Texas Register, Volume 38, Number 35, Pages 5587-5800, August 30, 2013 Page: 5,617
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ber 28, 2012, edition of the Texas Register (37 TexReg 10195)
(the original adoption). The adopted provisions were modeled
on the interim final rule of the Office of the Comptroller of the
Currency (OCC) on the same subject, published in the June 21,
2012 edition of the Federal Register (77 Fed. Reg. 37265), for
the reasons stated in the original adoption.
In general, a model based on the OCC approach takes advan-
tage of the deeper capital markets expertise of the OCC. Fur-
ther, state requirements similar to those imposed by the OCC on
national banks tend to minimize the potential for regulatory ar-
bitrage (converting from national bank to state bank) based on
a perception of weaker state regulation. In anticipation that the
OCC would ultimately revise its interim final rule, the commis-
sion indicated in its original adoption that further amendments
would likely be proposed once the final disposition of the OCC
rulemaking was known.
On June 19, 2013, the OCC released its final rule regarding pro-
cedures and methodologies for calculating the credit exposure
under a derivative transaction or a securities financing transac-
tion. Published in the June 25, 2013 edition of the Federal Regis-
ter(78 Fed. Reg. 37930), the final rule had a number of changes
made in response to comments. The amendments proposed to-
day would make similar changes. The explanations below are
based in part on the OCC analysis and discussion at 78 Fed.
Reg. 37930-37946 (June 25, 2013).
DISCUSSION OF PROPOSAL
Amendments to 12.2
Section 12.2(6) defines "effective margining arrangement" as a
master legal agreement governing derivative transactions be-
tween a bank and a counterparty that requires the counterparty
to post, on a daily basis, variation margin to fully collateralize
that amount of the bank's net credit exposure to the counterparty
that exceeds $1 million created by the derivative transactions
covered by the agreement. The OCC increased the threshold
amount from $1 million to $25 million to address existing agree-
ments with collateralization thresholds above the $1 million level
set in its interim final rule. To help ensure that this increase
in threshold amount will not raise new safety and soundness
concerns, the OCC required the amount of the threshold under
an effective margining arrangement to be added to the amount
of counterparty exposure calculated under the model method,
thereby subjecting the amount of the threshold to the legal lend-
ing limit. A related amendment is proposed to 12.12(b)(2)(A).
The definition of "eligible credit derivative," at 12.2(7)(C)(ii), is
proposed to be amended to specifically include a restructuring
for obligors not subject to bankruptcy or insolvency as a credit
event for a credit default swap. Because bankruptcy and insol-
vency regimes generally do not exist for sovereign or municipal-
ity reference obligors, standard credit default swap contracts on
sovereign and municipal reference exposures cover the buyer
of protection for restructurings that, while not conducted by a
bankruptcy court or receiver, nonetheless bind the holders of the
sovereign or municipal debt to changes in principal, interest, or
similar economic terms of the debt. However, a portion of the
definition of eligible credit derivative inadvertently excluded re-
structurings of such obligors by referring only to bankruptcy or
insolvency as a credit event for a credit default swap.
The proposed amendment of 12.2(9) would correct an erro-
neous cross-reference.
Amendment to 12.3Currently, the purchase of credit protection can only reduce
credit derivative exposure to a reference obligor, not other
exposures such as traditional loans and extensions of credit.
Because the purchase of credit protection is a well-accepted risk
management technique for managing credit concentration risk,
the OCC added a provision to its final rule allowing purchased
credit protection to offset other types of credit exposures under
certain circumstances, but only on a limited basis of up to 10%
of capital and surplus. The proposed amendment to 12.3(b)
would add new paragraph (8) to exclude from the application
of the lending limits that part of a loan or extension of credit for
which a bank has purchased protection if that protection is by
way of a single-name credit derivative that meets the require-
ments for an eligible credit derivative contained in 12.2(7),
but only if the reference obligor is the same legal entity as the
borrower in the loan or extension of credit and the maturity of
the protection purchased equals or exceeds the maturity of the
loan or extension of credit. However, the total amount of such
exclusion would not be allowed to exceed 15% of the bank's
Tier 1 capital.
Amendment to 12.10
Since the original adoption of 12.12 and related amendments, it
has become clear that banks choosing a non-model method for
measuring credit exposure under derivatives transactions could
face violations of the lending limits due to subsequent increases
in credit exposure, while banks using internal models, in similar
circumstances, would only be subject to an instance of noncon-
formance with the opportunity to correct the nonconformance be-
fore it is deemed a violation. This is an unintended result under
existing 12.10(b)(5). Because the provision on nonconforming
loans and extensions of credit should apply to transactions cal-
culated using a non-model method, proposed amendments to
12.10(b)(5) address this oversight.
Amendments to 12.12
Section 12.12 specifically concerns the calculation of credit
exposures under derivative or securities financing transactions.
Consistent with the OCC's final rule, the "internal model method"
set forth in 12.12(b)(1)(A) and 12.12(c)(1)(A) is proposed to
be re-named the "model method" to alleviate possible confusion
with the "Internal Models Approach" included in the federal
capital adequacy guidelines for calculating the risk-weighted
asset amount for equity exposures.
Existing 12.12(b)(1)(A)(iii) provides that a bank must calculate
its potential future exposure by using an internal model that has
been approved for purposes of 53 of the federal capital ade-
quacy guidelines, or another approved model. The reference
to 53 of the federal capital adequacy guidelines is proposed to
be replaced with a reference to 32(d). Section 53 refers to the
modeling of equity risk (a form of market risk) rather than coun-
terparty risk and is more general in nature. According to the
OCC, 32(d) more appropriately refers to the modeling of coun-
terparty credit exposure arising from derivatives and specifically
accounts for collateral. Likewise, for securities financing trans-
actions, the reference in 12.12(c)(1)(A) to 32(d) of the federal
capital adequacy guidelines is proposed to be replaced with a
reference to 32(b). According to the OCC, the model provided
for by 32(b) is the more appropriate model for measuring credit
exposure of securities financing transactions for lending limit pur-
poses.
Proposed amendments to 12.12(b)(1)(A)(iii) and
12.12(c)(1)(A) would also provide additional guidancePROPOSED RULES August 30, 2013 38 TexReg 5617
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Texas. Secretary of State. Texas Register, Volume 38, Number 35, Pages 5587-5800, August 30, 2013, periodical, August 30, 2013; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth342086/m1/31/: accessed April 27, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting UNT Libraries Government Documents Department.