Part: / PART 628 - CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS /
Subpart: / Subpart D - Risk Weighted Assets--Standardized Approach /
Date Created: / 1/6/2017
Date Modified: / 1/6/2017
Risk-Weighted Assets for General Credit Risk
§628.36 Guaranteesand creditderivatives:substitution treatment.
(a)Scope—
(1) General.A System institution mayrecognizethecreditrisk mitigationbenefitsof aneligibleguaranteeor eligiblecreditderivativeby substitutingtheriskweightassociatedwith theprotectionproviderfor therisk weightassignedtoanexposure,as providedunderthis section.
(2) Thissectionappliestoexposures for which:
(i)Creditrisk isfullycoveredby aneligibleguaranteeor eligiblecreditderivative;or
(ii)Creditrisk iscoveredon apro ratabasis(thatis,on abasis inwhichthe System institution and theprotectionprovidersharelosses proportionately)by aneligibleguaranteeor eligiblecredit derivative.
(3) Exposures on whichthereisatranchingof creditrisk (reflectingatleasttwo different levelsof seniority)generallyaresecuritizationexposures subjectto§§628.41 through628.45.
(4) If multipleeligibleguaranteesor eligiblecreditderivativescovera singleexposure describedinthissection,a System institution maytreatthehedgedexposureas multipleseparate exposures eachcoveredby asingleeligibleguaranteeor eligiblecreditderivativeandmay calculateaseparaterisk-weightedassetamountfor eachseparateexposureas describedin paragraph(c)of thissection.
(5) Ifasingleeligibleguaranteeor eligiblecreditderivativecoversmultiplehedged exposures describedinparagraph(a)(2)of thissection,a System institution musttreateachhedged exposureas coveredby aseparateeligibleguaranteeor eligiblecreditderivativeandmust calculateaseparaterisk-weightedassetamountfor eachexposureas describedinparagraph(c) ofthissection.
(b)Rulesof recognition.
(1) A System institution mayonlyrecognizethecreditrisk mitigation benefitsof eligibleguaranteesandeligiblecreditderivatives.
(2) A System institution mayonlyrecognizethecreditriskmitigationbenefitsof aneligiblecredit derivativetohedgeanexposurethatisdifferentfromthecreditderivative'sreferenceexposure used for determiningthederivative'scashsettlementvalue,deliverableobligation,or occurrence ofacrediteventif:
(i)Thereferenceexposureranks paripassuwith,or issubordinatedto,thehedged exposure;and
(ii)Thereferenceexposureandthehedgedexposurearetothesamelegalentity,and legallyenforceablecross-defaultor cross-accelerationclausesareinplacetoensurepayments underthecreditderivativearetriggeredwhen theobligatedpartyof thehedgedexposurefailsto payunderthetermsof thehedgedexposure.
(c)Substitutionapproach—
(1) Fullcoverage.Ifaneligibleguaranteeor eligiblecredit derivativemeetstheconditionsinparagraphs(a)and(b) of thissectionandtheprotection amount(P) of theguaranteeor creditderivativeisgreaterthanor equaltotheexposureamount of thehedgedexposure,a System institution mayrecognizetheguaranteeor creditderivativein determiningtherisk-weightedassetamountfor thehedgedexposureby substitutingtherisk weightapplicabletotheguarantoror creditderivativeprotectionproviderunder§628.32 for the risk weightassignedtotheexposure.
(2)Partialcoverage.If aneligibleguaranteeoreligiblecreditderivativemeetsthe conditionsin§§628.36(a)and628.37(b) andtheprotectionamount(P)of theguaranteeor credit derivativeisless thantheexposureamountof thehedgedexposure,the System institution musttreatthe hedgedexposureas two separateexposures (protectedandunprotected)inordertorecognizethe creditriskmitigationbenefitoftheguaranteeor creditderivative.
(i)TheSystem institution maycalculatetherisk-weightedassetamountfor theprotectedexposure under§628.32, wheretheapplicablerisk weightistherisk weightapplicabletotheguarantoror creditderivativeprotectionprovider.
(ii)The System institution mustcalculatetherisk-weightedasset amountfor theunprotectedexposureunder§628.32, wheretheapplicablerisk weightisthatof theunprotectedportionof thehedgedexposure.
(iii)Thetreatmentprovidedinthissectionisapplicablewhen thecreditrisk of an exposure iscoveredon apartialpro ratabasis andmaybeapplicablewhen anadjustmentis made totheeffectivenotionalamountof theguaranteeor creditderivativeunderparagraph(d), (e),or (f) of thissection.
(d)Maturitymismatchadjustment.
(1) A System institution thatrecognizesaneligibleguarantee or eligiblecreditderivativeindeterminingtherisk-weightedassetamountfor ahedgedexposure mustadjusttheeffectivenotionalamountof thecreditrisk mitiganttoreflectanymaturity mismatchbetweenthehedgedexposureandthecreditrisk mitigant.
(2) A maturitymismatchoccurswhen theresidualmaturityofacreditrisk mitigantis less thanthatof thehedgedexposure(s).
(3) Theresidualmaturityof ahedgedexposureisthelongestpossibleremainingtime beforetheobligatedpartyof thehedgedexposureisscheduledtofulfillitsobligationon the hedgedexposure. If acreditriskmitiganthas embeddedoptionsthatmayreduceitsterm,the System institution (protectionpurchaser)mustuse theshortestpossibleresidualmaturityfor thecreditrisk mitigant. Ifacallisatthediscretionoftheprotectionprovider,theresidualmaturityofthe creditriskmitigantisatthefirst calldate. IfthecallisatthediscretionoftheSystem institution (protectionpurchaser),butthetermsofthearrangementatoriginationofthecreditrisk mitigant containapositiveincentivefor theSystem institutiontocallthetransactionbeforecontractualmaturity, theremainingtimetothefirstcalldateistheresidual maturityofthecreditrisk mitigant.
(4) A creditrisk mitigantwithamaturitymismatchmayberecognizedonlyifitsoriginal maturityisgreaterthanor equalto1yearanditsresidualmaturityisgreaterthan3 months.
(5)Whenamaturitymismatchexists,the System institutionmustapplythefollowingadjustment toreducetheeffectivenotionalamountof thecreditrisk mitigant:
Pm=Ex [(t-0.25)/(T-0.25)]
Where:
Pm=effectivenotionalamountof thecreditrisk mitigant,adjustedfor maturity mismatch;
E=effectivenotionalamountof thecreditrisk mitigant;
t=thelesserofTortheresidualmaturityofthecreditriskmitigant,expressedin years;and
T=thelesserof 5or theresidualmaturityof thehedgedexposure,expressedin years.
(e)Adjustmentfor creditderivativeswithoutrestructuringas acreditevent. If a System institution recognizesaneligiblecreditderivativethatdoes notincludeasacrediteventarestructuringof the hedgedexposureinvolvingforgivenessor postponementof principal,interest,or feesthat resultsinacreditloss event(thatis,acharge-off,specificprovision,or othersimilardebittothe profitandloss account),the System institution mustapplythefollowingadjustmenttoreducetheeffective notionalamountof thecreditderivative:
Pr =Pmx 0.60
Where:
Pr =effectivenotionalamountof thecreditrisk mitigant,adjustedfor lackof restructuringevent(andmaturitymismatch,ifapplicable);and
Pm=effectivenotionalamountof thecreditrisk mitigant(adjustedfor maturity mismatch,ifapplicable).
(f)Currencymismatchadjustment.
(1) If a System institution recognizesaneligibleguaranteeor eligiblecreditderivativethatisdenominatedinacurrencydifferentfromthatinwhichthe hedgedexposureisdenominated,the System institution mustapplythefollowingformulatotheeffective notionalamountof theguaranteeor creditderivative:
Pc =Pr x (1-Hfx)
Where:
Pc =effectivenotionalamountof thecreditrisk mitigant,adjustedfor currency mismatch(andmaturitymismatchandlackof restructuringevent,ifapplicable);
Pr =effectivenotionalamountof thecreditrisk mitigant(adjustedfor maturity mismatchandlackof restructuringevent,ifapplicable);and
Hfx=haircutappropriatefor thecurrencymismatchbetweenthecreditrisk mitigant andthehedgedexposure.
(2) A System institution mustsetHfxequalto8 percent.
(3) A System institution mustadjustHfxcalculatedinparagraph(f)(2)of thissectionupward ifthe System institution revaluestheguaranteeor creditderivativeless frequentlythanonceevery10 business days usingthefollowingsquarerootof timeformula:
Where TM equals the greater of 10 or the number of days between revaluation.
[81 FR 49798, July 28, 2016]