(a) In general. For purposes of this subpart, a covered foreign entity 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 foreign entity
must reduce its gross credit exposure on the transaction by the adjusted
market value of any eligible collateral.
(2) A covered foreign entity 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 foreign entity’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 252.173(a).
(c) Eligible guarantees.
(1) In calculating net credit exposure
to a counterparty for any credit transaction, a covered foreign entity
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 foreign entity
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 foreign entity’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 252.173(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 foreign entity 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
252.173(a)(7)).
(2) (i) A covered foreign entity
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 252.172 (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 252.173(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 entity
must recognize to the eligible guarantor is the amount that would
be calculated pursuant to section 252.173(a).
(3) Notwithstanding paragraph (d)(2) of
this section, a covered foreign entity’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 252.173(a).
(e) Other eligible
hedges. In calculating net credit exposure to a counterparty
for a credit transaction under this section, a covered foreign entity
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 foreign entity has a short
position is junior to, or pari passu with, the instrument in
which the covered foreign entity has the long position; and
(2) The instrument in which the covered
foreign entity has a short position and the instrument
in which the covered foreign entity 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 foreign
entity may reduce its gross credit exposure by the amount of the unused
portion of the credit extension to the extent that the covered foreign
entity 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 foreign entity 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 foreign entity’s credit transactions
with an exempt counterparty are not subject to the requirements of
this subpart, including but not limited to section 252.172.
(2) Notwithstanding paragraph (g)(1) of
this section, in cases where a covered foreign entity has a credit
transaction with an exempt counterparty and the covered foreign entity
has obtained eligible collateral from that exempt counterparty or
an eligible guarantee or eligible credit or equity derivative from
an eligible guarantor, the covered foreign entity 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 foreign entity
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
foreign entity 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.
