Illinois Administrative Code › Title 38 - FINANCIAL INSTITUTIONS › Part 330 - LENDING LIMITS › Subpart C - DERIVATIVE TRANSACTIONS › Section 330.230 - Credit Exposure Arising from Derivative Transactions

Current through Register Vol. 48, No. 28, July 12, 2024
a) Scope. This Section sets forth the
				standards for calculating the credit exposure arising from a derivative
				transaction entered into by a state bank for purposes of determining the bank's
				lending limit pursuant to Section 32 of the Act, Section 6013 of the Savings
				Bank Act or, as applicable, this Part.
b) Derivative Transactions
1) Non-Credit Derivatives
Subject to subsections (b)(2) and (b)(3), a state bank shall
				  calculate the non-credit derivative exposure (e.g., a contract regarding
				  performance at a point in time unrelated to specific credit risk, such as, but
				  not limited to, interest rates or future delivery, such as forwards, futures,
				  options, caps or floors) to a counterparty arising from a derivative
				  transaction by one of the methods described in this subsection (b)(1). Subject
				  to subsection (b)(3), a state bank shall use the same method for calculating
				  counterparty credit exposure arising from all of its derivative
				  transactions.
Conversion Factor Matrix Method
The credit exposure arising from a derivative transaction
				  under the Conversion Factor Matrix Method shall equal and remain fixed at the
				  potential future credit exposure of the derivative transaction as determined at
				  the execution of the transaction by reference to the following table, which is
				  based on the following formula:
Credit exposure = (notional amount) x (conversion
				  factor)
Conversion Factor Matrix for Calculating Potential
							 Future Credit Exposure*
Original Maturity**
Interest Rate
Foreign Exchange Rate and Gold
Equity
Other***
(includes commodities and precious metals except
							 gold)
1 year or less
.015
.015
.20
.06
Over 1 to 3 years
.03
.03
.20
.18
Over 3 to 5 years
.06
.06
.20
.30
Over 5 to 10 years
.12
.12
.20
.60
Over 10 years
.30
.30
.20
1.00
2)
				Credit Derivatives
A) A state bank shall
				calculate the counterparty credit exposure arising from credit derivatives
				entered by the bank or savings association by adding the net notional value of
				all protection purchased from the counterparty on each reference
				entity.
B) A state bank shall
				calculate the credit exposure to a reference entity arising from credit
				derivatives entered by the bank by adding the notional value of all protection
				sold on the reference entity. However, the bank may reduce its exposure to a
				reference entity by the amount of any eligible credit derivative purchased on
				that reference entity from an eligible protection provider.
3) Mandatory Use of a Certain
				Method
A) Upon request by a state bank, the
				Department may allow a state bank to use any method the Department deems
				appropriate to calculate the credit exposure of derivative transactions if the
				Department finds that the method is necessary to promote the safety and
				soundness of the bank.
B) A state
				bank may elect to determine credit exposure on the basis of such other method
				of determining credit exposure as may be permitted by
				12
				CFR 32.9 (June 12, 2012) for national banks
				by the Office of the Comptroller of Currency.
* For an OTC derivative contract with multiple exchanges of
				  principal, the conversion factor is multiplied by the number of remaining
				  payments in the derivative contract.
** For an OTC derivative contract that is structured so that,
				  on specified dates, any outstanding exposure is settled and the terms are reset
				  so that the market 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.
*** Transactions not explicitly covered by any other column
				  in the Table are to be treated as "Other".