Bank Capital Requirements: Federal Bank Regulators Finalize Standardized Approach for Calculating the Exposure Amount of Derivative Contracts

Sullivan & Cromwell LLP - December 10, 2019
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On November 19, the Federal Reserve Board, the FDIC and the OCC issued a final rule (the “Final Rule”), amending their capital rules, that will implement a new standardized approach for calculating the amount of counterparty credit risk (“SA-CCR”) exposure arising out of  derivative contracts.  The Final Rule contains some modifications to the proposed rule issued by the agencies on October 30, 2018, and published in the Federal Register on December 17, 2018 (the “Proposal”).  The agencies note that SA-CCR is intended to improve the risk-sensitivity and calibration of counterparty credit risk capital requirements relative to the existing U.S. standardized approach, the current exposure method, which was initially adopted in 1989 and last significantly updated in 1995.  Key modifications to the Proposal in the Final Rule include: (1) removing the proposed alpha factor, which for conservatism increases the exposure amount otherwise calculated by 40 percent, when calculating exposure amounts where the counterparty is a commercial end-user (as opposed to a financial entity); (2) permitting banking organizations to elect at the netting set level to treat cleared settled-to-market derivative contracts as cleared collateralized-to-market derivative contracts and thereby benefit from netting across the two types of contracts; (3) “[allowing] for greater recognition of collateral in the calculation of total leverage exposure relating to client-cleared derivative contracts” for purposes of the supplementary leverage ratio, consistent with recent changes to the Basel Committee’s leverage ratio standard; and (4) changing certain of the supervisory factors for commodity derivative contracts “to coincide with the supervisory factors in the Basel Committee standard.”