(a) In general. For purposes of this subpart, a covered company
must calculate its net credit exposure to a counterparty by
adjusting its gross credit exposure to that counterparty in accordance
with the rules set forth in this section.
(b) Eligible collateral.
(1) In computing its net credit exposure
to a counterparty for any credit transaction other than a securities
financing transaction, a covered company must reduce its gross credit
exposure on the transaction by the adjusted market value of any eligible
collateral.
(2) A covered
company that reduces its gross credit exposure to a counterparty as
required under paragraph (b)(1) of this section must include the adjusted
market value of the eligible collateral, when calculating its gross
credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of
this section, a covered company’s gross credit exposure to a collateral
issuer under this paragraph (b) is limited to:
(i) Its
gross credit exposure to the counterparty on the credit transaction,
or
(ii) In the case
of an exempt counterparty, the gross credit exposure that would have
been attributable to that exempt counterparty on the credit transaction
if valued in accordance with section 252.73(a).
(c) Eligible guarantees.
(1) In calculating net credit
exposure to a counterparty for any credit transaction, a covered company
must reduce its gross credit exposure to the counterparty by the amount
of any eligible guarantee from an eligible guarantor that covers the
transaction.
(2) A
covered company that reduces its gross credit exposure to a counterparty
as required under paragraph (c)(1) of this section must include the
amount of eligible guarantees when calculating its gross credit exposure
to the eligible guarantor.
(3) Notwithstanding paragraph (c)(2) of
this section, a covered company’s gross credit exposure to an eligible
guarantor with respect to an eligible guarantee under this paragraph
(c) is limited to:
(i) Its gross credit exposure to the
counterparty on the credit transaction prior to recognition of the
eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit exposure
that would have been attributable to that exempt counterparty on the
credit transaction prior to recognition of the eligible guarantee
if valued in accordance with section 252.73(a).
(d) Eligible credit and
equity derivatives.
(1) In calculating net credit exposure
to a counterparty for a credit transaction under this section, a covered
company must reduce its gross credit exposure to the counterparty
by:
(i) In the case of any eligible credit
derivative from an eligible guarantor, the notional amount of the
eligible credit derivative; or
(ii) In the case of any eligible equity
derivative from an eligible guarantor, the gross credit exposure amount
to the counterparty (calculated in accordance with section 252.73(a)(7)).
(2) (i) A covered company that
reduces its gross credit exposure to a counterparty as provided under
paragraph (d)(1) of this section must include, when calculating its
net credit exposure to the eligible guarantor, including in instances
where the underlying credit transaction would not be subject to the
credit limits of section 252.72 (for example, due to an exempt counterparty),
either
(A) In the case of any eligible credit derivative
from an eligible guarantor, the notional amount of the eligible credit
derivative; or
(B) In
the case of any eligible equity derivative from an eligible guarantor,
the gross credit exposure amount to the counterparty (calculated in
accordance with section 252.73(a)(7)).
(ii) Notwithstanding paragraph
(d)(2)(i) of this section, in cases where the eligible credit derivative
or eligible equity derivative is used to hedge covered positions that
are subject to the Board’s market risk rule (12 CFR part 217, subpart
F) and the counterparty on the hedged transaction is not a financial
entity, the amount of credit exposure that a company must recognize
to the eligible guarantor is the amount that would be calculated pursuant
to section 252.73(a).
(3) Notwithstanding paragraph (d)(2) of
this section, a covered company’s gross credit exposure to an eligible
guarantor with respect to an eligible credit derivative or an eligible
equity derivative under this paragraph (d) is limited to:
(i) Its
gross credit exposure to the counterparty on the credit transaction
prior to recognition of the eligible credit derivative or the eligible
equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit exposure
that would have been attributable to that exempt counterparty on the
credit transaction prior to recognition of the eligible credit derivative
or the eligible equity derivative if valued in accordance with section
252.73(a).
(e) Other eligible hedges. In calculating net
credit exposure to a counterparty for a credit transaction under this
section, a covered company may reduce its gross credit exposure to
the counterparty by the face amount of a short sale
of the counterparty’s debt security or equity security, provided that:
(1) The instrument in which the covered
company has a short position is junior to, or pari passu with,
the instrument in which the covered company has the long position;
and
(2) The instrument
in which the covered company has a short position and the instrument
in which the covered company has the long position are either both
treated as trading or available-for-sale exposures or both treated
as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit.
(1) In computing its net credit
exposure to a counterparty for a committed credit line or revolving
credit facility under this section, a covered company may reduce its
gross credit exposure by the amount of the unused portion of the credit
extension to the extent that the covered company does not have any
legal obligation to advance additional funds under the extension of
credit and the used portion of the credit extension has been fully
secured by eligible collateral.
(2) To the extent that the used portion
of a credit extension has been secured by eligible collateral, the
covered company may reduce its gross credit exposure by the adjusted
market value of any eligible collateral received from the counterparty,
even if the used portion has not been fully secured by eligible collateral.
(3) To qualify for the
reduction in net credit exposure under this paragraph, the credit
contract must specify that any used portion of the credit extension
must be fully secured by the adjusted market value of any eligible
collateral.
(g) Credit transactions involving exempt counterparties.
(1) A covered company’s credit transactions
with an exempt counterparty are not subject to the requirements of
this subpart, including but not limited to section 252.72.
(2) Notwithstanding paragraph
(g)(1) of this section, in cases where a covered company has a credit
transaction with an exempt counterparty and the covered company has
obtained eligible collateral from that exempt counterparty or an eligible
guarantee or eligible credit or equity derivative from an eligible
guarantor, the covered company must include (for purposes of this
subpart) such exposure to the issuer of such eligible collateral or
the eligible guarantor, as calculated in accordance with the rules
set forth in this section, when calculating its gross credit exposure
to that issuer of eligible collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty
under this section, a covered company must apply, as applicable:
(1) When reducing its gross
credit exposure to a counterparty resulting from any credit transaction
due to any eligible collateral and calculating its gross credit exposure
to an issuer of eligible collateral, pursuant to paragraph (b) of
this section, the currency mismatch adjustment approach of section
217.37(c)(3)(ii) of the Board’s Regulation Q (12 CFR 217.37(c)(3)(ii));
and
(2) When reducing
its gross credit exposure to a counterparty resulting from any credit
transaction due to any eligible guarantee, eligible equity derivative,
or eligible credit derivative from an eligible guarantor and calculating
its gross credit exposure to an eligible guarantor, pursuant to paragraphs
(c) and (d) of this section, the currency mismatch adjustment approach
of section 217.36(f) of the Board’s Regulation Q (12 CFR 217.36(f)).
(i) Maturity
mismatch adjustments. For purposes of calculating its net credit
exposure to a counterparty under this section, a covered company must
apply, as applicable, the maturity mismatch adjustment approach of
section 217.36(d) of the Board’s Regulation Q (12 CFR 217.36(d)):
(1) When reducing its gross credit exposure
to a counterparty resulting from any credit transaction due to any
eligible collateral or any eligible guarantees, eligible equity derivatives,
or eligible credit derivatives from an eligible guarantor, pursuant
to paragraphs (b) through (d) of this section, and
(2) In calculating its gross
credit exposure to an issuer of eligible collateral, pursuant to paragraph
(b) of this section, or to an eligible guarantor, pursuant to paragraphs
(c) and (d) of this section; provided that
(3) The eligible collateral, eligible guarantee,
eligible equity derivative, or eligible credit derivative subject
to paragraph (i)(1) of this section:
(i) Has a shorter maturity
than the credit transaction;
(ii) Has an original maturity equal
to or greater than one year;
(iii) Has a residual maturity of not
less than three months; and
(iv) The adjustment approach is otherwise
applicable.
