(1) This section sets forth the rules for
calculating the credit exposure arising from a derivative transaction entered
into by a bank for purposes of determining the bank's lending limit pursuant to
RCW
30A.04.111 and this chapter.
(2) Subject to the direction of the division,
a bank shall calculate the credit exposure to a counterparty arising from a
derivative transaction by means of:
(a) The
internal model method;
(b) The
conversion factor matrix method;
(c) The remaining maturity method;
or
(d) The current exposure
method.
(3) Except as
otherwise required by the division, a bank shall use the same method for
calculating counterparty credit exposure arising from all of its derivative
transactions.
(4) The division may
require a bank to use the internal model method, the conversion factor matrix
method, or the remaining maturity method to calculate the credit exposure of
derivative transactions if it finds that such method is necessary to promote
the safety and soundness of the bank.
(5) The requirements for using the internal
model method are as follows:
(a) The credit
exposure of a derivative transaction under the internal model method shall
equal the sum of the current credit exposure of the derivative transaction and
the potential future credit exposure of the derivative transaction.
(b) A bank shall determine its current credit
exposure by the mark-to-market value of the derivative contract. If the
mark-to-market value is positive, then the current credit exposure equals that
mark-to-market value. If the mark-to-market value is zero or negative, than the
current credit exposure is zero.
(c) A bank may not use the internal model
method in its calculation of potential credit exposure to a derivative
transaction unless the bank obtains prior approval of the division or unless it
is already using the internal model method, as of January 21, 2013, and the
division thereafter determines that the bank's internal model method is safe
and sound and that bank's management is competent to administer its derivative
investment program using such internal model method.
(d) A bank that calculates its credit
exposure by using the internal model method may net credit exposures of
derivative transactions arising under the same qualifying master netting
agreement.
(6) The
credit exposure arising from a derivative transaction under the conversion
factor matrix method shall equal and remain fixed at the potential future
credit exposure of the derivative transaction as determined at the execution of
the transaction by reference to Table 1 below.
Table 1 - Conversion Factor Matrix for Calculating Potential
Future Credit Exposure1
Original Maturity2
|
Interest Rate |
Foreign Exchange Rate and Gold |
Equity |
Other3 (includes
commodities and precious metals except gold) |
1 year or less |
0.015 |
0.015 |
0.20 |
0.06 |
Over 1 to 3 years |
0.030 |
0.030 |
0.20 |
0.18 |
Over 3 to 5 years |
0.060 |
0.060 |
0.20 |
0.30 |
Over 5 to 10 years |
0.120 |
0.120 |
0.20 |
0.60 |
Over ten years |
0.300 |
0.300 |
0.20 |
1.00 |
1 For an OTC derivative contract
with multiple exchanges of principal, the conversion factor is multiplied by
the number of remaining payments in the derivative contract.
2 For an OTC derivative contract
that is structured such that on specified dates any outstanding exposure is
settled and the terms are reset so that the market value of the contract is
zero, the remaining maturity equals the time until the next reset date. For an
interest rate derivative contract with a remaining maturity of greater than one
year that meets these criteria, the minimum conversion factor is 0.005.
3 Transactions not explicitly
covered by any other column in Table 1 are to be treated as "Other."
(7) The credit exposure arising
from a derivative transaction under the remaining maturity method shall equal
the greater of zero or the sum of the current mark-to-market value of the
derivative transaction added to the product of the notional amount of the
transaction, the remaining maturity in years of the transaction, and a fixed
multiplicative factor determined by reference to Table 2 below.
Table 2 - Remaining Maturity Factor for Calculating Credit
Exposure
|
Interest Rate |
Foreign Exchange Rate and Gold |
Equity |
Other1 (includes
commodities and precious metals except gold) |
Multiplicative Factor |
1.5% |
1.5% |
6% |
6% |
1 Transactions not explicitly
covered by any other column in Table 2 are to be treated as "Other."
(8) The credit exposure arising
from a derivative transaction under the current exposure method shall be
calculated pursuant to the Office of the Comptroller of the Currency
regulations, 12 C.F.R. Part
32, at Sec. 9 (b)(iii).
(9) Notwithstanding any other provision of
this section, a bank that uses the conversion factor matrix method or remaining
maturity method, or that uses the internal model method without entering an
effective margining arrangement, shall calculate the counterparty credit
exposure arising from credit derivatives entered by the bank by adding the net
notional value of all protection purchased from the counterparty on each
reference entity.
(10) A bank shall
calculate the credit exposure to a reference entity arising from credit
derivatives entered by the bank by adding the notional value of all protection
sold on the reference entity. However, the bank may reduce its exposure to a
reference entity by the amount of any eligible credit derivative purchased on
that reference entity from an eligible protection provider.