#### § 3.34 Derivative contracts.

(a) *Exposure amount for derivative contracts* —

(1) *National bank or Federal savings association that is not an advanced approaches national bank or Federal savings association.*

(i) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must use the current exposure methodology (CEM) described in [paragraph (b)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)) of this section to calculate the exposure amount for all its OTC derivative contracts, unless the national bank or Federal savings association makes the election provided in [paragraph (a)(1)(ii)](/on/2024-09-19/title-12/section-3.34#p-3.34(a)(1)(ii)) of this section.

(ii) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association may elect to calculate the exposure amount for all its OTC derivative contracts under the standardized approach for counterparty credit risk (SA-CCR) in [§ 3.132(c)](/on/2024-09-19/title-12/section-3.132#p-3.132(c)) by notifying the OCC, rather than calculating the exposure amount for all its derivative contracts using CEM. A national bank or Federal savings association that elects under this [paragraph (a)(1)(ii)](/on/2024-09-19/title-12/section-3.34#p-3.34(a)(1)(ii)) to calculate the exposure amount for its OTC derivative contracts under SA-CCR must apply the treatment of cleared transactions under [§ 3.133](/on/2024-09-19/title-12/section-3.133) to its derivative contracts that are cleared transactions and to all default fund contributions associated with such derivative contracts, rather than applying [§ 3.35](/on/2024-09-19/title-12/section-3.35). A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must use the same methodology to calculate the exposure amount for all its derivative contracts and, if a national bank or Federal savings association has elected to use SA-CCR under this [paragraph (a)(1)(ii)](/on/2024-09-19/title-12/section-3.34#p-3.34(a)(1)(ii)), the national bank or Federal savings association may change its election only with prior approval of the OCC.

(2) *Advanced approaches national bank or Federal savings association.* An advanced approaches national bank or Federal savings association must calculate the exposure amount for all its derivative contracts using SA-CCR in [§ 3.132(c)](/on/2024-09-19/title-12/section-3.132#p-3.132(c)) for purposes of standardized total risk-weighted assets. An advanced approaches national bank or Federal savings association must apply the treatment of cleared transactions under [§ 3.133](/on/2024-09-19/title-12/section-3.133) to its derivative contracts that are cleared transactions and to all default fund contributions associated with such derivative contracts for purposes of standardized total risk-weighted assets.

(b) *Current exposure methodology exposure amount* —

(1) *Single OTC derivative contract.* Except as modified by [paragraph (c)](/on/2024-09-19/title-12/section-3.34#p-3.34(c)) of this section, the exposure amount for a single OTC derivative contract that is not subject to a qualifying master netting agreement is equal to the sum of the national bank's or Federal savings association's current credit exposure and potential future credit exposure (PFE) on the OTC derivative contract.

(i) *Current credit exposure.* The current credit exposure for a single OTC derivative contract is the greater of the fair value of the OTC derivative contract or zero.

(ii) *PFE.*

(A) The PFE for a single OTC derivative contract, including an OTC derivative contract with a negative fair value, is calculated by multiplying the notional principal amount of the OTC derivative contract by the appropriate conversion factor in Table 1 to this section.

(B) For purposes of calculating either the PFE under this [paragraph (b)(1)(ii)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(1)(ii)) or the gross PFE under [paragraph (b)(2)(ii)(A)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(2)(ii)(A)) of this section for exchange rate contracts and other similar contracts in which the notional principal amount is equivalent to the cash flows, notional principal amount is the net receipts to each party falling due on each value date in each currency.

(C) For an OTC derivative contract that does not fall within one of the specified categories in Table 1 to this section, the PFE must be calculated using the appropriate “other” conversion factor.

(D) A national bank or Federal savings association must use an OTC derivative contract's effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC derivative contract) rather than the apparent or stated notional principal amount in calculating PFE.

(E) The PFE of the protection provider of a credit derivative is capped at the net present value of the amount of unpaid premiums.

Table 1 to [§ 3.34](/on/2024-09-19/title-12/section-3.34)—Conversion Factor Matrix for Derivative Contracts1

| Remaining maturity2 | Interest rate | Foreign exchange rate and gold | Credit (investment grade reference asset)3 | Credit (non- investment- grade reference asset) | Equity | Precious metals (except gold) | Other |
| --- | --- | --- | --- | --- | --- | --- | --- |
| One year or less | 0.00 | 0.01 | 0.05 | 0.10 | 0.06 | 0.07 | 0.10 |
| Greater than one year and less than or equal to five years | 0.005 | 0.05 | 0.05 | 0.10 | 0.08 | 0.07 | 0.12 |
| Greater than five years | 0.015 | 0.075 | 0.05 | 0.10 | 0.10 | 0.08 | 0.15 |
| | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| 1 For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract. | | | | | | | |
| 2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005. | | | | | | | |
| 3 A national bank or Federal savings association must use the column labeled “Credit (investment-grade reference asset)” for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A national bank or Federal savings association must use the column labeled “Credit (non-investment-grade reference asset)” for all other credit derivatives. | | | | | | | |

(2) *Multiple OTC derivative contracts subject to a qualifying master netting agreement.* Except as modified by [paragraph (c)](/on/2024-09-19/title-12/section-3.34#p-3.34(c)) of this section, the exposure amount for multiple OTC derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC derivative contracts subject to the qualifying master netting agreement.

(i) *Net current credit exposure.* The net current credit exposure is the greater of the net sum of all positive and negative fair values of the individual OTC derivative contracts subject to the qualifying master netting agreement or zero.

(ii) *Adjusted sum of the PFE amounts.* The adjusted sum of the PFE amounts, Anet, is calculated as Anet = (0.4 × Agross) + (0.6 × NGR × Agross), where:

(A) Agross = the gross PFE (that is, the sum of the PFE amounts as determined under [paragraph (b)(1)(ii)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(1)(ii)) of this section for each individual derivative contract subject to the qualifying master netting agreement); and

(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under [paragraph (b)(1)(i)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(1)(i)) of this section) of all individual derivative contracts subject to the qualifying master netting agreement.

(c) *Recognition of credit risk mitigation of collateralized OTC derivative contracts.*

(1) A national bank or Federal savings association using CEM under [paragraph (b)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)) of this section may recognize the credit risk mitigation benefits of financial collateral that secures an OTC derivative contract or multiple OTC derivative contracts subject to a qualifying master netting agreement (netting set) by using the simple approach in [§ 3.37(b)](/on/2024-09-19/title-12/section-3.37#p-3.37(b)).

(2) As an alternative to the simple approach, a national bank or Federal savings association using CEM under [paragraph (b)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)) of this section may recognize the credit risk mitigation benefits of financial collateral that secures such a contract or netting set if the financial collateral is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement by applying a risk weight to the uncollateralized portion of the exposure, after adjusting the exposure amount calculated under [paragraph (b)(1)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(1)) or [(2)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(2)) of this section using the collateral haircut approach in [§ 3.37(c)](/on/2024-09-19/title-12/section-3.37#p-3.37(c)). The national bank or Federal savings association must substitute the exposure amount calculated under [paragraph (b)(1)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(1)) or [(2)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(2)) of this section for ΣE in the equation in [§ 3.37(c)(2)](/on/2024-09-19/title-12/section-3.37#p-3.37(c)(2)).

(d) *Counterparty credit risk for credit derivatives* —

(1) *Protection purchasers.* A national bank or Federal savings association that purchases a credit derivative that is recognized under [§ 3.36](/on/2024-09-19/title-12/section-3.36) as a credit risk mitigant for an exposure that is not a covered position under [subpart F of this part](/on/2024-09-19/title-12/part-3/subpart-F) is not required to compute a separate counterparty credit risk capital requirement under this subpart provided that the national bank or Federal savings association does so consistently for all such credit derivatives. The national bank or Federal savings association must either include all or exclude all such credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes.

(2) *Protection providers.*

(i) A national bank or Federal savings association that is the protection provider under a credit derivative must treat the credit derivative as an exposure to the underlying reference asset. The national bank or Federal savings association is not required to compute a counterparty credit risk capital requirement for the credit derivative under this subpart, provided that this treatment is applied consistently for all such credit derivatives. The national bank or Federal savings association must either include all or exclude all such credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure.

(ii) The provisions of this [paragraph (d)(2)](/on/2024-09-19/title-12/section-3.34#p-3.34(d)(2)) apply to all relevant counterparties for risk-based capital purposes unless the national bank or Federal savings association is treating the credit derivative as a covered position under [subpart F of this part](/on/2024-09-19/title-12/part-3/subpart-F), in which case the national bank or Federal savings association must compute a supplemental counterparty credit risk capital requirement under this section.

(e) *Counterparty credit risk for equity derivatives.*

(1) A national bank or Federal savings association must treat an equity derivative contract as an equity exposure and compute a risk-weighted asset amount for the equity derivative contract under [§§ 3.51](/on/2024-09-19/title-12/section-3.51) through [3.53](/on/2024-09-19/title-12/section-3.53) (unless the national bank or Federal savings association is treating the contract as a covered position under [subpart F of this part](/on/2024-09-19/title-12/part-3/subpart-F)).

(2) In addition, the national bank or Federal savings association must also calculate a risk-based capital requirement for the counterparty credit risk of an equity derivative contract under this section if the national bank or Federal savings association is treating the contract as a covered position under [subpart F of this part](/on/2024-09-19/title-12/part-3/subpart-F).

(3) If the national bank or Federal savings association risk weights the contract under the Simple Risk-Weight Approach (SRWA) in [§ 3.52](/on/2024-09-19/title-12/section-3.52), the national bank or Federal savings association may choose not to hold risk-based capital against the counterparty credit risk of the equity derivative contract, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a national bank or Federal savings association using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure.

(f) *Clearing member national bank's or Federal savings association's exposure amount.* The exposure amount of a clearing member national bank or Federal savings association using CEM under [paragraph (b)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)) of this section for a client-facing derivative transaction or netting set of client-facing derivative transactions equals the exposure amount calculated according to [paragraph (b)(1)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(1)) or [(2)](/on/2024-09-19/title-12/section-3.34#p-3.34(b)(2)) of this section multiplied by the scaling factor of the square root of 1⁄2 (which equals 0.707107). If the national bank or Federal savings association determines that a longer period is appropriate, the national bank or Federal savings association must use a larger scaling factor to adjust for a longer holding period as follows:

[![](https://img.federalregister.gov/ER24JA20.012/ER24JA20.012_large.png)](https://img.federalregister.gov/ER24JA20.012/ER24JA20.012_original_size.png)

Where H = the holding period greater than or equal to five days.

Additionally, the OCC may require the national bank or Federal savings association to set a longer holding period if the OCC determines that a longer period is appropriate due to the nature, structure, or characteristics of the transaction or is commensurate with the risks associated with the transaction.

[[85 FR 4402](https://www.federalregister.gov/citation/85-FR-4402), Jan. 24, 2020]