(a) General requirement. Each Bank's credit risk capital requirement shall equal the sum of the Bank's individual credit risk capital charges for all advances, residential mortgage assets, CMOs, non-mortgage assets, non-rated assets, off-balance sheet items, and derivative contracts, as calculated in accordance with this section.
(b) Credit risk capital charge for residential mortgage assets and collateralized mortgage obligations. The credit risk capital charge for residential mortgages, residential mortgage pools, residential mortgage securities, and collateralized mortgage obligations shall be determined as set forth in paragraph (g) of this section.
(c) Credit risk capital charge for advances, non-mortgage assets, and non-rated assets. Except as provided in paragraph (j) of this section, each Bank's credit risk capital charge for advances, non-mortgage assets, and non-rated assets shall be equal to the amortized cost of the asset multiplied by the credit risk percentage requirement assigned to that asset pursuant to paragraph (f)(1) or (2) of this section. For any such asset carried at fair value where any change in fair value is recognized in the Bank's income, the Bank shall calculate the capital charge based on the fair value of the asset rather than its amortized cost.
(d) Credit risk capital charge for off-balance sheet items. Each Bank's credit risk capital charge for an off-balance sheet item shall be equal to the credit equivalent amount of such item, as determined pursuant to paragraph (h) of this section, multiplied by the credit risk percentage requirement assigned to that item pursuant to paragraph (f)(1) of this section and Table 2 to this section, except that the credit risk percentage requirement applied to the credit equivalent amount for a standby letter of credit shall be that for an advance with the same remaining maturity as that of the standby letter of credit, as specified in Table 1 to this section.
(e) Derivative contracts.
(1) Except as provided in paragraphs (e)(4) (transactions with members) and (5) (cleared transactions and foreign exchange rate contracts) of this section, the credit risk capital charge for a derivative contract entered into by a Bank shall equal, after any adjustment allowed under paragraph (e)(2) of this section, the sum of:
(i) The current credit exposure for the derivative contract, calculated in accordance with paragraph (i)(1) of this section, multiplied by the credit risk percentage requirement assigned to that derivative contract pursuant to Table 2 to this section, provided that a Bank shall use the credit risk percentages from the column for instruments with maturities of one year or less for all such derivative contracts; plus
(ii) The potential future credit exposure for the derivative contract, calculated in accordance with paragraph (i)(2) of this section, multiplied by the credit risk percentage requirement assigned to that derivative contract pursuant to Table 2 to this section, where a Bank uses the actual remaining maturity of the derivative contract for the purpose of applying Table 2 to this section; plus
(iii) A credit risk capital charge applicable to the undiscounted amount of collateral posted by the Bank with respect to a derivative contract that exceeds the Bank's current payment obligation under that derivative contract, where the charge equals the amount of such excess collateral multiplied by the credit risk percentage requirement assigned under Table 2 to this section for the custodian or other party that holds the collateral, and where a Bank deems the exposure to have a remaining maturity of one year or less when applying Table 2 to this section.
(2)
(i) A Bank may reduce the credit risk capital charge calculated under paragraph (e)(1) of this section by the amount of the discounted value of any collateral that is held by or on behalf of the Bank against an exposure from the derivative contract, and that satisfies the requirements of paragraph (e)(3) of this section. If the total amount of the discounted value of the collateral is less than the credit risk capital charge calculated under paragraph (e)(1) of this section for a particular derivative contract, then the credit risk capital charge for the derivative contract shall equal the amount of the initial charge that remains after having been reduced by the collateral. A Bank that uses a counterparty's pledged collateral to reduce the capital charge against a derivative contract under this provision, shall also apply a capital charge to the amount of the pledged collateral that it has used to reduce its credit exposure on the derivative contract. The amount of that capital charge shall be equal to the capital charge that would be required under paragraph (b) or (c) of this section, whichever applies to the type of collateral, as if the Bank were to own the collateral directly. In reducing the capital charge on a particular derivative contract, the Bank shall apply the discounted value of the collateral for that derivative contract in the following manner:
(A) First, to reduce the current credit exposure of the derivative contract subject to the capital charge; and
(B) Second, and only if the total discounted value of the collateral held exceeds the current credit exposure of the contract, any remaining amounts may be applied to reduce the amount of the potential future credit exposure of the derivative contract subject to the capital charge.
(ii) If a counterparty's payment obligations to a Bank under a derivative contract are unconditionally guaranteed by a third-party, then the credit risk percentage requirement applicable to the derivative contract may be that associated with the guarantor, rather than the Bank's counterparty.
(3) The credit risk capital charge may be reduced as described in paragraph (e)(2)(i) of this section for collateral held against the derivative contract exposure only if the collateral is:
(i) Held by, or has been paid to, the Bank or held by an independent, third-party custodian on behalf of the Bank pursuant to a custody agreement that meets the requirements of §1221.7(c) and (d) of this chapter;
(ii) Legally available to absorb losses;
(iii) Of a readily determinable value at which it can be liquidated by the Bank; and
(iv) Subject to an appropriate discount to protect against price decline during the holding period and the costs likely to be incurred in the liquidation of the collateral, provided that such discount shall equal at least the minimum discount required under appendix B to part 1221 of this chapter for collateral listed in that appendix, or shall be estimated by the Bank based on appropriate assumptions about the price risks and liquidation costs for collateral not listed in appendix B to part 1221.
(4) The credit risk capital charge for any derivative contracts entered into between a Bank and its members shall be calculated in accordance with paragraph (e)(1) of this section, except that the Bank shall use the credit risk percentage requirements from Table 1 to this section, which sets forth the credit risk percentage requirements for advances.
(5) Notwithstanding any other provision in this paragraph (e), the credit risk capital charge for:
(i) A foreign exchange rate contract (excluding gold contracts) with an original maturity of 14 calendar days or less shall be zero; and
(ii) A derivative contract cleared by a derivatives clearing organization shall equal 0.16 percent times the sum of the following:
(A) The current credit exposure for the derivative contract, calculated in accordance with paragraph (i)(1)(i) of this section;
(B) The potential future credit exposure for the derivative contract calculated in accordance with paragraph (i)(2) of this section; and
(C) The amount of collateral posted by the Bank and held by the derivatives clearing organization, clearing member, or custodian in a manner that is not bankruptcy remote, but only to the extent the amount exceeds the Bank's current credit exposure to the derivatives clearing organization.
(f) Determination of credit risk percentage requirements—
(1) General.
(i) Each Bank shall determine the credit risk percentage requirement applicable to each advance and each non-rated asset by identifying the appropriate category from Table 1 or 3 to this section, respectively, to which the advance or non-rated asset belongs. Except as provided in paragraphs (f)(2) and (3) of this section, each Bank shall determine the credit risk percentage requirement applicable to each non-mortgage asset, off-balance sheet item, and derivative contract by identifying the appropriate category set forth in Table 2 to this section to which the asset, item, or contract belongs as determined in accordance with paragraph (f)(1)(ii) of this section, and remaining maturity. Each Bank shall use the applicable credit risk percentage requirement to calculate the credit risk capital charge for each asset, item, or contract in accordance with paragraph (c), (d), or (e) of this section, respectively. The relevant categories and credit risk percentage requirements are provided in the following Tables 1 through 3 to this section—
Table 1 to §1277.4—Requirement for Advances
| Maturity of advances | Percentage applicable to advances |
|---|---|
| Advances with: | |
| Remaining maturity <=4 years | 0.09 |
| Remaining maturity >4 years to 7 years | 0.23 |
| Remaining maturity >7 years to 10 years | 0.35 |
| Remaining maturity >10 years | 0.51 |
Table 2 to §1277.4—Requirement for Internally Rated Non-Mortgage Assets, Off-Balance Sheet Items, and Derivative Contracts
[Based on remaining contractual maturity]
| FHFA Credit Rating | Applicable percentage | ||||
|---|---|---|---|---|---|
| <=1 year | >1 yr to 3 yrs | >3 yrs to 7 yrs | >7 yrs to 10 yrs |
>10 yrs | |
| U.S. Government Securities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| FHFA 1 | 0.20 | 0.59 | 1.37 | 2.28 | 3.32 |
| FHFA 2 | 0.36 | 0.87 | 1.88 | 3.07 | 4.42 |
| FHFA 3 | 0.64 | 1.31 | 2.65 | 4.22 | 6.01 |
| FHFA 4 | 3.24 | 4.79 | 7.89 | 11.51 | 15.64 |
| FHFA 5 | 9.24 | 11.46 | 15.90 | 21.08 | 27.00 |
| FHFA 6 | 15.99 | 18.06 | 22.18 | 26.99 | 32.49 |
| FHFA 7 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
Table 3 to §1277.4—Requirement for Non-Rated Assets
| Type of unrated asset | Applicable percentage |
|---|---|
| Cash | 0.00 |
| Premises, Plant and Equipment | 8.00 |
| Investments Under 12 CFR 1265.3(e) & (f) | 8.00 |
(ii) Each Bank shall develop a methodology to be used to assign an internal credit risk rating to each counterparty, asset, item, and contract that is subject to Table 2 to this section. The methodology shall involve an evaluation of counterparty or asset risk factors, and may incorporate, but must not rely solely on, credit ratings prepared by credit rating agencies. Each Bank shall align its various internal credit ratings to the appropriate categories of FHFA Credit Ratings included in Table 2 to this section. In doing so, FHFA Categories 7 through 1 shall include assets of progressively higher credit quality. After aligning its internal credit ratings to the appropriate categories of Table 2 to this section, each Bank shall assign each counterparty, asset, item, and contract to the appropriate FHFA Credit Rating category based on the applicable internal credit rating.
(2) Exception for assets subject to a guarantee or secured by collateral.
(i) When determining the applicable credit risk percentage requirement from Table 1 to this section for a non-mortgage asset that is subject to an unconditional guarantee by a third-party guarantor or is secured as set forth in paragraph (f)(2)(ii) of this section, the Bank may substitute the credit risk percentage requirement associated with the guarantor or the collateral, as appropriate, for the credit risk percentage requirement associated with that portion of the asset subject to the guarantee or covered by the collateral.
(ii) For purposes of paragraph (f)(2)(i) of this section, a non-mortgage asset shall be considered to be secured if the collateral is:
(A) Actually held by the Bank, or an independent third-party custodian on the Bank's behalf, or, if posted by a Bank member and permitted under the Bank's collateral agreement with that member, by the Bank's member or an affiliate of that member where the term “affiliate” has the same meaning as in §1266.1 of this chapter;
(B) Legally available to absorb losses;
(C) Of a readily determinable value at which it can be liquidated by the Bank;
(D) Held in accordance with the provisions of the Bank's member products policy established pursuant to §1239.30 of this chapter, if the collateral has been posted by a member or an affiliate of a member; and
(E) Subject to an appropriate discount to protect against price decline during the holding period and the costs likely to be incurred in the liquidation of the collateral.
(3) Exception for obligations of the Enterprises. A Bank may use a credit risk capital charge of zero for any debt instrument or obligation issued by an Enterprise, other than a residential mortgage security or a collateralized mortgage obligation, provided that, and only for so long as, the Enterprise receives capital support or other form of direct financial assistance from the United States government that enables the Enterprise to repay those obligations.
(4) Methodology and model review. A Bank shall provide to FHFA upon request the methodology, model, and any analyses used by the Bank to assign any non-mortgage asset, off-balance sheet item, or derivative contract to an FHFA Credit Rating category. FHFA may direct a Bank to promptly revise its methodology or model to address any deficiencies identified by FHFA.
(g) Credit risk capital charges for residential mortgage assets—
(1) Bank determination of credit risk percentage.
(i) Each Bank's credit risk capital charge for a residential mortgage, residential mortgage pool, residential mortgage security, or collateralized mortgage obligation shall be equal to the asset's amortized cost multiplied by the credit risk percentage requirement assigned to that asset pursuant to paragraph (g)(1)(ii) or (g)(2) of this section. For any such asset carried at fair value where any change in fair value is recognized in the Bank's income, the Bank shall calculate the capital charge based on the fair value of the asset rather than its amortized cost.
(ii) Each Bank shall determine the credit risk percentage requirement applicable to each residential mortgage, residential mortgage pool, and residential mortgage security by identifying the appropriate FHFA RMA category set forth in the following Table 4 to this section to which the asset belongs, and shall determine the credit risk percentage requirement applicable to each collateralized mortgage obligation by identifying the appropriate FHFA CMO category set forth in Table 4 to this section to which the asset belongs, with the appropriate categories being determined in accordance with paragraph (g)(1)(iii) of this section.
(iii) Each Bank shall develop a methodology to estimate the potential future stress losses on its residential mortgages, residential mortgage pools, residential mortgage securities, and collateralized mortgage obligations, as may yet occur from the current amortized cost (or fair value) of those assets, and that converts those loss estimates into a stress loss percentage for each asset, expressed as a percentage of its amortized cost (or fair value). A Bank shall use the stress loss percentage for each asset to determine the appropriate FHFA RMA or CMO ratings category for that asset, as set forth in Table 4 to this section. A Bank shall do so by assigning each such asset to the category whose credit risk percentage requirement equals the asset's stress loss percentage, or to the category with the next highest credit risk percentage requirement. For residential mortgages and residential mortgage pools, the methodology shall involve an evaluation of the residential mortgages and residential mortgage pools and any credit enhancements or guarantees, including an assessment of the creditworthiness of the providers of such enhancements or guarantees. In the case of a residential mortgage security or collateralized mortgage obligation, the methodology shall involve an evaluation of the underlying mortgage collateral, the structure of the security, and any credit enhancements or guarantees, including an assessment of the creditworthiness of the providers of such enhancements or guarantees.
Table 4 to §1277.4—Requirement for Residential Mortgage Assets and CMOs
| Credit risk percentage |
|
|---|---|
| Categories for residential mortgage assets: | |
| FHFA RMA 1 | 0.37 |
| FHFA RMA 2 | 0.60 |
| FHFA RMA 3 | 0.86 |
| FHFA RMA 4 | 1.20 |
| FHFA RMA 5 | 2.40 |
| FHFA RMA 6 | 4.80 |
| FHFA RMA 7 | 34.00 |
| Categories for Collateralized Mortgage Obligations: | |
| FHFA CMO 1 | 0.37 |
| FHFA CMO 2 | 0.60 |
| FHFA CMO 3 | 1.60 |
| FHFA CMO 4 | 4.45 |
| FHFA CMO 5 | 13.00 |
| FHFA CMO 6 | 34.00 |
| FHFA CMO 7 | 100.00 |
(2) Exceptions.
(i) A Bank may use a credit risk capital charge of zero for any residential mortgage asset or collateralized mortgage obligation, or portion thereof, guaranteed by an Enterprise as to payment of principal and interest, provided that, and only for so long as, the Enterprise receives capital support or other form of direct financial assistance from the United States government that enables the Enterprise to repay those obligations;
(ii) A Bank may use a credit risk capital charge of zero for any residential mortgage asset or collateralized mortgage obligation, or any portion thereof, guaranteed or insured as to payment of principal and interest by a department or agency of the United States government that is backed by the full faith and credit of the United States; and
(iii) A Bank shall provide to FHFA upon request the methodology, model, and any analyses used to estimate the potential future stress losses on its residential mortgages, residential mortgage pools, residential mortgage securities, and collateralized mortgage obligations, and to determine a stress loss percentage for each such asset. FHFA may direct a Bank to promptly revise its methodology or model to address any deficiencies identified by FHFA.
(h) Calculation of credit equivalent amount for off-balance sheet items—
(1) General requirement. The credit equivalent amount for an off-balance sheet item shall be determined by an FHFA-approved model or shall be equal to the face amount of the instrument multiplied by the credit conversion factor assigned to such risk category of instruments by the following Table 5 to this section, subject to the exceptions in paragraph (h)(2) of this section.
Table 5 to §1277.4—Credit Conversion Factors for Off-Balance Sheet Items
| Instrument | Credit conversion factor (in percent) |
|---|---|
| Asset sales with recourse where the credit risk remains with the Bank | 100 |
| Commitments to make advances subject to certain drawdown. | |
| Commitments to acquire loans subject to certain drawdown. | |
| Standby letters of credit | 50 |
| Other commitments with original maturity of over one year. | |
| Other commitments with original maturity of one year or less | 20 |
(2) Exceptions. The credit conversion factor shall be zero for “Other Commitments With Original Maturity of Over One Year” and “Other Commitments With Original Maturity of One Year or Less” for which Table 5 to this section would otherwise apply credit conversion factors of 50 percent or 20 percent, respectively, if the commitments are unconditionally cancelable, or effectively provide for automatic cancellation due to the deterioration in a borrower's creditworthiness, at any time by the Bank without prior notice.
(i) Calculation of credit exposures for derivative contracts—
(1) Current credit exposure—
(i) Single derivative contract. The current credit exposure for derivative contracts that are not subject to an eligible master netting agreement shall be:
(A) If the mark-to-market value of the contract is positive, the mark-to-market value of the contract; or
(B) If the mark-to-market value of the contract is zero or negative, zero.
(ii) Derivative contracts subject to an eligible master netting agreement. The current credit exposure for multiple uncleared derivative contracts executed with a single counterparty and subject to an eligible master netting agreement shall be calculated on a net basis and shall equal:
(A) The net sum of all positive and negative mark-to-market values of the individual derivative contracts subject to the eligible master netting agreement, if the net sum of the mark-to-market values is positive; or
(B) Zero, if the net sum of the mark-to-market values is zero or negative.
(2) Potential future credit exposure. The potential future credit exposure for derivative contracts, including derivative contracts with a negative mark-to-market value, shall be calculated:
(i) Using an internal initial margin model that meets the requirements of §1221.8 of this chapter and is approved by FHFA for use by the Bank, or using an initial margin model that has been approved under regulations similar to §1221.8 of this chapter for use by the Bank's counterparty to calculate initial margin for those derivative contracts for which the calculation is being done; or
(ii) By applying the standardized approach in appendix A to part 1221 of this chapter; or
(iii) Using an initial margin model that is employed by a derivatives clearing organization.
(j) Credit risk capital charge for non-mortgage assets hedged with credit derivatives—
(1) Credit derivatives with a remaining maturity of one year or more. The credit risk capital charge for a non-mortgage asset that is hedged with a credit derivative that has a remaining maturity of one year or more may be reduced only in accordance with paragraph (j)(3) or (4) of this section and only if the credit derivative provides substantial protection against credit losses.
(2) Credit derivatives with a remaining maturity of less than one year. The credit risk capital charge for a non-mortgage asset that is hedged with a credit derivative that has a remaining maturity of less than one year may be reduced only in accordance with paragraph (j)(3) of this section and only if the remaining maturity on the credit derivative is identical to or exceeds the remaining maturity of the hedged non-mortgage asset and the credit derivative provides substantial protection against credit losses.
(3) Credit risk capital charge reduced to zero. The credit risk capital charge for a non-mortgage asset shall be zero if a credit derivative is used to hedge the credit risk on that asset in accordance with paragraph (j)(1) or (2) of this section, provided that:
(i) The remaining maturity for the credit derivative used for the hedge is identical to or exceeds the remaining maturity for the hedged non-mortgage asset, and either:
(A) The non-mortgage asset referenced in the credit derivative is identical to the hedged non-mortgage asset; or
(B) The non-mortgage asset referenced in the credit derivative is different from the hedged non-mortgage asset, but only if the asset referenced in the credit derivative and the hedged non-mortgage asset have been issued by the same obligor, the asset referenced in the credit derivative ranks pari passu to, or more junior than, the hedged non-mortgage asset and has the same maturity as the hedged non-mortgage asset, and cross-default clauses apply; and
(ii) The credit risk capital charge for the credit derivative contract calculated pursuant to paragraph (e) of this section is still applied.
(4) Capital charge reduction in certain other cases. The credit risk capital charge for a non-mortgage asset hedged with a credit derivative in accordance with paragraph (j)(1) of this section shall equal the sum of the credit risk capital charges for the hedged and unhedged portion of the non-mortgage asset provided that:
(i) The remaining maturity for the credit derivative is less than the remaining maturity for the hedged non-mortgage asset and either:
(A) The non-mortgage asset referenced in the credit derivative is identical to the hedged non-mortgage asset; or
(B) The non-mortgage asset referenced in the credit derivative is different from the hedged non-mortgage asset, but only if the asset referenced in the credit derivative and the hedged non-mortgage asset have been issued by the same obligor, the asset referenced in the credit derivative ranks pari passu to, or more junior than, the hedged non-mortgage asset and has the same maturity as the hedged non-mortgage asset, and cross-default clauses apply; and
(ii) The credit risk capital charge for the unhedged portion of the non-mortgage asset equals:
(A) The credit risk capital charge for the non-mortgage asset, calculated as the amortized cost, or fair value, of the non-mortgage asset multiplied by that asset's credit risk percentage requirement assigned pursuant to paragraph (f)(1) of this section where the appropriate credit rating is that for the non-mortgage asset and the appropriate maturity is the remaining maturity of the non-mortgage asset; minus
(B) The credit risk capital charge for the non-mortgage asset, calculated as the amortized cost, or fair value, of the non-mortgage asset multiplied by that asset's credit risk percentage requirement assigned pursuant to paragraph (f)(1) of this section where the appropriate credit rating is that for the non-mortgage asset but the appropriate maturity is deemed to be the remaining maturity of the credit derivative; and
(iii) The credit risk capital charge for the hedged portion of the non-mortgage asset is equal to the credit risk capital charge for the credit derivative, calculated in accordance with paragraph (e) of this section.
(k) Frequency of calculations. Each Bank shall perform all calculations required by this section at least quarterly, unless otherwise directed by FHFA, using the advances, residential mortgages, residential mortgage pools, residential mortgage securities, collateralized mortgage obligations, non-rated assets, non-mortgage assets, off-balance sheet items, and derivative contracts held by the Bank, and, if applicable, the values of, or FHFA Credit Ratings categories for, such assets, off-balance sheet items, or derivative contracts as of the close of business of the last business day of the calendar period for which the credit risk capital charge is being calculated.
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