(1) To recognize the risk-mitigating effects
of financial collateral, a Board-regulated institution may use:
(i) The simple approach in paragraph (b) of this section for any
exposure; or
(ii)
The collateral haircut approach in paragraph (c) of this section for
repo-style transactions, eligible margin loans, collateralized derivative
contracts, and single-product netting sets of such transactions.
(2) A Board-regulated
institution may use any approach described in this section that is
valid for a particular type of exposure or transaction; however, it
must use the same approach for similar exposures or transactions.
(1) General requirements.
(i) A Board-regulated institution may
recognize the credit risk mitigation benefits of financial collateral
that secures any exposure.
(ii) To qualify for the simple approach, the financial collateral
must meet the following requirements:
(A) The collateral must be
subject to a collateral agreement for at least the life of the exposure;
(B) The collateral must
be revalued at least every six months; and
(C) The collateral (other than gold) and the
exposure must be denominated in the same currency.
(2) Risk weight substitution.
(i) A Board-regulated
institution may apply a risk weight to the portion of an exposure
that is secured by the fair value of financial collateral (that meets
the requirements of paragraph (b)(1) of this section) based on the
risk weight assigned to the collateral under this subpart D. For repurchase
agreements, reverse repurchase agreements, and securities lending
and borrowing transactions, the collateral is the instruments, gold,
and cash the Board-regulated institution has borrowed, purchased subject
to resale, or taken as collateral from the counterparty under the
transaction. Except as provided in paragraph (b)(3) of this section,
the risk weight assigned to the collateralized portion of the exposure
may not be less than 20 percent.
(ii) A Board-regulated institution must
apply a risk weight to the unsecured portion of the exposure based
on the risk weight applicable to the exposure under this subpart.
(3) Exceptions to the 20 percent risk-weight floor
and other requirements. Notwithstanding paragraph (b)(2)(i) of
this section:
(i) A Board-regulated institution may
assign a zero percent risk weight to an exposure to an OTC derivative
contract that is marked-to-market on a daily basis and subject to
a daily margin maintenance requirement, to the extent the contract
is collateralized by cash on deposit.
(ii) A Board-regulated institution may
assign a 10 percent risk weight to an exposure to an OTC derivative
contract that is marked-to-market daily and subject to a daily margin
maintenance requirement, to the extent that the contract is collateralized
by an exposure to a sovereign that qualifies for a zero percent risk
weight under section 217.32.
(iii) A Board-regulated institution
may assign a zero percent risk weight to the collateralized portion
of an exposure where:
(A) The financial collateral is cash on deposit;
or
(B) The financial collateral
is an exposure to a sovereign that qualifies for a zero percent risk
weight under section 217.32, and the Board-regulated institution has
discounted the fair value of the collateral by 20 percent.
(1) General. A Board-regulated institution may recognize the credit risk mitigation
benefits of financial collateral that secures an eligible margin loan,
repo-style transaction, collateralized derivative contract, or single-product
netting set of such transactions, and of any collateral that secures
a repo-style transaction that is included in the Board-regulated institution’s
VaR-based measure under subpart F of this part by using the collateral
haircut approach in this section. A Board-regulated institution may
use the standard supervisory haircuts in paragraph (c)(3) of this
section or, with prior written approval of the Board, its own estimates
of haircuts according to paragraph (c)(4) of this section.
(2) Exposure amount equation. A Board-regulated institution must
determine the exposure amount for an eligible margin loan, repo-style
transaction, collateralized derivative contract, or a single-product
netting set of such transactions by setting the exposure amount equal
to max {0, [(ΣE − ΣC) + Σ(Es × Hs) + Σ(Efx × Hfx)]}, where:
(i) (A) For eligible margin loans and repo-style transactions and
netting sets thereof, ΣE equals the value of the exposure (the sum
of the current fair values of all instruments, gold, and cash the
Board-regulated institution has lent, sold subject to repurchase,
or posted as collateral to the counterparty under the transaction (or
netting set)); and
(B) For collateralized derivative contracts
and netting sets thereof, ΣE equals the exposure amount of the OTC
derivative contract (or netting set) calculated under section 217.34
(b)(1) or (2).
(ii) ΣC equals the value of the collateral
(the sum of the current fair values of all instruments, gold and cash
the Board-regulated institution has borrowed, purchased subject to
resale, or taken as collateral from the counterparty under the transaction
(or netting set));
(iii) Es equals the absolute value of the net position
in a given instrument or in gold (where the net position in the instrument
or gold equals the sum of the current fair values of the instrument
or gold the Board-regulated institution has lent, sold subject to
repurchase, or posted as collateral to the counterparty minus the
sum of the current fair values of that same instrument or gold the
Board-regulated institution has borrowed, purchased subject to resale,
or taken as collateral from the counterparty);
(iv) Hs equals the market
price volatility haircut appropriate to the instrument or gold referenced
in Es;
(v) Efx equals the absolute value of the net position
of instruments and cash in a currency that is different from the settlement
currency (where the net position in a given currency equals the sum
of the current fair values of any instruments or cash in the currency
the Board-regulated institution has lent, sold subject to repurchase,
or posted as collateral to the counterparty minus the sum of the current
fair values of any instruments or cash in the currency the Board-regulated
institution has borrowed, purchased subject to resale, or taken as
collateral from the counterparty); and
(vi) Hfx equals the haircut
appropriate to the mismatch between the currency referenced in Efx and the settlement currency.
(3) Standard
supervisory haircuts.
(i) A Board-regulated institution must
use the haircuts for market price volatility (Hs) provided
in Table 1 to section 217.37, as adjusted in certain circumstances
in accordance with the requirements of paragraphs (c)(3)(iii) and
(iv) of this section.
Table 1 to section
217.37—Standard supervisory market price volatility haircuts
| |
Haircut (in percent) assigned based on: |
Investment grade securitization exposures (in percent) |
| Residual maturity |
Sovereign issuers risk weight under section 217.32 (in percent)2 |
Non-sovereign issuers risk weight under section 217.32 (in percent) |
| |
Zero |
20
or 50 |
100 |
20 |
50 |
100 |
| Less than or equal to 1 year |
0.5 |
1.0 |
15.0 |
1.0 |
2.0 |
4.0 |
4.0 |
| Greater than 1 year and less than or equal to
5 years |
2.0 |
3.0 |
15.0 |
4.0 |
6.0 |
8.0 |
12.0 |
| Greater than 5 years |
4.0 |
6.0 |
15.0 |
8.0 |
12.0 |
16.0 |
24.0 |
| Main index equities
(including convertible bonds) and gold |
15.0 |
| Other publicly traded
equities (including convertible bonds) |
25.0 |
| Mutual funds |
Highest
haircut applicable to any security in which the fund can invest |
| Cash collateral held |
Zero |
| Other exposure
types |
25.0 |
1 The market price volatility haircuts in Table
1 to section 217.37 are based on a 10 business-day holding period.
2 Includes a foreign PSE that receives a zero percent risk
weight.
(ii) For currency mismatches, a Board-regulated
institution must use a haircut for foreign exchange rate volatility
(Hfx) of 8.0 percent, as adjusted in certain circumstances
under paragraphs (c)(3)(iii) and (iv) of this section.
(iii) For repo-style transactions
and client-facing derivative transactions, a Board-regulated institution
may multiply the standard supervisory haircuts provided in paragraphs
(c)(3)(i) and (ii) of this section by the square root of ½ (which
equals 0.707107). For client-facing derivative transactions, if a
larger scaling factor is applied under section 217.34(f), the same
factor must be used to adjust the supervisory haircuts.
(iv) If the number of trades
in a netting set exceeds 5,000 at any time during a quarter, a Board-regulated
institution must adjust the supervisory haircuts provided in paragraphs
(c)(3)(i) and (ii) of this section upward on the basis of a holding
period of twenty business days for the following quarter except in
the calculation of the exposure amount for purposes of section 217.35.
If a netting set contains one or more trades involving illiquid collateral
or an OTC derivative that cannot be easily replaced, a Board-regulated
institution must adjust the supervisory haircuts upward on the basis
of a holding period of twenty business days. If over the two previous
quarters more than two margin disputes on a netting set have occurred
that lasted more than the holding period, then the Board-regulated
institution must adjust the supervisory haircuts upward for that netting
set on the basis of a holding period that is at least two times the
minimum holding period for that netting set. A Board-regulated institution
must adjust the standard supervisory haircuts upward using the following
formula:
Figure 1. DISPLAY EQUATION
$$
\mathrm{H_A = H_s \sqrt{\frac{T_M}{T_S}}} \text{ ,}
$$
where
(A) TM equals a holding period of longer than 10 business
days for eligible margin loans and derivative contracts other than
client-facing derivative transactions or longer than 5 business days
for repo-style transactions and client-facing derivative transactions;
(B) HS equals
the standard supervisory haircut; and
(C) TS equals 10 business days
for eligible margin loans and derivative contracts other than client-facing
derivative transactions or 5 business days for repo-style transactions
and client-facing derivative transactions.
(v) If the instrument a Board-regulated
institution has lent, sold subject to repurchase, or posted as collateral
does not meet the definition of financial collateral, the Board-regulated
institution must use a 25.0 percent haircut for market price volatility
(Hs).
(4) Own internal
estimates for haircuts. With the prior written approval of the
Board, a Board-regulated institution may calculate haircuts (Hs and Hfx) using its own internal estimates of
the volatilities of market prices and foreign exchange rates:
(i) To receive
Board approval to use its own internal estimates, a Board-regulated
institution must satisfy the following minimum standards:
(A) A Board-regulated
institution must use a 99th percentile one-tailed confidence interval.
(B) The minimum holding
period for a repo-style transaction and client-facing derivative transaction
is five business days and for an eligible margin loan and a derivative
contract other than a client-facing derivative transaction is ten
business days except for transactions or netting sets for which paragraph
(c)(4)(i)(C) of this section applies. When a Board-regulated institution
calculates an own-estimates haircut on a TN-day holding
period, which is different from the minimum holding period for the
transaction type, the applicable haircut (HM) is calculated
using the following square root of time formula:
Figure 2. DISPLAY EQUATION
$$
H_M = H_N \sqrt{\frac{T_\mathrm{M}}{T_N}} \text{ ,}
$$
where
(1) TM equals 5 for repo-style
trans actions and client-facing derivative transactions and 10 for eligible
margin loans and derivative contracts other than client-facing derivative
transactions;
(2) TN equals the holding period used by the Board-regulated
institution to derive HN; and
(3) HN equals the haircut
based on the holding period TN.
(C) If the number of trades in a netting set
exceeds 5,000 at any time during a quarter, a Board-regulated institution
must calculate the haircut using a minimum holding period of twenty
business days for the following quarter except in the calculation
of the exposure amount for purposes of section 217.35. If a netting
set contains one or more trades involving illiquid collateral or an
OTC derivative that cannot be easily replaced, a Board-regulated institution
must calculate the haircut using a minimum holding period of twenty
business days. If over the two previous quarters more than two margin
disputes on a netting set have occurred that lasted more than the
holding period, then the Board-regulated institution must calculate
the haircut for transactions in that netting set on the basis of a
holding period that is at least two times the minimum holding period
for that netting set.
(D)
A Board-regulated institution is required to calculate its own internal
estimates with inputs calibrated to historical data from a continuous
12-month period that reflects a period of significant financial stress
appropriate to the security or category of securities.
(E) A Board-regulated institution
must have policies and procedures that describe how it determines
the period of significant financial stress used to calculate the Board-regulated
institution’s own internal estimates for haircuts under this section
and must be able to provide empirical support for the period used.
The Board-regulated institution must obtain the prior approval of
the Board for, and notify the Board if the Board-regulated institution
makes any material changes to, these policies and procedures.
(F) Nothing in this section prevents
the Board from requiring a Board-regulated institution to use a different
period of significant financial stress in the calculation of own internal
estimates for haircuts.
(G) A Board-regulated institution must update its data sets and calculate
haircuts no less frequently than quarterly and must also reassess
data sets and haircuts whenever market prices change materially.
(ii)
With respect to debt securities that are investment grade, a Board-regulated
institution may calculate haircuts for categories of securities. For
a category of securities, the Board-regulated institution must calculate
the haircut on the basis of internal volatility estimates for securities
in that category that are representative of the securities in that
category that the Board-regulated institution has lent, sold subject
to repurchase, posted as collateral, borrowed, purchased subject to
resale, or taken as collateral. In determining relevant categories,
the Board-regulated institution must at a minimum take into account:
(A) The type of issuer of the security;
(B) The credit quality of the security;
(C) The maturity of the
security; and
(D) The
interest rate sensitivity of the security.
(iii) With respect to debt
securities that are not investment grade and equity securities, a
Board-regulated institution must calculate a separate haircut for
each individual security.
(iv) Where an exposure or collateral
(whether in the form of cash or securities) is denominated in a currency
that differs from the settlement currency, the Board-regulated institution
must calculate a separate currency mismatch haircut for its net position
in each mismatched currency based on estimated volatilities of foreign
exchange rates between the mismatched currency and the settlement
currency.
(v) A
Board-regulated institution’s own estimates of market price and foreign
exchange rate volatilities may not take into account the correlations
among securities and foreign exchange rates on either the exposure
or collateral side of a transaction (or netting set) or the
correlations among securities and foreign exchange rates between the
exposure and collateral sides of the transaction (or netting set).
