W. Va. Code R. § 106-20-5

Current through Register Vol. XLI, No. 50, December 13, 2024

Section 106-20-5 - Acceptable methods for calculating credit exposure from derivative transactions

5.1 Banks may elect to use one of three methods to calculate their credit exposure for derivative transactions: the Conversion Factor Matrix Method; the Remaining Maturity Method; or an Internal Model Method. These methods are interpreted by the Division to be the same as those contained in 12 C.F.R. Part 32.

5.2 The Division of Financial Institutions encourages banks to use either the Conversion Factor Matrix Method or the Remaining Maturity Method since they provide a simpler method for calculating credit exposures.

5.3 A bank may only use the Internal Model Method to calculate credit exposure to derivative transactions after obtaining the prior approval to use that model from both its primary federal regulator and the Division of Financial Institutions.

5.4 A bank must declare and document at the origination of a derivative transaction which of the permitted methods it will use to determine potential future exposure of the derivative. The bank may not change the method used to calculate potential future exposure during the life of that derivative. Furthermore, for each type of derivative, a bank must use the same method to calculate potential future exposure for that type unless it requests and receives prior written permission from the Division.

5.5 If the derivative transaction is a credit derivative and the bank has not established an effective margining arrangement, the bank must calculate its credit exposure to a counterparty by adding the net notional value of all protection purchased from the counterparty on each reference entity.

W. Va. Code R. § 106-20-5