Rule2023-26078
Enterprise Regulatory Capital Framework-Commingled Securities, Multifamily Government Subsidy, Derivatives, and Other Enhancements
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Published
November 30, 2023
Effective
April 1, 2024
Issuing agencies
Federal Housing Finance Agency
Abstract
The Federal Housing Finance Agency (FHFA or the Agency) is adopting a final rule that amends 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 final rule includes modifications related to guarantees on commingled securities, multifamily mortgage exposures secured by government-subsidized properties, and derivatives and cleared transactions, among other items.
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[Federal Register Volume 88, Number 229 (Thursday, November 30, 2023)]
[Rules and Regulations]
[Pages 83467-83492]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-26078]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 88, No. 229 / Thursday, November 30, 2023 /
Rules and Regulations
[[Page 83467]]
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: Final rule.
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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
adopting a final rule that amends 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 final rule
includes modifications related to guarantees on commingled securities,
multifamily mortgage exposures secured by government-subsidized
properties, and derivatives and cleared transactions, among other
items.
DATES: This final rule is effective on April 1, 2024, except for the
amendments to Sec. Sec. 1240.36, 1240.37, and 1240.39, which are
effective on January 1, 2026.
FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate
Director, Office of Capital Policy, (202) 649-3141,
<a href="/cdn-cgi/l/email-protection#1c5d72786e796b324a7d6e6e7579696e5c7a747a7d327b736a"><span class="__cf_email__" data-cfemail="f1b09f95839486dfa790838398948483b197999790df969e87">[email protected]</span></a>; Christopher Vincent, Principal Financial
Analyst, Office of Capital Policy, (202) 649-3685,
<a href="/cdn-cgi/l/email-protection#397a514b504a4d5649515c4b176f50575a5c574d795f515f58175e564f"><span class="__cf_email__" data-cfemail="317259435842455e415954431f67585f52545f4571575957501f565e47">[email protected]</span></a>; or James Jordan, Associate General
Counsel, Office of General Counsel, (202) 649-3075,
<a href="/cdn-cgi/l/email-protection#216b404c44520f6b4e5345404f61474947400f464e57"><span class="__cf_email__" data-cfemail="ace6cdc1c9df82e6c3dec8cdc2eccac4cacd82cbc3da">[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:
Table of Contents
I. Introduction
II. Overview of the Final Rule
III. General Overview of Comments on the Proposed Rule
IV. Final Rule Requirements
A. Guarantees on Commingled Securities
B. Multifamily Government Subsidy Risk Multiplier
C. Derivatives and Cleared Transactions
D. Original Credit Scores for Single-Family Mortgage Exposures
Without a Representative Original Credit Score
E. Guarantee Assets
F. Mortgage Servicing Assets
G. Time-Based Calls for CRT Exposures
H. Interest-Only Mortgage-Backed Securities
I. Single-Family Countercyclical Adjustment
J. Stability Capital Buffer
K. Advanced Approaches
V. Representative Credit Scores for Single-Family Mortgage Exposures
VI. Effective Dates
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act
IX. Congressional Review Act
I. Introduction
On March 13, 2023, FHFA published in the Federal Register a notice
of proposed rulemaking \1\ (proposed rule) seeking comments on
amendments to the ERCF \2\ that would modify various regulatory capital
requirements for the Enterprises. The proposed rule included
modifications 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.
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\1\ 88 FR 15306.
\2\ 12 CFR part 1240.
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FHFA proposed these amendments to implement lessons learned through
the continued application of the ERCF and to better reflect the risks
faced by the Enterprises in operating their businesses. Regulatory
capital requirements that properly account for risk will allow the
Enterprises to build capital to enhance their safety and soundness and
protect U.S. taxpayers against financial losses. FHFA is now adopting
in this final rule many of the proposed amendments, with minor
modifications as discussed in the relevant sections of this preamble.
FHFA currently is not adopting the proposed amendment related to
calculating the representative credit score for a single-family
mortgage exposure when multiple credit scores are present. The
amendments in the final rule will bolster the ERCF as it aims to ensure
that each Enterprise operates in a safe and sound manner and is
positioned to fulfill its statutory mission to provide stability and
ongoing assistance to the secondary mortgage market throughout the
economic cycle, in particular during periods of financial stress.
II. Overview of the Final Rule
FHFA continuously monitors the risks faced by the Enterprises and
reviews the appropriateness of the ERCF's capital requirements and
buffers to mitigate those risks. After carefully considering the
comments on the proposed rule, FHFA has determined that the amendments
in the final rule will enhance the ERCF, contribute to the Enterprises'
safety and soundness, and better enable the Enterprises to fulfill
their statutory mission throughout the economic cycle. Specifically,
the final rule will:
<bullet> Reduce the risk weight and credit conversion factor for
guarantees on commingled securities to 5 percent and 50 percent,
respectively,
<bullet> Introduce a risk multiplier of 0.6 for multifamily
mortgage exposures secured by properties with certain government
subsidies,
<bullet> Replace the current exposure methodology (CEM) with the
standardized approach for counterparty credit risk (SA-CCR) as the
method for computing exposure and risk-weighted asset amounts for
derivatives and cleared transactions,
<bullet> Update the credit score assumption to 680 for single-
family mortgage exposures originated without a representative credit
score,
<bullet> Introduce a risk weight of 20 percent for guarantee
assets,
<bullet> Align the timing of the first application of the single-
family countercyclical adjustment with the first property value
adjustment, and
[[Page 83468]]
<bullet> Delay the compliance date for the advanced approaches to
January 1, 2028.
FHFA has also identified several aspects of the ERCF where
modifications will clarify and enhance the usefulness of the framework.
Therefore, the final rule will also:
<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, subject to certain restrictions,
<bullet> Amend the risk weights for IO MBS to 0 percent, 20
percent, and 100 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.
III. General Overview of Comments on the Proposed Rule
FHFA received 23 public comment letters on the proposed rule from a
variety of interested parties, including private individuals, trade
associations, consumer advocacy groups, and financial institutions.\3\
In general, and as discussed in greater detail in the relevant sections
of this preamble, commenters were supportive of FHFA's proposed
amendments to the ERCF.
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\3\ See comments on Enterprise Regulatory Capital Framework--
Commingled Securities, Multifamily Government Subsidy, Derivatives,
and Other Enhancements, available at <a href="https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=754">https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=754</a>. The
comment period for the proposed rule closed on May 12, 2023.
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One commenter recommended that FHFA consider climate-related
financial risks in relation to most topics covered in the proposed
rule. FHFA recognizes that climate change poses a serious threat to the
U.S. housing finance system and the Agency has been actively working to
ensure that its regulated entities are accounting for the risks
associated with climate change and natural disasters.\4\ Outside of
this rulemaking, FHFA will continue to evaluate how the ERCF can better
account for climate-related financial risks.
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\4\ More information on the steps FHFA has taken to evaluate and
address climate-related risks can be found on FHFA's website,
available at <a href="https://www.fhfa.gov/PolicyProgramsResearch/Programs/Pages/Climate-Change-and-ESG.aspx">https://www.fhfa.gov/PolicyProgramsResearch/Programs/Pages/Climate-Change-and-ESG.aspx</a>.
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In addition to the feedback FHFA received on elements of the
proposed rule, FHFA also received comments on many issues that are
outside the scope of this rulemaking. In these letters, commenters
offered views on important topics such as single-family and multifamily
base risk weights, a multifamily countercyclical adjustment, a risk
multiplier for multifamily senior housing, defeased loans, early
redemption features in senior-subordinated CRT structures, the CRT
risk-weight floor, the calculation of the stability capital buffer, the
commingling fee, pricing for single-family loans originated by third-
parties, the alternative credit score implementation timeline, and the
Enterprises' exits from conservatorships. FHFA acknowledges the
importance of these topics and will thoroughly consider the public's
feedback on these issues when relevant rulemakings and policy decisions
are under consideration.
IV. Final Rule Requirements
A. Guarantees on Commingled Securities
The proposed rule would reduce the risk weight under the
standardized approach for guarantees on commingled securities from 20
percent to 5 percent and the credit conversion factor for guarantees on
commingled securities from 100 percent to 50 percent. A commingled
security is a security issued by one Enterprise that is backed, in
whole or in part, by collateral issued by the other Enterprise, subject
to certain restrictions. FHFA posited that 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.
Many commenters supported FHFA's proposal to lower the risk weight
and credit conversion factor for guarantees on commingled securities.
Several commenters supported the proposed 5 percent risk weight and 50
percent credit conversion factor. Others expressed the view that
guarantees on commingled securities should have a risk weight and
credit conversion factor lower than 5 percent and 50 percent,
respectively, stating that lower capital requirements would enhance the
liquidity of the common MBS known as the Uniform Mortgage-Backed
Security (UMBS) and foster the stability and liquidity of the secondary
mortgage market. Several commenters recommended that FHFA eliminate all
capital requirements for guarantees on commingled securities,
suggesting that any provisions in the ERCF that might deter commingling
activity by hindering the fungibility of the Enterprises' MBS or by
driving commingling fees should be removed. One commenter opposed any
non-zero risk weight because in the commenter's view, it results in a
double capital charge on the securities underlying the UMBS, as each
Enterprise is already required to hold capital for the underlying
securities it guarantees.
The final rule adopts FHFA's proposal to reduce the risk weight for
guarantees on commingled securities from 20 percent to 5 percent and
the credit conversion factor for guarantees on commingled securities
from 100 percent to 50 percent. FHFA is adopting a non-zero risk weight
and a non-zero credit conversion factor because a key tenet of the ERCF
is that all exposures with risk, however small, are capitalized. The
Enterprises' obligations do not have an unlimited explicit guarantee of
the full faith and credit of the United States, despite the current
support of the U.S. Department of the Treasury under the senior
preferred stock purchase agreements (PSPAs). Therefore, the
counterparty credit risk arising from guarantees on commingled
securities is unique to the guaranteeing Enterprise and is not a double
counting of the borrower credit risk on the underlying mortgage
exposures.
FHFA is retaining the 5 percent risk weight as proposed because the
credit exposures arising out of these guarantees and the resultant
losses 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. FHFA will continue to monitor the impact
of a non-zero risk weight on the performance of the UMBS in keeping
with the intent and purpose of the Single Security Initiative.
Conceptually, the risk weight for guarantees on commingled securities
in the final rule aligns with the risk-weight floor for retained CRT
exposures. In addition, the final rule's 50 percent credit conversion
factor for guarantees on commingled securities aligns with the
prevailing regulatory capital treatment for off-balance sheet undrawn
commitments with an original maturity of more than one year that are
not unconditionally cancelable by the Enterprise.
B. Multifamily Government Subsidy Risk Multiplier
The proposed rule would introduce a risk multiplier under the
standardized approach equal to 0.6 for any multifamily mortgage
exposures secured by one or more properties each with at
[[Page 83469]]
least one applicable government subsidy, subject to certain
affordability criteria. Under the proposed rule, the applicable
government subsidies would be limited to the following three primary
subsidy programs: (i) Low-Income Housing Tax Credit (LIHTC),\5\ (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 the income of the
renter is less than or equal to 80 percent of area median income (AMI).
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\5\ Section 42 of the Internal Revenue Code (26 U.S.C.A. Sec.
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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The current rule does not differentiate between multifamily
mortgage exposures secured by properties with a government subsidy and
by properties without a government subsidy. Properties with government
subsidies represent an important segment of the Enterprises'
multifamily business models, and 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.
Many commenters expressed support for FHFA's proposal to introduce
a government subsidy 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. Many commenters supported the 0.6 risk multiplier as proposed,
while a few commenters recommended that FHFA adopt a multiplier smaller
than 0.6. One commenter recommended that FHFA consider a pro-rated risk
multiplier scaled between 0.6 and 1.0 when a multifamily mortgage
exposure is secured by multiple properties and some but not all of the
properties have an applicable government subsidy.
One commenter recommended that FHFA require an Enterprise to
measure the percentage of affordable units at each property only at
acquisition rather than on a quarterly basis, which the commenter
understood was FHFA's intent, to avoid operational constraints and be
consistent with the application of the housing goals regulation.
Multiple commenters recommended that FHFA expand the affordability
criteria to allow for exceptions in high-cost and very-high-cost
markets. For example, one commenter suggested that an 80 percent of AMI
threshold could be used in standard markets, while thresholds of 100
percent of AMI and 120 percent of AMI could be used high-cost and very-
high-cost markets, respectively. Several commenters recommended that
FHFA expand the list of applicable government subsidies, with suggested
additions including the rural rental housing program under Section 515
of the Housing Act of 1949 (Section 515 Rural Rental Housing Loans),
Fannie Mae's Sponsor-Initiated Affordability (SIA) and Freddie Mac's
Tenant Advancement Commitment (TAC) programs, block grant programs such
as HOME Investment Partnerships or Community Development Block Grants,
and tax-exempt private activity bonds used for multifamily housing.
The final rule adopts a multifamily government subsidy risk
multiplier that is scaled between 0.6 and 1.0 depending on the
properties securing the multifamily mortgage exposure. When some but
not all properties securing a multifamily mortgage exposure have an
applicable government subsidy, each property with an applicable
government subsidy will receive a property multiplier of 0.6 and each
property without an applicable government subsidy will receive a
property multiplier of 1.0, and the government subsidy risk multiplier
for the multifamily mortgage exposure will be calculated as a weighted
average of the property multipliers using the total number of units per
building as weights.
In addition, the final rule adopts the affordability criteria and
list of applicable government subsidies substantially as proposed, with
the addition of Section 515 Rural Rental Housing Loans as an applicable
government subsidy. Section 515 Rural Rental Housing Loans are direct
loans made by the United States Department of Agriculture (USDA) to
finance affordable rental housing for low- to moderate-income (50
percent to 80 percent of AMI) renters in rural communities. This
program is analogous to Section 8 project-based rental assistance, and
as with LIHTC and Section 8, affordability is required for the life of
the loan and accompanied by a use restriction. For these reasons, the
final rule includes Section 515 Rural Housing Loans as an applicable
government subsidy.
To ensure that the applicable subsidy programs meet the
affordability criteria without creating ongoing compliance and
operational burdens for the Enterprises, the final rule requires that
at least 20 percent of the property's units are restricted to be
affordable units per a regulatory agreement, recorded use restriction,
a housing-assistance payments contract, or other restrictions codified
in loan agreements. Each program included in the list of applicable
government subsidies has its own requirements that ensure the subsidies
are significant, long-term, and continuous. By requiring the
affordability criteria to be included in contractual provisions, FHFA
believes it is not necessary for the final rule to specify that the
percentage of affordable units be measured only at acquisition. FHFA
expects an Enterprise to validate that a property is receiving a valid
government subsidy at acquisition in order for the multifamily mortgage
exposure secured by that property to receive a government subsidy risk
multiplier less than 1.0, and subsequently not to undertake additional
compliance exercises on top of what is required by the subsidy programs
themselves.
The final rule does not include a government subsidy risk
multiplier less than 0.6. In a data-driven exercise, FHFA determined
that a 40 percent decrease in regulatory capital appropriately captures
the lower credit risk associated with multifamily mortgage exposures
secured by properties with a significant, long-term, and continuous
government subsidy. The final rule does not include exceptions for
high-cost and very-high-cost markets in order to mitigate the
operational complexity of applying the government subsidy risk
multiplier, as rental costs and income levels within metro areas change
over time.
Finally, the final rule does not include the Enterprises' voluntary
rent restriction programs (SIA and TAC), block grant programs, or tax-
exempt private activity bonds as applicable government subsidies. While
these programs do often support affordable housing and provide benefits
to lenders, FHFA sought to include as applicable government subsidies
programs administered by the Federal or a State government that span
most of the
[[Page 83470]]
Enterprises' affordable businesses and that have significant
performance data available. Many of the additional programs identified
by commenters as recommended inclusions are either non-governmental,
are used as a layer in a financing stack in conjunction with an already
applicable government subsidy, do not have performance data readily
available for FHFA to assess, or are not specifically oriented to the
creation or preservation of affordable rental housing.
C. Derivatives and Cleared Transactions
The proposed rule would require an Enterprise to calculate risk-
weighted assets for the standardized approach based on the exposure
amounts of its over-the-counter (OTC) derivative contracts, cleared
derivative contracts, and contributions of commitments to mutualized
loss sharing agreements with central counterparties (i.e., default fund
contributions) calculated using SA-CCR. The proposed rule would also
require an Enterprise to use these same exposure amounts for inclusion
in adjusted total assets. The current regulation requires an Enterprise
to use the CEM to determine the exposure amounts of its OTC derivative
contracts and cleared derivative contracts and the risk-weighted assets
amounts of its default fund contributions.
The proposed rule would require an Enterprise to apply SA-CCR in
the following ways:
1. Netting Sets
The proposed rule would require an Enterprise to 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).
2. Hedging Sets
To calculate potential future exposure (PFE), the proposed rule
would require an Enterprise to fully or partially net derivative
contracts within 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.
Under SA-CCR, a hedging set means those derivative contracts within
the same netting set that share similar risk factors. The proposed rule
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
The proposed rule would require an Enterprise to 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 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 omit exposure
calculations related to internal model methodology to reduce reliance
on the Enterprises' internal model results.
The proposed rule would maintain the current collateral haircut
approach and standard supervisory haircuts for collateralized
transactions. However, the proposed rule would remove the current
simple approach and add the U.S. banking framework's simple value-at-
risk (VaR) methodology.
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 to reduce reliance on the Enterprises' internal model
results.
Two commenters supported FHFA's proposal to replace CEM with SA-
CCR, with certain revisions. Both commenters recommended an
implementation timeline of no less than 24 months due to the complexity
of implementing SA-CCR and to be generally consistent with the
transition period offered to large U.S. banking organizations when they
implemented similar financial regulatory reforms.\6\ One commenter
recommended that FHFA provide optionality allowing an Enterprise to use
either CEM or SA-CCR after any regulatory transition period. The
commenter stated that Enterprise derivative portfolios more closely
resemble the derivative portfolios of U.S. banking organizations
subject to the standardized approach than those subject to the advanced
approaches, so CEM might be more appropriate.
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\6\ See 85 FR 4362 (Jan. 24, 2020).
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The final rule adopts the requirements that an Enterprise must
determine the exposure amounts of its OTC derivative contracts, cleared
derivative contracts, and default fund contributions, for use in
calculating risk-weighted assets under the standardized approach and
adjusted total assets, using SA-CCR substantially as proposed, with a
[[Page 83471]]
transition period resulting in an effective date of January 1, 2026.
FHFA continues to believe that relative to CEM, SA-CCR provides
important improvements to risk sensitivity and calibration, including
by differentiating between margined and unmargined derivative contracts
and recognizing the benefits of netting agreements, resulting in more
appropriate capital requirements for derivative contracts. The final
rule also adopts the requirement to add CVA risk-weighted assets to the
calculation of standardized total risk-weighted assets.
FHFA agrees with commenters that a 24-month transition period will
allow the Enterprises a suitable amount of time to update their systems
and processes to implement SA-CCR. During the transition period, the
Enterprises must continue to use CEM to calculate exposure amounts for
derivatives and cleared transactions, as provided in prior Sec. Sec.
1240.36, 1240.37, and 1240.39.\7\ On January 1, 2026, an Enterprise
must calculate exposure amounts for derivates and cleared transactions
using SA-CCR as detailed in this Sec. Sec. 1240.36, 1240.37, and
1240.39.
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\7\ See 85 FR 82150 (Dec. 17, 2020).
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Regarding the commenter's suggestion to make SA-CCR an optional
requirement, although the Enterprises' derivatives portfolios are
relatively uncomplicated today, that may not be the case after the
Enterprises exit their conservatorships. Furthermore, in constructing
the ERCF, FHFA has consistently developed requirements similar to those
applicable to banking organizations subject to the advanced approaches
rather than those subject to the standardized approach. For example,
the ERCF includes a stability capital buffer (analogous to surcharge
for global systemically important banks), a leverage buffer, market
risk capital requirements, and operational risk capital requirements,
none of which are applicable to banking organizations subject to the
standardized approach. Following this reasoning, and to limit certain
capital arbitrage opportunities between Enterprises and between the
Enterprises and large banking organizations, the final rule does not
include CEM as an option for calculating regulatory capital ratios
after the transition period.
D. Original Credit Scores for Single-Family Mortgage Exposures Without
a Representative Original Credit Score
The proposed rule would require an Enterprise to assign an original
credit score of 680 under the standardized approach to a single-family
mortgage exposure without a permissible credit score at origination
(unscored), subject to Enterprise verification that none of the
borrowers have a credit score at one of the repositories. The current
regulation requires an Enterprise to assign a credit score of 600 to
any single-family mortgage exposure that is unscored. The current
regulation's 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.
Four commenters expressed full support for FHFA's proposal to
increase the assigned original credit score for unscored single-family
mortgage exposures from 600 to 680. Therefore, to reflect 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,\8\ the final rule
adopts the requirement to assign an original credit score of 680 to
unscored single-family mortgage exposures without a permissible credit
score, subject to Enterprise verification that none of the borrowers
have a credit score at one of the repositories, as proposed.
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\8\ 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>).
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E. Guarantee Assets
The proposed rule would introduce a 20 percent risk weight under
the standardized approach for an Enterprise's 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 currently required to assign a 100 percent risk weight
(Sec. 1240.32(i)(5)) to guarantee assets.
One commenter supported FHFA's proposed 20 percent credit risk
weight for guarantee assets. In addition, in response to a question
posed in the proposed rule, the commenter recommended that FHFA not
include guarantee assets in the definition of covered positions subject
to market risk capital requirements. The commenter expressed the view
that because guarantee assets are not positions held for the purpose of
short-term resale or with the intent of benefitting from short-term
price movements, the positions do not contribute to an Enterprise's
interest rate risk.
The final rule adopts the risk weight of 20 percent for guarantee
assets as proposed. In addition, and in consideration of the feedback
FHFA received, the final rule does not include guarantee assets in the
definition of covered positions subject to market risk capital
requirements.
F. Mortgage Servicing Assets
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.
Currently, the ERCF defines an MSA as the contractual right to service
for a fee mortgage loans that are owned by others. Therefore, this
definition omits MSAs created when an Enterprise acquires servicing
rights on mortgage loans already owned by the Enterprise, bifurcating
the capital treatment for MSAs by the owner of the underlying loans.
One commenter supported FHFA's proposal to expand the definition of
MSA to include servicing rights on mortgage loans owned by the
acquiring Enterprise. No commenters raised objections or provided
alternative recommendations to the proposal. The final rule adopts the
definition of MSA as proposed.
G. Time-Based Calls for CRT Exposures
The proposed rule would amend the ERCF to permit eligible time-
based calls for CRT exposures under the standardized approach, defining
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
[[Page 83472]]
de minimis credit protection to the securitization; and
(iii) Is only exercisable five years after the securitization
exposure's issuance date.
Under the current regulation, 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 in the credit risk transfer approach.\9\
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\9\ 12 CFR 1240.44.
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Three commenters supported FHFA's proposal to permit eligible time-
based calls for CRT exposures. One commenter recommended that FHFA
modify the proposed definition of time-based calls to be a contractual
provision that permits an originating Enterprise to redeem a
securitization or credit risk transfer exposure on or after a specified
redemption or cancellation date to clarify FHFA's intent that eligible
time-based calls will be permitted for all CRT exposures. While this is
FHFA's intent, the Agency believes that the proposed definition without
the phrase ``or credit risk transfer'' is sufficient because the
definition of a securitization exposure in Sec. 1240.2 explicitly
includes both retained CRT and acquired CRT exposures. Further, the
proposed rule would only modify the operational criteria for credit
risk transfers (Sec. 1240.2(c)), implying that the only securitization
exposures that would be affected by the amendment are CRT exposures.
One commenter recommended that FHFA modify proposed restriction (i) to
be ``is exercisable no less than five years after the securitization or
credit risk transfer issuance or effective date,'' because the
commenter expressed the view that adding ``or effective date'' would
clarify FHFA's intent that eligible time-based calls will be permitted
for CRT that do not involve securitizations, such as reinsurance
transactions. Finally, one commenter recommended that for CRT involving
single-family mortgage exposures with terms less than or equal to 20
years, the proposed five-year exercise restriction be shortened to four
years.
The final rule adopts the ERCF amendment permitting eligible time-
based calls for CRT exposures substantially as proposed, with revisions
reflecting two commenter suggestions. First, the final rule adopts the
suggested clarification that an eligible time-based call is one that is
exercisable no less than a certain number of years after the
securitization or CRT issuance or effective date. This revision
reflects FHFA's intent that eligible time-based calls will be permitted
for CRT that do not involve securitizations. Second, the final rule
adopts the suggested modification to shorten the exercise restriction
for CRT involving single-family mortgage exposures with terms less than
or equal to 20 years to no less than four years after the CRT issuance
or effective date. This revision reflects the risk reduction associated
with the faster amortization of shorter-term loans relative to longer-
term loans.
H. Interest-Only Mortgage-Backed Securities
The proposed rule would clarify that, under the standardized
approach, an Enterprise must assign a zero percent risk weight to an IO
MBS issued and guaranteed by the Enterprise, a 20 percent risk weight
to an IO MBS issued and guaranteed by the other Enterprise, and a 100
percent risk weight to an IO MBS issued by a non-Enterprise entity.
Currently, the ERCF contains conflicting requirements that an
Enterprise must assign a zero percent risk weight to any MBS guaranteed
by the Enterprise (other than any retained CRT exposure), but also that
the risk weight for a non-credit-enhancing IO MBS must not be less than
100 percent.
One commenter supported FHFA's proposal to amend the risk weights
for IO MBS to clarify which risk weight must be applied when an IO MBS
is issued and guaranteed by the Enterprise versus when an IO MBS is
issued by a non-Enterprise entity. No commenters raised objections or
provided alternative recommendations to the proposal. The final rule
adopts the updated IO MBS risk weights as proposed.
I. Single-Family Countercyclical Adjustment
The proposed rule would require under the standardized approach an
Enterprise to apply to a single-family mortgage exposure's loan-to-
value ratio (LTV) the first single-family countercyclical adjustment
simultaneously with the first property value adjustment, six months
after acquisition. Currently, an Enterprise is required to apply the
first single-family countercyclical adjustment after acquisition
without delay, while the Enterprise is required to apply the first
property value adjustment after a six-month delay to allow for a rate
of change to be computed following the quarterly release of FHFA's
Purchase-only State-level House Price Index.
One commenter supported FHFA's proposal to align the timing between
the application of the first single-family countercyclical adjustment
and the first property value adjustment. However, the commenter
recommended that both adjustments be applied immediately rather than
after a six-month delay. The commenter did not provide analytical
support for this recommendation.
The final rule adopts the timing adjustment to the application of
the first single-family countercyclical adjustment as proposed. FHFA
believes this modification will 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.
J. Stability Capital Buffer
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. Under the ERCF, increases in the
stability capital buffer are implemented with a two-year delay, while
decreases are implemented with a one-year delay. This delay difference
potentially creates a situation where an increase and a decrease in the
stability capital buffer are scheduled to become effective at the same
time.
One commenter supported FHFA's proposed clarification to the
calculation of the stability capital buffer. No commenters raised
objections or provided alternative recommendations to the proposal. The
final rule adopts the clarification as proposed.
K. Advanced Approaches
The proposed rule would extend the compliance date for an
Enterprise's advanced approaches from January 1, 2025, to January 1,
2028. The ERCF's advanced approaches for determining risk-weighted
assets rely on an Enterprise's internal models, and 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.
Commenters fully supported FHFA's proposal to extend the compliance
date of the advanced approaches. One commenter expressed the view that
the advanced approaches are exceptionally burdensome and undermine the
capital visibility provided by the ERCF's standardized approach.
[[Page 83473]]
The final rule extends the compliance date for an Enterprise's
advanced approaches to January 1, 2028, as proposed. In the proposed
rule, FHFA discussed how U.S. banking regulators were signaling
potential changes in the U.S. banking framework that would further
strengthen capital rules by reducing reliance on internal bank models.
To this end, the OCC, Federal Reserve Board, and the Federal Deposit
Insurance Corporation (FDIC) recently issued a notice of proposed
rulemaking \10\ that would substantially revise the regulatory capital
framework for banking organizations with total assets of $100 billion
or more and banking organizations with significant trading activity,
including by replacing the advanced approaches with a new expanded
risk-based approach.
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\10\ See 88 FR 64028 (Sept. 18, 2023).
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V. Representative Credit Scores for Single-Family Mortgage Exposures
FHFA currently is not adopting the proposed modification to the
procedure for selecting a representative credit score for a single-
family mortgage exposure when multiple credit scores have been
submitted for at least one borrower. The proposed methodology would
have required an Enterprise to use an average credit score for each
borrower whenever multiple scores are present as opposed to the current
methodology which requires an Enterprise to select the median borrower
credit score when three scores are present or the lower borrower credit
score when two scores are present.
FHFA proposed this modification to prevent a downward shift in
representative credit scores under the current methodology once the
Enterprises require a minimum of two, rather than three, credit reports
(bi-merge credit score requirement) from the repositories.\11\ While
the implementation date for the bi-merge credit score requirement has
yet to be announced, the proposed modification would have positioned
the Enterprises to account for the new requirement upon implementation.
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\11\ FHFA Announces Validation of FICO 10T and VantageScore 4.0
for Use by Fannie Mae and Freddie Mac [verbar] 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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Many commenters supported FHFA's proposal to modify the current
procedure for selecting a representative credit score for single-family
mortgage exposures. However, other commenters expressed concern over
the proposed change. Several commenters stated that it is difficult or
impossible to evaluate the proposed change without additional data and
when the eventual effects of the bi-merge credit score requirement and
the transition to alternative credit scores are not yet known. Others
expressed concern that changes to the ERCF could lead to policy changes
at the Enterprises that would front-run the implementation of the bi-
merge credit score requirement and the transition to alternative credit
scores. FHFA also received a number of comments on the bi-merge credit
score requirement and on the use of alternative credit scores more
generally, but those initiatives are outside the scope of this
rulemaking.
One commenter provided empirical support for FHFA's proposal to use
the average credit score when multiple scores are present rather than
the median/lower score. However, the commenter also suggested that FHFA
should require a third score when the two submitted scores are more
than 30 points apart to minimize the impact of outliers. In addition,
the commenter requested further analysis on, among other things, the
potential impact of the bi-merge credit score requirement on race,
gender, and geographic location for high-LTV loans with bi-merge
representative credit scores greater than or equal to 10 points higher
or lower than the score derived under the tri-merge process. Several
commenters expressed the view that they could not comment on the
appropriateness of the representative credit score proposal until FHFA
or the Enterprises released additional data on the bi-merge credit
score requirement under Classic FICO scores and under the new
alternative credit scoring models. Several commenters also expressed
criticism that FHFA's analysis only considered Classic FICO scores,
suggesting that the results of the analysis might differ after the
Enterprises begin accepting alternative credit scores.
FHFA proposed this narrow change to the calculation of a
representative credit scores to prepare the ERCF for the eventual
transition to the bi-merge credit score requirement. In March 2023,
FHFA and the Enterprises announced plans for stakeholder input on
proposed milestones as the Enterprises work to replace the Classic FICO
credit score model with the FICO 10T and the VantageScore 4.0 credit
score models and transition from the tri-merge requirement to the bi-
merge requirement.\12\ In September 2023, FHFA announced additional
opportunities for ongoing public engagement to facilitate the
transition to updated credit score models and credit report
requirements for loans acquired by the Enterprises, and also that the
Agency expects the implementation date for the bi-merge requirement to
occur later than the first quarter of 2024, as was initially
proposed.\13\ In consideration of the delayed implementation date for
the bi-merge requirement and the ongoing public engagement related to
credit scores, FHFA has determined to not adopt the proposed change to
the calculation of representative credit scores at this time.
---------------------------------------------------------------------------
\12\ See <a href="https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Public-Engagement-Process-for-Implementation-of-Updated-Credit-Score-Requirements.aspx">https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Public-Engagement-Process-for-Implementation-of-Updated-Credit-Score-Requirements.aspx</a>.
\13\ See <a href="https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Next-Phase-of-Public-Engagement-Process-for-Updated-Credit-Score-Requirements.aspx">https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Next-Phase-of-Public-Engagement-Process-for-Updated-Credit-Score-Requirements.aspx</a>.
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FHFA may, in the future, finalize this aspect of the proposed rule.
The Agency's options for doing so include adopting the changes
substantially as proposed without another notice and comment period,
reopening the comment period for the proposed change, or reproposing
this item in another notice of proposed rulemaking.
VI. Effective Dates
Under the rule establishing the ERCF published on December 17,
2020, 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. With the
exception of the amendments related to derivatives and cleared
transactions, the effective date for the amendments in this final rule
will be April 1, 2024. The effective date for the amendments
implementing SA-CCR and for the other amendments to Sec. Sec. 1240.36,
1240.37, and 1240.39 will be January 1, 2026.
VII. 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 final
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (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
[[Page 83474]]
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 final rule under the RFA. FHFA certifies
that the final rule will not have a significant economic impact on a
substantial number of small entities because the final rule is
applicable only to the Enterprises, which are not small entities for
purposes of the RFA.
IX. Congressional Review Act
In accordance with the Congressional Review Act (5 U.S.C. 801 et
seq.), FHFA has determined that this final rule is a major rule and has
verified this determination with the Office of Information and
Regulatory Affairs of OMB.
List of Subjects for 12 CFR Part 1240
Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.
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
amends part 1240 of subchapter C of title 12 of the Code of Federal
Regulations chapter XII, 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. Effective April 1, 2024, 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 definitions for ``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 a definition for ``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'';
0
g. Adding in alphabetical order definitions for ``Guarantee asset'' and
``Independent collateral'';
0
h. Revising the definition of ``Mortgage servicing assets (MSAs)'';
0
i. Adding in alphabetical order a definition for ``Net independent
collateral amount'';
0
j. Revising the definition of ``Netting set'';
0
k. Adding in alphabetical order definitions for ``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 (i)(viii); and
0
m. Adding in alphabetical order definitions for ``Sub-speculative
grade'', ``Time-based call'', ``Uniform Mortgage-backed Security'',
``Value-at-Risk'', ``Variation margin'', ``Variation margin amount'',
and ``Volatility derivative contract''.
The revisions and additions 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-CVM<INF>r</INF> + CVM<INF>p</INF>; 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) CVM<INF>r</INF> 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) CVM<INF>p</INF> 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
[[Page 83475]]
(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 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 or effective date, where the
underlying collateral is mortgage exposures with amortization terms
greater than 20 years.
(4) Is exercisable no less than four years after the securitization
or credit risk transfer issuance date or effective date, where the
underlying collateral is mortgage exposures with amortization terms of
20 years or less.
* * * * *
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
[[Page 83476]]
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.
* * * * *
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. Effective April 1, 2024, amend Sec. 1240.4 in paragraph (c) by
removing the year ``2025'' and adding in its place the year ``2028''.
0
4. Effective April 1, 2024, amend Sec. 1240.31 by:
0
a. In paragraph (a)(1)(iv) removing the word ``or'' after the
semicolon;
0
b. In paragraph (a)(1)(v) removing the period after ``1240.52'' and
adding ``; or'' in its place; and
0
c. Adding paragraph (a)(1)(vi).
The addition reads 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. Effective April 1, 2024, 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. Effective April 1, 2024, amend Sec. 1240.33 in paragraph (a) 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.
* * * * *
[[Page 83477]]
Table 1 to Paragraph (a)--Permissible Values and Additional Instructions
----------------------------------------------------------------------------------------------------------------
Defined term Permissible values Additional instructions
----------------------------------------------------------------------------------------------------------------
Cohort burnout..................... ``No burnout,'' if the single-family High if unable to determine.
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 <= 100 0 percent if outside of permissible
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.
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.. If there are credit scores from
multiple credit repositories for a
borrower, use the following logic
to determine a single original
credit score:
<bullet> If there are credit
scores from two repositories,
take the lower credit score.
<bullet> If there are credit
scores from three repositories,
use the middle credit score.
<bullet> If there are credit
scores from three repositories
and two of the credit scores are
identical, use the identical
credit score.
If there are multiple borrowers,
use the following logic to
determine a single original
credit score:
<bullet> Using the logic above,
determine a single credit score
for each borrower.
<bullet> Select the lowest single
credit score across all
borrowers.
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.
600 if outside of permissible range
or unable to determine.
Origination channel................ Retail, third-party origination (TPO) TPO includes broker and
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
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 <= 850. If there are credit scores from
multiple credit repositories for a
borrower, use the following logic
to determine a single refreshed
credit score:
[[Page 83478]]
<bullet> If there are credit
scores from two repositories,
take the lower credit score.
<bullet> If there are credit
scores from three repositories,
use the middle credit score.
<bullet> If there are credit
scores from three repositories
and two of the credit scores are
identical, use the identical
credit score.
If there are multiple borrowers,
use the following logic to
determine a single Refreshed
Credit Score:
<bullet> Using the logic above,
determine a single credit score
for each borrower.
<bullet> Select the lowest single
credit score across all
borrowers.
600 if outside of permissible
range or unable to determine.
Streamlined refi................... Yes, no.............................. No if unable to determine.
Subordination...................... 0 percent <= Subordination <= 80 80 percent if outside permissible
percent. range.
----------------------------------------------------------------------------------------------------------------
* * * * *
0
7. Effective April 1, 2024, amend Sec. 1240.34 by:
0
a. Adding in alphabetical order definitions for ``Affordable unit'' and
``Government subsidy'' in paragraph (a); and
0
b. Revising table 1 to paragraph (a) and 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:
(i) At least 20 percent of the property's units are restricted to
be affordable units per a regulatory agreement, recorded use
restriction, a housing-assistance payments contract, or other
restrictions codified in loan agreements; and
(ii) The property benefits from one of the following government
programs:
(A) Low Income Housing Tax Credits (LIHTC);
(B) Section 8 project-based rental assistance;
(C) Section 515 Rural Rental Housing Loans; or
(D) State/Local affordable housing programs that require the
provision of affordable housing for the life of the loan.
* * * * *
BILLING CODE 8070-01-P
Table 1 to Paragraph (a)--Permissible Values and Additional
Instructions
[[Page 83479]]
[GRAPHIC] [TIFF OMITTED] TR30NO23.028
* * * * *
(d) * * *
Table 4 to Paragraph (d)--Multifamily Risk Multipliers
[[Page 83480]]
[GRAPHIC] [TIFF OMITTED] TR30NO23.029
BILLING CODE 8070-01-C
\1\ If a multifamily mortgage exposure is collateralized by
multiple properties, calculate a weighted average government subsidy
multiplier by assigning a 0.6 multiplier to each property with a
government subsidy and 1.0 multiplier to each property without a
government subsidy, and using the total number of units in a
property as weights.
0
8. Effective April 1, 2024, 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:
[[Page 83481]]
(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. Effective January 1, 2026, 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 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 this paragraph (c), 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 this paragraph (c).
(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 this paragraph (c).
(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 contracts, 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 (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 this paragraph (c), 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) as if
the netting set
[[Page 83482]]
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
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:
[GRAPHIC] [TIFF OMITTED] TR30NO23.030
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:
[[Page 83483]]
[GRAPHIC] [TIFF OMITTED] TR30NO23.031
(B) Formula 2 is as follows:
[GRAPHIC] [TIFF OMITTED] TR30NO23.032
Where in paragraphs (c)(8)(i)(A) and (B) of this section:
(1) AddOn TB<INF>1</INF> IR 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) AddOn TB<INF>2</INF> IR 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) AddOn TB<INF>3</INF> IR 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
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] TR30NO23.033
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) [rho]kPkequals 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] TR30NO23.034
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 (Type <INF>k</INF>) 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 commodity type.
(D) P 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
[[Page 83484]]
supervisory duration, as calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TR30NO23.035
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 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:
Table 1 to Paragraph (c)(9)(iii)(B)(1)--Supervisory Delta Adjustment
for Options Contracts
[GRAPHIC] [TIFF OMITTED] TR30NO23.036
(2) As used in the formulas in table 1 to paragraph
(c)(9)(iii)(B)(1):
(i) E 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).
[[Page 83485]]
(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] TR30NO23.037
(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:
[GRAPHIC] [TIFF OMITTED] TR30NO23.038
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] TR30NO23.039
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]<INF>NS</INF>max{V<INF>NS</INF>;
0{time} -max{C<INF>MA</INF>; 0{time} ; 0{time}
+ max{[Sigma]<INF>NS</INF>min{V<INF>NS</INF>; 0{time} -
min{C<INF>MA</INF>; 0{time} ; 0{time}
Where:
(A) NS is each netting set subject to the variation margin agreement
MA;
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
(B) C<INF>MA</INF> is the sum of the net independent collateral
amount and the variation margin amount applicable to the
[[Page 83486]]
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
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 grade....... N/A............................ 100 50 6.0
Credit, index............................ Investment Grade............ N/A............................ 80 80 0.38
Speculative Grade........... N/A............................ 80 80 1.06
Equity, single name...................... N/A......................... N/A............................ 120 50 32
Equity, index............................ N/A......................... N/A............................ 75 80 20
Commodity................................ Energy...................... Electricity.................... 150 40 40
Other.......................... 70 40 18
Metals...................... N/A............................ 70 40 18
Agricultural................ N/A............................ 70 40 18
Other....................... N/A............................ 70 40 18
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the supervisory factor provided in this table
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<SUP>th</SUP>-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.
[[Page 83487]]
(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] TR30NO23.040
Where:
A = [Sigma]i 0.75 x wi<SUP>2</SUP> x (Mi x EADitotal-Mihedge x
Bi)<SUP>2</SUP>
(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
------------------------------------------------------------------------
Weight wi (in
Internal PD (in percent) 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. Effective January 1, 2026, 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
[[Page 83488]]
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 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] TR30NO23.041
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) DFCCPCMpref 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:
[GRAPHIC] [TIFF OMITTED] TR30NO23.042
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.
[[Page 83489]]
(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 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. Effective January 1, 2026, 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 Efx 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 83490]]
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 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).
(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] TR30NO23.043
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; H<INF>s</INF> equals the standard supervisory haircut;
and
(2) 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 an own-estimates haircut on a T<INF>N</INF>-day holding
period, which is different from
[[Page 83491]]
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] TR30NO23.044
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. Effective April 1, 2024, amend Sec. 1240.41 by revising paragraph
(c)(5), redesignating paragraph (c)(6) as paragraph (c)(7), and adding
new paragraph (c)(6).
The revision and addition 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. Effective April 1, 2024, 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
[[Page 83492]]
that are not subject to Sec. 1240.32(c), the risk weight may not be
less than 100 percent.
* * * * *
0
14. Effective April 1, 2024, amend Sec. 1240.400 by revising paragraph
(c)(1) and removing paragraph (d).
The revision reads 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) shall take effect.
* * * * *
Sandra L. Thompson,
Director, Federal Housing Finance Agency.
[FR Doc. 2023-26078 Filed 11-29-23; 8:45 am]
BILLING CODE 8070-01-P
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