * * OTC derivative products, the national equal to the maximum of: (1) Risk-weighted assets for cleared bank or Federal savings association may (A) Half of the longest maturity of a transactions. (i) To determine the risk- assume that the standardized approach transaction in the netting set; and weighted asset amount for a cleared for counterparty credit risk pursuant to (B) The notional weighted average transaction, a national bank or Federal paragraph (c) of this section meets the maturity of all transactions in the savings association that is a clearing conservatism requirement of this section netting set. member client must multiply the trade for a period not to exceed 180 days. 10. Section 3.133 is amended by exposure amount for the cleared (B) For immaterial portfolios of OTC revising paragraphs (a), (b)(1) through transaction, calculated in accordance derivative contracts, the national bank (3), (b)(4)(i), (c)(1) thorough (3), (c)(4)(i), with paragraph (b)(2) of this section, by or Federal savings association generally and (d) to read as follows: the risk weight appropriate for the

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cleared transaction, determined in insolvency, or receivership proceedings) (ii) For a cleared transaction that is a accordance with paragraph (b)(3) of this the relevant court and administrative repo-style transaction or netting set of section. authorities would find the arrangements repo-style transactions, trade exposure (ii) A clearing member client national to be legal, valid, binding, and amount equals the EAD calculated bank’s or Federal savings association’s enforceable under the law of the under § 3.132(b)(2) or (3) or (d), plus the total risk-weighted assets for cleared relevant jurisdictions. fair value of the collateral posted by the transactions is the sum of the risk- (B) 4 percent, if the requirements of clearing member national bank or weighted asset amounts for all of its paragraph (b)(3)(i)(A) of this section are Federal savings association and held by cleared transactions. not met. the CCP in a manner that is not (2) Trade exposure amount. (i) For a (ii) For a cleared transaction with a bankruptcy remote. When the clearing cleared transaction that is a derivative CCP that is not a QCCP, a clearing member national bank or Federal contract or a netting set of derivative member client national bank or Federal savings association calculates EAD for contracts, trade exposure amount equals savings association must apply the risk the cleared transaction under § 3.132(d), the EAD for the derivative contract or weight applicable to the CCP under EAD equals EADunstressed. netting set of derivative contracts subpart D of this part. (3) Cleared transaction risk weights. calculated using the methodology used (4) * * * (i) A clearing member national bank or to calculate EAD for derivative contracts (i) Notwithstanding any other Federal savings association must apply requirement of this section, collateral set forth in § 3.132(c) or (d), plus the fair a risk weight of 2 percent to the trade posted by a clearing member client value of the collateral posted by the exposure amount for a cleared national bank or Federal savings clearing member client national bank or transaction with a QCCP. association that is held by a custodian Federal savings association and held by (ii) For a cleared transaction with a (in its capacity as a custodian) in a the CCP or a clearing member in a CCP that is not a QCCP, a clearing manner that is bankruptcy remote from manner that is not bankruptcy remote. member national bank or Federal the CCP, clearing member, and other When the national bank or Federal savings association must apply the risk clearing member clients of the clearing savings association calculates EAD for weight applicable to the CCP according member, is not subject to a capital the cleared transaction using the to subpart D of this part. requirement under this section. methodology in § 3.132(d), EAD equals (iii) Notwithstanding paragraphs EADunstressed. * * * * * (c)(3)(i) and (ii) of this section, a (ii) For a cleared transaction that is a (c) * * * clearing member national bank or repo-style transaction or netting set of (1) Risk-weighted assets for cleared Federal savings association may apply a repo-style transactions, trade exposure transactions. (i) To determine the risk- risk weight of zero percent to the trade amount equals the EAD for the repo- weighted asset amount for a cleared exposure amount for a cleared style transaction calculated using the transaction, a clearing member national transaction with a QCCP where the methodology set forth in § 3.132(b)(2) or bank or Federal savings association clearing member national bank or (3) or (d), plus the fair value of the must multiply the trade exposure collateral posted by the clearing member amount for the cleared transaction, Federal savings association is acting as client national bank or Federal savings calculated in accordance with paragraph a financial intermediary on behalf of a association and held by the CCP or a (c)(2) of this section by the risk weight clearing member client, the transaction clearing member in a manner that is not appropriate for the cleared transaction, offsets another transaction that satisfies bankruptcy remote. When the national determined in accordance with the requirements set forth in § 3.3(a), bank or Federal savings association paragraph (c)(3) of this section. and the clearing member national bank calculates EAD for the cleared (ii) A clearing member national bank’s or Federal savings association is not transaction under § 3.132(d), EAD or Federal savings association’s total obligated to reimburse the clearing member client in the event of the QCCP equals EADunstressed. risk-weighted assets for cleared (3) Cleared transaction risk weights. transactions is the sum of the risk- default. (i) For a cleared transaction with a weighted asset amounts for all of its (4) * * * QCCP, a clearing member client national cleared transactions. (i) Notwithstanding any other bank or Federal savings association (2) Trade exposure amount. A requirement of this section, collateral must apply a risk weight of: clearing member national bank or posted by a clearing member national (A) 2 percent if the collateral posted Federal savings association must bank or Federal savings association that by the national bank or Federal savings calculate its trade exposure amount for is held by a custodian (in its capacity as association to the QCCP or clearing a cleared transaction as follows: a custodian) in a manner that is member is subject to an arrangement (i) For a cleared transaction that is a bankruptcy remote from the CCP, that prevents any loss to the clearing derivative contract or a netting set of clearing member, and other clearing member client national bank or Federal derivative contracts, trade exposure member clients of the clearing member, savings association due to the joint amount equals the EAD calculated using is not subject to a capital requirement default or a concurrent insolvency, the methodology used to calculate EAD under this section. liquidation, or receivership proceeding for derivative contracts set forth in * * * * * of the clearing member and any other § 3.132(c) or (d), plus the fair value of (d) Default fund contributions—(1) clearing member clients of the clearing the collateral posted by the clearing General requirement. A clearing member; and the clearing member client member national bank or Federal member national bank or Federal national bank or Federal savings savings association and held by the CCP savings association must determine the association has conducted sufficient in a manner that is not bankruptcy risk-weighted asset amount for a default legal review to conclude with a well- remote. When the clearing member fund contribution to a CCP at least founded basis (and maintains sufficient national bank or Federal savings quarterly, or more frequently if, in the written documentation of that legal association calculates EAD for the opinion of the national bank or Federal review) that in the event of a legal cleared transaction using the savings association or the OCC, there is challenge (including one resulting from methodology in § 3.132(d), EAD equals a material change in the financial an event of default or from liquidation, EADunstressed. condition of the CCP.

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(2) Risk-weighted asset amount for membership characteristics of the CCP QCCP, as calculated under the default fund contributions to and riskiness of its transactions, in cases methodology set forth in paragraph nonqualifying CCPs. A clearing member where such default fund contributions (d)(4) of this section, multiplied by 12.5. national bank’s or Federal savings may be unlimited. (4) Capital requirement for default association’s risk-weighted asset amount (3) Risk-weighted asset amount for fund contributions to a QCCP. A for default fund contributions to CCPs default fund contributions to QCCPs. A clearing member national bank’s or that are not QCCPs equals the sum of clearing member national bank’s or such default fund contributions Federal savings association’s risk- Federal savings association’s capital multiplied by 1,250 percent, or an weighted asset amount for default fund requirement for its default fund amount determined by the OCC, based contributions to QCCPs equals the sum contribution to a QCCP (KCM) is equal to: on factors such as size, structure, and of its capital requirement, KCM for each

Where: Federal savings association and the CCP (iv) EAD must be calculated KCCP is the hypothetical capital requirement that are cleared transactions and any separately for each clearing member’s of the QCCP, as determined under guarantees that the national bank or sub-client accounts and sub-house paragraph (d)(5) of this section; Federal savings association has account (i.e., for the clearing member’s pref DF is the prefunded default fund provided to the CCP with respect to proprietary activities). If the clearing contribution of the clearing member performance of a clearing member client national bank or Federal savings member’s collateral and its client’s association to the QCCP; on a derivative contract, the EAD is collateral are held in the same default DFCCP is the QCCP’s own prefunded amounts equal to the exposure amount for all fund contribution account, then the that are contributed to the default such derivative contracts and guarantees EAD of that account is the sum of the waterfall and are junior or pari passu of derivative contracts calculated under EAD for the client-related transactions with prefunded default fund SA–CCR in § 3.132(c) (or, with respect within the account and the EAD of the contributions of clearing members of the to a CCP located outside the United house-related transactions within the CCP; and pref States, under a substantially identical account. For purposes of determining DFCM is the total prefunded default fund methodology in effect in the contributions from clearing members of such EADs, the independent collateral the QCCP to the QCCP. jurisdiction) using a value of 10 of the clearing member and its client business days for purposes of must be allocated in proportion to the (5) Hypothetical capital requirement § 3.132(c)(9)(iv); less the value of all of a QCCP. Where a QCCP has provided respective total amount of independent collateral held by the CCP posted by the collateral posted by the clearing member its KCCP, a national bank or Federal clearing member national bank or to the QCCP. savings association must rely on such Federal savings association or a clearing disclosed figure instead of calculating member client of the national bank or (v) If any account or sub-account KCCP under this paragraph (d)(5), unless Federal savings association in contains both derivative contracts and the national bank or Federal savings connection with a derivative contract repo-style transactions, the EAD of that association determines that a more for which the national bank or Federal account is the sum of the EAD for the conservative figure is appropriate based savings association has provided a derivative contracts within the account on the nature, structure, or guarantee to the CCP and the amount of and the EAD of the repo-style characteristics of the QCCP. The the prefunded default fund contribution transactions within the account. If hypothetical capital requirement of a of the national bank or Federal savings independent collateral is held for an QCCP (KCCP), as determined by the association to the CCP. account containing both derivative national bank or Federal savings (iii) With respect to any repo-style contracts and repo-style transactions, association, is equal to: transactions between the national bank then such collateral must be allocated to KCCP = SCMi EADi * 1.6 percent or Federal savings association and the the derivative contracts and repo-style Where: CCP that are cleared transactions, EAD transactions in proportion to the

CMi is each clearing member of the QCCP; is equal to: respective product specific exposure and EAD = max{EBRM ¥ IM ¥ DF; 0} amounts, calculated, excluding the EADi is the exposure amount of each clearing Where: effects of collateral, according to member of the QCCP to the QCCP, as § 3.132(b) for repo-style transactions and EBRM is the sum of the exposure amounts of determined under paragraph (d)(6) of to § 3.132(c)(5) for derivative contracts. this section. each repo-style transaction between the national bank or Federal savings (vi) Notwithstanding any other (6) EAD of a clearing member national association and the CCP as determined provision of paragraph (d) of this bank or Federal savings association to a under § 3.132(b)(2) and without section, with the prior approval of the QCCP. (i) The EAD of a clearing member recognition of any collateral securing the OCC, a national bank or Federal savings national bank or Federal savings repo-style transactions; IM is the initial margin collateral posted by association may determine the risk- association to a QCCP is equal to the weighted asset amount for a default sum of the EAD for derivative contracts the national bank or Federal savings association to the CCP with respect to fund contribution to a QCCP according determined under paragraph (d)(6)(ii) of the repo-style transactions; and to § 3.35(d)(3)(ii). this section and the EAD for repo-style DF is the prefunded default fund ■ transactions determined under contribution of the national bank or 10. Section 3.173 is amended in Table paragraph (d)(6)(iii) of this section. Federal savings association to the CCP 13 to § 3.173 by revising line 4 under (ii) With respect to any derivative that is not already deducted in paragraph Part 2, Derivative exposures, to read as contracts between the national bank or (d)(6)(ii) of this section. follows:

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§ 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 § 3.173—SUPPLEMENTARY LEVERAGE RATIO

Dollar amounts in thousands Tril Bil Mil Thou

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Part 2: Supplementary leverage ratio

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Derivative exposures

******* 4 Current exposure for derivative exposures (that is, net of cash variation margin).

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■ 11. Section 3.300 is amended by PART 32—LENDING LIMITS FEDERAL RESERVE SYSTEM adding paragraphs (g) and (h) to read as 12 CFR Chapter II follows: ■ 12. The authority citation for part 32 Authority and Issuance continues to read as follows: § 3.300 Transitions. For the reasons set forth in the * * * * * Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463, 1464(u), 5412(b)(2)(B), and preamble, chapter II of title 12 of the (g) SA–CCR. An advanced approaches 15 U.S.C. 1639h. Code of Federal Regulations is amended national bank or Federal savings as set forth below: association may use CEM rather than ■ 13. Section 32.9 is amended by PART 217—CAPITAL ADEQUACY OF SA–CCR for purposes of §§ 3.34(a) and revising paragraph (b)(1)(iii) and adding BANK HOLDING COMPANIES, 3.132(c) until January 1, 2022. An paragraph (b)(1)(iv) to read as follows: SAVINGS AND LOAN HOLDING advanced approaches national bank or § 32.9 Credit exposure arising from COMPANIES, AND STATE MEMBER Federal savings association must BANKS (REGULATION Q) provide prior notice to the OCC if it derivative and securities financing transactions. decides to begin using SA–CCR before ■ 14. The authority citation for part 217 * * * * * January 1, 2022. On January 1, 2022, continues to read as follows: and thereafter, an advanced approaches (b) * * * Authority: 12 U.S.C. 248(a), 321–338a, national bank or Federal savings (1) * * * 481–486, 1462a, 1467a, 1818, 1828, 1831n, association must use SA–CCR for (iii) Current Exposure Method. The 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, purposes of §§ 3.34(a), 3.132(c), and credit exposure arising from a derivative 3904, 3906–3909, 4808, 5365, 5368, 5371, 3.133(d). Once an advanced approaches and 5371 note. transaction (other than a credit national bank or Federal savings derivative transaction) under the ■ 15. Section 217.2 is amended by: association has begun to use SA–CCR, Current Exposure Method shall be ■ a. Adding the definitions of ‘‘Basis the advanced approaches national bank calculated pursuant to 12 CFR 3.34(b)(1) derivative contract,’’ ‘‘Client-facing or Federal savings association may not and (2) and (c) or 324.34(b)(1) and (2) derivative transaction,’’ and change to use CEM. and (c), as appropriate. ‘‘Commercial end-user’’ in alphabetical (h) Default fund contributions. Prior order; (iv) Standardized Approach for to January 1, 2022, a national bank or ■ b. Revising the definitions of ‘‘Current Counterparty Credit Risk Method. The Federal savings association that exposure’’ and ‘‘Current exposure credit exposure arising from a derivative calculates the exposure amounts of its methodology;’’ transaction (other than a credit derivative contracts under the ■ c. Revising paragraph (2) of the derivative transaction) under the standardized approach for counterparty definition of ‘‘Financial collateral;’’ Standardized Approach for credit risk in § 3.132(c) may calculate ■ d. Adding the definitions of Counterparty Credit Risk Method shall the risk-weighted asset amount for a ‘‘Independent collateral,’’ ‘‘Minimum default fund contribution to a QCCP be calculated pursuant to 12 CFR transfer amount,’’ and ‘‘Net independent under either method 1 under 3.132(c)(5) or 324.132(c)(5), as collateral amount’’ in alphabetical § 3.35(d)(3)(i) or method 2 under appropriate. order; § 3.35(d)(3)(ii), rather than under * * * * * ■ e. Revising the definition of ‘‘Netting § 3.133(d). set;’’ and

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■ f. Adding the definitions of fair value of a transaction or portfolio of single derivative contract between a ‘‘Speculative grade,’’ ‘‘Sub-speculative transactions within the netting set that Board-regulated institution and a single grade,’’ ‘‘Variation margin,’’ ‘‘Variation would be lost upon default of the counterparty. For purposes of the margin agreement,’’ ‘‘Variation margin counterparty, assuming no recovery on internal model methodology under amount,’’ ‘‘Variation margin threshold,’’ the value of the transactions. § 217.132(d), netting set also includes a and ‘‘Volatility derivative contract’’ in Current exposure methodology means group of transactions with a single alphabetical order. the method of calculating the exposure counterparty that are subject to a The additions and revisions read as amount for over-the-counter derivative qualifying cross-product master netting follows: contracts in § 217.34(b). agreement and does not include a * * * * * transaction: § 217.2 Definitions. Financial collateral *** (1) That is not subject to such a master * * * * * (2) In which the Board-regulated netting agreement; or Basis derivative contract means a non- institution has a perfected, first-priority (2) Where the Board-regulated foreign-exchange derivative contract security interest or, outside of the institution has identified specific (i.e., the contract is denominated in a United States, the legal equivalent wrong-way risk. single currency) in which the cash flows thereof, (with the exception of cash on * * * * * of the derivative contract depend on the deposit; and notwithstanding the prior Speculative grade means the reference difference between two risk factors that security interest of any custodial agent entity has adequate capacity to meet are attributable solely to one of the or any priority security interest granted financial commitments in the near term, following derivative asset classes: to a CCP in connection with collateral but is vulnerable to adverse economic Interest rate, credit, equity, or posted to that CCP). conditions, such that should economic commodity. * * * * * conditions deteriorate, the reference * * * * * Independent collateral means entity would present an elevated default Client-facing derivative transaction financial collateral, other than variation risk. means a derivative contract that is not margin, that is subject to a collateral * * * * * a cleared transaction where the Board- agreement, or in which a Board- Sub-speculative grade means the regulated institution is either acting as regulated institution has a perfected, reference entity depends on favorable a financial intermediary and enters into first-priority security interest or, outside economic conditions to meet its an offsetting transaction with a of the United States, the legal equivalent financial commitments, such that qualifying central counterparty (QCCP) thereof (with the exception of cash on should such economic conditions or where the Board-regulated institution deposit; notwithstanding the prior deteriorate the reference entity likely provides a guarantee on the security interest of any custodial agent would default on its financial performance of a client on a transaction or any prior security interest granted to commitments. between the client and a QCCP. a CCP in connection with collateral * * * * * * * * * * posted to that CCP), and the amount of Variation margin means financial Commercial end-user means an entity which does not change directly in collateral that is subject to a collateral that: response to the value of the derivative agreement provided by one party to its (1)(i) Is using derivative contracts to contract or contracts that the financial counterparty to meet the performance of hedge or mitigate commercial risk; and collateral secures. the first party’s obligations under one or (ii)(A) Is not an entity described in * * * * * more transactions between the parties as section 2(h)(7)(C)(i)(I) through (VIII) of Minimum transfer amount means the a result of a change in value of such the Commodity Exchange Act (7 U.S.C. smallest amount of variation margin that obligations since the last time such 2(h)(7)(C)(i)(I) through (VIII)); or may be transferred between financial collateral was provided. (B) Is not a ‘‘financial entity’’ for counterparties to a netting set pursuant Variation margin agreement means an purposes of section 2(h)(7) of the to the variation margin agreement. agreement to collect or post variation Commodity Exchange Act (7 U.S.C. * * * * * margin. 2(h)) by virtue of section 2(h)(7)(C)(iii) Net independent collateral amount Variation margin amount means the of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or means the fair value amount of the fair value amount of the variation (2)(i) Is using derivative contracts to independent collateral, as adjusted by margin, as adjusted by the standard hedge or mitigate commercial risk; and the standard supervisory haircuts under supervisory haircuts under (ii) Is not an entity described in § 217.132(b)(2)(ii), as applicable, that a § 217.132(b)(2)(ii), as applicable, that a section 3C(g)(3)(A)(i) through (viii) of counterparty to a netting set has posted counterparty to a netting set has posted the Securities Exchange Act of 1934 (15 to a Board-regulated institution less the to a Board-regulated institution less the U.S.C. 78c–3(g)(3)(A)(i) through (viii)); fair value amount of the independent fair value amount of the variation or collateral, as adjusted by the standard margin, as adjusted by the standard (3) Qualifies for the exemption in supervisory haircuts under supervisory haircuts under section 2(h)(7)(A) of the Commodity § 217.132(b)(2)(ii), as applicable, posted § 217.132(b)(2)(ii), as applicable, posted Exchange Act (7 U.S.C. 2(h)(7)(A)) by by the Board-regulated institution to the by the Board-regulated institution to the virtue of section 2(h)(7)(D) of the Act (7 counterparty, excluding such amounts counterparty. U.S.C. 2(h)(7)(D)); or held in a bankruptcy remote manner or Variation margin threshold means the (4) Qualifies for an exemption in posted to a QCCP and held in amount of credit exposure of a Board- section 3C(g)(1) of the Securities conformance with the operational regulated institution to its counterparty Exchange Act of 1934 (15 U.S.C. 78c– requirements in § 217.3. that, if exceeded, would require the 3(g)(1)) by virtue of section 3C(g)(4) of Netting set means a group of counterparty to post variation margin to the Act (15 U.S.C. 78c–3(g)(4)). transactions with a single counterparty the Board-regulated institution pursuant * * * * * that are subject to a qualifying master to the variation margin agreement. Current exposure means, with respect netting agreement. For derivative Volatility derivative contract means a to a netting set, the larger of zero or the contracts, netting set also includes a derivative contract in which the payoff

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of the derivative contract explicitly derivatives or other similar instruments (2)(i) For a Board-regulated institution depends on a measure of the volatility through which it provides credit that uses the standardized approach for of an underlying risk factor to the protection pursuant to paragraph counterparty credit risk under derivative contract. (c)(4)(ii)(B)(1) of this section must do so § 217.132(c) for its standardized risk- * * * * * consistently over time for the weighted assets, the replacement cost of calculation of the PFE for all such ■ 16. Section 217.10 is amended by each derivative contract or single instruments; or revising paragraphs (c)(4)(ii)(A) through product netting set of derivative (2)(i) For a Board-regulated institution (C) to read as follows: contracts to which the Board-regulated that uses the standardized approach for institution is a counterparty, calculated § 217.10 Minimum capital requirements. counterparty credit risk under section according to the following formula, and, * * * * * § 217.132(c) for its standardized risk- for any counterparty that is not a (c) * * * weighted assets, the PFE for each commercial end-user, multiplied by 1.4: netting set to which the Board-regulated (4) * * * Replacement Cost = max{V¥CVMr + institution is a counterparty (including (ii) * * * CVMp; 0} (A) The balance sheet carrying value cleared transactions except as provided in paragraph (c)(4)(ii)(I) of this section Where: of all of the Board-regulated institution’s V equals the fair value for each derivative on-balance sheet assets, plus the value and, at the discretion of the Board- regulated institution, excluding a contract or each single-product netting of securities sold under a repurchase set of derivative contracts (including a forward agreement treated as a transaction or a securities lending cleared transaction except as provided in derivative contract that is part of a transaction that qualifies for sales paragraph (c)(4)(ii)(I) of this section and, repurchase or reverse repurchase or a treatment under U.S. GAAP, less at the discretion of the Board-regulated securities borrowing or lending amounts deducted from tier 1 capital institution, excluding a forward transaction that qualifies for sales agreement treated as a derivative under § 217.22(a), (c), and (d), and less treatment under U.S. GAAP), as contract that is part of a repurchase or the value of securities received in determined under § 217.132(c)(7), in reverse repurchase or a securities security-for-security repo-style which the term C in § 217.132(c)(7)(i) borrowing or lending transaction that transactions, where the Board-regulated qualifies for sales treatment under U.S. equals zero except as provided in institution acts as a securities lender GAAP); paragraph (c)(4)(ii)(B)(2)(ii) of this CVMr equals the amount of cash collateral and includes the securities received in section, and, for any counterparty that is its on-balance sheet assets but has not received from a counterparty to a not a commercial end-user, multiplied derivative contract and that satisfies the sold or re-hypothecated the securities by 1.4; and conditions in paragraphs (c)(4)(ii)(C)(3) received, and, for a Board-regulated (ii) For purposes of paragraph through (7) of this section, or, in the case institution that uses the standardized (c)(4)(ii)(B)(2)(i) of this section, a Board- of a client-facing derivative transaction, approach for counterparty credit risk regulated institution may set the value the amount of collateral received from under § 217.132(c) for its standardized of the term C in § 217.132(c)(7)(i) equal the clearing member client; and risk-weighted assets, less the fair value CVMp equals the amount of cash collateral to the amount of collateral posted by a that is posted to a counterparty to a of any derivative contracts; clearing member client of the Board- (B)(1) For a Board-regulated derivative contract and that has not regulated institution in connection with offset the fair value of the derivative institution that uses the current the client-facing derivative transactions contract and that satisfies the conditions exposure methodology under within the netting set; in paragraphs (c)(4)(ii)(C)(3) through (7) § 217.34(b) for its standardized risk- (C)(1)(i) For a Board-regulated of this section, or, in the case of a client- weighted assets, the potential future institution that uses the current facing derivative transaction, the amount credit exposure (PFE) for each exposure methodology under of collateral posted to the clearing derivative contract or each single- § 217.34(b) for its standardized risk- member client; product netting set of derivative weighted assets, the amount of cash (ii) Notwithstanding paragraph contracts (including a cleared collateral that is received from a (c)(4)(ii)(C)(2)(i) of this section, where transaction except as provided in counterparty to a derivative contract multiple netting sets are subject to a paragraph (c)(4)(ii)(I) of this section and, and that has offset the mark-to-fair value single variation margin agreement, a at the discretion of the Board-regulated of the derivative asset, or cash collateral Board-regulated institution must apply institution, excluding a forward that is posted to a counterparty to a the formula for replacement cost agreement treated as a derivative derivative contract and that has reduced provided in § 217.132(c)(10)(i), in which contract that is part of a repurchase or the Board-regulated institution’s on- the term CMA may only include cash reverse repurchase or a securities balance sheet assets, unless such cash collateral that satisfies the conditions in borrowing or lending transaction that collateral is all or part of variation paragraphs (c)(4)(ii)(C)(3) through (7) of qualifies for sales treatment under U.S. margin that satisfies the conditions in this section; and GAAP), to which the Board-regulated paragraphs (c)(4)(ii)(C)(3) through (7) of (iii) For purposes of paragraph institution is a counterparty as this section; and (c)(4)(ii)(C)(2)(i), a Board-regulated determined under § 217.34, but without (ii) The variation margin is used to institution must treat a derivative regard to § 217.34(b), provided that: reduce the current credit exposure of contract that references an index as if it (i) A Board-regulated institution may the derivative contract, calculated as were multiple derivative contracts each choose to exclude the PFE of all credit described in § 217.34(b), and not the referencing one component of the index derivatives or other similar instruments PFE; and if the Board-regulated institution elected through which it provides credit (iii) For the purpose of the calculation to treat the derivative contract as protection when calculating the PFE of the NGR described in multiple derivative contracts under under § 217.34, but without regard to § 217.34(b)(2)(ii)(B), variation margin § 217.132(c)(5)(vi); § 217.34(b), provided that it does not described in paragraph (c)(4)(ii)(C)(1)(ii) (3) For derivative contracts that are adjust the net-to-gross ratio (NGR); and of this section may not reduce the net not cleared through a QCCP, the cash (ii) A Board-regulated institution that current credit exposure or the gross collateral received by the recipient chooses to exclude the PFE of credit current credit exposure; or counterparty is not segregated (by law,

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regulation, or an agreement with the regulated institution posting cash CCR in § 217.132(c) for purposes of counterparty); collateral to the QCCP in connection standardized total risk-weighted assets. (4) Variation margin is calculated and with a cleared transaction that meets the An advanced approaches Board- transferred on a daily basis based on the requirements of § 217.35(b)(3)(i)(B). regulated institution must apply the mark-to-fair value of the derivative (3) A Board-regulated institution must treatment of cleared transactions under contract; assign a 2 percent risk weight to an § 217.133 to its derivative contracts that (5) The variation margin transferred exposure to a QCCP arising from the are cleared transactions and to all under the derivative contract or the Board-regulated institution posting cash default fund contributions associated governing rules of the CCP or QCCP for collateral to the QCCP in connection with such derivative contracts for a cleared transaction is the full amount with a cleared transaction that meets the purposes of standardized total risk- that is necessary to fully extinguish the requirements of § 217.35(c)(3)(i). weighted assets. net current credit exposure to the * * * * * (b) Current exposure methodology counterparty of the derivative contracts, ■ 18. Section 217.34 is revised to read exposure amount—(1) Single OTC subject to the threshold and minimum as follows: derivative contract. Except as modified transfer amounts applicable to the by paragraph (c) of this section, the counterparty under the terms of the § 217.34 Derivative contracts. exposure amount for a single OTC derivative contract or the governing (a) Exposure amount for derivative derivative contract that is not subject to rules for a cleared transaction; contracts—(1) Board-regulated a qualifying master netting agreement is (6) The variation margin is in the form institution that is not an advanced equal to the sum of the Board-regulated of cash in the same currency as the approaches Board-regulated institution. institution’s current credit exposure and currency of settlement set forth in the (i) A Board-regulated institution that is potential future credit exposure (PFE) derivative contract, provided that for the not an advanced approaches Board- on the OTC derivative contract. regulated institution must use the purposes of this paragraph (i) Current credit exposure. The current exposure methodology (CEM) (c)(4)(ii)(C)(6), currency of settlement current credit exposure for a single OTC described in paragraph (b) of this means any currency for settlement derivative contract is the greater of the section to calculate the exposure specified in the governing qualifying fair value of the OTC derivative contract amount for all its OTC derivative master netting agreement and the credit or zero. support annex to the qualifying master contracts, unless the Board-regulated (ii) PFE. (A) The PFE for a single OTC netting agreement, or in the governing institution makes the election provided derivative contract, including an OTC rules for a cleared transaction; and in paragraph (a)(1)(ii) of this section. derivative contract with a negative fair (7) The derivative contract and the (ii) A Board-regulated institution that value, is calculated by multiplying the variation margin are governed by a is not an advanced approaches Board- notional principal amount of the OTC qualifying master netting agreement regulated institution may elect to derivative contract by the appropriate between the legal entities that are the calculate the exposure amount for all its conversion factor in Table 1 to this counterparties to the derivative contract OTC derivative contracts under the section. or by the governing rules for a cleared standardized approach for counterparty transaction, and the qualifying master credit risk (SA–CCR) in § 217.132(c) by (B) For purposes of calculating either netting agreement or the governing rules notifying the Board, rather than the PFE under this paragraph (b)(1)(ii) for a cleared transaction must explicitly calculating the exposure amount for all or the gross PFE under paragraph stipulate that the counterparties agree to its derivative contracts using CEM. A (b)(2)(ii)(A) of this section for exchange settle any payment obligations on a net Board-regulated institution that elects rate contracts and other similar basis, taking into account any variation under this paragraph (a)(1)(ii) to contracts in which the notional margin received or provided under the calculate the exposure amount for its principal amount is equivalent to the contract if a credit event involving OTC derivative contracts under SA–CCR cash flows, notional principal amount is either counterparty occurs; must apply the treatment of cleared the net receipts to each party falling due transactions under § 217.133 to its on each value date in each currency. * * * * * derivative contracts that are cleared (C) For an OTC derivative contract ■ 17. Section 217.32 is amended by transactions and to all default fund that does not fall within one of the revising paragraph (f) to read as follows: contributions associated with such specified categories in Table 1 to this derivative contracts, rather than § 217.32 General risk weights. section, the PFE must be calculated applying § 217.35. A Board-regulated * * * * * using the appropriate ‘‘other’’ institution that is not an advanced conversion factor. (f) Corporate exposures. (1) A Board- approaches Board-regulated institution regulated institution must assign a 100 must use the same methodology to (D) A Board-regulated institution percent risk weight to all its corporate calculate the exposure amount for all its must use an OTC derivative contract’s exposures, except as provided in derivative contracts and, if a Board- effective notional principal amount (that paragraph (f)(2) of this section. regulated institution has elected to use is, the apparent or stated notional (2) A Board-regulated institution must SA–CCR under this paragraph (a)(1)(ii), principal amount multiplied by any assign a 2 percent risk weight to an the Board-regulated institution may multiplier in the OTC derivative exposure to a QCCP arising from the change its election only with prior contract) rather than the apparent or Board-regulated institution posting cash approval of the Board. stated notional principal amount in collateral to the QCCP in connection (2) Advanced approaches Board- calculating PFE. with a cleared transaction that meets the regulated institution. An advanced (E) The PFE of the protection provider requirements of § 217.35(b)(3)(i)(A) and approaches Board-regulated institution of a credit derivative is capped at the a 4 percent risk weight to an exposure must calculate the exposure amount for net present value of the amount of to a QCCP arising from the Board- all its derivative contracts using SA– unpaid premiums.

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TABLE 1 TO § 217.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1

Credit Credit (non- Foreign (investment Precious 2 investment- Remaining maturity Interest rate exchange grade grade Equity metals Other rate and gold reference (except gold) 3 reference asset) 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 equal to five years ...... 0.005 0.05 0.05 0.10 0.08 0.07 0.12 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 (2) As an alternative to the simple that this treatment is applied subject to a qualifying master netting approach, a Board-regulated institution consistently for all such credit agreement. Except as modified by using CEM under paragraph (b) of this derivatives. The Board-regulated paragraph (c) of this section, the section may recognize the credit risk institution must either include all or exposure amount for multiple OTC mitigation benefits of financial collateral exclude all such credit derivatives that derivative contracts subject to a that secures such a contract or netting are subject to a qualifying master netting qualifying master netting agreement is set if the financial collateral is marked- agreement from any measure used to equal to the sum of the net current to-fair value on a daily basis and subject determine counterparty credit risk credit exposure and the adjusted sum of to a daily margin maintenance exposure. the PFE amounts for all OTC derivative requirement by applying a risk weight to (ii) The provisions of this paragraph contracts subject to the qualifying the uncollateralized portion of the (d)(2) apply to all relevant master netting agreement. exposure, after adjusting the exposure counterparties for risk-based capital (i) Net current credit exposure. The amount calculated under paragraph purposes unless the Board-regulated net current credit exposure is the greater (b)(1) or (2) of this section using the institution is treating the credit of the net sum of all positive and collateral haircut approach in derivative as a covered position under negative fair values of the individual § 217.37(c). The Board-regulated subpart F of this part, in which case the OTC derivative contracts subject to the institution must substitute the exposure Board-regulated institution must qualifying master netting agreement or amount calculated under paragraph compute a supplemental counterparty zero. (b)(1) or (2) of this section for SE in the credit risk capital requirement under (ii) Adjusted sum of the PFE amounts. equation in § 217.37(c)(2). this section. The adjusted sum of the PFE amounts, (d) Counterparty credit risk for credit (e) Counterparty credit risk for equity Anet, is calculated as Anet = (0.4 × derivatives—(1) Protection purchasers. derivatives. (1) A Board-regulated Agross) + (0.6 × NGR × Agross), where: A Board-regulated institution that institution must treat an equity (A) Agross = the gross PFE (that is, the purchases a credit derivative that is derivative contract as an equity sum of the PFE amounts as determined recognized under § 217.36 as a credit exposure and compute a risk-weighted under paragraph (b)(1)(ii) of this section risk mitigant for an exposure that is not asset amount for the equity derivative for each individual derivative contract a covered position under subpart F of contract under §§ 217.51 through 217.53 subject to the qualifying master netting this part is not required to compute a (unless the Board-regulated institution agreement); and separate counterparty credit risk capital is treating the contract as a covered (B) Net-to-gross Ratio (NGR) = the requirement under this subpart position under subpart F of this part). ratio of the net current credit exposure provided that the Board-regulated (2) In addition, the Board-regulated to the gross current credit exposure. In institution does so consistently for all institution must also calculate a risk- calculating the NGR, the gross current such credit derivatives. The Board- based capital requirement for the credit exposure equals the sum of the regulated institution must either include counterparty credit risk of an equity positive current credit exposures (as all or exclude all such credit derivatives derivative contract under this section if determined under paragraph (b)(1)(i) of that are subject to a qualifying master the Board-regulated institution is this section) of all individual derivative netting agreement from any measure treating the contract as a covered contracts subject to the qualifying used to determine counterparty credit position under subpart F of this part. master netting agreement. risk exposure to all relevant (3) If the Board-regulated institution (c) Recognition of credit risk counterparties for risk-based capital risk weights the contract under the mitigation of collateralized OTC purposes. Simple Risk-Weight Approach (SRWA) derivative contracts. (1) A Board- (2) Protection providers. (i) A Board- in § 217.52, the Board-regulated regulated institution using CEM under regulated institution that is the institution may choose not to hold risk- paragraph (b) of this section may protection provider under a credit based capital against the counterparty recognize the credit risk mitigation derivative must treat the credit credit risk of the equity derivative benefits of financial collateral that derivative as an exposure to the contract, as long as it does so for all secures an OTC derivative contract or underlying reference asset. The Board- such contracts. Where the equity multiple OTC derivative contracts regulated institution is not required to derivative contracts are subject to a subject to a qualifying master netting compute a counterparty credit risk qualified master netting agreement, a agreement (netting set) by using the capital requirement for the credit Board-regulated institution using the simple approach in § 217.37(b). derivative under this subpart, provided SRWA must either include all or

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exclude all of the contracts from any (b) * * * (iv) * * * measure used to determine counterparty (4) * * * (A) TM equals a holding period of credit risk exposure. (i) Notwithstanding any other longer than 10 business days for eligible (f) Clearing member Board-regulated requirements in this section, collateral margin loans and derivative contracts institution’s exposure amount. The posted by a clearing member client other than client-facing derivative exposure amount of a clearing member Board-regulated institution that is held transactions or longer than 5 business Board-regulated institution using CEM by a custodian (in its capacity as days for repo-style transactions and under paragraph (b) of this section for custodian) in a manner that is client-facing derivative transactions; bankruptcy remote from the CCP, a client-facing derivative transaction or * * * * * netting set of client-facing derivative clearing member, and other clearing (C) T equals 10 business days for transactions equals the exposure member clients of the clearing member, S eligible margin loans and derivative amount calculated according to is not subject to a capital requirement contracts other than client-facing paragraph (b)(1) or (2) of this section under this section. derivative transactions or 5 business multiplied by the scaling factor the * * * * * days for repo-style transactions and square root of 1⁄2 (which equals (c) * * * client-facing derivative transactions. 0.707107). If the Board-regulated (3) * * * institution determines that a longer (iii) Notwithstanding paragraphs * * * * * period is appropriate, the Board- (c)(3)(i) and (ii) of this section, a (4) * * * regulated institution must use a larger clearing member Board-regulated (i) * * * scaling factor to adjust for a longer institution may apply a risk weight of (B) The minimum holding period for holding period as follows: zero percent to the trade exposure a repo-style transaction and client- amount for a cleared transaction with a facing derivative transaction is five CCP where the clearing member Board- business days and for an eligible margin regulated institution is acting as a loan and a derivative contract other than financial intermediary on behalf of a a client-facing derivative transaction is clearing member client, the transaction ten business days except for Where H = the holding period greater than offsets another transaction that satisfies or equal to five days. transactions or netting sets for which the requirements set forth in § 217.3(a), paragraph (c)(4)(i)(C) of this section Additionally, the Board may require and the clearing member Board- applies. When a Board-regulated the Board-regulated institution to set a regulated institution is not obligated to institution calculates an own-estimates longer holding period if the Board reimburse the clearing member client in haircut on a TN-day holding period, determines that a longer period is the event of the CCP default. which is different from the minimum appropriate due to the nature, structure, * * * * * holding period for the transaction type, or characteristics of the transaction or is ■ 20. Section 217.37 is amended by the applicable haircut (HM) is calculated commensurate with the risks associated revising paragraphs (c)(3)(iii), using the following square root of time with the transaction. (c)(3)(iv)(A) and (C), (c)(4)(i)(B) formula: ■ 19. Section 217.35 is amended by introductory text, and (c)(4)(i)(B)(1) to * * * * * adding paragraph (a)(3), revising read as follows: (1) T equals 5 for repo-style paragraph (b)(4)(i), and adding M transactions and client-facing derivative paragraph (c)(3)(iii) to read as follows: § 217.37 Collateralized transactions. transactions and 10 for eligible margin * * * * * § 217.35 Cleared transactions. (c) * * * loans and derivative contracts other (a) * * * (3) * * * than client-facing derivative (3) Alternate requirements. (iii) For repo-style transactions and transactions; Notwithstanding any other provision of client-facing derivative transactions, a * * * * * this section, an advanced approaches Board-regulated institution may Board-regulated institution or a Board- multiply the standard supervisory § § 217.134, 217.202, and 217.210 [Amended] regulated institution that is not an haircuts provided in paragraphs (c)(3)(i) advanced approaches Board-regulated and (ii) of this section by the square root ■ 21. For each section listed in the institution and that has elected to use of 1⁄2 (which equals 0.707107). For following table, the footnote number SA–CCR under § 217.34(a)(1) must client-facing derivative transactions, if a listed in the ‘‘Old footnote number’’ apply § 217.133 to its derivative larger scaling factor is applied under column is redesignated as the footnote contracts that are cleared transactions § 217.34(f), the same factor must be used number listed in the ‘‘New footnote rather than this section. to adjust the supervisory haircuts. number’’ column as follows:

Old footnote New footnote Section number number

217.134(d)(3) ...... 30 31 217.202, paragraph (1) introductory text of the definition of ‘‘Covered position’’ ...... 31 32 217.202, paragraph (1)(i) of the definition of ‘‘Covered position’’ ...... 32 33 217.210(e)(1) ...... 33 34

■ 22. Section 217.132 is amended by: ■ c. Revising paragraphs (c) heading and ■ f. In paragraphs (e)(5)(i)(A) and (H), ■ a. Revising paragraphs (b)(2)(ii)(A)(3) (c)(1) and (2) and (5) through (8); removing ‘‘Table 3 to § 217.132’’ and through (5); ■ d. Adding paragraphs (c)(9) through adding in its place ‘‘Table 4 to this ■ b. Adding paragraphs (b)(2)(ii)(A)(6) (11); section’’; and (7); ■ e. Revising paragraph (d)(10)(i);

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■ g. In paragraphs (e)(5)(i)(C) and upward on the basis of a holding period institution must use a 25.0 percent (e)(6)(i)(B), removing ‘‘current exposure longer than ten business days for haircut for market price volatility (Hs). methodology’’ and adding in its place collateral associated with derivative * * * * * ‘‘standardized approach to counterparty contracts (five business days for client- (c) EAD for derivative contracts—(1) credit risk’’ wherever it appears; facing derivative contracts) using the Options for determining EAD. A Board- ■ h. Redesignating Table 3 to § 217.132 formula provided in paragraph regulated institution must determine the following paragraph (e)(5)(ii) as Table 4 (b)(2)(ii)(A)(6) of this section where the EAD for a derivative contract using the to § 217.132; and conditions in this paragraph ■ i. Revising paragraph (e)(6)(viii). standardized approach for counterparty (b)(2)(ii)(A)(5)(i) apply. For collateral credit risk (SA–CCR) under paragraph The revisions and additions read as associated with a derivative contract follows: (c)(5) of this section or using the that is within a netting set that is internal models methodology described § 217.132 Counterparty credit risk of repo- composed of more than 5,000 derivative in paragraph (d) of this section. If a style transactions, eligible margin loans, contracts that are not cleared Board-regulated institution elects to use and OTC derivative contracts. transactions, a Board-regulated SA–CCR for one or more derivative * * * * * institution must use a minimum holding contracts, the exposure amount (b) * * * period of twenty business days. If a determined under SA–CCR is the EAD (2) * * * netting set contains one or more trades for the derivative contract or derivatives (ii) * * * involving illiquid collateral or a contracts. A Board-regulation institution (A) * * * derivative contract that cannot be easily must use the same methodology to (3) For repo-style transactions and replaced, a Board-regulated institution calculate the exposure amount for all its client-facing derivative transactions, a must use a minimum holding period of derivative contracts and may change its Board-regulated institution may twenty business days. election only with prior approval of the multiply the supervisory haircuts (ii) Notwithstanding paragraph provided in paragraphs (b)(2)(ii)(A)(1) Board. A Board-regulated institution (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) and (2) of this section by the square root may reduce the EAD calculated of this section, for collateral associated according to paragraph (c)(5) of this of 1⁄2 (which equals 0.707107). If the Board-regulated institution determines with a derivative contract in a netting section by the credit valuation that a longer holding period is set under which more than two margin adjustment that the Board-regulated appropriate for client-facing derivative disputes that lasted longer than the institution has recognized in its balance transactions, then it must use a larger holding period occurred during the two sheet valuation of any derivative scaling factor to adjust for the longer previous quarters, the minimum holding contracts in the netting set. For holding period pursuant to paragraph period is twice the amount provided purposes of this paragraph (c)(1), the (b)(2)(ii)(A)(6) of this section. under paragraph (b)(2)(ii)(A)(1) or (3) or credit valuation adjustment does not (4) A Board-regulated institution must (b)(2)(ii)(A)(5)(i) of this section. include any adjustments to common adjust the supervisory haircuts upward (6) A Board-regulated institution must equity tier 1 capital attributable to on the basis of a holding period longer adjust the standard supervisory haircuts changes in the fair value of the Board- than ten business days (for eligible upward, pursuant to the adjustments regulated institution’s liabilities that are margin loans) or five business days (for provided in paragraphs (b)(2)(ii)(A)(3) due to changes in its own credit risk repo-style transactions), using the through (5) of this section, using the since the inception of the transaction formula provided in paragraph following formula: with the counterparty. (b)(2)(ii)(A)(6) of this section where the (2) Definitions. For purposes of this conditions in this paragraph paragraph (c) of this section, the (b)(2)(ii)(A)(4) apply. If the number of following definitions apply: trades in a netting set exceeds 5,000 at (i) End date means the last date of the any time during a quarter, a Board- period referenced by an interest rate or regulated institution must adjust the credit derivative contract or, if the supervisory haircuts upward on the derivative contract references another basis of a minimum holding period of Where: instrument, by the underlying twenty business days for the following instrument, except as otherwise quarter (except when a Board-regulated TM equals a holding period of longer than 10 provided in paragraph (c) of this business days for eligible margin loans institution is calculating EAD for a section. cleared transaction under § 217.133). If and derivative contracts other than client-facing derivative transactions or (ii) Start date means the first date of a netting set contains one or more trades the period referenced by an interest rate involving illiquid collateral, a Board- longer than 5 business days for repo- style transactions and client-facing or credit derivative contract or, if the regulated institution must adjust the derivative contract references the value supervisory haircuts upward on the derivative transactions; Hs equals the standard supervisory haircut; of another instrument, by underlying basis of a minimum holding period of instrument, except as otherwise twenty business days. If over the two and Ts equals 10 business days for eligible provided in paragraph (c) of this previous quarters more than two margin margin loans and derivative contracts section. disputes on a netting set have occurred other than client-facing derivative (iii) Hedging set means: that lasted longer than the holding transactions or 5 business days for repo- period, then the Board-regulated (A) With respect to interest rate style transactions and client-facing derivative contracts, all such contracts institution must adjust the supervisory derivative transactions. haircuts upward for that netting set on within a netting set that reference the the basis of a minimum holding period (7) If the instrument a Board-regulated same reference currency; that is at least two times the minimum institution has lent, sold subject to (B) With respect to exchange rate holding period for that netting set. repurchase, or posted as collateral does derivative contracts, all such contracts (5)(i) A Board-regulated institution not meet the definition of financial within a netting set that reference the must adjust the supervisory haircuts collateral, the Board-regulated same currency pair;

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(C) With respect to credit derivative this section, the exposure amount of a agreement under which the contract, all such contracts within a netting set that consists of only sold counterparty is not required to post netting set; options in which the premiums have variation margin, is the greater of: (D) With respect to equity derivative been fully paid by the counterparty to (A) The sum of the fair values (after contracts, all such contracts within a the options and where the options are excluding any valuation adjustments) of netting set; not subject to a variation margin the derivative contracts within the (E) With respect to a commodity agreement is zero. netting set less the sum of the net derivative contract, all such contracts (iv) Notwithstanding the requirements independent collateral amount and the within a netting set that reference one of paragraph (c)(5)(i) of this section, the variation margin amount applicable to of the following commodity categories: exposure amount of a netting set in such derivative contracts; Energy, metal, agricultural, or other which the counterparty is a commercial (B) The sum of the variation margin commodities; end-user is equal to the sum of threshold and the minimum transfer (F) With respect to basis derivative replacement cost, as calculated under contracts, all such contracts within a amount applicable to the derivative paragraph (c)(6) of this section, and the contracts within the netting set less the netting set that reference the same pair potential future exposure of the netting of risk factors and are denominated in net independent collateral amount set, as calculated under paragraph (c)(7) applicable to such derivative contracts; the same currency; or of this section. (G) With respect to volatility or (v) For purposes of the exposure derivative contracts, all such contracts (C) Zero. amount calculated under paragraph within a netting set that reference one (ii) Netting sets not subject to a (c)(5)(i) of this section and all of interest rate, exchange rate, credit, variation margin agreement under calculations that are part of that equity, or commodity risk factors, which the counterparty must post exposure amount, a Board-regulated separated according to the requirements variation margin. The replacement cost institution may elect to treat a derivative under paragraphs (c)(2)(iii)(A) through of a netting set that is not subject to a (E) of this section. contract that is a cleared transaction that variation margin agreement under (H) If the risk of a derivative contract is not subject to a variation margin which the counterparty must post materially depends on more than one of agreement as one that is subject to a variation margin to the Board-regulated interest rate, exchange rate, credit, variation margin agreement, if the institution is the greater of: derivative contract is subject to a equity, or commodity risk factors, the (A) The sum of the fair values (after requirement that the counterparties Board may require a Board-regulated excluding any valuation adjustments) of make daily cash payments to each other institution to include the derivative the derivative contracts within the to account for changes in the fair value contract in each appropriate hedging set netting set less the sum of the net of the derivative contract and to reduce under paragraphs (c)(1)(iii)(A) through independent collateral amount and the net position of the contract to zero. (E) of this section. variation margin amount applicable to If a Board-regulated institution makes * * * * * such derivative contracts; or an election under this paragraph (5) Exposure amount. (i) The exposure (B) Zero. amount of a netting set, as calculated (c)(5)(v) for one derivative contract, it must treat all other derivative contracts (iii) Multiple netting sets subject to a under paragraph (c) of this section, is single variation margin agreement. equal to 1.4 multiplied by the sum of within the same netting set that are eligible for an election under this Notwithstanding paragraphs (c)(6)(i) the replacement cost of the netting set, and (ii) of this section, the replacement as calculated under paragraph (c)(6) of paragraph (c)(5)(v) as derivative contracts that are subject to a variation cost for multiple netting sets subject to this section, and the potential future a single variation margin agreement exposure of the netting set, as calculated margin agreement. (vi) For purposes of the exposure must be calculated according to under paragraph (c)(7) of this section. paragraph (c)(10)(i) of this section. (ii) Notwithstanding the requirements amount calculated under paragraph of paragraph (c)(5)(i) of this section, the (c)(5)(i) of this section and all (iv) Netting set subject to multiple exposure amount of a netting set subject calculations that are part of that variation margin agreements or a hybrid to a variation margin agreement, exposure amount, a Board-regulated netting set. Notwithstanding paragraphs excluding a netting set that is subject to institution may elect to treat a credit (c)(6)(i) and (ii) of this section, the a variation margin agreement under derivative contract, equity derivative replacement cost for a netting set subject which the counterparty to the variation contract, or commodity derivative to multiple variation margin agreements margin agreement is not required to post contract that references an index as if it or a hybrid netting set must be variation margin, is equal to the lesser were multiple derivative contracts each calculated according to paragraph of the exposure amount of the netting referencing one component of the index. (c)(11)(i) of this section. set calculated under paragraph (c)(5)(i) (6) Replacement cost of a netting set— (7) Potential future exposure of a of this section and the exposure amount (i) Netting set subject to a variation netting set. The potential future of the netting set calculated under margin agreement under which the exposure of a netting set is the product paragraph (c)(5)(i) of this section as if counterparty must post variation of the PFE multiplier and the aggregated the netting set were not subject to a margin. The replacement cost of a amount. variation margin agreement. netting set subject to a variation margin (i) PFE multiplier. The PFE multiplier (iii) Notwithstanding the agreement, excluding a netting set that is calculated according to the following requirements of paragraph (c)(5)(i) of is subject to a variation margin formula:

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Where: Notwithstanding paragraphs (c)(7)(i) under § 217.10(c)(4)(ii)(B)(2), the V is the sum of the fair values (after and (ii) of this section and when potential future exposure for a netting excluding any valuation adjustments) of calculating the potential future exposure set subject to multiple variation margin the derivative contracts within the for purposes of total leverage exposure agreements or a hybrid netting set must netting set; under § 217.10(c)(4)(ii)(B)(2), the be calculated according to paragraph C is the sum of the net independent collateral amount and the variation margin amount potential future exposure for multiple (c)(11)(ii) of this section. netting sets subject to a single variation applicable to the derivative contracts (8) Hedging set amount—(i) Interest margin agreement must be calculated within the netting set; and rate derivative contracts. To calculate according to paragraph (c)(10)(ii) of this A is the aggregated amount of the netting set. the hedging set amount of an interest section. (ii) Aggregated amount. The rate derivative contract hedging set, a aggregated amount is the sum of all (iv) Netting set subject to multiple Board-regulated institution may use hedging set amounts, as calculated variation margin agreements or a hybrid either of the formulas provided in under paragraph (c)(8) of this section, netting set. Notwithstanding paragraphs paragraphs (c)(8)(i)(A) and (B) of this within a netting set. (c)(7)(i) and (ii) of this section and when section: (iii) Multiple netting sets subject to a calculating the potential future exposure single variation margin agreement. for purposes of total leverage exposure (A) Formula 1 is as follows:

(B) Formula 2 is as follows: calculated under paragraph (c)(9) of this hedging set amount equals the absolute IR section, within the hedging set with an Hedging set amount = |AddOn TB1| + value of the sum of the adjusted IR IR end date of one to five years from the |AddOn TB2| + |AddOn TB3|. derivative contract amounts, as present date; and Where in paragraphs (c)(8)(i)(A) and (B) of IR calculated under paragraph (c)(9) of this AddOn TB3 is the sum of the adjusted this section: derivative contract amounts, as section, within the hedging set. IR AddOn TB1 is the sum of the adjusted calculated under paragraph (c)(9) of this (iii) Credit derivative contracts and derivative contract amounts, as section, within the hedging set with an equity derivative contracts. The hedging calculated under paragraph (c)(9) of this end date of more than five years from the set amount of a credit derivative section, within the hedging set with an present date. end date of less than one year from the contract hedging set or equity derivative present date; (ii) Exchange rate derivative contract hedging set within a netting set IR AddOn TB2 is the sum of the adjusted contracts. For an exchange rate is calculated according to the following derivative contract amounts, as derivative contract hedging set, the formula:

Where: determined under paragraph (c)(9) of this (iv) Commodity derivative contracts. k is each reference entity within the hedging section, for all derivative contracts The hedging set amount of a commodity set. within the hedging set that reference derivative contract hedging set within a K is the number of reference entities within reference entity k. netting set is calculated according to the rk equals the applicable supervisory the hedging set. following formula: AddOn(Refk) equals the sum of the adjusted correlation factor, as provided in Table 2 derivative contract amounts, as to this section.

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Where: separate hedging set amount for each notional amount by each of the k is each commodity type within the hedging basis derivative contract hedging set and supervisory delta adjustment, pursuant set. each volatility derivative contract to paragraph (c)(9)(iii) of this section, K is the number of commodity types within hedging set. A Board-regulated the maturity factor, pursuant to the hedging set. institution must calculate such hedging paragraph (c)(9)(iv) of this section, and AddOn(Typek) equals the sum of the adjusted derivative contract amounts, as set amounts using one of the formulas the applicable supervisory factor, as determined under paragraph (c)(9) of this under paragraphs (c)(8)(i) through (iv) provided in Table 2 to this section. that corresponds to the primary risk section, for all derivative contracts (ii) Adjusted notional amount. (A)(1) within the hedging set that reference factor of the hedging set being reference commodity type. calculated. For an interest rate derivative contract r equals the applicable supervisory (9) Adjusted derivative contract or a credit derivative contract, the correlation factor, as provided in Table 2 amount—(i) Summary. To calculate the adjusted notional amount equals the to this section. adjusted derivative contract amount of a product of the notional amount of the (v) Basis derivative contracts and derivative contract, a Board-regulated derivative contract, as measured in U.S. volatility derivative contracts. institution must determine the adjusted dollars using the exchange rate on the Notwithstanding paragraphs (c)(8)(i) notional amount of derivative contract, date of the calculation, and the through (iv) of this section, a Board- pursuant to paragraph (c)(9)(ii) of this supervisory duration, as calculated by regulated institution must calculate a section, and multiply the adjusted the following formula:

Where: denominated currency leg of the the number of such units referenced by S is the number of business days from the derivative contract, as measured in U.S. the derivative contract. present day until the start date of the dollars using the exchange rate on the (2) Notwithstanding paragraph derivative contract, or zero if the start date of the calculation. If both legs of (c)(9)(ii)(C)(1) of this section, when date has already passed; and the exchange rate derivative contract are calculating the adjusted notional E is the number of business days from the denominated in currencies other than amount for an equity derivative contract present day until the end date of the or a commodity derivative contract that derivative contract. U.S. dollars, the adjusted notional amount of the derivative contract is the is a volatility derivative contract, the (2) For purposes of paragraph largest leg of the derivative contract, as Board-regulated institution must replace (c)(9)(ii)(A)(1) of this section: measured in U.S. dollars using the the unit price with the underlying (i) For an interest rate derivative exchange rate on the date of the volatility referenced by the volatility contract or credit derivative contract calculation. derivative contract and replace the that is a variable notional swap, the (2) Notwithstanding paragraph number of units with the notional notional amount is equal to the time- amount of the volatility derivative (c)(9)(ii)(B)(1) of this section, for an weighted average of the contractual contract. exchange rate derivative contract with notional amounts of such a swap over (iii) Supervisory delta adjustments. the remaining life of the swap; and multiple exchanges of principal, the (A) For a derivative contract that is not (ii) For an interest rate derivative Board-regulated institution must set the an option contract or collateralized debt contract or a credit derivative contract adjusted notional amount of the obligation tranche, the supervisory delta that is a leveraged swap, in which the derivative contract equal to the notional adjustment is 1 if the fair value of the notional amount of all legs of the amount of the derivative contract derivative contract increases when the derivative contract are divided by a multiplied by the number of exchanges value of the primary risk factor factor and all rates of the derivative of principal under the derivative increases and ¥1 if the fair value of the contract are multiplied by the same contract. derivative contract decreases when the factor, the notional amount is equal to (C)(1) For an equity derivative value of the primary risk factor the notional amount of an equivalent contract or a commodity derivative increases. unleveraged swap. contract, the adjusted notional amount (B)(1) For a derivative contract that is (B)(1) For an exchange rate derivative is the product of the fair value of one an option contract, the supervisory delta contract, the adjusted notional amount unit of the reference instrument adjustment is determined by the is the notional amount of the non-U.S. underlying the derivative contract and following formulas, as applicable:

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(2) As used in the formulas in Table (v) l equals zero for all derivative regulated institution has with all 2 to this section: contracts except interest rate options for counterparties. Then, l is set according (i) F is the standard normal the currencies where interest rates have to this formula: l = max{¥L + 0.1%, 0}; cumulative distribution function; negative values. The same value of l and (ii) P equals the current fair value of must be used for all interest rate options (vi) s equals the supervisory option the instrument or risk factor, as that are denominated in the same volatility, as provided in Table 3 to this applicable, underlying the option; currency. To determine the value of l (iii) K equals the strike price of the section. for a given currency, a Board-regulated option; (C)(1) For a derivative contract that is (iv) T equals the number of business institution must find the lowest value L a collateralized debt obligation tranche, days until the latest contractual exercise of P and K of all interest rate options in the supervisory delta adjustment is date of the option; a given currency that the Board- determined by the following formula:

(2) As used in the formula in negative sign if the collateralized debt margining expressed in business days paragraph (c)(9)(iii)(C)(1) of this section: obligation tranche was sold by the minus one business day; (i) A is the attachment point, which Board-regulated institution. (ii) For a derivative contract that is a equals the ratio of the notional amounts (iv) Maturity factor. (A)(1) The client-facing derivative transaction, of all underlying exposures that are maturity factor of a derivative contract cannot be less than five business days subordinated to the Board-regulated that is subject to a variation margin plus the periodicity of re-margining institution’s exposure to the total agreement, excluding derivative expressed in business days minus one notional amount of all underlying contracts that are subject to a variation business day; and exposures, expressed as a decimal value margin agreement under which the between zero and one; 30 (iii) For a derivative contract that is (ii) D is the detachment point, which counterparty is not required to post within a netting set that is composed of equals one minus the ratio of the variation margin, is determined by the more than 5,000 derivative contracts notional amounts of all underlying following formula: that are not cleared transactions, or a exposures that are senior to the Board- netting set that contains one or more regulated institution’s exposure to the trades involving illiquid collateral or a total notional amount of all underlying derivative contract that cannot be easily exposures, expressed as a decimal value replaced, MPOR cannot be less than between zero and one; and Where MPOR refers to the period twenty business days. (iii) The resulting amount is from the most recent exchange of (3) Notwithstanding paragraphs designated with a positive sign if the collateral covering a netting set of (c)(9)(iv)(A)(1) and (2) of this section, for collateralized debt obligation tranche derivative contracts with a defaulting a netting set subject to two or more was purchased by the Board-regulated counterparty until the derivative outstanding disputes over margin that institution and is designated with a contracts are closed out and the lasted longer than the MPOR over the resulting market risk is re-hedged. previous two quarters, the applicable 30 In the case of a first-to-default credit derivative, (2) Notwithstanding paragraph floor is twice the amount provided in there are no underlying exposures that are subordinated to the Board-regulated institution’s (c)(9)(iv)(A)(1) of this section: (c)(9)(iv)(A)(1) and (2) of this section. exposure. In the case of a second-or-subsequent-to- (i) For a derivative contract that is not (B) The maturity factor of a derivative default credit derivative, the smallest (n¥1) notional amounts of the underlying exposures are a client-facing derivative transaction, contract that is not subject to a variation subordinated to the Board-regulated institution’s MPOR cannot be less than ten business margin agreement, or derivative exposure. days plus the periodicity of re- contracts under which the counterparty

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is not required to post variation margin, Board-regulated institution may and at least one derivative contract that is determined by the following formula: represent each payment option as a is not subject to such a variation margin combination of effective single-payment agreement, the calculation for options (such as interest rate caplets and replacement cost is provided under floorlets). paragraph (c)(6)(i) of this section, except (D) A Board-regulated institution may that the variation margin threshold Where M equals the greater of 10 not decompose linear derivative equals the sum of the variation margin business days and the remaining contracts (such as swaps) into thresholds of all variation margin maturity of the contract, as measured in components. agreements within the netting set and business days. (10) Multiple netting sets subject to a the minimum transfer amount equals (C) For purposes of paragraph single variation margin agreement—(i) the sum of the minimum transfer (c)(9)(iv) of this section, if a Board- Calculating replacement cost. amounts of all the variation margin regulated institution has elected Notwithstanding paragraph (c)(6) of this agreements within the netting set. pursuant to paragraph (c)(5)(v) of this section, a Board-regulated institution (ii) Calculating potential future section to treat a derivative contract that shall assign a single replacement cost to exposure. (A) To calculate potential is a cleared transaction that is not multiple netting sets that are subject to future exposure for a netting set subject subject to a variation margin agreement a single variation margin agreement to multiple variation margin agreements as one that is subject to a variation under which the counterparty must post under which the counterparty to each margin agreement, the Board-regulated variation margin, calculated according variation margin agreement must post institution must treat the derivative to the following formula: variation margin, or a netting set contract as subject to a variation margin Replacement Cost = max{SNSmax{VNS; composed of at least one derivative agreement with maturity factor as 0} ¥ max{CMA; 0}; 0} + contract subject to variation margin determined according to (c)(9)(iv)(A) of max{SNSmin{VNS; 0} ¥ min{CMA; agreement under which the this section, and daily settlement does 0}; 0} counterparty to the derivative contract not change the end date of the period must post variation margin and at least referenced by the derivative contract. Where: NS is each netting set subject to the variation one derivative contract that is not (v) Derivative contract as multiple subject to such a variation margin effective derivative contracts. A Board- margin agreement MA; VNS is the sum of the fair values (after agreement, a Board-regulated institution regulated institution must separate a excluding any valuation adjustments) of must divide the netting set into sub- derivative contract into separate the derivative contracts within the netting sets (as described in paragraph derivative contracts, according to the netting set NS; and (c)(11)(ii)(B) of this section) and following rules: CMA is the sum of the net independent calculate the aggregated amount for each (A) For an option where the collateral amount and the variation sub-netting set. The aggregated amount counterparty pays a predetermined margin amount applicable to the for the netting set is calculated as the derivative contracts within the netting amount if the value of the underlying sum of the aggregated amounts for the asset is above or below the strike price sets subject to the single variation margin agreement. sub-netting sets. The multiplier is and nothing otherwise (binary option), calculated for the entire netting set. the option must be treated as two (ii) Calculating potential future (B) For purposes of paragraph separate options. For purposes of exposure. Notwithstanding paragraph (c)(11)(ii)(A) of this section, the netting paragraph (c)(9)(iii)(B) of this section, a (c)(5) of this section, a Board-regulated set must be divided into sub-netting sets binary option with strike K must be institution shall assign a single potential as follows: represented as the combination of one future exposure to multiple netting sets bought European option and one sold that are subject to a single variation (1) All derivative contracts within the European option of the same type as the margin agreement under which the netting set that are not subject to a original option (put or call) with the counterparty must post variation margin variation margin agreement or that are strikes set equal to 0.95 * K and 1.05 * equal to the sum of the potential future subject to a variation margin agreement K so that the payoff of the binary option exposure of each such netting set, each under which the counterparty is not is reproduced exactly outside the region calculated according to paragraph (c)(7) required to post variation margin form between the two strikes. The absolute of this section as if such nettings sets a single sub-netting set. The aggregated value of the sum of the adjusted were not subject to a variation margin amount for this sub-netting set is derivative contract amounts of the agreement. calculated as if the netting set is not bought and sold options is capped at the (11) Netting set subject to multiple subject to a variation margin agreement. payoff amount of the binary option. variation margin agreements or a hybrid (2) All derivative contracts within the (B) For a derivative contract that can netting set—(i) Calculating replacement netting set that are subject to variation be represented as a combination of cost. To calculate replacement cost for margin agreements in which the standard option payoffs (such as collar, either a netting set subject to multiple counterparty must post variation margin butterfly spread, calendar spread, variation margin agreements under and that share the same value of the straddle, and strangle), a Board- which the counterparty to each MPOR form a single sub-netting set. The regulated institution must treat each variation margin agreement must post aggregated amount for this sub-netting standard option component as a variation margin, or a netting set set is calculated as if the netting set is separate derivative contract. composed of at least one derivative subject to a variation margin agreement, (C) For a derivative contract that contract subject to variation margin using the MPOR value shared by the includes multiple-payment options, agreement under which the derivative contracts within the netting (such as interest rate caps and floors), a counterparty must post variation margin set.

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TABLE 3 TO § 217.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS

Supervisory Supervisory option correlation Supervisory Asset class Category Type factor 1 volatility factor (percent) (percent) (percent)

Interest rate ...... N/A ...... N/A ...... 50 N/A 0.50 Exchange rate ...... N/A ...... N/A ...... 15 N/A 4.0 Credit, single name ...... Investment grade ...... N/A ...... 100 50 0.46 Speculative grade ...... N/A ...... 100 50 1.3 Sub-speculative grade ...... N/A ...... 100 50 6.0 Credit, index ...... Investment Grade ...... N/A ...... 80 80 0.38 Speculative Grade ...... N/A ...... 80 80 1.06 Equity, single name ...... N/A ...... N/A ...... 120 50 32 Equity, index ...... N/A ...... N/A ...... 75 80 20 Commodity ...... Energy ...... Electricity ...... 150 40 40 Other ...... 70 40 18 Metals ...... N/A ...... 70 40 18 Agricultural ...... N/A ...... 70 40 18 Other ...... N/A ...... 70 40 18 1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table 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) * * * calculation of CVA with the maturity (ii) A clearing member client Board- (10) * * * equal to the maximum of: regulated institution’s total risk- (i) With prior written approval of the (A) Half of the longest maturity of a weighted assets for cleared transactions Board, a Board-regulated institution transaction in the netting set; and is the sum of the risk-weighted asset may set EAD equal to a measure of (B) The notional weighted average amounts for all of its cleared counterparty credit risk exposure, such maturity of all transactions in the transactions. as peak EAD, that is more conservative netting set. (2) Trade exposure amount. (i) For a than an alpha of 1.4 times the larger of cleared transaction that is a derivative ■ 23. Section 217.133 is amended by EPEunstressed and EPEstressed for every contract or a netting set of derivative counterparty whose EAD will be revising paragraphs (a), (b)(1) through contracts, trade exposure amount equals measured under the alternative measure (3), (b)(4)(i), (c)(1) through (3), (c)(4)(i), the EAD for the derivative contract or of counterparty exposure. The Board- and (d) to read as follows: netting set of derivative contracts regulated institution must demonstrate § 217.133 Cleared transactions. calculated using the methodology used the conservatism of the measure of to calculate EAD for derivative contracts (a) General requirements—(1) counterparty credit risk exposure used set forth in § 217.132(c) or (d), plus the Clearing member clients. A Board- for EAD. With respect to paragraph fair value of the collateral posted by the regulated institution that is a clearing (d)(10)(i) of this section: clearing member client Board-regulated member client must use the (A) For material portfolios of new institution and held by the CCP or a methodologies described in paragraph OTC derivative products, the Board- clearing member in a manner that is not (b) of this section to calculate risk- regulated institution may assume that bankruptcy remote. When the Board- the standardized approach for weighted assets for a cleared regulated institution calculates EAD for counterparty credit risk pursuant to transaction. the cleared transaction using the paragraph (c) of this section meets the (2) Clearing members. A Board- methodology in § 217.132(d), EAD regulated institution that is a clearing conservatism requirement of this section equals EADunstressed. for a period not to exceed 180 days. member must use the methodologies (ii) For a cleared transaction that is a (B) For immaterial portfolios of OTC described in paragraph (c) of this repo-style transaction or netting set of derivative contracts, the Board-regulated section to calculate its risk-weighted repo-style transactions, trade exposure institution generally may assume that assets for a cleared transaction and amount equals the EAD for the repo- the standardized approach for paragraph (d) of this section to calculate style transaction calculated using the counterparty credit risk pursuant to its risk-weighted assets for its default methodology set forth in § 217.132(b)(2) paragraph (c) of this section meets the fund contribution to a CCP. or (3) or (d), plus the fair value of the conservatism requirement of this (b) * * * collateral posted by the clearing member section. (1) Risk-weighted assets for cleared client Board-regulated institution and * * * * * transactions. (i) To determine the risk- held by the CCP or a clearing member (e) * * * weighted asset amount for a cleared in a manner that is not bankruptcy (6) * * * transaction, a Board-regulated remote. When the Board-regulated (viii) If a Board-regulated institution institution that is a clearing member institution calculates EAD for the uses the standardized approach for client must multiply the trade exposure cleared transaction under § 217.132(d), counterparty credit risk pursuant to amount for the cleared transaction, EAD equals EADunstressed. paragraph (c) of this section to calculate calculated in accordance with paragraph (3) Cleared transaction risk weights. the EAD for any immaterial portfolios of (b)(2) of this section, by the risk weight (i) For a cleared transaction with a OTC derivative contracts, the Board- appropriate for the cleared transaction, QCCP, a clearing member client Board- regulated institution must use that EAD determined in accordance with regulated institution must apply a risk as a constant EE in the formula for the paragraph (b)(3) of this section. weight of:

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(A) 2 percent if the collateral posted (ii) A clearing member Board- offsets another transaction that satisfies by the Board-regulated institution to the regulated institution’s total risk- the requirements set forth in § 217.3(a), QCCP or clearing member is subject to weighted assets for cleared transactions and the clearing member Board- an arrangement that prevents any loss to is the sum of the risk-weighted asset regulated institution is not obligated to the clearing member client Board- amounts for all of its cleared reimburse the clearing member client in regulated institution due to the joint transactions. the event of the QCCP default. default or a concurrent insolvency, (2) Trade exposure amount. A (4) * * * liquidation, or receivership proceeding clearing member Board-regulated (i) Notwithstanding any other of the clearing member and any other institution must calculate its trade requirement of this section, collateral clearing member clients of the clearing exposure amount for a cleared posted by a clearing member Board- member; and the clearing member client transaction as follows: regulated institution that is held by a Board-regulated institution has (i) For a cleared transaction that is a custodian (in its capacity as a custodian) conducted sufficient legal review to derivative contract or a netting set of in a manner that is bankruptcy remote conclude with a well-founded basis derivative contracts, trade exposure from the CCP, clearing member, and (and maintains sufficient written amount equals the EAD calculated using other clearing member clients of the documentation of that legal review) that the methodology used to calculate EAD clearing member, is not subject to a in the event of a legal challenge for derivative contracts set forth in capital requirement under this section. § 217.132(c) or (d), plus the fair value of (including one resulting from an event * * * * * of default or from liquidation, the collateral posted by the clearing (d) Default fund contributions—(1) insolvency, or receivership proceedings) member Board-regulated institution and General requirement. A clearing the relevant court and administrative held by the CCP in a manner that is not member Board-regulated institution authorities would find the arrangements bankruptcy remote. When the clearing must determine the risk-weighted asset to be legal, valid, binding, and member Board-regulated institution amount for a default fund contribution enforceable under the law of the calculates EAD for the cleared to a CCP at least quarterly, or more relevant jurisdictions. transaction using the methodology in frequently if, in the opinion of the (B) 4 percent, if the requirements of § 217.132(d), EAD equals EADunstressed. paragraph (b)(3)(i)(A) of this section are (ii) For a cleared transaction that is a Board-regulated institution or the Board, not met. repo-style transaction or netting set of there is a material change in the (ii) For a cleared transaction with a repo-style transactions, trade exposure financial condition of the CCP. CCP that is not a QCCP, a clearing amount equals the EAD calculated (2) Risk-weighted asset amount for member client Board-regulated under § 217.132(b)(2) or (3) or (d), plus default fund contributions to institution must apply the risk weight the fair value of the collateral posted by nonqualifying CCPs. A clearing member applicable to the CCP under subpart D the clearing member Board-regulated Board-regulated institution’s risk- of this part. institution and held by the CCP in a weighted asset amount for default fund (4) * * * manner that is not bankruptcy remote. contributions to CCPs that are not (i) Notwithstanding any other When the clearing member Board- QCCPs equals the sum of such default requirement of this section, collateral regulated institution calculates EAD for fund contributions multiplied by 1,250 posted by a clearing member client the cleared transaction under percent, or an amount determined by the Board, based on factors such as size, Board-regulated institution that is held § 217.132(d), EAD equals EADunstressed. by a custodian (in its capacity as a (3) Cleared transaction risk weights. structure, and membership custodian) in a manner that is (i) A clearing member Board-regulated characteristics of the CCP and riskiness bankruptcy remote from the CCP, institution must apply a risk weight of of its transactions, in cases where such clearing member, and other clearing 2 percent to the trade exposure amount default fund contributions may be member clients of the clearing member, for a cleared transaction with a QCCP. unlimited. is not subject to a capital requirement (ii) For a cleared transaction with a (3) Risk-weighted asset amount for under this section. CCP that is not a QCCP, a clearing default fund contributions to QCCPs. A * * * * * member Board-regulated institution clearing member Board-regulated (c) * * * must apply the risk weight applicable to institution’s risk-weighted asset amount (1) Risk-weighted assets for cleared the CCP according to subpart D of this for default fund contributions to QCCPs transactions. (i) To determine the risk- part. equals the sum of its capital weighted asset amount for a cleared (iii) Notwithstanding paragraphs requirement, KCM for each QCCP, as transaction, a clearing member Board- (c)(3)(i) and (ii) of this section, a calculated under the methodology set regulated institution must multiply the clearing member Board-regulated forth in paragraph (d)(4) of this section, trade exposure amount for the cleared institution may apply a risk weight of multiplied by 12.5. transaction, calculated in accordance zero percent to the trade exposure (4) Capital requirement for default with paragraph (c)(2) of this section by amount for a cleared transaction with a fund contributions to a QCCP. A the risk weight appropriate for the QCCP where the clearing member clearing member Board-regulated cleared transaction, determined in Board-regulated institution is acting as a institution’s capital requirement for its accordance with paragraph (c)(3) of this financial intermediary on behalf of a default fund contribution to a QCCP section. clearing member client, the transaction (KCM) is equal to:

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Where: provided to the CCP with respect to collateral are held in the same default KCCP is the hypothetical capital requirement performance of a clearing member client fund contribution account, then the of the QCCP, as determined under on a derivative contract, the EAD is EAD of that account is the sum of the paragraph (d)(5) of this section; equal to the exposure amount for all EAD for the client-related transactions pref DF is the prefunded default fund such derivative contracts and guarantees within the account and the EAD of the contribution of the clearing member Board-regulated institution to the QCCP; of derivative contracts calculated under house-related transactions within the DFCCP is the QCCP’s own prefunded amounts SA–CCR in § 217.132(c) (or, with account. For purposes of determining that are contributed to the default respect to a CCP located outside the such EADs, the independent collateral waterfall and are junior or pari passu United States, under a substantially of the clearing member and its client with prefunded default fund identical methodology in effect in the must be allocated in proportion to the contributions of clearing members of the jurisdiction) using a value of 10 respective total amount of independent CCP; and pref business days for purposes of collateral posted by the clearing member DFCM is the total prefunded default fund contributions from clearing members of § 217.132(c)(9)(iv); less the value of all to the QCCP. the QCCP to the QCCP. collateral held by the CCP posted by the (v) If any account or sub-account clearing member Board-regulated contains both derivative contracts and (5) Hypothetical capital requirement institution or a clearing member client of a QCCP. Where a QCCP has provided repo-style transactions, the EAD of that of the Board-regulated institution in account is the sum of the EAD for the its KCCP, a Board-regulated institution connection with a derivative contract derivative contracts within the account must rely on such disclosed figure for which the Board-regulated instead of calculating KCCP under this and the EAD of the repo-style institution has provided a guarantee to transactions within the account. If paragraph (d)(5), unless the Board- the CCP and the amount of the regulated institution determines that a independent collateral is held for an prefunded default fund contribution of account containing both derivative more conservative figure is appropriate the Board-regulated institution to the based on the nature, structure, or contracts and repo-style transactions, CCP. characteristics of the QCCP. The then such collateral must be allocated to (iii) With respect to any repo-style the derivative contracts and repo-style hypothetical capital requirement of a transactions between the Board- QCCP (KCCP), as determined by the transactions in proportion to the regulated institution and the CCP that Board-regulated institution, is equal to: respective product specific exposure are cleared transactions, EAD is equal amounts, calculated, excluding the KCCP = SCM EADi * 1.6 percent i to: effects of collateral, according to Where: EAD = max{EBRM¥IM¥DF; 0} § 217.132(b) for repo-style transactions CMi is each clearing member of the QCCP; Where: and to § 217.132(c)(5) for derivative and contracts. EADi is the exposure amount of each clearing EBRM is the sum of the exposure amounts of member of the QCCP to the QCCP, as each repo-style transaction between the (vi) Notwithstanding any other determined under paragraph (d)(6) of Board-regulated institution and the CCP provision of paragraph (d) of this this section. as determined under § 217.132(b)(2) and section, with the prior approval of the without recognition of any collateral Board, a Board-regulated institution (6) EAD of a clearing member Board- securing the repo-style transactions; regulated institution to a QCCP. (i) The IM is the initial margin collateral posted by may determine the risk-weighted asset EAD of a clearing member Board- the Board-regulated institution to the amount for a default fund contribution regulated institution to a QCCP is equal CCP with respect to the repo-style to a QCCP according to to the sum of the EAD for derivative transactions; and § 217.35(d)(3)(ii). DF is the prefunded default fund contracts determined under paragraph ■ contribution of the Board-regulated 24. Section 217.173 is amended in (d)(6)(ii) of this section and the EAD for Table 13 to § 217.173 by revising line 4 repo-style transactions determined institution to the CCP that is not already deducted in § 217.133(d)(6)(ii). under Part 2, Derivative exposures, to under paragraph (d)(6)(iii) of this read as follows: section. (iv) EAD must be calculated (ii) With respect to any derivative separately for each clearing member’s § 217.173 Disclosures by certain advanced contracts between the Board-regulated sub-client accounts and sub-house approaches Board-regulated institutions institution and the CCP that are cleared account (i.e., for the clearing member’s and Category III Board-regulated transactions and any guarantees that the proprietary activities). If the clearing institutions. Board-regulated institution has member’s collateral and its client’s * * * * *

TABLE 13 TO § 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).

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TABLE 13 TO § 217.173—SUPPLEMENTARY LEVERAGE RATIO—Continued

Dollar amounts in thousands Tril Bil Mil Thou

*******

■ 25. Section 217.300 is amended by ■ 27. Section 324.2 is amended by: (ii)(A) Is not an entity described in adding paragraph (h) and (i) to read as ■ a. Adding the definitions of ‘‘Basis section 2(h)(7)(C)(i)(I) through (VIII) of follows: derivative contract,’’ ‘‘Client-facing the Commodity Exchange Act (7 U.S.C. derivative transaction,’’ and 2(h)(7)(C)(i)(I) through (VIII)); or § 217.300 Transitions. ‘‘Commercial end-user’’ in alphabetical (B) Is not a ‘‘financial entity’’ for * * * * * order; purposes of section 2(h)(7) of the (h) SA–CCR. An advanced approaches ■ b. Revising the definition of ‘‘Current Commodity Exchange Act (7 U.S.C. Board-regulated institution may use exposure’’ and ‘‘Current exposure 2(h)) by virtue of section 2(h)(7)(C)(iii) CEM rather than SA–CCR for purposes methodology;’’ of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or of §§ 217.34(a) and 217.132(c) until ■ c. Revising paragraph (2) of the (2)(i) Is using derivative contracts to January 1, 2022. A Board-regulated definition of ‘‘Financial collateral;’’ hedge or mitigate commercial risk; and (ii) Is not an entity described in institution must provide prior notice to ■ d. Adding the definitions of section 3C(g)(3)(A)(i) through (viii) of the Board if it decides to begin using ‘‘Independent collateral,’’ ‘‘Minimum the Securities Exchange Act of 1934 (15 SA–CCR before January 1, 2022. On transfer amount,’’ and ‘‘Net independent U.S.C. 78c–3(g)(3)(A)(i) through (viii)); January 1, 2022, and thereafter, an collateral amount’’ in alphabetical advanced approaches Board-regulated or order; (3) Qualifies for the exemption in institution must use SA–CCR for ■ e. Revising the definition of ‘‘Netting purposes of §§ 217.34(a), 217.132(c), section 2(h)(7)(A) of the Commodity set;’’ and Exchange Act (7 U.S.C. 2(h)(7)(A)) by and 217.135(d). Once an advanced ■ f. Adding the definitions of approaches Board-regulated institution virtue of section 2(h)(7)(D) of the Act (7 ‘‘Speculative grade,’’ ‘‘Sub-speculative U.S.C. 2(h)(7)(D)); or has begun to use SA–CCR, the advanced grade,’’ ‘‘Variation margin,’’ ‘‘Variation approaches Board-regulated institution (4) Qualifies for an exemption in margin agreement,’’ ‘‘Variation margin section 3C(g)(1) of the Securities may not change to use CEM. amount,’’ ‘‘Variation margin threshold,’’ (i) Default fund contributions. Prior to Exchange Act of 1934 (15 U.S.C. 78c– and ‘‘Volatility derivative contract’’ in 3(g)(1)) by virtue of section 3C(g)(4) of January 1, 2022, a Board-regulated alphabetical order. institution that calculates the exposure the Act (15 U.S.C. 78c–3(g)(4)). The additions and revisions read as * * * * * amounts of its derivative contracts follows: under the standardized approach for Current exposure means, with respect counterparty credit risk in § 217.132(c) § 324.2 Definitions. to a netting set, the larger of zero or the fair value of a transaction or portfolio of may calculate the risk-weighted asset * * * * * transactions within the netting set that amount for a default fund contribution Basis derivative contract means a non- would be lost upon default of the to a QCCP under either method 1 under foreign-exchange derivative contract counterparty, assuming no recovery on § 217.35(d)(3)(i) or method 2 under (i.e., the contract is denominated in a the value of the transactions. § 217.35(d)(3)(ii), rather than under single currency) in which the cash flows § 217.133(d). Current exposure methodology means of the derivative contract depend on the the method of calculating the exposure FEDERAL DEPOSIT INSURANCE difference between two risk factors that amount for over-the-counter derivative CORPORATION are attributable solely to one of the contracts in § 324.34(b). following derivative asset classes: For the reasons forth out in the Interest rate, credit, equity, or * * * * * Financial collateral *** preamble, 12 CFR parts 324 and 327 are commodity. amended as set forth below. (2) In which the FDIC-supervised * * * * * institution has a perfected, first-priority PART 324—CAPITAL ADEQUACY OF Client-facing derivative transaction security interest or, outside of the FDIC-SUPERVISED INSTITUTIONS means a derivative contract that is not United States, the legal equivalent a cleared transaction where the FDIC- thereof (with the exception of cash on ■ 26. The authority citation for part 324 supervised institution is either acting as deposit; and notwithstanding the prior continues to read as follows: a financial intermediary and enters into security interest of any custodial agent an offsetting transaction with a Authority: 12 U.S.C. 1815(a), 1815(b), or any priority security interest granted 1816, 1818(a), 1818(b), 1818(c), 1818(t), qualifying central counterparty (QCCP) to a CCP in connection with collateral 1819(Tenth), 1828(c), 1828(d), 1828(i), or where the FDIC-supervised posted to that CCP). 1828(n), 1828(o), 1831o, 1835, 3907, 3909, institution provides a guarantee to the * * * * * 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. QCCP on the performance of a client on Independent collateral means 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. a transaction between the client and a financial collateral, other than variation L. 102–242, 105 Stat. 2236, 2355, as amended QCCP. margin, that is subject to a collateral by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 * * * * * U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. agreement, or in which a FDIC- 2236, 2386, as amended by Pub. L. 102–550, Commercial end-user means an entity supervised institution has a perfected, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); that: first-priority security interest or, outside Pub. L. 111–203, 124 Stat. 1376, 1887 (15 (1)(i) Is using derivative contracts to of the United States, the legal equivalent U.S.C. 78o–7 note). hedge or mitigate commercial risk; and thereof (with the exception of cash on

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deposit; notwithstanding the prior deteriorate the reference entity likely sold or re-hypothecated the securities security interest of any custodial agent would default on its financial received, and, for a FDIC-supervised or any prior security interest granted to commitments. institution that uses the standardized a CCP in connection with collateral * * * * * approach for counterparty credit risk posted to that CCP), and the amount of Variation margin means financial under § 324.132(c) for its standardized which does not change directly in collateral that is subject to a collateral risk-weighted assets, less the fair value response to the value of the derivative agreement provided by one party to its of any derivative contracts; contract or contracts that the financial counterparty to meet the performance of (B)(1) For a FDIC-supervised collateral secures. the first party’s obligations under one or institution that uses the current * * * * * more transactions between the parties as exposure methodology under Minimum transfer amount means the a result of a change in value of such § 324.34(b) for its standardized risk- smallest amount of variation margin that obligations since the last time such weighted assets, the potential future may be transferred between financial collateral was provided. credit exposure (PFE) for each counterparties to a netting set pursuant Variation margin agreement means an derivative contract or each single- to the variation margin agreement. agreement to collect or post variation product netting set of derivative * * * * * margin. contracts (including a cleared Net independent collateral amount Variation margin amount means the transaction except as provided in means the fair value amount of the fair value amount of the variation paragraph (c)(4)(ii)(I) of this section and, independent collateral, as adjusted by margin, as adjusted by the standard at the discretion of the FDIC-supervised the standard supervisory haircuts under supervisory haircuts under institution, excluding a forward § 324.132(b)(2)(ii), as applicable, that a § 324.132(b)(2)(ii), as applicable, that a agreement treated as a derivative counterparty to a netting set has posted counterparty to a netting set has posted contract that is part of a repurchase or to a FDIC-supervised institution less the to a FDIC-supervised institution less the reverse repurchase or a securities fair value amount of the independent fair value amount of the variation borrowing or lending transaction that collateral, as adjusted by the standard margin, as adjusted by the standard qualifies for sales treatment under U.S. supervisory haircuts under supervisory haircuts under GAAP), to which the FDIC-supervised § 324.132(b)(2)(ii), as applicable, posted § 324.132(b)(2)(ii), as applicable, posted institution is a counterparty as by the FDIC-supervised institution to by the FDIC-supervised institution to determined under § 324.34, but without the counterparty, excluding such the counterparty. regard to § 324.34(b), provided that: amounts held in a bankruptcy remote Variation margin threshold means the (i) A FDIC-supervised institution may manner or posted to a QCCP and held amount of credit exposure of a FDIC- choose to exclude the PFE of all credit in conformance with the operational supervised institution to its derivatives or other similar instruments requirements in § 324.3. counterparty that, if exceeded, would through which it provides credit Netting set means a group of require the counterparty to post protection when calculating the PFE transactions with a single counterparty variation margin to the FDIC-supervised under § 324.34, but without regard to that are subject to a qualifying master institution pursuant to the variation § 324.34(b), provided that it does not netting agreement. For derivative margin agreement. adjust the net-to-gross ratio (NGR); and contracts, netting set also includes a Volatility derivative contract means a (ii) A FDIC-supervised institution that single derivative contract between a derivative contract in which the payoff chooses to exclude the PFE of credit FDIC-supervised institution and a single of the derivative contract explicitly derivatives or other similar instruments counterparty. For purposes of the depends on a measure of the volatility through which it provides credit internal model methodology under of an underlying risk factor to the protection pursuant to paragraph § 324.132(d), netting set also includes a derivative contract. (c)(4)(ii)(B)(1) of this section must do so group of transactions with a single * * * * * consistently over time for the counterparty that are subject to a ■ 28. Section 324.10 is amended by calculation of the PFE for all such qualifying cross-product master netting revising paragraphs (c)(4)(ii)(A) through instruments; or agreement and does not include a (C) to read as follows: (2)(i) For a FDIC-supervised transaction: institution that uses the standardized (1) That is not subject to such a master § 324.10 Minimum capital requirements. approach for counterparty credit risk netting agreement; or * * * * * under section § 324.132(c) for its (2) Where the FDIC-supervised (c) * * * standardized risk-weighted assets, the institution has identified specific (4) * * * PFE for each netting set to which the wrong-way risk. (ii) * * * FDIC-supervised institution is a * * * * * (A) The balance sheet carrying value counterparty (including cleared Speculative grade means the reference of all of the FDIC-supervised transactions except as provided in entity has adequate capacity to meet institution’s on-balance sheet assets, paragraph (c)(4)(ii)(I) of this section and, financial commitments in the near term, plus the value of securities sold under at the discretion of the FDIC-supervised but is vulnerable to adverse economic a repurchase transaction or a securities institution, excluding a forward conditions, such that should economic lending transaction that qualifies for agreement treated as a derivative conditions deteriorate, the reference sales treatment under U.S. GAAP, less contract that is part of a repurchase or entity would present an elevated default amounts deducted from tier 1 capital reverse repurchase or a securities risk. under § 324.22(a), (c), and (d), and less borrowing or lending transaction that * * * * * the value of securities received in qualifies for sales treatment under U.S. Sub-speculative grade means the security-for-security repo-style GAAP), as determined under reference entity depends on favorable transactions, where the FDIC-supervised § 324.132(c)(7), in which the term C in economic conditions to meet its institution acts as a securities lender § 324.132(c)(7)(i) equals zero except as financial commitments, such that and includes the securities received in provided in paragraph (c)(4)(ii)(B)(2)(ii) should such economic conditions its on-balance sheet assets but has not of this section, and, for any counterparty

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that is not a commercial end-user, derivative contract and that satisfies the support annex to the qualifying master multiplied by 1.4; and conditions in paragraphs (c)(4)(ii)(C)(3) netting agreement, or in the governing (ii) For purposes of paragraph through (7) of this section, or, in the case rules for a cleared transaction; and (c)(4)(ii)(B)(2)(i) of this section, a FDIC- of a client-facing derivative transaction (7) The derivative contract and the supervised institution may set the value on behalf of a clearing member client, variation margin are governed by a the amount of collateral received from of the term C in § 324.132(c)(7)(i) equal the clearing member client; and qualifying master netting agreement to the amount of collateral posted by a CVMp equals the amount of cash collateral between the legal entities that are the clearing member client of the FDIC- that is posted to a counterparty to a counterparties to the derivative contract supervised institution in connection derivative contract and that has not or by the governing rules for a cleared with the client-facing derivative offset the fair value of the derivative transaction, and the qualifying master transactions within the netting set; contract and that satisfies the conditions netting agreement or the governing rules (C)(1)(i) For a FDIC-supervised in paragraphs (c)(4)(ii)(C)(3) through (7) for a cleared transaction must explicitly institution that uses the current of this section, or, in the case of a client- stipulate that the counterparties agree to exposure methodology under facing derivative transaction on behalf of settle any payment obligations on a net a clearing member client, the amount of § 324.34(b) for its standardized risk- basis, taking into account any variation weighted assets, the amount of cash collateral posted to the clearing member client; margin received or provided under the collateral that is received from a contract if a credit event involving counterparty to a derivative contract (ii) Notwithstanding paragraph either counterparty occurs; and that has offset the mark-to-fair value (c)(4)(ii)(C)(2)(i) of this section, where * * * * * of the derivative asset, or cash collateral multiple netting sets are subject to a that is posted to a counterparty to a single variation margin agreement, a ■ 29. Section 324.32 is amended by derivative contract and that has reduced FDIC-supervised institution must apply revising paragraph (f) to read as follows: the FDIC-supervised institution’s on- the formula for replacement cost § 324.32 General risk weights. balance sheet assets, unless such cash provided in § 324.132(c)(10)(i), in which * * * * * collateral is all or part of variation the term CMA may only include cash (f) Corporate exposures. (1) A FDIC- margin that satisfies the conditions in collateral that satisfies the conditions in supervised institution must assign a 100 paragraphs (c)(4)(ii)(C)(3) through (7) of paragraphs (c)(4)(ii)(C)(3) through (7) of percent risk weight to all its corporate this section; and this section; and (ii) The variation margin is used to (iii) For purposes of paragraph exposures, except as provided in reduce the current credit exposure of (c)(4)(ii)(C)(2)(i), a FDIC-supervised paragraph (f)(2) of this section. (2) A FDIC-supervised institution the derivative contract, calculated as institution must treat a derivative must assign a 2 percent risk weight to described in § 324.34(b), and not the contract that references an index as if it an exposure to a QCCP arising from the PFE; and were multiple derivative contracts each (iii) For the purpose of the calculation referencing one component of the index FDIC-supervised institution posting of the NGR described in if the FDIC-supervised institution cash collateral to the QCCP in § 324.34(b)(2)(ii)(B), variation margin elected to treat the derivative contract as connection with a cleared transaction described in paragraph (c)(4)(ii)(C)(1)(ii) multiple derivative contracts under that meets the requirements of of this section may not reduce the net § 324.132(c)(5)(vi); § 324.35(b)(3)(i)(A) and a 4 percent risk current credit exposure or the gross (3) For derivative contracts that are weight to an exposure to a QCCP arising current credit exposure; or not cleared through a QCCP, the cash from the FDIC-supervised institution (2)(i) For a FDIC-supervised collateral received by the recipient posting cash collateral to the QCCP in institution that uses the standardized counterparty is not segregated (by law, connection with a cleared transaction approach for counterparty credit risk regulation, or an agreement with the that meets the requirements of under § 324.132(c) for its standardized counterparty); § 324.35(b)(3)(i)(B). risk-weighted assets, the replacement (4) Variation margin is calculated and (3) A FDIC-supervised institution cost of each derivative contract or single transferred on a daily basis based on the must assign a 2 percent risk weight to product netting set of derivative mark-to-fair value of the derivative an exposure to a QCCP arising from the contracts to which the FDIC-supervised contract; FDIC-supervised institution posting institution is a counterparty, calculated (5) The variation margin transferred cash collateral to the QCCP in according to the following formula, and, under the derivative contract or the connection with a cleared transaction for any counterparty that is not a governing rules of the CCP or QCCP for that meets the requirements of commercial end-user, multiplied by 1.4: a cleared transaction is the full amount § 324.35(c)(3)(i). Replacement Cost = max{V¥CVMr + that is necessary to fully extinguish the * * * * * ■ CVMp; 0} net current credit exposure to the 30. Section 324.34 is revised to read counterparty of the derivative contracts, as follows: Where: subject to the threshold and minimum V equals the fair value for each derivative transfer amounts applicable to the § 324.34 Derivative contracts. contract or each single-product netting (a) Exposure amount for derivative set of derivative contracts (including a counterparty under the terms of the cleared transaction except as provided in derivative contract or the governing contracts—(1) FDIC-supervised paragraph (c)(4)(ii)(I) of this section and, rules for a cleared transaction; institution that is not an advanced at the discretion of the FDIC-supervised (6) The variation margin is in the form approaches FDIC-supervised institution. institution, excluding a forward of cash in the same currency as the (i) A FDIC-supervised institution that is agreement treated as a derivative currency of settlement set forth in the not an advanced approaches FDIC- contract that is part of a repurchase or derivative contract, provided that for the supervised institution must use the reverse repurchase or a securities purposes of this paragraph current exposure methodology (CEM) borrowing or lending transaction that qualifies for sales treatment under U.S. (c)(4)(ii)(C)(6), currency of settlement described in paragraph (b) of this GAAP); means any currency for settlement section to calculate the exposure CVMr equals the amount of cash collateral specified in the governing qualifying amount for all its OTC derivative received from a counterparty to a master netting agreement and the credit contracts, unless the FDIC-supervised

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institution makes the election provided approaches FDIC-supervised institution derivative contract by the appropriate in paragraph (a)(1)(ii) of this section. must calculate the exposure amount for conversion factor in Table 1 to this (ii) A FDIC-supervised institution that all its derivative contracts using SA– section. is not an advanced approaches FDIC- CCR in § 324.132(c) for purposes of (B) For purposes of calculating either supervised institution may elect to standardized total risk-weighted assets. the PFE under this paragraph (b)(1)(ii) calculate the exposure amount for all its An advanced approaches FDIC- or the gross PFE under paragraph OTC derivative contracts under the supervised institution must apply the standardized approach for counterparty treatment of cleared transactions under (b)(2)(ii)(A) of this section for exchange credit risk (SA–CCR) in § 324.132(c) by § 324.133 to its derivative contracts that rate contracts and other similar notifying the FDIC, rather than are cleared transactions and to all contracts in which the notional calculating the exposure amount for all default fund contributions associated principal amount is equivalent to the its derivative contracts using CEM. A with such derivative contracts for cash flows, notional principal amount is FDIC-supervised institution that elects purposes of standardized total risk- the net receipts to each party falling due under this paragraph (a)(1)(ii) to weighted assets. on each value date in each currency. calculate the exposure amount for its (b) Current exposure methodology (C) For an OTC derivative contract OTC derivative contracts under SA–CCR exposure amount—(1) Single OTC that does not fall within one of the must apply the treatment of cleared derivative contract. Except as modified specified categories in Table 1 to this transactions under § 324.133 to its by paragraph (c) of this section, the section, the PFE must be calculated derivative contracts that are cleared exposure amount for a single OTC using the appropriate ‘‘other’’ transactions and to all default fund derivative contract that is not subject to contributions associated with such a qualifying master netting agreement is conversion factor. derivative contracts, rather than equal to the sum of the FDIC-supervised (D) A FDIC-supervised institution applying § 324.35. A FDIC-supervised institution’s current credit exposure and must use an OTC derivative contract’s institution that is not an advanced potential future credit exposure (PFE) effective notional principal amount (that approaches FDIC-supervised institution on the OTC derivative contract. is, the apparent or stated notional must use the same methodology to (i) Current credit exposure. The principal amount multiplied by any calculate the exposure amount for all its current credit exposure for a single OTC multiplier in the OTC derivative derivative contracts and, if a FDIC- derivative contract is the greater of the contract) rather than the apparent or supervised institution has elected to use fair value of the OTC derivative contract stated notional principal amount in SA–CCR under this paragraph (a)(1)(ii), or zero. calculating PFE. the FDIC-supervised institution may (ii) PFE. (A) The PFE for a single OTC change its election only with prior derivative contract, including an OTC (E) The PFE of the protection provider approval of the FDIC. derivative contract with a negative fair of a credit derivative is capped at the (2) Advanced approaches FDIC- value, is calculated by multiplying the net present value of the amount of supervised institution. An advanced notional principal amount of the OTC unpaid premiums. TABLE 1 TO § 324.34—CONVERSION FACTOR MATRIX FOR DERIVATIVE CONTRACTS 1

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 equal to five years ...... 0.005 0.05 0.05 0.10 0.08 0.07 0.12 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 negative fair values of the individual to the gross current credit exposure. In subject to a qualifying master netting OTC derivative contracts subject to the calculating the NGR, the gross current agreement. Except as modified by qualifying master netting agreement or credit exposure equals the sum of the paragraph (c) of this section, the zero. positive current credit exposures (as exposure amount for multiple OTC (ii) Adjusted sum of the PFE amounts. determined under paragraph (b)(1)(i) of derivative contracts subject to a The adjusted sum of the PFE amounts, this section) of all individual derivative × qualifying master netting agreement is Anet, is calculated as Anet = (0.4 contracts subject to the qualifying × × equal to the sum of the net current Agross) + (0.6 NGR Agross), where: master netting agreement. credit exposure and the adjusted sum of (A) Agross = the gross PFE (that is, the sum of the PFE amounts as determined (c) Recognition of credit risk the PFE amounts for all OTC derivative under paragraph (b)(1)(ii) of this section mitigation of collateralized OTC contracts subject to the qualifying for each individual derivative contract derivative contracts. (1) A FDIC- master netting agreement. subject to the qualifying master netting supervised institution using CEM under (i) Net current credit exposure. The agreement); and paragraph (b) of this section may net current credit exposure is the greater (B) Net-to-gross Ratio (NGR) = the recognize the credit risk mitigation of the net sum of all positive and ratio of the net current credit exposure benefits of financial collateral that

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secures an OTC derivative contract or institution is treating the credit that a longer period is appropriate due multiple OTC derivative contracts derivative as a covered position under to the nature, structure, or subject to a qualifying master netting subpart F of this part, in which case the characteristics of the transaction or is agreement (netting set) by using the FDIC-supervised institution must commensurate with the risks associated simple approach in § 324.37(b). compute a supplemental counterparty with the transaction. (2) As an alternative to the simple credit risk capital requirement under ■ 31. Section 324.35 is amended by approach, a FDIC-supervised institution this section. adding paragraph (a)(3), revising using CEM under paragraph (b) of this (e) Counterparty credit risk for equity paragraph (b)(4)(i), and adding section may recognize the credit risk derivatives. (1) A FDIC-supervised paragraph (c)(3)(iii) to read as follows: mitigation benefits of financial collateral institution must treat an equity that secures such a contract or netting derivative contract as an equity § 324.35 Cleared transactions. set if the financial collateral is marked- exposure and compute a risk-weighted (a) * * * to-fair value on a daily basis and subject asset amount for the equity derivative (3) Alternate requirements. to a daily margin maintenance contract under §§ 324.51 through 324.53 Notwithstanding any other provision of requirement by applying a risk weight to (unless the FDIC-supervised institution this section, an advanced approaches the uncollateralized portion of the is treating the contract as a covered FDIC-supervised institution or a FDIC- exposure, after adjusting the exposure position under subpart F of this part). supervised institution that is not an amount calculated under paragraph (2) In addition, the FDIC-supervised advanced approaches FDIC-supervised (b)(1) or (2) of this section using the institution must also calculate a risk- institution and that has elected to use collateral haircut approach in based capital requirement for the SA–CCR under § 324.34(a)(1) must § 324.37(c). The FDIC-supervised counterparty credit risk of an equity apply § 324.133 to its derivative institution must substitute the exposure derivative contract under this section if contracts that are cleared transactions amount calculated under paragraph the FDIC-supervised institution is rather than this section. (b)(1) or (2) of this section for SE in the treating the contract as a covered (b) * * * equation in § 324.37(c)(2). position under subpart F of this part. (4) * * * (d) Counterparty credit risk for credit (3) If the FDIC-supervised institution (i) Notwithstanding any other derivatives—(1) Protection purchasers. risk weights the contract under the requirements in this section, collateral A FDIC-supervised institution that Simple Risk-Weight Approach (SRWA) posted by a clearing member client purchases a credit derivative that is in § 324.52, the FDIC-supervised FDIC-supervised institution that is held recognized under § 324.36 as a credit institution may choose not to hold risk- by a custodian (in its capacity as risk mitigant for an exposure that is not based capital against the counterparty custodian) in a manner that is a covered position under subpart F of credit risk of the equity derivative bankruptcy remote from the CCP, this part is not required to compute a contract, as long as it does so for all clearing member, and other clearing separate counterparty credit risk capital such contracts. Where the equity member clients of the clearing member, requirement under this subpart derivative contracts are subject to a is not subject to a capital requirement provided that the FDIC-supervised qualified master netting agreement, a under this section. institution does so consistently for all FDIC-supervised institution using the such credit derivatives. The FDIC- * * * * * SRWA must either include all or (c) * * * supervised institution must either exclude all of the contracts from any include all or exclude all such credit (3) * * * measure used to determine counterparty (iii) Notwithstanding paragraphs derivatives that are subject to a credit risk exposure. qualifying master netting agreement (c)(3)(i) and (ii) of this section, a (f) Clearing member FDIC-supervised clearing member FDIC-supervised from any measure used to determine institution’s exposure amount. The counterparty credit risk exposure to all institution may apply a risk weight of exposure amount of a clearing member zero percent to the trade exposure relevant counterparties for risk-based FDIC-supervised institution using CEM capital purposes. amount for a cleared transaction with a under paragraph (b) of this section for CCP where the clearing member FDIC- (2) Protection providers. (i) A FDIC- a client-facing derivative transaction or supervised institution that is the supervised institution is acting as a netting set of client-facing derivative financial intermediary on behalf of a protection provider under a credit transactions equals the exposure derivative must treat the credit clearing member client, the transaction amount calculated according to derivative as an exposure to the offsets another transaction that satisfies paragraph (b)(1) or (2) of this section underlying reference asset. The FDIC- the requirements set forth in § 324.3(a), multiplied by the scaling factor the supervised institution is not required to and the clearing member FDIC- square root of 1⁄2 (which equals compute a counterparty credit risk supervised institution is not obligated to 0.707107). If the FDIC-supervised capital requirement for the credit reimburse the clearing member client in institution determines that a longer derivative under this subpart, provided the event of the CCP default. period is appropriate, the FDIC- that this treatment is applied * * * * * supervised institution must use a larger consistently for all such credit ■ scaling factor to adjust for a longer 32. Section 324.37 is amended by derivatives. The FDIC-supervised holding period as follows: revising paragraphs (c)(3)(iii), institution must either include all or (c)(3)(iv)(A) and (C), (c)(4)(i)(B) exclude all such credit derivatives that introductory text, and (c)(4)(i)(B)(1) to are subject to a qualifying master netting read as follows: agreement from any measure used to determine counterparty credit risk § 324.37 Collateralized transactions. exposure. Where H = the holding period greater * * * * * (ii) The provisions of this paragraph than or equal to five days. Additionally, (c) * * * (d)(2) apply to all relevant the FDIC may require the FDIC- (3) * * * counterparties for risk-based capital supervised institution to set a longer (iii) For repo-style transactions and purposes unless the FDIC-supervised holding period if the FDIC determines client-facing derivative transactions, a

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FDIC-supervised institution may derivative transactions or 5 business using the following square root of time multiply the standard supervisory days for repo-style transactions and formula: haircuts provided in paragraphs (c)(3)(i) client-facing derivative transactions. * * * * * and (ii) of this section by the square root * * * * * 1 (1) T equals 5 for repo-style of ⁄2 (which equals 0.707107). For (4) * * * M client-facing derivative transactions, if a (i) * * * transactions and client-facing derivative larger scaling factor is applied under (B) The minimum holding period for transactions and 10 for eligible margin § 324.34(f), the same factor must be used a repo-style transaction and client- loans and derivative contracts other to adjust the supervisory haircuts. facing derivative transaction is five than client-facing derivative (iv) * * * business days and for an eligible margin transactions; (A) TM equals a holding period of loan and a derivative contract other than * * * * * longer than 10 business days for eligible a client-facing derivative transaction is margin loans and derivative contracts ten business days except for §§ 324.134, 324.202, and 324.210 other than client-facing derivative transactions or netting sets for which [Amended] transactions or longer than 5 business paragraph (c)(4)(i)(C) of this section ■ days for repo-style transactions and applies. When a FDIC-supervised 33. For each section listed in the client-facing derivative transactions; institution calculates an own-estimates following table, the footnote number listed in the ‘‘Old footnote number’’ * * * * * haircut on a TN-day holding period, (C) TS equals 10 business days for which is different from the minimum column is redesignated as the footnote eligible margin loans and derivative holding period for the transaction type, number listed in the ‘‘New footnote contracts other than client-facing the applicable haircut (HM) is calculated number’’ column as follows:

Old footnote New footnote Section number number

324.134(d)(3) ...... 30 31 324.202, paragraph (1) introductory text of the definition of ‘‘Covered position’’ ...... 31 32 324.202, paragraph (1)(i) of the definition of ‘‘Covered position’’ ...... 32 33 324.210(e)(1) ...... 33 34

■ 34. Section 324.132 is amended by: provided in paragraphs (b)(2)(ii)(A)(1) period, then the FDIC-supervised ■ a. Revising paragraphs (b)(2)(ii)(A)(3) and (2) of this section by the square root institution must adjust the supervisory through (5); of 1⁄2 (which equals 0.707107). If the haircuts upward for that netting set on ■ b. Adding paragraphs (b)(2)(ii)(A)(6) FDIC-supervised institution determines the basis of a minimum holding period and (7); that a longer holding period is that is at least two times the minimum ■ c. Revising paragraphs (c) heading and appropriate for client-facing derivative holding period for that netting set. (c)(1) and (2) and (5) through (8); transactions, then it must use a larger (5)(i) A FDIC-supervised institution ■ d. Adding paragraphs (c)(9) through scaling factor to adjust for the longer must adjust the supervisory haircuts (11); holding period pursuant to paragraph upward on the basis of a holding period ■ e. Revising paragraph (d)(10)(i); (b)(2)(ii)(A)(6) of this section. longer than ten business days for ■ f. In paragraphs (e)(5)(i)(A) and (H), (4) A FDIC-supervised institution collateral associated with derivative removing ‘‘Table 3 to § 324.132’’ and must adjust the supervisory haircuts contracts (five business days for client- adding in its pace ‘‘Table 4 to this upward on the basis of a holding period facing derivative contracts) using the section’’; longer than ten business days (for formula provided in paragraph ■ g. In paragraphs (e)(5)(i)(C) and eligible margin loans) or five business (b)(2)(ii)(A)(6) of this section where the (e)(6)(i)(B), removing ‘‘current exposure days (for repo-style transactions), using conditions in this paragraph methodology’’ and adding in its place the formula provided in paragraph (b)(2)(ii)(A)(5)(i) apply. For collateral ‘‘standardized approach for (b)(2)(ii)(A)(6) of this section where the associated with a derivative contract counterparty credit risk’’ wherever it conditions in this paragraph that is within a netting set that is appears; (b)(2)(ii)(A)(4) apply. If the number of composed of more than 5,000 derivative ■ h. Redesignating Table 3 to § 324.132 trades in a netting set exceeds 5,000 at contracts that are not cleared following paragraph (e)(5)(ii) as Table 4 any time during a quarter, a FDIC- transactions, a FDIC-supervised to § 324.132; and supervised institution must adjust the institution must use a minimum holding ■ i. Revising paragraph (e)(6)(viii). supervisory haircuts upward on the period of twenty business days. If a The revisions and additions read as basis of a minimum holding period of netting set contains one or more trades follows: twenty business days for the following involving illiquid collateral or a § 324.132 Counterparty credit risk of repo- quarter (except when a FDIC-supervised derivative contract that cannot be easily style transactions, eligible margin loans, institution is calculating EAD for a replaced, a FDIC-supervised institution and OTC derivative contracts. cleared transaction under § 324.133). If must use a minimum holding period of * * * * * a netting set contains one or more trades twenty business days. (b) * * * involving illiquid collateral, a FDIC- (ii) Notwithstanding paragraph (2) * * * supervised institution must adjust the (b)(2)(ii)(A)(1) or (3) or (b)(2)(ii)(A)(5)(i) (ii) * * * supervisory haircuts upward on the of this section, for collateral associated (A) * * * basis of a minimum holding period of with a derivative contract in a netting (3) For repo-style transactions and twenty business days. If over the two set under which more than two margin client-facing derivative transactions, a previous quarters more than two margin disputes that lasted longer than the FDIC-supervised institution may disputes on a netting set have occurred holding period occurred during the two multiply the supervisory haircuts that lasted longer than the holding previous quarters, the minimum holding

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period is twice the amount provided does not include any adjustments to under paragraphs (c)(2)(iii)(A) through under paragraph (b)(2)(ii)(A)(1) or (3) or common equity tier 1 capital (E) of this section. (b)(2)(ii)(A)(5)(i) of this section. attributable to changes in the fair value * * * * * (6) A FDIC-supervised institution of the FDIC-supervised institution’s (5) Exposure amount. (i) The exposure must adjust the standard supervisory liabilities that are due to changes in its amount of a netting set, as calculated haircuts upward, pursuant to the own credit risk since the inception of under paragraph (c) of this section, is adjustments provided in paragraphs the transaction with the counterparty. equal to 1.4 multiplied by the sum of (b)(2)(ii)(A)(3) through (5) of this (2) Definitions. For purposes of this the replacement cost of the netting set, section, using the following formula: paragraph (c) of this section, the as calculated under paragraph (c)(6) of following definitions apply: this section, and the potential future (i) End date means the last date of the exposure of the netting set, as calculated period referenced by an interest rate or under paragraph (c)(7) of this section. credit derivative contract or, if the (ii) Notwithstanding the requirements derivative contract references another of paragraph (c)(5)(i) of this section, the instrument, by the underlying exposure amount of a netting set subject instrument, except as otherwise to a variation margin agreement, Where: provided in paragraph (c) of this excluding a netting set that is subject to

TM equals a holding period of longer than 10 section. a variation margin agreement under business days for eligible margin loans (ii) Start date means the first date of which the counterparty to the variation and derivative contracts other than the period referenced by an interest rate margin agreement is not required to post client-facing derivative transactions or or credit derivative contract or, if the variation margin, is equal to the lesser longer than 5 business days for repo- derivative contract references the value of the exposure amount of the netting style transactions and client-facing set calculated under paragraph (c)(5)(i) derivative transactions; of another instrument, by underlying Hs equals the standard supervisory haircut; instrument, except as otherwise of this section and the exposure amount and provided in paragraph (c) of this of the netting set calculated as if the Ts equals 10 business days for eligible section. netting set were not subject to a margin loans and derivative contracts (iii) Hedging set means: variation margin agreement. other than client-facing derivative (A) With respect to interest rate (iii) Notwithstanding the transactions or 5 business days for repo- derivative contracts, all such contracts requirements of paragraph (c)(5)(i) of style transactions and client-facing this section, the exposure amount of a derivative transactions. within a netting set that reference the same reference currency; netting set that consists of only sold (7) If the instrument a FDIC- (B) With respect to exchange rate options in which the premiums have supervised institution has lent, sold derivative contracts, all such contracts been fully paid by the counterparty to subject to repurchase, or posted as within a netting set that reference the the options and where the options are collateral does not meet the definition of same currency pair; not subject to a variation margin financial collateral, the FDIC-supervised agreement is zero. (C) With respect to credit derivative institution must use a 25.0 percent (iv) Notwithstanding the requirements contract, all such contracts within a haircut for market price volatility (Hs). of paragraph (c)(5)(i) of this section, the netting set; * * * * * exposure amount of a netting set in (c) EAD for derivative contracts—(1) (D) With respect to equity derivative which the counterparty is a commercial Options for determining EAD. A FDIC- contracts, all such contracts within a end-user is equal to the sum of supervised institution must determine netting set; replacement cost, as calculated under the EAD for a derivative contract using (E) With respect to a commodity paragraph (c)(6) of this section, and the the standardized approach for derivative contract, all such contracts potential future exposure of the netting counterparty credit risk (SA–CCR) within a netting set that reference one set, as calculated under paragraph (c)(7) under paragraph (c)(5) of this section or of the following commodity categories: of this section. using the internal models methodology Energy, metal, agricultural, or other (v) For purposes of the exposure described in paragraph (d) of this commodities; amount calculated under paragraph section. If a FDIC-supervised institution (F) With respect to basis derivative (c)(5)(i) of this section and all elects to use SA–CCR for one or more contracts, all such contracts within a calculations that are part of that derivative contracts, the exposure netting set that reference the same pair exposure amount, a FDIC-supervised amount determined under SA–CCR is of risk factors and are denominated in institution may elect, at the netting set the EAD for the derivative contract or the same currency; or level, to treat a derivative contract that derivatives contracts. A FDIC- (G) With respect to volatility is a cleared transaction that is not supervised institution must use the derivative contracts, all such contracts subject to a variation margin agreement same methodology to calculate the within a netting set that reference one as one that is subject to a variation exposure amount for all its derivative of interest rate, exchange rate, credit, margin agreement, if the derivative contracts and may change its election equity, or commodity risk factors, contract is subject to a requirement that only with prior approval of the FDIC. A separated according to the requirements the counterparties make daily cash FDIC-supervised institution may reduce under paragraphs (c)(2)(iii)(A) through payments to each other to account for the EAD calculated according to (E) of this section. changes in the fair value of the paragraph (c)(5) of this section by the (H) If the risk of a derivative contract derivative contract and to reduce the net credit valuation adjustment that the materially depends on more than one of position of the contract to zero. If a FDIC-supervised institution has interest rate, exchange rate, credit, FDIC-supervised institution makes an recognized in its balance sheet valuation equity, or commodity risk factors, the election under this paragraph (c)(5)(v) of any derivative contracts in the netting FDIC may require a FDIC-supervised for one derivative contract, it must treat set. For purposes of this paragraph institution to include the derivative all other derivative contracts within the (c)(1), the credit valuation adjustment contract in each appropriate hedging set same netting set that are eligible for an

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election under this paragraph (c)(5)(v) as netting set less the sum of the net (B) Zero. derivative contracts that are subject to a independent collateral amount and the (iii) Multiple netting sets subject to a variation margin agreement. variation margin amount applicable to single variation margin agreement. (vi) For purposes of the exposure such derivative contracts; Notwithstanding paragraphs (c)(6)(i) amount calculated under paragraph (B) The sum of the variation margin and (ii) of this section, the replacement (c)(5)(i) of this section and all threshold and the minimum transfer cost for multiple netting sets subject to calculations that are part of that amount applicable to the derivative exposure amount, a FDIC-supervised contracts within the netting set less the a single variation margin agreement institution may elect to treat a credit net independent collateral amount must be calculated according to derivative contract, equity derivative applicable to such derivative contracts; paragraph (c)(10)(i) of this section. contract, or commodity derivative or (iv) Netting set subject to multiple contract that references an index as if it (C) Zero. variation margin agreements or a hybrid were multiple derivative contracts each (ii) Netting sets not subject to a netting set. Notwithstanding paragraphs referencing one component of the index. variation margin agreement under (c)(6)(i) and (ii) of this section, the (6) Replacement cost of a netting set— which the counterparty must post replacement cost for a netting set subject (i) Netting set subject to a variation variation margin. The replacement cost to multiple variation margin agreements margin agreement under which the of a netting set that is not subject to a or a hybrid netting set must be counterparty must post variation variation margin agreement under calculated according to paragraph margin. The replacement cost of a which the counterparty must post (c)(11)(i) of this section. netting set subject to a variation margin variation margin to the FDIC-supervised (7) Potential future exposure of a agreement, excluding a netting set that institution is the greater of: netting set. The potential future is subject to a variation margin (A) The sum of the fair values (after agreement under which the excluding any valuation adjustments) of exposure of a netting set is the product counterparty is not required to post the derivative contracts within the of the PFE multiplier and the aggregated variation margin, is the greater of: netting set less the sum of the net amount. (A) The sum of the fair values (after independent collateral amount and (i) PFE multiplier. The PFE multiplier excluding any valuation adjustments) of variation margin amount applicable to is calculated according to the following the derivative contracts within the such derivative contracts; or formula:

Where: (iii) Multiple netting sets subject to a for purposes of total leverage exposure V is the sum of the fair values (after single variation margin agreement. under § 324.10(c)(4)(ii)(B), the potential excluding any valuation adjustments) of Notwithstanding paragraphs (c)(7)(i) future exposure for a netting set subject the derivative contracts within the and (ii) of this section and when to multiple variation margin agreements netting set; calculating the potential future exposure or a hybrid netting set must be C is the sum of the net independent collateral for purposes of total leverage exposure calculated according to paragraph amount and the variation margin amount under § 324.10(c)(4)(ii)(B), the potential (c)(11)(ii) of this section. applicable to the derivative contracts future exposure for multiple netting sets (8) Hedging set amount—(i) Interest within the netting set; and subject to a single variation margin rate derivative contracts. To calculate A is the aggregated amount of the netting set. agreement must be calculated according the hedging set amount of an interest to paragraph (c)(10)(ii) of this section. rate derivative contract hedging set, a (ii) Aggregated amount. The (iv) Netting set subject to multiple FDIC-supervised institution may use aggregated amount is the sum of all variation margin agreements or a hybrid either of the formulas provided in hedging set amounts, as calculated netting set. Notwithstanding paragraphs paragraphs (c)(8)(i)(A) and (B) of this under paragraph (c)(8) of this section, (c)(7)(i) and (ii) of this section and when section: within a netting set. calculating the potential future exposure (A) Formula 1 is as follows:

IR IR (B) Formula 2 is as follows: AddOnTB1 is the sum of the adjusted AddOnTB2 is the sum of the adjusted derivative contract amounts, as derivative contract amounts, as | IR| Hedging set amount = AddOnTB1 + calculated under paragraph (c)(9) of this calculated under paragraph (c)(9) of this | IR | IR| AddOnTB2 + AddOnTB3 . section, within the hedging set with an section, within the hedging set with an Where in paragraphs (c)(8)(i)(A) and (B) of end date of less than one year from the end date of one to five years from the this section: present date; present date; and

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IR AddOnTB3 is the sum of the adjusted derivative contract hedging set, the (iii) Credit derivative contracts and derivative contract amounts, as hedging set amount equals the absolute equity derivative contracts. The hedging calculated under paragraph (c)(9) of this value of the sum of the adjusted set amount of a credit derivative section, within the hedging set with an end date of more than five years from the derivative contract amounts, as contract hedging set or equity derivative present date. calculated under paragraph (c)(9) of this contract hedging set within a netting set section, within the hedging set. is calculated according to the following (ii) Exchange rate derivative formula: contracts. For an exchange rate

Where: separate hedging set amount for each notional amount by each of the k is each commodity type within the hedging basis derivative contract hedging set and supervisory delta adjustment, pursuant set. each volatility derivative contract to paragraph (c)(9)(iii) of this section, K is the number of commodity types within hedging set. A FDIC-supervised the maturity factor, pursuant to the hedging set. institution must calculate such hedging paragraph (c)(9)(iv) of this section, and AddOn(Typek) equals the sum of the adjusted set amounts using one of the formulas derivative contract amounts, as the applicable supervisory factor, as determined under paragraph (c)(9) of this under paragraphs (c)(8)(i) through (iv) provided in Table 2 to this section. that corresponds to the primary risk section, for all derivative contracts (ii) Adjusted notional amount. (A)(1) within the hedging set that reference factor of the hedging set being commodity type k. calculated. For an interest rate derivative contract r equals the applicable supervisory (9) Adjusted derivative contract or a credit derivative contract, the correlation factor, as provided in Table 2 amount—(i) Summary. To calculate the adjusted notional amount equals the to this section. adjusted derivative contract amount of a product of the notional amount of the (v) Basis derivative contracts and derivative contract, a FDIC-supervised derivative contract, as measured in U.S. volatility derivative contracts. institution must determine the adjusted dollars using the exchange rate on the Notwithstanding paragraphs (c)(8)(i) notional amount of derivative contract, date of the calculation, and the through (iv) of this section, a FDIC- pursuant to paragraph (c)(9)(ii) of this supervisory duration, as calculated by supervised institution must calculate a section, and multiply the adjusted the following formula:

Where: that is a variable notional swap, the factor, the notional amount is equal to S is the number of business days from the notional amount is equal to the time- the notional amount of an equivalent present day until the start date of the weighted average of the contractual unleveraged swap. derivative contract, or zero if the start notional amounts of such a swap over (B)(1) For an exchange rate derivative date has already passed; and the remaining life of the swap; and contract, the adjusted notional amount E is the number of business days from the (ii) For an interest rate derivative is the notional amount of the non-U.S. present day until the end date of the contract or a credit derivative contract denominated currency leg of the derivative contract. that is a leveraged swap, in which the derivative contract, as measured in U.S. (2) For purposes of paragraph notional amount of all legs of the dollars using the exchange rate on the (c)(9)(ii)(A)(1) of this section: derivative contract are divided by a date of the calculation. If both legs of (i) For an interest rate derivative factor and all rates of the derivative the exchange rate derivative contract are contract or credit derivative contract contract are multiplied by the same denominated in currencies other than

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U.S. dollars, the adjusted notional (C)(1) For an equity derivative the number of units with the notional amount of the derivative contract is the contract or a commodity derivative amount of the volatility derivative largest leg of the derivative contract, as contract, the adjusted notional amount contract. measured in U.S. dollars using the is the product of the fair value of one (iii) Supervisory delta adjustments. exchange rate on the date of the unit of the reference instrument (A) For a derivative contract that is not calculation. underlying the derivative contract and an option contract or collateralized debt the number of such units referenced by obligation tranche, the supervisory delta (2) Notwithstanding paragraph the derivative contract. adjustment is 1 if the fair value of the (c)(9)(ii)(B)(1) of this section, for an (2) Notwithstanding paragraph derivative contract increases when the exchange rate derivative contract with (c)(9)(ii)(C)(1) of this section, when value of the primary risk factor multiple exchanges of principal, the calculating the adjusted notional increases and ¥1 if the fair value of the FDIC-supervised institution must set the amount for an equity derivative contract derivative contract decreases when the adjusted notional amount of the or a commodity derivative contract that value of the primary risk factor derivative contract equal to the notional is a volatility derivative contract, the increases. amount of the derivative contract FDIC-supervised institution must (B)(1) For a derivative contract that is multiplied by the number of exchanges replace the unit price with the an option contract, the supervisory delta of principal under the derivative underlying volatility referenced by the adjustment is determined by the contract. volatility derivative contract and replace following formulas, as applicable:

(2) As used in the formulas in Table (v) l equals zero for all derivative supervised institution has with all 2 to this section: contracts except interest rate options for counterparties. Then, l is set according (i) F is the standard normal the currencies where interest rates have to this formula: l = max{¥L + 0.1%, 0}; cumulative distribution function; negative values. The same value of l and (ii) P equals the current fair value of must be used for all interest rate options (vi) s equals the supervisory option the instrument or risk factor, as that are denominated in the same volatility, as provided in Table 3 to this applicable, underlying the option; currency. To determine the value of l (iii) K equals the strike price of the section. for a given currency, a FDIC-supervised option; (C)(1) For a derivative contract that is (iv) T equals the number of business institution must find the lowest value L a collateralized debt obligation tranche, days until the latest contractual exercise of P and K of all interest rate options in the supervisory delta adjustment is date of the option; a given currency that the FDIC- determined by the following formula:

(2) As used in the formula in (ii) D is the detachment point, which (iii) The resulting amount is paragraph (c)(9)(iii)(C)(1) of this section: equals one minus the ratio of the designated with a positive sign if the (i) A is the attachment point, which notional amounts of all underlying collateralized debt obligation tranche equals the ratio of the notional amounts exposures that are senior to the FDIC- was purchased by the FDIC-supervised of all underlying exposures that are supervised institution’s exposure to the institution and is designated with a subordinated to the FDIC-supervised total notional amount of all underlying negative sign if the collateralized debt institution’s exposure to the total exposures, expressed as a decimal value obligation tranche was sold by the FDIC- notional amount of all underlying between zero and one; and supervised institution. exposures, expressed as a decimal value (iv) Maturity factor. (A)(1) The between zero and one; 30 exposure. In the case of a second-or-subsequent-to- maturity factor of a derivative contract ¥ default credit derivative, the smallest (n 1) that is subject to a variation margin 30 In the case of a first-to-default credit derivative, notional amounts of the underlying exposures are there are no underlying exposures that are subordinated to the FDIC-supervised institution’s agreement, excluding derivative subordinated to the FDIC-supervised institution’s exposure. contracts that are subject to a variation

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margin agreement under which the institution must treat the derivative Where: counterparty is not required to post contract as subject to a variation margin NS is each netting set subject to the variation variation margin, is determined by the agreement with maturity factor as margin agreement MA; following formula: determined according to (c)(9)(iv)(A) of VNS is the sum of the fair values (after this section, and daily settlement does excluding any valuation adjustments) of not change the end date of the period the derivative contracts within the netting set NS; and referenced by the derivative contract. CMA is the sum of the net independent (v) Derivative contract as multiple collateral amount and the variation Where MPOR refers to the period effective derivative contracts. A FDIC- margin amount applicable to the from the most recent exchange of supervised institution must separate a derivative contracts within the netting collateral covering a netting set of derivative contract into separate sets subject to the single variation margin derivative contracts with a defaulting derivative contracts, according to the agreement. counterparty until the derivative following rules: (ii) Calculating potential future contracts are closed out and the (A) For an option where the exposure. Notwithstanding paragraph resulting market risk is re-hedged. counterparty pays a predetermined (c)(5) of this section, a FDIC-supervised (2) Notwithstanding paragraph amount if the value of the underlying institution shall assign a single potential (c)(9)(iv)(A)(1) of this section: asset is above or below the strike price future exposure to multiple netting sets (i) For a derivative contract that is not and nothing otherwise (binary option), a client-facing derivative transaction, that are subject to a single variation the option must be treated as two margin agreement under which the MPOR cannot be less than ten business separate options. For purposes of days plus the periodicity of re- counterparty must post variation margin paragraph (c)(9)(iii)(B) of this section, a equal to the sum of the potential future margining expressed in business days binary option with strike K must be minus one business day; exposure of each such netting set, each represented as the combination of one calculated according to paragraph (c)(7) (ii) For a derivative contract that is a bought European option and one sold client-facing derivative transaction, of this section as if such nettings sets European option of the same type as the were not subject to a variation margin MPOR cannot be less than five business original option (put or call) with the days plus the periodicity of re- agreement. strikes set equal to 0.95 * K and 1.05 * (11) Netting set subject to multiple margining expressed in business days K so that the payoff of the binary option minus one business day; and variation margin agreements or a hybrid is reproduced exactly outside the region netting set—(i) Calculating replacement (iii) For a derivative contract that is between the two strikes. The absolute within a netting set that is composed of cost. To calculate replacement cost for value of the sum of the adjusted either a netting set subject to multiple more than 5,000 derivative contracts derivative contract amounts of the that are not cleared transactions, or a variation margin agreements under bought and sold options is capped at the which the counterparty to each netting set that contains one or more payoff amount of the binary option. trades involving illiquid collateral or a variation margin agreement must post (B) For a derivative contract that can variation margin, or a netting set derivative contract that cannot be easily be represented as a combination of replaced, MPOR cannot be less than composed of at least one derivative standard option payoffs (such as collar, contract subject to variation margin twenty business days. butterfly spread, calendar spread, (3) Notwithstanding paragraphs agreement under which the straddle, and strangle), a FDIC- counterparty must post variation margin (c)(9)(iv)(A)(1) and (2) of this section, for supervised institution must treat each a netting set subject to two or more and at least one derivative contract that standard option component must be is not subject to such a variation margin outstanding disputes over margin that treated as a separate derivative contract. lasted longer than the MPOR over the agreement, the calculation for (C) For a derivative contract that replacement cost is provided under previous two quarters, the applicable includes multiple-payment options, floor is twice the amount provided in paragraph (c)(6)(i) of this section, except (such as interest rate caps and floors), a that the variation margin threshold (c)(9)(iv)(A)(1) and (2) of this section. FDIC-supervised institution may (B) The maturity factor of a derivative equals the sum of the variation margin represent each payment option as a contract that is not subject to a variation thresholds of all variation margin combination of effective single-payment margin agreement, or derivative agreements within the netting set and options (such as interest rate caplets and contracts under which the counterparty the minimum transfer amount equals floorlets). the sum of the minimum transfer is not required to post variation margin, (D) A FDIC-supervised institution is determined by the following formula: amounts of all the variation margin may not decompose linear derivative agreements within the netting set. contracts (such as swaps) into (ii) Calculating potential future components. exposure. (A) To calculate potential (10) Multiple netting sets subject to a future exposure for a netting set subject Where M equals the greater of 10 single variation margin agreement—(i) to multiple variation margin agreements business days and the remaining Calculating replacement cost. under which the counterparty to each maturity of the contract, as measured in Notwithstanding paragraph (c)(6) of this variation margin agreement must post business days. section, a FDIC-supervised institution variation margin, or a netting set (C) For purposes of paragraph shall assign a single replacement cost to composed of at least one derivative (c)(9)(iv) of this section, if a FDIC- multiple netting sets that are subject to contract subject to variation margin supervised institution has elected a single variation margin agreement agreement under which the pursuant to paragraph (c)(5)(v) of this under which the counterparty must post counterparty to the derivative contract section to treat a derivative contract that variation margin, calculated according must post variation margin and at least is a cleared transaction that is not to the following formula: one derivative contract that is not subject to a variation margin agreement Replacement Cost = max{SNS max{VNS; subject to such a variation margin as one that is subject to a variation 0} ¥ max{CMA; 0}; 0} + max{SNS agreement, a FDIC-supervised margin agreement, the Board-regulated min{VNS; 0} ¥ min{CMA; 0}; 0} institution must divide the netting set

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into sub-netting sets (as described in (1) All derivative contracts within the margin agreements in which the paragraph (c)(11)(ii)(B) of this section) netting set that are not subject to a counterparty must post variation margin and calculate the aggregated amount for variation margin agreement or that are and that share the same value of the each sub-netting set. The aggregated subject to a variation margin agreement MPOR form a single sub-netting set. The amount for the netting set is calculated under which the counterparty is not aggregated amount for this sub-netting as the sum of the aggregated amounts for required to post variation margin form set is calculated as if the netting set is the sub-netting sets. The multiplier is a single sub-netting set. The aggregated subject to a variation margin agreement, calculated for the entire netting set. amount for this sub-netting set is using the MPOR value shared by the (B) For purposes of paragraph calculated as if the netting set is not derivative contracts within the netting (c)(11)(ii)(A) of this section, the netting subject to a variation margin agreement. set. set must be divided into sub-netting sets (2) All derivative contracts within the as follows: netting set that are subject to variation

TABLE 3 TO § 324.132—SUPERVISORY OPTION VOLATILITY, SUPERVISORY CORRELATION PARAMETERS, AND SUPERVISORY FACTORS FOR DERIVATIVE CONTRACTS

Supervisory Supervisory Supervisory option correlation 1 Asset class Subclass Type volatility factor factor (percent) (percent) (percent)

Interest rate ...... N/A ...... N/A ...... 50 N/A 0.50 Exchange rate ...... N/A ...... N/A ...... 15 N/A 4.0 Credit, single name ...... Investment grade ...... N/A ...... 100 50 0.46 Speculative grade ...... N/A ...... 100 50 1.3 Sub-speculative grade ...... N/A ...... 100 50 6.0 Credit, index ...... Investment Grade ...... N/A ...... 80 80 0.38 Speculative Grade ...... N/A ...... 80 80 1.06 Equity, single name ...... N/A ...... N/A ...... 120 50 32 Equity, index ...... N/A ...... N/A ...... 75 80 20 Commodity ...... Energy ...... Electricity ...... 150 40 40 Other ...... 70 40 18 Metals ...... N/A ...... 70 40 18 Agricultural ...... N/A ...... 70 40 18 Other ...... N/A ...... 70 40 18 1 The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this Table 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) * * * conservatism requirement of this (b) of this section to calculate risk- (10) * * * section. weighted assets for a cleared (i) With prior written approval of the * * * * * transaction. FDIC, a FDIC-supervised institution may (e) * * * (2) Clearing members. A FDIC- set EAD equal to a measure of (6) * * * supervised institution that is a clearing counterparty credit risk exposure, such (viii) If a FDIC-supervised institution member must use the methodologies as peak EAD, that is more conservative uses the standardized approach for described in paragraph (c) of this than an alpha of 1.4 times the larger of counterparty credit risk pursuant to section to calculate its risk-weighted EPEunstressed and EPEstressed for every paragraph (c) of this section to calculate assets for a cleared transaction and counterparty whose EAD will be the EAD for any immaterial portfolios of paragraph (d) of this section to calculate measured under the alternative measure OTC derivative contracts, the FDIC- its risk-weighted assets for its default of counterparty exposure. The FDIC- supervised institution must use that fund contribution to a CCP. supervised institution must demonstrate EAD as a constant EE in the formula for (b) * * * the conservatism of the measure of the calculation of CVA with the (1) Risk-weighted assets for cleared counterparty credit risk exposure used maturity equal to the maximum of: transactions. (i) To determine the risk- for EAD. With respect to paragraph (A) Half of the longest maturity of a weighted asset amount for a cleared (d)(10)(i) of this section: transaction in the netting set; and transaction, a FDIC-supervised (A) For material portfolios of new (B) The notional weighted average institution that is a clearing member OTC derivative products, the FDIC- maturity of all transactions in the client must multiply the trade exposure supervised institution may assume that netting set. amount for the cleared transaction, the standardized approach for ■ 35. Section 324.133 is amended by calculated in accordance with paragraph counterparty credit risk pursuant to revising paragraphs (a), (b)(1) through (b)(2) of this section, by the risk weight paragraph (c) of this section meets the (3), (b)(4)(i), (c)(1) through (3), (c)(4)(i), appropriate for the cleared transaction, conservatism requirement of this section and (d) to read as follows: determined in accordance with for a period not to exceed 180 days. paragraph (b)(3) of this section. (B) For immaterial portfolios of OTC § 324.133 Cleared transactions. (ii) A clearing member client FDIC- derivative contracts, the FDIC- (a) General requirements—(1) supervised institution’s total risk- supervised institution generally may Clearing member clients. A FDIC- weighted assets for cleared transactions assume that the standardized approach supervised institution that is a clearing is the sum of the risk-weighted asset for counterparty credit risk pursuant to member client must use the amounts for all of its cleared paragraph (c) of this section meets the methodologies described in paragraph transactions.

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(2) Trade exposure amount. (i) For a institution must apply the risk weight (3) Cleared transaction risk weights. cleared transaction that is a derivative applicable to the CCP under subpart D (i) A clearing member FDIC-supervised contract or a netting set of derivative of this part. institution must apply a risk weight of contracts, trade exposure amount equals (4) * * * 2 percent to the trade exposure amount the EAD for the derivative contract or (i) Notwithstanding any other for a cleared transaction with a QCCP. netting set of derivative contracts requirement of this section, collateral (ii) For a cleared transaction with a calculated using the methodology used posted by a clearing member client CCP that is not a QCCP, a clearing to calculate EAD for derivative contracts FDIC-supervised institution that is held member FDIC-supervised institution set forth in § 324.132(c) or (d), plus the by a custodian (in its capacity as a must apply the risk weight applicable to fair value of the collateral posted by the custodian) in a manner that is the CCP according to subpart D of this clearing member client FDIC-supervised bankruptcy remote from the CCP, part. institution and held by the CCP or a clearing member, and other clearing (iii) Notwithstanding paragraphs clearing member in a manner that is not member clients of the clearing member, (c)(3)(i) and (ii) of this section, a bankruptcy remote. When the FDIC- is not subject to a capital requirement clearing member FDIC-supervised supervised institution calculates EAD under this section. institution may apply a risk weight of for the cleared transaction using the * * * * * zero percent to the trade exposure methodology in § 324.132(d), EAD (c) * * * amount for a cleared transaction with a equals EADunstressed. (1) Risk-weighted assets for cleared QCCP where the clearing member FDIC- (ii) For a cleared transaction that is a transactions. (i) To determine the risk- supervised institution is acting as a repo-style transaction or netting set of weighted asset amount for a cleared financial intermediary on behalf of a repo-style transactions, trade exposure transaction, a clearing member FDIC- clearing member client, the transaction amount equals the EAD for the repo- supervised institution must multiply the offsets another transaction that satisfies style transaction calculated using the trade exposure amount for the cleared the requirements set forth in § 324.3(a), methodology set forth in § 324.132(b)(2) transaction, calculated in accordance and the clearing member FDIC- or (3) or (d), plus the fair value of the with paragraph (c)(2) of this section by supervised institution is not obligated to collateral posted by the clearing member the risk weight appropriate for the reimburse the clearing member client in client FDIC-supervised institution and cleared transaction, determined in the event of the QCCP default. held by the CCP or a clearing member accordance with paragraph (c)(3) of this (4) * * * in a manner that is not bankruptcy section. (i) Notwithstanding any other (ii) A clearing member FDIC- remote. When the FDIC-supervised requirement of this section, collateral supervised institution’s total risk- institution calculates EAD for the posted by a clearing member FDIC- weighted assets for cleared transactions cleared transaction under § 324.132(d), supervised institution that is held by a is the sum of the risk-weighted asset EAD equals EADunstressed. custodian (in its capacity as a custodian) (3) Cleared transaction risk weights. amounts for all of its cleared in a manner that is bankruptcy remote (i) For a cleared transaction with a transactions. from the CCP, clearing member, and QCCP, a clearing member client FDIC- (2) Trade exposure amount. A other clearing member clients of the supervised institution must apply a risk clearing member FDIC-supervised clearing member, is not subject to a weight of: institution must calculate its trade (A) 2 percent if the collateral posted exposure amount for a cleared capital requirement under this section. by the FDIC-supervised institution to transaction as follows: * * * * * the QCCP or clearing member is subject (i) For a cleared transaction that is a (d) Default fund contributions—(1) to an arrangement that prevents any loss derivative contract or a netting set of General requirement. A clearing to the clearing member client FDIC- derivative contracts, trade exposure member FDIC-supervised institution supervised institution due to the joint amount equals the EAD calculated using must determine the risk-weighted asset default or a concurrent insolvency, the methodology used to calculate EAD amount for a default fund contribution liquidation, or receivership proceeding for derivative contracts set forth in to a CCP at least quarterly, or more of the clearing member and any other § 324.132(c) or (d), plus the fair value of frequently if, in the opinion of the FDIC- clearing member clients of the clearing the collateral posted by the clearing supervised institution or the FDIC, there member; and the clearing member client member FDIC-supervised institution is a material change in the financial FDIC-supervised institution has and held by the CCP in a manner that condition of the CCP. conducted sufficient legal review to is not bankruptcy remote. When the (2) Risk-weighted asset amount for conclude with a well-founded basis clearing member FDIC-supervised default fund contributions to (and maintains sufficient written institution calculates EAD for the nonqualifying CCPs. A clearing member documentation of that legal review) that cleared transaction using the FDIC-supervised institution’s risk- in the event of a legal challenge methodology in § 324.132(d), EAD weighted asset amount for default fund (including one resulting from an event equals EADunstressed. contributions to CCPs that are not of default or from liquidation, (ii) For a cleared transaction that is a QCCPs equals the sum of such default insolvency, or receivership proceedings) repo-style transaction or netting set of fund contributions multiplied by 1,250 the relevant court and administrative repo-style transactions, trade exposure percent, or an amount determined by authorities would find the arrangements amount equals the EAD calculated the FDIC, based on factors such as size, to be legal, valid, binding, and under § 324.132(b)(2) or (3) or (d), plus structure, and membership enforceable under the law of the the fair value of the collateral posted by characteristics of the CCP and riskiness relevant jurisdictions. the clearing member FDIC-supervised of its transactions, in cases where such (B) 4 percent, if the requirements of institution and held by the CCP in a default fund contributions may be paragraph (b)(3)(i)(A) of this section are manner that is not bankruptcy remote. unlimited. not met. When the clearing member FDIC- (3) Risk-weighted asset amount for (ii) For a cleared transaction with a supervised institution calculates EAD default fund contributions to QCCPs. A CCP that is not a QCCP, a clearing for the cleared transaction under clearing member FDIC-supervised member client FDIC-supervised § 324.132(d), EAD equals EADunstressed. institution’s risk-weighted asset amount

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for default fund contributions to QCCPs forth in paragraph (d)(4) of this section, clearing member FDIC-supervised equals the sum of its capital multiplied by 12.5. institution’s capital requirement for its requirement, KCM for each QCCP, as (4) Capital requirement for default default fund contribution to a QCCP calculated under the methodology set fund contributions to a QCCP. A (KCM) is equal to:

Where: provided to the CCP with respect to collateral are held in the same default KCCP is the hypothetical capital requirement performance of a clearing member client fund contribution account, then the of the QCCP, as determined under on a derivative contract, the EAD is EAD of that account is the sum of the paragraph (d)(5) of this section; equal to the exposure amount for all EAD for the client-related transactions DFpref is the prefunded default fund such derivative contracts and guarantees within the account and the EAD of the contribution of the clearing member of derivative contracts calculated under house-related transactions within the FDIC-supervised institution to the QCCP; SA–CCR in § 324.132(c) (or, with account. For purposes of determining DFCCP is the QCCP’s own prefunded amounts respect to a CCP located outside the that are contributed to the default such EADs, the independent collateral waterfall and are junior or pari passu United States, under a substantially of the clearing member and its client with prefunded default fund identical methodology in effect in the must be allocated in proportion to the contributions of clearing members of the jurisdiction) using a value of 10 respective total amount of independent CCP; and business days for purposes of collateral posted by the clearing member pref DFCM is the total prefunded default fund § 324.132(c)(9)(iv); less the value of all to the QCCP. contributions from clearing members of collateral held by the CCP posted by the (v) If any account or sub-account the QCCP to the QCCP. clearing member FDIC-supervised contains both derivative contracts and institution or a clearing member client (5) Hypothetical capital requirement repo-style transactions, the EAD of that of the FDIC-supervised institution in of a QCCP. Where a QCCP has provided account is the sum of the EAD for the connection with a derivative contract its KCCP, a FDIC-supervised institution derivative contracts within the account for which the FDIC-supervised must rely on such disclosed figure and the EAD of the repo-style institution has provided a guarantee to instead of calculating KCCP under this transactions within the account. If paragraph (d)(5), unless the FDIC- the CCP and the amount of the prefunded default fund contribution of independent collateral is held for an supervised institution determines that a account containing both derivative more conservative figure is appropriate the FDIC-supervised institution to the CCP. contracts and repo-style transactions, based on the nature, structure, or then such collateral must be allocated to (iii) With respect to any repo-style characteristics of the QCCP. The the derivative contracts and repo-style hypothetical capital requirement of a transactions between the FDIC- supervised institution and the CCP that transactions in proportion to the QCCP (KCCP), as determined by the respective product specific exposure FDIC-supervised institution, is equal to: are cleared transactions, EAD is equal to: amounts, calculated, excluding the KCCP = SCM EADi * 1.6 percent effects of collateral, according to i EAD = max{EBRM ¥ IM ¥ DF; 0} Where: § 324.132(b) for repo-style transactions Where: and to § 324.132(c)(5) for derivative CMi is each clearing member of the QCCP; and EBRM is the sum of the exposure amounts of contracts. each repo-style transaction between the EADi is the exposure amount of each clearing (vi) Notwithstanding any other FDIC-supervised institution and the CCP member of the QCCP to the QCCP, as provision of paragraph (d) of this as determined under § 324.132(b)(2) and determined under paragraph (d)(6) of section, with the prior approval of the this section. without recognition of any collateral securing the repo-style transactions; FDIC, a FDIC-supervised institution may (6) EAD of a clearing member FDIC- IM is the initial margin collateral posted by determine the risk-weighted asset supervised institution to a QCCP. (i) The the FDIC-supervised institution to the amount for a default fund contribution EAD of a clearing member FDIC- CCP with respect to the repo-style to a QCCP according to supervised institution to a QCCP is transactions; and § 324.35(d)(3)(ii). equal to the sum of the EAD for DF is the prefunded default fund ■ derivative contracts determined under contribution of the FDIC-supervised 36. Section 324.173 is amended in paragraph (d)(6)(ii) of this section and institution to the CCP that is not already Table 13 to § 324.173 by revising line 4 the EAD for repo-style transactions deducted in paragraph (d)(6)(ii) of this under Part 2, Derivative exposures, to section. determined under paragraph (d)(6)(iii) read as follows: of this section. (iv) EAD must be calculated § 324.173 Disclosures by certain advanced (ii) With respect to any derivative separately for each clearing member’s approaches FDIC-supervised institutions contracts between the FDIC-supervised sub-client accounts and sub-house and Category III FDIC-supervised institution and the CCP that are cleared account (i.e., for the clearing member’s institutions. transactions and any guarantees that the proprietary activities). If the clearing * * * * * FDIC-supervised institution has member’s collateral and its client’s

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TABLE 13 TO § 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).

*******

■ 37. Section 324.300 is amended by SA–CCR, the advanced approaches Authority: 12 U.S.C. 1441, 1813, 1815, adding paragraphs (g) and (h) to read as FDIC-supervised institution may not 1817–19, 1821. follows: change to use CEM. ■ (h) Default fund contributions. Prior 39. Appendix A to subpart A of part § 324.300 Transitions. to January 1, 2022, a FDIC-supervised 327 is amended in section VI by revising * * * * * institution that calculates the exposure the entries ‘‘(2) Top 20 Counterparty (g) SA–CCR. An advanced approaches amounts of its derivative contracts Exposure/Tier 1 Capital and Reserves’’ FDIC-supervised institution may use under the standardized approach for and ‘‘(3) Largest Counterparty Exposure/ CEM rather than SA–CCR for purposes counterparty credit risk in § 324.132(c) Tier 1 Capital and Reserves’’ to read as of §§ 324.34(a) and 324.132(c) until may calculate the risk-weighted asset follows: January 1, 2022. A FDIC-supervised amount for a default fund contribution Appendix A to Subpart A of Part 327— institution must provide prior notice to to a QCCP under either method 1 under Method To Derive Pricing Multipliers the FDIC if it decides to begin using SA– § 324.35(d)(3)(i) or method 2 under and Uniform Amount CCR before January 1, 2022. On January § 324.35(d)(3)(ii), rather than under 1, 2022, and thereafter, an advanced § 324.133(d). * * * * * approaches FDIC-supervised institution must use SA–CCR for purposes of PART 327—ASSESSMENTS VI. Description of Scorecard Measures §§ 324.34(a), 324.132(c), and 324.133(d). Once an advanced approaches FDIC- ■ 38. The authority citation for part 327 supervised institution has begun to use continues to read as follows:

Scorecard measures 1 Description

******* (2) Top 20 Counterparty Ex- Sum of the 20 largest total exposure amounts to counterparties divided by Tier 1 capital and reserves. The total posure/Tier 1 Capital and exposure amount is equal to the sum of the institution’s exposure amounts to one counterparty (or borrower) Reserves. 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

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Scorecard measures 1 Description

(3) Largest Counterparty Ex- The largest total exposure amount to one counterparty divided by Tier 1 capital and reserves. The total exposure posure/Tier 1 Capital and amount is equal to the sum of the institution’s exposure amounts to one counterparty (or borrower) for deriva- Reserves. tives, 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.

* * * * * By order of the Board of Governors of the Dated at Washington, DC, on November 19, Federal Reserve System, November 19, 2019. 2019. Dated: November 18, 2019. Annmarie H. Boyd, Morris R. Morgan, Ann E. Misback, Assistant Executive Secretary. First Deputy Comptroller, Comptroller of the Secretary of the Board. Currency. Federal Deposit Insurance Corporation. [FR Doc. 2019–27249 Filed 1–23–20; 8:45 am] BILLING CODE 4810–33–P By order of the Board of Directors.

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