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

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Staffs o f the Office o f the Com ptroller o f the Currency (OCC), the B oard o f G overnors o f the 

Federal R eserve System (Board), and the Federal D eposit Insurance Corporation (FDIC) (jointly, 

the A gencies) are providing supervised institutions w ith this guidance on the regulatory capital 

treatm ent o f certain centrally-cleared derivative contracts in light o f recent changes to the

rulebooks o f certain central counterparties. [Fotne1

- 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. EndofFte 1.]

In particular, supervised institutions have requested

guidance on the treatm ent o f cleared settled-to-m arket contracts under the regulatory capital rules 

o f the Agencies.

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

and circum stances presented. This guidance does not represent new rules or regulations. [Fotne2

- 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. EndofFte 2.]

Centrally cleared derivative contracts and netting sets o f centrally cleared derivative contracts 

(together, Cleared D erivative Contract N etting Sets) generally are subject to m argin requirem ents 

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

the contract. Central counterparties have rulebooks that specify how to determ ine the am ount o f 

m argin required at the beginning o f a Cleared D erivative Contract N etting Set— generally called 

initial m argin— and the am ount o f additional m argin necessary to address subsequent periodic 

changes in the fair value o f the Cleared D erivative Contract N etting Set— generally called 

variation m argin. [Fotne3

- 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. EndofFte 3.]

Certain central counterparties recently have m odified their variation m argin requirem ents for 

certain Cleared D erivative Contract N etting Sets. U nder the previous requirem ents o f these 

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

from m arking Cleared D erivative Contract N etting Sets to fair value w as considered collateral 

pledged by one party to the other, w ith title to the collateral rem aining w ith the posting party 

(C ollateralized-to-M arket Contracts). U nder the central counterparties’ revised rulebooks, 

variation m argin for certain Cleared D erivative Contract N etting Sets is considered a settlem ent 

paym ent for the exposure that arises from m arking the Cleared D erivative Contract N etting Sets
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to fair value (Settled-to-M arket Contracts), w ith title to the paym ent transferring to the receiving 

party. For both types o f contracts, the am ount o f variation m argin is based on the change in fair 

value o f the Cleared D erivative Contract N etting Sets since the previous exchange o f variation 

margin.

The regulatory capital rules provide that an institution m ust determ ine the trade exposure am ount 

for a Cleared D erivative Contract N etting Set using the m ethodology described in section 34 o f 

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

supplem entary leverage ratio calculation. [Fotne4

- 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. EndofFte 4.]

To calculate this trade exposure am ount, an

institution m ust determ ine the current credit exposure and the potential future exposure o f the

derivative contract or netting set o f derivative contracts. [Fotne5

- 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). EndofFte 5.]

C urrent credit exposure is determ ined

by reference to the m ark-to-fair value o f each derivative contract under U.S. generally accepted 

accounting principles. Potential future exposure is determ ined, in part, by m ultiplying each

derivative contract’s notional principal am ount by a conversion factor. [Fotne6

- 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). EndofFte 6.]

The conversion factors

vary by the category (for exam ple, interest rate, equity) and rem aining m aturity o f the derivative

contract. [Fotne7

- 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). EndofFte 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 term s are reset so that the 

fair value o f the contract is zero, the rem aining m aturity equals the tim e until the next reset date. [Fotne8

- 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). EndofFte 8.]

A ccordingly, for the purpose o f the regulatory capital rules, if, after accounting and legal 

analysis, the institution determ ines that (i) the variation m argin paym ent on a centrally cleared 

Settled-to-M arket Contract settles any outstanding exposure on the contract, and (ii) the term s 

are reset so that fair value o f the contract is zero, the rem aining m aturity on such contract w ould 

equal the tim e until the next exchange o f variation m argin on the contract. [Fotne9

- Id. EndofFte 9.]

In conducting its legal analysis to determ ine w hether variation m argin m ay be considered 

settlem ent o f outstanding exposure under the regulatory capital rules, an institution should 

evaluate w hether the transferor o f the variation m argin has relinquished all legal claim s to the 

variation m argin and w hether the paym ent o f variation m argin constitutes settlem ent under the 

central counterparty’s rulebook, any other applicable agreem ents governing the derivative
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contract, and applicable law . [Fotne10

- 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. EndofFte 10.]

A m ong other items, settlem ent o f any outstanding exposure

w ould generally involve a clear and unequivocal transfer o f ow nership o f the variation m argin

from the transferor to the transferee, the transferee taking possession o f the variation m argin, and 

term ination o f any claim o f the transferor on the variation m argin transferred, including any 

security interest in the variation margin. Any right o f the transferor to repurchase or sim ilarly 

recover the variation m argin paym ent from the transferee w ould generally be inconsistent with 

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