(a) General requirement. A Board-regulated institution must calculate
a total specific risk add-on for each portfolio of debt and equity
positions for which the Board-regulated institution’s VaR-based measure
does not capture all material aspects of specific risk and for all
securitization positions that are not modeled under section 217.209.
A Board-regulated institution must calculate each specific risk add-on
in accordance with the requirements of this section. Notwithstanding
any other definition or requirement in this subpart, a position that
would have qualified as a debt position or an equity position but
for the fact that it qualifies as a correlation trading position under
paragraph (2) of the definition of correlation trading position in
section 217.2, shall be considered a debt position or an equity position,
respectively, for purposes of this section 210 of this subpart.
(1) The specific risk add-on
for an individual debt or securitization position that represents
sold credit protection is capped at the notional amount of the credit
derivative contract. The specific risk add-on for an individual debt
or securitization position that represents purchased credit protection
is capped at the current fair value of the transaction plus the absolute
value of the present value of all remaining payments to the protection
seller under the transaction. This sum is equal to the value of the
protection leg of the transaction.
(2) For debt, equity, or securitization
positions that are derivatives with linear payoffs, a Board-regulated
institution must assign a specific risk-weighting factor to the fair
value of the effective notional amount of the underlying instrument
or index portfolio, except for a securitization position for which
the Board-regulated institution directly calculates a specific risk
add-on using the SFA in paragraph (b)(2)(vii)(B) of this section.
A swap must be included as an effective notional position in the underlying
instrument or portfolio, with the receiving side treated as a long
position and the paying side treated as a short position. For debt,
equity, or securitization positions that are derivatives with nonlinear
payoffs, a Board-regulated institution must risk weight the fair value
of the effective notional amount of the underlying instrument or portfolio
multiplied by the derivative’s delta.
(3) For debt, equity, or securitization
positions, a Board-regulated institution may net long and short positions
(including derivatives) in identical issues or identical indices.
A Board-regulated institution may also net positions in depositary
receipts against an opposite position in an identical equity in different
markets, provided that the Board-regulated institution includes the
costs of conversion.
(4) A set of transactions consisting of either a debt position and
its credit derivative hedge or a securitization position and its credit
derivative hedge has a specific risk add-on of zero if:
(i) The
debt or securitization position is fully hedged by a total return
swap (or similar instrument where there is a matching of swap payments
and changes in fair value of the debt or securitization position);
(ii) There is an exact match
between the reference obligation of the swap and the debt or securitization
position;
(iii) There
is an exact match between the currency of the swap and the debt or
securitization position; and
(iv) There is either an exact match
between the maturity date of the swap and the maturity date of the
debt or securitization position; or, in cases where a total return
swap references a portfolio of positions with different maturity dates,
the total return swap maturity date must match the maturity date of
the underlying asset in that portfolio that has the latest maturity
date.
(5) The specific risk add-on for a set of transactions consisting
of either a debt position and its credit derivative hedge or a securitization
position and its credit derivative hedge that does not meet the criteria
of paragraph (a)(4) of this section is equal to 20.0 percent of the
capital requirement for the side of the transaction with the higher
specific risk add-on when:
(i) The credit risk of the position
is fully hedged by a credit default swap or similar instrument;
(ii) There is an exact
match between the reference obligation of the credit derivative hedge
and the debt or securitization position;
(iii) There is an exact match between
the currency of the credit derivative hedge and the debt or securitization
position; and
(iv)
There is either an exact match between the maturity date of the credit
derivative hedge and the maturity date of the debt or securitization
position; or, in the case where the credit derivative hedge has a
standard maturity date:
(A) The maturity date of the credit derivative
hedge is within 30 business days of the maturity date of the debt
or securitization position; or
(B) For purchased credit protection, the maturity
date of the credit derivative hedge is later than the maturity date
of the debt or securitization position, but is no later than the standard
maturity date for that instrument that immediately follows the maturity
date of the debt or securitization position. The maturity date of
the credit derivative hedge may not exceed the maturity date of the
debt or securitization position by more than 90 calendar days.
(6) The specific risk add-on for a set of transactions consisting
of either a debt position and its credit derivative hedge or a securitization
position and its credit derivative hedge that does not meet the criteria
of either paragraph (a)(4) or (a)(5) of this section, but in which
all or substantially all of the price risk has been hedged, is equal
to the specific risk add-on for the side of the transaction with the
higher specific risk add-on.
(b) Debt and securitization positions.
(1) The total specific risk add-on for
a portfolio of debt or securitization positions is the sum of the
specific risk add-ons for individual debt or securitization positions,
as computed under this section. To determine the specific risk add-on
for individual debt or securitization positions, a Board-regulated
institution must multiply the absolute value of the current fair value
of each net long or net short debt or securitization position in the
portfolio by the appropriate specific risk-weighting factor as set
forth in paragraphs (b)(2)(i) through (b)(2)(vii) of this section.
(2) For the purpose of
this section, the appropriate specific risk-weighting factors include:
(i) Sovereign debt positions.
(A) In accordance with Table 1 to section 217.210, a Board-regulated
institution must assign a specific risk-weighting factor to a sovereign
debt position based on the CRC applicable to the sovereign, and, as
applicable, the remaining contractual maturity of the position, or
if there is no CRC applicable to the sovereign, based on whether the
sovereign entity is a member of the OECD. Notwithstanding any other
provision in this subpart, sovereign debt positions that are backed
by the full faith and credit of the United States are treated as having
a CRC of 0.
Table 1 to
section 217.210—Specific risk-weighting factors for sovereign debt
positions
| |
Specific risk-weighting factor (in percent) |
| CRC |
0-1 |
0.0 |
| 2-3 |
0.25 |
| 1.0 |
| 1.6 |
| |
4-6 |
8.0 |
| |
7 |
12 |
| OECD member with
no CRC |
0.0 |
| Non-OECD member with
no CRC |
8.0 |
| Sovereign
default |
12.0 |
(B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a Board-regulated
institution may assign to a sovereign debt position a specific risk-weighting
factor that is lower than the applicable specific risk-weighting factor
in Table 1 to section 217.210 if:
(1) The position is denominated in the sovereign entity’s
currency;
(2)
The Board-regulated institution has at least an equivalent amount
of liabilities in that currency; and
(3) The sovereign entity allows banks
under its jurisdiction to assign the lower specific risk-weighting
factor to the same exposures to the sovereign entity.
(C) A Board-regulated institution
must assign a 12.0 percent specific risk-weighting factor to a sovereign
debt position immediately upon determination a default has occurred;
or if a default has occurred within the previous five years.
(D) A Board-regulated institution
must assign a 0.0 percent specific risk-weighting factor to a sovereign
debt position if the sovereign entity is a member of the OECD and
does not have a CRC assigned to it, except as provided in paragraph
(b)(2)(i)(C) of this section.
(E) A Board-regulated institution must assign an 8.0 percent specific
risk-weighting factor to a sovereign debt position if the sovereign
is not a member of the OECD and does not have a CRC assigned to it,
except as provided in paragraph (b)(2)(i)(C) of this section.
(ii) Certain supranational entity and multilateral
development bank debt positions. A Board-regulated institution
may assign a 0.0 percent specific risk-weighting factor to a debt
position that is an exposure to the Bank for International Settlements,
the European Central Bank, the European Commission, the International
Monetary Fund, the European Stability Mechanism, the European Financial
Stability Facility, or an MDB.
(iii) GSE
debt positions. A Board-regulated institution must assign a 1.6
percent specific risk-weighting factor to a debt position that is
an exposure to a GSE. Notwithstanding the foregoing, a Board-regulated
institution must assign an 8.0 percent specific risk-weighting factor
to preferred stock issued by a GSE.
(iv) Depository
institution, foreign bank, and credit union debt positions.
(A) Except as provided in paragraph (b)(2)(iv)(B) of this section,
a Board-regulated institution must assign a specific risk-weighting
factor to a debt position that is an exposure to a depository institution,
a foreign bank, or a credit union, in accordance with Table 2 to section
217.210, based on the CRC that corresponds to that entity’s
home country or the OECD membership status of that entity’s home country
if there is no CRC applicable to the entity’s home country, and, as
applicable, the remaining contractual maturity of the position.
(B) A Board-regulated institution
must assign a specific risk-weighting factor of 8.0 percent to a debt
position that is an exposure to a depository institution or a foreign
bank that is includable in the depository institution’s or foreign
bank’s regulatory capital and that is not subject to deduction as
a reciprocal holding under section 217.22.
(C) A Board-regulated institution must assign
a 12.0 percent specific risk-weighting factor to a debt position that
is an exposure to a foreign bank immediately upon determination that
a default by the foreign bank’s home country has occurred or if a
default by the foreign bank’s home country has occurred within the
previous five years.
(v) PSE debt
positions.
(A) Except as provided in paragraph (b)(2)(v)(B)
of this section, a Board-regulated institution must assign a specific
risk-weighting factor to a debt position that is an exposure to a
PSE in accordance with Tables 3 and 4 to section 217.210 depending
on the position’s categorization as a general obligation or revenue
obligation based on the CRC that corresponds to the PSE’s home country
or the OECD membership status of the PSE’s home country if there is
no CRC applicable to the PSE’s home country, and, as applicable, the
remaining contractual maturity of the position, as set forth in Tables
3 and 4 of this section.
(B) A Board-regulated institution may assign a lower specific risk-weighting
factor than would otherwise apply under Tables 3 and 4 of this section
to a debt position that is an exposure to a foreign PSE if:
(1) The PSE’s home country allows
banks under its jurisdiction to assign a lower specific risk-weighting
factor to such position; and
(2) The specific risk-weighting factor is not lower than the
risk weight that corresponds to the PSE’s home country in accordance
with Tables 3 and 4 of this section.
(C) A Board-regulated institution must assign
a 12.0 percent specific risk-weighting factor to a PSE debt position
immediately upon determination that a default by the PSE’s home country
has occurred or if a default by the PSE’s home country has occurred
within the previous five years.
Table 2 to section
217.210—Specific risk-weighting factors for depository institution,
foreign bank, and credit union debt positions
| |
Specific risk-weighting factor (in percent) |
| CRC 0-2 or OECD member with no CRC |
0.25 |
| 1.0 |
| 1.6 |
| CRC 3 |
8.0 |
| CRC 4-7 |
12.0 |
| Non-OECD member with no CRC |
8.0 |
| Sovereign default |
12.0 |
(vi) Corporate
debt positions. Except as otherwise provided in paragraph (b)(2)(vi)(B)
of this section, a Board-regulated institution must assign a specific
risk-weighting factor to a corporate debt position in accordance with
the investment grade methodology in paragraph (b)(2)(vi)(A) of this
section.
(A) Investment grade
methodology.
(1) For corporate debt positions that are exposures to entities
that have issued and outstanding publicly traded instruments, a Board-regulated
institution must assign a specific risk-weighting factor based on
the category and remaining contractual maturity of the position, in
accordance with Table 5 to section 217.210. For purposes of this paragraph
(b)(2)(vi)(A)(1), the Board-regulated institution must determine
whether the position is in the investment grade or not investment
grade category.
Table 3 to
section 217.210—Specific risk-weighting factors for PSE general obligation
debt positions
| |
General obligation specific risk-weighting factor
(in percent) |
| CRC 0-2 or OECD member with no CRC |
0.25 |
| 1.0 |
| 1.6 |
| CRC 3 |
8.0 |
| CRC 4-7 |
12.0 |
| Non-OECD member with
no CRC |
8.0 |
| Sovereign default |
12.0 |
Table 4 to section
217.210—Specific risk-weighting factors for PSE revenue obligation
debt positions
| |
Revenue obligation specific risk-weighting factor
(in percent) |
| CRC 0-1 or OECD member with no CRC |
0.25 |
| 1.0 |
| 1.6 |
| CRC 2-3 |
8.0 |
| CRC 4-7 |
12.0 |
| Non-OECD member
with no CRC |
8.0 |
| Sovereign
default |
12.0 |
Table 5 to
section 217.210—Specific risk-weighting factors for corporate debt
positions under the investment grade methodology
| Category |
Remaining contractual maturity |
Specific risk-weighting factor (in percent) |
| Investment grade |
6 months
or less |
0.50 |
| Greater
than 6 and up to and including 24 months |
2.00 |
| Greater
than 24 months |
4.00 |
| Non-investment grade |
12.00 |
(2) A Board-regulated institution must assign an 8.0 percent
specific risk-weighting factor for corporate debt positions that are
exposures to entities that do not have publicly traded instruments
outstanding.
(B) Limitations.
(1) A Board-regulated institution
must assign a specific risk-weighting factor of at least 8.0 percent
to an interest-only mortgage-backed security that is not a securitization
position.
(2) A
Board-regulated institution shall not assign a corporate debt position
a specific risk-weighting factor that is lower than the specific risk-weighting
factor that corresponds to the CRC of the issuer’s home country, if
applicable, in table 1 of this section.
(vii) Securitization positions.
(A) General requirements.
(1) A Board-regulated institution
that is not an advanced approaches Board-regulated institution or
is a U.S. intermediate holding company that is required to be established
or designated pursuant to 12 CFR 252.153 and that is not calculating
risk-weighted assets according to subpart E must assign a specific
risk-weighting factor to a securitization position using either the
simplified supervisory formula approach (SSFA) in paragraph (b)(2)(vii)(C)
of this section (and section 217.211) or assign a specific risk-weighting
factor of 100 percent to the position.
(2) A Board-regulated institution
that is an advanced approaches Board-regulated institution or is a
U.S. intermediate holding company that is required to be established
or designated pursuant to 12 CFR 252.153 and that is calculating risk-weighted
assets according to subpart E must calculate a specific risk add-on
for a securitization position in accordance with paragraph (b)(2)(vii)(B)
of this section if the Board-regulated institution and the securitization
position each qualifies to use the SFA in section 217.143. A Board-regulated
institution that is an advanced approaches Board-regulated institution
or is a U.S. intermediate holding company that is required to be established
or designated pursuant to 12 CFR 252.153 and that is calculating risk-weighted
assets according to subpart E with a securitization position that
does not qualify for the SFA under paragraph (b)(2)(vii)(B) of this
section may assign a specific risk-weighting factor to the securitization
position using the SSFA in accordance with paragraph (b)(2)(vii)(C)
of this section or assign a specific risk-weighting factor of 100
percent to the position.
(3) A Board-regulated institution must treat a short securitization
position as if it is a long securitization position solely for calculation
purposes when using the SFA in paragraph (b)(2)(vii)(B) of this section
or the SSFA in paragraph (b)(2)(vii)(C) of this section.
(B) SFA. To calculate the specific risk add-on for a securitization
position using the SFA, a Board-regulated institution that is an advanced
approaches Board-regulated institution must set the specific risk
add-on for the position equal to the risk-based capital requirement
as calculated under section 217.143.
(C) SSFA. To
use the SSFA to determine the specific risk-weighting factor for a
securitization position, a Board-regulated institution must calculate
the specific risk-weighting factor in accordance with section 217.211.
(D) Nth-to-default credit derivatives. A Board-regulated
institution must determine a specific risk add-on using the SFA in
paragraph (b)(2)(vii)(B) of this section, or assign a specific risk-weighting
factor using the SSFA in paragraph (b)(2)(vii)(C) of this section
to an nth-to-default credit derivative in accordance with
this paragraph (b)(2)(vii)(D), regardless of whether the Board-regulated
institution is a net protection buyer or net protection seller.
A Board-regulated institution must determine its position in the nth-to-default credit derivative as the largest notional amount
of all the underlying exposures.
(1) For purposes of determining the specific risk add-on using
the SFA in paragraph (b)(2)(vii)(B) of this section or the specific
risk-weighting factor for an nth-to-default credit derivative
using the SSFA in paragraph (b)(2)(vii)(C) of this section the Board-regulated
institution must calculate the attachment point and detachment point
of its position as follows:
(i) The attachment point (parameter A) is the ratio of the
sum of the notional amounts of all underlying exposures that are subordinated
to the Board-regulated institution’s position to the total notional
amount of all underlying exposures. For purposes of the SSFA, parameter
A is expressed as a decimal value between zero and one. For purposes
of using the SFA in paragraph (b)(2)(vii)(B) of this section to calculate
the specific add-on for its position in an nth-to-default
credit derivative, parameter A must be set equal to the credit
enhancement level (L) input to the SFA formula in section 143
of this subpart. In the case of a first-to-default credit derivative,
there are no underlying exposures that are subordinated to the Board-regulated
institution’s position. In the case of a second-or-subsequent-to-default
credit derivative, the smallest (n-1) notional amounts of the underlying
exposure(s) are subordinated to the Board-regulated institution’s
position.
(ii)
The detachment point (parameter D) equals the sum of parameter A plus
the ratio of the notional amount of the Board-regulated institution’s
position in the nth-to-default credit derivative to the
total notional amount of all underlying exposures. For purposes of
the SSFA, parameter A is expressed as a decimal value between zero
and one. For purposes of using the SFA in paragraph (b)(2)(vii)(B)
of this section to calculate the specific risk add-on for its position
in an nth-to-default credit derivative, parameter D must
be set to equal the L input plus the thickness of tranche T
input to the SFA formula in section 217.143 of this subpart.
(2) A Board-regulated
institution that does not use the SFA in paragraph (b)(2)(vii)(B)
of this section to determine a specific risk-add on, or the SSFA in
paragraph (b)(2)(vii)(C) of this section to determine a specific risk-weighting
factor for its position in an nth-to-default credit derivative
must assign a specific risk-weighting factor of 100 percent to the
position.
(c) Modeled correlation
trading positions. For purposes of calculating the comprehensive
risk measure for modeled correlation trading positions under either
paragraph (a)(2)(i) or (a)(2)(ii) of section 217.209, the total specific
risk add-on is the greater of:
(1) The sum of the Board-regulated institution’s
specific risk add-ons for each net long correlation trading position
calculated under this section; or
(2) The sum of the Board-regulated institution’s
specific risk add-ons for each net short correlation trading position
calculated under this section.
(d) Non-modeled securitization positions. For
securitization positions that are not correlation trading positions
and for securitizations that are correlation trading positions not
modeled under section 217.209, the total specific risk add-on is the
greater of:
(1) The sum of the Board-regulated
institution’s specific risk add-ons for each net long securitization
position calculated under this section; or
(2) The sum of the Board-regulated institution’s
specific risk add-ons for each net short securitization position calculated
under this section.
(e) Equity positions. The total specific risk
add-on for a portfolio of equity positions is the sum of the specific
risk add-ons of the individual equity positions, as computed under
this section. To determine the specific risk add-on of individual
equity positions, a Board-regulated institution must multiply the
absolute value of the current fair value of each net long or net short
equity position by the appropriate specific risk-weighting factor
as determined under this paragraph (e):
(1) The Board-regulated institution must
multiply the absolute value of the current fair value of each net
long or net short equity position by a specific risk-weighting factor
of 8.0 percent. For equity positions that are index contracts comprising
a well-diversified portfolio of equity instruments, the absolute value
of the current fair value of each net long or net short position is
multiplied by a specific risk-weighting factor of 2.0 percent.
34(2) For equity positions arising from the
following futures-related arbitrage strategies, a Board-regulated
institution may apply a 2.0 percent specific risk-weighting factor
to one side (long or short) of each position with the opposite side
exempt from an additional capital requirement:
(i) Long
and short positions in exactly the same index at different dates or
in different market centers; or
(ii) Long and short positions in index
contracts at the same date in different, but similar indices.
(3) For futures contracts
on main indices that are matched by offsetting positions in a basket
of stocks comprising the index, a Board-regulated institution may
apply a 2.0 percent specific risk-weighting factor to the futures
and stock basket positions (long and short), provided that such trades
are deliberately entered into and separately controlled, and that
the basket of stocks is comprised of stocks representing at least
90.0 percent of the capitalization of the index. A main index refers
to the Standard & Poor’s 500 Index, the FTSE All-World Index,
and any other index for which the Board-regulated institution can
demonstrate to the satisfaction of the Board that the equities represented
in the index have liquidity, depth of market, and size of bid-ask
spreads comparable to equities in the Standard & Poor’s 500 Index
and FTSE All-World Index.
(f) Due diligence requirements for securitization
positions.
(1) A Board-regulated institution must
demonstrate to the satisfaction of the Board a comprehensive understanding
of the features of a securitization position that would materially
affect the performance of the position by conducting and documenting
the analysis set forth in paragraph (f)(2) of this section. The Board-regulated
institution’s analysis must be commensurate with the complexity of
the securitization position and the materiality of the position in
relation to capital.
(2) A Board-regulated institution must demonstrate its comprehensive
understanding for each securitization position by:
(i) Conducting
an analysis of the risk characteristics of a securitization position
prior to acquiring the position and document such analysis within
three business days after acquiring position, considering:
(A) Structural
features of the securitization that would materially impact the performance
of the position, for example, the contractual cash flow waterfall,
waterfall-related triggers, credit enhancements, liquidity enhancements,
fair value triggers, the performance of organizations that service
the position, and deal-specific definitions of default;
(B) Relevant information regarding
the performance of the underlying credit exposure(s), for example,
the percentage of loans 30, 60, and 90 days past due; default rates;
prepayment rates; loans in foreclosure; property types; occupancy;
average credit score or other measures of creditworthiness; average
loan-to-value ratio; and industry and geographic diversification
data on the underlying exposure(s);
(C) Relevant market data of the securitization,
for example, bid-ask spreads, most recent sales price and historical
price volatility, trading volume, implied market rating, and size,
depth and concentration level of the market for the securitization;
and
(D) For resecuritization
positions, performance information on the underlying securitization
exposures, for example, the issuer name and credit quality, and the
characteristics and performance of the exposures underlying the securitization
exposures.
(ii) On an on-going basis (no less frequently
than quarterly), evaluating, reviewing, and updating as appropriate
the analysis required under paragraph (f)(1) of this section for each
securitization position.
