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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL DEPOSIT INSURANCE CORPORATION

Office of the Comptroller of the Currency

12 CFR Parts 324 and 325

[Regulation Q; Docket No. R-1442]

RIN 3064-AD97

Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule

AGENCY: Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
SUMMARY: In this NPR (Advanced Approaches and Market Risk NPR) the agencies are proposing to revise the advanced approaches risk-based capital rule to incorporate certain aspects of "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) that the agencies would apply only to advanced approach banking organizations. This NPR also proposes other changes to the advanced approaches rule that the agencies believe are consistent with changes by the Basel Committee on Banking Supervision (BCBS) to its "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" (Basel II), as revised by the BCBS between 2006 and 2009, and recent consultative papers published by the BCBS. The agencies also propose to revise the advanced approaches risk-based capital rule to be consistent with Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). These revisions include replacing references to credit ratings with alternative standards of creditworthiness consistent with section 939A of the Dodd-Frank Act.

Additionally, the OCC and FDIC are proposing that the market risk capital rule be applicable to federal and state savings associations, and the Board is proposing that the advanced approaches and market risk capital rules apply to top-tier savings and loan holding companies domiciled in the United States that meet the applicable thresholds. In addition, this NPR would codify the market risk rule consistent with the proposed codification of the other regulatory capital rules across the three proposals.

DATES: Comments must be submitted on or before October 22, 2012.
ADDRESSES: OCC:Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments by the Federal eRulemaking Portal or email, if possible. Please use the title "Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule" to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

*Federal eRulemaking Portal--"Regulations.gov":Go tohttp://www.regulations.gov,under the "More Search Options" tab click next to the "Advanced Docket Search" option where indicated, select "Comptroller of the Currency" from the agency drop-down menu, and then click "Submit." In the "Docket ID" column, select "OCC-2012-0010" to submit or view public comments and to view supporting and related materials for this proposed rule. The "How to Use This Site" link on the Regulations.gov home page provides information on using Regulations.gov, including instructions for submitting or viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period.

*Email: regs.comments@occ.treas.gov.

*Mail:Office of the Comptroller of the Currency, 250 E Street SW., Mail Stop 2-3, Washington, DC 20219.

*Fax:(202) 874-5274.

*Hand Delivery/Courier:250 E Street SW., Mail Stop 2-3, Washington, DC 20219.

Instructions:You must include "OCC" as the agency name and "Docket Number OCC-2012-0010" in your comment. In general, OCC will enter all comments received into the docket and publish them on the Regulations.gov Web site without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this notice by any of the following methods:

*Viewing Comments Electronically:Go tohttp://www.regulations.gov. Select "Document Type" of "Public Submissions," in "Enter Keyword or ID Box," enter Docket ID "OCC-2012-0010," and click "Search." Comments will be listed under "View By Relevance" tab at bottom of screen. If comments from more than one agency are listed, the "Agency" column will indicate which comments were received by the OCC.

*Viewing Comments Personally:You may personally inspect and photocopy comments at the OCC, 250 E Street SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874-4700. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments.

*Docket:You may also view or request available background documents and project summaries using the methods described above.

Board:When submitting comments, please consider submitting your comments by email or fax because paper mail in the Washington, DC area and at the Board may be subject to delay. You may submit comments, identified by Docket No. [XX][XX], by any of the following methods:

*Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments athttp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

*Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

*Email: regs.comments@federalreserve.gov. Include docket number in the subject line of the message.

*Fax:(202) 452-3819 or (202) 452-3102.

*Mail:Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551.

All public comments are available from the Board's Web site athttp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfmas submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room MP-500 of the Board's Martin Building (20th and C Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on weekdays.

FDIC:You may submit comments by any of the following methods:

*Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

*Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.

*Mail:Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

*Hand Delivered/Courier:The guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7 a.m. and 5 p.m.

*E-mail: comments@FDIC.gov.

Instructions:Comments submitted must include "FDIC" and "RIN 3064-D97." Comments received will be posted without change tohttp://www.FDIC.gov/regulations/laws/federal/propose.html,including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Board:Anna Lee Hewko, Assistant Director, Capital and Regulatory Policy, (202) 530-6260, Thomas Boemio, Manager, Capital and Regulatory Policy, (202) 452-2982, or Constance M. Horsley, Manager, Capital and Regulatory Policy, (202) 452-5239, Division of Banking Supervision and Regulation; or Benjamin W. McDonough, Senior Counsel, (202) 452-2036, or April C. Snyder, Senior Counsel, (202) 452-3099, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC:Bobby R. Bean, Associate Director,bbean@fdic.gov;Ryan Billingsley, Senior Policy Analyst,rbillingsley@fdic.gov;or Karl Reitz, Senior Policy Analyst,kreitz@fdic.gov,Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; or Mark Handzlik, Counsel,mhandzlik@fdic.gov,Michael Phillips, Counsel,mphillips@fdic.gov;or Greg Feder, Counsel,gfeder@fdic.gov,Ryan Clougherty, Senior Attorney,rclougherty@fdic.gov;Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. SUPPLEMENTARY INFORMATION:

In connection with the proposed changes to the agencies' capital rules in this NPR, the agencies are also seeking comment on the two related NPRs published elsewhere in today'sFederal Register. In the notice titled “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action” (Basel III NPR) the agencies are proposing to revise their minimum risk-based capital requirements and criteria for regulatory capital, as well as establish a capital conservation buffer framework, consistent with Basel III. The Basel III NPR also includes transition provisions for banking organizations to come into compliance with its requirements.

In the notice titled “Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements” (Standardized Approach NPR), the agencies are proposing to revise and harmonize their rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating aspects of the standardized framework in Basel II, and providing alternatives to credit ratings, consistent with section 939A of the Dodd-Frank Act. The revisions include methodologies for determining risk-weighted assets for residential mortgages, securitization exposures, and counterparty credit risk. The Standardized Approach NPR also would introduce disclosure requirements that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets, including disclosures related to regulatory capital instruments.

The proposed requirements in the Basel III NPR and Standardized Approach NPR would apply to all banking organizations that are currently subject to minimum capital requirements (including national banks, state member banks, state nonmember banks, state and federal savings associations, and top-tier bank holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C)), as well as top-tier savings and loan holding companies domiciled in the United States (collectively, banking organizations).

The proposals are being published in three separate NPRs to reflect the distinct objectives of each proposal, to allow interested parties to better understand the various aspects of the overall capital framework, including which aspects of the rules would apply to which banking organizations, and to help interested parties better focus their comments on areas of particular interest.

Table of Contents I. Introduction II. Risk-Weighted Assets—Proposed Modifications to the Advanced Approaches Rules A. Counterparty Credit Risk 1. Revisions to the Recognition of Financial Collateral 2. Changes to Holding Periods and the Margin Period of Risk 3. Changes to the Internal Models Methodology (IMM) 4. Credit Valuation Adjustments 5. Cleared Transactions (Central Counterparties) 6. Stress period for Own Internal Estimates B. Removal of Credit Ratings C. Proposed Revisions to the Treatment of Securitization Exposures 1. Definitions 2. Operational Criteria for Recognizing Risk Transference in Traditional Securitizations 3. Proposed Revisions to the Hierarchy of Approaches 4. Guarantees and Credit Derivatives Referencing a Securitization Exposure 5. Due Diligence Requirements for Securitization Exposures 6. Nth-to-Default Credit Derivatives D. Treatment of Exposures Subject to Deduction E. Technical Amendments to the Advanced Approaches Rule 1. Eligible Guarantees and Contingent U.S. Government Guarantees 2. Calculation of Foreign Exposures for Applicability of the Advanced Approaches—Insurance Underwriting Subsidiaries 3. Calculation of Foreign Exposures for Applicability of the Advanced Approaches—Changes to FFIEC 009 4. Applicability of the Rule 5. Change to the Definition of Probability of Default Related to Seasoning 6. Cash Items in Process of Collection 7. Change to the Definition of Qualified Revolving Exposure 8. Trade-Related Letters of Credit F. Pillar 3 Disclosures 1. Frequency and Timeliness of Disclosures 2. Enhanced Securitization Disclosure Requirements 3. Equity Holding That Are Not Covered Positions III. Market Risk Capital Rule IV. List of Acronyms V. Regulatory Flexibility Act Analysis VI. Paperwork Reduction Act VII. Plain Language VIII. OCC Unfunded Mandates Reform Act of 1995 Determination I. Introduction

The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are issuing this notice of proposed rulemaking (NPR, proposal, or proposed rule) to revise the advanced approaches risk-based capital rule (advanced approaches rule) to incorporate certain aspects of “Basel III: A global regulatory framework for more resilient banks and banking systems” (Basel III). This NPR also proposes to revise the advanced approaches rule to incorporate other revisions to the Basel capital framework published by the Basel Committee on Banking Supervision (BCBS) in a series of documents between 2009 and 20111 and subsequent consultative papers. The proposal would also address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), and incorporate certain technical amendments to the existing requirements.2

1The BCBS is a committee of banking supervisory authorities, which was established by the central bank governors of the G-10 countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Documents issued by the BCBS are available through the Bank for International Settlements Web site athttp://www.bis.org. Basel III was published in December 2010 and revised in June 2011. The text is available athttp://www.bis.org/publ/bcbs189.htm.

2Public Law 111-203, 124 Stat. 1376 (July 21, 2010) (Dodd-Frank Act).

In this NPR, the Board also proposes applying the advanced approaches rule and the market risk rule to savings and loan holding companies, and the Board, FDIC, and OCC propose applying the market risk capital rule to savings and loan holding companies and to state and federal savings associations, respectively. In addition, this NPR would codify the market risk rule in a manner similar to the other regulatory capital rules in the three proposals. In a separateFederal Registernotice, also published today, the agencies are finalizing changes to the market risk rule. As described in more detail below, the agencies are proposing changes to the advanced approaches rule in a manner consistent with the BCBS requirements, including the requirements introduced by the BCBS in “Enhancements to the Basel II framework” (2009 Enhancements) in July 2009 and in Basel III.3 The main proposed revisions to the advanced approaches rule are related to treatment of counterparty credit risk, the securitization framework, and disclosure requirements.

3 See“Enhancements to the Basel II framework” (July 2009), available athttp://www.bis.org/publ/bcbs157.htm.

Consistent with Basel III, the proposal seeks to ensure that counterparty credit risk, credit valuation adjustments (CVA), and wrong-way risk are incorporated adequately into the agencies' regulatory capital requirements. More specifically, the NPR would establish a capital requirement for the market value of counterparty credit risk; propose a more risk-sensitive approach for certain transactions with central counterparties, including the treatment of default fund contributions to central counterparties; and make certain adjustments to the methodologies used to calculate counterparty credit risk requirements. In addition, consistent with the “2009 Enhancements,” the agencies propose strengthening the risk-based capital requirements for certain securitization exposures by requiring banking organizations that are subject to the advanced approaches rule to conduct more rigorous credit analysis of securitization exposures and enhancing the disclosure requirements related to these exposures.

In addition to the incorporation of the BCBS standards, the agencies are proposing changes to the advanced approaches rule in a manner consistent with the Dodd-Frank Act, by removing references to, or requirements of reliance on, credit ratings from their regulations.4 Accordingly, the agencies are proposing to remove the ratings-based approach and the internal assessment approach for securitization exposures from the advanced approaches rule and require advanced approaches banking organizations to use either the supervisory formula approach (SFA) or a simplified version of the SFA when calculating capital requirements for securitization exposures. The agencies also are proposing to remove references to ratings from certain defined terms under the advanced approaches rule and replace them with alternative standards of creditworthiness. Finally, the proposed rule contains a number of proposed technical amendments that would clarify or adjust existing requirements under the advanced approaches rule.

4 Seesection 939A of Dodd-Frank Act (15 U.S.C. 78o-7 note).

In addition, in today'sFederal Register, the agencies are publishing two separate notices of proposed rulemaking that are both relevant to the calculation of capital requirements for institutions using the advanced approaches rule. The notice titled “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action” (Basel III NPR), which is applicable to all banking organizations, would revise the definition of capital (the numerator of the risk-based capital ratios), establish the new minimum ratio requirements, and make other changes to the agencies' general risk-based capital rules related to regulatory capital. In addition, the Basel III NPR proposes that certain elements of Basel III apply only to institutions using the advanced approaches rule, including a supplementary Basel III leverage ratio and a countercyclical capital buffer. The Basel III NPR also includes transition provisions for banking organizations to come into compliance with the requirements of that proposed rule.

The notice titled “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements” (Standardized Approach NPR) would also apply to all banking organizations. In the Standardized Approach NPR, the agencies are proposing to revise and harmonize their rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating aspects of the BCBS' Basel II standardized framework, changes proposed in recent consultative papers published by the BCBS and alternatives to credit ratings, consistent with section 939A of the Dodd-Frank Act. The revisions include methodologies for determining risk-weighted assets for residential mortgages, securitization exposures, andcounterparty credit risk. The Standardized Approach NPR also would introduce disclosure requirements that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets, including disclosures related to regulatory capital instruments.

The requirements proposed in the Basel III NPR and Standardized Approach NPR, as well as the market risk capital rule in this proposal, are proposed to become the “generally applicable” capital requirements for purposes of section 171 of the Dodd-Frank Act because they would be the capital requirements applied to insured depository institutions under section 38 of the Federal Deposit Insurance Act, without regard to asset size or foreign financial exposure. Banking organizations that are or would be subject to the advanced approaches rule (advanced approaches banking organizations) or the market risk rule should also review the Basel III NPR and Standardized Approach NPR.

II. Risk-Weighted Assets—Proposed Modifications to the Advanced Approaches A. Counterparty Credit Risk

The recent financial crisis highlighted certain aspects of the treatment of counterparty credit risk under the Basel II framework that were inadequate and of banking organizations' risk management of counterparty credit risk that were insufficient. The Basel III revisions would address both areas of weakness by ensuring that all material on- and off-balance sheet counterparty risks, including those associated with derivative-related exposures, are appropriately incorporated into banking organizations' risk-based capital ratios. In addition, new risk management requirements in Basel III strengthen the oversight of counterparty credit risk exposures. The agencies are proposing the counterparty credit risk revisions in a manner generally consistent with Basel III, modified to incorporate alternative standards to the use of credit ratings. The discussion below highlights these revisions.

1. Revisions to the Recognition of Financial Collateral Eligible Financial Collateral

The exposure-at-default (EAD) adjustment approach under section 132 of the proposed rules permits a banking organization to recognize the credit risk mitigation benefits of eligible financial collateral by adjusting the EAD to the counterparty. Such approaches include the collateral haircut approach, simple Value-at-Risk (VaR) approach and the internal models methodology (IMM).

Consistent with Basel III, the agencies are proposing to modify the definition of financial collateral so that resecuritizations would no longer qualify as eligible financial collateral under the advanced approaches rule. Thus, resecuritization collateral could not be used to adjust the EAD of an exposure. The agencies believe that this treatment is appropriate because resecuritizations have been shown to have more market value volatility than other collateral types. During the recent financial crisis, the market volatility of resecuritization exposures made it difficult for resecuritizations to serve as a source of liquidity because banking organizations were unable to sell those positions without incurring substantial loss or to use them as collateral for secured lending transactions.

Under the proposal, a securitization in which one or more of the underlying exposures is a securitization position would be considered a resecuritization. A resecuritization position under the proposal means an on- or off-balance sheet exposure to a resecuritization, or an exposure that directly or indirectly references a resecuritization exposure.

Consistent with these changes excluding less liquid collateral from the definition of financial collateral, the agencies also propose that conforming residential mortgages no longer qualify as financial collateral under the advanced approaches rule. As a result, under this proposal, a banking organization would no longer be able to recognize the credit risk mitigation benefit of such instruments through an adjustment to EAD. In addition, also consistent with the Basel framework, the agencies propose to exclude all debt securities that are not investment grade from the definition of financial collateral. As discussed in section II (B) of this preamble, the agencies are proposing to revise the definition of “investment grade” for both the advanced approaches rule and market risk capital rule.

Revised Supervisory Haircuts

As reflected in Basel III, securitization exposures have increased levels of volatility relative to other collateral types. To address this issue, Basel III incorporates new standardized supervisory haircuts for securitization exposures in the EAD adjustment approach based on the credit rating of the exposure. Consistent with section 939A of the Dodd Frank Act, the agencies are proposing an alternative approach to assigning standard supervisory haircuts for securitization exposures, and are also proposing to amend the standard supervisory haircuts for other types of financial collateral to remove the references to credit ratings.

Under the proposal, as outlined in table 1 below, the standard supervisory market price volatility haircuts would be revised based on the applicable risk weight of the exposure calculated under the standardized approach. Supervisory haircuts for exposures to sovereigns, government-sponsored entities, public sector entities, depository institutions, foreign banks, credit unions, and corporate issuers would be calculated based upon the risk weights for such exposures described under section 32 of the Standardized Approach NPR. The proposed table for the standard supervisory market price volatility haircuts would be revised as follows:

Table 1—Standard Supervisory Market Price Volatility Haircuts1 Residual maturity Haircut (in percents) assigned based on: Sovereign issuers risk weight under § ___.322 Zero% 20% or 50% 100% Non-sovereign issuers risk weight under § ___.32 20% 50% 100% Investment grade securitization exposures
  • (in percent)
  • Less than or equal to 1 year 0.5 1.0 15.0 1.0 2.0 25.0 4.0 Greater than 1 year and less than or equal to 5 years 2.0 3.0 15.0 4.0 6.0 25.0 12.0 Greater than 5 years 4.0 6.0 15.0 8.0 12.0 25.0 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 1The market price volatility haircuts in Table 2 are based on a 10 business-day holding period. 2Includes a foreign PSE that receives a zero percent risk weight.

    The agencies are also proposing to clarify that if a banking organization lends instruments that do not meet the definition of financial collateral used in the Standardized Approach NPR and the advanced approaches rule (as modified by the proposal), such as non-investment grade corporate debt securities or resecuritization exposures, the haircut applied to the exposure would be the same as the haircut for equity that is publicly traded but which is not part of a main index.

    Question 1:The agencies solicit comments on the proposed changes to the recognition of financial collateral under the advanced approaches rule.

    2. Changes to Holding Periods and the Margin Period of Risk

    During the financial crisis, many financial institutions experienced significant delays in settling or closing-out collateralized transactions, such as repo-style transactions and collateralized over-the-counter (OTC) derivatives. The assumed holding period for collateral in the collateral haircut and simple VaR approaches and the margin period of risk in the IMM under Basel II proved to be inadequate for certain transactions and netting sets.5 It also did not reflect the difficulties and delays experienced by institutions when settling or liquidating collateral during a period of financial stress.

    5Under the advanced approaches rule, the margin period of risk means, with respect to a netting set subject to a collateral agreement, the time period from the most recent exchange of collateral with a counterparty until the next required exchange of collateral plus the period of time required to sell and realize the proceeds of the least liquid collateral that can be delivered under the terms of the collateral agreement and, where applicable, the period of time required to re-hedge the resulting market risk, upon the default of the counterparty.See12 CFR part 3, appendix C, and part 167, appendix C (OCC); 12 CFR part 208, appendix F, and 12 CFR part 225, appendix G (Board); 12 CFR part 325, appendix D, and 12 CFR part 390, subpart Z, appendix A (FDIC).

    Under Basel II, the minimum assumed holding period for collateral and margin period of risk are five days for repo-style transactions, and ten days for other collateralized transactions where liquid financial collateral is posted under a daily margin maintenance requirement. Under Basel III, a banking organization must assume a holding period of 20 business days under the collateral haircut or simple VaR approaches, or must assume a margin period of risk under the IMM of 20 business days for netting sets where: (1) The number of trades exceeds 5,000 at any time during the quarter (except if the counterparty is a central counterparty (CCP) or the netting set consists of cleared transactions with a clearing member); (2) one or more trades involves illiquid collateral posted by the counterparty; or (3) the netting set includes any OTC derivatives that cannot be easily replaced.

    For purposes of determining whether collateral is illiquid or an OTC derivative cannot be easily replaced for these purposes, a banking organization could, for example, assess whether, during a period of stressed market conditions, it could obtain multiple price quotes within two days or less for the collateral or OTC derivative that would not move the market or represent a market discount (in the case of collateral) or a premium (in the case of an OTC derivative).

    If, over the two previous quarters, more than two margin disputes on a netting set have occurred that lasted longer than the holding period or margin period of risk used in the EAD calculation, then a banking organization would use a holding period or a margin period of risk for that netting set that is at least two times the minimum holding period that would otherwise be used for that netting set. Margin disputes occur when the banking organization and its counterparty do not agree on the value of collateral or on the eligibility of the collateral provided. In addition, such disputes also can occur when a banking organization and its counterparty disagree on the amount of margin that is required, which could result from differences in the valuation of a transaction, or from errors in the calculation of the net exposure of a portfolio (for instance, if a transaction is incorrectly included or excluded from the portfolio).

    Consistent with Basel III, the agencies propose to amend the advanced approaches rule to incorporate these adjustments to the holding period in the collateral haircut and simple VaR approaches, and to the margin period of risk in the IMM that a banking organization may use to determine its capital requirement for repo-style transactions, OTC derivative transactions, or eligible margin loans. For cleared transactions, which are discussed below, the agencies propose that a banking organization not be required to adjust the holding period or margin period of risk upward when determining the capital requirement for its counterparty credit risk exposures to the central counterparty, which is also consistent with Basel III.

    Question 2:The agencies solicit comments on the proposed changes to holding periods and margin periods of risk.

    3. Changes to the Internal Models Methodology

    During the recent financial crisis, increased volatility in the value of derivative positions and collateral led to higher counterparty exposures than amounts estimated by banking organizations' internal models. To address this issue, under Basel III, whenusing the IMM, banking organizations are required to determine their capital requirements for counterparty credit risk using stressed inputs. Consistent with Basel III, the agencies propose to amend the advanced approaches rule so that the capital requirement for IMM exposures would be equal to the larger of the capital requirement for those exposures calculated using data from the most recent three-year period and data from a three-year period that contains a period of stress reflected in the credit default spreads of the banking organization's counterparties.

    Under the proposal, an IMM exposure would be defined as a repo-style transaction, eligible margin loan, or OTC derivative for which a banking organization calculates its EAD using the IMM. A banking organization would be required to demonstrate to the satisfaction of the banking organization's primary federal supervisor at least quarterly that the stress period coincides with increased credit default swap (CDS) spreads, or other credit spreads of its counterparties and have procedures to evaluate the effectiveness of its stress calibration. These procedures would be required to include a process for using benchmark portfolios that are vulnerable to the same risk factors as the banking organization's portfolio. In addition, the primary federal supervisor could require a banking organization to modify its stress calibration if the primary federal supervisor believes that another calibration would better reflect the actual historic losses of the portfolio.

    Consistent with Basel III, the agencies are proposing to require a banking organization to subject its internal models to an initial validation and annual model review process. As part of the model review process, the agencies propose that a banking organization would need to have a backtesting program for its model that includes a process by which unacceptable model performance would be identified and remedied. In addition, the agencies propose that when a banking organization multiplies expected positive exposure (EPE) by the default scaling factor alpha of 1.4 when calculating EAD, the primary federal supervisor may require the banking organization to set that alpha higher based on the performance of the banking organization's internal model.

    The agencies also are proposing to require a banking organization to have policies for the measurement, management, and control of collateral, including the reuse of collateral and margin amounts, as a condition of using the IMM. Under the proposal, a banking organization would be required to have a comprehensive stress testing program that captures all credit exposures to counterparties and incorporates stress testing of principal market risk factors and the creditworthiness of its counterparties.

    Under Basel II, a banking organization was permitted to capture within its internal model the effect on EAD of a collateral agreement that requires receipt of collateral when the exposure to the counterparty increases. Basel II also contained a “shortcut” method to provide a banking organization whose internal model did not capture the effects of collateral agreements with a method to recognize some benefit from the collateral agreement. Basel III modifies that “shortcut” method by setting effective EPE to a counterparty as the lesser of the following two exposure calculations: (1) The exposure without any held or posted margining collateral, plus any collateral posted to the counterparty independent of the daily valuation and margining process or current exposure, or (2) an add-on that reflects the potential increase of exposure over the margin period of risk plus the larger of (i) the current exposure of the netting set reflecting all collateral received or posted by the banking organization excluding any collateral called or in dispute; or (ii) the largest net exposure (including all collateral held or posted under the margin agreement) that would not trigger a collateral call. The add-on would be computed as the largest expected increase in the netting set's exposure over any margin period of risk in the next year. The agencies propose to include the Basel III modification of the “shortcut” method in this NPR.

    Recognition of Wrong-way Risk

    The financial crisis also highlighted the interconnectedness of large financial institutions through an array of complex transactions. To recognize this interconnectedness and to mitigate the risk of contagion from the banking sector to the broader financial system and the general economy, Basel III includes enhanced requirements for the recognition and treatment of wrong-way risk in the IMM. The proposed rule would define wrong-way risk as the risk that arises when an exposure to a particular counterparty is positively correlated with the probability of default of such counterparty itself.

    The agencies are proposing enhancements to the advanced approaches rule that would require banking organizations' risk management procedures to identify, monitor, and control wrong-way risk throughout the life of an exposure. These risk management procedures should include the use of stress testing and scenario analysis. In addition, where a banking organization has identified an IMM exposure with specific wrong-way risk, the banking organization would be required to treat that transaction as its own netting set. Specific wrong-way risk is a type of wrong way risk that arises when either the counterparty and issuer of the collateral supporting the transaction, or the counterparty and the reference asset of the transaction, are affiliates or are the same entity.

    In addition, where a banking organization has identified an OTC derivative transaction, repo-style transaction, or eligible margin loan with specific wrong-way risk for which the banking organization would otherwise apply the IMM, the banking organization would insert the probability of default (PD) of the counterparty and a loss given default (LGD) equal to 100 percent into the appropriate risk-based capital formula specified in table 1 of section 131 of the proposed rule, then multiply the output of the formula (K) by an alternative EAD based on the transaction type, as follows:

    (1) For a purchased credit derivative, EAD would be the fair value of the underlying reference asset of the credit derivative contract;

    (2) For an OTC equity derivative,6 EAD would be the maximum amount that the banking organization could lose if the fair value of the underlying reference asset decreased to zero;

    6Equity derivatives that are call options are not subject to a counterparty credit risk capital requirement for specific wrong-way risk.

    (3) For an OTC bond derivative (that is, a bond option, bond future, or any other instrument linked to a bond that gives rise to similar counterparty credit risks), EAD would be the smaller of the notional amount of the underlying reference asset and the maximum amount that the banking organization could lose if the fair value of the underlying reference asset decreased to zero; and

    (4) For repo-style transactions and eligible margin loans, EAD would be calculated using the formula in the collateral haircut approach of section 132 and with the estimated value of the collateral substituted for the parameter C in the equation.

    Question 3:The agencies solicit comment on the appropriateness of the proposed calculation of capital requirements for OTC equity or bond derivatives with specific wrong-way risk. What alternatives should be madeavailable to banking organizations in order to calculate the EAD in such cases? What challenges would a banking organization face in estimating the EAD for OTC derivative transactions with specific wrong-way risk if the agencies were to permit a banking organization to use its incremental risk model that meets the requirements of section 8 of the market risk rule instead of the proposed alternatives?

    Increased Asset Value Correlation Factor

    To recognize the correlation of financial institutions' creditworthiness attributable to similar sensitivities to common risk factors, the agencies are proposing to incorporate the Basel III increase in the correlation factor used in the formula provided in table 1 of section 131 of the proposed rule for certain wholesale exposures. Under the proposed rule, banking organizations would apply a multiplier of 1.25 to the correlation factor for wholesale exposures to unregulated financial institutions that generate a majority of their revenue from financial activities, regardless of asset size. This category would include highly leveraged entities such as hedge funds and financial guarantors. In addition, banking organizations would apply a multiplier of 1.25 to the correlation factor for wholesale exposures to regulated financial institutions with consolidated assets of greater than or equal to $100 billion.

    The proposed definitions of “financial institution” and “regulated financial institution” are set forth and discussed in the Basel III NPR.

    4. Credit Valuation Adjustments

    CVA is the fair value adjustment to reflect counterparty credit risk in the valuation of an OTC derivative contract. The BCBS reviewed the treatment of counterparty credit risk and found that roughly two-thirds of counterparty credit risk losses during the crisis were due to marked-to-market losses from CVA, while one-third of counterparty credit risk losses resulted from actual defaults. Basel II addressed counterparty credit risk as a combination of default risk and credit migration risk. Credit migration risk accounts for market value losses resulting from deterioration of counterparties' credit quality short of default and is addressed in Basel II via the maturity adjustment multiplier. However, the maturity adjustment multiplier in Basel II was calibrated for loan portfolios and may not be suitable for addressing CVA risk. Accordingly, Basel III requires banking organizations to directly reflect CVA risk through an additional capital requirement.

    The Basel III CVA capital requirement would reflect the CVA due to changes of counterparties' credit spreads, assuming fixed expected exposure (EE) profiles. Basel III provides two approaches for calculating the CVA capital requirement: the simple approach and the advanced CVA approach. The agencies are proposing both approaches for calculating the CVA capital requirement (subject to certain requirements discussed below), but without references to credit ratings.

    Only a banking organization that is subject to the market risk capital rule and has obtained prior approval from its primary federal supervisor to calculate both the EAD for OTC derivative contracts using the IMM described in section 132 of the proposed rule, and the specific risk add-on for debt positions using a specific risk model described in section 207(b) of subpart F would be eligible to use the advanced CVA approach. A banking organization that receives such approval would continue to use the advanced CVA approach until it notifies its primary federal supervisor in writing that it expects to begin calculating its CVA capital requirement using the simple CVA approach. The notice would include an explanation from the banking organization as to why it is choosing to use the simple CVA approach and the date when the banking organization would begin to calculate its CVA capital requirement using the simple CVA approach.

    Under the proposal, when calculating a CVA capital requirement, a banking organization would be permitted to recognize the hedging benefits of single name CDS, single name contingent CDS, index CDS (CDSind), and any other equivalent hedging instrument that references the counterparty directly, provided that the equivalent hedging instrument is managed as a CVA hedge in accordance with the banking organization's hedging policies. Consistent with Basel III, under this NPR, a tranched or nth-to-default CDS would not qualify as a CVA hedge. In addition, the agencies propose that any position that is recognized as a CVA hedge would not be a covered position under the market risk capital rule, except in the case where the banking organization is using the advanced CVA approach, the hedge is a CDSind, and the VaR model does not capture the basis between the spreads of the index that is used as the hedging instrument and the hedged counterparty exposure over various time periods, as discussed in further detail below.

    To convert the CVA capital requirement to a risk-weighted asset amount, a banking organization would multiply its CVA capital requirement by 12.5. Under the proposal, because the CVA capital requirement reflects market risk, the CVA risk-weighted asset amount would not be a component of credit risk-weighted assets and therefore would not be subject to the 1.06 multiplier for credit risk-weighted assets.

    Simple CVA Approach

    The agencies are proposing the Basel III formula for the simple CVA approach to calculate the CVA capital requirement (KCVA), with a modification in a manner consistent with section 939A of the Dodd-Frank Act. A banking organization would use the formula below to calculate its CVA capital requirement for OTC derivative transactions. The banking organization would calculate KCVAas the square root of the sum of the capital requirement for each of its OTC derivative counterparties multiplied by 2.33. The simple CVA approach is based on an analytical approximation derived from a general CVA VaR formulation under a set of simplifying assumptions:

    • All credit spreads have a flat term structure;

    • All credit spreads at the time horizon have a lognormal distribution;

    • Each single name credit spread is driven by the combination of a single systematic factor and an idiosyncratic factor;

    • The correlation between any single name credit spread and the systematic factor is equal to 0.5;

    • All credit indices are driven by the single systematic factor; and

    • The time horizon is short (the square root of time scaling to 1 year is applied in the end).

    The approximation is based on the linearization of the dependence of both CVA and CDS hedges on credit spreads. Given the assumptions listed above (most notably, the single-factor assumption), CVA VaR can be expressed using an analytical formula. The formula of the simple CVA approach is obtained by applying certain standardizations, conservative adjustments, and scaling to the analytical CVA VaR result.

    A banking organization would calculate KCVA, where:

    EP30AU12.023

    In Formula 1, wirefers to the weight applicable to counterparty i assigned according to Table 2 below.7 In Basel III, the BCBS assigned wibased on the external rating of the counterparty. However, to comply with the Dodd-Frank requirement to remove references to ratings, the agencies propose to assign wibased on the relevant PD of the counterparty, as assigned by the banking organization. Windin Formula 1 refers to the weight applicable to the CDSindbased on the average weight under Table 2 of the underlying reference names that comprise the index.

    7These weights represent the assumed values of the product of a counterparties' current credit spread and the volatility of that credit spread.

    Table 2—Assignment of Counterparty Weight Under the Simple CVA Internal PD
  • (in percent)
  • Weight Wind
  • (in percent)
  • 0.00-0.07 0.70 >0.07-0.15 0.80 >0.15-0.40 1.00 >0.4-2.00 2.00 >2.0—6.00 3.00 >6.0 10.00

    EADi totalin Formula 1 refers to the sum of the EAD for all netting sets of OTC derivative contracts with counterparty i calculated using the current exposure methodology described in section 132(c) of the proposed rule as adjusted by Formula 2 or the IMM described in section 132(d) of the proposed rule. When the banking organization calculates EAD using the IMM, EADi totalequals EADunstressed.

    EP30AU12.024

    Miin Formulas1 and 2 refers to the EAD-weighted average of the effective maturity of each netting set with counterparty i (where each netting set's M cannot be smaller than one). Mi hedgein Formula 1 refers to the notional weighted average maturity of the hedge instrument. Mindin Formula 1 equals the maturity of the CDSindor the notional weighted average maturity of any CDSindpurchased to hedge CVA risk of counterparty i.

    8The term “exp” is the exponential function.

    Biin Formula 1 refers to the sum of the notional amounts of any purchased single name CDS referencing counterpartyithat is used to hedge CVA risk to counterpartyimultiplied by (1-exp(−0.05 × Mi hedge))/(0.05 × Mi hedge). Bindin Formula 1 refers to the notional amount of one or more CDSindpurchased as protection to hedge CVA risk for counterpartyimultiplied by (1-exp(−0.05 × Mind))/(0.05 × Mind). A banking organization would be allowed to treat the notional amount in the index attributable to that counterparty as a single name hedge of counterpartyi(Bi,) when calculating KCVAand subtract the notional amount of Bifrom the notional amount of the CDSind.The banking organization would be required to then calculate its capital requirement for the remaining notional amount of the CDSindas a stand-alone position.

    Advanced CVA Approach

    Under the advanced CVA approach, a banking organization would use the VaR model it uses to calculate specific risk under section 205(b) of subpart F or another model that meets the quantitative requirements of sections 205(b) and 207(b) of subpart F to calculate its CVA capital requirement for a counterparty by modeling the impact of changes in the counterparty's credit spreads, together with any recognized CVA hedges on the CVA for the counterparty. A banking organization's total capital requirement for CVA equals the sum of the CVA capital requirements for each counterparty.

    The agencies are proposing that the VaR model incorporate only changes in the counterparty's credit spreads, not changes in other risk factors. The banking organization would not be required to capture jump-to-default risk in its VaR model. A banking organization would be required to include any immaterial OTC derivative portfolios for which it uses the current exposure methodology by using the EAD calculated under the current exposure methodology as a constant EE in the formula for the calculation of CVA and setting the maturity equal to the greater of half of the longest maturity occurring in the netting set and the notional weighted average maturity of all transactions in the netting set.

    In order for a banking organization to receive approval to use the advanced CVA approach, under the NPR, thebanking organization would need to have the systems capability to calculate the CVA capital requirement on a daily basis, but would not be expected or required to calculate the CVA capital requirement on a daily basis.

    The CVA capital requirement under the advanced CVA approach would be equal to the general market risk capital requirement of the CVA exposure using the ten-business-day time horizon of the revised market risk framework. The capital requirement would not include the incremental risk requirement of subpart F. The agencies propose to require a banking organization to use the Basel III formula for the advanced CVA approach to calculate KCVAas follows:

    EP30AU12.025 In Formula 3: (A) ti= the time of the i-th revaluation time bucket starting from t0= 0. (B) tT= the longest contractual maturity across the OTC derivative contracts with the counterparty. (C) si= the CDS spread for the counterparty at tenor tiused to calculate the CVA for the counterparty. If a CDS spread is not available, the banking organization would use a proxy spread based on the credit quality, industry and region of the counterparty. (D) LGDMKT= the loss given default of the counterparty based on the spread of a publicly traded debt instrument of the counterparty, or, where a publicly traded debt instrument spread is not available, a proxy spread based on the credit quality, industry and region of the counterparty. (E) EEi= the sum of the expected exposures for all netting sets with the counterparty at revaluation time ticalculated using the IMM. (F) Di= the risk-free discount factor at time ti,where D0= 1. (G) Exp is the exponential function.

    Under the proposal, if a banking organization's VaR model is not based on full repricing, the banking organization would use either Formula 4 or Formula 5 to calculate credit spread sensitivities. If the VaR model is based on credit spread sensitivities for specific tenors, the banking organization would calculate each credit spread sensitivity according to Formula 4:

    EP30AU12.026

    If the VaRmodel uses credit spread sensitivities to parallel shifts in credit spreads, the banking organization would calculate each credit spread sensitivity according to Formula 5:

    EP30AU12.027

    9For the final time bucket, i = T.

    To calculate the CVAUnstressedVARmeasure in Formula 3, a banking organization would use the EE for a counterparty calculated using current market data to compute current exposures and would estimate model parameters using the historical observation period required under section 205(b)(2) of subpart F. However, if a banking organization uses the shortcut method described in section 132(d)(5) of the proposed rule to capture the effect of a collateral agreement when estimating EAD using the IMM, the banking organization would calculate the EE for the counterparty using that method and keep that EE constant with the maturity equal to the maximum of half of the longest maturity occurring in the netting set, and the notional weighted average maturity of all transactions in the netting set.

    To calculate the CVAStressedVARmeasure in Formula 3, the banking organization would use the EEifor a counterparty calculated using the stress calibration of the IMM. However, if a banking organization uses the shortcut method described in section 132(d)(5) of the proposed rule to capture the effect of a collateral agreement when estimating EAD using the IMM, the banking organization would calculate the EEifor the counterparty using that method and keep that EEiconstant with the maturity equal to the greater of half of the longest maturity occurring in the netting set with the notional amount equal to the weighted average maturity of all transactions in the netting set. Consistent with Basel III, the agencies propose to require a banking organization to calibrate the VaR model inputs to historical data from the most severe twelve-month stress period contained within the three-year stress period used to calculate EEi. However, the agencies propose to retain the flexibility to require a banking organization to use a different period of significant financial stress in the calculation of the CVAStressedVARmeasure that would better reflect actual historic losses of the portfolio.

    Under the NPR, a banking organization's VaR model would be required to capture the basis between the spreads of the index that is used as the hedging instrument and the hedged counterparty exposure over various time periods, including benign and stressed environments. If the VaR model does not capture that basis, the banking organization would be permitted to reflect only 50 percent of the notional amount of the CDSindhedge in the VaR model. The remaining 50 percent of the notional amount of the CDSindhedge would be a covered position under the market risk capital rule.

    Question 4:The agencies solicit comments on the proposed CVA capital requirements, including the simple CVA approach and the advanced CVA approach.

    5. Cleared Transactions (Central Counterparties)

    CCPs help improve the safety and soundness of the derivatives and repo-style transaction markets through the multilateral netting of exposures, establishment and enforcement of collateral requirements, and market transparency. Under the current advanced approaches rule, exposures to qualifying central counterparties (QCCPs) received a zero percent risk weight. However, when developing Basel III, the BCBS recognized that as more derivatives and repo-style transactions move to CCPs, the potential for systemic risk increases. To address these concerns, the BCBS has sought comment on a specific capital requirement for such transactions with CCPs and a more risk-sensitive approach for determining a capital requirement for a banking organization's contributions to the default funds of these CCPs. The BCBS also has sought comment on a preferential capital treatment for exposures arising from derivative and repo-style transactions with, and related default fund contributions to, CCPs that meet the standards established by the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO).10 The treatment for exposures that arise from the settlement of cash transactions (such as equities, fixed income, spot (FX), and spot commodities) with a QCCP where there is no assumption of ongoing counterparty credit risk by the QCCP after settlement of the trade and associated default fund contributions remains unchanged.

    10 SeeCPSS, “Recommendations for Central Counterparties,” (November 2004),available at http://www.bis.org/publ/cpss64.pdf?

    A banking organization that is a clearing member, a term that is defined in the Basel III NPR as a member of, or direct participant in, a CCP that is entitled to enter into transactions with the CCP, or a clearing member client, proposed to be defined as a party to a cleared transaction associated with a CCP in which a clearing member acts either as a financial intermediary with respect to the party or guarantees the performance of the party to the CCP, would first calculate its trade exposure for a cleared transaction. The trade exposure amount for a cleared transaction would be determined as follows:

    (1) For a cleared transaction that is a derivative contract or netting set of derivative contracts, the trade exposure amount equals:

    (i) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the methodology used to calculate exposure amount for OTC derivative contracts under section 132(c) or 132(d) of this NPR, plus

    (ii) The fair value of the collateral posted by the banking organization and held by the CCP or a clearing member in a manner that is not bankruptcy remote.

    (2) For a cleared transaction that is a repo-style transaction, the trade exposure amount equals:

    (i) The exposure amount for the repo-style transaction calculated using the methodologies under sections 132(b)(2), 132(b)(3) or 132(d) of this NPR, plus

    (ii) The fair value of the collateral posted by the banking organization and held by the CCP or a clearing member in a manner that is not bankruptcy remote.

    When the banking organization calculates EAD under the IMM, EAD would be calculated using the most recent three years of historical data, that is, EADunstressed. Trade exposure would not include any collateral held by a custodian in a manner that is bankruptcy remote from the CCP.

    Under the proposal, a clearing member banking organization would apply a risk weight of 2 percent to its trade exposure amount with a QCCP. The proposed definition of QCCP is discussed in the Standardized Approach NPR preamble. A banking organization that is a clearing member client would apply a 2 percent risk weight to the trade exposure amount if:

    (1) The collateral posted by the banking organization to the QCCP or clearing member is subject to an arrangement that prevents any losses to the clearing member due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and

    (2) The clearing member client has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from default or a receivership, insolvency, or liquidation proceeding) the relevant court and administrative authoritieswould find the arrangements to be legal, valid, binding, and enforceable under the law of the relevant jurisdiction, provided certain additional criteria are met.

    The agencies believe that omnibus accounts (that is, accounts that are generally established by clearing entities for non-clearing members) in the United States would satisfy these requirements because of the protections afforded client accounts under certain regulations of the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC).11 If the criteria above are not met, a banking organization that is a clearing member client would apply a risk weight of 4 percent to the trade exposure amount.

    11 SeeSecurities Investor Protection Act of 1970, 15 U.S.C Section 78aaa—78lll; 17 CFR part 300; 17 CFR part 190.

    For a cleared transaction with a CCP that is not a QCCP, a clearing member and a banking organization that is a clearing member client would risk weight the trade exposure according to the risk weight applicable to the CCP under the Standardized Approach NPR.

    Collateral posted by a clearing member or clearing member client banking organization that is held in a manner that is bankruptcy remote from the CCP would not be subject to a capital requirement for counterparty credit risk. As with all posted collateral, the banking organization would continue to have a capital requirement for any collateral provided to a CCP or a custodian in connection with a cleared transaction.

    Under the proposal, a cleared transaction would not include an exposure of a banking organization that is a clearing member to its clearing member client where the banking organization is either acting as a financial intermediary and enters into an offsetting transaction with a CCP or where the banking organization provides a guarantee to the CCP on the performance of the client. Such a transaction would be treated as an OTC derivative transaction. However, the agencies recognize that this treatment may create a disincentive for banking organizations to act as intermediaries and provide access to CCPs for clients. As a result, the agencies are considering approaches that could address this disincentive while at the same time appropriately reflect the risks of these transactions. For example, one approach would allow banking organizations that are clearing members to adjust the EAD calculated under section 132 downward by a certain percentage or, for banking organizations using the IMM, to adjust the margin period of risk. International discussions are ongoing on this issue, and the agencies would expect to revisit the treatment of these transactions in the event that the BCBS revises its treatment of these transactions.

    Default Fund Contribution

    The agencies are proposing that, under the advanced approaches rule, a banking organization that is a clearing member of a CCP calculate its capital requirement for its default fund contributions at least quarterly or more frequently upon material changes to the CCP. Banking organizations seeking more information on the proposed risk-based capital treatment of default fund contributions should refer to the preamble of the Standardized Approach NPR.

    Question 5:The agencies request comment on the proposed treatment of cleared transactions. The agencies solicit comment on whether the proposal provides an appropriately risk-sensitive treatment of a transaction between a banking organization that is a clearing member and its client and a clearing member's guarantee of its client's transaction with a CCP by treating these exposures as OTC derivative contracts. The agencies also request comment on whether the adjustment of the exposure amount would address possible disincentives for banking organizations that are clearing members to facilitate the clearing of their clients' transactions. What other approaches should the agencies consider and why?

    Question 6:The agencies are seeking comment on the proposed calculation of the risk-based capital for cleared transactions, including the proposed risk-based capital requirements for exposures to a QCCP. Are there specific types of exposures to certain QCCPs that would warrant an alt