[Federal Register Volume 59, Number 97 (Friday, May 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12409]
[[Page Unknown]]
[Federal Register: May 20, 1994]
VOL. 59, NO. 97
Friday, May 20, 1994
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 94-08]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Docket No. R-0837]
Risk-Based Capital Standards; Bilateral Netting Requirements
AGENCIES: Office of the Comptroller of the Currency (OCC), Department
of the Treasury; and Board of Governors of the Federal Reserve System
(Board).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The OCC and the Board (the banking agencies) are proposing to
amend their risk-based capital standards to recognize the risk reducing
benefits of netting arrangements. Under the proposal, institutions
regulated by the OCC and the Federal Reserve would be permitted to net,
for risk-based capital purposes, interest and exchange rate contracts
(rate contracts) subject to legally enforceable bilateral netting
contracts that meet certain criteria. The OCC and the Board are
proposing these amendments on the basis of proposed revisions to the
Basle Accord which would permit the recognition of such netting
arrangements. The effect of the proposed amendments would be to allow
banks and bank holding companies regulated by the OCC and the Federal
Reserve (banking organizations, institutions) to net positive and
negative mark-to-market values of rate contracts in determining the
current exposure portion of the credit equivalent amount of such
contracts to be included in risk-weighted assets.
DATES: Comments must be received within 30 days of May 20, 1994.
ADDRESSES: Interested parties are invited to submit written comments to
either or both of the banking agencies. All comments will be shared by
the banking agencies.
OCC: Written comments should be submitted to Docket No. 94-08,
Communications Division, Ninth Floor, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219. Attention: Karen
Carter. Comments will be available for inspection and photocopying at
that address.
Board of Governors: Comments, which should refer to Docket No. R-
0837, may be mailed to Mr. William W. Wiles, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551; or delivered to room B-2223, Eccles
Building, between 8:45 a.m. and 5:15 p.m. weekdays. Comments may be
inspected in room MP-500 between 9 a.m. and 5 p.m. weekdays, except as
provided in Sec. 261.8 of the Board's Rules Regarding Availability of
Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT: OCC: For issues relating to netting
and the calculation of risk-based capital ratios, Roger Tufts, Senior
Economic Advisor (202/874-5070), Office of the Chief National Bank
Examiner. For legal issues, Eugene Cantor, Senior Attorney, Securities,
Investments, and Fiduciary Practices (202/874-5210), or Ronald
Shimabukuro, Senior Attorney, Bank Operations and Asset Division (202/
874-4460), Office of the Comptroller of the Currency, 250 E Street,
SW., Washington, DC 20219.
Board of Governors: Roger Cole, Deputy Associate Director (202/452-
2618), Norah Barger, Manager (202/452-2402), Robert Motyka, Supervisory
Financial Analyst (202/452-3621), Barbara Bouchard, Senior Financial
Analyst (202/452-3072), Division of Banking Supervision and Regulation;
or Stephanie Martin, Senior Attorney (202/452-3198), Legal Division.
For the hearing impaired only, Telecommunications Device for the Deaf,
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
A. Background
The international risk-based capital standards (Basle Accord)1
include a framework for calculating risk-weighted assets by assigning
assets and off-balance sheet items, including interest and exchange
rate contracts, to broad risk categories based primarily on credit
risk. The OCC and the Federal Reserve both adopted in 1989 similar
frameworks to assess the capital adequacy of the banking organizations
under their supervision. Banking organizations must hold capital
against their overall credit risk, that is, generally, against the risk
that a loss will be incurred if a counterparty defaults on a
transaction.
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\1\The Basle Accord is a risk-based framework that was proposed
by the Basle Committee on Banking Supervision (Basle Supervisors'
Committee) and endorsed by the central bank governors of the Group
of Ten (G-10) countries in July 1988. The Basle Supervisors'
Committee is comprised of representatives of the central banks and
supervisory authorities from the G-10 countries (Belgium, Canada,
France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the
United Kingdom, and the United States) and Luxembourg.
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Under the risk-based capital framework, off-balance sheet items are
incorporated into risk-weighted assets by first determining the on-
balance sheet credit equivalent amounts for the items and then
assigning the credit equivalent amounts to the appropriate risk
category according to the obligor, or if relevant, the guarantor or the
nature of the collateral. For many types of off-balance sheet
transactions, the on-balance sheet credit equivalent amount is
determined by multiplying the face amount of the item by a credit
conversion factor. For interest and exchange rate contracts however,
credit equivalent amounts are determined by summing two amounts: The
current exposure and the estimated potential future exposure.2
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\2\Exchange rate contracts with an original maturity of 14
calendar days or less and instruments traded on exchanges that
require daily payment of variation margin are excluded from the
risk-based ratio calculations.
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The current exposure (sometimes referred to as replacement cost) of
a contract is derived from its market value. In most instances the
initial market value of a contract is zero.3 A banking
organization should mark-to-market all of its rate contracts to reflect
the current market value of the contracts in light of changes in the
market price of the contracts or in the underlying interest or exchange
rates. Unless the market value of a contract is zero, one party will
always have a positive mark-to-market value for the contract, while the
other party (counterparty) will have a negative mark-to-market value.
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\3\An options contract has a positive value at inception, which
reflects the premium paid by the purchaser. The value of the option
may be reduced due to market movements but it cannot become
negative. Therefore, unless an option has zero value, the purchaser
of the option contract will always have some credit exposure, which
may be greater than or less than the original purchase price, and
the seller of the option contract will never have credit exposure.
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An institution holding a contract with a positive mark-to-market
value is ``in-the-money,'' that is, it would have the right to receive
payment from the counterparty if the contract were terminated. Thus, an
institution that is in-the-money on a contract is exposed to
counterparty credit risk, since the counterparty could fail to make the
expected payment. The potential loss is equal to the cost of replacing
the terminated contract with a new contract that would generate the
same expected cash flows under the existing market conditions.
Therefore, the in-the-money institution's current exposure on the
contract is equal to the market value of the contract.
An institution holding a contract with a negative mark-to-market
value, on the other hand, is ``out-of-the-money'' on that contract,
that is, if the contract were terminated, the institution would have an
obligation to pay the counterparty. The institution with the negative
mark-to-market value has no counterparty credit exposure because it is
not entitled to any payment from the counterparty in the case of
counterparty default. Consequently, a contract with a negative market
value is assigned a current exposure of zero. A current exposure of
zero is also assigned to a contract with a market value of zero, since
neither party would suffer a loss in the event of contract termination.
In summary, the current exposure of a rate contract equals either the
positive market value of the contract or zero.
The second part of the credit equivalent amount for rate contracts,
the estimated potential future exposure (often referred to as the add-
on), is an amount that represents the potential future credit exposure
of a contract over its remaining life. This exposure is calculated by
multiplying the notional principal amount of the underlying contract by
a credit conversion factor that is determined by the remaining maturity
of the contract and the type of contract.4 The potential future
credit exposure is calculated for all contracts, regardless of whether
the mark-to-market value is zero, positive, or negative.
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\4\For interest rate contracts with a remaining maturity of one
year or less, the factor is 0% and for those with a remaining
maturity of over one year, the factor is .5%. For exchange rate
contracts with a remaining maturity of one year or less, the factor
is 1% and for those with a remaining maturity of over one year, the
factor is 5%.
Because exchange rate contracts involve an exchange of principal
upon maturity and are generally more volatile, they carry a higher
conversion factor. No potential future credit exposure is calculated
for single-currency interest-rate swaps in which payments are made
based on two floating indices (basis swaps).
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The potential future exposure is added to the current exposure to
arrive at a credit equivalent amount.5 Each credit equivalent
amount is then assigned to the appropriate risk category, according to
the counterparty or, if relevant, the guarantor or the nature of the
collateral. The maximum risk weight applied to such rate contracts is
50 percent.
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\5\This method of determining credit equivalent amounts for rate
contracts is known as the current exposure method, which is used by
most international banks. The Basle Accord permits, subject to each
country's discretion, an alternative method for determining the
credit equivalent amount known as the original exposure method.
Under this method, the capital charge is derived by multiplying the
notional principal amount of the contract by a credit conversion
factor, which varies according to the original maturity of the
contract and whether it is an interest or exchange rate contract.
The conversion factors, which are greater than those used under the
current exposure method, make no distinction between current
exposure and potential future exposure.
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B. Netting and Current Risk-Based Capital Treatment
The OCC, the Board, and the Basle Supervisors' Committee have long
recognized the importance and encouraged the use of netting contracts
as a means of improving interbank efficiency and reducing counterparty
credit exposure. Netting contracts are increasingly being used by
institutions engaging in rate contracts. Often referred to as master
netting contracts, these arrangements typically provide for both
payment and close-out netting. Payment netting provisions permit an
institution to make payments to a counterparty on a net basis by
offsetting payments it is obligated to make with payments it is
entitled to receive and, thus, to reduce its costs arising out of
payment settlements.
Close-out netting provisions permit the netting of credit exposures
if a counterparty defaults or upon the occurrence of another event such
as insolvency or bankruptcy. If such an event occurs, all outstanding
contracts subject to the close-out provisions are terminated and
accelerated, and their market values are determined. The positive and
negative market values are then netted, or set off, against each other
to arrive at a single net exposure to be paid by one party to the other
upon final resolution of the default or other event.
The potential for close-out netting provisions to reduce
counterparty credit risk, by limiting an institution's obligation to
the net credit exposure, depends upon the legal enforceability of the
netting contract, particularly in insolvency or bankruptcy.6 In
this regard, the Basle Accord noted that while close-out netting could
reduce credit risk exposure associated with rate contracts, the legal
status of close-out netting in many of the G-10 countries was uncertain
and insufficiently developed to support a reduced capital charge for
such contracts.7 There was particular concern that a bank's credit
exposure to a counterparty was not reduced if liquidators of a failed
counterparty might assert the right to ``cherry-pick,'' that is, demand
performance on those contracts that are favorable and reject contracts
that are unfavorable to the defaulting party.
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\6\The primary criterion for determining whether a particular
netting contract should be recognized in the risk-based capital
framework is the enforceability of that netting contract in
insolvency or bankruptcy. In addition, the netting contract as well
as the individual contracts subject to the netting contract must be
legally valid and enforceable under non-insolvency or non-bankruptcy
law, as is the case with all contracts.
\7\While payment netting provisions can reduce costs and the
credit risk arising out of daily settlements with a counterparty,
such provisions are not relevant to the risk-based capital framework
since they do not in any way affect the counterparty's gross
obligations.
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Concern over ``cherry-picking'' led the Basle Supervisors'
Committee to limit the recognition of netting in the Basle Accord. The
only type of netting that was considered to genuinely reduce
counterparty credit risk at the time the Accord was endorsed was
netting accomplished by novation.8 Under legally enforceable
netting by novation ``cherry-picking'' cannot occur and, thus,
counterparty risk is genuinely reduced. The Accord stated that the
Basle Supervisors' Committee would continue to monitor and assess the
effectiveness of other forms of netting to determine if close-out
netting provisions could be recognized for risk-based capital purposes.
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\8\Netting by novation is accomplished under a written bilateral
contract providing that any obligation to deliver a given currency
on a given date is automatically amalgamated with all other
obligations for the same currency and value date. The previously
existing contracts are extinguished and a new contract, for the
single net amount, is legally substituted for the amalgamated gross
obligations. Parties to the novation contract, in effect, offset
their obligations to make payments on individual transactions
subject to the novation contract with their right to receive
payments on other transactions subject to the contract.
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The OCC and the Board's risk-based capital standards provide for
the same treatment of rate contracts as the Basle Accord, but require
that banking organizations use the current exposure method. The banking
agencies, in adopting their standards, generally stated they would work
with the Basle Supervisors' Committee in its continuing efforts with
regard to the recognition of netting provisions for capital purposes.
C. Basle Supervisors' Committee Proposal
Since the Basle Accord was adopted, a number of studies have
confirmed that close-out netting provisions can serve to reduce
counterparty risk. In response to the conclusions of these studies, as
well as to industry support for greater acceptance of netting contracts
under the risk-based capital framework, the Basle Supervisors'
Committee issued a consultative paper on April 30, 1993, proposing an
expanded recognition of netting arrangements in the Basle Accord.9
Under the proposal, for purposes of determining the current exposure of
rate contracts subject to legally enforceable bilateral close-out
netting provisions (that is, close-out netting provisions with a single
counterparty), an institution could net the contracts' positive and
negative mark-to-market values.
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\9\The paper is entitled ``The Prudential Supervision of
Netting, Market Risks and Interest Rate Risk.'' The section
applicable to netting is subtitled ``The Supervisory Recognition of
Netting for Capital Adequacy Purposes.'' This paper is available for
review through the banking agencies' Freedom of Information Offices
(FOIA) or through public information offices at the Federal Reserve
Banks or OCC District Offices.
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Specifically, the Basle proposal states that a banking organization
would be able to net rate contracts subject to a legally valid
bilateral netting contract for risk-based capital purposes if it
satisfied the appropriate national supervisor(s) that:
(1) In the event of a counterparty's failure to perform due to
default, bankruptcy or liquidation, the banking organization's claim
(or obligation) would be to receive (or pay) only the net value of the
sum of unrealized gains and losses on included transactions;
(2) It has obtained written and reasoned legal opinions stating
that in the event of legal challenge, the netting would be upheld in
all relevant jurisdictions; and
(3) It has procedures in place to ensure that the netting
arrangements are kept under review in light of changes in relevant law.
The Basle Supervisors' Committee agreed that if a national
supervisor is satisfied that a bilateral netting contract meets these
minimum criteria, the netting contract may be recognized for risk-based
capital purposes without raising safety and soundness concerns. The
Basle Supervisors' Committee's proposal includes a footnote stating
that if any of the relevant supervisors is dissatisfied with the status
of the enforceability of a netting contract under its laws, the netting
contract would not be recognized for risk-based capital purposes by
either counterparty.
In addition, the Basle Supervisors' Committee is proposing that any
netting contract that includes a walkaway clause be disqualified as an
acceptable netting contract for risk-based capital purposes. A walkaway
clause is a provision in a netting contract that permits the non-
defaulting counterparty to make only limited payments, or no payments
at all, to the defaulter or the estate of the defaulter even if the
defaulter is a net creditor under the contract.
Under the proposal, a banking organization would calculate one
current exposure under each qualifying bilateral netting contract. The
current exposure would be determined by adding together (netting) the
positive and negative market values for all individual interest rate
and exchange rate contracts subject to the netting contract. If the net
market value is positive, that value would equal the current exposure.
If the net market value is negative or zero, the current exposure would
be zero. The add-on for potential future credit exposure would be
determined by calculating individual potential future exposures for
each underlying contract subject to the netting contract in accordance
with the procedure already in place in the Basle Accord.10 A
banking organization would then add together the potential future
credit exposure (always a positive value) of each individual contract
subject to the netting contract to arrive at the total potential future
exposure it has under those contracts with the counterparty. The total
potential future exposure would be added to the net current exposure to
arrive at one credit equivalent amount that would be assigned to the
appropriate risk category.
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\1\0Under the proposal, a banking organization could net in this
manner for risk-based capital purposes if it uses, as all U.S.
banking organizations are required to use, the current exposure
method for calculating credit equivalent amounts of rate contracts.
Organizations using the original exposure method would use revised
conversion factors until market risk-related capital requirements
are implemented, at which time the original exposure method will no
longer be available for netted transactions.
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D. The Banking Agencies' Proposal
The OCC and the Board concur with the Basle Supervisors'
Committee's determination that the legal status of close-out netting
provisions has developed sufficiently to support the expanded
recognition of such provisions for risk-based capital purposes.
Therefore, the banking agencies are proposing to amend their respective
risk-based capital standards in a manner consistent with the Basle
Supervisors' Committee's proposed revision to the Basle Accord. The
banking agencies' proposed amendments would allow banking organizations
regulated by the OCC and the Federal Reserve to net the positive and
negative market values of interest and exchange rate contracts subject
to a qualifying, legally enforceable bilateral netting contract to
calculate one current exposure for that netting contract.
The banking agencies' proposed amendments would add provisions to
their standards setting forth criteria for a qualifying bilateral
netting contract and an explanation of how the credit equivalent amount
should be calculated for such contracts. The risk-based capital
treatment of an individual contract that is not subject to a qualifying
bilateral netting contract would remain unchanged.
For interest and exchange rate contracts that are subject to a
qualifying bilateral netting contract under the proposed standards, the
credit equivalent amount would equal the sum of: (i) The current
exposure of the netting contract and (ii) the total of the add-ons for
all individual contracts subject to the netting contract. (As with all
contracts, mark-to-market values for netted contracts would be measured
in dollars, regardless of the currency specified in the contract.) The
current exposure of the bilateral netting contract would be determined
by adding together all positive and negative mark-to-market values of
the individual contracts subject to the bilateral netting
contract.11 The current exposure would equal the sum of the market
values if that sum is positive, or zero if the sum of the market values
is zero or negative. The potential future exposure (add-on) for each
individual contract subject to the bilateral netting contract would be
calculated in the same manner as for non-netted contracts. These
individual potential future exposures would then be added together to
arrive at one total add-on amount.
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\1\1For regulatory capital purposes, the agencies would expect
that institutions would normally calculate the current exposure of a
bilateral netting contract by consistently including all contracts
covered by that netting contract. In the event a netting contract
covers transactions that are normally excluded from the risk-based
ratio calculation--for example, exchange rate contracts with an
original maturity of fourteen calendar days or less or instruments
traded on exchanges that require daily payment of variation margin--
institutions may elect to consistently either include or exclude all
mark-to-market values of such transactions when determining net
current exposures.
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The proposed amendments provide that a banking organization may
net, for risk-based capital purposes, interest and exchange rate
contracts only under a written bilateral netting contract that creates
a single legal obligation covering all included individual rate
contracts and that does not contain a walkaway clause. In addition, if
a counterparty fails to perform due to default, insolvency, bankruptcy,
liquidation or similar circumstances, the banking organization must
have a claim to receive a payment, or an obligation to make a payment,
for only the net amount of the sum of the positive and negative market
values on included individual contracts.
The banking agencies' proposal requires that a banking organization
obtain a written and reasoned legal opinion(s), representing that an
organization's claim or obligation, in the event of a legal challenge,
including one resulting from default, insolvency, bankruptcy, or
similar circumstances, would be found by the relevant court and
administrative authorities to be the net sum of all positive and
negative market values of contracts included in the bilateral netting
contract.12 The legal opinion normally would cover: (i) The law of
the jurisdiction in which the counterparty is chartered or the
equivalent location in the case of noncorporate entities, and if a
branch of the counterparty is involved, the law of the jurisdiction in
which the branch is located; (ii) the law that governs the individual
contracts covered by the bilateral netting contract; and (iii) the law
that governs the netting contract. The multiple jurisdiction
requirement is designed to ensure that the netting contract would be
upheld in any jurisdiction where the contract would likely be enforced
or whose law would likely be applied in an enforcement action, as well
as the jurisdiction where the counterparty's assets reside.
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\1\2The Financial Accounting Standards Board (FASB) has issued
Interpretation No. 39 (FIN 39) relating to the ``Offsetting of
Amounts Related to Certain Contracts.'' FIN 39 generally provides
that assets and liabilities meeting specified criteria may be netted
under generally accepted accounting principles (GAAP). However, FIN
39 does not specifically require a written and reasoned legal
opinion regarding the enforceability of the netting contract in
bankruptcy and other circumstances. Therefore, under this proposal a
banking organization might be able to net certain contracts in
accordance with FIN 39 for GAAP reporting purposes, but not be able
to net those contracts for risk-based capital purposes.
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A legal opinion could be prepared by either an outside law firm or
in-house counsel. If a banking organization obtained an opinion on the
enforceability of a bilateral netting contract that covered a variety
of underlying contracts, it generally would not need a legal opinion
for each individual underlying contract that is subject to the netting
contract, so long as the individual underlying contracts were of the
type contemplated by the legal opinion covering the netting contract.
The complexity of the legal opinions will vary according to the
extent and nature of the organization's involvement in rate contracts.
For instance, a banking organization that is active in the
international financial markets may need opinions covering multiple
foreign jurisdictions as well as domestic law. The banking agencies
expect that in many cases a legal opinion will focus on whether a
contractual choice of law would be recognized in the event of default,
insolvency, bankruptcy or similar circumstances in a particular
jurisdiction rather than whether the jurisdiction recognizes netting.
For example, a U.S. institution might engage in interest rate swaps
with a non-U.S. institution under a netting contract that includes a
provision that the contract will be governed by U.S. law. In this case
the U.S. institution should obtain a legal opinion as to whether the
netting would be upheld in the U.S. and whether the foreign courts
would honor the choice of U.S. law in default or in an insolvency,
bankruptcy, or similar proceeding.
For a banking organization that engages solely in domestic rate
contracts, the process of obtaining a legal opinion may be much
simpler. For example, for an institution that is an end-user of a
relatively small volume of domestic rate contracts, the standard
contracts used by the dealer bank may already have been subject to the
mandated legal review. In this case the end-user institution may obtain
a copy of the opinion covering the standard dealer contracts, supported
by the bank's own legal opinion.
The proposed amendments require a banking organization to establish
procedures to ensure that the legal characteristics of netting
contracts are kept under review in the light of possible changes in
relevant law. This review would apply to any conditions that, according
to the required legal opinions, are a prerequisite for the
enforceability of the netting contract, as well as to any adverse
changes in the law.
As with all of the provisions of the risk-based capital standards,
a banking organization must maintain in its files documentation
adequate to support any particular risk-based capital treatment. In the
case of a bilateral netting contract, a banking organization must
maintain in its files documentation adequate to support the bilateral
netting contract. In particular, this documentation should demonstrate
that the bilateral netting contract would be honored in all relevant
jurisdictions as set forth in this rule. Typically, these documents
would include a copy of the bilateral netting contract, legal opinions
and any related English translations.
The banking agencies would have the discretion to disqualify any or
all contracts from netting treatment for risk-based capital purposes if
the bilateral netting contract, individual contracts, or associated
legal opinions do not meet the requirements set out in the applicable
standards. In the event of such a disqualification, the affected
individual contracts subject to the bilateral netting contract would be
treated as individual non-netted contracts under the standards.
As a general matter, relevant legal provisions for banking
organizations in the U.S. make it clear that netting contracts with
close-out provisions enable such organizations to setoff included
individual transactions and reduce the obligations to a single net
amount in the event of default, insolvency, bankruptcy, liquidation or
similar circumstances.
The banking agencies' proposal provides that netting by novation
arrangements would not be grandfathered under the standards if such
arrangements do not meet all of the requirements proposed for
qualifying bilateral netting contracts. Although netting by novation
would continue to be recognized under the proposed standards,
institutions may not have the legal opinions or procedures in place
that would be required by the proposed amendments. The banking agencies
believe that holding all bilateral netting contracts to the same
standards will promote certainty as to the legal enforceability of the
contracts and decrease the risks faced by counterparties in the event
of a default.
E. Request for Comment
The banking agencies are seeking comment on all aspects of their
proposed amendments to the risk-based capital standards. In addition,
the agencies note that under current risk-based capital standards for
individual contracts, the degree to which collateral is recognized in
assigning the appropriate risk weight is based on the market value of
the collateral in relation to the credit equivalent amount of the rate
contract. The agencies are seeking comment on the nature of collateral
arrangements and the extent to which collateral might be recognized in
bilateral netting contracts, particularly taking into account legal
implications of collateral arrangements (e.g., whether the collateral
pledged for an individual transaction would be available to cover the
net counterparty exposure in the event of legal challenge) and
procedural difficulties in monitoring collateral levels.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
banking agencies hereby certify that this proposed rule will not have a
significant impact on a substantial number of small business entities.
Accordingly, a regulatory flexibility analysis is not required.
The banking agencies believe that a small institution is more
likely than a large institution to enter into relatively uncomplicated
transactions under standard bilateral netting contracts and may need
only to review a legal opinion that has already been obtained by its
counterparties.
Executive Order 12866
It has been determined that this proposal is not a significant
regulatory action as defined in Executive Order 12866.
Paperwork Reduction Act
The Federal Reserve has determined that its proposed amendments, if
adopted, would not increase the regulatory paperwork burden of banking
organizations pursuant to the provisions of the Paperwork Reduction Act
(44 U.S.C. 3501 et seq.). The OCC has determined that there are no
reporting or recordkeeping requirements in its proposed amendments;
accordingly, the provisions of the Paperwork Reduction Act do not
apply.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Accounting, Agriculture, Banks, Banking, Branches, Capital
adequacy, Confidential business information, Currency, Reporting and
recordkeeping requirements, Securities, State member banks.
12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Capital
adequacy, Holding companies, Reporting and recordkeeping requirements,
Securities.
Comptroller of the Currency
Authority and Issuance
For the reasons set out in the preamble, appendix A to part 3 of
title 12, chapter I of the Code of Federal Regulations is proposed to
be amended as set forth below.
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 is revised to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 3907 and 3909.
2. In appendix A, paragraph (c)(15) of section 1 is removed,
paragraphs (c)(16) through (c)(28) are redesignated as paragraphs
(c)(15) through (c)(27), and a new paragraph (c)(28) is added to read
as follows:
Appendix A--Risk-Based Capital Guidelines
* * * * *
Section 1. Purpose, Applicability of Guidelines, and Definitions
* * * * *
(c) * * *
(28) Walkaway clause means a provision in a bilateral netting
contract that permits a nondefaulting counterparty to make a lower
payment than it would make otherwise under the bilateral netting
contract, or no payment at all, to a defaulter or the estate of a
defaulter, even if a defaulter or the estate of a defaulter is a net
creditor under the bilateral netting contract.
3. In appendix A, paragraph (b)(5) of section 3 is revised to read
as follows:
Section 3. Risk Categories/Weights for On-Balance Sheet Assets and
Off-Balance Sheet Items
* * * * *
(b) * * *
(5) Off-Balance Sheet Contracts--Interest Rate and Foreign
Exchange Rate Contracts.
(i) Calculation of credit equivalent amounts. The credit
equivalent amount of an off-balance sheet interest rate or foreign
exchange rate contract is equal to the sum of the current credit
exposure (also referred to as the replacement cost) and the
potential future credit exposure of the off-balance sheet rate
contract. The calculation of credit equivalent amounts must be
measured in U.S. dollars, regardless of the currency or currencies
specified in the off-balance sheet rate contract.
(A) Current credit exposure. The current credit exposure for a
single off-balance sheet rate contract is determined by the mark-to-
market value of the off-balance sheet rate contract. If the mark-to-
market value is positive, then the current exposure is equal to that
mark-to-market value. If the mark-to-market value is zero or
negative, then the current exposure is zero. However, in determining
its current credit exposure for multiple off-balance sheet rate
contracts executed with a single counterparty, a bank may net
positive and negative mark-to-market values of off-balance sheet
rate contracts if subject to a bilateral netting contract as
provided by section 3(b)(5)(ii) of this appendix A. If the net mark-
to-market value is positive, then the current credit exposure is
equal to that net mark-to-market value. If the net mark-to-market
value is zero or negative, then the current exposure is zero.
(B) Potential future credit exposure. The potential future
credit exposure on an off-balance sheet rate contract, including
contracts with negative mark-to-market values, is estimated by
multiplying the notional principal18a by one of the following
credit conversion factors, as appropriate:\19\
---------------------------------------------------------------------------
\1\8aFor purposes of calculating potential future credit
exposure for foreign exchange contracts and other similar contracts,
in which notional principal is equivalent to cash flows, total
notional principal is defined as the net receipts to each party
falling due on each value date in each currency.
\19\No potential future credit exposure is calculated for single
currency interest rate swaps in which payments are made based upon
two floating rate indices, so-called floating/floating or basis
swaps; the credit equivalent amount is measured solely on the basis
of the current credit exposure.
------------------------------------------------------------------------
Interest Foreign
rate exchange
Remaining maturity contracts rate
(percents) contracts
(percents)
------------------------------------------------------------------------
One year or less................................ 0 1.0
Over one year................................... 0.5 5.0
------------------------------------------------------------------------
(ii) Off-balance sheet rate contracts subject to bilateral
netting contracts. In determining its current credit exposure for
multiple off-balance sheet rate contracts executed with a single
counterparty, a bank may net off-balance sheet rate contracts
subject to a bilateral netting contract by offsetting positive and
negative mark-to-market values, provided that:
(A) The bilateral netting contract is in writing;
(B) The bilateral netting contract creates a single legal
obligation for all individual off-balance sheet rate contracts
covered by the bilateral netting contract, and provides, in effect,
that the bank would have a single claim or obligation either to
receive or pay only the net amount of the sum of the positive and
negative mark-to-market values on the individual off-balance sheet
contracts covered by the bilateral netting contract in the event
that a counterparty, or a counterparty to whom the bilateral netting
contract has been validly assigned, fails to perform due to any of
the following events: default, insolvency, bankruptcy, or other
similar circumstances.
(C) The bank obtains a written and reasoned legal opinion(s)
that represents that in the event of a legal challenge, including
one resulting from default, insolvency, bankruptcy, or similar
circumstances, the relevant court and administrative authorities
would find the bank's exposure to be the net amount under:
(I) The law of the jurisdiction in which the counterparty is
chartered or the equivalent location in the case of noncorporate
entities, and if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
(II) The law that governs the individual off-balance sheet rate
contracts covered by the bilateral netting contract; and
(III) The law that governs the bilateral netting contract;
(D) The bank establishes and maintains procedures to monitor
possible changes in relevant law and to ensure that the bilateral
netting contract continues to satisfy the requirements of this
section; and
(E) The bank maintains in its files documentation adequate to
support the netting of an off-balance sheet rate contract.\19\a
---------------------------------------------------------------------------
\19\aBy netting individual off-balance sheet rate contracts
for the purpose of calculating its credit equivalent amount, a bank
represents that documentation adequate to support the netting of an
off-balance sheet rate contract is in the bank's files and available
for inspection by the OCC. Upon determination by the OCC that a
bank's files are inadequate or that a bilateral netting contract may
not be legally enforceable under any one of the bodies of law
described in section 3(b)(5)(ii)(C)(I) through (III) of this
appendix A, the underlying individual off-balance sheet rate
contracts may not be netted for the purposes of this section.
---------------------------------------------------------------------------
(F) The bilateral netting contract is not subject to a walkaway
clause.
(iii) Risk weighting. Once the bank determines the credit
equivalent amount for an off-balance sheet rate contract, that
amount is assigned to the risk weight category appropriate to the
counterparty, or, if relevant, the nature of any collateral or
guarantee. However, the maximum weight that will be applied to the
credit equivalent amount of such off-balance sheet rate contracts is
50 percent.
(iv) Exceptions. The following off-balance sheet rate contracts
are not subject to the above calculation, and therefore, are not
considered part of the denominator of a national bank's risk-based
capital ratio:
(A) A foreign exchange rate contract with an original maturity
of 14 calendar days or less; and
(B) Any interest rate or foreign exchange rate contract that is
traded on an exchange requiring the daily payment of any variations
in the market value of the contract.
* * * * *
3. The table title and the introductory text to Table 3 are revised
to read as follows:
Table 3--Treatment of Interest Rate and Foreign Exchange Rate Contracts
The current exposure method is used to calculate the credit
equivalent amounts of these off-balance sheet rate contracts. These
amounts are assigned a risk weight appropriate to the obligor or any
collateral or guarantee. However, the maximum risk weight is limited
to 50 percent. Multiple off-balance sheet rate contracts with a
single counterparty may be netted if those contracts are subject to
a qualifying bilateral netting contract.
* * * * *
Dated: April 29, 1994.
Office of the Comptroller of the Currency.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System
Authority and Issuance
For the reasons set out in the preamble, parts 208 and 225 of
chapter II of title 12 of the Code of Federal Regulations are proposed
to be amended as set forth below.
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as
follows:
Authority: 12 U.S.C. 36, 248(a) and (c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,
3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g),
781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318.
2. Appendix A to part 208 is amended by revising section III.E.2.;
section III.E.3.; section III.E.5.; the last sentence of Attachment IV;
and Attachment V to read as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
* * * * *
III. Procedures for Computing Weighted Risk Assets and Off-Balance
Sheet Items
* * * * *
E. Interest Rate and Foreign Exchange Rate Contracts
* * * * *
2. Calculation of credit equivalent amounts. (a) The credit
equivalent amount of an off-balance sheet rate contract that is not
subject to a qualifying bilateral netting contract in accordance
with section III.E.5. of this appendix A is equal to the sum of (i)
the current exposure (sometimes referred to as the replacement cost)
of the contract and (ii) an estimate of the potential future credit
exposure over the remaining life of the contract.
(b) The current exposure is determined by the mark-to-market
value of the contract. If the mark-to-market value is positive, then
the current exposure is equal to that mark-to-market value. If the
mark-to-market value is zero or negative, then the current exposure
is zero. Mark-to-market values are measured in dollars, regardless
of the currency or currencies specified in the contract and should
reflect changes in both interest rates and counterparty credit
quality.
(c) The potential future credit exposure on a contract,
including contracts with negative mark-to-market values, is
estimated by multiplying the notional principal amount of the
contract by one of the following credit conversion factors, as
appropriate:
[In percent]
------------------------------------------------------------------------
Interest Exchange
rate rate
Remaining maturity contracts contracts
------------------------------------------------------------------------
One year or less.................................. 0 1.0
Over one year..................................... 0.5 5.0
------------------------------------------------------------------------
(d) Examples of the calculation of credit equivalent amounts for
these instruments are contained in Attachment V of this appendix A.
(e) Because exchange rate contracts involve an exchange of
principal upon maturity, and exchange rates are generally more
volatile than interest rates, higher conversion factors have been
established for foreign exchange rate contracts than for interest
rate contracts.
(f) No potential future credit exposure is calculated for single
currency interest rate swaps in which payments are made based upon
two floating rate indices, so-called floating/floating or basis
swaps; the credit exposure on these contracts is evaluated solely on
the basis of their mark-to-market values.
3. Risk weights. Once the credit equivalent amount for interest
rate and exchange rate instruments has been determined, that amount
is assigned to the risk weight category appropriate to the
counterparty, or, if relevant, the guarantor or the nature of any
collateral.49 However, the maximum weight that will be applied
to the credit equivalent amount of such instruments is 50 percent.
---------------------------------------------------------------------------
\4\9For interest and exchange rate contracts, sufficiency of
collateral or guaranties is determined by the market value of the
collateral or the amount of the guarantee in relation to the credit
equivalent amount. Collateral and guarantees are subject to the same
provisions noted under section III.B. of this appendix A.
---------------------------------------------------------------------------
* * * * *
5. Netting. For purposes of this appendix A, netting refers to
the offsetting of positive and negative mark-to-market values when
determining a current exposure to be used in the calculation of a
credit equivalent amount. Any legally enforceable form of bilateral
netting (that is, netting with a single counterparty) of rate
contracts is recognized for purposes of calculating the credit
equivalent amount provided that:
(a) The netting is accomplished under a written netting contract
that creates a single legal obligation, covering all included
individual contracts, with the effect that the bank would have a
claim or obligation to receive or pay, respectively, only the net
amount of the sum of the positive and negative mark-to-market values
on included individual contracts in the event that a counterparty,
or a counterparty to whom the contract has been validly assigned,
fails to perform due to any of the following events: default,
insolvency, bankruptcy, or similar circumstances.
(b) The bank obtains a written and reasoned legal opinion(s)
representing that in the event of a legal challenge, including one
resulting from default, insolvency, liquidation or similar
circumstances, the relevant court and administrative authorities
would find the bank's exposure to be such a net amount under:
(i) The law of the jurisdiction in which the counterparty is
chartered or the equivalent location in the case of noncorporate
entities, and if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
(ii) The law that governs the individual contracts covered by
the netting contract; and
(iii) The law that governs the netting contract.
(c) The bank establishes and maintains procedures to ensure that
the legal characteristics of netting contracts are kept under review
in the light of possible changes in relevant law.
(d) The bank maintains in its files documentation adequate to
support the netting of rate contracts, including a copy of the
bilateral netting contract and necessary legal opinions.
(i) A contract containing a walkaway clause is not eligible for
netting for purposes of calculating the credit equivalent
amount.50
---------------------------------------------------------------------------
\5\0For purposes of this section, a walkaway clause means a
provision in a netting contract that permits a non-defaulting
counterparty to make lower payments than it would make otherwise
under the contract, or no payment at all, to a defaulter or to the
estate of a defaulter, even if a defaulter or the estate of a
defaulter is a net creditor under the contract.
---------------------------------------------------------------------------
(ii) By netting individual contracts for the purpose of
calculating its credit equivalent amount, a bank represents that it
has met the requirements of this appendix A and all the appropriate
documents are in the bank's files and available for inspection by
the Federal Reserve. Upon determination by the Federal Reserve that
a bank's files are inadequate or that a netting contract may not be
legally enforceable under any one of the bodies of law described in
(b)(i) through (iii) above, underlying individual contracts may be
treated as though they were not subject to the netting contract.
(iii) The credit equivalent amount of rate contracts that are
subject to a qualifying bilateral netting contract is calculated by
adding (A) the current exposure of the netting contract and (B) the
sum of the estimates of the potential future credit exposure on all
individual contracts subject to the netting contract.
(iv) The current exposure of the netting contract is determined
by summing all positive and negative mark-to-market values of the
individual contracts included in the netting contract. If the net
sum of the mark-to-market values is positive, then the current
exposure of the netting contract is equal to that sum. If the net
sum of the mark-to-market values is zero or negative, then the
current exposure of the netting contract is zero.
(v)For each individual contract included in the netting
contract, the potential future credit exposure is estimated in
accordance with section E.2. of this appendix A.51
---------------------------------------------------------------------------
\5\1For purposes of calculating potential future credit exposure
for foreign exchange contracts and other similar contracts in which
notional principal is equivalent to cash flows, total notional
principal is defined as the net receipts to each party falling due
on each value date in each currency.
---------------------------------------------------------------------------
(vi) Examples of the calculation of credit equivalent amounts
for these types of contracts are contained in Attachment V of this
appendix A.
* * * * *
Attachment IV--Credit Conversion Factors for Off-Balance Sheet Items
for State Member Banks
* * * * *
* * * Qualifying netting by novation contracts and other
qualifying bilateral netting contracts may be recognized.
* * * * *
Attachment V.--Calculation of Credit Equivalent Amounts for Interest Rate and Foreign Exchange Rate Related Transactions for State Member Banks
--------------------------------------------------------------------------------------------------------------------------------------------------------
Potential exposure + Current exposure
---------------------------------------------------------------------------------------- Credit
Type of contract (remaining maturity) Notional Potential Potential Current equivalent
principal x exposure = exposure Mark-to-market exposure amount
(dollars) conversion (dollars) value\1\ (dollars)\2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) 120-day forward foreign exchange............ 5,000,000 .01 50,000 100,000 100,000 150,000
(2) 120-day forward foreign exchange............ 6,000,000 .01 60,000 -120,000 0 60,000
(3) 3-year single currency fixed/floating
interest rate swap............................. 10,000,000 .005 50,000 200,000 200,000 250,000
(4) 3-year single currency fixed/floating
interest rate swap............................. 10,000,000 .005 50,000 -250,000 0 50,000
(5) 7-year cross-currency floating/floating
interest rate swap............................. 20,000,000 .05 1,000,000 -1,300,000 0 1,000,000
-------------------------------------------------------------------------------------------------------
Total..................................... .............. ..... .......... ..... 1,210,000 .............. 300,000 1,510,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
If contracts (1) through (5) above are subject to a qualifying
bilateral netting contract, then the following applies:
----------------------------------------------------------------------------------------------------------------
Potential Current
exposure Mark-to-market exposure Credit
(dollars) value (from (dollars) equivalent
(from above) above) amount
----------------------------------------------------------------------------------------------------------------
(1)........................................... 50,000 ..... 100,000
(2)........................................... 60,000 ..... -120,000
(3)........................................... 50,000 ..... 200,000
(4)........................................... 50,000 ..... -250,000
-----------------------------------------------------------------
(5)........................................... 1,000,000 -1,300,000
-----------------------------------------------------------------
Total................................... 1,210,000 + -1,370,000 0 1,210,000
----------------------------------------------------------------------------------------------------------------
\1\These numbers are purely for illustration.
\2\The larger of zero or a positive mark-to-market value.
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818(b), 1828(o), 1831i,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. Appendix A to part 225 is amended by revising section III.E.2.,
section III.E.3.; section III.E.5.; the last sentence of Attachment IV;
and Attachment V to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
* * * * *
III. Procedures for Computing Weighted Risk Assets and Off-Balance
Sheet Items
* * * * *
E. Interest Rate and Foreign Exchange Rate Contracts
* * * * *
2. Calculation of credit equivalent amounts. (a) The credit
equivalent amount of an off-balance sheet rate contract that is not
subject to a qualifying bilateral netting contract in accordance with
section III.E.5. of this appendix A is equal to the sum of (i) the
current exposure (sometimes referred to as the replacement cost) of the
contract and (ii) an estimate of the potential future credit exposure
over the remaining life of the contract.
(b) The current exposure is determined by the mark-to-market value
of the contract. If the mark-to-market value is positive, then the
current exposure is equal to that mark-to-market value. If the mark-to-
market value is zero or negative, then the current exposure is zero.
Mark-to-market values are measured in dollars, regardless of the
currency or currencies specified in the contract and should reflect
changes in both interest rates and counterparty credit quality.
(c) The potential future credit exposure on a contract, including
contracts with negative mark-to-market values, is estimated by
multiplying the notional principal amount of the contract by one of the
following credit conversion factors, as appropriate:
[In percent]
------------------------------------------------------------------------
Interest Exchange
rate rate
Remaining maturity contracts contracts
------------------------------------------------------------------------
One year or less.................................. 0 1.0
Over one year..................................... 0.5 5.0
------------------------------------------------------------------------
(d) Examples of the calculation of credit equivalent amounts for
these instruments are contained in Attachment V of this appendix A.
(e) Because exchange rate contracts involve an exchange of
principal upon maturity, and exchange rates are generally more volatile
than interest rates, higher conversion factors have been established
for foreign exchange contracts than for interest rate contracts.
(f) No potential future credit exposure is calculated for single
currency interest rate swaps in which payments are made based upon two
floating rate indices, so-called floating/floating or basis swaps; the
credit exposure on these contracts is evaluated solely on the basis of
their mark-to-market values.
3. Risk weights. Once the credit equivalent amount for interest
rate and exchange rate instruments has been determined, that amount is
assigned to the risk weight category appropriate to the counterparty,
or, if relevant, the guarantor or the nature of any collateral.53
However, the maximum weight that will be applied to the credit
equivalent amount of such instruments is 50 percent.
---------------------------------------------------------------------------
\5\3For interest and exchange rate contracts, sufficiency of
collateral or guaranties is determined by the market value of the
collateral or the amount of the guarantee in relation to the credit
equivalent amount. Collateral and guarantees are subject to the same
provisions noted under section III.B. of this appendix A.
---------------------------------------------------------------------------
* * * * *
5. Netting. (a) For purposes of this appendix A, netting refers to
the offsetting of positive and negative mark-to-market values when
determining a current exposure to be used in the calculation of a
credit equivalent amount. Any legally enforceable form of bilateral
netting (that is, netting with a single counterparty) of rate contracts
is recognized for purposes of calculating the credit equivalent amount
provided that:
(i) The netting is accomplished under a written netting contract
that creates a single legal obligation, covering all included
individual contracts, with the effect that the organization would have
a claim or obligation to receive or pay, respectively, only the net
amount of the sum of the positive and negative mark-to-market values on
included individual contracts in the event that a counterparty, or a
counterparty to whom the contract has been validly assigned, fails to
perform due to any of the following events: default, insolvency,
bankruptcy, or similar circumstances.
(ii) The banking organization obtains a written and reasoned legal
opinion(s) representing that, in the event of a legal challenge,
including one resulting from default, insolvency, bankruptcy, or
similar circumstances, the relevant court and administrative
authorities would find the organization's exposure to be such a net
amount under:
(A) the law of the jurisdiction in which the counterparty is
chartered or the equivalent location in the case of noncorporate
entities and, if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
(B) the law that governs the individual contracts covered by the
netting contract; and
(C) the law that governs the netting contract.
(iii) The banking organization establishes and maintains procedures
to ensure that the legal characteristics of netting contracts are kept
under review in the light of possible changes in relevant law.
(iv) The banking organization maintains in its files documentation
adequate to support the netting of rate contracts, including a copy of
the bilateral netting contract and necessary legal opinions.
(b) A contract containing a walkaway clause is not eligible for
netting for purposes of calculating the credit equivalent
amount.54
---------------------------------------------------------------------------
\5\4For purposes of this section, a walkaway clause means a
provision in a netting contract that permits a non-defaulting
counterparty to make lower payments than it would make otherwise
under the contract, or no payment at all, to a defaulter or the
estate of a defaulter, even if a defaulter or the estate of a
defaulter is a net creditor under the contract.
---------------------------------------------------------------------------
(c) By netting individual contracts for the purpose of calculating
its credit equivalent amount, a banking organization represents that it
has met the requirements of this appendix A and all the appropriate
documents are in the organization's files and available for inspection
by the Federal Reserve. Upon determination by the Federal Reserve that
a banking organization's files are inadequate or that a netting
contract may not be legally enforceable under any one of the bodies of
law described in (a)(ii) (A) through (C) above, underlying individual
contracts may be treated as though they were not subject to the netting
contract.
(d) The credit equivalent amount of rate contracts that are subject
to a qualifying bilateral netting contract is calculated by adding (i)
the current exposure of the netting contract and (ii) the sum of the
estimates of the potential future credit exposure on all individual
contracts subject to the netting contract.
(e) The current exposure of the netting contract is determined by
summing all positive and negative mark-to-market values of the
individual transactions included in the netting contract. If the net
sum of the mark-to-market values is positive, then the current exposure
of the netting contract is equal to that sum. If the net sum of the
mark-to-market values is zero or negative, then the current exposure of
the netting contract is zero.
(f) For each individual contract included in the netting contract,
the potential future credit exposure is estimated in accordance with
section E.2. of this appendix A.55
---------------------------------------------------------------------------
\5\5For purposes of calculating potential future credit exposure
for foreign exchange contracts and other similar contracts in which
notional principal is equivalent to cash flows, total notional
principal is defined as the net receipts to each party falling due
on each value date in each currency.
---------------------------------------------------------------------------
(g) Examples of the calculation of credit equivalent amounts for
these types of contracts are contained in Attachment V of this appendix
A.
* * * * *
Attachment IV--Credit Conversion Factors for Off-Balance Sheet Items
for Bank Holding Companies
* * * * *
* * * Qualifying netting by novation contracts and other qualifying
bilateral netting contracts may be recognized.
* * * * *
Attachment V.--Calculation of Credit Equivalent Amounts for Interest Rate and Foreign Exchange Rate Related Transactions for Bank Holding Companies
--------------------------------------------------------------------------------------------------------------------------------------------------------
Potential exposure + Current exposure
-------------------------------------------------------------------------------------------------- Credit
Type of contract (remaining maturity) Notional Potential Potential Current equivalent
principal x exposure = exposure + Mark-to-market exposure = amount
(dollars) conversion (dollars) value\1\ (ollars)\2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) 120-day forward foreign exchange..... 5,000,000 .01 50,000 100,000 100,000 150,000
(2) 120-day forward foreign exchange..... 6,000,000 .01 60,000 -120,000 0 60,000
(3) 3-year single currency fixed/floating
interest rate swap...................... 10,000,000 .005 50,000 200,000 200,000 250,000
(4) 3-year single currency fixed/floating
interest rate swap...................... 10,000,000 .005 50,000 -250,000 0 50,000
(5) 7-year cross-currency floating/
floating interest rate swap............. 20,000,000 .05 1,000,000 -1,300,000 0 1,000,000
--------------------------------------------------------------------------------------------------------------
Total.............................. .............. ..... .......... ..... 1,210,000 ..... .............. 300,000 ..... 1,510,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
If contracts (1) through (5) above are subject to a qualifying
bilateral netting contract, then the following applies:
----------------------------------------------------------------------------------------------------------------
Potential
exposure Mark-to-market Current Credit
(dollars) value (from exposure equivalent
(from above) above) (dollars) amount
----------------------------------------------------------------------------------------------------------------
(1)........................................... 50,000 100,000
(2)........................................... 60,000 -120,000
(3)........................................... 50,000 200,000
(4)........................................... 50,000 -250,000
(5)........................................... 1,000,000 1,300,000
-----------------------------------------------------------------
Total................................... 1,210,000 + -1,370,000 0 1,210,000
----------------------------------------------------------------------------------------------------------------
\1\These numbers are purely for illustration.
\2\The larger of zero or a positive mark-to-market value.
Board of Governors of the Federal Reserve System.
May 17, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-12409 Filed 5-19-94; 8:45 am]
BILLING CODE 6210-01-P
