Illinois Administrative Code › Title 38 - FINANCIAL INSTITUTIONS › Part 330 - LENDING LIMITS › Subpart C - DERIVATIVE TRANSACTIONS › Section 330.200 - Definitions

Current through Register Vol. 48, No. 28, July 12, 2024
For purposes of this Subpart, the following definitions
				  apply:
"Appropriate Federal Banking Agency" means the Federal
				  Deposit Insurance Corporation, the Federal Reserve Bank of Chicago or the
				  Federal Reserve Bank of St. Louis.
"Borrower" means a person who is named as a borrower or
				  debtor in a loan or extension of credit; a person to whom a state bank has
				  credit exposure arising from a derivative transaction entered by the bank or
				  any other person, including a drawer, endorser or guarantor, who is deemed to
				  be a borrower under Section 32 of the Act, Section 6013 of the Savings Bank Act
				  [205 ILCS 205 ], or this Part.
"Contractual Commitment to Advance Funds" includes a bank's
				  obligation to:
Make payment (directly or indirectly) to a third person
				  contingent upon default by a customer of the bank in performing an obligation
				  and to make the payment in keeping with the agreed upon terms of the customer's
				  contract with the third person, or to make payments upon some other stated
				  condition;
Guarantee or act as surety for the benefit of a
				  person;
Advance funds under a qualifying commitment to lend;
				  and
Advance funds under a standby letter of credit, a put or
				  other similar arrangement.
The term does not include commercial letters of credit and
				  similar instruments when the issuing bank expects the beneficiary to draw on
				  the issuer, that do not guarantee payment, and that do not provide for payment
				  in the event of a default by a third party.
"Credit Derivative" means a financial contract executed under
				  standard industry credit derivative documentation that allows one party (the
				  protection purchaser) to transfer the credit risk of one or more exposures
				  (reference exposure, e.g., currency interest or equities exposure) to another
				  party (the protection provider).
"Derivative Transaction" includes any transaction that is a
				  contract, agreement, swap, warrant, note or option that is based, in whole or
				  in part, on the value of, any interest in, or any quantitative measure or the
				  occurrence of any event relating to, one or more commodities, securities,
				  currencies, interest or other rates, indices or other assets.
"Effective Margining Arrangement" means a master legal
				  agreement governing derivative transactions between a bank or savings
				  association and a counterparty that requires the counterparty to post, on a
				  daily basis, the variation margin to fully collateralize that amount of the
				  bank's net credit exposure to the counterparty that exceeds $1,000,000 created
				  by the derivative transactions covered by the agreement.
"Eligible Credit Derivative" means a single-name credit
				  derivative or a standard, non-tranched index credit derivative provided
				  that:
The derivative contract meets the requirements of an eligible
				  guarantee, as defined in Section 32 of the Act, Section 6013 of the Savings
				  Bank Act, or this Part and has been confirmed by the protection purchaser and
				  the protection provider;
Any assignment of the derivative contract has been confirmed
				  by all relevant parties;
If the credit derivative is a credit default swap, the
				  derivative contract includes the following credit events:
Failure to pay any amount due under the terms of the
				  reference exposure, subject to any applicable minimal payment threshold that is
				  consistent with standard market practice and with a grace period that is
				  closely in line with the grace period of the reference exposure; and
Bankruptcy, insolvency or inability of the obligor on the
				  reference exposure to pay its debts, or its failure or admission in writing of
				  its inability generally to pay its debts as they become due, and similar
				  events;
The terms and conditions dictating the manner in which the
				  derivative contract is to be settled are incorporated into the contract;
If the derivative contract allows for cash settlement, the
				  contract incorporates a robust valuation process to estimate loss with respect
				  to the derivative reliably and specifies a reasonable period for obtaining
				  post-credit event valuations of the reference exposure;
If the derivative contract requires the protection purchaser
				  to transfer an exposure to the protection provider at settlement, the terms of
				  at least one of the exposures that is permitted to be transferred under the
				  contract provides that any required consent to transfer may not be unreasonably
				  withheld; and
If the credit derivative is a credit default swap, the
				  derivative contract clearly identifies the parties responsible for determining
				  whether a credit event has occurred, specifies that this determination is not
				  the sole responsibility of the protection provider, and gives the protection
				  purchaser the right to notify the protection provider of the occurrence of a
				  credit event.
"Eligible Guarantee" means a guarantee that:
Is written and unconditional;
Covers all, or a pro rata portion of, all contractual
				  payments of the obligor on the reference exposure;
Gives the beneficiary a direct claim against the protection
				  provider;
Is not unilaterally cancelable by the protection provider for
				  reasons other than the breach of the contract by the beneficiary;
Is legally enforceable against the protection provider in a
				  jurisdiction where the protection provider has sufficient assets against which
				  a judgment may be attached and enforced;
Requires the protection provider to make payment to the
				  beneficiary on the occurrence of a default (as defined in the guarantee) of the
				  obligor on the reference exposure in a timely manner without the beneficiary
				  first having to take legal actions to pursue the obligor for payment;
Does not increase the beneficiary's cost of credit protection
				  on the guarantee in response to deterioration in the credit quality of the
				  reference exposure; and
Is not provided by an affiliate of the bank, unless the
				  affiliate is an insured depository institution, bank, securities broker or
				  dealer, or insurance company that:
Does not control the bank; and
Is subject to consolidated supervision and regulation
				  comparable to that imposed on U.S. depository institutions, securities
				  broker-dealers, or insurance companies (as the case may be).
"Eligible Protection Provider" means:
A sovereign entity (a central government, including the U.S.
				  government, an agency, department, ministry or central bank);
The Bank for International Settlements, the International
				  Monetary Fund, the European Central Bank, the European Commission or a
				  multilateral development bank;
A Federal Home Loan Bank;
The Federal Agricultural Mortgage Corporation;
A depository institution, as defined in Section 3 of the
				  Federal Deposit Insurance Act (
				  12
				  USC 1813(c) );
A federal bank holding company, as defined in Section 2 of
				  the Bank Holding Company Act, as amended (
				  12
				  USC 1841 );
A savings and loan holding company, as defined in Section 10
				  of the federal Home Owners' Loan Act (
				  12 USC 1467 a
				  );
A securities broker or dealer registered with the SEC under
				  the Securities Exchange Act of 1934 ( 15 USC 78 o );
An insurance company that is subject to the supervision of a
				  state insurance regulator;
A foreign banking organization;
A non-US-based securities firm or a non-US-based insurance
				  company that is subject to consolidated supervision and regulation comparable
				  to that imposed on U.S. depository institutions, securities broker-dealers, or
				  insurance companies; and
A qualifying central counterparty.
"Extension of Credit" shall have the same meaning as ascribed
				  to Letter of Credit in Section 5-102 of Uniform Commercial Code [810 ILCS 5/5-102 ]
				  and any credit exposure, as determined pursuant to Section
				  330.230,
				  arising from a derivative transaction.
Loans or extensions of credit, for purposes of this Part,
				  include a contractual commitment to advance funds.
The following items do not constitute loans or extensions of
				  credit for purposes of Section 32 of the Act, Section 6013 of the Savings Bank
				  Act, or this Part:
Additional funds advanced for the benefit of a borrower by a
				  bank for payment of taxes, insurance, utilities, security and maintenance and
				  operating expenses necessary to preserve the value of real property securing
				  the loan, consistent with safe and sound banking practices, but only if the
				  advance is for the protection of the bank's interest in the collateral, and
				  provided that the amounts must be treated as an extension of credit if a new
				  loan or extension of credit is made to the borrower;
Accrued and discounted interest on an existing loan or
				  extension of credit, including interest that has been capitalized from prior
				  notes and interest that has been advanced under terms and conditions of a loan
				  agreement;
Financed sales of a bank's own assets, including other real
				  estate owned, if the financing does not put the bank in a worse position than
				  when the bank held title to the assets;
Amounts paid against uncollected funds in the normal process
				  of collection; and
That portion of a loan or extension of credit sold as a
				  participation by a bank on a nonrecourse basis, provided that the participation
				  results in a pro rata sharing of credit risk proportionate to the respective
				  interests of the originating and participating lenders. When a participation
				  agreement provides that repayment must be applied first to the portions sold, a
				  pro rata sharing will be deemed to exist only if the agreement also provides
				  that, in the event of a default or comparable event defined in the agreement,
				  participants must share in all subsequent repayments and collections in
				  proportion to their percentage participation at the time of the occurrence of
				  the event.
When an originating bank funds the entire loan, it must
				  receive funding from the participants before the close of business of its next
				  business day. If the participating portions are not received within that
				  period, then the portions funded will be treated as a loan by the originating
				  bank to the borrower. If the portions so attributed to the borrower exceed the
				  originating bank's lending limit, the loan may be treated as nonconforming,
				  rather than a violation of Section 32 of the Act or Section 6013 of the Savings
				  Bank Act, as applicable, if:
The originating bank had a valid and unconditional
				  participation agreement with a participant or participants that was sufficient
				  to reduce the loan to within the originating bank's lending limit;
The participant reconfirmed its participation and the
				  originating bank had no knowledge of any information that would permit the
				  participant to withhold its participation; and
The participation was to be funded by close of business of
				  the originating bank's next business day.
"Notice" means a copy of the state bank's application to its
				  appropriate federal banking agency for approval to establish a branch.
"Qualifying Master Netting Agreement" means any written,
				  legally enforceable, bilateral agreement, provided that:
The agreement creates a single legal obligation for all
				  individual transactions covered by the agreement upon an event of default,
				  including bankruptcy, insolvency or similar proceeding, of the
				  counterparty;
The agreement provides the bank the right to accelerate,
				  terminate and close-out on a net basis all transactions under the agreement and
				  to liquidate or set off collateral promptly upon an event of default, including
				  upon an event of bankruptcy, insolvency or similar proceeding, of the
				  counterparty, provided that, in any such case, any exercise of rights under the
				  agreement will not be stayed or avoided under applicable law in the relevant
				  jurisdictions;
The bank has conducted sufficient legal review to conclude
				  with a well-founded basis, and maintains sufficient written documentation of
				  that legal review, that:
The agreement meets the requirements of this definition;
				  and
In the event of a legal challenge, including one resulting
				  from default or from bankruptcy, insolvency or similar proceeding, the relevant
				  court and administrative authorities would find the agreement to be legal,
				  valid, binding and enforceable under the law of the relevant
				  jurisdictions;
The bank establishes and maintains procedures to monitor
				  possible changes in relevant law and to ensure that the agreement continues to
				  satisfy the requirements of this definition; and
The agreement does not contain a walk-away clause (that is, a
				  provision that permits a non-defaulting counterparty to make a lower payment
				  than it would make otherwise under the agreement, or no payment at all, to a
				  defaulter or the estate of a defaulter, even if the defaulter or the estate of
				  the defaulter is a net creditor under the agreement).
"State Bank" or "Bank" means a bank that has a banking
				  charter issued under the Act, or a savings bank that has a charter issued under
				  Section 1001 of the Savings Bank Act.