US Agencies Update Rule on Derivative Contracts Exposure Calculation

Under the final rule, an advanced approaches banking organization may use SA-CCR or the internal models methodology to calculate the advanced approaches total risk-weighted assets and must use SA-CCR, instead of the current exposure methodology, to calculate its standardized total risk-weighted assets. A non-advanced approaches banking organization may use the current exposure methodology or SA-CCR to calculate its standardized total risk-weighted assets. The final rule also implements SA-CCR in other aspects of the capital rule. The final rule requires an advanced approaches banking organization to use SA-CCR to determine the exposure amount of derivative contracts included in the total leverage exposure of a banking organization, the denominator of the supplementary leverage ratio. In addition, the final rule incorporates SA-CCR into the cleared transactions framework and makes other amendments with respect to cleared transactions.

As a result of this final rule, the agencies have proposed to clarify the reporting instructions for the FFIEC 031, FFIEC 041, and FFIEC 051 Call Reports and FFIEC 101 for regulatory capital reporting for institutions subject to the advanced capital adequacy framework. OCC and FDIC expect to clarify the reporting instructions for DFAST 14A and FED expects to clarify the reporting instructions for forms FR Y–9C on the consolidated financial statements for holding companies, FR Y–14A and FR Y–14Q on capital assessments and stress testing, and FR Y-15 on banking organization systemic risk report, as appropriate, to reflect the changes to the regulatory capital rule related to this final rule. FED expects to address the use of SA-CCR for purposes of the FR Y-15 in a separate process. Until such time, banking organizations that must report the FR Y-15 should continue to use the current exposure method to determine the potential future exposure of their derivative contracts for purposes of completing line 11(b) of Schedule B, consistent with the current instructions to the form.This rule does not impose any reporting, recordkeeping, and other compliance requirements onto small entities.

The US Agencies, on October 30, 2018, had launched a consultation on the implementation of SA-CCR. The agencies received approximately 58 comments on the proposal, with the respondents including banking organizations, trade groups, members of Congress, and advocacy organizations. While generally consistent with the proposal, the final rule has been revised in response to the comments received. The changes include revised capital requirements for derivatives contracts with commercial end-user counterparties. The final rule removes the alpha factor of 1.4 from the exposure amount calculation for derivative contracts with commercial end-user counterparties. 

Respondents to the consultation also criticized the approach to recognition of collateral provided to support a derivative contract for purposes of the supplementary leverage ratio. In response to the concerns of these respondents and to maintain consistency with changes to the BCBS leverage ratio standard that occurred during the comment period, the final rule allows for greater recognition of collateral in the calculation of total leverage exposure related to the client-cleared derivative contracts. 

Related Links

• Press Release
• Final rule (PDF)

Effective Date: April 01, 2020

Keywords: Americas, US, Banking, Basel III, SA-CCR, Advanced Approaches, Derivatives, Regulatory Capital, Leverage Ratio, Reporting, US Agencies