(a) Scope. This section sets forth the rules for calculating
the credit exposure arising from a derivative transaction or a securities
financing transaction entered into by a state bank for purposes of
determining the bank's lending limit pursuant to Finance Code, §34.201,
and this subchapter.
(b) Derivative transactions.
(1) Non-credit derivatives. Subject to paragraphs (2)
- (4) of this subsection, a state bank shall calculate the credit
exposure to a counterparty arising from a derivative transaction by
one of the following methods. Subject to paragraphs (3) and (4) of
this subsection, a bank shall use the same method for calculating
counterparty credit exposure arising from all of its derivative transactions.
(A) Model method.
(i) Credit exposure. The credit exposure of a derivative
transaction under the model method is equal to the sum of the current
credit exposure of the derivative transaction and the potential future
credit exposure of the derivative transaction.
(ii) Calculation of current credit exposure. A bank
shall determine its current credit exposure by the mark-to-market
value of the derivative contract. If the mark-to-market value is positive,
then the current credit exposure equals that mark-to-market value.
If the mark-to-market value is zero or negative, then the current
credit exposure is zero.
(iii) Calculation of potential future credit exposure.
A bank shall calculate its potential future credit exposure by using
an internal model that has been approved in writing for purposes of
12 C.F.R. §324.132(d) (or 12 C.F.R. §217.132(d) in the case
of a bank that is a member of the Federal Reserve System), provided
that the bank notifies the commissioner prior to its use for purposes
of this section, or another model approved by the department based
on the views of the bank's primary federal banking regulatory agency
and any third party testing and evaluation reports submitted to the
commissioner. Any substantive revisions to an internal model made
after the bank has provided notice of its use, or after the commissioner
has approved the use of an alternate model, must be approved by the
commissioner before a bank may use the revised model for purposes
of this section.
(iv) Net credit exposure. A bank that calculates its
credit exposure by using the model method pursuant to this subparagraph
may net credit exposures of derivative transactions arising under
the same qualifying master netting agreement.
(B) Conversion factor matrix method. The credit exposure
arising from a derivative transaction under the conversion factor
matrix method is equal to and will remain fixed at the potential future
credit exposure of the derivative transaction, which equals the product
of the notional amount of the derivative transaction and a fixed multiplicative
factor determined by reference to Table 1 of this section.
Attached Graphic
(C) Current exposure method. The credit exposure arising
from a derivative transaction (other than a credit derivative transaction)
under the current exposure method is calculated in the manner provided
by 12 C.F.R. §324.34(b)-(c) (or 12 C.F.R. §217.34(b)-(c)
in the case of a bank that is a member of the Federal Reserve System).
(2) Credit derivatives.
(A) Counterparty exposure.
(i) General rule. Notwithstanding paragraph (1) of
this subsection and subject to clause (ii) of this subparagraph, a
state bank that uses the conversion factor matrix method or the current
exposure method, or that uses the model method without entering an
effective margining arrangement as defined in §12.2 of this title
(relating to Definitions), shall calculate the counterparty credit
exposure arising from credit derivatives entered by the bank by adding
the net notional value of all protection purchased from the counterparty
on each reference entity.
(ii) Special rule for certain effective margining arrangements.
A bank must add the effective margining arrangement threshold amount
to the counterparty credit exposure arising from credit derivatives
calculated under the model method. The effective margining arrangement
threshold is the amount under an effective margining arrangement with
respect to which the counterparty is not required to post variation
margin to fully collateralize the amount of the bank's net credit
exposure to the counterparty.
(B) Reference entity exposure. A state bank shall calculate
the credit exposure to a reference entity arising from credit derivatives
entered into by the bank by adding the net notional value of all protection
sold on the reference entity. A bank may reduce its exposure to a
reference entity by the amount of any eligible credit derivative purchased
on that reference entity from an eligible protection provider.
(3) Special rule for central counterparties. In addition
to amounts calculated under paragraphs (1) and (2) of this subsection,
the measure of counterparty exposure to a central counterparty must
also include the sum of the initial margin posted by the bank plus
any contributions made by it to a guaranty fund at the time such contribution
is made. However, this requirement does not apply to a bank that uses
an internal model pursuant to paragraph (1)(A) of this subsection
if such model reflects the initial margin and any contributions to
a guaranty fund.
(4) Mandatory or alternative use of method. The commissioner
may in the exercise of discretion require or permit a state bank to
use a specific method or methods set forth in this subsection to calculate
the credit exposure arising from all derivative transactions, from
any category of derivative transactions, or from a specific derivatives
transaction if the commissioner in the exercise of discretion finds
that such method is consistent with the safety and soundness of the
bank.
(c) Securities financing transactions.
(1) In general. Except as provided by paragraph (2)
of this subsection, a state bank shall calculate the credit exposure
arising from a securities financing transaction by one of the following
methods. A state bank shall use the same method for calculating credit
exposure arising from all of its securities financing transactions.
(A) Model method. A state bank may calculate the credit
exposure of a securities financing transaction by using an internal
model that has been approved in writing for purposes of 12 C.F.R. §324.132(b)
(or 12 C.F.R. §217.132(b) in the case of a bank that is a member
of the Federal Reserve System), provided that the bank notifies the
commissioner prior to its use for purposes of this section, or another
model approved by the department based on the views of the bank's
primary federal banking regulatory agency and any third party testing
and evaluation reports submitted to the commissioner. Any substantive
revisions to an internal model made after the bank has provided notice
of its use, or after the commissioner has approved the use of an alternate
model, must be approved by the commissioner before a bank may use
the revised model for purposes of this section.
(B) Basic method. A state bank may calculate the credit
exposure of a securities financing transaction as follows:
(i) Repurchase agreement. The credit exposure arising
from a repurchase agreement shall equal and remain fixed at the market
value at execution of the transaction of the securities transferred
to the other party less cash received.
(ii) Securities lending.
(I) Cash collateral transactions. The credit exposure
arising from a securities lending transaction where the collateral
is cash shall equal and remain fixed at the market value at execution
of the transaction of securities transferred less cash received.
(II) Non-cash collateral transactions. The credit exposure
arising from a securities lending transaction where the collateral
is other securities shall equal and remain fixed as the product of
the higher of the two haircuts associated with the two securities,
as determined by reference to Table 2 of this section, and the higher
of the two par values of the securities. Where more than one security
is provided as collateral, the applicable haircut is the higher of
the haircut associated with the security lent and the notional-weighted
average of the haircuts associated with the securities provided as
collateral.
(iii) Reverse repurchase agreements. The credit exposure
arising from a reverse repurchase agreement shall equal and remain
fixed as the product of the haircut associated with the collateral
received, as determined by reference to Table 2 of this section, and
the amount of cash transferred.
(iv) Securities borrowing.
(I) Cash collateral transactions. The credit exposure
arising from a securities borrowed transaction where the collateral
is cash shall equal and remain fixed as the product of the haircut
on the collateral received, as determined by reference to Table 2
of this section, and the amount of cash transferred to the other party.
Cont'd... |