(1) A Category III Board-regulated
institution or advanced approaches Board-regulated institution must
determine its supplementary leverage ratio in accordance with this
paragraph, beginning with the calendar quarter immediately following
the quarter in which the Board-regulated institution is identified
as a Category III Board-regulated institution. An advanced approaches
Board-regulated institution’s or a Category III Board-regulated
institution’s supplementary leverage ratio is the ratio of its
tier 1 capital to total leverage exposure, the latter of which is
calculated as the sum of:
(i) The balance sheet carrying value
of all of the Board-regulated institution’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 GAAP, less amounts deducted from tier
1 capital under section 217.22(a), (c), and (d), and less the
value of securities received in security-for-security repo-style transactions,
where the Board-regulated institution acts as a securities lender
and includes the securities received in its on-balance sheet assets
but has not sold or rehypothecated the securities received, and, for
a Board-regulated institution that uses the standardized approach
for counterparty credit risk under section 217.132(c) for its standardized
risk-weighted assets, less the fair value of any derivative
contracts;
(ii) (A) For a Board-regulated institution
that uses the current exposure methodology under section 217.34(b)
for its standardized risk-weighted assets, the potential future credit
exposure (PFE) for each derivative contract or each single-product
netting set of derivative contracts (including a cleared transaction
except as provided in paragraph (c)(2)(ix) of this section and, at
the discretion of the Board-regulated institution, 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), to which the Board-regulated
institution is a counterparty as determined under section 217.34,
but without regard to section 217.34(c), provided that:
(1) A Board-regulated institution
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 section 217.34, but without regard to section 217.34(c),
provided that it does not adjust the net-to-gross ratio (NGR); and
(2) A Board-regulated
institution that chooses to exclude the PFE of credit derivatives
or other similar instruments through which it provides credit protection
pursuant to paragraph (c)(2)(ii)(A) of this section must do so consistently
over time for the calculation of the PFE for all such instruments;
or
(B) (1) For a Board-regulated
institution that uses the standardized approach for counterparty credit
risk under section 217.132(c) for its standardized risk-weighted assets,
the PFE for each netting set to which the Board-regulated institution
is a counterparty (including cleared transactions except as provided
in paragraph (c)(2)(ix) of this section and, at the discretion of
the Board-regulated institution, 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 section 217.132(c)(7),
in which the term C in section 217.132(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 (c)(2)(ii)(B)(1), a
Board-regulated institution may set the value of the term C in section
217.132(c)(7)(i) equal to the amount of collateral posted by a clearing
member client of the Board-regulated institution in connection with
the client-facing derivative transactions within the netting set;
and
(2) A Board-regulated
institution 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 section 217.132(c), provided that it
does so consistently over time for the calculation of the PFE for
all such instruments;
(iii) (A)
(1) For a Board-regulated institution that uses the current
exposure methodology under section 217.34(b) for its standardized
risk-weighted assets, the amount of cash collateral that is received
from a counterparty to a derivative contract and that has offset the
mark-to-fair value of the derivative asset, or cash collateral that
is posted to a counterparty to a derivative contract and that has
reduced the Board-regulated institution’s on-balance sheet assets,
unless such cash collateral is all or part of variation margin that
satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G)
of this section; and
(2) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in section
217.34(b), and not the PFE; and
(3) For the purpose of the calculation
of the NGR described in section 217.34(b)(2)(ii)(B), variation margin
described in paragraph (c)(2)(iii)(A)(2) of this section may
not reduce the net current credit exposure or the gross current credit
exposure; or
(B) (1) For a Board-regulated
institution that uses the standardized approach for counterparty credit
risk under section 217.132(c) for its standardized risk-weighted assets,
the replacement cost of each derivative contract or single product
netting set of derivative contracts to which the Board-regulated institution
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 − CVMr + CVMp;0}
Where:
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 (c)(2)(ix) of this section and, at
the discretion of the Board-regulated institution, 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);
CVMr equals the amount of cash collateral received from a counterparty
to a derivative contract and that satisfies the conditions in paragraphs
(c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing
derivative transaction, the amount of collateral received from the
clearing member client; and
CVMp 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 (c)(2)(iii)(C) through (G)
of this section, or, in the case of a client-facing derivative transaction,
the amount of collateral posted to the clearing member client;
(2) Notwithstanding
paragraph (c)(2)(iii)(B)(1) of this section, where multiple
netting sets are subject to a single variation margin agreement, a
Board-regulated institution must apply the formula for replacement
cost provided in section 217.132(c)(10)(i), in which the term CMA
may only include cash collateral that satisfies the conditions in
paragraphs (c)(2)(iii)(C) through (G) of this section; and
(3) For purposes of paragraph
(c)(2)(iii)(B)(1), a Board-regulated institution 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 Board-regulated institution elected to treat the derivative contract
as multiple derivative contracts under section 217.132(c)(5)(vi);
(C) 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);
(D) Variation margin is calculated
and transferred on a daily basis based on the mark-to-fair value of
the derivative contract;
(E) 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;
(F) 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 (c)(2)(iii)(F), 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
(G) 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;
(iv) The effective notional principal
amount (that is, the apparent or stated notional principal amount
multiplied by any multiplier in the derivative contract) of a credit
derivative, or other similar instrument, through which the Board-regulated
institution provides credit protection, provided that:
(A) The Board-regulated
institution may reduce the effective notional principal amount of
the credit derivative by the amount of any reduction in the mark-to-fair
value of the credit derivative if the reduction is recognized in common
equity tier 1 capital;
(B) The Board-regulated institution may reduce the effective notional
principal amount of the credit derivative by the effective notional
principal amount of a purchased credit derivative or other similar
instrument, provided that the remaining maturity of the purchased
credit derivative is equal to or greater than the remaining maturity
of the credit derivative through which the Board-regulated institution
provides credit protection and that:
(1) With respect to a credit derivative that references a
single exposure, the reference exposure of the purchased credit derivative
is to the same legal entity and ranks pari passu with, or is
junior to, the reference exposure of the credit derivative through
which the Board-regulated institution provides credit protection;
or
(2) With respect
to a credit derivative that references multiple exposures, the reference
exposures of the purchased credit derivative are to the same legal
entities and rank pari passu with the reference exposures of
the credit derivative through which the Board-regulated institution
provides credit protection, and the level of seniority of the purchased
credit derivative ranks pari passu to the level of seniority
of the credit derivative through which the Board-regulated institution
provides credit protection;
(3) Where a Board-regulated institution has reduced the effective
notional amount of a credit derivative through which the Board-regulated
institution provides credit protection in accordance with paragraph
(c)(2)(iv)(A) of this section, the Board-regulated institution must
also reduce the effective notional principal amount of a purchased
credit derivative used to offset the credit derivative through which
the Board-regulated institution provides credit protection, by the
amount of any increase in the mark-to-fair value of the purchased
credit derivative that is recognized in common equity tier 1 capital;
and
(4) Where the
Board-regulated institution purchases credit protection through a
total return swap and records the net payments received on a credit
derivative through which the Board-regulated institution provides
credit protection in net income, but does not record offsetting deterioration
in the mark-to-fair value of the credit derivative through which the
Board-regulated institution provides credit protection in net income
(either through reductions in fair value or by additions to reserves),
the Board-regulated institution may not use the purchased credit protection
to offset the effective notional principal amount of the related credit
derivative through which the Board-regulated institution provides
credit protection;
(v) Where a Board-regulated institution
acting as a principal has more than one repo-style transaction with
the same counterparty and has offset the gross value of receivables
due from a counterparty under reverse repurchase transactions by the
gross value of payables under repurchase transactions due to the same
counterparty, the gross value of receivables associated with the repo-style
transactions less any on-balance sheet receivables amount associated
with these repo-style transactions included under paragraph (c)(2)(i)
of this section, unless the following criteria are met:
(A) The offsetting
transactions have the same explicit final settlement date under their
governing agreements;
(B) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership, insolvency,
liquidation, or similar proceeding; and
(C) Under the governing agreements, the counterparties
intend to settle net, settle simultaneously, or settle according to
a process that is the functional equivalent of net settlement, (that
is, the cash flows of the transactions are equivalent, in effect,
to a single net amount on the settlement date), where both transactions
are settled through the same settlement system, the settlement arrangements
are supported by cash or intraday credit facilities intended to ensure
that settlement of both transactions will occur by the end of the
business day, and the settlement of the underlying securities does
not interfere with the net cash settlement;
(vi) The counterparty credit
risk of a repo-style transaction, including where the Board-regulated
institution acts as an agent for a repo-style transaction and indemnifies
the customer with respect to the performance of the customer’s
counterparty in an amount limited to the difference between the fair
value of the security or cash its customer has lent and the fair value
of the collateral the borrower has provided, calculated as follows:
(A) If the transaction is not subject to a qualifying master netting
agreement, the counterparty credit risk (E*) for transactions with
a counterparty must be calculated on a transaction by transaction
basis, such that each transaction i is treated as its own netting
set, in accordance with the following formula, where Ei is the fair value of the instruments, gold, or cash that the Board-regulated
institution has lent, sold subject to repurchase, or provided as collateral
to the counterparty, and Ci is the fair value of the instruments,
gold, or cash that the Board-regulated institution has borrowed, purchased
subject to resale, or received as collateral from the counterparty:
Ei * = max {0, [Ei − Ci ]};
and
(B) If the transaction
is subject to a qualifying master netting agreement, the counterparty
credit risk (E*) must be calculated as the greater of zero and the
total fair value of the instruments, gold, or cash that the Board-regulated
institution has lent, sold subject to repurchase or provided as collateral
to a counterparty for all transactions included in the qualifying
master netting agreement (ΣEi), less the total fair
value of the instruments, gold, or cash that the Board-regulated institution
borrowed, purchased subject to resale or received as collateral from
the counterparty for those transactions (ΣCi), in accordance
with the following formula: E* = max {0, [ΣEi −
ΣCi ]}
(vii) If a Board-regulated institution
acting as an agent for a repo-style transaction provides a guarantee
to a customer of the security or cash its customer has lent or borrowed
with respect to the performance of the customer’s counterparty
and the guarantee is not limited to the difference between the fair
value of the security or cash its customer has lent and the fair value
of the collateral the borrower has provided, the amount of the guarantee
that is greater than the difference between the fair value of the
security or cash its customer has lent and the value of the collateral
the borrower has provided;
(viii) The credit equivalent amount
of all off-balance sheet exposures of the Board-regulated institution,
excluding repo-style transactions, repurchase or reverse repurchase
or securities borrowing or lending transactions that qualify for sales
treatment under GAAP, and derivative transactions, determined using
the applicable credit conversion factor under section 217.33(b), provided,
however, that the minimum credit conversion factor that may be assigned
to an off-balance sheet exposure under this paragraph is 10 percent;
and
(ix) For a Board-regulated
institution that is a clearing member:
(A) A clearing member Board-regulated
institution that guarantees the performance of a clearing member client
with respect to a cleared transaction must treat its exposure to the
clearing member client as a derivative contract for purposes of determining
its total leverage exposure;
(B) A clearing member Board-regulated institution that guarantees
the performance of a CCP with respect to a transaction cleared on
behalf of a clearing member client must treat its exposure to the
CCP as a derivative contract for purposes of determining its total
leverage exposure;
(C)
A clearing member Board-regulated institution that does not guarantee
the performance of a CCP with respect to a transaction cleared on
behalf of a clearing member client may exclude its exposure to the
CCP for purposes of determining its total leverage exposure;
(D) A Board-regulated institution
that is a clearing member may exclude from its total leverage exposure
the effective notional principal amount of credit protection sold
through a credit derivative contract, or other similar instrument,
that it clears on behalf of a clearing member client through a CCP
as calculated in accordance with paragraph (c)(2)(iv) of this section;
and
(E) Notwithstanding
paragraphs (c)(2)(ix)(A) through (C) of this section, a Board-regulated
institution may exclude from its total leverage exposure a clearing
member’s exposure to a clearing member client for a derivative
contract, if the clearing member client and the clearing member are
affiliates and consolidated for financial reporting purposes on the
Board-regulated institution’s balance sheet.
(x) A custodial banking
organization shall exclude from its total leverage exposure the lesser
of:
(A) The amount of funds that the custodial
banking organization has on deposit at a qualifying central bank;
and
(B) The amount of
funds in deposit accounts at the custodial banking organization that
are linked to fiduciary or custodial and safekeeping accounts at the
custodial banking organization. For purposes of this paragraph (c)(2)(x),
a deposit account is linked to a fiduciary or custodial and safekeeping
account if the deposit account is provided to a client that maintains
a fiduciary or custodial and safekeeping account with the custodial
banking organization, and the deposit account is used to facilitate
the administration of the fiduciary or custodial and safekeeping account.
