§217.37. Collateralized transactions. — Inbound Citations

(i) Credit-risk-weighted assets;

(ii) Credit valuation adjustment (CVA) risk-weighted assets;

(iii) Risk-weighted assets for operational risk; and

(iv) For a market risk Board-regulated institution only, advanced market risk-weighted assets; minus

(3) A Board-regulated institution may assign a risk weight to the collateralized portion of a past due exposure based on the risk weight that applies under § 217.37 if the collateral meets the requirements of that section.

(i) A Board-regulated institution must use the haircuts for market price volatility (Hs) provided in Table 1 to § 217.37, as adjusted in certain circumstances in accordance with the requirements of paragraphs (c)(3)(iii) and (iv) of this section.

(4) The exposure amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or derivative contract (other than a credit derivative) is the exposure amount of the transaction as calculated under § 217.34 or § 217.37, as applicable.

(1) An originating Board-regulated institution that has obtained a credit risk mitigant to hedge its exposure to a synthetic or traditional securitization that satisfies the operational criteria provided in § 217.41 may recognize the credit risk mitigant under §§ 217.36 or 217.37, but only as provided in this section.

(1) Except as modified by paragraph (c) of this section, the exposure amount for a single OTC derivative contract that is not subject to a qualifying master netting agreement is equal to the sum of the Board-regulated institution's current credit exposure and potential future credit exposure (PFE) on the OTC derivative contract.

(i) The current credit exposure for a single OTC derivative contract is the greater of the fair value of the OTC derivative contract or zero.

(A) The PFE for a single OTC derivative contract, including an OTC derivative contract with a negative fair value, is calculated by multiplying the notional principal amount of the OTC derivative contract by the appropriate conversion factor in Table 1 to this section.

(B) For purposes of calculating either the PFE under this paragraph (b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this section for exchange rate contracts and other similar contracts in which the notional principal amount is equivalent to the cash flows, notional principal amount is the net receipts to each party falling due on each value date in each currency.

(C) For an OTC derivative contract that does not fall within one of the specified categories in Table 1 to this section, the PFE must be calculated using the appropriate “other” conversion factor.

(D) A Board-regulated institution must use an OTC derivative contract's effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC derivative contract) rather than the apparent or stated notional principal amount in calculating PFE.

(E) The PFE of the protection provider of a credit derivative is capped at the net present value of the amount of unpaid premiums.

(2) If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is less than the exposure amount of the hedged exposure, the Board-regulated institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative.

(i) The Board-regulated institution may calculate the risk-weighted asset amount for the protected exposure under this subpart D, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider.

(ii) The Board-regulated institution must calculate the risk-weighted asset amount for the unprotected exposure under this subpart D, where the applicable risk weight is that of the unprotected portion of the hedged exposure.

(iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraphs (d), (e), or (f) of this section.

(2) Except as modified by paragraph (c) of this section, the exposure amount for multiple OTC derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC derivative contracts subject to the qualifying master netting agreement.

(i) The net current credit exposure is the greater of the net sum of all positive and negative fair values of the individual OTC derivative contracts subject to the qualifying master netting agreement or zero.

(ii) The adjusted sum of the PFE amounts, Anet, is calculated as Anet = (0.4 × Agross) + (0.6 × NGR × Agross), where:

(A) Agross = the gross PFE (that is, the sum of the PFE amounts as determined under paragraph (b)(1)(ii) of this section for each individual derivative contract subject to the qualifying master netting agreement); and

(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (b)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement.

(A) The exposure amount for the repo-style transaction calculated using the methodologies under § 217.37(c); plus

(A) Act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:

(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company's policies and procedures; and

(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and

(A) To act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:

(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company's policies and procedures; and

(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and

(2) Except as modified by paragraph (c) of this section, the exposure amount for multiple OTC derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC derivative contracts subject to the qualifying master netting agreement.

(i) The net current credit exposure is the greater of the net sum of all positive and negative fair values of the individual OTC derivative contracts subject to the qualifying master netting agreement or zero.

(ii) The adjusted sum of the PFE amounts, Anet, is calculated as Anet = (0.4 × Agross) + (0.6 × NGR × Agross), where:

(A) Agross = the gross PFE (that is, the sum of the PFE amounts as determined under paragraph (b)(1)(ii) of this section for each individual derivative contract subject to the qualifying master netting agreement); and

(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (b)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement.

(A) EBRMi = the exposure amount for each transaction cleared through the QCCP by clearing member i, calculated in accordance with § 217.34 for OTC derivative contracts and § 217.37(c)(2) for repo-style transactions, provided that:

(1) For purposes of this section, in calculating the exposure amount the Board-regulated institution may replace the formula provided in § 217.34(a)(2)(ii) with the following: Anet = (0.15 × Agross) + (0.85 × NGR × Agross); and

(2) For option derivative contracts that are cleared transactions, the PFE described in § 217.34(a)(1)(ii) must be adjusted by multiplying the notional principal amount of the derivative contract by the appropriate conversion factor in Table 1 to § 217.34 and the absolute value of the option's delta, that is, the ratio of the change in the value of the derivative contract to the corresponding change in the price of the underlying asset.

(3) For repo-style transactions, when applying § 217.37(c)(2), the Board-regulated institution must use the methodology in § 217.37(c)(3);

(A) EBRMi = the exposure amount for each transaction cleared through the QCCP by clearing member i, calculated in accordance with § 217.34 for OTC derivative contracts and § 217.37(c)(2) for repo-style transactions, provided that:

(1) For purposes of this section, in calculating the exposure amount the Board-regulated institution may replace the formula provided in § 217.34(a)(2)(ii) with the following: Anet = (0.15 × Agross) + (0.85 × NGR × Agross); and

(2) For option derivative contracts that are cleared transactions, the PFE described in § 217.34(a)(1)(ii) must be adjusted by multiplying the notional principal amount of the derivative contract by the appropriate conversion factor in Table 1 to § 217.34 and the absolute value of the option's delta, that is, the ratio of the change in the value of the derivative contract to the corresponding change in the price of the underlying asset.

(3) For repo-style transactions, when applying § 217.37(c)(2), the Board-regulated institution must use the methodology in § 217.37(c)(3);

(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of this chapter; and

(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of the Board's Regulation Q (12 CFR 217.37(c)(3)(ii)); and

(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of the Board's Regulation Q (12 CFR 217.37(c)(3)(ii)); and

(2) A Board-regulated institution must set HFX equal to eight percent unless it qualifies for the use of and uses its own internal estimates of foreign exchange volatility based on a ten-business-day holding period. A Board-regulated institution qualifies for the use of its own internal estimates of foreign exchange volatility if it qualifies for the use of its own-estimates haircuts in § 217.37(c)(4).

(A) Act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:

(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company's policies and procedures; and

(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and

(A) To act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:

(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company's policies and procedures; and

(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and

(A) Act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:

(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company's policies and procedures; and

(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and

(A) To act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:

(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company's policies and procedures; and

(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and