Banking Regulators Propose Revised Methodology for Calculating Derivatives Exposure
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the agencies) are inviting public comment on a proposal that would implement a new approach for calculating the exposure amount of derivative contracts under the agencies’ regulatory capital rule.
The highlights of the notice of proposed rulemaking (NPR) are described by the FDIC as follows:
The “standardized approach for measuring counterparty credit risk” (SA-CCR) described in the NPR would: (1) replace the current exposure methodology (CEM) in the capital rule’s advanced approaches with SA-CCR as an option to internal models methodology (IMM) for purposes of calculating advanced approaches total risk-weighted assets; (2) require an advanced approaches banking organization to begin using SA-CCR by July 1, 2020, in determining the exposure amount for a derivative contract for purposes of calculating its standardized total risk-weighted assets; and (3) allow a non-advanced approaches banking organization to use either CEM or SA-CCR to determine the exposure amount for its derivative contracts.
If a banking organization elects to use SA-CCR to determine the exposure amount for its derivative contracts, it also would be required to use SA-CCR to determine the trade exposure amount for cleared derivative contracts and default fund contributions.
The NPR would simplify the formula used to determine the risk-weighted asset amount for a default fund contribution to be based on the banking organization’s pro rata share of the default fund.
Advanced approaches banking organizations would be required to use a modified version of SA-CCR to determine the exposure amount of derivative contracts for purposes of calculating total leverage exposure under the supplemental leverage ratio.
The NPR would make technical amendments to the capital rule with respect to cleared transactions.
The comment period for the NPR will end 60 days after publication of the NPR in the Federal Register.
The NPR is available here: