OTC Derivative Contracts

Risk-Weighted Assets for General Credit Risk

§628.34OTC derivative contracts.

(a)Exposure amount—

(1) Single OTC derivative contract. Except as modified by paragraph (b) 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 System institution's current credit exposure and potential future credit exposure (PFE) on the OTC derivative contract.

(i)Current credit exposure.The current credit exposure for a single OTC derivative contract is the greater of the mark-to-fair value of the OTC derivative contract or 0.

(ii)PFE.

(A) The PFE for a single OTC derivative contract, including an OTC derivative contract with a negative mark-to-fair value, is calculated by multiplying the notional principal amount of the OTC derivative contract by the appropriate conversion factor in Table 1 to § 628.34.

(B) For purposes of calculating either the PFE under this paragraph or the gross PFE under paragraph (a)(2) 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 §628.34, the PFE must be calculated using the appropriate "other" conversion factor.

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

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

TABLE 1 TO §628.34 – CONVERSIONFACTORMATRIXFORDERIVATIVE CONTRACTS1

1For a derivative contractwithmultiple exchanges ofprincipal, the conversion factor is multiplied by thenumber of remaining payments inthe derivativecontract.

2For an OTCderivative contract that is structuredsuchthat on specified dates anyoutstanding exposure is settled and the terms are reset so thatthe fair valueof the contract is 0, theremainingmaturity equals the time until the nextresetdate. For an interest ratederivative contractwitharemaining maturity of greater than 1 year that meetsthesecriteria,theminimumconversion factoris 0.005.

3A System institution must usethecolumnlabeled"Credit (investment-gradereferenceasset)"foracredit derivativewhose reference assetis an outstanding unsecuredlong-termdebtsecurity without credit enhancement that is investment grade.A System institution must use the columnlabeled"Credit (non-investment-gradereferenceasset)"forallothercredit derivatives.

(2)MultipleOTC derivativecontractssubjecttoaqualifyingmasternettingagreement. Exceptas modifiedby paragraph(b) of thissection,theexposureamountfor multipleOTC derivativecontractssubjecttoaqualifyingmasternettingagreementisequaltothesumofthe netcurrentcreditexposureandtheadjustedsumof thePFE amountsfor allOTC derivative contractssubjecttothequalifyingmasternettingagreement.

(i)Netcurrentcreditexposure.Thenetcurrentcreditexposureisthegreaterof thenet sumofallpositiveandnegativemark-to-fairvaluesoftheindividualOTC derivative contractssubjecttothequalifyingmasternettingagreementor 0.

(ii)Adjustedsumof thePFE amounts.Theadjustedsumof thePFE amounts,Anet,is calculatedas:

Anet=(0.4×Agross) +(0.6×NGR×Agross)

Where:

Agross =thegross PFE (thatis,thesumof thePFE amounts(as determinedunder paragraph(a)(1)(ii)of thissectionfor eachindividualderivativecontractsubjecttothe qualifyingmasternettingagreement);and

Net-to-grossRatio(NGR) =theratio of the netcurrent creditexposuretothegross currentcreditexposure.In calculatingtheNGR,thegross current creditexposureequalsthesumof thepositivecurrentcreditexposures (asdeterminedunder paragraph(a)(1)(i)of thissection)of allindividualderivativecontractssubjecttothequalifying masternettingagreement.

(b) Recognitionof creditrisk mitigationof collateralizedOTCderivativecontracts.

(1) A System institution mayrecognizethecreditrisk mitigationbenefitsof financialcollateralthatsecures anOTC derivativecontractor multipleOTC derivativecontractssubjecttoaqualifyingmaster nettingagreement(nettingset)by usingthesimpleapproachin§628.37(b).

(2) Alternatively, if the financial collateral securing a contract or netting set described in paragraph (b)(1) of this section is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement, a System institution may recognize the credit risk mitigation benefits of financial collateral that secures the contract or netting set by using the collateral haircut approach in §628.37(c).

(c)Counterpartycreditriskfor OTC creditderivatives—

(1) Protectionpurchasers.A System institution thatpurchasesanOTCcreditderivativethatisrecognizedunder§628.36 as acredit risk mitigantisnotrequiredto computeaseparatecounterpartycreditriskcapitalrequirementunder§628.32 providedthatthe System institution does so consistentlyfor allsuch creditderivatives. The System institution musteitherincludeall or excludeallsuch creditderivativesthataresubjecttoaqualifyingmasternettingagreement fromanymeasureused todeterminecounterpartycreditrisk exposuretoallrelevant counterpartiesfor risk-basedcapitalpurposes.

(2)Protectionproviders.

(i)A System institution thatistheprotectionproviderunderanOTC creditderivativemusttreattheOTC creditderivativeas anexposuretotheunderlyingreference asset. TheSystem institution isnotrequiredtocomputeacounterpartycreditriskcapitalrequirementfor theOTC creditderivativeunder§628.32, providedthatthistreatmentisappliedconsistentlyfor allsuchOTC creditderivatives. TheSystem institutionmusteitherincludeallor excludeallsuch OTC creditderivativesthataresubjecttoaqualifyingmasternettingagreementfromanymeasure used todeterminecounterpartycreditrisk exposure.

(ii)Theprovisionsof paragraph(c)(2)of thissectionapplytoallrelevantcounterparties for risk-basedcapitalpurposes.

(d)Counterpartycreditriskfor OTC equityderivatives.

(1) A System institution musttreatan OTC equityderivativecontractas anequityexposureandcomputearisk-weightedassetamount for theOTC equityderivativecontractunder§§628.51 through628.53.

(2) [Reserved]

(3) If theSystem institution risk weightsthecontractundertheSimpleRisk-WeightApproach (SRWA) in§628.52, theSystem institution maychoosenottoholdrisk-basedcapitalagainstthe counterpartycreditrisk of theOTCequityderivativecontract,as longas itdoes so for allsuch contracts. WheretheOTC equityderivativecontractsaresubjecttoa qualifyingmasternetting agreement, a System institution usingtheSRWA musteitherincludeallor excludeallof thecontracts fromanymeasureused todeterminecounterpartycreditrisk exposure.

(e) [Reserved]

[81 FR 49796, July 28, 2016]