Title 12—Banks and Banking--Volume 1
PART 1240—CAPITAL ADEQUACY OF ENTERPRISES
§ 1240.37   Cleared transactions.
(a) General requirements —(1) Clearing member clients. An Enterprise that is a clearing member client must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.
(2) Clearing members. An Enterprise that is a clearing member must use the methodologies described in paragraph (c) of this section to calculate its risk-weighted assets for a cleared transaction and paragraph (b) of this section to calculate its risk-weighted assets for its default fund contribution to a CCP.
(b) Clearing member client Enterprises —(1) Risk-weighted assets for cleared transactions. (i) To determine the risk-weighted asset amount for a cleared transaction, an Enterprise that is a clearing member client must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(2) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client Enterprise's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a derivative contract or a netting set of derivative contracts, trade exposure amount equals the EAD for the derivative contract or netting set of derivative contracts calculated using the methodology used to calculate EAD for derivative contracts set forth in § 1240.36(c), plus the fair value of the collateral posted by the clearing member client Enterprise and held by the CCP or a clearing member in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals the EAD for the repo-style transaction calculated using the methodology set forth in § 1240.39(b)(2) or (3), plus the fair value of the collateral posted by the clearing member client Enterprise and held by the CCP or a clearing member in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction with a QCCP, a clearing member client Enterprise must apply a risk weight of:
(A) 2 percent if the collateral posted by the Enterprise to the QCCP or clearing member is subject to an arrangement that prevents any loss to the clearing member client Enterprise 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 the clearing member client Enterprise 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 an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions.
(B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client Enterprise must apply the risk weight applicable to the CCP under this subpart D.
(4) Collateral. (i) Notwithstanding any other requirement of this section, collateral posted by a clearing member client Enterprise that is held by a custodian (in its capacity as a custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.
(ii) A clearing member client Enterprise must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member or a custodian in connection with a cleared transaction in accordance with requirements under this subpart D, as applicable.
(c) Clearing member Enterprise —(1) Risk-weighted assets for cleared transactions. (i) To determine the risk-weighted asset amount for a cleared transaction, a clearing member Enterprise must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (c)(2) of this section by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (c)(3) of this section.
(ii) A clearing member Enterprise's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.
(2) Trade exposure amount. A clearing member Enterprise must calculate its trade exposure amount for a cleared transaction as follows:
(i) For a cleared transaction that is a derivative contract or a netting set of derivative contracts, trade exposure amount equals the EAD calculated using the methodology used to calculate EAD for derivative contracts set forth in § 1240.36(c), plus the fair value of the collateral posted by the clearing member Enterprise and held by the CCP in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals the EAD calculated under § 1240.39(b)(2) or (3), plus the fair value of the collateral posted by the clearing member Enterprise and held by the CCP in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) A clearing member Enterprise must apply a risk weight of 2 percent to the trade exposure amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member Enterprise must apply the risk weight applicable to the CCP according to this subpart D.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, a clearing member Enterprise may apply a risk weight of zero percent to the trade exposure amount for a cleared transaction with a QCCP where the clearing member Enterprise is acting as a financial intermediary on behalf of a clearing member client, the transaction offsets another transaction that satisfies the requirements set forth in § 1240.3(a), and the clearing member Enterprise is not obligated to reimburse the clearing member client in the event of the QCCP default.
(4) Collateral. (i) Notwithstanding any other requirement of this section, collateral posted by a clearing member Enterprise that is held by a custodian (in its capacity as a custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.
(ii) A clearing member Enterprise must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member or a custodian in connection with a cleared transaction in accordance with requirements under this subpart D.
(d) Default fund contributions —(1) General requirement. A clearing member Enterprise must determine the risk-weighted asset amount for a default fund contribution to a CCP at least quarterly, or more frequently if, in the opinion of the Enterprise or FHFA, there is a material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to nonqualifying CCPs. A clearing member Enterprise's risk-weighted asset amount for default fund contributions to CCPs that are not QCCPs equals the sum of such default fund contributions multiplied by 1,250 percent, or an amount determined by FHFA, based on factors such as size, structure, and membership characteristics of the CCP and riskiness of its transactions, in cases where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to QCCPs. A clearing member Enterprise's risk-weighted asset amount for default fund contributions to QCCPs equals the sum of its capital requirement, K CM for each QCCP, as calculated under the methodology set forth in paragraph (d)(4) of this section, multiplied by 12.5.
(4) Capital requirement for default fund contributions to a QCCP. A clearing member Enterprise's capital requirement for its default fund contribution to a QCCP (K CM ) is equal to:
(5) Hypothetical capital requirement of a QCCP. Where a QCCP has provided its K CCP , an Enterprise must rely on such disclosed figure instead of calculating K CCP under this paragraph (d)(5), unless the Enterprise determines that a more conservative figure is appropriate based on the nature, structure, or characteristics of the QCCP. The hypothetical capital requirement of a QCCP (K CCP ), as determined by the Enterprise, is equal to:
(6) EAD of a QCCP to a clearing member. (i) The EAD of a QCCP to a clearing member is equal to the sum of the EAD for derivative contracts determined under paragraph (d)(6)(ii) of this section and the EAD for repo-style transactions determined under paragraph (d)(6)(iii) of this section.
(ii) With respect to any derivative contracts between the QCCP and the clearing member that are cleared transactions and any guarantees that the clearing member has provided to the QCCP with respect to performance of a clearing member client on a derivative contract, the EAD is equal to the exposure amount of the QCCP to the clearing member for all such derivative contracts and guarantees of derivative contracts calculated under SA-CCR in § 1240.36(c) (or, with respect to a QCCP located outside the United States, under a substantially identical methodology in effect in the jurisdiction) using a value of 10 business days for purposes of § 1240.36(c)(9)(iv); less the value of all collateral held by the QCCP posted by the clearing member or a client of the clearing member in connection with a derivative contract for which the clearing member has provided a guarantee to the QCCP and the amount of the prefunded default fund contribution of the clearing member to the QCCP.
(iii) With respect to any repo-style transactions between the QCCP and a clearing member that are cleared transactions, EAD is equal to:
(iv) EAD must be calculated separately for each clearing member's sub-client accounts and sub-house account ( i.e., for the clearing member's proprietary activities). If the clearing member's collateral and its client's collateral are held in the same default fund contribution account, then the EAD of that account is the sum of the EAD for the client-related transactions within the account and the EAD of the house-related transactions within the account. For purposes of determining such EADs, the independent collateral of the clearing member and its client must be allocated in proportion to the respective total amount of independent collateral posted by the clearing member to the QCCP.
(v) If any account or sub-account contains both derivative contracts and repo-style transactions, the EAD of that account is the sum of the EAD for the derivative contracts within the account and the EAD of the repo-style transactions within the account. If independent collateral is held for an account containing both derivative contracts and repo-style transactions, then such collateral must be allocated to the derivative contracts and repo-style transactions in proportion to the respective product specific exposure amounts, calculated, excluding the effects of collateral, according to § 1240.39(b) for repo-style transactions and to § 1240.36(c)(5) for derivative contracts.
§ 1240.38   Guarantees and credit derivatives: substitution treatment.
(a) Scope —(1) General. An Enterprise may recognize the credit risk mitigation benefits of an eligible guarantee or eligible credit derivative by substituting the risk weight associated with the protection provider for the risk weight assigned to an exposure, as provided under this section.
(2) Applicability. This section applies to exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the Enterprise and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative.
(3) Tranching. Exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) generally are securitization exposures subject to §§ 1240.41 through 1240.46.
(4) Multiple guarantees or credit derivatives. If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in this section, an Enterprise may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-weighted asset amount for each separate exposure as described in paragraph (c) of this section.
(5) Single guarantees or credit derivatives. If a single eligible guarantee or eligible credit derivative covers multiple hedged exposures described in paragraph (a)(2) of this section, an Enterprise must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-weighted asset amount for each exposure as described in paragraph (c) of this section.
(b) Rules of recognition. (1) An Enterprise may only recognize the credit risk mitigation benefits of eligible guarantees and eligible credit derivatives.
(2) An Enterprise may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event if:
(i) The reference exposure ranks pari passu with, or is subordinated to, the hedged exposure; and
(ii) The reference exposure and the hedged exposure are to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to ensure payments under the credit derivative are triggered when the obligated party of the hedged exposure fails to pay under the terms of the hedged exposure.
(c) Substitution approach —(1) Full coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is greater than or equal to the exposure amount of the hedged exposure, an Enterprise may recognize the guarantee or credit derivative in determining the risk-weighted asset amount for the hedged exposure by substituting the risk weight applicable to the guarantor or credit derivative protection provider under this subpart D for the risk weight assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is less than the exposure amount of the hedged exposure, the Enterprise must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative.
(i) The Enterprise may calculate the risk-weighted asset amount for the protected exposure under this subpart D, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider.
(ii) The Enterprise must calculate the risk-weighted asset amount for the unprotected exposure under this subpart D, where the applicable risk weight is that of the unprotected portion of the hedged exposure.
(iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraph (d), (e), or (f) of this section.
(d) Maturity mismatch adjustment. (1) An Enterprise that recognizes an eligible guarantee or eligible credit derivative in determining the risk-weighted asset amount for a hedged exposure must adjust the effective notional amount of the credit risk mitigant to reflect any maturity mismatch between the hedged exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligated party of the hedged exposure is scheduled to fulfil its obligation on the hedged exposure. If a credit risk mitigant has embedded options that may reduce its term, the Enterprise (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the Enterprise (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the Enterprise to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant.
(4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the Enterprise must apply the following adjustment to reduce the effective notional amount of the credit risk mitigant: Pm = E × (t−0.25)/(T−0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant, adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years.
(e) Adjustment for credit derivatives without restructuring as a credit event. If an Enterprise recognizes an eligible credit derivative that does not include as a credit event a restructuring of the hedged exposure involving forgiveness or postponement of principal, interest, or fees that results in a credit loss event (that is, a charge-off, specific provision, or other similar debit to the profit and loss account), the Enterprise must apply the following adjustment to reduce the effective notional amount of the credit derivative: Pr = Pm × 0.60, where:
(1) Pr = effective notional amount of the credit risk mitigant, adjusted for lack of restructuring event (and maturity mismatch, if applicable); and
(2) Pm = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch, if applicable).
(f) Currency mismatch adjustment. (1) If an Enterprise recognizes an eligible guarantee or eligible credit derivative that is denominated in a currency different from that in which the hedged exposure is denominated, the Enterprise must apply the following formula to the effective notional amount of the guarantee or credit derivative: Pc = Pr × (1−H FX ), where:
(i) Pc = effective notional amount of the credit risk mitigant, adjusted for currency mismatch (and maturity mismatch and lack of restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch and lack of restructuring event, if applicable); and
(iii) H FX = haircut appropriate for the currency mismatch between the credit risk mitigant and the hedged exposure.
(2) An Enterprise must set H FX equal to eight percent unless it qualifies for the use of and uses its own internal estimates of foreign exchange volatility based on a ten-business-day holding period. An Enterprise qualifies for the use of its own internal estimates of foreign exchange volatility if it qualifies for the use of its own-estimates haircuts in § 1240.39(c)(4).
(3) An Enterprise must adjust H FX calculated in paragraph (f)(2) of this section upward if the Enterprise revalues the guarantee or credit derivative less frequently than once every 10 business days using the following square root of time formula:
§ 1240.39   Collateralized transactions.
(a) General. (1) An Enterprise may use the following methodologies to recognize the benefits of financial collateral (other than with respect to a retained CRT exposure) in mitigating the counterparty credit risk of repo-style transactions, eligible margin loans, collateralized OTC derivative contracts and single product netting sets of such transactions:
(i) The collateral haircut approach set forth in paragraph (b)(2) of this section; and
(ii) For single product netting sets of repo-style transactions and eligible margin loans, the simple VaR methodology set forth in paragraph (b)(3) of this section.
(2) An Enterprise may use any combination of the two methodologies for collateral recognition; however, it must use the same methodology for similar exposures or transactions.
(b) EAD for eligible margin loans and repo-style transactions —(1) General. An Enterprise may recognize the credit risk mitigation benefits of financial collateral that secures an eligible margin loan, repo-style transaction, or single-product netting set of such transactions by determining the EAD of the exposure using:
(i) The collateral haircut approach described in paragraph (b)(2) of this section; or
(ii) For netting sets only, the simple VaR methodology described in paragraph (b)(3) of this section.
(2) Collateral haircut approach —(i) EAD equation. An Enterprise may determine EAD for an eligible margin loan, repo-style transaction, or netting set by setting EAD equal to
(ii) Standard supervisory haircuts. Under the standard supervisory haircuts approach:
(A) An Enterprise must use the haircuts for market price volatility (H s ) in table 1 to paragraph (b)(2)(ii)(A) as adjusted in certain circumstances as provided in paragraphs (b)(2)(ii)(C) and (D) of this section;
Table 1 to Paragraph ( b )(2)( ii )(A)—Standard Supervisory Market Price Volatility Haircuts 1
1 The market price volatility haircuts in table 1 are based on a 10 business-day holding period.
2 Includes a foreign PSE that receives a zero percent risk weight.
(B) For currency mismatches, an Enterprise must use a haircut for foreign exchange rate volatility (H fx ) of 8 percent, as adjusted in certain circumstances as provided in paragraphs (b)(2)(ii)(C) and (D) of this section.
(C) For repo-style transactions and client-facing derivative transactions, an Enterprise may multiply the supervisory haircuts provided in paragraphs (b)(2)(ii)(A) and (B) of this section by the square root of 1/2 (which equals 0.707107). If the Enterprise determines that a longer holding period is appropriate for client-facing derivative transactions, then it must use a larger scaling factor to adjust for the longer holding period pursuant to paragraph (b)(2)(ii)(F) of this section.
(D) An Enterprise must adjust the supervisory haircuts upward on the basis of a holding period longer than ten business days (for eligible margin loans) or five business days (for repo-style transactions), using the formula provided in paragraph (b)(2)(ii)(F) of this section where the conditions in this paragraph (b)(2)(ii)(D) apply. If the number of trades in a netting set exceeds 5,000 at any time during a quarter, an Enterprise must adjust the supervisory haircuts upward on the basis of a minimum holding period of twenty business days for the following quarter (except when an Enterprise is calculating EAD for a cleared transaction under § 1240.37). If a netting set contains one or more trades involving illiquid collateral, an Enterprise must adjust the supervisory haircuts upward on the basis of a minimum holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted longer than the holding period, then the Enterprise must adjust the supervisory haircuts upward for that netting set on the basis of a minimum holding period that is at least two times the minimum holding period for that netting set.
(E)( 1 ) An Enterprise must adjust the supervisory haircuts upward on the basis of a holding period longer than ten business days for collateral associated with derivative contracts (five business days for client-facing derivative contracts) using the formula provided in paragraph (b)(2)(ii)(F) of this section where the conditions in this paragraph (b)(2)(ii)(E)( 1 ) apply. For collateral associated with a derivative contract that is within a netting set that is composed of more than 5,000 derivative contracts that are not cleared transactions, an Enterprise must use a minimum holding period of twenty business days. If a netting set contains one or more trades involving illiquid collateral or a derivative contract that cannot be easily replaced, an Enterprise must use a minimum holding period of twenty business days.
( 2 ) Notwithstanding paragraph (b)(2)(ii)(A) or (C) or (b)(2)(ii)(E)( 1 ) of this section, for collateral associated with a derivative contract in a netting set under which more than two margin disputes that lasted longer than the holding period occurred during the two previous quarters, the minimum holding period is twice the amount provided under paragraph (b)(2)(ii)(A) or (C) or (b)(2)(ii)(E)( 1 ).
(F) An Enterprise must adjust the standard supervisory haircuts upward, pursuant to the adjustments provided in paragraphs (b)(2)(ii)(C) through (E) of this section, using the following formula:
(G) If the instrument an Enterprise has lent, sold subject to repurchase, or posted as collateral does not meet the definition of financial collateral, the Enterprise must use a 25.0 percent haircut for market price volatility (H s ).
(iii) Own internal estimates for haircuts. With the prior written notice to FHFA, an Enterprise may calculate haircuts (H s and H fx ) using its own internal estimates of the volatilities of market prices and foreign exchange rates.
(A) To use its own internal estimates, an Enterprise must satisfy the following minimum quantitative standards:
( 1 ) An Enterprise must use a 99th percentile one-tailed confidence interval.
( 2 ) The minimum holding period for a repo-style transaction is five business days and for an eligible margin loan is ten business days except for transactions or netting sets for which paragraph (b)(2)(iii)(A)( 3 ) of this section applies. When an Enterprise calculates an own-estimates haircut on a T N -day holding period, which is different from the minimum holding period for the transaction type, the applicable haircut (H M ) is calculated using the following square root of time formula:
( 3 ) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, an Enterprise must calculate the haircut using a minimum holding period of twenty business days for the following quarter (except when an Enterprise is calculating EAD for a cleared transaction under § 1240.37). If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, an Enterprise must calculate the haircut using a minimum holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the Enterprise must calculate the haircut for transactions in that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set.
( 4 ) An Enterprise is required to calculate its own internal estimates with inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate to the security or category of securities.
( 5 ) An Enterprise must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the Enterprise's own internal estimates for haircuts under this section and must be able to provide empirical support for the period used. The Enterprise must obtain the prior approval of FHFA for, and notify FHFA if the Enterprise makes any material changes to, these policies and procedures.
( 6 ) Nothing in this section prevents FHFA from requiring an Enterprise to use a different period of significant financial stress in the calculation of own internal estimates for haircuts.
( 7 ) An Enterprise must update its data sets and calculate haircuts no less frequently than quarterly and must also reassess data sets and haircuts whenever market prices change materially.
(B) With respect to debt securities that are investment grade, an Enterprise may calculate haircuts for categories of securities. For a category of securities, the Enterprise must calculate the haircut on the basis of internal volatility estimates for securities in that category that are representative of the securities in that category that the Enterprise has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining relevant categories, the Enterprise must at a minimum take into account:
( 1 ) The type of issuer of the security;
( 2 ) The credit quality of the security;
( 3 ) The maturity of the security; and
( 4 ) The interest rate sensitivity of the security.
(C) With respect to debt securities that are not investment grade and equity securities, an Enterprise must calculate a separate haircut for each individual security.
(D) Where an exposure or collateral (whether in the form of cash or securities) is denominated in a currency that differs from the settlement currency, the Enterprise must calculate a separate currency mismatch haircut for its net position in each mismatched currency based on estimated volatilities of foreign exchange rates between the mismatched currency and the settlement currency.
(E) An Enterprise's own estimates of market price and foreign exchange rate volatilities may not take into account the correlations among securities and foreign exchange rates on either the exposure or collateral side of a transaction (or netting set) or the correlations among securities and foreign exchange rates between the exposure and collateral sides of the transaction (or netting set).
(3) Simple VaR methodology. With the prior written notice to FHFA, an Enterprise may estimate EAD for a netting set using a VaR model that meets the requirements in paragraph (b)(3)(iii) of this section. In such event, the Enterprise must set EAD equal to max {0, [(ΣE−ΣC) + PFE]}, where:
(i) ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the Enterprise has lent, sold subject to repurchase, or posted as collateral to the counterparty under the netting set);
(ii) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold, and cash the Enterprise has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the Enterprise's empirically based best estimate of the 99th percentile, one-tailed confidence interval for an increase in the value of (ΣE−ΣC) over a five-business-day holding period for repo-style transactions, or over a ten-business-day holding period for eligible margin loans except for netting sets for which paragraph (b)(3)(iv) of this section applies using a minimum one-year historical observation period of price data representing the instruments that the Enterprise has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. The Enterprise must validate its VaR model by establishing and maintaining a rigorous and regular backtesting regime.
(iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, an Enterprise must use a twenty-business-day holding period for the following quarter (except when an Enterprise is calculating EAD for a cleared transaction under § 1240.37). If a netting set contains one or more trades involving illiquid collateral, an Enterprise must use a twenty-business-day holding period. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the Enterprise must set its PFE for that netting set equal to an estimate over a holding period that is at least two times the minimum holding period for that
§ 1240.40   Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies.
(3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days.
(4) Positive current exposure of an Enterprise for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the Enterprise to the counterparty.
(b) Scope. This section applies to all transactions involving securities, foreign exchange instruments, and commodities that have a risk of delayed settlement or delivery. This section does not apply to:
(1) Cleared transactions that are marked-to-market daily and subject to daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style transactions;
(3) One-way cash payments on OTC derivative contracts; or
(4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts as provided in § 1240.36).
(c) System-wide failures. In the case of a system-wide failure of a settlement, clearing system or central counterparty, FHFA may waive risk-based capital requirements for unsettled and failed transactions until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. An Enterprise must hold risk-based capital against any DvP or PvP transaction with a normal settlement period if the Enterprise's counterparty has not made delivery or payment within five business days after the settlement date. The Enterprise must determine its risk-weighted asset amount for such a transaction by multiplying the positive current exposure of the transaction for the Enterprise by the appropriate risk weight in table 1 to this paragraph (d).
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (1) An Enterprise must hold risk-based capital against any non-DvP/non-PvP transaction with a normal settlement period if the Enterprise has delivered cash, securities, commodities, or currencies to its counterparty but has not received its corresponding deliverables by the end of the same business day. The Enterprise must continue to hold risk-based capital against the transaction until the Enterprise has received its corresponding deliverables.
(2) From the business day after the Enterprise has made its delivery until five business days after the counterparty delivery is due, the Enterprise must calculate the risk-weighted asset amount for the transaction by treating the current fair value of the deliverables owed to the Enterprise as an exposure to the counterparty and using the applicable counterparty risk weight under this subpart D.
(3) If the Enterprise has not received its deliverables by the fifth business day after counterparty delivery was due, the Enterprise must assign a 1,250 percent risk weight to the current fair value of the deliverables owed to the Enterprise.
(f) Total risk-weighted assets for unsettled transactions. Total risk-weighted assets for unsettled transactions is the sum of the risk-weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP transactions.
§ 1240.41   Operational requirements for CRT and other securitization exposures.
(a) Operational criteria for traditional securitizations. An Enterprise that transfers exposures it has purchased or otherwise acquired to a securitization SPE or other third party in connection with a traditional securitization may exclude the exposures from the calculation of its risk-weighted assets only if each condition in this section is satisfied. An Enterprise that meets these conditions must hold risk-based capital against any credit risk it retains in connection with the securitization. An Enterprise that fails to meet these conditions must hold risk-based capital against the transferred exposures as if they had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the transaction. The conditions are:
(1) The exposures are not reported on the Enterprise's consolidated balance sheet under GAAP;
(2) The Enterprise has transferred to one or more third parties credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible clean-up calls; and
(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For synthetic securitizations, an Enterprise may recognize for risk-based capital purposes the use of a credit risk mitigant to hedge underlying exposures only if each condition in this paragraph (b) is satisfied. An Enterprise that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the synthetic securitization. An Enterprise that fails to meet these conditions or chooses not to recognize the credit risk mitigant for purposes of this section must instead hold risk-based capital against the underlying exposures as if they had not been synthetically securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral;
(ii) A guarantee that meets all criteria as set forth in the definition of “eligible guarantee” in § 1240.2, except for the criteria in paragraph (3) of that definition; or
(iii) A credit derivative that meets all criteria as set forth in the definition of “eligible credit derivative” in § 1240.2, except for the criteria in paragraph (3) of the definition of “eligible guarantee” in § 1240.2.
(2) The Enterprise transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(ii) Require the Enterprise to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Enterprise's cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the Enterprise in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the Enterprise after the inception of the securitization;
(3) The Enterprise obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible clean-up calls.
(c) Operational criteria for credit risk transfers. For credit risk transfers, an Enterprise may recognize for risk-based capital purposes, the use of a credit risk transfer only if each condition in this paragraph (c) is satisfied (or, for a credit risk transfer entered into before February 16, 2021, only if each condition in paragraphs (c)(2) and (3) of this section is satisfied). An Enterprise that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the credit risk transfer. An Enterprise that fails to meet these conditions or chooses not to recognize the credit risk transfer for purposes of this section must instead hold risk-based capital against the underlying exposures as if they had not been subject to the credit risk transfer. The conditions are:
(1) The credit risk transfer is any of the following—
(i) An eligible funded synthetic risk transfer;
(ii) An eligible reinsurance risk transfer;
(iii) An eligible single-family lender risk share;
(iv) An eligible multifamily lender risk share; or
(v) An eligible senior-subordinated structure.
(2) The credit risk transfer has been approved by FHFA as effective in transferring the credit risk of one or more mortgage exposures to another party, taking into account any counterparty, recourse, or other risk to the Enterprise and any capital, liquidity, or other requirements applicable to counterparties;
(3) The Enterprise transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk transfer employed do not include provisions that:
(i) Allow for the termination of the credit risk transfer due to deterioration in the credit quality of the underlying exposures;
(ii) Require the Enterprise to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Enterprise's cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the Enterprise in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the Enterprise after the inception of the credit risk transfer;
(4) The Enterprise obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk transfer in all relevant jurisdictions;
(5) Any clean-up calls relating to the credit risk transfer are eligible clean-up calls;
(6) Any time-based calls relating to the credit risk transfer are eligible time-based calls; and
(7) The Enterprise includes in its periodic disclosures under the Federal securities laws, or in other appropriate public disclosures, a reasonably detailed description of—
(i) The material recourse or other risks that might reduce the effectiveness of the credit risk transfer in transferring the credit risk on the underlying exposures to third parties; and
(ii) Each condition under paragraph (a) of this section (governing traditional securitizations) or paragraph (b) of this section (governing synthetic securitizations) that is not satisfied by the credit risk transfer and the reasons that each such condition is not satisfied.
(d) Due diligence requirements for securitization exposures. (1) Except for exposures that are deducted from common equity tier 1 capital and exposures subject to § 1240.42(h), if an Enterprise is unable to demonstrate to the satisfaction of FHFA a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the Enterprise must assign the securitization exposure a risk weight of 1,250 percent. The Enterprise's analysis must be commensurate with the complexity of the securitization exposure and the materiality of the exposure in relation to its capital.
(2) An Enterprise must demonstrate its comprehensive understanding of a securitization exposure under paragraph (d)(1) of this section, for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure, and documenting such analysis within three business days after acquiring the exposure, considering:
(A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the exposure, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spread, most recent sales price and historic price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (d)(1) of this section for each securitization exposure.
§ 1240.42   Risk-weighted assets for CRT and other securitization exposures.
(a) Securitization risk weight approaches. Except as provided elsewhere in this section or in § 1240.41:
(1) An Enterprise must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and apply a 1,250 percent risk weight to the portion of a CEIO that does not constitute after-tax gain-on-sale.
(2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section, an Enterprise may assign a risk weight to the securitization exposure either using the simplified supervisory formula approach (SSFA) in accordance with § 1240.43(a) through (d) for a securitization exposure that is not a retained CRT exposure or an acquired CRT exposure or using the credit risk transfer approach (CRTA) in accordance with § 1240.44 for a retained CRT exposure, and in either case, subject to the limitation under paragraph (e) of this section.
(3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and the Enterprise cannot, or chooses not to apply the SSFA or the CRTA to the exposure, the Enterprise must assign a risk weight to the exposure as described in § 1240.45.
(4) If a securitization exposure is a derivative contract (other than protection provided by an Enterprise in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), an Enterprise may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (c) of this section.
(b) Total risk-weighted assets for securitization exposures. An Enterprise's total risk-weighted assets for securitization exposures equals the sum of the risk-weighted asset amount for securitization exposures that the Enterprise risk weights under § 1240.41(d), § 1240.42(a)(1), § 1240.43, § 1240.44, or § 1240.45, and paragraphs (e) through (h) of this section, as applicable.
(c) Exposure amount of a CRT or other securitization exposure —(1) On-balance sheet securitization exposures. Except as provided for retained CRT exposures in § 1240.44(f), the exposure amount of an on-balance sheet securitization exposure (excluding a repo-style transaction, eligible margin loan, OTC derivative contract, or cleared transaction) is equal to the carrying value of the exposure.
(2) Off-balance sheet securitization exposures. Except as provided in paragraph (h) of this section or as provided for retained CRT exposures in § 1240.44(f), the exposure amount of an off-balance sheet securitization exposure that is not a repo-style transaction, eligible margin loan, cleared transaction (other than a credit derivative), or an OTC derivative contract (other than a credit derivative) is the notional amount of the exposure.
(3) Repo-style transactions, eligible margin loans, and derivative contracts. The exposure amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or derivative contract (other than a credit derivative) is the exposure amount of the transaction as calculated under § 1240.36 or § 1240.39, as applicable.
(d) Overlapping exposures. If an Enterprise has multiple securitization exposures that provide duplicative coverage to the underlying exposures of a securitization, the Enterprise is not required to hold duplicative risk-based capital against the overlapping position. Instead, the Enterprise may apply to the overlapping position the applicable risk-based capital treatment that results in the highest risk-based capital requirement.
(e) Implicit support. If an Enterprise provides support to a securitization (including a CRT) in excess of the Enterprise's contractual obligation to provide credit support to the securitization (implicit support):
(1) The Enterprise must include in risk-weighted assets all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and
(2) The Enterprise must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The risk-based capital impact to the Enterprise of providing such implicit support.
(f) Interest-only mortgage-backed securities. For non-credit-enhancing interest-only mortgage-backed securities that are not subject to § 1240.32(c), the risk weight may not be less than 100 percent.
(g) Nth-to-default credit derivatives —(1) Protection provider. An Enterprise may assign a risk weight using the SSFA in § 1240.43 to an nth-to-default credit derivative in accordance with this paragraph (g). An Enterprise must determine its exposure in the nth-to-default credit derivative as the largest notional amount of all the underlying exposures.
(2) A ttachment and detachment points. For purposes of determining the risk weight for an nth-to-default credit derivative using the SSFA, the Enterprise must calculate the attachment point and detachment point of its exposure as follows:
(i) The attachment point (parameter A ) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the Enterprise's exposure to the total notional amount of all underlying exposures. The ratio is expressed as a decimal value between zero and one. In the case of a first-to-default credit derivative, there are no underlying exposures that are subordinated to the Enterprise's exposure. In the case of a second-or-subsequent-to-default credit derivative, the smallest (n-1) notional amounts of the underlying exposure(s) are subordinated to the Enterprise's exposure.
(ii) The detachment point (parameter D ) equals the sum of parameter A plus the ratio of the notional amount of the Enterprise's exposure in the nth-to-default credit derivative to the total notional amount of all underlying exposures. The ratio is expressed as a decimal value between zero and one.
(3) Risk weights. An Enterprise that does not use the SSFA to determine a risk weight for its nth-to-default credit derivative must assign a risk weight of 1,250 percent to the exposure.
(4) Protection purchaser —(i) First-to-default credit derivatives. An Enterprise that obtains credit protection on a group of underlying exposures through a first-to-default credit derivative that meets the rules of recognition of § 1240.38(b) must determine its risk-based capital requirement for the underlying exposures as if the Enterprise synthetically securitized the underlying exposure with the smallest risk-weighted asset amount and had obtained no credit risk mitigant on the other underlying exposures. An Enterprise must calculate a risk-based capital requirement for counterparty credit risk according to § 1240.36 for a first-to-default credit derivative that does not meet the rules of recognition of § 1240.38(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) An Enterprise that obtains credit protection on a group of underlying exposures through a nth-to-default credit derivative that meets the rules of recognition of § 1240.38(b) (other than a first-to-default credit derivative) may recognize the credit risk mitigation benefits of the derivative only if:
( 1 ) The Enterprise also has obtained credit protection on the same underlying exposures in the form of first-through-(n-1)-to-default credit derivatives; or
( 2 ) If n-1 of the underlying exposures have already defaulted.
(B) If an Enterprise satisfies the requirements of paragraph (i)(4)(ii)(A) of this section, the Enterprise must determine its risk-based capital requirement for the underlying exposures as if the Enterprise had only synthetically securitized the underlying exposure with the nth smallest risk-weighted asset amount and had obtained no credit risk mitigant on the other underlying exposures.
(C) An Enterprise must calculate a risk-based capital requirement for counterparty credit risk according to § 1240.36 for a nth-to-default credit derivative that does not meet the rules of recognition of § 1240.38(b).
(h) Guarantees and credit derivatives other than nth-to-default credit derivatives —(1) Protection provider. For a guarantee or credit derivative (other than an nth-to-default credit derivative) provided by an Enterprise that covers the full amount or a pro rata share of a securitization exposure's principal and interest, the Enterprise must risk weight the guarantee or credit derivative as if it holds the portion of the reference exposure covered by the guarantee or credit derivative.
(2) Protection purchaser. (i) An Enterprise that purchases a guarantee or OTC credit derivative (other than an nth-to-default credit derivative) that is recognized under § 1240.46 as a credit risk mitigant (including via collateral recognized under § 1240.39) is not required to compute a separate counterparty credit risk capital requirement under § 1240.31, in accordance with § 1240.36(c).
(ii) If an Enterprise cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 1240.46, the Enterprise must determine the exposure amount of the credit derivative under § 1240.36.
(A) If the Enterprise purchases credit protection from a counterparty that is not a securitization SPE, the Enterprise must determine the risk weight for the exposure according to this subpart D.
(B) If the Enterprise purchases the credit protection from a counterparty that is a securitization SPE, the Enterprise must determine the risk weight for the exposure according to § 1240.42, including § 1240.42(a)(4) for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments).
§ 1240.43   Simplified supervisory formula approach (SSFA).
(a) General requirements for the SSFA. To use the SSFA to determine the risk weight for a securitization exposure, an Enterprise must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the securitization require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. An Enterprise that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a risk weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a securitization exposure using the SSFA, an Enterprise must have accurate information on the following five inputs to the SSFA calculation:
(1) K G is the weighted-average (with unpaid principal used as the weight for each exposure) adjusted total capital requirement of the underlying exposures calculated using this subpart. K G is expressed as a decimal value between zero and one (that is, an average risk weight of 100 percent represents a value of K G equal to 0.08).
(2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in § 1240.42(g) for nth-to-default credit derivatives, parameter A equals the ratio of the current dollar amount of underlying exposures that are subordinated to the exposure of the Enterprise to the current dollar amount of underlying exposures. Any reserve account funded by the accumulated cash flows from the underlying exposures that is subordinated to the Enterprise's securitization exposure may be included in the calculation of parameter A to the extent that cash is present in the account. Parameter A is expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in § 1240.42(g) for nth-to-default credit derivatives, parameter D equals parameter A plus the ratio of the current dollar amount of the securitization exposures that are pari passu with the exposure (that is, have equal seniority with respect to credit risk) to the current dollar amount of the underlying exposures. Parameter D is expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures (except p is equal to 0.5 for resecuritization exposures secured by MBS guaranteed by an Enterprise).
(c) Mechanics of the SSFA. K G and W are used to calculate K A , the augmented value of K G , which reflects the observed credit quality of the underlying exposures. K A is defined in paragraph (d) of this section. The values of parameters A and D, relative to K A determine the risk weight assigned to a securitization exposure as described in paragraph (d) of this section. The risk weight assigned to a securitization exposure, or portion of a securitization exposure, as appropriate, is the larger of the risk weight determined in accordance with this paragraph (c) or paragraph (d) of this section and a risk weight of 20 percent.
(1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K A , the exposure must be assigned a risk weight of 1,250 percent.
(2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K A , the Enterprise must calculate the risk weight in accordance with paragraph (d) of this section.
(3) When A is less than K A and D is greater than K A , the risk weight is a weighted-average of 1,250 percent and 1,250 percent times K SSFA calculated in accordance with paragraph (d) of this section. For the purpose of this weighted-average calculation:
(i) The weight assigned to 1,250 percent equals
(ii) The weight assigned to 1,250 percent times K SSFA equals
(iii) The risk weight will be set equal to:
(d) SSFA equation. (1) The Enterprise must define the following parameters:
e = 2.71828, the base of the natural logarithms.
(2) Then the Enterprise must calculate K SSFA according to the following equation:
(3) The risk weight for the exposure (expressed as a percent) is equal to K SSFA * 1,250.
(e) Limitations. Notwithstanding any other provision of this section, an Enterprise must assign a risk weight of not less than 20 percent to a securitization exposure.
§ 1240.44   Credit risk transfer approach (CRTA).
(a) General requirements for the CRTA. To use the CRTA to determine the risk weighted assets for a retained CRT exposure, an Enterprise must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contracts governing the underlying exposures of the credit risk transfer require payments on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. An Enterprise that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a risk weight of 1,250 percent to the retained CRT exposure.
(b) CRTA parameters. To calculate the risk weighted assets for a retained CRT exposure, an Enterprise must have accurate information on the following ten inputs to the CRTA calculation.
(1) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Parameter A equals the ratio of the current dollar amount of underlying exposures that are subordinated to the exposure of the Enterprise to the current dollar amount of underlying exposures. Any reserve account funded by the accumulated cash flows from the underlying exposures that is subordinated to the Enterprise's exposure may be included in the calculation of parameter A to the extent that cash is present in the account. Parameter A is expressed as a value between 0 and 100 percent.
(2) Parameter AggUPB $ is the aggregate unpaid principal balance of the underlying mortgage exposures.
(3) Parameter CM % is the percentage of a tranche sold in the capital markets. CM % is expressed as a value between 0 and 100 percent.
(4) Parameter Collat % RIF is the amount of financial collateral posted by a counterparty under a loss sharing contract expressed as a percentage of the risk in force. For multifamily lender loss sharing transactions where an Enterprise has the contractual right to receive future lender guarantee-fee revenue, the Enterprise may include up to 12 months of estimated lender retained servicing fees in excess of servicing costs on the multifamily mortgage exposures subject to the loss sharing contract. Collat % RIF is expressed as a value between 0 and 100 percent.
(5) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Parameter D equals parameter A plus the ratio of the current dollar amount of the exposures that are pari passu with the exposure (that is, have equal seniority with respect to credit risk) to the current dollar amount of the underlying exposures. Parameter D is expressed as a value between 0 and 100 percent.
(6) Parameter EL $ is the remaining lifetime net expected credit risk losses of the underlying mortgage exposures. EL $ must be calculated internally by an Enterprise. If the contractual terms of the CRT do not provide for the transfer of the counterparty credit risk associated with any loan-level credit enhancement or other loss sharing on the underlying mortgage exposures, then the Enterprise must calculate EL $ assuming no counterparty haircuts. Parameter EL $ is expressed in dollars.
(7) Parameter HC is the haircut for the counterparty in contractual loss sharing transactions.
(i) For a CRT with respect to single-family mortgage exposures, the counterparty haircut is set forth in table 12 to paragraph (e)(3)(ii) in § 1240.33, determined as if the counterparty to the CRT were a counterparty to loan-level credit enhancement (as defined in § 1240.33(a)) and considering the counterparty rating and mortgage concentration risk of the counterparty to the CRT and the single-family segment and product of the underlying single-family mortgage exposures.
(ii) For a CRT with respect to multifamily mortgage exposures, the counterparty haircut is set forth in table 1 to this paragraph (b)(7)(ii), with counterparty rating and mortgage concentration risk having the meaning given in § 1240.33(a).
(8) Parameter LS % is the percentage of a tranche that is either insured, reinsured, or afforded coverage through lender reimbursement of credit losses of principal. LS % is expressed as a value between 0 and 100 percent.
(9) Parameter LTF % is the loss timing factor which accounts for maturity differences between the CRT and the underlying mortgage exposures. Maturity differences arise when the maturity date of the CRT is before the maturity dates of the underlying mortgage exposures. LTF % is expressed as a value between 0 and 100 percent.
(i) An Enterprise must have the following information to calculate LTF % for a CRT with respect to multifamily mortgage exposures:
(A) The remaining months to the contractual maturity of the CRT ( CRT RMM ).
(B) The UPB-weighted-average remaining months to maturity of the underlying multifamily mortgage exposures that have remaining months to maturity greater than CRT RMM ( MME RMM ). If the underlying multifamily mortgage exposures all have maturity dates less than or equal to CRT RMM , MME RMM should equal CRT RMM .
(C) The sum of UPB on the underlying multifamily mortgage exposures that have remaining loan terms less than or equal to CRT RMM expressed as a percent of total UPB on the underlying multifamily mortgage exposures LTF % ( LTFUPB % ).
(D) An Enterprise must use the following method to calculate LTF % for multifamily CRTs:
(ii) An Enterprise must have the following information to calculate LTF % for a newly issued CRT with respect to single-family mortgage exposures:
(A) The original closing date (or effective date) of the CRT and the maturity date on the CRT.
(B) UPB share of single-family mortgage exposures that have original amortization terms of less than or equal to 189 months ( CRTF15 % ).
(C) UPB share of single-family mortgage exposures that have original amortization terms greater than 189 months and OLTVs of less than or equal to 80 percent( CRT80NotF15 % ).
(D) The duration of seasoning.
(E) An Enterprise must use the following method to calculate LTF % for single-family CRTs: Calculate CRT months to maturity ( CRTMthstoMaturity ) using one of the following methods:
( 1 ) For single-family CRTs with reimbursement based upon occurrence or resolution of delinquency, CRTMthstoMaturity is the difference between the CRT's maturity date and original closing date, except for the following:
( i ) If the coverage based upon delinquency is between one and three months, add 24 months to the difference between the CRT's maturity date and original closing date; and
( ii ) If the coverage based upon delinquency is between four and six months, add 18 months to the difference between the CRT's maturity date and original closing date.
( 2 ) For all other single-family CRTs, CRTMthstoMaturity is the difference between the CRT's maturity date and original closing date.
( i ) If CRTMthstoMaturity is a multiple of 12, then an Enterprise must use the first column of Table 2 to paragraph (b)(9)(ii)(E)( 2 )( iii ) of this section to identify the row matching CRTMthstoMaturity and take a weighted average of the three loss timing factors in columns 2, 3, and 4 as follows:
( ii ) If CRTMthstoMaturity is not a multiple of 12, an Enterprise must use the first column of Table 2 to paragraph (b)(9)(ii)(E)( 2 )( iii ) of this section to identify the two rows that are closest to CRTMthstoMaturity and take a weighted average between the two rows of loss timing factors using linear interpolation, where the weights reflect CRTMthstoMaturity.
( iii ) For seasoned single-family CRTs, the LTF % , is calculated:
(10) Parameter RWA $ is the aggregate credit risk-weighted assets associated with the underlying mortgage exposures.
(11) Parameter CntptyRWA $ is the aggregate credit risk-weighted assets due to counterparty haircuts from loan-level credit enhancements. CntptyRWA $ is the difference between:
(i) Parameter RWA $ ; and
(ii) Aggregate credit risk-weighted assets associated with the underlying mortgage exposures where the counterparty haircuts for loan-level credit enhancements are set to zero.
(c) Mechanics of the CRTA. The risk weight assigned to a retained CRT exposure, or portion of a retained CRT exposure, as appropriate, is the larger of RW % determined in accordance with paragraph (d) of this section and a risk weight of 5 percent.
(1) When the detachment point, parameter D, for a retained CRT exposure is less than or equal to the sum of K A and AggEL % , the exposure must be assigned a risk weight of 1,250 percent.
(2) When the attachment point, parameter A, for a retained CRT exposure is greater than or equal to or equal to the sum of K A and AggEL % ,

determined in accordance with paragraph (d) of this section, the exposure must be assigned a risk weight of 5 percent.
(3) When parameter A is less than or equal to the sum of K A and AggEL % , and

parameter D is greater than the sum of K A and AggEL %, the Enterprise must calculate the risk weight as the sum of:
(i) 1,250 percent multiplied by the ratio of (A) the sum of K A and AggEL % minus parameter A to (B) the difference between parameter D and parameter A ; and
(ii) 5 percent multiplied by the ratio of (A) parameter D minus the sum of K A and AggEL % to (B) the difference between parameter D and parameter A.
(d) CRTA equations.
If the contractual terms of the CRT do not provide for the transfer of the counterparty credit risk associated with any loan-level credit enhancement or other loss sharing on the underlying mortgage exposures, then the Enterprise shall calculate K A as follows:

Otherwise the Enterprise shall calculate K A as follows:
(e) Limitations. Notwithstanding any other provision of this section, an Enterprise must assign an overall risk weight of not less than 5 percent to a retained CRT exposure.
(f) Adjusted exposure amount (AEA) —(1) In general. The adjusted exposure amount (AEA) of a retained CRT exposure is equal to:
(2) Inputs —(i) Enterprise adjusted exposure. The adjusted exposure (EAE) of an Enterprise with respect to a retained CRT exposure is as follows:
(ii) Expected loss share. The expected loss share is the share of a tranche that is covered by expected loss (ELS):
(iii) Risk weight. The risk weight of a retained CRT exposure is determined under paragraph (d) of this section.
(g) Loss timing effectiveness adjustments. The loss timing effectiveness adjustments (LTEA) for a retained CRT exposure is calculated according to the following calculation:
Otherwise LTEA % ,Tranche,CM = 100% and LTEA % ,Tranche,LS = 100%
LTF % ,CM is LTF % calculated for the capital markets component of the tranche,
LTF % ,LS is LTF % calculated for the loss sharing component of the tranche, and the share of the tranche that is covered by expected loss (ELS) and the share of the tranche that is covered by stress loss (SLS) are as follows:
(h) Loss sharing effectiveness adjustment. The loss sharing effectiveness adjustment (LSEA) for a retained CRT exposure is calculated according to the following calculation:
(i) [Reserved]
(j) RWA supplement for retained loan-level counterparty credit risk. If the Enterprise elects to use the CRTA for a retained CRT exposure and if the contractual terms of the CRT do not provide for the transfer of the counterparty credit risk associated with any loan-level credit enhancement or other loss sharing on the underlying mortgage exposures, then the Enterprise must add the following risk-weighted assets supplement ( RWASup $ ) to risk weighted assets for the retained CRT exposure.
(k) Retained CRT Exposure. Credit risk-weighted assets for the retained CRT exposure are as follows:
§ 1240.45   Securitization exposures to which the SSFA and the CRTA do not apply.
An Enterprise must assign a 1,250 percent risk weight to any acquired CRT exposure and all securitization exposures to which the Enterprise does not apply the SSFA under § 1240.43 or the CRTA under § 1240.44.
§ 1240.46   Recognition of credit risk mitigants for securitization exposures.
(a) General. (1) An originating Enterprise that has obtained a credit risk mitigant to hedge its exposure to a synthetic or traditional securitization that satisfies the operational criteria provided in § 1240.41 may recognize the credit risk mitigant under § 1240.38 or § 1240.39, but only as provided in this section.
(2) An investing Enterprise that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant under § 1240.38 or § 1240.39, but only as provided in this section.
(b) Mismatches. An Enterprise must make any applicable adjustment to the protection amount of an eligible guarantee or credit derivative as required in § 1240.38(d) through (f) for any hedged securitization exposure. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the Enterprise must use the longest residual maturity of any of the hedged exposures as the residual maturity of all hedged exposures.
§ 1240.51   Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for equity exposures, an Enterprise must use the Simple Risk-Weight Approach (SRWA) provided in § 1240.52.
(2) An Enterprise must treat an investment in a separate account (as defined in § 1240.2) as if it were an equity exposure to an investment fund.
(b) Adjusted carrying value. For purposes of §§ 1240.51 and 1240.52, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the Enterprise's carrying value of the exposure;
(2) [Reserved]
(3) For the off-balance sheet component of an equity exposure that is not an equity commitment, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) given a small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section; and
(4) For a commitment to acquire an equity exposure (an equity commitment), the effective notional principal amount of the exposure is multiplied by the following conversion factors (CFs):
(i) Conditional equity commitments with an original maturity of one year or less receive a CF of 20 percent.
(ii) Conditional equity commitments with an original maturity of over one year receive a CF of 50 percent.
(iii) Unconditional equity commitments receive a CF of 100 percent.
§ 1240.52   Simple risk-weight approach (SRWA).
(a) General. Under the SRWA, an Enterprise's total risk-weighted assets for equity exposures equals the sum of the risk-weighted asset amounts for each of the Enterprise's individual equity exposures as determined under this section.
(b) SRWA computation for individual equity exposures. An Enterprise must determine the risk-weighted asset amount for an individual equity exposure by multiplying the adjusted carrying value of the equity exposure by the lowest applicable risk weight in this section.
(1) Community development equity exposures. A 100 percent risk weight is assigned to an equity exposure that was acquired with the prior written approval of FHFA and is designed primarily to promote community welfare, including the welfare of low- and moderate-income communities or families, such as by providing services or employment, and excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(2) Other equity exposures. A 400 percent risk weight is assigned to an equity exposure to an operating company or an investment in a separate account.
§§ 1240.53-1240.60   [Reserved]
§ 1240.61   Purpose and scope.
Sections 1240.61 through 1240.63 of this subpart establish public disclosure requirements related to the capital requirements and buffers described in subpart B and subpart G.
§ 1240.62   Disclosure requirements.
(a) An Enterprise must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 1240.63, where for the purpose of these disclosure requirements timely means no later than 10 business days after an Enterprise files its corresponding Annual Report on SEC Form 10-K at the end of a fiscal year or its corresponding Quarterly Report on SEC Form 10-Q at the end of other calendar quarters. If a material change occurs, where for the purpose of these disclosure requirements a material change means a change such that the omission or misstatement of which could change or influence the assessment or decision of a user relying on that information for the purpose of making investment decisions, then an Enterprise must disclose a brief discussion of this change and its likely impact as soon as practicable thereafter, and no later than the end of the next calendar quarter. Qualitative disclosures that have not changed from the prior quarter may be omitted from the next quarterly disclosure but must be disclosed at least annually after the end of the fourth calendar quarter.
(b) Unless otherwise directed by FHFA, the Enterprise's management may provide all of the disclosures required by §§ 1240.61 through 1240.63 in one place on the Enterprise's public website or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Enterprise publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(c) An Enterprise must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures.
(d) The Enterprise's board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. The Chief Risk Officer and the Chief Financial Officer of the Enterprise must attest that the disclosures meet the requirements of this subpart.
(e) If an Enterprise believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public certain information that is either proprietary or confidential in nature, the Enterprise is not required to disclose these specific items but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
§ 1240.63   Disclosures.
(a) Except as provided in § 1240.62, an Enterprise must make the disclosures described in Tables 1 through 11 of this section publicly available for each of the last three years (that is, twelve quarters) or such shorter period until an Enterprise has made twelve quarterly disclosures pursuant to this part beginning with the disclosure for the quarter ending December 31, 2022.
(b) An Enterprise must publicly disclose each quarter the following:
(1) Regulatory capital ratios for common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, total capital, core capital, and adjusted total capital, including the regulatory capital elements and all the regulatory adjustments and deductions needed to calculate the numerator of such ratios;
(2) Total risk-weighted assets, including the different regulatory adjustments and deductions needed to calculate total risk-weighted assets; and
(3) A reconciliation of regulatory capital elements as they relate to its balance sheet in any audited consolidated financial statements.
Table 1 to Paragraph ( b )(3)—Capital Structure
Table 2 to Paragraph ( b )(3)—Capital Adequacy
Table 3 to Paragraph ( b )(3)—Capital Buffers
(c) For each separate risk area described in Tables 4 through 9, the Enterprise must, as a general qualitative disclosure requirement, describe its risk management objectives and policies, including: Strategies and processes; the structure and organization of the relevant risk management function; the scope and nature of risk reporting and/or measurement systems; policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges and/or mitigants.
Table 4 to Paragraph ( c ) 1 —Credit Risk: General Disclosures
1 Table 4 does not cover equity exposures, which should be reported in Table 8 of this section.
2 Geographical areas consist of areas within the United States and territories. An Enterprise might choose to define the geographical areas based on the way the Enterprise's portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified.
3 An Enterprise may, but is not required to, also provide an analysis of the aging of past-due loans.
4 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
5 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated expected credit losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions, and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.
Table 5 to Paragraph ( c )—General Disclosure for Counterparty Credit Risk-Related Exposures
1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
Table 6 to Paragraph ( c )—Credit Risk Mitigation 1 2
1 At a minimum, an Enterprise must provide the disclosures in Table 6 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, the Enterprises may give further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures and included within those relating to securitization (Table 7 of this section).
Table 7 to Paragraph ( c )—CRT and Securitization
1 The Enterprise should describe the structure of resecuritizations in which it participates; this description should be provided for the main categories of resecuritization products in which the Enterprise is active.
2 For example, these roles may include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider.
3 Such affiliated entities may include, for example, money market funds, to be listed individually, and personal and private trusts, to be noted collectively.
4 “Exposures securitized” include underlying exposures originated by the Enterprise, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the Enterprise's balance sheet and underlying exposures acquired by the Enterprise from third-party entities) in which the originating Enterprise does not retain any securitization exposure should be shown separately but need only be reported for the year of inception. Enterprises are required to disclose exposures regardless of whether there is a capital charge under this part.
5 For example, charge-offs/allowances (if the assets remain on the Enterprise's balance sheet) or credit-related write-off of interest-only strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the Enterprise with respect to securitized assets.
Table 8 to Paragraph ( c )—Equities
1 This disclosure must include a breakdown of equities that are subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400 percent, and 600 percent risk weights, as applicable.
Table 9 to Paragraph ( c )—Interest Rate Risk for Non-Trading Activities
Table 10 to Paragraph ( c )—Operational Risk
Table 11 to Paragraph ( c )—Tier 1 Leverage Ratio
§ 1240.100   Purpose, applicability, and principle of conservatism.
(a) Purpose. This subpart establishes:
(1) Minimum requirements for using Enterprise-specific internal risk measurement and management processes for calculating risk-based capital requirements; and
(2) Methodologies for the Enterprises to calculate their advanced approaches total risk-weighted assets.
(b) Applicability. (1) This subpart applies to each Enterprise.
(2) An Enterprise must also include in its calculation of advanced credit risk-weighted assets under this subpart all covered positions, as defined in subpart F of this part.
(c) Principle of conservatism. Notwithstanding the requirements of this subpart, an Enterprise may choose not to apply a provision of this subpart to one or more exposures provided that:
(1) The Enterprise can demonstrate on an ongoing basis to the satisfaction of FHFA that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required under this subpart;
(2) The Enterprise appropriately manages the risk of each such exposure;
(3) The Enterprise notifies FHFA in writing prior to applying this principle to each such exposure; and
(4) The exposures to which the Enterprise applies this principle are not, in the aggregate, material to the Enterprise.
§ 1240.101   Definitions.
(a) Terms that are set forth in § 1240.2 and used in this subpart have the definitions assigned thereto in § 1240.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Advanced internal ratings-based (IRB) systems means an Enterprise's internal risk rating and segmentation system; risk parameter quantification system; data management and maintenance system; and control, oversight, and validation system for credit risk of exposures.
Advanced systems means an Enterprise's advanced IRB systems, operational risk management processes, operational risk data and assessment systems, operational risk quantification systems, and, to the extent used by the Enterprise, the internal models methodology, advanced CVA approach, double default excessive correlation detection process, and internal models approach (IMA) for equity exposures.
Backtesting means the comparison of an Enterprise's internal estimates with actual outcomes during a sample period not used in model development. In this context, backtesting is one form of out-of-sample testing.
Benchmarking means the comparison of an Enterprise's internal estimates with relevant internal and external data or with estimates based on other estimation techniques.
Business environment and internal control factors means the indicators of an Enterprise's operational risk profile that reflect a current and forward-looking assessment of the Enterprise's underlying business risk factors and internal control environment.
Dependence means a measure of the association among operational losses across and within units of measure.
Economic downturn conditions means, with respect to an exposure held by the Enterprise, those conditions in which the aggregate default rates for that exposure's exposure subcategory (or subdivision of such subcategory selected by the Enterprise) in the exposure's jurisdiction (or subdivision of such jurisdiction selected by the Enterprise) are significantly higher than average.
Eligible operational risk offsets means amounts, not to exceed expected operational loss, that:
(i) Are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated consistent with GAAP; and
(ii) Are available to cover expected operational losses with a high degree of certainty over a one-year horizon.
Expected operational loss (EOL) means the expected value of the distribution of potential aggregate operational losses, as generated by the Enterprise's operational risk quantification system using a one-year horizon.
External operational loss event data means, with respect to an Enterprise, gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organizations other than the Enterprise.
Internal operational loss event data means, with respect to an Enterprise, gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at the Enterprise.
Operational loss means a loss (excluding insurance or tax effects) resulting from an operational loss event. Operational loss includes all expenses associated with an operational loss event except for opportunity costs, forgone revenue, and costs related to risk management and control enhancements implemented to prevent future operational losses.
Operational loss event means an event that results in loss and is associated with any of the following seven operational loss event type categories:
(i) Internal fraud, which means the operational loss event type category that comprises operational losses resulting from an act involving at least one internal party of a type intended to defraud, misappropriate property, or circumvent regulations, the law, or company policy excluding diversity- and discrimination-type events.
(ii) External fraud, which means the operational loss event type category that comprises operational losses resulting from an act by a third party of a type intended to defraud, misappropriate property, or circumvent the law. All third-party-initiated credit losses are to be treated as credit risk losses.
(iii) Employment practices and workplace safety, which means the operational loss event type category that comprises operational losses resulting from an act inconsistent with employment, health, or safety laws or agreements, payment of personal injury claims, or payment arising from diversity- and discrimination-type events.
(iv) Clients, products, and business practices, which means the operational loss event type category that comprises operational losses resulting from the nature or design of a product or from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements).
(v) Damage to physical assets, which means the operational loss event type category that comprises operational losses resulting from the loss of or damage to physical assets from natural disaster or other events.
(vi) Business disruption and system failures, which means the operational loss event type category that comprises operational losses resulting from disruption of business or system failures.
(vii) Execution, delivery, and process management, which means the operational loss event type category that comprises operational losses resulting from failed transaction processing or process management or losses arising from relations with trade counterparties and vendors.
Operational risk means the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events (including legal risk but excluding strategic and reputational risk).
Operational risk exposure means the 99.9th percentile of the distribution of potential aggregate operational losses, as generated by the Enterprise's operational risk quantification system over a one-year horizon (and not incorporating eligible operational risk offsets or qualifying operational risk mitigants).
Risk parameter means a variable used in determining risk-based capital requirements for exposures, such as probability of default, loss given default, exposure at default, or effective maturity.
Scenario analysis means a systematic process of obtaining expert opinions from business managers and risk management experts to derive reasoned assessments of the likelihood and loss impact of plausible high-severity operational losses. Scenario analysis may include the well-reasoned evaluation and use of external operational loss event data, adjusted as appropriate to ensure relevance to an Enterprise's operational risk profile and control structure.
Unexpected operational loss (UOL) means the difference between the Enterprise's operational risk exposure and the Enterprise's expected operational loss.
Unit of measure means the level (for example, organizational unit or operational loss event type) at which the Enterprise's operational risk quantification system generates a separate distribution of potential operational losses.
§ 1240.121   Minimum requirements.
(a) Process and systems requirements. (1) An Enterprise must have a rigorous process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital.
(2) The systems and processes used by an Enterprise for risk-based capital purposes under this subpart must be consistent with the Enterprise's internal risk management processes and management information reporting systems.
(3) Each Enterprise must have an appropriate infrastructure with risk measurement and management processes that meet the requirements of this section and are appropriate given the Enterprise's size and level of complexity. The Enterprise must ensure that the risk parameters and reference data used to determine its risk-based capital requirements are representative of long run experience with respect to its credit risk and operational risk exposures.
(b) Risk rating and segmentation systems for exposures. (1) An Enterprise must have an internal risk rating and segmentation system that accurately, reliably, and meaningfully differentiates among degrees of credit risk for the Enterprise's exposures. When assigning an internal risk rating, an Enterprise may consider a third-party assessment of credit risk, provided that the Enterprise's internal risk rating assignment does not rely solely on the external assessment.
(2) If an Enterprise uses multiple rating or segmentation systems, the Enterprise's rationale for assigning an exposure to a particular system must be documented and applied in a manner that best reflects the obligor or exposure's level of risk. An Enterprise must not inappropriately allocate exposures across systems to minimize regulatory capital requirements.
(3) In assigning ratings to exposures, an Enterprise must use all relevant and material information and ensure that the information is current.
(c) Quantification of risk parameters for exposures. (1) The Enterprise must have a comprehensive risk parameter quantification process that produces accurate, timely, and reliable estimates of the risk parameters on a consistent basis for the Enterprise's exposures.
(2) An Enterprise's estimates of risk parameters must incorporate all relevant, material, and available data that is reflective of the Enterprise's actual exposures and of sufficient quality to support the determination of risk-based capital requirements for the exposures. In particular, the population of exposures in the data used for estimation purposes, the underwriting standards in use when the data were generated, and other relevant characteristics, should closely match or be comparable to the Enterprise's exposures and standards. In addition, an Enterprise must:
(i) Demonstrate that its estimates are representative of long run experience, including periods of economic downturn conditions, whether internal or external data are used;
(ii) Take into account any changes in underwriting practice or the process for pursuing recoveries over the observation period;
(iii) Promptly reflect technical advances, new data, and other information as they become available;
(iv) Demonstrate that the data used to estimate risk parameters support the accuracy and robustness of those estimates; and
(v) Demonstrate that its estimation technique performs well in out-of-sample tests whenever possible.
(3) The Enterprise's risk parameter quantification process must produce appropriately conservative risk parameter estimates where the Enterprise has limited relevant data, and any adjustments that are part of the quantification process must not result in a pattern of bias toward lower risk parameter estimates.
(4) The Enterprise's risk parameter estimation process should not rely on the possibility of U.S. government financial assistance.
(5) Default, loss severity, and exposure amount data must include periods of economic downturn conditions, or the Enterprise must adjust its estimates of risk parameters to compensate for the lack of data from periods of economic downturn conditions.
(6) If an Enterprise uses internal data obtained prior to becoming subject to this subpart or external data to arrive at risk parameter estimates, the Enterprise must demonstrate to FHFA that the Enterprise has made appropriate adjustments if necessary to be consistent with the Enterprise's definition of default. Internal data obtained after the Enterprise becomes subject to this subpart must be consistent with the Enterprise's definition of default.
(7) The Enterprise must review and update (as appropriate) its risk parameters and its risk parameter quantification process at least annually.
(8) The Enterprise must, at least annually, conduct a comprehensive review and analysis of reference data to determine relevance of the reference data to the Enterprise's exposures, quality of reference data to support risk parameter estimates, and consistency of reference data to the Enterprise's definition of default.
(d) Operational risk —(1) Operational risk management processes. An Enterprise must:
(i) Have an operational risk management function that:
(A) Is independent of business line management; and
(B) Is responsible for designing, implementing, and overseeing the Enterprise's operational risk data and assessment systems, operational risk quantification systems, and related processes;
(ii) Have and document a process (which must capture business environment and internal control factors affecting the Enterprise's operational risk profile) to identify, measure, monitor, and control operational risk in the Enterprise's products, activities, processes, and systems; and
(iii) Report operational risk exposures, operational loss events, and other relevant operational risk information to business unit management, senior management, and the board of directors (or a designated committee of the board).
(2) Operational risk data and assessment systems. An Enterprise must have operational risk data and assessment systems that capture operational risks to which the Enterprise is exposed. The Enterprise's operational risk data and assessment systems must:
(i) Be structured in a manner consistent with the Enterprise's current business activities, risk profile, technological processes, and risk management processes; and
(ii) Include credible, transparent, systematic, and verifiable processes that incorporate the following elements on an ongoing basis:
(A) Internal operational loss event data. The Enterprise must have a systematic process for capturing and using internal operational loss event data in its operational risk data and assessment systems.
( 1 ) The Enterprise's operational risk data and assessment systems must include a historical observation period of at least five years for internal operational loss event data (or such shorter period approved by FHFA to address transitional situations, such as integrating a new business line).
( 2 ) The Enterprise must be able to map its internal operational loss event data into the seven operational loss event type categories.
( 3 ) The Enterprise may refrain from collecting internal operational loss event data for individual operational losses below established dollar threshold amounts if the Enterprise can demonstrate to the satisfaction of FHFA that the thresholds are reasonable, do not exclude important internal operational loss event data, and permit the Enterprise to capture substantially all the dollar value of the Enterprise's operational losses.
(B) External operational loss event data. The Enterprise must have a systematic process for determining its methodologies for incorporating external operational loss event data into its operational risk data and assessment systems.
(C) Scenario analysis. The Enterprise must have a systematic process for determining its methodologies for incorporating scenario analysis into its operational risk data and assessment systems.
(D) Business environment and internal control factors. The Enterprise must incorporate business environment and internal control factors into its operational risk data and assessment systems. The Enterprise must also periodically compare the results of its prior business environment and internal control factor assessments against its actual operational losses incurred in the intervening period.
(3) Operational risk quantification systems. The Enterprise's operational risk quantification systems:
(i) Must generate estimates of the Enterprise's operational risk exposure using its operational risk data and assessment systems;
(ii) Must employ a unit of measure that is appropriate for the Enterprise's range of business activities and the variety of operational loss events to which it is exposed, and that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution;
(iii) Must include a credible, transparent, systematic, and verifiable approach for weighting each of the four elements, described in paragraph (d)(2)(ii) of this section, that an Enterprise is required to incorporate into its operational risk data and assessment systems;
(iv) May use internal estimates of dependence among operational losses across and within units of measure if the Enterprise can demonstrate to the satisfaction of FHFA that its process for estimating dependence is sound, robust to a variety of scenarios, and implemented with integrity, and allows for uncertainty surrounding the estimates. If the Enterprise has not made such a demonstration, it must sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure; and
(v) Must be reviewed and updated (as appropriate) whenever the Enterprise becomes aware of information that may have a material effect on the Enterprise's estimate of operational risk exposure, but the review and update must occur no less frequently than annually.
(e) Data management and maintenance. (1) An Enterprise must have data management and maintenance systems that adequately support all aspects of its advanced systems and the timely and accurate reporting of risk-based capital requirements.
(2) An Enterprise must retain data using an electronic format that allows timely retrieval of data for analysis, validation, reporting, and disclosure purposes.
(3) An Enterprise must retain sufficient data elements related to key risk drivers to permit adequate monitoring, validation, and refinement of its advanced systems.
(f) Control, oversight, and validation mechanisms. (1) The Enterprise's senior management must ensure that all components of the Enterprise's advanced systems function effectively and comply with the minimum requirements in this section.
(2) The Enterprise's board of directors (or a designated committee of the board) must at least annually review the effectiveness of, and approve, the Enterprise's advanced systems.
(3) An Enterprise must have an effective system of controls and oversight that:
(i) Ensures ongoing compliance with the minimum requirements in this section;
(ii) Maintains the integrity, reliability, and accuracy of the Enterprise's advanced systems; and
(iii) Includes adequate governance and project management processes.
(4) The Enterprise must validate, on an ongoing basis, its advanced systems. The Enterprise's validation process must be independent of the advanced systems' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the advanced systems;
(ii) An ongoing monitoring process that includes verification of processes and benchmarking; and
(iii) An outcomes analysis process that includes backtesting.
(5) The Enterprise must have an internal audit function or equivalent function that is independent of business-line management that at least annually:
(i) Reviews the Enterprise's advanced systems and associated operations, including the operations of its credit function and estimations of risk parameters;
(ii) Assesses the effectiveness of the controls supporting the Enterprise's advanced systems; and
(iii) Documents and reports its findings to the Enterprise's board of directors (or a committee thereof).
(6) The Enterprise must periodically stress test its advanced systems. The stress testing must include a consideration of how economic cycles, especially downturns, affect risk-based capital requirements (including migration across rating grades and segments and the credit risk mitigation benefits of double default treatment).
(g) Documentation. The Enterprise must adequately document all material aspects of its advanced systems.
§ 1240.122   Ongoing qualification.
(a) Changes to advanced systems. An Enterprise must meet all the minimum requirements in § 1240.121 on an ongoing basis. An Enterprise must notify FHFA when the Enterprise makes any change to an advanced system that would result in a material change in the Enterprise's advanced approaches total risk-weighted asset amount for an exposure type or when the Enterprise makes any significant change to its modeling assumptions.
(b) Failure to comply with qualification requirements. (1) If FHFA determines that an Enterprise fails to comply with the requirements in § 1240.121, FHFA will notify the Enterprise in writing of the Enterprise's failure to comply.
(2) The Enterprise must establish and submit a plan satisfactory to FHFA to return to compliance with the qualification requirements.
(3) In addition, if FHFA determines that the Enterprise's advanced approaches total risk-weighted assets are not commensurate with the Enterprise's credit, market, operational, or other risks, FHFA may require such an Enterprise to calculate its advanced approaches total risk-weighted assets with any modifications provided by FHFA.
§ 1240.123   Advanced approaches credit risk-weighted asset calculations.
(a) An Enterprise must use its advanced systems to determine its credit risk capital requirements for each of the following exposures:
(1) General credit risk (including for mortgage exposures);
(2) Cleared transactions;
(3) Default fund contributions;
(4) Unsettled transactions;
(5) Securitization exposures;
(6) Equity exposures; and
(7) The fair value adjustment to reflect counterparty credit risk in valuation of OTC derivative contracts.
(b) The credit-risk-weighted assets calculated under this subpart E equals the aggregate credit risk capital requirement under paragraph (a) of this section multiplied by 12.5.
§§ 1240.124--1240.160   [Reserved]
§ 1240.161   Qualification requirements for incorporation of operational risk mitigants.
(a) Qualification to use operational risk mitigants. An Enterprise may adjust its estimate of operational risk exposure to reflect qualifying operational risk mitigants if:
(1) The Enterprise's operational risk quantification system is able to generate an estimate of the Enterprise's operational risk exposure (which does not incorporate qualifying operational risk mitigants) and an estimate of the Enterprise's operational risk exposure adjusted to incorporate qualifying operational risk mitigants; and
(2) The Enterprise's methodology for incorporating the effects of insurance, if the Enterprise uses insurance as an operational risk mitigant, captures through appropriate discounts to the amount of risk mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancelation terms of the policy, where less than one year;
(iii) The policy's timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy; and
(v) Mismatches in coverage between the policy and the hedged operational loss event.
(b) Qualifying operational risk mitigants. Qualifying operational risk mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated company that the Enterprise deems to have strong capacity to meet its claims payment obligations and the Enterprise assigns the company a probability of default equal to or less than 10 basis points;
(ii) Has an initial term of at least one year and a residual term of more than 90 days;
(iii) Has a minimum notice period for cancellation by the provider of 90 days;
(iv) Has no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed depository institution; and
(v) Is explicitly mapped to a potential operational loss event;
(2) In evaluating an operational risk mitigant other than insurance, FHFA will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding total capital.
§ 1240.162   Mechanics of operational risk risk-weighted asset calculation.
(a) If an Enterprise does not qualify to use or does not have qualifying operational risk mitigants, the Enterprise's dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any).
(b) If an Enterprise qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the Enterprise's dollar risk-based capital requirement for operational risk is the greater of:
(1) The Enterprise's operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); or
(2) 0.8 multiplied by the difference between:
(i) The Enterprise's operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The Enterprise's risk-weighted asset amount for operational risk equals the greater of:
(1) The Enterprise's dollar risk-based capital requirement for operational risk determined under paragraphs (a) or (b) multiplied by 12.5; and
(2) The Enterprise's adjusted total assets multiplied by 0.0015 multiplied by 12.5.
(d) After January 1, 2022, and until the compliance date for this section under § 1240.4, the Enterprise's risk weighted amount for operational risk will equal the Enterprise's adjusted total assets multiplied by 0.0015 multiplied by 12.5.
§ 1240.201   Purpose, applicability, and reservation of authority.
(a) Purpose. This subpart F establishes risk-based capital requirements for spread risk and provides methods for the Enterprises to calculate their measure for spread risk.
(b) Applicability. This subpart applies to each Enterprise.
(c) Reservation of authority. Subject to applicable provisions of the Safety and Soundness Act:
(1) FHFA may require an Enterprise to hold an amount of capital greater than otherwise required under this subpart if FHFA determines that the Enterprise's capital requirement for spread risk as calculated under this subpart is not commensurate with the spread risk of the Enterprise's covered positions.
(2) If FHFA determines that the risk-based capital requirement calculated under this subpart by the Enterprise for one or more covered positions or portfolios of covered positions is not commensurate with the risks associated with those positions or portfolios, FHFA may require the Enterprise to assign a different risk-based capital requirement to the positions or portfolios that more accurately reflects the risk of the positions or portfolios.
(3) In addition to calculating risk-based capital requirements for specific positions or portfolios under this subpart, the Enterprise must also calculate risk-based capital requirements for covered positions under subpart D or subpart E of this part, as appropriate.
(4) Nothing in this subpart limits the authority of FHFA under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law.
§ 1240.202   Definitions.
(a) Terms set forth in § 1240.2 and used in this subpart have the definitions assigned in § 1240.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Backtesting means the comparison of an Enterprise's internal estimates with actual outcomes during a sample period not used in model development. For purposes of this subpart, backtesting is one form of out-of-sample testing.
Covered position means, any asset that has more than de minimis spread risk (other than any intangible asset, such as any servicing asset), including:
(i) Any NPL, RPL, reverse mortgage loan, or other mortgage exposure that, in any case, does not secure an MBS guaranteed by the Enterprise;
(ii) Any MBS guaranteed by an Enterprise, MBS guaranteed by Ginnie Mae, reverse mortgage security, PLS, commercial MBS, CRT exposure, or other securitization exposure, regardless of whether the position is held by the Enterprise for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits; and
(iii) Any other trading asset or trading liability (whether on- or off-balance sheet). 1
1 Securities subject to repurchase and lending agreements are included as if they are still owned by the Enterprise.
Market risk means the risk of loss on a position that could result from movements in market prices, including spread risk.
Private label security (PLS) means any MBS that is collateralized by a pool or pools of single-family mortgage exposures and that is not guaranteed by an Enterprise or by Ginnie Mae.
Reverse mortgage means a mortgage loan secured by a residential property in which a homeowner relinquishes equity in their home in exchange for regular payments.
Reverse mortgage security means a security collateralized by reverse mortgages.
Spread risk means the risk of loss on a position that could result from a change in the bid or offer price of such position relative to a risk free or funding benchmark, including when due to a change in perceptions of performance or liquidity of the position.
§ 1240.203   Requirements for managing market risk.
(a) Management of covered positions —(1) Active management. An Enterprise must have clearly defined policies and procedures for actively managing all covered positions. At a minimum, these policies and procedures must require:
(i) Marking covered positions to market or to model on a daily basis;
(ii) Daily assessment of the Enterprise's ability to hedge position and portfolio risks, and of the extent of market liquidity;
(iii) Establishment and daily monitoring of limits on covered positions by a risk control unit independent of the business unit;
(iv) Routine monitoring by senior management of information described in paragraphs (a)(1)(i) through (iii) of this section;
(v) At least annual reassessment of established limits on positions by senior management; and
(vi) At least annual assessments by qualified personnel of the quality of market inputs to the valuation process, the soundness of key assumptions, the reliability of parameter estimation in pricing models, and the stability and accuracy of model calibration under alternative market scenarios.
(2) Valuation of covered positions. The Enterprise must have a process for prudent valuation of its covered positions that includes policies and procedures on the valuation of positions, marking positions to market or to model, independent price verification, and valuation adjustments or reserves. The valuation process must consider, as appropriate, unearned credit spreads, close-out costs, early termination costs, investing and funding costs, liquidity, and model risk.
(b) Requirements for internal models. (1) A risk control unit independent of the business unit must approve any internal model to calculate its risk-based capital requirement under this subpart.
(2) An Enterprise must meet all of the requirements of this section on an ongoing basis. The Enterprise must promptly notify FHFA when:
(i) The Enterprise plans to extend the use of a model to an additional business line or product type;
(ii) The Enterprise makes any change to an internal model that would result in a material change in the Enterprise's risk-weighted asset amount for a portfolio of covered positions; or
(iii) The Enterprise makes any material change to its modeling assumptions.
(3) FHFA may determine an appropriate capital requirement for the covered positions to which a model would apply, if FHFA determines that the model no longer complies with this subpart or fails to reflect accurately the risks of the Enterprise's covered positions.
(4) The Enterprise must periodically, but no less frequently than annually, review its internal models in light of developments in financial markets and modeling technologies, and enhance those models as appropriate to ensure that they continue to meet the Enterprise's standards for model approval and employ risk measurement methodologies that are most appropriate for the Enterprise's covered positions.
(5) The Enterprise must incorporate its internal models into its risk management process and integrate the internal models used for calculating its market risk measure into its daily risk management process.
(6) The level of sophistication of an Enterprise's internal models must be commensurate with the complexity and amount of its covered positions. An Enterprise's internal models may use any of the generally accepted approaches, including variance-covariance models, historical simulations, or Monte Carlo simulations, to measure market risk.
(7) The Enterprise's internal models must properly measure all the material risks in the covered positions to which they are applied.
(8) The Enterprise's internal models must conservatively assess the risks arising from less liquid positions and positions with limited price transparency under realistic market scenarios.
(9) The Enterprise must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal models to ensure continued applicability and relevance.
(c) Control, oversight, and validation mechanisms. (1) The Enterprise must have a risk control unit that reports directly to senior management and is independent from the business units.
(2) The Enterprise must validate its internal models initially and on an ongoing basis. The Enterprise's validation process must be independent of the internal models' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the internal models;
(ii) An ongoing monitoring process that includes verification of processes and the comparison of the Enterprise's model outputs with relevant internal and external data sources or estimation techniques; and
(iii) An outcomes analysis process that includes backtesting.
(3) The Enterprise must stress test the market risk of its covered positions at a frequency appropriate to each portfolio, and in no case less frequently than quarterly. The stress tests must take into account concentration risk (including concentrations in single issuers, industries, sectors, or markets), illiquidity under stressed market conditions, and risks arising from the Enterprise's trading activities that may not be adequately captured in its internal models.
(4) The Enterprise must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the Enterprise's market risk measurement systems, including the activities of the business units and independent risk control unit, compliance with policies and procedures, and calculation of the Enterprise's measures for spread risk under this subpart. At least annually, the internal audit function must report its findings to the Enterprise's board of directors (or a committee thereof).
(d) Internal assessment of capital adequacy. The Enterprise must have a rigorous process for assessing its overall capital adequacy in relation to its market risk.
(e) Documentation. The Enterprise must adequately document all material aspects of its internal models, management and valuation of covered positions, control, oversight, validation and review processes and results, and internal assessment of capital adequacy.
§ 1240.204   Measure for spread risk.
(a) General requirement —(1) In general. An Enterprise must calculate its standardized measure for spread risk by following the steps described in paragraph (a)(2) of this section. An Enterprise also must calculate an advanced measure for spread risk by following the steps in paragraph (a)(2) of this section.
(2) Measure for spread risk. An Enterprise must calculate the standardized measure for spread risk, which equals the sum of the spread risk capital requirements of all covered positions using one or more of its internal models except as contemplated by paragraphs (b) or (c) of this section. An Enterprise also must calculate the advanced measure for spread risk, which equals the sum of the spread risk capital requirements of all covered positions calculated using one or more of its internal models.
(b) Single point approach —(1) General. For purposes of the standardized measure for spread risk, the spread risk capital requirement for a covered position that is an RPL, an NPL, a reverse mortgage loan, or a reverse mortgage security is the amount equal to:
(i) The market value of the covered position; multiplied by
(ii) The applicable single point shock assumption for the covered position under paragraph (b)(2) of this section.
(2) Applicable single point shock assumption. The applicable single point shock assumption is:
(i) 0.0475 for an RPL or an NPL;
(ii) 0.0160 for a reverse mortgage loan; and
(iii) 0.0410 for a reverse mortgage security.
(c) Spread duration approach —(1) General. For purposes of the standardized measure for spread risk, the spread risk capital requirement for a covered position that is a multifamily mortgage exposure, a PLS, or an MBS guaranteed by an Enterprise or Ginnie Mae and secured by multifamily mortgage exposures is the amount equal to:
(i) The market value of the covered position; multiplied by
(ii) The spread duration of the covered position determined by the Enterprise using one or more of its internal models; multiplied by
(iii) The applicable spread shock assumption under paragraph (c)(2) of this section.
(2) Applicable spread shock assumption. The applicable spread shock is:
(i) 0.0015 for a multifamily mortgage exposure;
(ii) 0.0265 for a PLS; and
(iii) 0.0100 for an MBS guaranteed by an Enterprise or by Ginnie Mae and secured by multifamily mortgage exposures (other than IO securities guaranteed by an Enterprise or Ginnie Mae).
§ 1240.205   Market risk disclosures.
(a) Scope. An Enterprise must make timely public disclosures each calendar quarter, where for the purpose of these disclosure requirements timely means no later than 10 business days after an Enterprise files its corresponding Annual Report on SEC Form 10-K at the end of a fiscal year or its corresponding Quarterly Report on SEC Form 10-Q at the end of other calendar quarters. If a significant change occurs, such that the most recent reporting amounts are no longer reflective of the Enterprise's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be provided as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter may be disclosed annually, provided any material changes are disclosed as soon as practicable thereafter, and no later than the end of the next calendar quarter, where for the purpose of these disclosure requirements a material change means a change such that the omission or misstatement of which could change or influence the assessment or decision of a user relying on that information for the purpose of making investment decisions. If an Enterprise believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public certain information that is either proprietary or confidential in nature, the Enterprise is not required to disclose these specific items but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
(b) Location. The Enterprise's management may provide all of the disclosures required by this section in one place on the Enterprise's public website or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Enterprise publicly provides a summary table specifically indicating the location(s) of all such disclosures.
(c) Disclosure policy. The Enterprise must have a formal disclosure policy approved by the board of directors that addresses the Enterprise's approach for determining its market risk disclosures. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management must ensure that appropriate verification of the disclosures takes place and that effective internal controls and disclosure controls and procedures are maintained. The Chief Risk Officer and the Chief Financial Officer of the Enterprise must attest that the disclosures meet the requirements of this subpart, and the board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over the disclosures required by this section.
(d) Quantitative disclosures. (1) For each material portfolio of covered positions, the Enterprise must provide timely public disclosures of the following information at least quarterly:
(i) Exposure amounts for each product type included in covered positions as described in § 1240.202; and
(ii) Risk-weighted assets for each product type included in covered positions as described in § 1240.202.
(2) In addition, the Enterprise must disclose publicly the aggregate amount of on-balance sheet and off-balance sheet securitization positions by exposure type at least quarterly.
(e) Qualitative disclosures. For each material portfolio of covered positions as identified using the definitions in § 1240.202, the Enterprise must provide timely public disclosures of the following information at least annually after the end of the fourth calendar quarter, or more frequently in the event of material changes for each portfolio:
(1) The composition of material portfolios of covered positions;
(2) The Enterprise's valuation policies, procedures, and methodologies for covered positions including, for securitization positions, the methods and key assumptions used for valuing such positions, any significant changes since the last reporting period, and the impact of such change;
(3) The characteristics of the internal models used for purposes of this subpart;
(4) A description of the approaches used for validating and evaluating the accuracy of internal models and modeling processes for purposes of this subpart;
(5) For each market risk category (that is, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk), a description of the stress tests applied to the positions subject to the factor;
(6) The results of the comparison of the Enterprise's internal estimates for purposes of this subpart with actual outcomes during a sample period not used in model development; and
(7) A description of the Enterprise's processes for monitoring changes in the market risk of securitization positions, including how those processes differ for resecuritization positions.
§ 1240.400   Stability capital buffer.
(a) Definitions. For purposes of this subpart:
(1) Mortgage assets means, with respect to an Enterprise, the dollar amount equal to the sum of:
(i) The unpaid principal balance of its single-family mortgage exposures, including any single-family loans that secure MBS guaranteed by the Enterprise;
(ii) The unpaid principal balance of its multifamily mortgage exposures, including any multifamily mortgage exposures that secure MBS guaranteed by the Enterprise;
(iii) The carrying value of its MBS guaranteed by an Enterprise, MBS guaranteed by Ginnie Mae, PLS, and other securitization exposures (other than its retained CRT exposures); and
(iv) The exposure amount of any other mortgage assets.
(2) Residential mortgage debt outstanding means the dollar amount of mortgage debt outstanding secured by one- to four-family residences or multifamily residences that are located in the United States (and excluding any mortgage debt outstanding secured by commercial or farm properties).
(b) Amount. An Enterprise must calculate its stability capital buffer under this section on an annual basis by December 31 of each year. The stability capital buffer of an Enterprise is equal to:
(1) The ratio of:
(i) The mortgage assets of the Enterprise as of December 31 of the previous calendar year; to
(ii) The residential mortgage debt outstanding as of December 31 of the previous calendar year, as published by FHFA;
(2) Minus 0.05;
(3) Multiplied by 5;
(4) Divided by 100; and
(5) Multiplied by the adjusted total assets of the Enterprise, as of December 31 of the previous calendar year.
(c) Effective date of an adjusted stability capital buffer —(1) Increase in stability capital buffer. An increase in the stability capital buffer of an Enterprise under this section will take effect ( i.e., be incorporated into the maximum payout ratio under table 1 to paragraph (b)(5) in § 1240.11) on January 1 of the year that is one full calendar year after the increased stability capital buffer was calculated, provided that where a stability capital buffer under paragraph (c)(2) of this section is calculated to be a decrease in the stability capital buffer from the previously calculated scheduled increase applicable on the same January 1, the decreased stability capital buffer under paragraph (c)(2) shall take effect.
(2) Decrease in stability capital buffer. A decrease in the stability capital buffer of an Enterprise will take effect ( i.e., be incorporated into the maximum payout ratio under table 1 to paragraph (b)(5) in § 1240.11) on January 1 of the year immediately following the calendar year in which the decreased stability capital buffer was calculated.
§ 1240.500   Capital planning and stress capital buffer determination.
(a) Purpose. This section establishes capital planning and prior notice and approval requirements for capital distributions by the Enterprises. This section also establishes FHFA's process for determining the stress capital buffer applicable to the Enterprises.
(b) Scope and reservation of authority —(1) Applicability. This section applies to the Enterprises.
(2) Reservation of authority. Nothing in this section shall limit the authority of FHFA to issue or enforce a capital directive or take any other supervisory or enforcement action, including an action to address unsafe or unsound practices or conditions or violations of law.
(c) Definitions. For purposes of this section, the following definitions apply:
Adjusted total assets has the same meaning as under subpart A of this part.
Advanced approaches means the risk-weighted assets calculation methodologies as set forth in subpart E of this part.
Capital action means any issuance of a debt or equity capital instrument, any capital distribution, and any similar action that FHFA determines could impact an Enterprise's consolidated capital.
Capital distribution means a redemption or repurchase of any debt or equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum regulatory capital ratio, and any similar transaction that FHFA determines to be in substance a distribution of capital.
Capital plan means a written presentation of an Enterprise's capital planning strategies and capital adequacy process that includes the mandatory elements set forth in paragraph (d)(2) of this section.
Capital plan cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
Capital policy means an Enterprise's written principles and guidelines used for capital planning, capital issuance, capital usage and distributions, including internal capital goals; the quantitative or qualitative guidelines for capital distributions; the strategies for addressing potential capital shortfalls; and the internal governance procedures around capital policy principles and guidelines.
Common equity tier 1 capital has the same meaning as under subpart C of this part.
Effective capital distribution limitations means any limitations on capital distributions established by FHFA by order or regulation, provided that, for any limitations based on risk-weighted assets, such limitations must be calculated using the standardized approach, as set forth in subpart D of this part.
Final planned capital distributions means the planned capital distributions included in a capital plan that include the adjustments made pursuant to paragraph (g) of this section, if any.
Internal baseline scenario means a scenario that reflects the Enterprise's expectation of the economic and financial outlook, including expectations related to the Enterprise's capital adequacy and financial condition.
Internal stress scenario means a scenario designed by an Enterprise that stresses the specific vulnerabilities of the Enterprise's risk profile and operations, including those related to the Enterprise's capital adequacy and financial condition.
Planning horizon means the period of at least nine consecutive quarters for the FHFA scenarios and at least five years for the Internal scenarios, beginning with the quarter preceding the quarter in which the Enterprise submits its capital plan, over which the relevant projections extend, unless otherwise directed by FHFA.
Regulatory capital ratio means a capital ratio for which FHFA has established minimum requirements for the Enterprise by regulation or order, including, as applicable, the Enterprise's regulatory capital ratios calculated under subpart B of this part; except that the Enterprise shall not use the advanced approaches to calculate its regulatory capital ratios.
Severely adverse scenario has the same meaning as under 12 CFR part 1238.
Stability capital buffer has the same meaning as under subpart G of this part.
Stress capital buffer means the amount calculated under paragraph (e) of this section.
Supervisory stress test means a stress test conducted by FHFA using a severely adverse scenario and the assumptions contained in 12 CFR part 1238.
(d) Capital planning requirements and procedures —(1) Annual capital planning. (i) An Enterprise must develop and maintain a capital plan.
(ii) An Enterprise must submit its complete capital plan to FHFA by May 20 of each calendar year, or such later date as directed by FHFA.
(iii) The Enterprise's board of directors or a designated committee thereof must at least annually and prior to submission of the capital plan under paragraph (d)(1)(ii) of this section:
(A) Review the robustness of the Enterprise's process for assessing capital adequacy;
(B) Ensure that any deficiencies in the Enterprise's process for assessing capital adequacy are appropriately remedied; and
(C) Approve the Enterprise's capital plan.
(2) Mandatory elements of capital plan. A capital plan must contain at least the following elements:
(i) An assessment of the expected uses and sources of capital over the planning horizon that reflects the Enterprise's size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including:
(A) Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels, including regulatory capital ratios, and any additional capital measures deemed relevant by the Enterprise, over the planning horizon under a range of scenarios, including the Internal baseline scenario and at least one Internal stress scenario, as well as any additional scenarios that FHFA may provide the Enterprise after giving notice to the Enterprise;
(B) A discussion of the results of any stress test required by law or regulation, and an explanation of how the capital plan takes these results into account; and
(C) A description of all planned capital actions over the planning horizon. Planned capital actions must be consistent with any effective capital distribution limitations, except as may be adjusted pursuant to paragraph (g) of this section. In determining whether an Enterprise's planned capital distributions are consistent with effective capital distribution limitations, an Enterprise must assume that:
( 1 ) Any countercyclical capital buffer amount currently applicable to the Enterprise remains at the same level, except that the Enterprise must reflect any increases or decreases in the countercyclical capital buffer amount that have been announced by FHFA at the times indicated by FHFA's announcement for when such increases or decreases will take effect; and
( 2 ) Any stability capital buffer currently applicable to the Enterprise when the capital plan is submitted remains at the same level, except that the Enterprise must reflect any increase in its stability capital buffer pursuant to § 1240.400(c)(1), beginning in the fifth quarter of the planning horizon.
(ii) A detailed description of the Enterprise's process for assessing capital adequacy, including:
(A) A discussion of how the Enterprise will, under expected and stressful conditions, maintain capital commensurate with its risks, and maintain capital above the regulatory capital ratios;
(B) A discussion of how the Enterprise will, under expected and stressful conditions, maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary;
(iii) The Enterprise's capital policy; and
(iv) A discussion of any expected changes to the Enterprise's business plan that are likely to have a material impact on the Enterprise's capital adequacy or liquidity.
(3) Data collection. Upon the request of FHFA, the Enterprise shall provide FHFA with information regarding:
(i) The Enterprise's financial condition, including its capital;
(ii) The Enterprise's structure;
(iii) Amount and risk characteristics of the Enterprise's on- and off-balance sheet exposures, including exposures within the Enterprise's trading account, other trading-related exposures (such as counterparty-credit risk exposures) or other items sensitive to changes in market factors, including, as appropriate, information about the sensitivity of positions to changes in market rates and prices;
(iv) The Enterprise's relevant policies and procedures, including risk management policies and procedures;
(v) The Enterprise's liquidity profile and management;
(vi) The loss, revenue, and expense estimation models used by the Enterprise for stress scenario analysis, including supporting documentation regarding each model's development and validation; and
(vii) Any other relevant qualitative or quantitative information requested by FHFA to facilitate review of the Enterprise's capital plan under this section.
(4) Resubmission of a capital plan. (i) An Enterprise must update and resubmit its capital plan to FHFA within 30 calendar days of the occurrence of one of the following events:
(A) The Enterprise determines there has been or will be a material change in the Enterprise's risk profile, financial condition, or corporate structure since the Enterprise last submitted the capital plan to FHFA; or
(B) FHFA instructs the Enterprise in writing to revise and resubmit its capital plan, as necessary to monitor risks to capital adequacy, for reasons including, but not limited to:
( 1 ) The capital plan is incomplete or the capital plan, or the Enterprise's internal capital adequacy process, contains material weaknesses;
( 2 ) There has been, or will likely be, a material change in the Enterprise's risk profile (including a material change in its business strategy or any risk exposure), financial condition, or corporate structure;
( 3 ) The Internal stress scenario(s) are not appropriate for the Enterprise's business model and portfolios, or changes in financial markets or the macro-economic outlook that could have a material impact on an Enterprise's risk profile and financial condition require the use of updated scenarios; or
(ii) FHFA may extend the 30-day period in paragraph (d)(4)(i) of this section for up to an additional 60 calendar days, or such longer period as FHFA determines appropriate.
(iii) Any updated capital plan must satisfy all the requirements of this section; however, an Enterprise may continue to rely on information submitted as part of a previously submitted capital plan to the extent that the information remains accurate and appropriate.
(5) Confidential treatment of information submitted. The confidentiality of information submitted to FHFA under this section and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and FHFA's rule in 12 CFR part 1214—Availability of Non-Public Information.
(e) Calculation of the stress capital buffer —(1) General. FHFA will determine the stress capital buffer that applies under § 1240.11 pursuant to this paragraph (e). FHFA will calculate the Enterprise's stress capital buffer requirement annually.
(2) Stress capital buffer calculation. An Enterprise's stress capital buffer is

equal to the Enterprise's adjusted total assets, as of the last day of the previous calendar quarter, multiplied by the greater of:
(i) The following calculation:
(A) The ratio of an Enterprise's common equity tier 1 capital to adjusted total assets, as of the final quarter of the previous capital plan cycle, unless otherwise determined by FHFA; minus
(B) The lowest projected ratio of the Enterprise's common equity tier 1 capital to adjusted total assets, in any quarter of the planning horizon under a supervisory stress test; plus
(C) The ratio of:
( 1 ) The sum of the Enterprise's planned common stock dividends (expressed as a dollar amount) for each of the fourth through seventh quarters of the planning horizon; to
( 2 ) The adjusted total assets of the Enterprise in the quarter in which the Enterprise had its lowest projected ratio of common equity tier 1 capital to adjusted total assets, in any quarter of the planning horizon under a supervisory stress test; and

(ii) 0.75 percent.
(3) Recalculation of stress capital buffer. If an Enterprise resubmits its capital plan pursuant to paragraph (d)(4) of this section, FHFA may recalculate the Enterprise's stress capital buffer. FHFA will provide notice of whether the Enterprise's stress capital buffer will be recalculated within 75 calendar days after the date on which the capital plan is resubmitted, unless FHFA provides notice to the Enterprise that it is extending the time period.
(f) Review of capital plans by FHFA. FHFA will consider the following factors in reviewing an Enterprise's capital plan:
(1) The comprehensiveness of the capital plan, including the extent to which the analysis underlying the capital plan captures and addresses potential risks stemming from activities across the Enterprise and the Enterprise's capital policy;
(2) The reasonableness of the Enterprise's capital plan, the assumptions and analysis underlying the capital plan, and the robustness of its capital adequacy process;
(3) Relevant supervisory information about the Enterprise and its subsidiaries;
(4) The Enterprise's regulatory and financial reports, as well as supporting data that would allow for an analysis of the Enterprise's loss, revenue, and reserve projections;
(5) The results of any stress tests conducted by the Enterprise or FHFA; and
(6) Other information requested or required by FHFA, as well as any other information relevant, or related, to the Enterprise's capital adequacy.
(g) FHFA notice of stress capital buffer; final planned capital distributions —(1) Notice. FHFA will provide an Enterprise with notice of its stress capital buffer and an explanation of the results of the supervisory stress test. Unless otherwise determined by FHFA, notice will be provided by August 15 of the calendar year in which the capital plan was submitted pursuant to paragraph (d)(1)(ii) of this section or within 90 calendar days of receiving notice that FHFA will recalculate the Enterprise's stress capital buffer pursuant to paragraph (e)(3) of this section.
(2) Response to notice —(i) Request for reconsideration of stress capital buffer. An Enterprise may request reconsideration of a stress capital buffer provided under paragraph (g)(1) of this section. To request reconsideration of a stress capital buffer, an Enterprise must submit to FHFA a request pursuant to paragraph (h) of this section.
(ii) Adjustments to planned capital distributions. Within two business days of receipt of notice of a stress capital buffer under paragraph (g)(1) or (h)(5) of this section, as applicable, an Enterprise must:
(A) Determine whether the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer provided by FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable, in place of any stress capital buffer in effect; and
( 1 ) If the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would not be consistent with effective capital distribution limitations assuming the stress capital buffer provided by FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable, in place of any stress capital buffer in effect, the Enterprise must adjust its planned capital distributions such that its planned capital distributions would be consistent with effective capital distribution limitations assuming the stress capital buffer provided by FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable, in place of any stress capital buffer in effect; or
( 2 ) If the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer provided by FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable, in place of any stress capital buffer in effect, the Enterprise may adjust its planned capital distributions. An Enterprise may not adjust its planned capital distributions to be inconsistent with the effective capital distribution limitations assuming the stress capital buffer provided by FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable; and
(B) Notify FHFA of any adjustments made to planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario.
(3) Final planned capital distributions. FHFA will consider the planned capital distributions, including any adjustments made pursuant to paragraph (g)(2)(ii) of this section, to be the Enterprise's final planned capital distributions on the later of:
(i) The expiration of the time for requesting reconsideration under paragraph (i) of this section; and
(ii) The expiration of the time for adjusting planned capital distributions pursuant to paragraph (g)(2)(ii) of this section.
(4) Effective date of final stress capital buffer. (i) FHFA will provide an Enterprise with its final stress capital buffer and confirmation of the Enterprise's final planned capital distributions by August 31 of the calendar year that a capital plan was submitted pursuant to paragraph (d)(1)(ii) of this section, unless otherwise determined by FHFA. A stress capital buffer will not be considered final so as to be agency action subject to judicial review under 5 U.S.C. 704 during the pendency of a request for reconsideration made pursuant to paragraph (h) of this section or before the time for requesting reconsideration has expired.
(ii) Unless otherwise determined by FHFA, an Enterprise's final planned capital distributions and final stress capital buffer shall:
(A) Be effective on October 1 of the calendar year in which a capital plan was submitted pursuant to paragraph (d)(1)(ii) of this section; and
(B) Remain in effect until superseded.
(5) Publication. With respect to an Enterprise subject to this section, FHFA may disclose publicly any or all of the following:
(i) The stress capital buffer provided to an Enterprise under paragraph (g)(1) or (h)(5) of this section;
(ii) Adjustments made pursuant to paragraph (g)(2)(ii) of this section;
(iii) A summary of the results of the supervisory stress test; and
(iv) Other information.
(h) Administrative remedies; request for reconsideration. The following requirements and procedures apply to any request under this paragraph (h):
(1) General. To request reconsideration of a stress capital buffer, provided under paragraph (g) of this section, an Enterprise must submit a written request for reconsideration.
(2) Timing of request. A request for reconsideration of a stress capital buffer, provided under paragraph (g) of this section, must be received within 15 calendar days of receipt of a notice of an Enterprise's stress capital buffer.
(3) Contents of request. (i) A request for reconsideration must include a detailed explanation of why reconsideration should be granted (that is, why a stress capital buffer should be reconsidered). With respect to any information that was not

previously provided to FHFA in the Enterprise's capital plan, the request should include an explanation of why the information should be considered.
(ii) A request for reconsideration may include a request for an informal hearing on the Enterprise's request for reconsideration.
(4) Hearing. (i) FHFA may, in its sole discretion, order an informal hearing if FHFA finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact.
(ii) An informal hearing shall be held within 30 calendar days of a request, if granted, provided that FHFA may extend this period upon notice to the requesting party.
(5) Response to request. Within 30 calendar days of receipt of the Enterprise's request for reconsideration of its stress capital buffer submitted under paragraph (h)(2) of this section or within 30 days of the conclusion of an informal hearing conducted under paragraph (h)(4) of this section, FHFA will notify the Enterprise of its decision to affirm or modify the Enterprise's stress capital buffer, provided that FHFA may extend this period upon notice to the Enterprise.
(6) Distributions during the pendency of a request for reconsideration. During the pendency of FHFA's decision under paragraph (h)(5) of this section, the Enterprise may make capital distributions that are consistent with effective distribution limitations, unless prior approval is required under paragraph (i)(1) of this section.
(i) Approval requirements for certain capital actions —(1) Circumstances requiring approval — resubmission of a capital plan. Unless it receives prior approval pursuant to paragraph (i)(3) of this section, an Enterprise may not make a capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio) if the capital distribution would occur after the occurrence of an event requiring resubmission under paragraph (d)(4)(i)(A) or (B) of this section.
(2) Contents of request. A request for a capital distribution under this section must contain the following information:
(i) The Enterprise's capital plan or a discussion of changes to the Enterprise's capital plan since it was last submitted to FHFA;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for redemptions or repurchases of securities, the gross consideration to be paid and the terms and sources of funding for the transaction, and for dividends, the amount of the dividend(s); and
(iv) Any additional information requested by FHFA (which may include, among other things, an assessment of the Enterprise's capital adequacy under a severely adverse scenario, a revised capital plan, and supporting data).
(3) Approval of certain capital distributions. (i) FHFA will act on a request for prior approval of a capital distribution within 30 calendar days after the receipt of all the information required under paragraph (i)(2) of this section.
(ii) In acting on a request for prior approval of a capital distribution, FHFA will apply the considerations and principles in paragraph (f) of this section, as appropriate. In addition, FHFA may disapprove the transaction if the Enterprise does not provide all of the information required to be submitted under paragraph (i)(2) of this section.
(4) Disapproval and hearing. (i) FHFA will notify the Enterprise in writing

of the reasons for a decision to disapprove any proposed capital distribution. Within 15 calendar days after receipt of a disapproval by FHFA, the Enterprise may submit a written request for a hearing.
(ii) FHFA may, in its sole discretion, order an informal hearing if FHFA finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact. An informal hearing shall be held within 30 calendar days of a request, if granted, provided that FHFA may extend this period upon notice to the requesting party.
(iii) Written notice of the final decision of FHFA shall be given to the Enterprise within 60 calendar days of the conclusion of any informal hearing ordered by FHFA, provided that FHFA may extend this period upon notice to the requesting party.
(iv) While FHFA's decision is pending and until such time as FHFA approves the capital distribution at issue, the Enterprise may not make such capital distribution.
(j) Post notice requirement. An Enterprise must notify FHFA within 15 days of making a capital distribution if:
(1) The capital distribution was approved pursuant to paragraph (i)(3) of this section; or
(2) The dollar amount of the capital distribution will exceed the dollar amount of the Enterprise's final planned capital distributions, as measured on an aggregate basis beginning in the fourth quarter of the planning horizon through the quarter at issue.
§§ 1240.501-1240.502   [Reserved]