5 Del. Admin. Code § 905-3.0

Current through Reigster Vol. 28, No. 6, December 1, 2024

Section 905-3.0 - Credit Exposure to Derivative Transactions

3.1Derivative transactions. For purposes of Section 909 of Title 5 of the Delaware Code, derivative transactions entered into by a bank shall be included for purposes of determining the bank's loan limitations.

3.2Non-credit derivatives. A bank shall calculate the credit exposure to a counterparty arising from a derivative transaction by one of the following methods. A bank shall use the same method for calculating counterparty credit exposure arising from all of its derivative transactions.

3.2.1 Model Method.

3.2.1.1Credit exposure. The credit exposure of a derivative transaction under the Internal Model Method shall equal the sum of the current credit exposure of the derivative transaction and the potential future credit exposure of the derivative transaction.

3.2.1.2Calculation of current credit exposure. A bank shall determine its current credit exposure by the mark-to-market value of the derivative contract. If the mark-to-market value is positive, then the current credit exposure equals that mark-to-market value. If the mark to market value is zero or negative, than the current credit exposure is zero.

3.2.1.3Calculation of potential future credit exposure. A bank shall calculate its potential future credit exposure by using either:

3.2.1.3.1 An internal model the use of which has been approved in writing for purposes of 12 CFR part 3, Appendix C, Section 32(d), 12 CFR part 167, Appendix C, Section 32(d), or 12 CFR part 390, subpart Z, Appendix A, Section 32(d), as appropriate, provided that the bank provides prior written notice to the Commissioner and the appropriate Federal banking agency of its use for purposes of this section; or

3.2.1.3.2 Any other appropriate model the use of which has been approved in writing for purposes of this section by the Commissioner and the appropriate Federal banking agency.

Any substantive revisions to a model made after the bank or savings association has provided notice of the use of the model to its regulator or after the regulator has approved the use of the model must be approved by the [state and the] appropriate Federal banking agency before the bank may use the revised model.

3.2.1.4Net credit exposure. A bank that calculates its credit exposure by using the Model Method pursuant to this paragraph may net credit exposures of derivative transactions arising under the same qualifying master netting agreement.

3.2.2Conversion 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 which shall equal the product of the notional amount of the derivative transaction and a fixed multiplicative factor as determined at the execution of the transaction by reference to Table 1 below.

Table 1-Conversion Factor Matrix for Calculating Potential Future Credit Exposure.1
Original maturity2	Interest Rate	Foreign exchange rate and gold	Equity	Other3(includes commodities and precious metals except gold)
1 year or less	0.015	0.015	0.20	0.06
Over 1 to 3 years	0.03	0.03	0.20	0.18
Over 3 to 5 years	0.06	0.06	0.20	0.30
Over 5 to 10 years	0.12	0.12	0.20	0.60
Over 10 years	0.30	0.30	0.20	1.00

¹ 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. ² For an OTC derivative contract that is structured such 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. ³ Transactions not explicitly covered by any other column in the Table are to be treated as "Other."

4(includes commodities and precious metals except gold)

3.2.3 Current Exposure Method.The credit exposure arising from a derivative transaction (other than a credit derivative transaction) under the Current Exposure Method shall be calculated pursuant to 12 CFR part 3, Appendix C, Sections 32(c)(5), (6) and (7); 12 CFR part 167, Appendix C, Sections 32(c)(5), (6) and (7); or 12 CFR part 390, subpart Z, Appendix A, Sections 32(c)(5), (6) and (7), as appropriate.

3.3Credit Derivatives.

3.3.1 Counterparty Exposure.

3.3.1.1 Notwithstanding Subsection 3.2 of this section, a bank that uses the Conversion Factor Matrix Method or Current Exposure Method, or that uses the Model Method without entering an effective margining arrangement, as defined in Section 2.0 of this regulation, shall calculate the counterparty credit exposure arising from credit derivatives entered by the bank by adding the net notional value of all protection purchased from the counterparty on each reference entity.

3.3.1.2 Special rule for certain effective margining arrangements. A bank must add the EMA threshold amount to the counterparty credit exposure arising from credit derivatives calculated under the Model Method. The EMA threshold is the amount under an effective margining arrangement with respect to which the counterparty is not required to post variation margin to fully collateralize the amount of the bank's net credit exposure to the counterparty.

3.3.2 Reference Entity Exposure A bank shall calculate the credit exposure to a reference entity arising from credit derivatives entered by the bank by adding the net 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.

3.4Special Rule for Central Counterparties. In addition to amounts calculated under previous sections of this rule, the measure of counterparty exposure to a central counterparty shall also include the sum of the initial margin posted by the bank, plus any contributions made by it to a guaranty fund at the time such contribution is made. However, this does not apply to a bank or saving association that uses an internal model pursuant to this regulation if such model reflects the initial margin and any contributions to a guaranty fund.

3.5Mandatory use of a certain method. The Commissioner or the appropriate Federal banking agency may, in their discretion, require or permit a bank to use a specific method or methods set forth in this Section 3.0 to calculate the credit exposure arising from all derivative transactions or any specific, or category of, derivative transactions upon finding, in their discretion, that such method is consistent with the safety and soundness of the bank.

5 Del. Admin. Code § 905-3.0

17 DE Reg. 656 (12/1/2013) (Final)