Proposed Rule2023-04041
Enterprise Regulatory Capital Framework-Commingled Securities, Multifamily Government Subsidy, Derivatives, and Other Enhancements
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Published
March 13, 2023
Issuing agencies
Federal Housing Finance Agency
Abstract
The Federal Housing Finance Agency (FHFA or the Agency) is seeking comments on a notice of proposed rulemaking (proposed rule) that would amend several provisions in the Enterprise Regulatory Capital Framework (ERCF) for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac, and with Fannie Mae, each an Enterprise). The proposed rule would include modifications related to guarantees on commingled securities, multifamily mortgage exposures secured by government-subsidized properties, derivatives and cleared transactions, and credit scores, among other items.
Full Text
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<title>Federal Register, Volume 88 Issue 48 (Monday, March 13, 2023)</title>
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[Federal Register Volume 88, Number 48 (Monday, March 13, 2023)]
[Proposed Rules]
[Pages 15306-15333]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-04041]
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FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1240
RIN 2590-AB27
Enterprise Regulatory Capital Framework--Commingled Securities,
Multifamily Government Subsidy, Derivatives, and Other Enhancements
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
seeking comments on a notice of proposed rulemaking (proposed rule)
that would amend several provisions in the Enterprise Regulatory
Capital Framework (ERCF) for the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac, and with Fannie Mae, each an Enterprise). The proposed rule would
include modifications related to guarantees on commingled securities,
multifamily mortgage exposures secured by government-subsidized
properties, derivatives and cleared transactions, and credit scores,
among other items.
DATES: Comments must be received on or before May 12, 2023.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AB27, by any one
of the following methods:
<bullet> Agency website: <a href="http://www.fhfa.gov/open-for-comment-or-input">www.fhfa.gov/open-for-comment-or-input</a>.
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at <a href="/cdn-cgi/l/email-protection#21734446624e4c4c444f555261474947400f464e57"><span class="__cf_email__" data-cfemail="c391a6a480acaeaea6adb7b083a5aba5a2eda4acb5">[email protected]</span></a> to ensure timely receipt by FHFA.
Include the following information in the subject line of your
submission: Comments/RIN 2590-AB27.
<bullet> Hand Delivered/Courier: The hand delivery address is:
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB27,
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC
20219. Deliver the package at the Seventh Street entrance Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
[[Page 15307]]
<bullet> U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Clinton Jones,
General Counsel, Attention: Comments/RIN 2590-AB27, Federal Housing
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please
note that all mail sent to FHFA via U.S. Mail is routed through a
national irradiation facility, a process that may delay delivery by
approximately two weeks. For any time-sensitive correspondence, please
plan accordingly.
FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202) 649-3141,
<a href="/cdn-cgi/l/email-protection#23624d475146540d754251514a46565163454b45420d444c55"><span class="__cf_email__" data-cfemail="01406f657364762f576073736864747341676967602f666e77">[email protected]</span></a>; Christopher Vincent, Principal Financial
Analyst, Office of Capital Policy, (202) 649-3685,
<a href="/cdn-cgi/l/email-protection#4f0c273d263c3b203f272a3d611926212c2a213b0f2927292e61282039"><span class="__cf_email__" data-cfemail="d695bea4bfa5a2b9a6beb3a4f880bfb8b5b3b8a296b0beb0b7f8b1b9a0">[email protected]</span></a>; or James Jordan, Associate General
Counsel, Office of General Counsel, (202) 649-3075,
<a href="/cdn-cgi/l/email-protection#450f242820366b0f2a3721242b05232d23246b222a33"><span class="__cf_email__" data-cfemail="99d3f8f4fceab7d3f6ebfdf8f7d9fff1fff8b7fef6ef">[email protected]</span></a>. These are not toll-free numbers. For TTY/TRS
users with hearing and speech disabilities, dial 711 and ask to be
connected to any of the contact numbers above.
SUPPLEMENTARY INFORMATION:
Comments
FHFA invites comments on all aspects of the proposed rule. Copies
of all comments will be posted without change and will include any
personal information you provide, such as your name, address, email
address, and telephone number, on the FHFA website at <a href="https://www.fhfa.gov">https://www.fhfa.gov</a>. In addition, copies of all comments received will be
available for examination by the public through the electronic
rulemaking docket for this proposed rule also located on the FHFA
website.
Table of Contents
I. Introduction
II. Proposed Requirements
A. Guarantees on Commingled Securities
B. Multifamily Government Subsidy Risk Multiplier
C. Derivatives and Cleared Transactions
D. Representative Credit Scores for Single-Family Mortgage
Exposures
E. Original Credit Scores for Single-Family Mortgage Exposures
Without a Representative Original Credit Score
F. Guarantee Assets
G. Mortgage Servicing Assets
H. Time-Based Calls for CRT Exposures
I. Interest-Only Mortgage-Backed Securities
J. Single-Family Countercyclical Adjustment
K. Stability Capital Buffer
L. Advanced Approaches
III. Effective Date
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act
I. Introduction
FHFA is seeking comments on amendments to the ERCF that would
enhance, clarify, or otherwise refine various regulatory capital
requirements for the Enterprises. The proposed rule would modify
provisions in the ERCF related to the following items: guarantees on
commingled securities, multifamily mortgage exposures secured by
properties with a government subsidy, derivatives and cleared
transactions, credit scores for single-family mortgage exposures,
guarantee assets, mortgage servicing assets (MSAs), time-based calls
for credit risk transfer (CRT) exposures, interest-only (IO) mortgage-
backed securities (MBS), the single-family countercyclical adjustment,
the stability capital buffer, and the compliance date for the advanced
approaches.
The proposed amendments would implement the lessons learned through
the continued application of the ERCF and better reflect the risks
inherent in the Enterprises' business models. In addition, the proposed
rule would clarify certain areas of the ERCF. In doing so, the
modifications in this proposed rule would enhance the safety and
soundness of the Enterprises and contribute to the furtherance of the
Enterprises' missions.
FHFA adopted the ERCF on December 17, 2020, with the purpose of
implementing a going-concern regulatory capital standard to ensure that
each of Fannie Mae and Freddie Mac operates in a safe and sound manner,
and, across the economic cycle is positioned to fulfill its statutory
mission to provide stability and ongoing assistance to the secondary
mortgage market. The ERCF satisfied a statutory requirement that FHFA
establish by regulation, risk-based capital requirements to safeguard
the Enterprises against the risks that arise in the operation and
management of their businesses. The ERCF also implemented a new
leverage framework that included both a minimum requirement and a
leverage buffer. The ERCF became effective on February 16, 2021. FHFA
subsequently amended the ERCF three times. The amendments refined the
prescribed leverage buffer amount (PLBA or leverage buffer) and the
risk-based capital treatment of CRT, implemented a more comprehensive
set of public disclosure requirements for the standardized approach,
and required the Enterprises to submit capital plans to FHFA on an
annual basis. Each of the amendments became effective in 2022.
Since the adoption of the ERCF, the Enterprises have been operating
under the capital requirements and buffers outlined in the standardized
approach while simultaneously building their capital positions.
However, despite their recent progress accumulating capital, the
Enterprises remain severely undercapitalized. Since the Enterprises
were placed into conservatorships in September 2008, they have been
supported by Senior Preferred Stock Purchase Agreements (PSPAs) between
the U.S. Department of the Treasury (Treasury) and each Enterprise.\1\
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\1\ Fannie Mae's and Freddie Mac's Amended and Restated Senior
Preferred Stock Purchase Agreements with Treasury, as amended
through September 14, 2021, can be found on FHFA's web page at
<a href="https://www.fhfa.gov/Conservatorship/Pages/Senior-Preferred-Stock-Purchase-Agreements.aspx">https://www.fhfa.gov/Conservatorship/Pages/Senior-Preferred-Stock-Purchase-Agreements.aspx</a>.
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As conservator and prudential regulator, FHFA continuously monitors
the risk inherent in the Enterprises' business operations and reviews
the appropriateness of the ERCF's capital requirements and buffers to
mitigate those risks. FHFA has identified several provisions in the
ERCF that could be revised to enhance the ERCF. Specifically, the
proposed rule would introduce:
<bullet> A 5 percent risk weight and 50 percent credit conversion
factor for guarantees on commingled securities,
<bullet> A risk multiplier of 0.6 for multifamily mortgage
exposures secured by properties with certain government subsidies,
<bullet> A standardized approach for counterparty credit risk (SA-
CCR) as the method for computing risk weights for derivatives and
cleared transactions,
<bullet> A modified procedure for determining a representative
credit score for single-family mortgage exposures,
<bullet> A modified credit score assumption for single-family
mortgage exposures originated without a representative credit score,
<bullet> A 20 percent risk weight for guarantee assets, and
<bullet> A timing alignment between the application of single-
family countercyclical adjustments and property value adjustments.
FHFA has also identified several aspects of the ERCF where specific
language would clarify and enhance the usefulness of the ERCF. The
proposed rule would:
<bullet> Expand the definition of MSAs to include servicing rights
on mortgage loans owned by the Enterprise,
<bullet> Explicitly permit eligible time-based call options in the
CRT operational criteria,
<bullet> Amend the risk weights for IO MBS to 0 percent, 20
percent, and 100
[[Page 15308]]
percent, conditional on whether the security was issued by the
Enterprise, the other Enterprise, or a non-Enterprise entity,
respectively, and
<bullet> Clarify the calculation of the stability capital buffer
when an increase and a decrease might be applied concurrently.
Finally, the proposed rule would extend the compliance date for the
advanced approaches. Each item is discussed below.
II. Proposed Requirements
A. Guarantees on Commingled Securities
The ERCF includes risk-based, leverage, and buffer capital
requirements for guarantees on commingled securities--certain
resecuritizations guaranteed by a combination of Fannie Mae and Freddie
Mac, described more fully below. For risk-based capital, an Enterprise
is currently required to apply a 20 percent risk weight on exposures to
the other Enterprise in a commingled security. For leverage capital and
buffer calculations, an Enterprise is currently required to apply a 100
percent credit conversion factor to these exposures because they are
off-balance sheet guarantees. The 20 percent risk weight and 100
percent credit conversion factor for guarantees on commingled
securities may not accurately reflect the counterparty risks posed by
commingling activities and in certain circumstances may impair the
liquidity of the Enterprises' securities, which may adversely affect
the nation's housing finance market. The proposed rule would reduce the
risk weight and the credit conversion factor for guarantees on
commingled securities to 5 percent and 50 percent, respectively.
On February 28, 2019, FHFA issued a final rule on common MBS known
as the Uniform Mortgage-Backed Security (UMBS) with the purpose of
enhancing liquidity in the MBS marketplace and fostering the efficiency
and liquidity of the secondary mortgage market. On June 3, 2019, the
Enterprises launched newly issued UMBS. The UMBS are a single-class
security issued by either Fannie Mae or Freddie Mac backed by single-
family mortgage loans purchased by the issuing Enterprise. For the UMBS
market to operate successfully, market participants must continue to
accept UMBS as fungible irrespective of the issuing Enterprise. That
is, investors generally must agree that a UMBS of a certain coupon,
maturity, and loan origination year issued by one Enterprise is roughly
equivalent to the corresponding UMBS issued by the other Enterprise.\2\
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\2\ To support investor confidence in that fungibility, FHFA
adopted a final rule governing Enterprise actions affecting UMBS
cash flows to investors (12 CFR part 1248), publishes quarterly
prepayment monitoring reports, and limits certain pooling practices
with respect to the creation of UMBS.
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To foster fungibility, each Enterprise may issue ``Supers,'' which
are single-class resecuritizations of UMBS. The securities underlying
Supers may be commingled, i.e., Supers may be backed by both securities
that are issued and guaranteed by Fannie Mae and securities that are
issued and guaranteed by Freddie Mac. The Enterprises may also issue
collateralized mortgage obligations, or CMOs, and real estate mortgage
investment conduits, or REMICs, which are each a type of structured
security in which the collateral can include UMBS. If an Enterprise
guarantees a security backed in whole or in part by securities of the
other Enterprise, the Enterprise is obligated under its guarantee to
fund any shortfall in the event that the other Enterprise fails to make
a payment due on its securities.\3\ Investors in commingled securities
benefit from the original guarantees extended by guarantors of the
underlying collateral, as well as the additional guarantees of
resecuritizing Enterprise, including on the commingled collateral.
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\3\ The Enterprises have entered into an indemnification
agreement relating to commingled securities issued by the
Enterprises. The indemnification agreement obligates each Enterprise
to reimburse the other for any such shortfall.
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As a result of these multiple guarantees, the current 20 percent
risk weight and 100 percent credit conversion factor for commingled
securities may not accurately reflect these counterparty risks and, in
certain circumstances, may impair the liquidity of the Enterprises'
securities. However, despite their current Treasury support under the
PSPAs, the Enterprises also remain privately-owned corporations, and
their obligations do not have the explicit guarantee of the full faith
and credit of the United States. Therefore, the MBS and other
obligations of an Enterprise pose some degree of counterparty risk.
The proposed rule would reduce the risk weight for guarantees on
commingled securities from 20 percent to 5 percent to better align the
capital requirements with the inherent counterparty risk. A lower risk
weight should reduce an Enterprise's incentive to only guarantee Supers
securities collateralized by its own UMBS, leading to different volumes
and investor perceptions of UMBS issued by each Enterprise, and
potentially leading to a bifurcation of UMBS pricing and trading.
Several commenters on FHFA's 2020 notice of proposed rulemaking on
Enterprise capital \4\ recommended FHFA implement a similar treatment,
while also stating that an Enterprise's exposures to the other
Enterprise do not increase aggregate credit risk and the 20 percent
risk weight is therefore excessive.
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\4\ 85 FR 39274 (June 30, 2020).
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The risk-weight floor assigned to any retained CRT exposure is 5
percent.\5\ This risk weight applies to senior tranches of CRT
transactions that absorb catastrophic levels of loss only after
resources to absorb expected and unexpected losses are exhausted.
Similarly, the losses that an Enterprise would experience from
commingled securities would likely occur in remote circumstances
through sustained catastrophic levels of loss after the other
Enterprise has exhausted its loss-absorbing financial resources.
Therefore, the proposed 5 percent risk weight for credit exposures
arising out of guarantees on commingling activities would align with
the risk-weight floor for retained CRT exposures.
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\5\ 87 FR 14764 (March 16, 2022).
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The proposed rule would also reduce the credit conversion factor
for guarantees on commingled securities from 100 percent to 50 percent.
To enhance the liquidity of UMBS and the overall stability of the
secondary mortgage market, the leverage and buffer requirements for
guarantees on commingled securities would also need to be updated. FHFA
proposes to accomplish this by reducing the impact of these guarantees
on an Enterprise's adjusted total assets. According to generally
accepted accounting principles, an Enterprise's guarantee of commingled
collateral is not consolidated on the balance sheet because the
Enterprise issuing the guarantee does not have any rights or powers to
direct the activities of the underlying commingled resecuritization
trust and is not the primary beneficiary of its activities.\6\ Under
the ERCF, off-balance sheet assets are subject to a range of credit
conversion factors to determine adjusted total assets. FHFA's proposal
to update the credit conversion factor for guarantees on commingled
securities to 50 percent would align with the prevailing regulatory
capital treatment for off-balance sheet undrawn commitments with an
original maturity of more than one year that are not
[[Page 15309]]
unconditionally cancelable by the Enterprise.
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\6\ FASB ASC 810.
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The proposed changes to the requirements for guarantees on
commingled securities would affect both risk-weighted assets and
adjusted total assets. FHFA estimates that under the proposed rule, the
total common equity tier 1 capital (CET1) required to meet the risk-
based capital requirements and buffers for the Enterprises' guarantees
on commingled securities as of June 30, 2022 would decline by
approximately $5.1 billion.
Question 1: What, if any, other factors should FHFA consider in its
determination of a 5 percent risk weight and 50 percent credit
conversion factor for guarantees on commingled securities?
Question 2: Is the proposed 5 percent risk weight for guarantees on
commingled securities appropriately calibrated?
Question 3: Is the proposed 50 percent credit conversion factor for
guarantees on commingled securities appropriately calibrated?
Question 4: Should FHFA adjust the regulatory capital treatment for
exposures to MBS guaranteed by the other Enterprise to mitigate any
risk of disruption to the UMBS?
Question 5: Should FHFA consider a different risk weight for
second-level resecuritizations backed by UMBS?
Question 6: What should be the regulatory capital treatment of any
credit risk mitigation effect of any indemnification or similar
arrangements between the Enterprises relating to UMBS
resecuritizations?
Question 7: Should FHFA adopt different risk weights for MBS
guaranteed by an Enterprise and the unsecured debt of an Enterprise?
B. Multifamily Government Subsidy Risk Multiplier
The methodology for calculating multifamily credit risk weights in
the ERCF does not differentiate between multifamily mortgage exposures
secured by properties with a government subsidy and by properties
without a government subsidy. Two previous FHFA products that together
formed much of the basis for the ERCF--the Conservatorship Capital
Framework, an internal risk measurement framework established in 2017,
and FHFA's 2018 notice of proposed rulemaking on Enterprise Capital
Requirements \7\--each contained such a differentiation in the form of
a multifamily risk multiplier. FHFA did not include such a multiplier
in the ERCF due to calibration challenges caused by the relatively
infrequent instances of loss across multifamily loan programs that
include a government subsidy. However, several commenters on FHFA's
2020 notice of proposed rulemaking on Enterprise capital \8\
recommended that FHFA introduce a risk multiplier to reflect that
multifamily mortgage exposures associated with government-subsidized
properties are less risky than those associated with unsubsidized
properties, all else equal.
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\7\ 83 FR 33312 (July 17, 2018).
\8\ 85 FR 39274.
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Properties with government subsidies represent an important segment
of the Enterprises' multifamily business models. FHFA sets a yearly
limit or cap on the dollar value of the Enterprises' multifamily
acquisitions, ensuring they provide liquidity to the secondary market
without crowding out private competition. As part of the annual
acquisition limits, FHFA directs the Enterprises to meet specific
affordable housing or mission goals by acquiring multifamily loans
collateralized by properties that charge rents affordable to certain
segments of the population with specified income levels. Affordable
property units are available to renters at a rental rate below the
typical market rate, leading to generally strong demand for affordable
property units and therefore to relatively stable vacancy rates.
Government subsidies of affordable housing are issued either at the
Federal or state and local levels, typically in the form of a tax
credit, direct subsidy, or voucher reimbursement. The purpose of these
subsidies is to compensate property owners for providing below-market
rental rates on units within their multifamily properties. Many
subsidies last for multiple years and remain in place only if the
property owner meets certain program-specific requirements. Although
government-subsidized properties typically collect lower gross rents
per unit than comparable non-affordable properties and may generate
lower net operating income (NOI), property owners compensate for the
lower property income through the value of the government-subsidies.
Thus, property owners have an incentive to ensure the property follows
the contractual subsidy restrictions, including avoiding potential
default (60 or more days past due), to retain the government subsidy.
The primary subsidy programs include the Low-Income Housing Tax Credit
(LIHTC) program,\9\ Section 8 Housing Assistance Payment contracts, and
diverse state- and local-level programs.
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\9\ Section 42 of the Internal Revenue Code (26 U.S.C.A. section
42); 26 CFR 1.42 (Treasury regulations); each state agency's
qualified allocation plan, regulations and compliance manual, along
with a list of state and local LIHTC-allocating agencies, can be
found at <a href="https://www.huduser.gov/portal/datasets/lihtc.html">https://www.huduser.gov/portal/datasets/lihtc.html</a>.
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Many government subsidy programs require property owners to make a
specified percentage of units affordable to residents at or below a
certain percent of area median income (AMI). For example, to qualify
for the LIHTC program, a property owner must (in general) make at least
20 percent of the units available to renters at or below 50 percent of
AMI, make at least 40 percent of the units available to renters at or
below 60 percent of AMI, or make at least 40 percent of the units
available to renters with an average income of no more than 60 percent
of AMI and no units to renters with an income greater than 80 percent
of AMI. In practice, the number of units restricted as affordable at a
multifamily property often significantly exceeds the applicable minimum
program requirements because the penalties for non-compliance can be
quite costly. Minimum affordability criteria aim to ensure that the
primary benefits of government subsidy programs accrue to low-income
renters rather than to property owners acting in bad faith.
The proposed rule would introduce a risk multiplier equal to 0.6
for any multifamily mortgage exposures secured by one or more
properties each with at least one applicable government subsidy,
subject to certain affordability criteria. The applicable government
subsidies would be limited to the following three primary subsidy
programs: (i) LIHTC, (ii) Section 8 project-based rental assistance,
and (iii) state and local affordable housing programs that require the
provision of affordable housing for the life of the loan. A multifamily
mortgage exposure meeting the collateral criteria would qualify for the
0.6 risk multiplier if the Enterprise can verify that each property
securing the exposure has at least 20 percent of its units restricted
as affordable units, where the affordability restriction means less
than or equal to 80 percent of AMI.
For a multifamily mortgage exposure to qualify for the government
subsidy multiplier, the properties securing the exposure must have
significant, long-term, and continuous government subsidies. LIHTC and
project-based Section 8 programs meet these criteria, so to ensure
alignment in this regard, the proposed rule would require that
qualifying state and local affordable housing programs require
affordable
[[Page 15310]]
housing to be provided for the life of the loan.
The addition of a government subsidy multiplier would affect risk-
weighted assets, only. FHFA estimates that under the proposed rule,
required CET1 capital for the Enterprises' multifamily mortgage
exposures as of June 30, 2022 would decline by approximately $0.4
billion.
Question 8: Is the 0.6 risk multiplier for multifamily mortgage
exposures secured by properties with a government subsidy appropriately
calibrated?
Question 9: Is the restriction that at least 20 percent of units
must be made available at or below 80 percent of AMI appropriately
calibrated?
Question 10: Should FHFA consider additional thresholds and/or
affordability restrictions for a multifamily mortgage exposure to
qualify for a risk multiplier greater than 0.6 but less than 1.0?
Question 11: Do FHFA's proposed categories of applicable government
subsidies appropriately capture the population of multifamily
government subsidies that are significant, long-term, and continuous?
Question 12: Are there data or analyses available that would
support a multi-tiered government subsidy risk multiplier that varies
with the level of subsidy or by other relevant factors? If so, what
data and factors?
C. Derivatives and Cleared Transactions
An Enterprise with a positive exposure on a derivative contract
expects to receive a payment from its counterparty and is subject to
the credit risk that the counterparty will default on its obligations
and fail to pay the amount owed under the contract. Therefore, the ERCF
requires an Enterprise to hold risk-based capital based on the exposure
amount of its derivative contracts.
The current rule requires an Enterprise to use the current exposure
methodology (CEM) to determine the exposure amount of each derivative
contract. The risk-weighted asset amount for the derivative contract is
then the product of the exposure amount and the risk weight of the
counterparty. The ERCF requires an Enterprise to use CEM to determine
the exposure amounts of their over-the-counter (OTC) derivative
contacts and cleared derivative contracts, as well as determine the
risk-weighted assets amount of their contributions of commitments to
mutualized loss sharing agreements with central counterparties (i.e.,
default fund contributions).
Under CEM, the exposure amount of a single derivative contract is
equal to the sum of its current credit exposure and potential future
exposure (PFE). Current credit exposure is equal to the greater of zero
and the on-balance sheet fair value of the derivative contract. PFE
approximates the Enterprise's potential exposure to its counterparty
over the remaining maturity of the derivative contract. PFE equals the
product of the notional amount of the derivative contract and a
supervisory-provided conversion factor, which reflects the potential
volatility in the reference asset of the derivative contract. The ERCF
provides the conversion factors in a look-up table that is based on the
derivative contract's type and remaining maturity. The potential
exposure generally increases with an increase in volatility and the
duration of the derivative contract.
CEM was developed before the financial crisis and does not reflect
recent market conventions and regulatory requirements that are designed
to reduce the risks associated with derivative contracts. This can lead
to a significant mismatch between the risks of derivative portfolios
and the regulatory capital that the Enterprises must hold against them.
Examples of CEM drawbacks include a lack of differentiation between
margined and unmargined derivative contracts and inadequate recognition
of the risk-reducing benefits of a balanced derivatives portfolio.
Furthermore, the supervisory conversion factors provided under CEM were
developed prior to the 2007-2008 financial crisis and they have not
been recalibrated to reflect the stress volatilities observed in recent
years.
For these reasons, the Basel Committee on Banking Supervision
(Basel Committee) developed the SA-CCR and published it as a final
standard in 2014.\10\ The U.S. banking regulators adopted SA-CCR as a
replacement for CEM in 2020.
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\10\ <a href="https://www.bis.org/publ/bcbs279.pdf">https://www.bis.org/publ/bcbs279.pdf</a>.
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SA-CCR provides important improvements to risk sensitivity and
calibration relative to CEM, including differentiation of margin and
non-margin trades and recognition of netting agreements, resulting in
more appropriate capital requirements for derivative contracts. One of
the concerns regarding the current regulatory capital treatment for
derivative contracts under CEM is that CEM does not appropriately
recognize collateral, including the risk-reducing nature of variation
margin, and does not provide sufficient netting for derivative
contracts that share similar risk factors. The SA-CCR methodology
addresses these concerns.
Compared to CEM, SA-CCR offers a more risk-sensitive approach to
determine the replacement cost and PFE for a derivative contract.
Specifically, SA-CCR improves collateral recognition by differentiating
between margined and unmargined derivative contracts. SA-CCR also
better captures recently observed stress volatilities among the primary
risk drivers for derivative contracts. SA-CCR is a standardized, non-
modelled approach that is relatively straightforward to implement.
The proposed rule would require an Enterprise to calculate the
exposure amounts of OTC and cleared derivative contracts using SA-CCR
rather than CEM, as well as the risk-weighted asset amounts of default
fund contributions. The Enterprises would also be required to use SA-
CCR to determine the exposure amount of their derivative contracts for
inclusion in adjusted total assets. Use of SA-CCR would allow an
Enterprise to recognize the meaningful, risk-reducing relationship
between derivative contracts within a balanced derivatives portfolio
and to recognize the risk-mitigation effects of guarantees, credit
derivatives, and collateral for purposes of its risk-based capital
requirements. In addition, the replacement of CEM with SA-CCR would
result in better alignment between the ERCF and both the U.S. banking
framework and the international standards issued by the Basel
Committee.\11\
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\11\ To note one point of departure, the proposed rule would not
include the internal models methodology from 12 CFR 217.132(d) to
reduce reliance on internal models.
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Under the proposed rule and consistent with the U.S. banking
framework, the Enterprises would apply SA-CCR in the following ways:
1. Netting Sets
Under SA-CCR, an Enterprise would calculate the exposure amount of
its derivative contract at the netting set level. The proposed rule
would define a netting set to mean either one derivative contract
between an Enterprise and a single counterparty, or a group of
derivative contracts between an Enterprise and a single counterparty
that are subject to a qualifying master netting agreement (QMNA). The
proposed rule would retain the current definition of a QMNA.
2. Hedging Sets
For the PFE calculation under SA-CCR, an Enterprise would fully or
partially net derivative contracts within
[[Page 15311]]
the same netting set that share similar risk factors. This approach
would recognize that derivative contracts with similar risk factors
share economically meaningful relationships with close correlations
that make netting appropriate. In contrast, CEM recognizes only a
portion of the netting benefits of derivative contracts subject to a
QMNA, without accounting for relationships between the underlying risk
factors of derivative contracts.
Under SA-CCR, a hedging set means those derivative contracts within
the same netting set that share similar risk factors. The proposal
would define five types of hedging sets--interest rate, exchange rate,
credit, equity, and commodities--and would provide formulas for netting
within each hedging set. Each formula would be particular to each
hedging set type and would reflect the regulatory correlation
assumptions between risk factors in the hedging set.
3. Derivative Contract Amount for the PFE Component Calculation
Similar to CEM, an Enterprise would use an adjusted derivative
contract amount for the PFE component calculation under SA-CCR.
However, as part of the estimate, SA-CCR would use updated supervisory
factors that reflect the stress volatilities observed during the
financial crisis. The supervisory factors would reflect the variability
of the primary risk factors of the derivative contract over a one-year
time horizon. In addition, SA-CCR would apply a separate maturity
factor to each derivative contract that would scale down, if necessary,
the default one-year risk horizon of the supervisory factor to the risk
horizon appropriate for the derivative contract.
4. Collateral Recognition and Differentiation Between Margined and
Unmargined Derivative Contracts
Under CEM, an Enterprise recognizes the collateral only after the
exposure amount has been determined. Under the proposed rule, SA-CCR
would account for collateral directly within the exposure amount
calculation. For replacement cost, the proposed rule would recognize
collateral on a one-for-one basis. For PFE, SA-CCR would use the
concept of a PFE multiplier, which would allow an Enterprise to reduce
the PFE amount through recognition of over-collateralization, in the
form of both variation margin and independent collateral. It would also
account for negative fair value amounts of the derivative contracts
within the netting set. In addition, the proposed rule would
differentiate between margined and unmargined derivative contracts,
such that the netting set subject to variation margin would always have
an exposure amount no higher than an equivalent netting set that is not
subject to a variation margin agreement.
To accommodate the introduction of the SA-CCR into the ERCF's
standardized approach, the proposed rule would make a series of
corresponding modifications, including adding appropriate defined terms
to ERCF's definitions and updating the calculation of total risk-
weighted assets. Notably, the proposed rule would replace the current
requirements for cleared transactions (12 CFR 1240.37) and
collateralized transactions (12 CFR 1240.39) with modified requirements
from the U.S. banking framework's advanced approaches (12 CFR 217.133
and 12 CFR 217.132(b)). As a result, the proposed rule's requirements
for cleared transactions would reflect the U.S. banking framework's
risk weights on cleared transactions and risk-weighted assets on
default fund contributions. The proposal would depart from the U.S.
banking framework by omitting exposure calculations related to internal
model methodology to reduce reliance on the Enterprises' internal model
results.
The proposed rule's requirements for collateralized transactions
would maintain the current collateral haircut approach and standard
supervisory haircuts, both of which are also included in the U.S.
banking framework. However, the proposed rule's requirements for
collateralized transactions would remove the current simple approach
and add the U.S. banking framework's simple value-at-risk (VaR)
methodology to align with the U.S. banking framework's advanced
approaches application of collateralized transactions.
The proposed rule would also add credit valuation adjustment (CVA)
risk-weighted assets to the calculation of standardized total risk-
weighted assets. The CVA is a fair value adjustment that reflects
counterparty credit risk in the valuation of OTC derivative contracts.
CVA risk-weighted assets cover the risk of incurring mark-to-market
losses because of the deterioration in the creditworthiness of an
Enterprise's counterparties. The proposed rule would include the U.S.
banking framework's formulaic simple CVA approach but not the advanced
CVA approach. This departure from the U.S. banking framework would
reduce reliance on the Enterprises' internal model results.
The proposed changes to the approaches for derivatives and cleared
transactions would affect both risk-weighted assets and adjusted total
assets. FHFA estimates that under the proposed rule, the total CET1
capital required to meet the risk-based capital requirements and
buffers for the Enterprises' derivatives and cleared transactions as of
September 30, 2022 would increase by less than $0.1 billion.
Question 13: In addition to the risk-sensitivity enhancements SA-
CCR provides relative to CEM, what, if any, other factors should FHFA
consider in its determination to replace CEM with SA-CCR?
D. Representative Credit Scores for Single-Family Mortgage Exposures
Credit scores are a primary risk factor for determining the
riskiness of a single-family mortgage exposure due to their strong
correlation with the likelihood of a borrower default. Therefore,
credit scores are an important input in the ERCF calculation of risk
weights for single-family mortgage exposures, both at origination
(original credit score) and over time (refreshed credit score). A
single-family mortgage exposure is normally associated with multiple
credit scores because an exposure can have multiple borrowers and each
borrower can have multiple scores. Often, each borrower has three
credit reports and, therefore, three credit scores, one from each
national consumer reporting agency (repository). To account for
multiple credit scores associated with a single-family mortgage
exposure, the ERCF includes a procedure to determine a single
representative credit score for each single-family mortgage exposure.
The proposed rule would modify the current procedure for selecting
a representative credit score to reflect FHFA's announcement \12\ in
October 2022 that the Enterprises will require two, rather than three,
credit reports from the repositories (bi-merge credit report
requirement). While the implementation date for the bi-merge credit
report requirement has yet to be announced, the proposed rule would
position the Enterprises to account for the new requirement upon
implementation.
---------------------------------------------------------------------------
\12\ FHFA Announces Validation of FICO 10T and VantageScore 4.0
for Use by Fannie Mae and Freddie Mac [bond] Federal Housing Finance
Agency, available at <a href="https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Validation-of-FICO10T-and-Vantage-Score4-for-FNM-FRE.aspx">https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Validation-of-FICO10T-and-Vantage-Score4-for-FNM-FRE.aspx</a>.
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The current ERCF instructs the Enterprises to use a two-step
procedure for identifying the representative credit score on a single-
family mortgage exposure. In the first step, an Enterprise
[[Page 15312]]
selects a single score for each borrower on the loan by either
selecting the median score if the borrower has scores from three
repositories or selecting the lowest score if the borrower has fewer
than three scores. In the second step, an Enterprise determines the
representative score for the exposure by selecting the lowest single
score across all borrowers from step one.
After the adoption of the bi-merge credit score requirement, the
current procedure for determining a representative credit score could
result in a significant downward shift in representative credit scores
for most borrowers. This is because with the bi-merge credit report
requirement, there is a higher likelihood that the representative
credit score for most borrowers would end up being the lower of two
scores rather than the median of three scores.
To mitigate this risk, the proposed rule would replace the first
step in determining a single-family mortgage exposure's representative
credit score. Rather than using the median or lowest score, the
proposed rule would require an Enterprise to calculate the average
credit score across repositories for each borrower in step one. This
change should mitigate the concern about downward bias, as the average
across the two scores is closer to the center of the borrower's credit
score distribution than the minimum across scores. To validate this
assumption, FHFA analyzed original credit scores from over 39 million
borrowers associated with loans acquired between 2010 and 2022 and
found that changing the procedure from the minimum of the medians to
the minimum of the averages (where for each borrower FHFA selected, at
random, two out of three scores) had little aggregate effect on the
average representative score. The results of this analysis suggested
that under the current rule, the average representative credit score
was 750.6, whereas under the proposed rule, the average representative
credit score was 750.3 using two borrower scores (selected at random
from the set of three) and 750.7 using three borrower scores.
The proposed change to step one would also alleviate concerns about
when the bi-merge credit score requirement will be implemented. To
examine the effect of the proposed change before the implementation
date of the bi-merge credit score requirement, FHFA repeated the
previous analysis but analyzed the difference between the use of the
median of three scores and the use of the mean of three scores. The
results of this analysis again showed little change (750.6 vs. 750.7)
in the central tendency of the representative credit score
distributions, and it showed there is little difference between the two
approaches in aggregate. Under the proposed rule, FHFA expects that for
the period before the implementation date of the bi-merge credit score
requirement the borrower credit score would typically be based on three
scores, and after the implementation date the borrower credit score
would typically be based on two scores.
The proposed change to the procedure for selecting a representative
credit score would affect risk-weighted assets, only. FHFA estimates
that under the proposed rule, the total CET1 capital required to meet
the risk-based capital requirements for the Enterprises' single-family
mortgage exposures as of June 30, 2022 would decline by less than $0.1
billion.
Question 14: What, if any, changes should FHFA consider to the
proposed methodology for determining a representative credit score? For
example, should FHFA consider requiring an Enterprise to calculate a
representative credit score by averaging credit scores across multiple
borrowers in step two rather than by taking the lowest score across
those borrowers?
E. Original Credit Scores for Single-Family Mortgage Exposures Without
a Representative Original Credit Score
As discussed above, credit scores play an important role in the
ERCF calculation of risk weights for single-family mortgage exposures
due to their strong correlation with the likelihood of a borrower
default. Credit scores are commonly used as a proxy for a borrower's
creditworthiness and are therefore a primary input in many lenders'
automated underwriting systems. Historically, and in particular prior
to the financial crisis, a borrower's lack of credit history and credit
score indicated a significant level of risk. Therefore, the current
ERCF requires an Enterprise to assign a credit score of 600 to any
single-family mortgage exposure where a permissible credit score cannot
be determined (unscored). This conservative assignation places single-
family mortgage exposures with unscored borrowers in the lowest
possible ERCF credit score buckets across the single-family base grids,
implying the highest level of risk.
However, advances in financial regulation and improvements in
mortgage underwriting and lending standards since the financial crisis
suggest that FHFA's initial credit score assignation for single-family
mortgage exposures associated with unscored borrowers may not
accurately reflect the prevailing level of credit risk in these
exposures. Although a missing credit score could be due to a data
error, today it is far more likely the loan was either manually
underwritten with the establishment of nontraditional credit and strict
requirements on property type, loan purpose, and DTI, or the loan was
underwritten through an automated system with more stringent
requirements than would be necessary if the borrower had an available
credit score.\13\
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\13\ In August 2021, FHFA announced that to expand access to
credit in a safe and sound manner, Fannie Mae would begin to
consider rental payment history as part of its mortgage underwiring
processes (<a href="https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Inclusion-of-Rental-Payment-History-in-Fannie-Maes-Underwriting-Process.aspx">https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Inclusion-of-Rental-Payment-History-in-Fannie-Maes-Underwriting-Process.aspx</a>). In July 2022,
Freddie Mac made a similar announcement (<a href="https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-takes-further-action-help-renters-achieve">https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-takes-further-action-help-renters-achieve</a>).
---------------------------------------------------------------------------
To reflect the post-crisis improvements in regulatory,
underwriting, and lending standards, as well as the recent inclusions
of positive rental payment histories in the Enterprises' automated
underwriting systems, the proposed rule would modify the assignation
process of an original credit score to a single-family mortgage
exposure without a permissible credit score at origination. FHFA
analyzed the two-year default performance of single-family mortgage
exposures associated with unscored borrowers relative to similar
exposures associated with scored borrowers and determined that unscored
exposures performed most similarly to scored exposures with original
credit scores in the range of 680 to 699. Therefore, subject to
Enterprise verification that none of the borrowers have a credit score
at one of the repositories, the proposed rule would require an
Enterprise to assign an original credit score of 680 to a single-family
mortgage exposure without a permissible credit score at origination.
After five months, an Enterprise would continue to assign a
refreshed credit score. To reflect the implied default performance in
the population of unscored borrowers, the proposed rule would modify
the definition of a refreshed credit score to mean the most recently
available credit score. For a single-family mortgage exposure without a
permissible credit score at origination, the refreshed credit score
would be either an updated credit score if one is available at the
credit repositories or the original credit score, as determined per the
proposed rule, if one is not.
[[Page 15313]]
The proposed change to the assignation process of an original
credit score to a single-family mortgage exposure without a permissible
credit score at origination would affect risk-weighted assets during
the period between origination and the later of 5 months and when a
borrower's refreshed credit score becomes available. FHFA estimates
that under the proposed rule, required CET1 capital for the
Enterprises' single-family mortgage exposures as of June 30, 2022 would
decline by less than $0.1 billion.
Question 15: What, if any, changes should FHFA consider to the
proposed methodology for determining an original credit score for a
single-family mortgage exposure without a permissible credit score at
origination?
F. Guarantee Assets
A guarantee asset is an on-balance sheet asset that represents the
present value of a future consideration for providing a financial
guarantee on a portfolio of mortgage exposures not recognized on the
balance sheet. Examples of such off-balance sheet exposures include,
but are not limited to, Freddie Mac's multifamily K-deals, Fannie Mae's
multifamily bond credit enhancements, and certain single-family
guarantee arrangements without securitization. The current ERCF does
not include an explicit risk weight for guarantee assets. As an ``other
asset'' not specifically assigned a different risk weight, an
Enterprise is required to assign a 100 percent risk weight (Sec.
1240.32(i)(5)) to guarantee assets.
The proposed rule would introduce a 20 percent risk weight for an
Enterprise's guarantee assets. This risk weight would reflect the risk-
weight floor for mortgage exposures in the ERCF as well as the minimum
risk weight for residential mortgage exposures under the Basel
framework. In addition, FHFA's proposal would promote consistency
across the financial system by aligning the risk weight for guarantee
assets with the risk weight assigned to exposures to an Enterprise in
the U.S banking framework.
The specification of a 20 percent risk weight for guarantee assets
would affect risk-weighted assets, only. FHFA estimates that under the
proposed rule, the total CET1 capital required to meet the risk-based
capital requirements for the Enterprises' guarantee assets as of
September 30, 2022 would decline by approximately $0.2 billion.
Question 16: What, if any, other factors should FHFA consider in
its determination that guarantee assets should be assigned an explicit
risk weight?
Question 17: Is the proposed 20 percent risk weight for guarantee
assets appropriately calibrated?
Question 18: Should FHFA include guarantee assets in its definition
of covered positions subject to market risk capital requirements?
G. Mortgage Servicing Assets
When a lender originates a mortgage loan, the lender may retain in
its portfolio or transfer to another party both the loan and the
servicing function, or the lender may separate the mortgage servicing
rights (MSRs) from the mortgage loan and transfer individually either
the loan or the MSR to another party. MSAs are, in general, assets
resulting from owning MSRs that are expected to generate future income
in exchange for performing the servicing function on one or more
mortgage loans.
MSA valuations rely on assessments of future economic variables and
are therefore subjective and subject to uncertainty. If interest rates
rapidly decline, such as during a stress event, MSA values can also
rapidly decline. In addition, adverse financial conditions may cause
liquidity strains for firms seeking to sell or transfer their MSAs,
further impacting the potential loss absorbing capacity of MSAs. For
these and other reasons, the U.S. banking framework requires banks to
capitalize MSAs through a combination of capital deductions and a 250
percent risk weight, and the current ERCF requires the Enterprises to
do the same.
The ERCF defines an MSA as the contractual right to service for a
fee mortgage loans that are owned by others. This definition reflects
the traditional practice of acquiring MSRs for mortgage loans not
already owned by the acquiring institution. However, it is unlikely
that the value of MSRs would be less subjective or subject to less
uncertainty if the underlying mortgage loans were already owned by the
acquiring institution rather than by others. Therefore, the proposed
rule would modify the definition of MSAs to include the contractual
right to service any mortgage loans, regardless of the owner of the
loan at the time the servicing rights are acquired.
FHFA anticipates that the proposed rule would not affect the total
CET1 capital required to meet the Enterprises' stability capital
buffers as of June 30, 2022.
Question 19: What, if any, changes should FHFA consider to the
proposed definition for MSAs?
Question 20: Does the proposed definition for MSAs include
circumstances in which an Enterprise acquires a contractual right to
service mortgage loans already owned by the Enterprise?
Question 21: Does the proposed definition for MSAs include
circumstances in which an Enterprise acquires a contractual right to
service mortgage loans but, for reasons including compliance with
generally accepted accounting principles, the servicing rights would
not result in the creation of an MSA in the absence of the proposed
requirement?
H. Time-Based Calls for CRT Exposures
For mortgage exposures that are included in a CRT, an Enterprise
has the option to calculate risk weights using the ``credit risk
transfer approach'' \14\ only if the CRT satisfies the ERCF's
``operational criteria for credit risk transfers.'' \15\ Under the
current rule, these operational criteria include restrictions for
clean-up calls. Clean-up calls are contractual provisions that permit
an originating Enterprise to redeem securitization exposures before
their stated maturity or call date. Time-based calls are contractual
provisions that permit an issuing Enterprise to redeem a securitization
exposure on one or more prespecified call dates. Time-based calls,
which are integral to the Enterprises' credit risk management and are
routinely used by the Enterprises to manage CRT economics, are not
explicitly included as eligible clean-up calls. This lack of
specificity has led to a lack of clarity about the eligibility of CRT
transactions with time-based calls under the credit risk transfer
approach in the ERCF.
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\14\ 12 CFR 1240.44.
\15\ 12 CFR 1240.41(c).
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The proposed rule would define an eligible time-based call as a
time-based call that:
(i) Is exercisable solely at the discretion of the issuing
Enterprise, and with a non-objection letter from FHFA prior to being
exercised;
(ii) Is not structured to avoid allocating losses to securitization
exposures held by investors or otherwise structured to provide at most
de minimis credit protection to the securitization; and
(iii) Is only exercisable five years after the securitization
exposure's issuance date.
The proposed changes would clarify that the ERCF permits time-based
calls, with restrictions. To ensure a significant length of time before
the first prespecified exercise date, the proposed rule would require
that the eligible time-based calls have a first exercise call date at
least five years after issuance. Further, to ensure safety and
soundness,
[[Page 15314]]
an Enterprise must request FHFA approval before exercising its time-
based calls.
To satisfy the proposed operational criteria for CRT, any time-
based call associated with a CRT must be an eligible time-based call.
FHFA anticipates that the proposed rule would result in an
insignificant change to the total CET1 capital required to meet the
risk-based capital requirements for the Enterprises' CRT exposures as
of June 30, 2022.
Question 22: What, if any, changes should FHFA consider to the
proposed definitions of time-based calls and eligible time-based calls
for CRT?
I. Interest-Only Mortgage-Backed Securities
An IO MBS is a financial instrument that receives solely the
interest payment stream generated by a pool of mortgages. An Enterprise
may securitize the IO income stream from a pool of mortgages to better
manage the interest rate risk exposure of the pool, or an Enterprise
may buy IO securities of other issuers to hold in its portfolio as
investment assets. Through the ownership of these investments, the
Enterprises are exposed to both credit and market risk. This discussion
pertains to credit risk only, as risk weights for market risk on IO
securities are contemplated in subpart F of the ERCF.
Under the current rule, an Enterprise must assign a zero percent
risk weight to any MBS guaranteed by the Enterprise (other than any
retained CRT exposure). Thus, by implication, IO MBS guaranteed by the
securitizing Enterprise should receive a zero percent risk weight.
However, the ERCF also states that the risk weight for a non-credit-
enhancing IO MBS must not be less than 100 percent. Therefore, there is
a need to clarify the risk weight for IO MBS to clarify whether a zero
percent or 100 percent risk weight should apply.
An Enterprise could be both the issuer of and investor in an IO
MBS. The credit risk on IO MBS issued and guaranteed by an Enterprise
is significantly different from that of an IO MBS issued by a non-
Enterprise entity and held in the Enterprise's retained portfolio as an
investment.\16\ Therefore, the proposed rule would require an
Enterprise to apply a different risk weight to IO MBS issued and
guaranteed by the Enterprise versus an IO MBS issued by a non-
Enterprise entity. This bifurcation would better align the capital
requirements for IO MBS to the risks inherent in the positions.
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\16\ Risk weights for an Enterprise's exposures to the other
Enterprise are determined in 12 CFR 1240.32(c).
---------------------------------------------------------------------------
For IO MBS issued and guaranteed by an Enterprise, the proposed
rule would require the issuing Enterprise to assign a zero percent risk
weight to that exposure. The zero percent risk weight reflects that the
Enterprise has already capitalized the credit risk on the underlying
single-family mortgage exposures and that there is no incremental
credit risk due to the securitization process. For IO MBS issued by a
non-Enterprise entity, the proposed rule would require the Enterprise
to assign a 100 percent risk weight to that exposure. The 100 percent
risk weight reflects that there is incremental credit risk accruing to
the investing Enterprise through the acquisition of the IO MBS.
Therefore, an Enterprise must hold credit risk capital against that
asset. For IO MBS issued by the other Enterprise, the ERCF would
continue to require an Enterprise to assign a 20 percent risk weight to
that exposure.
FHFA anticipates that the proposed rule would not affect the total
CET1 capital required to meet the risk-based capital requirements for
the Enterprises' IO MBS as of June 30, 2022.
Question 23: Is the 100 percent risk weight assigned to the IO MBS
issued by a non-Enterprise entity appropriately calibrated?
Question 24: Is the 20 percent risk weight assigned to the IO MBS
issued by the other Enterprise appropriated calibrated?
J. Single-Family Countercyclical Adjustment
In the ERCF, the mark-to-market loan-to-value ratio (MTMLTV) of a
single-family mortgage exposure is a key input to determining credit
risk-weighted assets for these exposures. The rule requires an
Enterprise to use the FHFA Purchase-only State-level House Price Index
(HPI) to update a property value when calculating an MTMLTV. The MTMLTV
is then adjusted up or down by the application of a single-family
countercyclical adjustment. This adjustment seeks to reduce the
procyclicality of the capital requirements by increasing requirements
when house prices are significantly above their long-term trend and
reducing requirements when house prices are significantly below their
long-term trend.
In calculating an MTMLTV, the ERCF mandates a six-month delay
between loan origination and the first property value adjustment to
reflect the time lag between loan origination and the publication of
the FHFA HPI for the quarter following origination. However, there is
no similar delay in the application of the single-family
countercyclical adjustment. When house price appreciation is
consistently high, such as in 2020 and 2021, this misalignment results
in rapid increases to the risk-weighted assets for single-family
mortgage exposures for the first six months due to the countercyclical
adjustment, followed by a rapid decrease with the application of the
first property value adjustment. In 2020 and 2021, this misalignment
created a significant challenge for the Enterprises' reinsurance CRT
programs. While FHFA has continually encouraged the Enterprises to
reduce the time lag between loan origination and when they acquire
credit protection, the misalignment created an incentive for the
Enterprises to wait seven months before acquiring protection. By
waiting until the capital requirement decreased mechanically, the
Enterprises were able to reduce the amount of credit protection they
acquired and save on premium costs.
The proposed rule would correct this misalignment by requiring an
Enterprise to apply the first single-family countercyclical adjustment
simultaneously with the first property value adjustment. This
modification would reduce the volatility in the capital requirement for
a single-family mortgage exposure over the first six months after
origination and mitigate the incentive for the Enterprises to delay
acquiring credit protection.
FHFA anticipates that adjusting the timing of the first single-
family countercyclical adjustment would not affect the total CET1
capital required to meet the risk-based capital requirements for the
Enterprises' single-family mortgage exposures as of June 30, 2022.
Question 25: What, if any, changes should FHFA consider to the
proposed adjustment to the timing and application of the single-family
countercyclical adjustment?
K. Stability Capital Buffer
The stability capital buffer is an Enterprise-specific amount of
common equity tier 1 capital in excess of an Enterprise's risk-based
capital requirements. It is tailored to the risk that an Enterprise's
default or other financial distress could have on the liquidity,
efficiency, competitiveness, or resiliency of the national housing
finance markets. The stability capital buffer is based on an
Enterprise's share of the total residential mortgage debt outstanding
in the United States and is expressed as a percent of adjusted total
assets.
[[Page 15315]]
Under the current rule, an Enterprise's share of residential
mortgage debt outstanding is assessed annually, and the stability
capital buffer is derived from that assessment. Increases in the
stability capital buffer are implemented with a two-year delay, while
decreases are implemented with a one-year delay. These implementation
delays contribute to the overall stability of the capital framework by
providing the Enterprises with time to adjust their capital positions
in response to changes in the stability capital buffer. However, having
increases and decreases implemented with different delays potentially
creates a situation where an increase and a decrease in the stability
capital buffer are scheduled to become effective at the same time. To
address this situation, the proposed rule would clarify that if an
increase and decrease in the stability capital buffer are scheduled for
the same date, the Enterprise should rely on the more recent data and
implement the decrease, disregarding the increase.
FHFA anticipates that the proposed rule would not affect the total
CET1 capital required to meet the Enterprises' stability capital
buffers as of June 30, 2022.
Question 26: What, if any, changes should FHFA consider to the
proposed change to the application of the stability capital buffer?
L. Advanced Approaches
The ERCF's advanced approaches for determining risk-weighted assets
rely on an Enterprise's internal models. These approaches require an
Enterprise to maintain its own processes for identifying and assessing
credit, market, and operational risk. They are intended to ensure that
an Enterprise continues to enhance its risk management and analytical
systems and not rely solely on its regulator's views on risk tolerance,
risk measurement, and capital allocation. Because of the effort
required to develop the governance processes and risk models necessary
for effectuating the advanced approaches, the ERCF includes a
transition period that delays the compliance date for the advanced
approaches until January 1, 2025.
In December 2017, the Basel Committee finalized its Basel III
framework.\17\ As part of these post-crisis reforms, the Basel
Committee sought to reduce excess variability of risk-weighted assets
and restore credibility in the calculation of risk-weighted assets, in
part by significantly constraining the use of internally-modeled
approaches. Much of the finalized Basel III framework became effective
in 2022.
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\17\ <a href="https://www.bis.org/bcbs/publ/d424.pdf">https://www.bis.org/bcbs/publ/d424.pdf</a>.
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U.S. banking regulators have yet to implement many of the reforms
outlined in the finalized Basel III framework. However, on September 9,
2022, the U.S. banking regulators formally reaffirmed their commitment
to implementing enhanced regulatory capital requirements that align
with the finalized Basel III framework.\18\ Further, in a recent
speech,\19\ the Vice Chair for Supervision of the Board of Governors of
the Federal Reserve System noted that the last set of comprehensive
adjustments to the Basel III framework, now under consideration in the
U.S., would ``further strengthen capital rules by reducing reliance on
internal bank models.''
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\18\ <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220909a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220909a.htm</a>.
\19\ <a href="https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm">https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm</a>.
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Because the U.S. banking regulators are currently contemplating the
last set of comprehensive adjustments to the Basel III framework,
including the reliance on internal models, and given the costly nature
of developing suitable internal models and governance processes for the
advanced approaches, the proposed rule would further extend the
compliance date for an Enterprise's advanced approaches to January 1,
2028. Until that time, the Enterprises will continue to rely on the
standardized approach.
III. Effective Date
Under the rule published on December 17, 2020 establishing the
ERCF, an Enterprise will not be subject to any requirement in the ERCF
until the compliance date for the requirement as detailed in the ERCF.
The effective date for the ERCF was February 16, 2021. The effective
date for the ERCF amendments in this proposed rule would be 60 days
after the day of publication of the final rule in the Federal Register.
IV. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The proposed
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if the agency has certified that the regulation will not have
a significant economic impact on a substantial number of small entities
(5 U.S.C. 605(b)). FHFA has considered the impact of the proposed rule
under the Regulatory Flexibility Act. FHFA certifies that the proposed
rule, if adopted as a final rule, would not have a significant economic
impact on a substantial number of small entities because the proposed
rule is applicable only to the Enterprises, which are not small
entities for purposes of the Regulatory Flexibility Act.
List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.
Accordingly, for the reasons stated in the Preamble, under the
authority of 12 U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-
4612, 4631-36, FHFA proposes to amend part 1240 of title 12 of the Code
of Federal Regulations as follows:
PART 1240--CAPITAL ADEQUACY OF ENTERPRISES
0
1. The authority citation for part 1240 continues to read as follows:
Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526,
4611-4612, 4631-36.
0
2. Amend Sec. 1240.2 by:
0
a. Revising paragraphs (1) through (3) in the definition of ``Adjusted
total assets'';
0
b. Adding in alphabetical order the definitions of ``Backtesting,''
``Basis derivative contract,'' ``Commercial end-user,'' ``Commingled
security,'' ``Credit default swap,'' and ``Credit valuation
adjustment'';
0
c. Removing the definitions of ``Current exposure'' and ``Current
exposure methodology'';
0
d. Adding in alphabetical order the definition of ``Eligible time-based
call'';
0
e. In the definition of ``Exposure amount'':
0
i. In paragraph (1), removing the words ``; an OTC derivative
contract'' and adding in their place the words ``(other than an OTC
derivative contract''; and
0
ii. In paragraph (3), adding the words ``or exposure at default (EAD)''
after the word ``amount'';
0
f. Revising paragraph (2) in the definition of ``Financial
collateral'';
[[Page 15316]]
0
g. Adding in alphabetical order the definitions of ``Guarantee asset,''
and ``Independent collateral'';
0
h. Revising the definition of ``Mortgage servicing assets'';
0
i. Adding in alphabetical order the definition of ``Net independent
collateral amount'';
0
j. Revising the definition of ``Netting set'';
0
k. Adding in alphabetical order the definitions of ``Qualifying cross-
product master netting agreement,'' and ``Speculative grade'';
0
l. In the definition of ``Standardized total risk-weighted assets'',
redesignating paragraphs (1)(vi) and (1)(vii) as paragraphs (1)(vii)
and (1)(viii), adding new paragraph (1)(vi), and revising newly
designated paragraph (1)(viii); and
0
m. Adding in alphabetical order the definitions of ``Sub-speculative
grade,'' ``Time-based call,'' ``Uniform Mortgage-backed Security,''
``Value-at-Risk,'' ``Variation margin,'' ``Variation margin amount,''
and ``Volatility derivative contract'';
The additions and revisions read as follows:
Sec. 1240.2 Definitions.
* * * * *
Adjusted total assets * * *
(1) The balance sheet carrying value of all of the Enterprise's on-
balance sheet assets, plus the value of securities sold under a
repurchase transaction or a securities lending transaction that
qualifies for sales treatment under Generally Accepted Accounting
Principles (GAAP), less amounts deducted from tier 1 capital under
Sec. 1240.22(a), (c), and (d), and less the value of securities
received in security-for-security repo-style transactions, where the
Enterprise acts as a securities lender and includes the securities
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received, less the fair value of any
derivative contracts;
(2)(i) The potential future exposure (PFE) for each netting set to
which the Enterprise is a counterparty (including cleared transactions
except as provided in paragraph (9) of this definition and, at the
discretion of the Enterprise, excluding a forward agreement treated as
a derivative contract that is part of a repurchase or reverse
repurchase or a securities borrowing or lending transaction that
qualifies for sales treatment under GAAP), as determined under Sec.
1240.36(c)(7), in which the term C in Sec. 1240.36(c)(7)(i) equals
zero, and, for any counterparty that is not a commercial end-user,
multiplied by 1.4. For purposes of this paragraph, an Enterprise may
set the value of the term C in Sec. 1240.36(c)(7)(i) equal to the
amount of collateral posted by a clearing member client of the
Enterprise in connection with the client-facing derivative transactions
within the netting set; and
(ii) An Enterprise may choose to exclude the PFE of all credit
derivatives or other similar instruments through which it provides
credit protection when calculating the PFE under Sec. 1240.36(c),
provided that it does so consistently over time for the calculation of
the PFE for all such instruments;
(3)(i)(A) The replacement cost of each derivative contract or
single product netting set of derivative contracts to which the
Enterprise is a counterparty, calculated according to the following
formula, and, for any counterparty that is not a commercial end-user,
multiplied by 1.4:
Replacement Cost = max {V-CVMr + CVMp;0{time}
Where:
(1) V equals the fair value for each derivative contract or each
single-product netting set of derivative contracts (including a cleared
transaction except as provided in paragraph (9) of this definition and,
at the discretion of the Enterprise, excluding a forward agreement
treated as a derivative contract that is part of a repurchase or
reverse repurchase or a securities borrowing or lending transaction
that qualifies for sales treatment under GAAP);
(2) CVMr equals the amount of cash collateral received from a
counterparty to a derivative contract and that satisfies the conditions
in paragraphs (3)(ii) through (vi) of this definition, or, in the case
of a client-facing derivative transaction, the amount of collateral
received from the clearing member client; and
(3) CVMp equals the amount of cash collateral that is posted to a
counterparty to a derivative contract and that has not offset the fair
value of the derivative contract and that satisfies the conditions in
paragraphs (3)(ii) through (vi) of this definition, or, in the case of
a client-facing derivative transaction, the amount of collateral posted
to the clearing member client;
(B) Notwithstanding paragraph (3)(i)(A) of this definition, where
multiple netting sets are subject to a single variation margin
agreement, an Enterprise must apply the formula for replacement cost
provided in Sec. 1240.36(c)(10)(i), in which the term C<INF>MA</INF>
may only include cash collateral that satisfies the conditions in
paragraphs (3)(ii) through (vi) of this definition; and
(C) For purposes of paragraph (3)(i)(A) of this definition, an
Enterprise must treat a derivative contract that references an index as
if it were multiple derivative contracts each referencing one component
of the index if the Enterprise elected to treat the derivative contract
as multiple derivative contracts under Sec. 1240.36(c)(5)(vi);
(ii) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation, or an agreement with the counterparty);
(iii) Variation margin is calculated and transferred on a daily
basis based on the mark-to-fair value of the derivative contract;
(iv) The variation margin transferred under the derivative contract
or the governing rules of the CCP or QCCP for a cleared transaction is
the full amount that is necessary to fully extinguish the net current
credit exposure to the counterparty of the derivative contracts,
subject to the threshold and minimum transfer amounts applicable to the
counterparty under the terms of the derivative contract or the
governing rules for a cleared transaction;
(v) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph, currency of
settlement means any currency for settlement specified in the governing
qualifying master netting agreement and the credit support annex to the
qualifying master netting agreement, or in the governing rules for a
cleared transaction; and
(vi) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction, and the qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
* * * * *
Backtesting means the comparison of an Enterprise's internal
estimates with actual outcomes during a sample period not used in model
development. In this
[[Page 15317]]
context, backtesting is one form of out-of-sample testing.
* * * * *
Basis derivative contract means a non-foreign-exchange derivative
contract (i.e., the contract is denominated in a single currency) in
which the cash flows of the derivative contract depend on the
difference between two risk factors that are attributable solely to one
of the following derivative asset classes: Interest rate, credit,
equity, or commodity.
* * * * *
Commercial end-user means an entity that:
(1)(i) Is using derivative contracts to hedge or mitigate
commercial risk; and
(ii)(A) Is not an entity described in section 2(h)(7)(C)(i)(I)
through (VIII) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(C)(i)(I)
through (VIII)); or
(B) Is not a ``financial entity'' for purposes of section 2(h)(7)
of the Commodity Exchange Act (7 U.S.C. 2(h)) by virtue of section
2(h)(7)(C)(iii) of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or
(2)(i) Is using derivative contracts to hedge or mitigate
commercial risk; and
(ii) Is not an entity described in section 3C(g)(3)(A)(i) through
(viii) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-
3(g)(3)(A)(i) through (viii)); or
(3) Qualifies for the exemption in section 2(h)(7)(A) of the
Commodity Exchange Act (7 U.S.C. 2(h)(7)(A)) by virtue of section
2(h)(7)(D) of the Act (7 U.S.C. 2(h)(7)(D)); or
(4) Qualifies for an exemption in section 3C(g)(1) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) by virtue of
section 3C(g)(4) of the Act (15 U.S.C. 78c-3(g)(4)).
Commingled security means a resecuritization of UMBS in which one
or more of the underlying exposures is a UMBS guaranteed by the other
Enterprise or is a resecuritization of UMBS guaranteed by the other
Enterprise.
* * * * *
Credit default swap (CDS) means a financial contract executed under
standard industry documentation that allows one party (the protection
purchaser) to transfer the credit risk of one or more exposures
(reference exposure(s)) to another party (the protection provider) for
a certain period of time.
* * * * *
Credit valuation adjustment (CVA) means the fair value adjustment
to reflect counterparty credit risk in valuation of OTC derivative
contracts.
* * * * *
Eligible time-based call means a time-based call that:
(1) Is exercisable solely at the discretion of the originating
Enterprise, provided the Enterprise obtains FHFA's non-objection prior
to exercising the time-based call;
(2) Is not structured to avoid allocating credit losses to
investors or otherwise structured to provide at most de minimis credit
protection to the securitization or credit risk transfer; and
(3) Is exercisable no less than five years after the securitization
or credit risk transfer issuance date.
* * * * *
Financial collateral * * *
(2) In which the Enterprise has a perfected, first-priority
security interest or, outside of the United States, the legal
equivalent thereof, (with the exception of cash on deposit; and
notwithstanding the prior security interest of any custodial agent or
any priority security interest granted to a CCP in connection with
collateral posted to that CCP).
* * * * *
Guarantee asset means the present value of a future consideration
to be received for providing a financial guarantee on a portfolio of
mortgage exposures not recognized on the balance sheet.
Independent collateral means financial collateral, other than
variation margin, that is subject to a collateral agreement, or in
which an Enterprise has a perfected, first-priority security interest
or, outside of the United States, the legal equivalent thereof (with
the exception of cash on deposit; notwithstanding the prior security
interest of any custodial agent or any prior security interest granted
to a CCP in connection with collateral posted to that CCP), and the
amount of which does not change directly in response to the value of
the derivative contract or contracts that the financial collateral
secures.
* * * * *
Mortgage servicing assets (MSAs) means the contractual rights to
service mortgage loans for a fee.
* * * * *
Net independent collateral amount means the fair value amount of
the independent collateral, as adjusted by the standard supervisory
haircuts under Sec. 1240.39(b)(2)(ii), as applicable, that a
counterparty to a netting set has posted to an Enterprise less the fair
value amount of the independent collateral, as adjusted by the standard
supervisory haircuts under Sec. 1240.39(b)(2)(ii), as applicable,
posted by the Enterprise to the counterparty, excluding such amounts
held in a bankruptcy remote manner or posted to a QCCP and held in
conformance with the operational requirements in Sec. 1240.3.
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement
or a qualifying cross-product master netting agreement. For derivative
contracts, netting set also includes a single derivative contract
between an Enterprise and a single counterparty.
* * * * *
Qualifying cross-product master netting agreement means a
qualifying master netting agreement that provides for termination and
close-out netting across multiple types of financial transactions or
qualifying master netting agreements in the event of a counterparty's
default, provided that the underlying financial transactions are OTC
derivative contracts, eligible margin loans, or repo-style
transactions. In order to treat an agreement as a qualifying cross-
product master netting agreement for purposes of this subpart, an
Enterprise must comply with the requirements of Sec. 1240.3(c) with
respect to that agreement.
* * * * *
Speculative grade means the reference entity has adequate capacity
to meet financial commitments in the near term, but is vulnerable to
adverse economic conditions, such that should economic conditions
deteriorate, the reference entity would present an elevated default
risk.
* * * * *
Standardized total risk-weighted assets * * *
(1) * * *
(vi) Credit valuation adjustment (CVA) risk-weighted assets as
calculated under Sec. 1240.36(d);
* * * * *
(viii) Standardized market risk-weighted assets, as calculated
under Sec. 1240.204; minus
* * * * *
Sub-speculative grade means the reference entity depends on
favorable economic conditions to meet its financial commitments, such
that should such economic conditions deteriorate the reference entity
likely would default on its financial commitments.
* * * * *
Time-based call means a contractual provision that permits an
originating Enterprise to redeem a securitization exposure on or after
a specified redemption or cancellation date.
* * * * *
[[Page 15318]]
Uniform Mortgage-backed Security (UMBS) means the same as that
defined in Sec. 1248.1.
Value-at-Risk (VaR) means the estimate of the maximum amount that
the value of one or more exposures could decline due to market price or
rate movements during a fixed holding period within a stated confidence
interval.
Variation margin means financial collateral that is subject to a
collateral agreement provided by one party to its counterparty to meet
the performance of the first party's obligations under one or more
transactions between the parties as a result of a change in value of
such obligations since the last time such financial collateral was
provided.
* * * * *
Variation margin amount means the fair value amount of the
variation margin, as adjusted by the standard supervisory haircuts
under Sec. 1240.39(b)(2)(ii), as applicable, that a counterparty to a
netting set has posted to an Enterprise less the fair value amount of
the variation margin, as adjusted by the standard supervisory haircuts
under Sec. 1240.39(b)(2)(ii), as applicable, posted by the Enterprise
to the counterparty.
* * * * *
Volatility derivative contract means a derivative contract in which
the payoff of the derivative contract explicitly depends on a measure
of the volatility of an underlying risk factor to the derivative
contract.
* * * * *
Sec. 1240.4 [Amended]
0
3. Amend Sec. 1240.4(c) by removing the year ``2025'' and adding, in
its place, the year ``2028''.
0
4. Amend Sec. 1240.31 by:
0
a. In paragraph (a)(1)(iv) removing the word ``or'' after the ``;'';
0
b. In paragraph (a)(1)(v) removing the ``.'' after ``1240.52'' and
adding ``; or'' in its place; and
0
c. Adding paragraph (a)(1)(vi) to read as follows:
Sec. 1240.31 Mechanics for calculating risk-weighted assets for
general credit risk.
(a) * * *
(1) * * *
(vi) CVA risk-weighted assets subject to Sec. 1240.36(d).
* * * * *
0
5. Amend Sec. 1240.32 by:
0
a. Redesignating paragraph (c)(2) as paragraph (c)(3), adding new
paragraph (c)(2), and revising redesignated paragraph (c)(3); and
0
b. Redesignating paragraph (i)(5) as paragraph (i)(6) and adding new
paragraph (i)(5).
The additions and revision read as follows:
Sec. 1240.32 General risk weights.
(c) * * *
(2) An Enterprise must assign a 5 percent risk weight to an
exposure to the other Enterprise in a commingled security.
(3) An Enterprise must assign a 20 percent risk weight to an
exposure to another GSE, including an MBS guaranteed by the other
Enterprise, except for exposures under paragraph (c)(2) of this
section.
* * * * *
(i) * * *
(5) An Enterprise must assign a 20 percent risk weight to guarantee
assets.
* * * * *
0
6. Amend Sec. 1240.33 by:
0
a. Revising paragraph (ii) in the definition of ``Adjusted MTMLTV'';
and
0
b. Revising table 1 to paragraph (a).
The revisions read as follows:
Sec. 1240.33 Single-family mortgage exposures.
(a) * * *
Adjusted MTMLTV * * *
(ii) The amount equal to 1 plus either:
(A) The single-family countercyclical adjustment available at the
time of the exposure's origination if the loan age of the single-family
mortgage exposure is less than or equal to 5; or
(B) The single-family countercyclical adjustment available as of
that time if the loan age of the single-family mortgage exposure is
greater than or equal to 6.
* * * * *
Table 1 to Paragraph (a)--Permissible Values and Additional Instructions
----------------------------------------------------------------------------------------------------------------
Defined term Permissible values Additional instructions
----------------------------------------------------------------------------------------------------------------
Cohort burnout........................ ``No burnout,'' if the single- High if unable to determine.
family mortgage exposure has not
had a refinance opportunity since
the loan age of the single-family
mortgage exposure was 6.
``Low,'' if the single-family
mortgage exposure has had 12 or
fewer refinance opportunities
since the loan age of the single-
family mortgage exposure was 6.
``Medium,'' if the single-family
mortgage exposure has had between
13 and 24 refinance opportunities
since the loan age of the single-
family mortgage exposure was 6.
``High,'' if the single-family
mortgage exposure has had more
than 24 refinance opportunities
since the loan age of the single-
family mortgage exposure was 6.
Coverage percent...................... 0 percent <= coverage percent <= 0 percent if outside of permissible
100 percent. range or unable to determine.
Days past due......................... Non-negative integer............... 210 if negative or unable to
determine.
Debt-to-income (DTI) ratio............ 0 percent < DTI < 100 percent...... 42 percent if outside of
permissible range or unable to
determine.
Interest-only (IO).................... Yes, no............................ Yes if unable to determine.
Loan age.............................. 0 <= loan age <= 500............... 500 if outside of permissible range
or unable to determine.
Loan documentation.................... None, low, full.................... None if unable to determine.
Loan purpose.......................... Purchase, cashout refinance, rate/ Cashout refinance if unable to
term refinance. determine.
MTMLTV................................ 0 percent < MTMLTV <= 300 percent.. If the property securing the single-
family mortgage exposure is
located in Puerto Rico or the U.S.
Virgin Islands, use the FHFA House
Price Index of the United States.
If the property securing the single-
family mortgage exposure is
located in Hawaii, use the FHFA
Purchase-only State-level House
Price Index of Guam.
If the single-family mortgage
exposure was originated before
1991, use the Enterprise's
proprietary housing price index.
Use geometric interpolation to
convert quarterly housing price
index data to monthly data.
300 percent if outside of
permissible range or unable to
determine.
Mortgage concentration risk........... High, not high..................... High if unable to determine.
[[Page 15319]]
MI cancellation feature............... Cancellable mortgage insurance, non- Cancellable mortgage insurance, if
cancellable mortgage insurance. unable to determine.
Occupancy type........................ Investment, owner-occupied, second Investment if unable to determine.
home.
OLTV.................................. 0 percent < OLTV <= 300 percent.... 300 percent if outside of
permissible range or unable to
determine.
Original credit score................. 300 <= original credit score <= 850 The original credit score for the
single-family mortgage exposure is
determined based on the original
credit scores of each borrower on
the exposure using the following
procedure.
Determine the borrower credit score
for each borrower:
<bullet> If there are original
credit scores from multiple
credit repositories for a
borrower, the borrower credit
score is the mean across the
borrower's original credit
scores.
<bullet> If there is only one
original credit score for the
borrower from one repository,
the borrower credit score is
the one available original
credit score.
Determine the original credit score
for the single-family mortgage
exposure:
<bullet> If there is only one
borrower, the borrower credit
score is the original credit
score for the single-family
mortgage exposure.
<bullet> If there are multiple
borrowers, the lowest borrower
credit score across all
borrowers is the original
credit score for the single-
family mortgage exposure.
<bullet> If a borrower does not
have a borrower credit score,
determine the original credit
score for the single-family
mortgage exposure based on the
borrower credit scores of the
other borrowers on the loan.
The original credit score for the
single-family mortgage exposure is
680 if the Enterprise has verified
that no borrower has a credit
score at any of the three
repositories.
The original credit score for the
single-family mortgage exposure is
600 if (i) an Enterprise is unable
to determine the original credit
score using the above procedure or
(ii) the original credit score
calculated using the procedure
falls outside of the permissible
range.
Origination channel................... Retail, third-party origination TPO includes broker and
(TPO). correspondent channels.
TPO if unable to determine.
Payment change from modification...... -80 percent < payment change from If the single-family mortgage
modification < 50 percent. exposure initially had an
adjustable or step-rate feature,
the monthly payment after a
permanent modification is
calculated using the initial
modified rate.
0 percent if unable to determine.
-79 percent if less than or equal
to -80 percent.
49 percent if greater than or equal
to 50 percent.
Previous maximum days past due........ Non-negative integer............... 181 months if negative or unable to
determine.
Product type.......................... ``FRM30'' means a fixed-rate single- Product types other than FRM30,
family mortgage exposure with an FRM20, FRM15 or ARM 1/1 should be
original amortization term greater assigned to FRM30.
than 309 months and less than or Use the post-modification product
equal to 429 months. type for modified mortgage
``FRM20'' means a fixed-rate single- exposures.
family mortgage exposure with an ARM 1/1 if unable to determine.
original amortization term greater
than 189 months and less than or
equal to 309 months.
``FRM15'' means a fixed-rate single-
family mortgage exposure with an
original amortization term less
than or equal to 189 months.
``ARM1/1'' is an adjustable-rate
single-family mortgage exposure
that has a mortgage rate and
required payment that adjust
annually.
Property type......................... 1-unit, 2-4 units, condominium, Use condominium for cooperatives.
manufactured home. 2-4 units if unable to determine.
Refreshed credit score................ 300 <= refreshed credit score <= The refreshed credit score for the
850. single-family mortgage exposure is
determined based on the refreshed
credit scores of each borrower on
the exposure using the following
procedure.
Determine the borrower credit score
for each borrower:
<bullet> If the Enterprise
acquires refreshed credit
scores from multiple
repositories for a borrower,
the borrower credit score is
the mean across the borrower's
refreshed credit scores.
<bullet> If the Enterprise
acquires only one refreshed
credit score for the borrower
from one repository, the
borrower credit score is the
one available refreshed credit
score.
<bullet> If the Enterprise does
not acquire refreshed credit
scores, the borrower's
refreshed credit score is the
borrower's most recently
available credit score, which
could be the borrower's
original credit score.
Determine the refreshed credit
score for the single-family
mortgage exposure:
<bullet> If there is only one
borrower, the borrower credit
score is the refreshed credit
score for the single-family
mortgage exposure.
<bullet> If there are multiple
borrowers, the lowest borrower
credit score across all
borrowers is the refreshed
credit score for the single-
family mortgage exposure. If a
borrower does not have a
borrower credit score,
determine the refreshed credit
score for the single-family
mortgage exposure based on the
borrower credit scores of the
other borrowers on the loan.
[[Page 15320]]
<bullet> If no refreshed credit
scores are available for any
borrowers on the loan, then the
refreshed credit score for the
single-family mortgage exposure
is the same as the original
credit score for the single-
family mortgage exposure.
Streamlined refi...................... Yes, no............................ No if unable to determine.
Subordination......................... 0 percent <= Subordination <= 80 80 percent if outside permissible
percent. range.
----------------------------------------------------------------------------------------------------------------
* * * * *
0
7. Amend Sec. 1240.34 by:
0
a. Adding in alphabetical order the definition of ``Affordable unit'';
0
b. Adding in alphabetical order the definition of ``Government
subsidy'';
0
c. Revising table 1 to paragraph (a); and
0
d. Revising table 4 to paragraph (d).
The additions and revisions read as follows:
Sec. 1240.34 Multifamily mortgage exposures.
(a) * * *
Affordable unit means a unit within a property securing a
multifamily mortgage exposure that can be rented by occupants with
income less than or equal to 80 percent of the area median income where
the property resides.
* * * * *
Government subsidy means that the property satisfies both of the
following criteria:
(1) at least 20 percent of the property's units are restricted to
be affordable units; and
(2) the property benefits from one of the following three
government programs:
(i) Low Income Housing Tax Credits (LIHTC);
(ii) Section 8 project-based rental assistance; or
(iii) State/Local affordable housing programs that require the
provision of affordable housing for the life of the loan.
* * * * *
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TP13MR23.019
* * * * *
[[Page 15321]]
[GRAPHIC] [TIFF OMITTED] TP13MR23.020
BILLING CODE 4910-13-C
0
8. Amend Sec. 1240.35 by revising paragraphs (b)(3) and (b)(4)(i) to
read as follows:
Sec. 1240.35 Off-balance sheet exposures.
* * * * *
(b) * * *
(3) 50 percent CCF. An Enterprise must apply a 50 percent CCF to:
(i) The amount of commitments with an original maturity of more
than one year that are not unconditionally cancelable by the
Enterprise; and
(ii) Guarantees on exposures to the other Enterprise in commingled
securities.
(4) * * *
(i) Guarantees, except guarantees included in paragraph (b)(3)(ii)
of this section;
* * * * *
0
9. Revise Sec. 1240.36 to read as follows:
Sec. 1240.36 Derivative contracts.
(a) Exposure amount for derivative contracts. An Enterprise must
calculate the exposure amount or EAD for all its
[[Page 15322]]
derivative contracts using the standardized approach for counterparty
credit risk (SA-CCR) in paragraph (c) of this section for purposes of
standardized total risk-weighted assets. An Enterprise must apply the
treatment of cleared transactions under Sec. 1240.37 to its derivative
contracts that are cleared transactions and to all default fund
contributions associated with such derivative contracts for purposes of
standardized total risk-weighted assets.
(b) Methodologies for collateral recognition. (1) An Enterprise may
use the methodologies under Sec. 1240.39 to recognize the benefits of
financial collateral in mitigating the counterparty credit risk of
repo-style transactions, eligible margin loans, collateralized OTC
derivative contracts and single product netting sets of such
transactions.
(2) An Enterprise must use the methodology in paragraph (c) of this
section to calculate EAD for an OTC derivative contract or a set of OTC
derivative contracts subject to a qualifying master netting agreement.
(3) An Enterprise must also use the methodology in paragraph (d) of
this section to calculate the risk-weighted asset amounts for CVA for
OTC derivatives.
(c) EAD for derivative contracts--(1) Options for determining EAD.
An Enterprise must determine the EAD for a derivative contract using
SA-CCR under paragraph (c)(5) of this section. The exposure amount
determined under SA-CCR is the EAD for the derivative contract or
derivatives contracts. An Enterprise must use the same methodology to
calculate the exposure amount for all its derivative contracts. An
Enterprise may reduce the EAD calculated according to paragraph (c)(5)
of this section by the credit valuation adjustment that the Enterprise
has recognized in its balance sheet valuation of any derivative
contracts in the netting set. For purposes of this paragraph (c)(1),
the credit valuation adjustment does not include any adjustments to
common equity tier 1 capital attributable to changes in the fair value
of the Enterprise's liabilities that are due to changes in its own
credit risk since the inception of the transaction with the
counterparty.
(2) Definitions. For purposes of paragraph (c) of this section, the
following definitions apply:
(i) End date means the last date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references another instrument, by the underlying instrument,
except as otherwise provided in paragraph (c) of this section.
(ii) Start date means the first date of the period referenced by an
interest rate or credit derivative contract or, if the derivative
contract references the value of another instrument, by underlying
instrument, except as otherwise provided in paragraph (c) of this
section.
(iii) Hedging set means:
(A) With respect to interest rate derivative contracts, all such
contracts within a netting set that reference the same reference
currency;
(B) With respect to exchange rate derivative contracts, all such
contracts within a netting set that reference the same currency pair;
(C) With respect to credit derivative contract, all such contracts
within a netting set;
(D) With respect to equity derivative contracts, all such contracts
within a netting set;
(E) With respect to a commodity derivative contract, all such
contracts within a netting set that reference one of the following
commodity categories: Energy, metal, agricultural, or other
commodities;
(F) With respect to basis derivative contracts, all such contracts
within a netting set that reference the same pair of risk factors and
are denominated in the same currency; or
(G) With respect to volatility derivative contracts, all such
contracts within a netting set that reference one of interest rate,
exchange rate, credit, equity, or commodity risk factors, separated
according to the requirements under paragraphs (c)(2)(iii)(A) through
(E) of this section.
(H) If the risk of a derivative contract materially depends on more
than one of interest rate, exchange rate, credit, equity, or commodity
risk factors, FHFA may require an Enterprise to include the derivative
contract in each appropriate hedging set under paragraphs
(c)(2)(iii)(A) through (E) of this section.
(3) Credit derivatives. Notwithstanding paragraphs (c)(1) and
(c)(2) of this section:
(i) An Enterprise that purchases a credit derivative that is
recognized under Sec. 1240.38 as a credit risk mitigant for an
exposure is not required to calculate a separate counterparty credit
risk capital requirement under this section so long as the Enterprise
does so consistently for all such credit derivatives and either
includes or excludes all such credit derivatives that are subject to a
master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes.
(ii) An Enterprise that is the protection provider in a credit
derivative must treat the credit derivative as an exposure to the
reference obligor and is not required to calculate a counterparty
credit risk capital requirement for the credit derivative under this
section, so long as it does so consistently for all such credit
derivatives and either includes all or excludes all such credit
derivatives that are subject to a master netting agreement from any
measure used to determine counterparty credit risk exposure to all
relevant counterparties for risk-based capital purposes.
(4) Equity derivatives. An Enterprise must treat an equity
derivative contract as an equity exposure and compute a risk-weighted
asset amount for the equity derivative contract under Sec. 1240.51. In
addition, if an Enterprise is treating the contract as a covered
position under subpart F of this part, the Enterprise must also
calculate a risk-based capital requirement for the counterparty credit
risk of an equity derivative contract under this section.
(5) Exposure amount. (i) The exposure amount of a netting set, as
calculated under paragraph (c) of this section, is equal to 1.4
multiplied by the sum of the replacement cost of the netting set, as
calculated under paragraph (c)(6) of this section, and the potential
future exposure of the netting set, as calculated under paragraph
(c)(7) of this section.
(ii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty to the
variation margin agreement is not required to post variation margin, is
equal to the lesser of the exposure amount of the netting set
calculated under paragraph (c)(5)(i) of this section and the exposure
amount of the netting set calculated under paragraph (c)(5)(i) of this
section as if the netting set were not subject to a variation margin
agreement.
(iii) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set that consists of
only sold options in which the premiums have been fully paid by the
counterparty to the options and where the options are not subject to a
variation margin agreement is zero.
(iv) Notwithstanding the requirements of paragraph (c)(5)(i) of
this section, the exposure amount of a netting set in which the
counterparty is a commercial end-user is equal to the sum of
[[Page 15323]]
replacement cost, as calculated under paragraph (c)(6) of this section,
and the potential future exposure of the netting set, as calculated
under paragraph (c)(7) of this section.
(v) For purposes of the exposure amount calculated under paragraph
(c)(5)(i) of this section and all calculations that are part of that
exposure amount, an Enterprise may elect to treat a derivative contract
that is a cleared transaction that is not subject to a variation margin
agreement as one that is subject to a variation margin agreement, if
the derivative contract is subject to a requirement that the
counterparties make daily cash payments to each other to account for
changes in the fair value of the derivative contract and to reduce the
net position of the contract to zero. If an Enterprise makes an
election under this paragraph (c)(5)(v) for one derivative contract, it
must treat all other derivative contracts within the same netting set
that are eligible for an election under this paragraph (c)(5)(v) as
derivative contracts that are subject to a variation margin agreement.
(vi) For purposes of the exposure amount calculated under paragraph
(c)(5)(i) of this section and all calculations that are part of that
exposure amount, an Enterprise may elect to treat a credit derivative
contract, equity derivative contract, or commodity derivative contract
that references an index as if it were multiple derivative contracts
each referencing one component of the index.
(6) Replacement cost of a netting set--(i) Netting set subject to a
variation margin agreement under which the counterparty must post
variation margin. The replacement cost of a netting set subject to a
variation margin agreement, excluding a netting set that is subject to
a variation margin agreement under which the counterparty is not
required to post variation margin, is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the sum of the net independent collateral amount and the variation
margin amount applicable to such derivative contracts;
(B) The sum of the variation margin threshold and the minimum
transfer amount applicable to the derivative contracts within the
netting set less the net independent collateral amount applicable to
such derivative contracts; or
(C) Zero.
(ii) Netting sets not subject to a variation margin agreement under
which the counterparty must post variation margin. The replacement cost
of a netting set that is not subject to a variation margin agreement
under which the counterparty must post variation margin to the
Enterprise is the greater of:
(A) The sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set less
the sum of the net independent collateral amount and variation margin
amount applicable to such derivative contracts; or
(B) Zero.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(6)(i) and (ii) of this
section, the replacement cost for multiple netting sets subject to a
single variation margin agreement must be calculated according to
paragraph (c)(10)(i) of this section.
(iv) Netting set subject to multiple variation margin agreements or
a hybrid netting set. Notwithstanding paragraphs (c)(6)(i) and (ii) of
this section, the replacement cost for a netting set subject to
multiple variation margin agreements or a hybrid netting set must be
calculated according to paragraph (c)(11)(i) of this section.
(7) Potential future exposure of a netting set. The potential
future exposure of a netting set is the product of the PFE multiplier
and the aggregated amount.
(i) PFE multiplier. The PFE multiplier is calculated according to
the following formula:
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TP13MR23.021
Where:
(A) V is the sum of the fair values (after excluding any valuation
adjustments) of the derivative contracts within the netting set;
(B) C is the sum of the net independent collateral amount and the
variation margin amount applicable to the derivative contracts within
the netting set; and
(C) A is the aggregated amount of the netting set.
(ii) Aggregated amount. The aggregated amount is the sum of all
hedging set amounts, as calculated under paragraph (c)(8) of this
section, within a netting set.
(iii) Multiple netting sets subject to a single variation margin
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section and when calculating the potential future exposure for purposes
of adjusted total assets, the potential future exposure for multiple
netting sets subject to a single variation margin agreement must be
calculated according to paragraph (c)(10)(ii) of this section.
(iv) Netting set subject to multiple variation margin agreements or
a hybrid netting set. Notwithstanding paragraphs (c)(7)(i) and (ii) of
this section and when calculating the potential future exposure for
purposes of adjusted total assets, the potential future exposure for a
netting set subject to multiple variation margin agreements or a hybrid
netting set must be calculated according to paragraph (c)(11)(ii) of
this section.
(8) Hedging set amount--(i) Interest rate derivative contracts. To
calculate the hedging set amount of an interest rate derivative
contract hedging set, an Enterprise may use either of the formulas
provided in paragraphs (c)(8)(i)(A) and (B) of this section:
(A) Formula 1 is as follows:
Hedging set amount = [(AddOnTB1IR)<SUP>2</SUP> +
AddOnTB2IR)<SUP>2</SUP> + 1.4 * AddOnTB1IR * AddOnTB2IR + 1.4 *
AddOnTB2IR * AddOnTB3IR + 0.6 * AddOnTB1IR *
AddOnTB3IR]<SUP>\1/2\</SUP>; or
(B) Formula 2 is as follows:
Hedging set amount = [verbar]AddOnTB1IR[verbar] +
[verbar]AddOnTB2IR[verbar] + [verbar]AddOnTB3IR[verbar].
Where in paragraphs (c)(8)(i)(A) and (B) of this section:
(1) AddOnTB1IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section, within
the hedging set with an end date of less than one year from the present
date;
(2) AddOnTB2IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section, within
the hedging set with an end date of one to five years from the present
date; and
(3) AddOnTB3IR is the sum of the adjusted derivative contract
amounts, as calculated under paragraph (c)(9) of this section, within
the hedging set with an end date of more than five years from the
present date.
(ii) Exchange rate derivative contracts. For an exchange rate
[[Page 15324]]
derivative contract hedging set, the hedging set amount equals the
absolute value of the sum of the adjusted derivative contract amounts,
as calculated under paragraph (c)(9) of this section, within the
hedging set.
(iii) Credit derivative contracts and equity derivative contracts.
The hedging set amount of a credit derivative contract hedging set or
equity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.022
Where:
(A) k is each reference entity within the hedging set.
(B) K is the number of reference entities within the hedging set.
(C) AddOn(Refk) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for all
derivative contracts within the hedging set that reference reference
entity k.
(D) rk equals the applicable supervisory correlation factor, as
provided in table 2 to paragraph (c)(11)(ii)(B)(2).
(iv) Commodity derivative contracts. The hedging set amount of a
commodity derivative contract hedging set within a netting set is
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.023
Where:
(A) k is each commodity type within the hedging set.
(B) K is the number of commodity types within the hedging set.
(C) AddOn(Typek) equals the sum of the adjusted derivative contract
amounts, as determined under paragraph (c)(9) of this section, for all
derivative contracts within the hedging set that reference reference
commodity type.
(D) [rho] equals the applicable supervisory correlation factor, as
provided in table 2 to paragraph (c)(11)(ii)(B)(2).
(v) Basis derivative contracts and volatility derivative contracts.
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, an
Enterprise must calculate a separate hedging set amount for each basis
derivative contract hedging set and each volatility derivative contract
hedging set. An Enterprise must calculate such hedging set amounts
using one of the formulas under paragraphs (c)(8)(i) through (iv) that
corresponds to the primary risk factor of the hedging set being
calculated.
(9) Adjusted derivative contract amount--(i) Summary. To calculate
the adjusted derivative contract amount of a derivative contract, an
Enterprise must determine the adjusted notional amount of derivative
contract, pursuant to paragraph (c)(9)(ii) of this section, and
multiply the adjusted notional amount by each of the supervisory delta
adjustment, pursuant to paragraph (c)(9)(iii) of this section, the
maturity factor, pursuant to paragraph (c)(9)(iv) of this section, and
the applicable supervisory factor, as provided in table 2 to paragraph
(c)(11)(ii)(B)(2).
(ii) Adjusted notional amount. (A)(1) For an interest rate
derivative contract or a credit derivative contract, the adjusted
notional amount equals the product of the notional amount of the
derivative contract, as measured in U.S. dollars using the exchange
rate on the date of the calculation, and the supervisory duration, as
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.024
Where:
(i) S is the number of business days from the present day until the
start date of the derivative contract, or zero if the start date has
already passed; and
(ii) E is the number of business days from the present day until
the end date of the derivative contract.
(2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
(i) For an interest rate derivative contract or credit derivative
contract that is a variable notional swap, the notional amount is equal
to the time-weighted average of the contractual notional amounts of
such a swap over the remaining life of the swap; and
(ii) For an interest rate derivative contract or a credit
derivative contract that is a leveraged swap, in which the notional
amount of all legs of the derivative contract are divided by a factor
and all rates of the derivative contract are multiplied by the same
factor, the notional amount is equal to the notional amount of an
equivalent unleveraged swap.
(B)(1) For an exchange rate derivative contract, the adjusted
notional amount is the notional amount of the non-U.S. denominated
currency leg of the derivative contract, as measured in U.S. dollars
using the exchange rate on the date of the calculation. If both legs of
the exchange rate derivative contract are denominated in currencies
other than U.S. dollars, the adjusted notional amount of the derivative
contract is the largest leg of the derivative contract, as measured in
U.S. dollars using the exchange rate on the date of the calculation.
(2) Notwithstanding paragraph (c)(9)(ii)(B)(1) of this section, for
an exchange rate derivative contract with
[[Page 15325]]
multiple exchanges of principal, the Enterprise must set the adjusted
notional amount of the derivative contract equal to the notional amount
of the derivative contract multiplied by the number of exchanges of
principal under the derivative contract.
(C)(1) For an equity derivative contract or a commodity derivative
contract, the adjusted notional amount is the product of the fair value
of one unit of the reference instrument underlying the derivative
contract and the number of such units referenced by the derivative
contract.
(2) Notwithstanding paragraph (c)(9)(ii)(C)(1) of this section,
when calculating the adjusted notional amount for an equity derivative
contract or a commodity derivative contract that is a volatility
derivative contract, the Enterprise must replace the unit price with
the underlying volatility referenced by the volatility derivative
contract and replace the number of units with the notional amount of
the volatility derivative contract.
(iii) Supervisory delta adjustments. (A) For a derivative contract
that is not an option contract or collateralized debt obligation
tranche, the supervisory delta adjustment is 1 if the fair value of the
derivative contract increases when the value of the primary risk factor
increases and -1 if the fair value of the derivative contract decreases
when the value of the primary risk factor increases.
(B)(1) For a derivative contract that is an option contract, the
supervisory delta adjustment is determined by the following formulas,
as applicable:
[GRAPHIC] [TIFF OMITTED] TP13MR23.025
(2) As used in the formulas in table 1 to paragraph
(c)(9)(iii)(B)(1):
(i) [PHgr] is the standard normal cumulative distribution function;
(ii) P equals the current fair value of the instrument or risk
factor, as applicable, underlying the option;
(iii) K equals the strike price of the option;
(iv) T equals the number of business days until the latest
contractual exercise date of the option;
(v) [lambda] equals zero for all derivative contracts except
interest rate options for the currencies where interest rates have
negative values. The same value of [lambda] must be used for all
interest rate options that are denominated in the same currency. To
determine the value of [lambda] for a given currency, an Enterprise
must find the lowest value L of P and K of all interest rate options in
a given currency that the Enterprise has with all counterparties. Then,
[lambda] is set according to this formula:
[lambda] = max{-L + 0.1%, 0{time} ; and
(vi) [sigma] equals the supervisory option volatility, as provided
in table 2 to paragraph (c)(11)(ii)(B)(2).
(C)(1) For a derivative contract that is a collateralized debt
obligation tranche, the supervisory delta adjustment is determined by
the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.026
(2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this
section:
(i) A is the attachment point, which equals the ratio of the
notional amounts of all underlying exposures that are subordinated to
the Enterprise's exposure to the total notional amount of all
underlying exposures, expressed as a decimal value between zero and
one; \1\
---------------------------------------------------------------------------
\1\ In the case of a first-to-default credit derivative, there
are no underlying exposures that are subordinated to the
Enterprise's exposure. In the case of a second-or-subsequent-to-
default credit derivative, the smallest (n-1) notional amounts of
the underlying exposures are subordinated to the Enterprise's
exposure.
---------------------------------------------------------------------------
(ii) D is the detachment point, which equals one minus the ratio of
the notional amounts of all underlying exposures that are senior to the
Enterprise's exposure to the total notional amount of all underlying
exposures, expressed as a decimal value between zero and one; and
(iii) The resulting amount is designated with a positive sign if
the collateralized debt obligation tranche was purchased by the
Enterprise and is designated with a negative sign if the collateralized
debt obligation tranche was sold by the Enterprise.
(iv) Maturity factor. (A)(1) The maturity factor of a derivative
contract that is subject to a variation margin agreement, excluding
derivative contracts that are subject to a variation margin agreement
under which the counterparty is not required to post variation margin,
is determined by the following formula:
[[Page 15326]]
[GRAPHIC] [TIFF OMITTED] TP13MR23.027
Where Margin Period of Risk (MPOR) refers to the period from the
most recent exchange of collateral covering a netting set of derivative
contracts with a defaulting counterparty until the derivative contracts
are closed out and the resulting market risk is re-hedged.
(2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
(i) For a derivative contract that is not a client-facing
derivative transaction, MPOR cannot be less than ten business days plus
the periodicity of re-margining expressed in business days minus one
business day;
(ii) For a derivative contract that is a client-facing derivative
transaction, cannot be less than five business days plus the
periodicity of re-margining expressed in business days minus one
business day; and
(iii) For a derivative contract that is within a netting set that
is composed of more than 5,000 derivative contracts that are not
cleared transactions, or a netting set that contains one or more trades
involving illiquid collateral or a derivative contract that cannot be
easily replaced, MPOR cannot be less than twenty business days.
(3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this
section, for a netting set subject to more than two outstanding
disputes over margin that lasted longer than the MPOR over the previous
two quarters, the applicable floor is twice the amount provided in
paragraphs (c)(9)(iv)(A)(1) and (2) of this section.
(B) The maturity factor of a derivative contract that is not
subject to a variation margin agreement, or derivative contracts under
which the counterparty is not required to post variation margin, is
determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.028
BILLING CODE 4910-13-C
Where M equals the greater of 10 business days and the remaining
maturity of the contract, as measured in business days.
(C) For purposes of paragraph (c)(9)(iv) of this section, if an
Enterprise has elected pursuant to paragraph (c)(5)(v) of this section
to treat a derivative contract that is a cleared transaction that is
not subject to a variation margin agreement as one that is subject to a
variation margin agreement, the Enterprise must treat the derivative
contract as subject to a variation margin agreement with maturity
factor as determined according to (c)(9)(iv)(A) of this section, and
daily settlement does not change the end date of the period referenced
by the derivative contract.
(v) Derivative contract as multiple effective derivative contracts.
An Enterprise must separate a derivative contract into separate
derivative contracts, according to the following rules:
(A) For an option where the counterparty pays a predetermined
amount if the value of the underlying asset is above or below the
strike price and nothing otherwise (binary option), the option must be
treated as two separate options. For purposes of paragraph
(c)(9)(iii)(B) of this section, a binary option with strike K must be
represented as the combination of one bought European option and one
sold European option of the same type as the original option (put or
call) with the strikes set equal to 0.95 * K and 1.05 * K so that the
payoff of the binary option is reproduced exactly outside the region
between the two strikes. The absolute value of the sum of the adjusted
derivative contract amounts of the bought and sold options is capped at
the payoff amount of the binary option.
(B) For a derivative contract that can be represented as a
combination of standard option payoffs (such as collar, butterfly
spread, calendar spread, straddle, and strangle), an Enterprise must
treat each standard option component as a separate derivative contract.
(C) For a derivative contract that includes multiple-payment
options, (such as interest rate caps and floors), an Enterprise may
represent each payment option as a combination of effective single-
payment options (such as interest rate caplets and floorlets).
(D) An Enterprise may not decompose linear derivative contracts
(such as swaps) into components.
(10) Multiple netting sets subject to a single variation margin
agreement--(i) Calculating replacement cost. Notwithstanding paragraph
(c)(6) of this section, an Enterprise shall assign a single replacement
cost to multiple netting sets that are subject to a single variation
margin agreement under which the counterparty must post variation
margin, calculated according to the following formula:
Replacement Cost = max{[Sigma]NSmax{VNS; 0{time} -max{CMA; 0{time} ;
0{time} + max{[Sigma]NSmin{VNS; 0{time} -min{CMA; 0{time} ; 0{time}
Where:
(A) NS is each netting set subject to the variation margin
agreement MA;
(B) V<INF>NS</INF> is the sum of the fair values (after excluding
any valuation adjustments) of the derivative contracts within the
netting set NS; and
(C) C<INF>MA</INF> is the sum of the net independent collateral
amount and the variation margin amount applicable to the derivative
contracts within the netting sets subject to the single variation
margin agreement.
(ii) Calculating potential future exposure. Notwithstanding
paragraph (c)(5) of this section, an Enterprise shall assign a single
potential future exposure to multiple netting sets that are subject to
a single variation margin agreement under which the counterparty must
post variation margin equal to the sum of the potential future exposure
of each such netting set, each calculated according to paragraph (c)(7)
of this section as if such nettings sets were not subject to a
variation margin agreement.
(11) Netting set subject to multiple variation margin agreements or
a hybrid netting set--(i) Calculating replacement cost. To calculate
replacement cost for either a netting set subject to multiple variation
margin agreements under which the counterparty to each variation margin
agreement must post variation margin, or a netting set composed of at
least one derivative contract subject to variation margin agreement
under which the counterparty must post variation margin and at least
one derivative contract that is not subject to such a variation margin
[[Page 15327]]
agreement, the calculation for replacement cost is provided under
paragraph (c)(6)(i) of this section, except that the variation margin
threshold equals the sum of the variation margin thresholds of all
variation margin agreements within the netting set and the minimum
transfer amount equals the sum of the minimum transfer amounts of all
the variation margin agreements within the netting set.
(ii) Calculating potential future exposure. (A) To calculate
potential future exposure for a netting set subject to multiple
variation margin agreements under which the counterparty to each
variation margin agreement must post variation margin, or a netting set
composed of at least one derivative contract subject to variation
margin agreement under which the counterparty to the derivative
contract must post variation margin and at least one derivative
contract that is not subject to such a variation margin agreement, an
Enterprise must divide the netting set into sub-netting sets (as
described in paragraph (c)(11)(ii)(B) of this section) and calculate
the aggregated amount for each sub-netting set. The aggregated amount
for the netting set is calculated as the sum of the aggregated amounts
for the sub-netting sets. The multiplier is calculated for the entire
netting set.
(B) For purposes of paragraph (c)(11)(ii)(A) of this section, the
netting set must be divided into sub-netting sets as follows:
(1) All derivative contracts within the netting set that are not
subject to a variation margin agreement or that are subject to a
variation margin agreement under which the counterparty is not required
to post variation margin form a single sub-netting set. The aggregated
amount for this sub-netting set is calculated as if the netting set is
not subject to a variation margin agreement.
(2) All derivative contracts within the netting set that are
subject to variation margin agreements in which the counterparty must
post variation margin and that share the same value of the MPOR form a
single sub-netting set. The aggregated amount for this sub-netting set
is calculated as if the netting set is subject to a variation margin
agreement, using the MPOR value shared by the derivative contracts
within the netting set.
Table 2 to Paragraph (c)(11)(ii)(B)(2)--Supervisory Option Volatility, Supervisory Correlation Parameters, and
Supervisory Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
Supervisory Supervisory
option correlation Supervisory
Asset class Category Type volatility factor factor \1\
(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 N/A................ 100 50 6.0
grade.
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 2, and the applicable supervisory factor for volatility derivative
contract hedging sets is equal to 5 times the supervisory factor provided in this table 2.
(d) Credit valuation adjustment (CVA) risk-weighted assets--(1) In
general. With respect to its OTC derivative contracts, an Enterprise
must calculate a CVA risk-weighted asset amount for its portfolio of
OTC derivative transactions that are subject to the CVA capital
requirement using the simple CVA approach described in paragraph (d)(5)
of this section.
(2) [Reserved]
(3) Recognition of hedges. (i) An Enterprise may recognize a single
name CDS, single name contingent CDS, any other equivalent hedging
instrument that references the counterparty directly, and index credit
default swaps (CDS<INF>ind</INF>) as a CVA hedge under paragraph
(d)(5)(ii) of this section or paragraph (d)(6) of this section,
provided that the position is managed as a CVA hedge in accordance with
the Enterprise's hedging policies.
(ii) An Enterprise shall not recognize as a CVA hedge any tranched
or n\th\-to-default credit derivative.
(4) Total CVA risk-weighted assets. Total CVA risk-weighted assets
is the CVA capital requirement, K<INF>CVA,</INF> calculated for an
Enterprise's entire portfolio of OTC derivative counterparties that are
subject to the CVA capital requirement, multiplied by 12.5.
(5) Simple CVA approach. (i) Under the simple CVA approach, the CVA
capital requirement, K<INF>CVA,</INF> is calculated according to the
following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.029
[[Page 15328]]
Where:
[GRAPHIC] [TIFF OMITTED] TP13MR23.030
(A) w<INF>i</INF> = the weight applicable to counterparty i under
table 3 to paragraph (d)(5)(ii);
(B) M<INF>i</INF> = the EAD-weighted average of the effective
maturity of each netting set with counterparty i (where each netting
set's effective maturity can be no less than one year.)
(C) EADitotal = the sum of the EAD for all netting sets of OTC
derivative contracts with counterparty i calculated using the
standardized approach to counterparty credit risk described in
paragraph (c) of this section. When the Enterprise calculates EAD under
paragraph (c) of this section, such EAD may be adjusted for purposes of
calculating EADitotal by multiplying EAD by (1-exp(-0.05 x
M<INF>i</INF>))/(0.05 x M<INF>i</INF>), where ``exp'' is the
exponential function.
(D) Mihedge = the notional weighted average maturity of the hedge
instrument.
(E) B<INF>i</INF> = the sum of the notional amounts of any
purchased single name CDS referencing counterparty i that is used to
hedge CVA risk to counterparty i multiplied by (1-exp(-0.05 x
Mihedge))/(0.05 x Mihedge).
(F) M<INF>ind</INF> = the maturity of the CDS<INF>ind</INF> or the
notional weighted average maturity of any CDS<INF>ind</INF> purchased
to hedge CVA risk of counterparty i.
(G) B<INF>ind</INF> = the notional amount of one or more
CDS<INF>ind</INF> purchased to hedge CVA risk for counterparty i
multiplied by (1-exp(-0.05 x M<INF>ind</INF>))/(0.05 x M<INF>ind</INF>)
(H) w<INF>ind</INF> = the weight applicable to the
CDS<INF>ind</INF> based on the average weight of the underlying
reference names that comprise the index under table 3 to paragraph
(d)(5)(ii).
(ii) The Enterprise may treat the notional amount of the index
attributable to a counterparty as a single name hedge of counterparty i
(B<INF>i</INF>,) when calculating K<INF>CVA</INF>, and subtract the
notional amount of B<INF>i</INF> from the notional amount of the
CDS<INF>ind</INF>. An Enterprise must treat the CDS<INF>ind</INF> hedge
with the notional amount reduced by B<INF>i</INF> as a CVA hedge.
Table 3 to Paragraph (d)(5)(ii)--Assignment of Counterparty Weight
------------------------------------------------------------------------
Internal PD (in percent) Weight w (in percent)
------------------------------------------------------------------------
0.00-0.07 0.70
>0.070-0.15 0.80
>0.15-0.40 1.00
>0.40-2.00 2.00
>2.00-6.00 3.00
>6.00 10.00
------------------------------------------------------------------------
0
10. Revise Sec. 1240.37 to read as follows:
Sec. 1240.37 Cleared transactions.
(a) General requirements--(1) Clearing member clients. An
Enterprise that is a clearing member client must use the methodologies
described in paragraph (b) of this section to calculate risk-weighted
assets for a cleared transaction.
(2) Clearing members. An Enterprise that is a clearing member must
use the methodologies described in paragraph (c) of this section to
calculate its risk-weighted assets for a cleared transaction and
paragraph (b) of this section to calculate its risk-weighted assets for
its default fund contribution to a CCP.
(b) Clearing member client Enterprises--(1) Risk-weighted assets
for cleared transactions. (i) To determine the risk-weighted asset
amount for a cleared transaction, an Enterprise that is a clearing
member client must multiply the trade exposure amount for the cleared
transaction, calculated in accordance with paragraph (b)(2) of this
section, by the risk weight appropriate for the cleared transaction,
determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client Enterprise's total risk-weighted
assets for cleared transactions is the sum of the risk-weighted asset
amounts for all of its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or a netting set of derivative contracts, trade
exposure amount equals the EAD for the derivative contract or netting
set of derivative contracts calculated using the methodology used to
calculate EAD for derivative contracts set forth in Sec. 1240.36(c),
plus the fair value of the collateral posted by the clearing member
client Enterprise and held by the CCP or a clearing member in a manner
that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD for the repo-style transaction calculated using the methodology
set forth in Sec. 1240.39(b)(2) or (3), plus the fair value of the
collateral posted by the clearing member client Enterprise and held by
the CCP or a clearing member in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client Enterprise must apply a risk
weight of:
(A) 2 percent if the collateral posted by the Enterprise to the
QCCP or clearing member is subject to an arrangement that prevents any
loss to the clearing member client Enterprise due to the joint default
or a concurrent insolvency, liquidation, or receivership proceeding of
the clearing member and any other clearing member clients of the
clearing member; and the clearing member client Enterprise has
conducted sufficient legal review to conclude with a well-founded basis
(and maintains sufficient written documentation of that legal review)
that in the event of a legal challenge (including one resulting from an
event of default or from liquidation, insolvency, or receivership
proceedings) the relevant court and administrative authorities would
find the arrangements to be legal, valid, binding, and enforceable
under the law of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of
this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client Enterprise must apply the risk weight applicable
to the CCP under this subpart D.
(4) Collateral. (i) Notwithstanding any other requirement of this
section, collateral posted by a clearing member client Enterprise that
is held by a custodian (in its capacity as a custodian) in a manner
that is bankruptcy remote from the CCP, clearing member, and other
clearing member clients of the clearing member, is not subject to a
capital requirement under this section.
(ii) A clearing member client Enterprise must calculate a risk-
weighted asset amount for any collateral provided to a CCP, clearing
member or a custodian in connection with a cleared transaction in
accordance with requirements under this subpart D, as applicable.
(c) Clearing member Enterprise--(1) Risk-weighted assets for
cleared transactions. (i) To determine the risk-weighted asset amount
for a cleared transaction, a clearing member
[[Page 15329]]
Enterprise must multiply the trade exposure amount for the cleared
transaction, calculated in accordance with paragraph (c)(2) of this
section by the risk weight appropriate for the cleared transaction,
determined in accordance with paragraph (c)(3) of this section.
(ii) A clearing member Enterprise's total risk-weighted assets for
cleared transactions is the sum of the risk-weighted asset amounts for
all of its cleared transactions.
(2) Trade exposure amount. A clearing member Enterprise must
calculate its trade exposure amount for a cleared transaction as
follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for
derivative contracts set forth in Sec. 1240.36(c), plus the fair value
of the collateral posted by the clearing member Enterprise and held by
the CCP in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals
the EAD calculated under Sec. 1240.39(b)(2) or (3), plus the fair
value of the collateral posted by the clearing member Enterprise and
held by the CCP in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) A clearing member
Enterprise must apply a risk weight of 2 percent to the trade exposure
amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member Enterprise must apply the risk weight applicable to the
CCP according to this subpart D.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Enterprise may apply a risk weight of zero
percent to the trade exposure amount for a cleared transaction with a
QCCP where the clearing member Enterprise is acting as a financial
intermediary on behalf of a clearing member client, the transaction
offsets another transaction that satisfies the requirements set forth
in Sec. 1240.3(a), and the clearing member Enterprise is not obligated
to reimburse the clearing member client in the event of the QCCP
default.
(4) Collateral. (i) Notwithstanding any other requirement of this
section, collateral posted by a clearing member Enterprise that is held
by a custodian (in its capacity as a custodian) in a manner that is
bankruptcy remote from the CCP, clearing member, and other clearing
member clients of the clearing member, is not subject to a capital
requirement under this section.
(ii) A clearing member Enterprise must calculate a risk-weighted
asset amount for any collateral provided to a CCP, clearing member or a
custodian in connection with a cleared transaction in accordance with
requirements under this subpart D.
(d) Default fund contributions--(1) General requirement. A clearing
member Enterprise must determine the risk-weighted asset amount for a
default fund contribution to a CCP at least quarterly, or more
frequently if, in the opinion of the Enterprise or FHFA, there is a
material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
nonqualifying CCPs. A clearing member Enterprise's risk-weighted asset
amount for default fund contributions to CCPs that are not QCCPs equals
the sum of such default fund contributions multiplied by 1,250 percent,
or an amount determined by FHFA, based on factors such as size,
structure, and membership characteristics of the CCP and riskiness of
its transactions, in cases where such default fund contributions may be
unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member Enterprise's risk-weighted asset amount for
default fund contributions to QCCPs equals the sum of its capital
requirement, K<INF>CM</INF> for each QCCP, as calculated under the
methodology set forth in paragraph (d)(4) of this section, multiplied
by 12.5.
(4) Capital requirement for default fund contributions to a QCCP. A
clearing member Enterprise's capital requirement for its default fund
contribution to a QCCP (K<INF>CM</INF>) is equal to:
[GRAPHIC] [TIFF OMITTED] TP13MR23.031
Where:
(i) KCCP is the hypothetical capital requirement of the QCCP, as
determined under paragraph (d)(5) of this section;
(ii) DFpref is prefunded default fund contribution of the clearing
member Enterprise to the QCCP;
(iii) DFCCP is the QCCP's own prefunded amount that are contributed
to the default waterfall and are junior or pari passu with prefunded
default fund contributions of clearing members of the QCCP; and
(iv) DFprefCCPCM is the total prefunded default fund contributions
from clearing members of the QCCP to the QCCP.
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has
provided its K<INF>CCP,</INF> an Enterprise must rely on such disclosed
figure instead of calculating K<INF>CCP</INF> under this paragraph
(d)(5), unless the Enterprise determines that a more conservative
figure is appropriate based on the nature, structure, or
characteristics of the QCCP. The hypothetical capital requirement of a
QCCP (K<INF>CCP</INF>), as determined by the Enterprise, is equal to:
KCCP = [Sigma]CMi EADi * 1.6 percent
Where:
(i) CM<INF>i</INF> is each clearing member of the QCCP; and
(ii) EAD<INF>i</INF> is the exposure amount of the QCCP to each
clearing member of the QCCP, as determined under paragraph (d)(6) of
this section.
(6) EAD of a QCCP to a clearing member. (i) The EAD of a QCCP to a
clearing member is equal to the sum of the EAD for derivative contracts
determined under paragraph (d)(6)(ii) of this section and the EAD for
repo-style transactions determined under paragraph (d)(6)(iii) of this
section.
(ii) With respect to any derivative contracts between the QCCP and
the clearing member that are cleared transactions and any guarantees
that the clearing member has provided to the QCCP with respect to
performance of a clearing member client on a derivative contract, the
EAD is equal to the exposure amount of the QCCP to the clearing member
for all such derivative contracts and guarantees of derivative
contracts calculated under SA-CCR in Sec. 1240.36(c) (or, with respect
to a QCCP located outside the United States, under a substantially
identical methodology in effect in the jurisdiction) using a value of
10 business days for purposes of Sec. 1240.36(c)(9)(iv); less the
value of all collateral held by the QCCP posted by the clearing member
or a client of the clearing member in connection with a derivative
contract for which the
[[Page 15330]]
clearing member has provided a guarantee to the QCCP and the amount of
the prefunded default fund contribution of the clearing member to the
QCCP.
(iii) With respect to any repo-style transactions between the QCCP
and a clearing member that are cleared transactions, EAD is equal to:
EAD<INF>i</INF> = max{EBRM<INF>i</INF>-IM<INF>i</INF>-
DF<INF>i</INF>;0{time}
Where:
(A) EBRM<INF>i</INF> is the exposure amount of the QCCP to each
clearing member for all repo-style transactions between the QCCP and
the clearing member, as determined under Sec. 1240.39(b)(2) and
without recognition of the initial margin collateral posted by the
clearing member to the QCCP with respect to the repo-style transactions
or the prefunded default fund contribution of the clearing member
institution to the QCCP;
(B) IM<INF>i</INF> is the initial margin collateral posted by each
clearing member to the QCCP with respect to the repo-style
transactions; and
(C) DF<INF>i</INF> is the prefunded default fund contribution of
each clearing member to the
(D) QCCP that is not already deducted in paragraph (d)(6)(ii) of
this section.
(iv) EAD must be calculated separately for each clearing member's
sub-client accounts and sub-house account (i.e., for the clearing
member's proprietary activities). If the clearing member's collateral
and its client's collateral are held in the same default fund
contribution account, then the EAD of that account is the sum of the
EAD for the client-related transactions within the account and the EAD
of the house-related transactions within the account. For purposes of
determining such EADs, the independent collateral of the clearing
member and its client must be allocated in proportion to the respective
total amount of independent collateral posted by the clearing member to
the QCCP.
(v) If any account or sub-account contains both derivative
contracts and repo-style transactions, the EAD of that account is the
sum of the EAD for the derivative contracts within the account and the
EAD of the repo-style transactions within the account. If independent
collateral is held for an account containing both derivative contracts
and repo-style transactions, then such collateral must be allocated to
the derivative contracts and repo-style transactions in proportion to
the respective product specific exposure amounts, calculated, excluding
the effects of collateral, according to Sec. 1240.39(b) for repo-style
transactions and to Sec. 1240.36(c)(5) for derivative contracts.
0
11. Revise Sec. 1240.39 to read as follows:
Sec. 1240.39 Collateralized transactions.
(a) General. (1) An Enterprise may use the following methodologies
to recognize the benefits of financial collateral (other than with
respect to a retained CRT exposure) in mitigating the counterparty
credit risk of repo-style transactions, eligible margin loans,
collateralized OTC derivative contracts and single product netting sets
of such transactions:
(i) The collateral haircut approach set forth in paragraph (b)(2)
of this section; and
(ii) For single product netting sets of repo-style transactions and
eligible margin loans, the simple VaR methodology set forth in
paragraph (b)(3) of this section.
(2) An Enterprise may use any combination of the two methodologies
for collateral recognition; however, it must use the same methodology
for similar exposures or transactions.
(b) EAD for eligible margin loans and repo-style transactions--(1)
General. An Enterprise may recognize the credit risk mitigation
benefits of financial collateral that secures an eligible margin loan,
repo-style transaction, or single-product netting set of such
transactions by determining the EAD of the exposure using:
(i) The collateral haircut approach described in paragraph (b)(2)
of this section; or
(ii) For netting sets only, the simple VaR methodology described in
paragraph (b)(3) of this section.
(2) Collateral haircut approach--(i) EAD equation. An Enterprise
may determine EAD for an eligible margin loan, repo-style transaction,
or netting set by setting EAD equal to
max{0, [([Sigma]E - [Sigma]C) + [Sigma](E<INF>s</INF> x H<INF>s</INF>)
+ [Sigma](E<INF>fx</INF> x H<INF>fx</INF>)]{time} ,
Where:
(A) [Sigma]E equals the value of the exposure (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has lent, sold subject to repurchase, or posted as collateral to the
counterparty under the transaction (or netting set));
(B) [Sigma]C equals the value of the collateral (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has borrowed, purchased subject to resale, or taken as collateral from
the counterparty under the transaction (or netting set));
(C) E<INF>s</INF> equals the absolute value of the net position in
a given instrument or in gold (where the net position in a given
instrument or in gold equals the sum of the current fair values of the
instrument or gold the Enterprise has lent, sold subject to repurchase,
or posted as collateral to the counterparty minus the sum of the
current fair values of that same instrument or gold the Enterprise has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty);
(D) H<INF>s</INF> equals the market price volatility haircut
appropriate to the instrument or gold referenced in E<INF>s</INF>;
(E) E<INF>fx</INF> equals the absolute value of the net position of
instruments and cash in a currency that is different from the
settlement currency (where the net position in a given currency equals
the sum of the current fair values of any instruments or cash in the
currency the Enterprise has lent, sold subject to repurchase, or posted
as collateral to the counterparty minus the sum of the current fair
values of any instruments or cash in the currency the Enterprise has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty); and
(F) H<INF>fx</INF> equals the haircut appropriate to the mismatch
between the currency referenced in E<INF>fx</INF> and the settlement
currency.
(ii) Standard supervisory haircuts. Under the standard supervisory
haircuts approach:
(A) An Enterprise must use the haircuts for market price volatility
(H<INF>s</INF>) in table 1 to paragraph (b)(2)(ii)(A) as adjusted in
certain circumstances as provided in paragraphs (b)(2)(ii)(C) and (D)
of this section;
[[Page 15331]]
Table 1 to Paragraph (b)(2)(ii)(A)--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Haircut (in percent) assigned based on:
------------------------------------------------------------------
Sovereign issuers risk weight Non-sovereign issuers risk Investment grade
Residual maturity under Sec. 1240.32 \2\ (in weight under Sec. 1240.32 (in securitization
percent) percent) exposures (in
------------------------------------------------------------------ percent)
Zero 20 or 50 100 20 50 100
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year..................................... 0.5 1.0 15.0 1.0 2.0 4.0 4.0
Greater than 1 year and less than or equal to 5 years............ 2.0 3.0 15.0 4.0 6.0 8.0 12.0
Greater than 5 years............................................. 4.0 6.0 15.0 8.0 12.0 16.0 24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold............................15.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds)..........................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mutual funds.......................................................Highest haircut applicable to any security
in which the fund can invest.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash collateral held..................................................................Zero........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other exposure types..................................................................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in this table 1 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
(B) For currency mismatches, an Enterprise must use a haircut for
foreign exchange rate volatility (H<INF>fx</INF>) of 8 percent, as
adjusted in certain circumstances as provided in paragraphs
(b)(2)(ii)(C) and (D) of this section.
(C) For repo-style transactions and client-facing derivative
transactions, an Enterprise may multiply the supervisory haircuts
provided in paragraphs (b)(2)(ii)(A) and (B) of this section by the
square root of \1/2\ (which equals 0.707107). If the Enterprise
determines that a longer holding period is appropriate for client-
facing derivative transactions, then it must use a larger scaling
factor to adjust for the longer holding period pursuant to paragraph
(b)(2)(ii)(F) of this section.
(D) An Enterprise must adjust the supervisory haircuts upward on
the basis of a holding period longer than ten business days (for
eligible margin loans) or five business days (for repo-style
transactions), using the formula provided in paragraph (b)(2)(ii)(F) of
this section where the conditions in this paragraph (b)(2)(ii)(D)
apply. If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must adjust the supervisory
haircuts upward on the basis of a minimum holding period of twenty
business days for the following quarter (except when an Enterprise is
calculating EAD for a cleared transaction under Sec. 1240.37). If a
netting set contains one or more trades involving illiquid collateral,
an Enterprise must adjust the supervisory haircuts upward on the basis
of a minimum holding period of twenty business days. If over the two
previous quarters more than two margin disputes on a netting set have
occurred that lasted longer than the holding period, then the
Enterprise must adjust the supervisory haircuts upward for that netting
set on the basis of a minimum holding period that is at least two times
the minimum holding period for that netting set.
(E)(1) An Enterprise must adjust the supervisory haircuts upward on
the basis of a holding period longer than ten business days for
collateral associated with derivative contracts (five business days for
client-facing derivative contracts) using the formula provided in
paragraph (b)(2)(ii)(F) of this section where the conditions in this
paragraph (b)(2)(ii)(E)(1) apply. For collateral associated with a
derivative contract that is within a netting set that is composed of
more than 5,000 derivative contracts that are not cleared transactions,
an Enterprise must use a minimum holding period of twenty business
days. If a netting set contains one or more trades involving illiquid
collateral or a derivative contract that cannot be easily replaced, an
Enterprise must use a minimum holding period of twenty business days.
(2) Notwithstanding paragraph (b)(2)(ii)(A) or (C) or
(b)(2)(ii)(E)(1) of this section, for collateral associated with a
derivative contract in a netting set under which more than two margin
disputes that lasted longer than the holding period occurred during the
two previous quarters, the minimum holding period is twice the amount
provided under paragraph (b)(2)(ii)(A) or (C) or (b)(2)(ii)(E)(1) of
this section.
(F) An Enterprise must adjust the standard supervisory haircuts
upward, pursuant to the adjustments provided in paragraphs
(b)(2)(ii)(C) through (E) of this section, using the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.032
Where:
(1) T<INF>M</INF> equals a holding period of longer than 10
business days for eligible margin loans and derivative contracts other
than client-facing derivative transactions or longer than 5 business
days for repo-style transactions and client-facing derivative
transactions;
(2) H<INF>s</INF> equals the standard supervisory haircut; and
(3) T<INF>s</INF> equals 10 business days for eligible margin loans
and derivative contracts other than client-facing derivative
transactions or 5 business days for repo-style transactions and client-
facing derivative transactions.
(G) If the instrument an Enterprise has lent, sold subject to
repurchase, or posted as collateral does not meet the definition of
financial collateral, the Enterprise must use a 25.0 percent haircut
for market price volatility (H<INF>s</INF>).
(iii) Own internal estimates for haircuts. With the prior written
notice to FHFA, an Enterprise may calculate haircuts (H<INF>s</INF> and
H<INF>fx</INF>) using its own internal estimates of the volatilities of
market prices and foreign exchange rates.
(A) To use its own internal estimates, an Enterprise must satisfy
the following minimum quantitative standards:
(1) An Enterprise must use a 99th percentile one-tailed confidence
interval.
(2) The minimum holding period for a repo-style transaction is five
business days and for an eligible margin loan is ten business days
except for transactions or netting sets for which paragraph
(b)(2)(iii)(A)(3) of this section applies. When an Enterprise
calculates
[[Page 15332]]
an own-estimates haircut on a T<INF>N</INF>-day holding period, which
is different from the minimum holding period for the transaction type,
the applicable haircut (H<INF>M</INF>) is calculated using the
following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.033
Where:
(i) T<INF>M</INF> equals 5 for repo-style transactions and 10 for
eligible margin loans;
(ii) T<INF>N</INF> equals the holding period used by the Enterprise
to derive H<INF>N</INF>; and
(iii) H<INF>N</INF> equals the haircut based on the holding period
T<INF>N</INF>
(3) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must calculate the haircut using a
minimum holding period of twenty business days for the following
quarter (except when an Enterprise is calculating EAD for a cleared
transaction under Sec. 1240.37). If a netting set contains one or more
trades involving illiquid collateral or an OTC derivative that cannot
be easily replaced, an Enterprise must calculate the haircut using a
minimum holding period of twenty business days. If over the two
previous quarters more than two margin disputes on a netting set have
occurred that lasted more than the holding period, then the Enterprise
must calculate the haircut for transactions in that netting set on the
basis of a holding period that is at least two times the minimum
holding period for that netting set.
(4) An Enterprise is required to calculate its own internal
estimates with inputs calibrated to historical data from a continuous
12-month period that reflects a period of significant financial stress
appropriate to the security or category of securities.
(5) An Enterprise must have policies and procedures that describe
how it determines the period of significant financial stress used to
calculate the Enterprise's own internal estimates for haircuts under
this section and must be able to provide empirical support for the
period used. The Enterprise must obtain the prior approval of FHFA for,
and notify FHFA if the Enterprise makes any material changes to, these
policies and procedures.
(6) Nothing in this section prevents FHFA from requiring an
Enterprise to use a different period of significant financial stress in
the calculation of own internal estimates for haircuts.
(7) An Enterprise must update its data sets and calculate haircuts
no less frequently than quarterly and must also reassess data sets and
haircuts whenever market prices change materially.
(B) With respect to debt securities that are investment grade, an
Enterprise may calculate haircuts for categories of securities. For a
category of securities, the Enterprise must calculate the haircut on
the basis of internal volatility estimates for securities in that
category that are representative of the securities in that category
that the Enterprise has lent, sold subject to repurchase, posted as
collateral, borrowed, purchased subject to resale, or taken as
collateral. In determining relevant categories, the Enterprise must at
a minimum take into account:
(1) The type of issuer of the security;
(2) The credit quality of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the security.
(C) With respect to debt securities that are not investment grade
and equity securities, an Enterprise must calculate a separate haircut
for each individual security.
(D) Where an exposure or collateral (whether in the form of cash or
securities) is denominated in a currency that differs from the
settlement currency, the Enterprise must calculate a separate currency
mismatch haircut for its net position in each mismatched currency based
on estimated volatilities of foreign exchange rates between the
mismatched currency and the settlement currency.
(E) An Enterprise's own estimates of market price and foreign
exchange rate volatilities may not take into account the correlations
among securities and foreign exchange rates on either the exposure or
collateral side of a transaction (or netting set) or the correlations
among securities and foreign exchange rates between the exposure and
collateral sides of the transaction (or netting set).
(3) Simple VaR methodology. With the prior written notice to FHFA,
an Enterprise may estimate EAD for a netting set using a VaR model that
meets the requirements in paragraph (b)(3)(iii) of this section. In
such event, the Enterprise must set EAD equal to max {0, [([Sigma]E -
[Sigma]C) + PFE]{time} , where:
(i) [Sigma]E equals the value of the exposure (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has lent, sold subject to repurchase, or posted as collateral to the
counterparty under the netting set);
(ii) [Sigma]C equals the value of the collateral (the sum of the
current fair values of all instruments, gold, and cash the Enterprise
has borrowed, purchased subject to resale, or taken as collateral from
the counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the Enterprise's
empirically based best estimate of the 99th percentile, one-tailed
confidence interval for an increase in the value of ([Sigma]E -
[Sigma]C) over a five-business-day holding period for repo-style
transactions, or over a ten-business-day holding period for eligible
margin loans except for netting sets for which paragraph (b)(3)(iv) of
this section applies using a minimum one-year historical observation
period of price data representing the instruments that the Enterprise
has lent, sold subject to repurchase, posted as collateral, borrowed,
purchased subject to resale, or taken as collateral. The Enterprise
must validate its VaR model by establishing and maintaining a rigorous
and regular backtesting regime.
(iv) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must use a twenty-business-day
holding period for the following quarter (except when an Enterprise is
calculating EAD for a cleared transaction under Sec. 1240.37). If a
netting set contains one or more trades involving illiquid collateral,
an Enterprise must use a twenty-business-day holding period. If over
the two previous quarters more than two margin disputes on a netting
set have occurred that lasted more than the holding period, then the
Enterprise must set its PFE for that netting set equal to an estimate
over a holding period that is at least two times the minimum holding
period for that netting set.
0
12. Amend Sec. 1240.41 by revising paragraph (c)(5), redesignating
paragraph (c)(6) as paragraph (c)(7), and adding new paragraph (c)(6)
to read as follows:
Sec. 1240.41 Operational requirements for CRT and other
securitization exposures.
* * * * *
(c) * * *
(5) Any clean-up calls relating to the credit risk transfer are
eligible clean-up calls;
(6) Any time-based calls relating to the credit risk transfer are
eligible time-based calls; and
* * * * *
0
13. Amend Sec. 1240.42 by revising paragraph (f) to read as follows:
Sec. 1240.42 Risk-weighted assets for CRT and other securitization
exposures.
* * * * *
(f) Interest-only mortgage-backed securities. For non-credit-
enhancing interest-only mortgage-backed securities that are not subject
to Sec. 1240.32(c), the
[[Page 15333]]
risk weight may not be less than 100 percent.
* * * * *
0
14. Amend Sec. 1240.400 by revising paragraph (c)(1), and removing
paragraph (d) to read as follows:
Sec. 1240.400 Stability capital buffer.
* * * * *
(c) * * *
(1) Increase in stability capital buffer. An increase in the
stability capital buffer of an Enterprise under this section will take
effect (i.e., be incorporated into the maximum payout ratio under table
1 to paragraph (b)(5) in Sec. 1240.11) on January 1 of the year that
is one full calendar year after the increased stability capital buffer
was calculated, provided that where a stability capital buffer under
paragraph (c)(2) of this section is calculated to be a decrease in the
stability capital buffer from the previously calculated scheduled
increase applicable on the same January 1, the decreased stability
capital buffer under paragraph (c)(2) of this section shall take
effect.
* * * * *
Clinton Jones,
General Counsel, Federal Housing Finance Agency.
[FR Doc. 2023-04041 Filed 3-10-23; 8:45 am]
BILLING CODE 8070-01-P
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</html>Indexed from Federal Register on March 13, 2023.
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