02-029 C.M.R. ch. 128, § 8 - CREDIT EXPOSURE ARISING FROM DERIVATIVE TRANSACTIONS
1.
Scope. This section sets
forth the rules for calculating the credit exposure arising from a derivative
transaction entered into by a financial institution for purposes of determining
the financial institution's lending limit pursuant to this
regulation.
2.
Derivative
transactions
A.
Non-Credit
Derivatives. Subject to paragraph 2(B) of this section, a financial
institution shall calculate the credit exposure to a counterparty arising from
a derivative transaction by one of the following methods. A financial
institution shall use the same method for calculating counterparty credit
exposure arising from all of its derivative transactions.
(1)
Conversion Factor Matrix
Method. 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 Exposure.^{1} | ||||
Original maturity ^{2} | Interest Rate | Foreign exchange rate and gold | Equity | Other ^{3}(includes commodities and precious metals except gold) |
1 year or less............... | .015 | .015 | .20 | .06 |
Over 1 to 3 years........... | .03 | .03 | .20 | .18 |
Over 3 to 5 years........... | .06 | .06 | 0.20 | 0.30 |
Over 5 to 10 years......... | .12 | .12 | 0.20 | .60 |
Over ten years.............. | .30 | .30 | .20 | 1.0 |
(2)
Remaining Maturity Method. 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 | Other ^{4} (includes commodities and precious metals except gold) | |
Multiplicative Factor | 1.5% | 1.5% | 6% | 6% |
B.
Credit Derivatives
(1) Notwithstanding paragraph 2(A) of this
section, a financial institution that uses the Conversion Factor Matrix Method
or Remaining Maturity Method shall calculate the counterparty credit exposure
arising from credit derivatives entered by the financial institution by adding
the net notional value of all protection purchased from the counterparty on
each reference entity.
(2) A
financial institution shall calculate the credit exposure to a reference entity
arising from credit derivatives entered by the financial institution by adding
the notional value of all protection sold on the reference entity. However, the
financial institution 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.
[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 the Table are to be
treated as "Other."
[4]
Transactions not explicitly covered by any other column in the Table are to be
treated as "Other."
Notes
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