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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 17-7

August 14, 2017

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE 

BANK AND TO FINANCIAL INSTITUTIONS SUPERVISED BY THE 

FEDERAL RESERVE 

SUBJECT: Regulatory Capital Treatment of Certain Centrally-cleared Derivative 

Contracts under the Board’s Capital Rule

Applicability: This guidance applies to state member banks, bank holding companies, and 

savings and loan holding companies (not substantially engaged in insurance underwriting or 

commercial activities) supervised by the Federal Reserve, including those with $10 billion or less 

in consolidated assets.

The Federal Reserve, together with the Office of the Comptroller of the Currency and the

Federal Deposit Insurance Corporation (the agencies), is issuing the attached supervisory 

guidance in response to questions from regulated institutions about the agencies’ regulatory 

capital rules. The attached document provides regulated institutions with guidance on the 

regulatory capital treatment of certain centrally-cleared derivative contracts in light of some

changes to the rulebooks of certain central counterparties.

1

Reserve Banks are asked to distribute this letter and the attached supervisory guidance to 

the state member banks, relevant bank holding companies, and relevant savings and loan holding 

companies in their districts and to appropriate supervision staff. Questions regarding the 

attached supervisory guidance may be directed to the following staff in the Board’s Capital and 

Regulatory Policy Section: Elizabeth MacDonald, Manager, at (202) 475-6316; or Sviatlana 

Phelan, Supervisory Financial Analyst, at (202) 912-4306. In addition, questions may be sent via 

the Board’s public website.2

Maryann F. Hunter

Deputy Director

Attachment: 

• Regulatory Capital Treatment of Certain Centrally-cleared Derivative Contracts under 

the Regulatory Capital Rules

 1 The guidance applies solely to the regulatory capital rules of the Office of the Comptroller of the Currency (OCC), 

the Federal Reserve Board (Board), and the Federal Deposit Insurance Corporation (FDIC), which are codified at 

12 CFR part 3 (OCC), 12 CFR part 217 (Board), and 12 CFR part 324 (FDIC), and does not have any bearing on 

any other Board, OCC and FDIC regulations.

2 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.
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Office of the Comptroller of the Currency

Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Regulatory Capital Treatment of Certain Centrally-cleared Derivative Contracts 

Under Regulatory Capital Rules

August 14, 2017

Staffs of the Office of the Comptroller of the Currency (OCC), the Board of Governors of the 

Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (jointly, 

the Agencies) are providing supervised institutions with this guidance on the regulatory capital 

treatment of certain centrally-cleared derivative contracts in light of recent changes to the 

rulebooks of certain central counterparties.1 In particular, supervised institutions have requested 

guidance on the treatment of cleared settled-to-market contracts under the regulatory capital rules

of the Agencies.

This supervisory guidance is based on the application of the regulatory capital rules to the facts 

and circumstances presented. This guidance does not represent new rules or regulations.2 

Centrally cleared derivative contracts and netting sets of centrally cleared derivative contracts 

(together, Cleared Derivative Contract Netting Sets) generally are subject to margin requirements 

that are assessed by central counterparties at the beginning of the contract and during the life of 

the contract. Central counterparties have rulebooks that specify how to determine the amount of 

margin required at the beginning of a Cleared Derivative Contract Netting Set—generally called 

initial margin—and the amount of additional margin necessary to address subsequent periodic 

changes in the fair value of the Cleared Derivative Contract Netting Set—generally called 

variation margin.3 

Certain central counterparties recently have modified their variation margin requirements for 

certain Cleared Derivative Contract Netting Sets. Under the previous requirements of these 

central counterparties’ rulebooks, variation margin transferred to cover the exposure that arises 

from marking Cleared Derivative Contract Netting Sets to fair value was considered collateral 

pledged by one party to the other, with title to the collateral remaining with the posting party 

(Collateralized-to-Market Contracts). Under the central counterparties’ revised rulebooks, 

variation margin for certain Cleared Derivative Contract Netting Sets is considered a settlement 

payment for the exposure that arises from marking the Cleared Derivative Contract Netting Sets 

 1 See 78 Fed. Reg. 62018 (October 11, 2013) (OCC and Board) and 79 Fed. Reg. 20754 (April 14, 2014) (FDIC). 

The guidance applies solely to the regulatory capital rules of the Agencies, which are codified at 12 CFR part 3 

(OCC), 12 CFR part 217 (Board), and 12 CFR part 324 (FDIC) and does not apply to other OCC, Board, or FDIC 

regulations. 

2 For purposes of this guidance, section numbers refer to the Agencies’ common regulatory capital rules. As an 

example, section 34 refers to 12 CFR 3.34 for OCC-regulated institutions, 12 CFR 217.34 for Board-regulated 

institutions, and 12 CFR 324.34 for FDIC-supervised institutions.

3 Variation margin requirements generally derive from marking a Cleared Derivative Contract Netting Set to fair 

value and transferring an amount equal to the change in fair value of the Cleared Derivative Contract Netting Set 

from one party to the other. Initial margin may also be adjusted from time to time by the central counterparty to 

reflect changes in the potential future exposure of the contract or other factors.
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to fair value (Settled-to-Market Contracts), with title to the payment transferring to the receiving 

party. For both types of contracts, the amount of variation margin is based on the change in fair 

value of the Cleared Derivative Contract Netting Sets since the previous exchange of variation 

margin. 

The regulatory capital rules provide that an institution must determine the trade exposure amount 

for a Cleared Derivative Contract Netting Set using the methodology described in section 34 of 

the rules for purposes of the standardized approach risk-based capital calculation and the 

supplementary leverage ratio calculation.4

 To calculate this trade exposure amount, an

institution must determine the current credit exposure and the potential future exposure of the 

derivative contract or netting set of derivative contracts.5 Current credit exposure is determined 

by reference to the mark-to-fair value of each derivative contract under U.S. generally accepted 

accounting principles. Potential future exposure is determined, in part, by multiplying each

derivative contract’s notional principal amount by a conversion factor.6 The conversion factors 

vary by the category (for example, interest rate, equity) and remaining maturity of the derivative 

contract.7 The regulatory capital rules provide that, for a 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.8

 

Accordingly, for the purpose of the regulatory capital rules, if, after accounting and legal 

analysis, the institution determines that (i) the variation margin payment on a centrally cleared 

Settled-to-Market Contract settles any outstanding exposure on the contract, and (ii) the terms 

are reset so that fair value of the contract is zero, the remaining maturity on such contract would 

equal the time until the next exchange of variation margin on the contract.9 

In conducting its legal analysis to determine whether variation margin may be considered 

settlement of outstanding exposure under the regulatory capital rules, an institution should 

evaluate whether the transferor of the variation margin has relinquished all legal claims to the 

variation margin and whether the payment of variation margin constitutes settlement under the 

central counterparty’s rulebook, any other applicable agreements governing the derivative 

 4 See 12 CFR 3.35(b)(2) and (c)(2) (citing 12 CFR 3.34), 12 CFR 3.10(c)(4)(ii)(B) (OCC); 12 CFR 217.35(b)(2) and 

(c)(2) (citing 12 CFR 217.34), 12 CFR 217.10(c)(4)(ii)(B) (Board); and 12 CFR 324.35(b)(2) and (c)(2) (citing 12 

CFR 324.34), 12 CFR 324.10(c)(4)(ii)(B) (FDIC). The risk-weighted asset calculations under the advanced 

approaches capital framework have similar requirements. See 12 CFR 3.133(b)(2) and (c)(2) (citing 12 CFR 3.132) 

(OCC); 12 CFR 217.133(b)(2) and (c)(2) (citing 12 CFR 217.132) (Board); 12 CFR 324.133(b)(2) and (c)(2) (citing

12 CFR 324.132) (FDIC). The calculations described in this guidance apply to individual derivative contracts and 

netting sets of cleared derivative contracts. 

5 12 CFR 3.34(a), see also 12 CFR 3.132(c) (OCC); 12 CFR 217.34(a), see also 12 CFR 217.132(c) (Board); 12 

CFR 324.34(a), see also 12 CFR 324.132(c) (FDIC). 

6 12 CFR 3.34(a)(1)(ii), see also 12 CFR 3.132(c)(5)(ii) (OCC); 12 CFR 217.34(a)(1)(ii), see also 12 CFR 

217.132(c)(5)(ii) (Board); 12 CFR 324.34(a)(1)(ii), see also 12 CFR 324.132(c)(5)(ii) (FDIC).

7 12 CFR 3.34, Table 1, see also 12 CFR 3.132, Table 2 (OCC); 12 CFR 217.34, Table 1, see also 12 CFR 217.132, 

Table 2 (Board); 12 CFR 324.34, Table 1, see also 12 CFR 324.132, Table 2 (FDIC).

8 12 CFR 3.34, Table 1, Fn. 2, see also 12 CFR 3.132, Table 2, Fn. 2 (OCC); 12 CFR 217.34, Table 1, Fn. 2, see also

12 CFR 217.132, Table 2, Fn. 2 (Board); 12 CFR 324.34, Table 1, Fn. 2, see also 12 CFR 324.132, Table 2, Fn. 2 

(FDIC).

9 Id.
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contract, and applicable law.10 Among other items, settlement of any outstanding exposure 

would generally involve a clear and unequivocal transfer of ownership of the variation margin 

from the transferor to the transferee, the transferee taking possession of the variation margin, and 

termination of any claim of the transferor on the variation margin transferred, including any 

security interest in the variation margin. Any right of the transferor to repurchase or similarly 

recover the variation margin payment from the transferee would generally be inconsistent with 

treating the derivative contract as settled under the regulatory capital rules. 

 10 Among other requirements, a central counterparty’s rulebook may require an institution to satisfy additional 

obligations, such as payment of other expenses and fees, in order to recognize payment of variation margin as 

satisfying settlement under the rulebook. The legal and accounting analysis performed by the institution should take 

all such requirements into account.