FDIC letter gives highlights of recent capital rule changes for calculating derivatives exposures

Key points of a recent final rule on the calculation of the exposure amount for derivative contracts are presented in a Financial Institution Letter (FIL) issued Monday by the Federal Deposit Insurance Corp. (FDIC).

The final rule, issued jointly last month by the FDIC, Federal Reserve Board, and Office of the Comptroller of the Currency (OCC), amends the regulatory capital rule to implement a new approach for calculating the exposure amount for derivative contracts, which is called the “standardized approach for counterparty credit risk” (SA-CCR). The final rule also incorporates SA-CCR into the determination of the exposure amount of derivatives for total leverage exposure under the supplementary leverage ratio, and the cleared transaction framework under the capital rule. The rule also make technical amendments to the capital rule with respect to cleared transactions.

As summarized in the FIL, the final rule:

(1) replaces the current exposure methodology (CEM) in the capital rule’s advanced approaches with SA-CCR as an option to internal models methodology (IMM) for purposes of calculating advanced approaches total risk-weighted assets;

(2) requires an advanced approaches banking organization to begin using SA-CCR by Jan. 1, 2022, in determining the exposure amount for a derivative contract for purposes of calculating its standardized total risk-weighted assets; and

(3) allows a non-advanced approaches banking organization to use either CEM or SA-CCR to determine the exposure amount for its derivative contracts.

If a banking organization elects to use SA-CCR to determine the exposure amount for its derivative contracts, it also is required to use SA-CCR to determine the trade exposure amount for cleared derivative contracts and default fund contributions, the letter states.

FDIC FIL-74-2019

RR: Banking agencies finalize updated methodology for counterparty credit risk measurement (SA-CCR) (Nov. 21, 2019)

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