#### § 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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)) of this section; or

(ii) For netting sets only, the simple VaR methodology described in [paragraph (b)(3)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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

max{0, [(ΣE−ΣC) + Σ(Es × Hs) + Σ(Efx × Hfx)]},

Where:

(A) 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 transaction (or netting set));

(B) 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 transaction (or netting set));

(C) Es equals the absolute value of the net position in a given instrument or in gold (where the net position in a given instrument or in gold equals the sum of the current fair values of the instrument or gold the Enterprise has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current fair values of that same instrument or gold the Enterprise has borrowed, purchased subject to resale, or taken as collateral from the counterparty);

(D) Hs equals the market price volatility haircut appropriate to the instrument or gold referenced in Es;

(E) Efx equals the absolute value of the net position of instruments and cash in a currency that is different from the settlement currency (where the net position in a given currency equals the sum of the current fair values of any instruments or cash in the currency the Enterprise has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current fair values of any instruments or cash in the currency the Enterprise has borrowed, purchased subject to resale, or taken as collateral from the counterparty); and

(F) Hfx equals the haircut appropriate to the mismatch between the currency referenced in Efx and the settlement currency.

(ii) *Standard supervisory haircuts.* Under the standard supervisory haircuts approach:

(A) An Enterprise must use the haircuts for market price volatility (Hs) in table 1 to paragraph (b)(2)(ii)(A) as adjusted in certain circumstances as provided in [paragraphs (b)(2)(ii)(C)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(C)) and [(D)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(D)) of this section;

Table 1 to Paragraph (b)(2)(ii)(A)—Standard Supervisory Market Price Volatility Haircuts1

| Residual maturity | Haircut (in percent) assigned based on: | | | | | | Investment grade securitization exposures (in percent) |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Sovereign issuers risk weight under [§ 1240.32](/on/2024-09-19/title-12/section-1240.32)2 (in percent) | | | Non-sovereign issuers risk weight under [§ 1240.32](/on/2024-09-19/title-12/section-1240.32) (in percent) | | |
| Zero | 20 or 50 | 100 | 20 | 50 | 100 |
| Less than or equal to 1 year | 0.5 | 1.0 | 15.0 | 1.0 | 2.0 | 4.0 | 4.0 |
| Greater than 1 year and less than or equal to 5 years | 2.0 | 3.0 | 15.0 | 4.0 | 6.0 | 8.0 | 12.0 |
| Greater than 5 years | 4.0 | 6.0 | 15.0 | 8.0 | 12.0 | 16.0 | 24.0 |
| Main index equities (including convertible bonds) and gold | | | | 15.0 | | | |
| Other publicly traded equities (including convertible bonds) | | | | 25.0 | | | |
| Mutual funds | | | | Highest haircut applicable to any security in which the fund can invest. | | | |
| Cash collateral held | | | | Zero. | | | |
| Other exposure types | | | | 25.0 | | | |
| | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| 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 (Hfx) of 8 percent, as adjusted in certain circumstances as provided in [paragraphs (b)(2)(ii)(C)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(C)) and [(D)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(A)) and [(B)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(F)) of this section where the conditions in this [paragraph (b)(2)(ii)(D)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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](/on/2024-09-19/title-12/section-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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(F)) of this section where the conditions in this [paragraph (b)(2)(ii)(E)(*1*)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(A)) or [(C)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(C)) or [(b)(2)(ii)(E)(*1*)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(C)) through [(E)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(ii)(E)) of this section, using the following formula:

[![](https://img.federalregister.gov/ER30NO23.043/ER30NO23.043_large.png)](https://img.federalregister.gov/ER30NO23.043/ER30NO23.043_original_size.png)

Where:

(*1*) TM equals a holding period of longer than 10 business days for eligible margin loans and derivative contracts other than client-facing derivative transactions or longer than 5 business days for repo-style transactions and client-facing derivative transactions; Hs equals the standard supervisory haircut; and

(*2*) Ts equals 10 business days for eligible margin loans and derivative contracts other than client-facing derivative transactions or 5 business days for repo-style transactions and client-facing derivative transactions.

(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 (Hs).

(iii) *Own internal estimates for haircuts.* With the prior written notice to FHFA, an Enterprise may calculate haircuts (Hs and Hfx) 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*)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(b)(2)(iii)(A)(3)) of this section applies. When an Enterprise calculates an own-estimates haircut on a TN-day holding period, which is different from the minimum holding period for the transaction type, the applicable haircut (HM) is calculated using the following square root of time formula:

[![](https://img.federalregister.gov/ER30NO23.044/ER30NO23.044_large.png)](https://img.federalregister.gov/ER30NO23.044/ER30NO23.044_original_size.png)

Where:

(*i*) TM equals 5 for repo-style transactions and 10 for eligible margin loans;

(*ii*) TN equals the holding period used by the Enterprise to derive HN; and

(*iii*) HN equals the haircut based on the holding period TN

(*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](/on/2024-09-19/title-12/section-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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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)](/on/2024-09-19/title-12/section-1240.39#p-1240.39(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](/on/2024-09-19/title-12/section-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

[[88 FR 83481](https://www.federalregister.gov/citation/88-FR-83481), Nov. 30, 2023]

Risk-Weighted Assets for Unsettled Transactions