[Federal Register Volume 88, Number 48 (Monday, March 13, 2023)]
[Proposed Rules]
[Pages 15306-15333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04041]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1240

RIN 2590-AB27


Enterprise Regulatory Capital Framework--Commingled Securities, 
Multifamily Government Subsidy, Derivatives, and Other Enhancements

AGENCY: Federal Housing Finance Agency.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is 
seeking comments on a notice of proposed rulemaking (proposed rule) 
that would amend several provisions in the Enterprise Regulatory 
Capital Framework (ERCF) for the Federal National Mortgage Association 
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 
Mac, and with Fannie Mae, each an Enterprise). The proposed rule would 
include modifications related to guarantees on commingled securities, 
multifamily mortgage exposures secured by government-subsidized 
properties, derivatives and cleared transactions, and credit scores, 
among other items.

DATES: Comments must be received on or before May 12, 2023.

ADDRESSES: You may submit your comments on the proposed rule, 
identified by regulatory information number (RIN) 2590-AB27, by any one 
of the following methods:
     Agency website: www.fhfa.gov/open-for-comment-or-input.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at [email protected] to ensure timely receipt by FHFA. 
Include the following information in the subject line of your 
submission: Comments/RIN 2590-AB27.
     Hand Delivered/Courier: The hand delivery address is: 
Clinton Jones, General Counsel, Attention: Comments/RIN 2590-AB27, 
Federal Housing Finance Agency, 400 Seventh Street SW, Washington, DC 
20219. Deliver the package at the Seventh Street entrance Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.

[[Page 15307]]

     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Clinton Jones, 
General Counsel, Attention: Comments/RIN 2590-AB27, Federal Housing 
Finance Agency, 400 Seventh Street SW, Washington, DC 20219. Please 
note that all mail sent to FHFA via U.S. Mail is routed through a 
national irradiation facility, a process that may delay delivery by 
approximately two weeks. For any time-sensitive correspondence, please 
plan accordingly.

FOR FURTHER INFORMATION CONTACT: Andrew Varrieur, Senior Associate 
Director, Office of Capital Policy, (202) 649-3141, 
[email protected]; Christopher Vincent, Principal Financial 
Analyst, Office of Capital Policy, (202) 649-3685, 
[email protected]; or James Jordan, Associate General 
Counsel, Office of General Counsel, (202) 649-3075, 
[email protected]. These are not toll-free numbers. For TTY/TRS 
users with hearing and speech disabilities, dial 711 and ask to be 
connected to any of the contact numbers above.

SUPPLEMENTARY INFORMATION:

Comments

    FHFA invites comments on all aspects of the proposed rule. Copies 
of all comments will be posted without change and will include any 
personal information you provide, such as your name, address, email 
address, and telephone number, on the FHFA website at https://www.fhfa.gov. In addition, copies of all comments received will be 
available for examination by the public through the electronic 
rulemaking docket for this proposed rule also located on the FHFA 
website.

Table of Contents

I. Introduction
II. Proposed Requirements
    A. Guarantees on Commingled Securities
    B. Multifamily Government Subsidy Risk Multiplier
    C. Derivatives and Cleared Transactions
    D. Representative Credit Scores for Single-Family Mortgage 
Exposures
    E. Original Credit Scores for Single-Family Mortgage Exposures 
Without a Representative Original Credit Score
    F. Guarantee Assets
    G. Mortgage Servicing Assets
    H. Time-Based Calls for CRT Exposures
    I. Interest-Only Mortgage-Backed Securities
    J. Single-Family Countercyclical Adjustment
    K. Stability Capital Buffer
    L. Advanced Approaches
III. Effective Date
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act

I. Introduction

    FHFA is seeking comments on amendments to the ERCF that would 
enhance, clarify, or otherwise refine various regulatory capital 
requirements for the Enterprises. The proposed rule would modify 
provisions in the ERCF related to the following items: guarantees on 
commingled securities, multifamily mortgage exposures secured by 
properties with a government subsidy, derivatives and cleared 
transactions, credit scores for single-family mortgage exposures, 
guarantee assets, mortgage servicing assets (MSAs), time-based calls 
for credit risk transfer (CRT) exposures, interest-only (IO) mortgage-
backed securities (MBS), the single-family countercyclical adjustment, 
the stability capital buffer, and the compliance date for the advanced 
approaches.
    The proposed amendments would implement the lessons learned through 
the continued application of the ERCF and better reflect the risks 
inherent in the Enterprises' business models. In addition, the proposed 
rule would clarify certain areas of the ERCF. In doing so, the 
modifications in this proposed rule would enhance the safety and 
soundness of the Enterprises and contribute to the furtherance of the 
Enterprises' missions.
    FHFA adopted the ERCF on December 17, 2020, with the purpose of 
implementing a going-concern regulatory capital standard to ensure that 
each of Fannie Mae and Freddie Mac operates in a safe and sound manner, 
and, across the economic cycle is positioned to fulfill its statutory 
mission to provide stability and ongoing assistance to the secondary 
mortgage market. The ERCF satisfied a statutory requirement that FHFA 
establish by regulation, risk-based capital requirements to safeguard 
the Enterprises against the risks that arise in the operation and 
management of their businesses. The ERCF also implemented a new 
leverage framework that included both a minimum requirement and a 
leverage buffer. The ERCF became effective on February 16, 2021. FHFA 
subsequently amended the ERCF three times. The amendments refined the 
prescribed leverage buffer amount (PLBA or leverage buffer) and the 
risk-based capital treatment of CRT, implemented a more comprehensive 
set of public disclosure requirements for the standardized approach, 
and required the Enterprises to submit capital plans to FHFA on an 
annual basis. Each of the amendments became effective in 2022.
    Since the adoption of the ERCF, the Enterprises have been operating 
under the capital requirements and buffers outlined in the standardized 
approach while simultaneously building their capital positions. 
However, despite their recent progress accumulating capital, the 
Enterprises remain severely undercapitalized. Since the Enterprises 
were placed into conservatorships in September 2008, they have been 
supported by Senior Preferred Stock Purchase Agreements (PSPAs) between 
the U.S. Department of the Treasury (Treasury) and each Enterprise.\1\
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    \1\ Fannie Mae's and Freddie Mac's Amended and Restated Senior 
Preferred Stock Purchase Agreements with Treasury, as amended 
through September 14, 2021, can be found on FHFA's web page at 
https://www.fhfa.gov/Conservatorship/Pages/Senior-Preferred-Stock-Purchase-Agreements.aspx.
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    As conservator and prudential regulator, FHFA continuously monitors 
the risk inherent in the Enterprises' business operations and reviews 
the appropriateness of the ERCF's capital requirements and buffers to 
mitigate those risks. FHFA has identified several provisions in the 
ERCF that could be revised to enhance the ERCF. Specifically, the 
proposed rule would introduce:
     A 5 percent risk weight and 50 percent credit conversion 
factor for guarantees on commingled securities,
     A risk multiplier of 0.6 for multifamily mortgage 
exposures secured by properties with certain government subsidies,
     A standardized approach for counterparty credit risk (SA-
CCR) as the method for computing risk weights for derivatives and 
cleared transactions,
     A modified procedure for determining a representative 
credit score for single-family mortgage exposures,
     A modified credit score assumption for single-family 
mortgage exposures originated without a representative credit score,
     A 20 percent risk weight for guarantee assets, and
     A timing alignment between the application of single-
family countercyclical adjustments and property value adjustments.
    FHFA has also identified several aspects of the ERCF where specific 
language would clarify and enhance the usefulness of the ERCF. The 
proposed rule would:
     Expand the definition of MSAs to include servicing rights 
on mortgage loans owned by the Enterprise,
     Explicitly permit eligible time-based call options in the 
CRT operational criteria,
     Amend the risk weights for IO MBS to 0 percent, 20 
percent, and 100

[[Page 15308]]

percent, conditional on whether the security was issued by the 
Enterprise, the other Enterprise, or a non-Enterprise entity, 
respectively, and
     Clarify the calculation of the stability capital buffer 
when an increase and a decrease might be applied concurrently.
    Finally, the proposed rule would extend the compliance date for the 
advanced approaches. Each item is discussed below.

II. Proposed Requirements

A. Guarantees on Commingled Securities

    The ERCF includes risk-based, leverage, and buffer capital 
requirements for guarantees on commingled securities--certain 
resecuritizations guaranteed by a combination of Fannie Mae and Freddie 
Mac, described more fully below. For risk-based capital, an Enterprise 
is currently required to apply a 20 percent risk weight on exposures to 
the other Enterprise in a commingled security. For leverage capital and 
buffer calculations, an Enterprise is currently required to apply a 100 
percent credit conversion factor to these exposures because they are 
off-balance sheet guarantees. The 20 percent risk weight and 100 
percent credit conversion factor for guarantees on commingled 
securities may not accurately reflect the counterparty risks posed by 
commingling activities and in certain circumstances may impair the 
liquidity of the Enterprises' securities, which may adversely affect 
the nation's housing finance market. The proposed rule would reduce the 
risk weight and the credit conversion factor for guarantees on 
commingled securities to 5 percent and 50 percent, respectively.
    On February 28, 2019, FHFA issued a final rule on common MBS known 
as the Uniform Mortgage-Backed Security (UMBS) with the purpose of 
enhancing liquidity in the MBS marketplace and fostering the efficiency 
and liquidity of the secondary mortgage market. On June 3, 2019, the 
Enterprises launched newly issued UMBS. The UMBS are a single-class 
security issued by either Fannie Mae or Freddie Mac backed by single-
family mortgage loans purchased by the issuing Enterprise. For the UMBS 
market to operate successfully, market participants must continue to 
accept UMBS as fungible irrespective of the issuing Enterprise. That 
is, investors generally must agree that a UMBS of a certain coupon, 
maturity, and loan origination year issued by one Enterprise is roughly 
equivalent to the corresponding UMBS issued by the other Enterprise.\2\
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    \2\ To support investor confidence in that fungibility, FHFA 
adopted a final rule governing Enterprise actions affecting UMBS 
cash flows to investors (12 CFR part 1248), publishes quarterly 
prepayment monitoring reports, and limits certain pooling practices 
with respect to the creation of UMBS.
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    To foster fungibility, each Enterprise may issue ``Supers,'' which 
are single-class resecuritizations of UMBS. The securities underlying 
Supers may be commingled, i.e., Supers may be backed by both securities 
that are issued and guaranteed by Fannie Mae and securities that are 
issued and guaranteed by Freddie Mac. The Enterprises may also issue 
collateralized mortgage obligations, or CMOs, and real estate mortgage 
investment conduits, or REMICs, which are each a type of structured 
security in which the collateral can include UMBS. If an Enterprise 
guarantees a security backed in whole or in part by securities of the 
other Enterprise, the Enterprise is obligated under its guarantee to 
fund any shortfall in the event that the other Enterprise fails to make 
a payment due on its securities.\3\ Investors in commingled securities 
benefit from the original guarantees extended by guarantors of the 
underlying collateral, as well as the additional guarantees of 
resecuritizing Enterprise, including on the commingled collateral.
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    \3\ The Enterprises have entered into an indemnification 
agreement relating to commingled securities issued by the 
Enterprises. The indemnification agreement obligates each Enterprise 
to reimburse the other for any such shortfall.
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    As a result of these multiple guarantees, the current 20 percent 
risk weight and 100 percent credit conversion factor for commingled 
securities may not accurately reflect these counterparty risks and, in 
certain circumstances, may impair the liquidity of the Enterprises' 
securities. However, despite their current Treasury support under the 
PSPAs, the Enterprises also remain privately-owned corporations, and 
their obligations do not have the explicit guarantee of the full faith 
and credit of the United States. Therefore, the MBS and other 
obligations of an Enterprise pose some degree of counterparty risk.
    The proposed rule would reduce the risk weight for guarantees on 
commingled securities from 20 percent to 5 percent to better align the 
capital requirements with the inherent counterparty risk. A lower risk 
weight should reduce an Enterprise's incentive to only guarantee Supers 
securities collateralized by its own UMBS, leading to different volumes 
and investor perceptions of UMBS issued by each Enterprise, and 
potentially leading to a bifurcation of UMBS pricing and trading. 
Several commenters on FHFA's 2020 notice of proposed rulemaking on 
Enterprise capital \4\ recommended FHFA implement a similar treatment, 
while also stating that an Enterprise's exposures to the other 
Enterprise do not increase aggregate credit risk and the 20 percent 
risk weight is therefore excessive.
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    \4\ 85 FR 39274 (June 30, 2020).
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    The risk-weight floor assigned to any retained CRT exposure is 5 
percent.\5\ This risk weight applies to senior tranches of CRT 
transactions that absorb catastrophic levels of loss only after 
resources to absorb expected and unexpected losses are exhausted. 
Similarly, the losses that an Enterprise would experience from 
commingled securities would likely occur in remote circumstances 
through sustained catastrophic levels of loss after the other 
Enterprise has exhausted its loss-absorbing financial resources. 
Therefore, the proposed 5 percent risk weight for credit exposures 
arising out of guarantees on commingling activities would align with 
the risk-weight floor for retained CRT exposures.
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    \5\ 87 FR 14764 (March 16, 2022).
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    The proposed rule would also reduce the credit conversion factor 
for guarantees on commingled securities from 100 percent to 50 percent. 
To enhance the liquidity of UMBS and the overall stability of the 
secondary mortgage market, the leverage and buffer requirements for 
guarantees on commingled securities would also need to be updated. FHFA 
proposes to accomplish this by reducing the impact of these guarantees 
on an Enterprise's adjusted total assets. According to generally 
accepted accounting principles, an Enterprise's guarantee of commingled 
collateral is not consolidated on the balance sheet because the 
Enterprise issuing the guarantee does not have any rights or powers to 
direct the activities of the underlying commingled resecuritization 
trust and is not the primary beneficiary of its activities.\6\ Under 
the ERCF, off-balance sheet assets are subject to a range of credit 
conversion factors to determine adjusted total assets. FHFA's proposal 
to update the credit conversion factor for guarantees on commingled 
securities to 50 percent would align with the prevailing regulatory 
capital treatment for off-balance sheet undrawn commitments with an 
original maturity of more than one year that are not

[[Page 15309]]

unconditionally cancelable by the Enterprise.
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    \6\ FASB ASC 810.
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    The proposed changes to the requirements for guarantees on 
commingled securities would affect both risk-weighted assets and 
adjusted total assets. FHFA estimates that under the proposed rule, the 
total common equity tier 1 capital (CET1) required to meet the risk-
based capital requirements and buffers for the Enterprises' guarantees 
on commingled securities as of June 30, 2022 would decline by 
approximately $5.1 billion.
    Question 1: What, if any, other factors should FHFA consider in its 
determination of a 5 percent risk weight and 50 percent credit 
conversion factor for guarantees on commingled securities?
    Question 2: Is the proposed 5 percent risk weight for guarantees on 
commingled securities appropriately calibrated?
    Question 3: Is the proposed 50 percent credit conversion factor for 
guarantees on commingled securities appropriately calibrated?
    Question 4: Should FHFA adjust the regulatory capital treatment for 
exposures to MBS guaranteed by the other Enterprise to mitigate any 
risk of disruption to the UMBS?
    Question 5: Should FHFA consider a different risk weight for 
second-level resecuritizations backed by UMBS?
    Question 6: What should be the regulatory capital treatment of any 
credit risk mitigation effect of any indemnification or similar 
arrangements between the Enterprises relating to UMBS 
resecuritizations?
    Question 7: Should FHFA adopt different risk weights for MBS 
guaranteed by an Enterprise and the unsecured debt of an Enterprise?

B. Multifamily Government Subsidy Risk Multiplier

    The methodology for calculating multifamily credit risk weights in 
the ERCF does not differentiate between multifamily mortgage exposures 
secured by properties with a government subsidy and by properties 
without a government subsidy. Two previous FHFA products that together 
formed much of the basis for the ERCF--the Conservatorship Capital 
Framework, an internal risk measurement framework established in 2017, 
and FHFA's 2018 notice of proposed rulemaking on Enterprise Capital 
Requirements \7\--each contained such a differentiation in the form of 
a multifamily risk multiplier. FHFA did not include such a multiplier 
in the ERCF due to calibration challenges caused by the relatively 
infrequent instances of loss across multifamily loan programs that 
include a government subsidy. However, several commenters on FHFA's 
2020 notice of proposed rulemaking on Enterprise capital \8\ 
recommended that FHFA introduce a risk multiplier to reflect that 
multifamily mortgage exposures associated with government-subsidized 
properties are less risky than those associated with unsubsidized 
properties, all else equal.
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    \7\ 83 FR 33312 (July 17, 2018).
    \8\ 85 FR 39274.
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    Properties with government subsidies represent an important segment 
of the Enterprises' multifamily business models. FHFA sets a yearly 
limit or cap on the dollar value of the Enterprises' multifamily 
acquisitions, ensuring they provide liquidity to the secondary market 
without crowding out private competition. As part of the annual 
acquisition limits, FHFA directs the Enterprises to meet specific 
affordable housing or mission goals by acquiring multifamily loans 
collateralized by properties that charge rents affordable to certain 
segments of the population with specified income levels. Affordable 
property units are available to renters at a rental rate below the 
typical market rate, leading to generally strong demand for affordable 
property units and therefore to relatively stable vacancy rates.
    Government subsidies of affordable housing are issued either at the 
Federal or state and local levels, typically in the form of a tax 
credit, direct subsidy, or voucher reimbursement. The purpose of these 
subsidies is to compensate property owners for providing below-market 
rental rates on units within their multifamily properties. Many 
subsidies last for multiple years and remain in place only if the 
property owner meets certain program-specific requirements. Although 
government-subsidized properties typically collect lower gross rents 
per unit than comparable non-affordable properties and may generate 
lower net operating income (NOI), property owners compensate for the 
lower property income through the value of the government-subsidies. 
Thus, property owners have an incentive to ensure the property follows 
the contractual subsidy restrictions, including avoiding potential 
default (60 or more days past due), to retain the government subsidy. 
The primary subsidy programs include the Low-Income Housing Tax Credit 
(LIHTC) program,\9\ Section 8 Housing Assistance Payment contracts, and 
diverse state- and local-level programs.
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    \9\ Section 42 of the Internal Revenue Code (26 U.S.C.A. section 
42); 26 CFR 1.42 (Treasury regulations); each state agency's 
qualified allocation plan, regulations and compliance manual, along 
with a list of state and local LIHTC-allocating agencies, can be 
found at https://www.huduser.gov/portal/datasets/lihtc.html.
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    Many government subsidy programs require property owners to make a 
specified percentage of units affordable to residents at or below a 
certain percent of area median income (AMI). For example, to qualify 
for the LIHTC program, a property owner must (in general) make at least 
20 percent of the units available to renters at or below 50 percent of 
AMI, make at least 40 percent of the units available to renters at or 
below 60 percent of AMI, or make at least 40 percent of the units 
available to renters with an average income of no more than 60 percent 
of AMI and no units to renters with an income greater than 80 percent 
of AMI. In practice, the number of units restricted as affordable at a 
multifamily property often significantly exceeds the applicable minimum 
program requirements because the penalties for non-compliance can be 
quite costly. Minimum affordability criteria aim to ensure that the 
primary benefits of government subsidy programs accrue to low-income 
renters rather than to property owners acting in bad faith.
    The proposed rule would introduce a risk multiplier equal to 0.6 
for any multifamily mortgage exposures secured by one or more 
properties each with at least one applicable government subsidy, 
subject to certain affordability criteria. The applicable government 
subsidies would be limited to the following three primary subsidy 
programs: (i) LIHTC, (ii) Section 8 project-based rental assistance, 
and (iii) state and local affordable housing programs that require the 
provision of affordable housing for the life of the loan. A multifamily 
mortgage exposure meeting the collateral criteria would qualify for the 
0.6 risk multiplier if the Enterprise can verify that each property 
securing the exposure has at least 20 percent of its units restricted 
as affordable units, where the affordability restriction means less 
than or equal to 80 percent of AMI.
    For a multifamily mortgage exposure to qualify for the government 
subsidy multiplier, the properties securing the exposure must have 
significant, long-term, and continuous government subsidies. LIHTC and 
project-based Section 8 programs meet these criteria, so to ensure 
alignment in this regard, the proposed rule would require that 
qualifying state and local affordable housing programs require 
affordable

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housing to be provided for the life of the loan.
    The addition of a government subsidy multiplier would affect risk-
weighted assets, only. FHFA estimates that under the proposed rule, 
required CET1 capital for the Enterprises' multifamily mortgage 
exposures as of June 30, 2022 would decline by approximately $0.4 
billion.
    Question 8: Is the 0.6 risk multiplier for multifamily mortgage 
exposures secured by properties with a government subsidy appropriately 
calibrated?
    Question 9: Is the restriction that at least 20 percent of units 
must be made available at or below 80 percent of AMI appropriately 
calibrated?
    Question 10: Should FHFA consider additional thresholds and/or 
affordability restrictions for a multifamily mortgage exposure to 
qualify for a risk multiplier greater than 0.6 but less than 1.0?
    Question 11: Do FHFA's proposed categories of applicable government 
subsidies appropriately capture the population of multifamily 
government subsidies that are significant, long-term, and continuous?
    Question 12: Are there data or analyses available that would 
support a multi-tiered government subsidy risk multiplier that varies 
with the level of subsidy or by other relevant factors? If so, what 
data and factors?

C. Derivatives and Cleared Transactions

    An Enterprise with a positive exposure on a derivative contract 
expects to receive a payment from its counterparty and is subject to 
the credit risk that the counterparty will default on its obligations 
and fail to pay the amount owed under the contract. Therefore, the ERCF 
requires an Enterprise to hold risk-based capital based on the exposure 
amount of its derivative contracts.
    The current rule requires an Enterprise to use the current exposure 
methodology (CEM) to determine the exposure amount of each derivative 
contract. The risk-weighted asset amount for the derivative contract is 
then the product of the exposure amount and the risk weight of the 
counterparty. The ERCF requires an Enterprise to use CEM to determine 
the exposure amounts of their over-the-counter (OTC) derivative 
contacts and cleared derivative contracts, as well as determine the 
risk-weighted assets amount of their contributions of commitments to 
mutualized loss sharing agreements with central counterparties (i.e., 
default fund contributions).
    Under CEM, the exposure amount of a single derivative contract is 
equal to the sum of its current credit exposure and potential future 
exposure (PFE). Current credit exposure is equal to the greater of zero 
and the on-balance sheet fair value of the derivative contract. PFE 
approximates the Enterprise's potential exposure to its counterparty 
over the remaining maturity of the derivative contract. PFE equals the 
product of the notional amount of the derivative contract and a 
supervisory-provided conversion factor, which reflects the potential 
volatility in the reference asset of the derivative contract. The ERCF 
provides the conversion factors in a look-up table that is based on the 
derivative contract's type and remaining maturity. The potential 
exposure generally increases with an increase in volatility and the 
duration of the derivative contract.
    CEM was developed before the financial crisis and does not reflect 
recent market conventions and regulatory requirements that are designed 
to reduce the risks associated with derivative contracts. This can lead 
to a significant mismatch between the risks of derivative portfolios 
and the regulatory capital that the Enterprises must hold against them. 
Examples of CEM drawbacks include a lack of differentiation between 
margined and unmargined derivative contracts and inadequate recognition 
of the risk-reducing benefits of a balanced derivatives portfolio. 
Furthermore, the supervisory conversion factors provided under CEM were 
developed prior to the 2007-2008 financial crisis and they have not 
been recalibrated to reflect the stress volatilities observed in recent 
years.
    For these reasons, the Basel Committee on Banking Supervision 
(Basel Committee) developed the SA-CCR and published it as a final 
standard in 2014.\10\ The U.S. banking regulators adopted SA-CCR as a 
replacement for CEM in 2020.
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    \10\ https://www.bis.org/publ/bcbs279.pdf.
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    SA-CCR provides important improvements to risk sensitivity and 
calibration relative to CEM, including differentiation of margin and 
non-margin trades and recognition of netting agreements, resulting in 
more appropriate capital requirements for derivative contracts. One of 
the concerns regarding the current regulatory capital treatment for 
derivative contracts under CEM is that CEM does not appropriately 
recognize collateral, including the risk-reducing nature of variation 
margin, and does not provide sufficient netting for derivative 
contracts that share similar risk factors. The SA-CCR methodology 
addresses these concerns.
    Compared to CEM, SA-CCR offers a more risk-sensitive approach to 
determine the replacement cost and PFE for a derivative contract. 
Specifically, SA-CCR improves collateral recognition by differentiating 
between margined and unmargined derivative contracts. SA-CCR also 
better captures recently observed stress volatilities among the primary 
risk drivers for derivative contracts. SA-CCR is a standardized, non-
modelled approach that is relatively straightforward to implement.
    The proposed rule would require an Enterprise to calculate the 
exposure amounts of OTC and cleared derivative contracts using SA-CCR 
rather than CEM, as well as the risk-weighted asset amounts of default 
fund contributions. The Enterprises would also be required to use SA-
CCR to determine the exposure amount of their derivative contracts for 
inclusion in adjusted total assets. Use of SA-CCR would allow an 
Enterprise to recognize the meaningful, risk-reducing relationship 
between derivative contracts within a balanced derivatives portfolio 
and to recognize the risk-mitigation effects of guarantees, credit 
derivatives, and collateral for purposes of its risk-based capital 
requirements. In addition, the replacement of CEM with SA-CCR would 
result in better alignment between the ERCF and both the U.S. banking 
framework and the international standards issued by the Basel 
Committee.\11\
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    \11\ To note one point of departure, the proposed rule would not 
include the internal models methodology from 12 CFR 217.132(d) to 
reduce reliance on internal models.
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    Under the proposed rule and consistent with the U.S. banking 
framework, the Enterprises would apply SA-CCR in the following ways:
1. Netting Sets
    Under SA-CCR, an Enterprise would calculate the exposure amount of 
its derivative contract at the netting set level. The proposed rule 
would define a netting set to mean either one derivative contract 
between an Enterprise and a single counterparty, or a group of 
derivative contracts between an Enterprise and a single counterparty 
that are subject to a qualifying master netting agreement (QMNA). The 
proposed rule would retain the current definition of a QMNA.
2. Hedging Sets
    For the PFE calculation under SA-CCR, an Enterprise would fully or 
partially net derivative contracts within

[[Page 15311]]

the same netting set that share similar risk factors. This approach 
would recognize that derivative contracts with similar risk factors 
share economically meaningful relationships with close correlations 
that make netting appropriate. In contrast, CEM recognizes only a 
portion of the netting benefits of derivative contracts subject to a 
QMNA, without accounting for relationships between the underlying risk 
factors of derivative contracts.
    Under SA-CCR, a hedging set means those derivative contracts within 
the same netting set that share similar risk factors. The proposal 
would define five types of hedging sets--interest rate, exchange rate, 
credit, equity, and commodities--and would provide formulas for netting 
within each hedging set. Each formula would be particular to each 
hedging set type and would reflect the regulatory correlation 
assumptions between risk factors in the hedging set.
3. Derivative Contract Amount for the PFE Component Calculation
    Similar to CEM, an Enterprise would use an adjusted derivative 
contract amount for the PFE component calculation under SA-CCR. 
However, as part of the estimate, SA-CCR would use updated supervisory 
factors that reflect the stress volatilities observed during the 
financial crisis. The supervisory factors would reflect the variability 
of the primary risk factors of the derivative contract over a one-year 
time horizon. In addition, SA-CCR would apply a separate maturity 
factor to each derivative contract that would scale down, if necessary, 
the default one-year risk horizon of the supervisory factor to the risk 
horizon appropriate for the derivative contract.
4. Collateral Recognition and Differentiation Between Margined and 
Unmargined Derivative Contracts
    Under CEM, an Enterprise recognizes the collateral only after the 
exposure amount has been determined. Under the proposed rule, SA-CCR 
would account for collateral directly within the exposure amount 
calculation. For replacement cost, the proposed rule would recognize 
collateral on a one-for-one basis. For PFE, SA-CCR would use the 
concept of a PFE multiplier, which would allow an Enterprise to reduce 
the PFE amount through recognition of over-collateralization, in the 
form of both variation margin and independent collateral. It would also 
account for negative fair value amounts of the derivative contracts 
within the netting set. In addition, the proposed rule would 
differentiate between margined and unmargined derivative contracts, 
such that the netting set subject to variation margin would always have 
an exposure amount no higher than an equivalent netting set that is not 
subject to a variation margin agreement.
    To accommodate the introduction of the SA-CCR into the ERCF's 
standardized approach, the proposed rule would make a series of 
corresponding modifications, including adding appropriate defined terms 
to ERCF's definitions and updating the calculation of total risk-
weighted assets. Notably, the proposed rule would replace the current 
requirements for cleared transactions (12 CFR 1240.37) and 
collateralized transactions (12 CFR 1240.39) with modified requirements 
from the U.S. banking framework's advanced approaches (12 CFR 217.133 
and 12 CFR 217.132(b)). As a result, the proposed rule's requirements 
for cleared transactions would reflect the U.S. banking framework's 
risk weights on cleared transactions and risk-weighted assets on 
default fund contributions. The proposal would depart from the U.S. 
banking framework by omitting exposure calculations related to internal 
model methodology to reduce reliance on the Enterprises' internal model 
results.
    The proposed rule's requirements for collateralized transactions 
would maintain the current collateral haircut approach and standard 
supervisory haircuts, both of which are also included in the U.S. 
banking framework. However, the proposed rule's requirements for 
collateralized transactions would remove the current simple approach 
and add the U.S. banking framework's simple value-at-risk (VaR) 
methodology to align with the U.S. banking framework's advanced 
approaches application of collateralized transactions.
    The proposed rule would also add credit valuation adjustment (CVA) 
risk-weighted assets to the calculation of standardized total risk-
weighted assets. The CVA is a fair value adjustment that reflects 
counterparty credit risk in the valuation of OTC derivative contracts. 
CVA risk-weighted assets cover the risk of incurring mark-to-market 
losses because of the deterioration in the creditworthiness of an 
Enterprise's counterparties. The proposed rule would include the U.S. 
banking framework's formulaic simple CVA approach but not the advanced 
CVA approach. This departure from the U.S. banking framework would 
reduce reliance on the Enterprises' internal model results.
    The proposed changes to the approaches for derivatives and cleared 
transactions would affect both risk-weighted assets and adjusted total 
assets. FHFA estimates that under the proposed rule, the total CET1 
capital required to meet the risk-based capital requirements and 
buffers for the Enterprises' derivatives and cleared transactions as of 
September 30, 2022 would increase by less than $0.1 billion.
    Question 13: In addition to the risk-sensitivity enhancements SA-
CCR provides relative to CEM, what, if any, other factors should FHFA 
consider in its determination to replace CEM with SA-CCR?

D. Representative Credit Scores for Single-Family Mortgage Exposures

    Credit scores are a primary risk factor for determining the 
riskiness of a single-family mortgage exposure due to their strong 
correlation with the likelihood of a borrower default. Therefore, 
credit scores are an important input in the ERCF calculation of risk 
weights for single-family mortgage exposures, both at origination 
(original credit score) and over time (refreshed credit score). A 
single-family mortgage exposure is normally associated with multiple 
credit scores because an exposure can have multiple borrowers and each 
borrower can have multiple scores. Often, each borrower has three 
credit reports and, therefore, three credit scores, one from each 
national consumer reporting agency (repository). To account for 
multiple credit scores associated with a single-family mortgage 
exposure, the ERCF includes a procedure to determine a single 
representative credit score for each single-family mortgage exposure.
    The proposed rule would modify the current procedure for selecting 
a representative credit score to reflect FHFA's announcement \12\ in 
October 2022 that the Enterprises will require two, rather than three, 
credit reports from the repositories (bi-merge credit report 
requirement). While the implementation date for the bi-merge credit 
report requirement has yet to be announced, the proposed rule would 
position the Enterprises to account for the new requirement upon 
implementation.
---------------------------------------------------------------------------

    \12\ FHFA Announces Validation of FICO 10T and VantageScore 4.0 
for Use by Fannie Mae and Freddie Mac [bond] Federal Housing Finance 
Agency, available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Validation-of-FICO10T-and-Vantage-Score4-for-FNM-FRE.aspx.
---------------------------------------------------------------------------

    The current ERCF instructs the Enterprises to use a two-step 
procedure for identifying the representative credit score on a single-
family mortgage exposure. In the first step, an Enterprise

[[Page 15312]]

selects a single score for each borrower on the loan by either 
selecting the median score if the borrower has scores from three 
repositories or selecting the lowest score if the borrower has fewer 
than three scores. In the second step, an Enterprise determines the 
representative score for the exposure by selecting the lowest single 
score across all borrowers from step one.
    After the adoption of the bi-merge credit score requirement, the 
current procedure for determining a representative credit score could 
result in a significant downward shift in representative credit scores 
for most borrowers. This is because with the bi-merge credit report 
requirement, there is a higher likelihood that the representative 
credit score for most borrowers would end up being the lower of two 
scores rather than the median of three scores.
    To mitigate this risk, the proposed rule would replace the first 
step in determining a single-family mortgage exposure's representative 
credit score. Rather than using the median or lowest score, the 
proposed rule would require an Enterprise to calculate the average 
credit score across repositories for each borrower in step one. This 
change should mitigate the concern about downward bias, as the average 
across the two scores is closer to the center of the borrower's credit 
score distribution than the minimum across scores. To validate this 
assumption, FHFA analyzed original credit scores from over 39 million 
borrowers associated with loans acquired between 2010 and 2022 and 
found that changing the procedure from the minimum of the medians to 
the minimum of the averages (where for each borrower FHFA selected, at 
random, two out of three scores) had little aggregate effect on the 
average representative score. The results of this analysis suggested 
that under the current rule, the average representative credit score 
was 750.6, whereas under the proposed rule, the average representative 
credit score was 750.3 using two borrower scores (selected at random 
from the set of three) and 750.7 using three borrower scores.
    The proposed change to step one would also alleviate concerns about 
when the bi-merge credit score requirement will be implemented. To 
examine the effect of the proposed change before the implementation 
date of the bi-merge credit score requirement, FHFA repeated the 
previous analysis but analyzed the difference between the use of the 
median of three scores and the use of the mean of three scores. The 
results of this analysis again showed little change (750.6 vs. 750.7) 
in the central tendency of the representative credit score 
distributions, and it showed there is little difference between the two 
approaches in aggregate. Under the proposed rule, FHFA expects that for 
the period before the implementation date of the bi-merge credit score 
requirement the borrower credit score would typically be based on three 
scores, and after the implementation date the borrower credit score 
would typically be based on two scores.
    The proposed change to the procedure for selecting a representative 
credit score would affect risk-weighted assets, only. FHFA estimates 
that under the proposed rule, the total CET1 capital required to meet 
the risk-based capital requirements for the Enterprises' single-family 
mortgage exposures as of June 30, 2022 would decline by less than $0.1 
billion.
    Question 14: What, if any, changes should FHFA consider to the 
proposed methodology for determining a representative credit score? For 
example, should FHFA consider requiring an Enterprise to calculate a 
representative credit score by averaging credit scores across multiple 
borrowers in step two rather than by taking the lowest score across 
those borrowers?

E. Original Credit Scores for Single-Family Mortgage Exposures Without 
a Representative Original Credit Score

    As discussed above, credit scores play an important role in the 
ERCF calculation of risk weights for single-family mortgage exposures 
due to their strong correlation with the likelihood of a borrower 
default. Credit scores are commonly used as a proxy for a borrower's 
creditworthiness and are therefore a primary input in many lenders' 
automated underwriting systems. Historically, and in particular prior 
to the financial crisis, a borrower's lack of credit history and credit 
score indicated a significant level of risk. Therefore, the current 
ERCF requires an Enterprise to assign a credit score of 600 to any 
single-family mortgage exposure where a permissible credit score cannot 
be determined (unscored). This conservative assignation places single-
family mortgage exposures with unscored borrowers in the lowest 
possible ERCF credit score buckets across the single-family base grids, 
implying the highest level of risk.
    However, advances in financial regulation and improvements in 
mortgage underwriting and lending standards since the financial crisis 
suggest that FHFA's initial credit score assignation for single-family 
mortgage exposures associated with unscored borrowers may not 
accurately reflect the prevailing level of credit risk in these 
exposures. Although a missing credit score could be due to a data 
error, today it is far more likely the loan was either manually 
underwritten with the establishment of nontraditional credit and strict 
requirements on property type, loan purpose, and DTI, or the loan was 
underwritten through an automated system with more stringent 
requirements than would be necessary if the borrower had an available 
credit score.\13\
---------------------------------------------------------------------------

    \13\ In August 2021, FHFA announced that to expand access to 
credit in a safe and sound manner, Fannie Mae would begin to 
consider rental payment history as part of its mortgage underwiring 
processes (https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Inclusion-of-Rental-Payment-History-in-Fannie-Maes-Underwriting-Process.aspx). In July 2022, 
Freddie Mac made a similar announcement (https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-takes-further-action-help-renters-achieve).
---------------------------------------------------------------------------

    To reflect the post-crisis improvements in regulatory, 
underwriting, and lending standards, as well as the recent inclusions 
of positive rental payment histories in the Enterprises' automated 
underwriting systems, the proposed rule would modify the assignation 
process of an original credit score to a single-family mortgage 
exposure without a permissible credit score at origination. FHFA 
analyzed the two-year default performance of single-family mortgage 
exposures associated with unscored borrowers relative to similar 
exposures associated with scored borrowers and determined that unscored 
exposures performed most similarly to scored exposures with original 
credit scores in the range of 680 to 699. Therefore, subject to 
Enterprise verification that none of the borrowers have a credit score 
at one of the repositories, the proposed rule would require an 
Enterprise to assign an original credit score of 680 to a single-family 
mortgage exposure without a permissible credit score at origination.
    After five months, an Enterprise would continue to assign a 
refreshed credit score. To reflect the implied default performance in 
the population of unscored borrowers, the proposed rule would modify 
the definition of a refreshed credit score to mean the most recently 
available credit score. For a single-family mortgage exposure without a 
permissible credit score at origination, the refreshed credit score 
would be either an updated credit score if one is available at the 
credit repositories or the original credit score, as determined per the 
proposed rule, if one is not.

[[Page 15313]]

    The proposed change to the assignation process of an original 
credit score to a single-family mortgage exposure without a permissible 
credit score at origination would affect risk-weighted assets during 
the period between origination and the later of 5 months and when a 
borrower's refreshed credit score becomes available. FHFA estimates 
that under the proposed rule, required CET1 capital for the 
Enterprises' single-family mortgage exposures as of June 30, 2022 would 
decline by less than $0.1 billion.
    Question 15: What, if any, changes should FHFA consider to the 
proposed methodology for determining an original credit score for a 
single-family mortgage exposure without a permissible credit score at 
origination?

F. Guarantee Assets

    A guarantee asset is an on-balance sheet asset that represents the 
present value of a future consideration for providing a financial 
guarantee on a portfolio of mortgage exposures not recognized on the 
balance sheet. Examples of such off-balance sheet exposures include, 
but are not limited to, Freddie Mac's multifamily K-deals, Fannie Mae's 
multifamily bond credit enhancements, and certain single-family 
guarantee arrangements without securitization. The current ERCF does 
not include an explicit risk weight for guarantee assets. As an ``other 
asset'' not specifically assigned a different risk weight, an 
Enterprise is required to assign a 100 percent risk weight (Sec.  
1240.32(i)(5)) to guarantee assets.
    The proposed rule would introduce a 20 percent risk weight for an 
Enterprise's guarantee assets. This risk weight would reflect the risk-
weight floor for mortgage exposures in the ERCF as well as the minimum 
risk weight for residential mortgage exposures under the Basel 
framework. In addition, FHFA's proposal would promote consistency 
across the financial system by aligning the risk weight for guarantee 
assets with the risk weight assigned to exposures to an Enterprise in 
the U.S banking framework.
    The specification of a 20 percent risk weight for guarantee assets 
would affect risk-weighted assets, only. FHFA estimates that under the 
proposed rule, the total CET1 capital required to meet the risk-based 
capital requirements for the Enterprises' guarantee assets as of 
September 30, 2022 would decline by approximately $0.2 billion.
    Question 16: What, if any, other factors should FHFA consider in 
its determination that guarantee assets should be assigned an explicit 
risk weight?
    Question 17: Is the proposed 20 percent risk weight for guarantee 
assets appropriately calibrated?
    Question 18: Should FHFA include guarantee assets in its definition 
of covered positions subject to market risk capital requirements?

G. Mortgage Servicing Assets

    When a lender originates a mortgage loan, the lender may retain in 
its portfolio or transfer to another party both the loan and the 
servicing function, or the lender may separate the mortgage servicing 
rights (MSRs) from the mortgage loan and transfer individually either 
the loan or the MSR to another party. MSAs are, in general, assets 
resulting from owning MSRs that are expected to generate future income 
in exchange for performing the servicing function on one or more 
mortgage loans.
    MSA valuations rely on assessments of future economic variables and 
are therefore subjective and subject to uncertainty. If interest rates 
rapidly decline, such as during a stress event, MSA values can also 
rapidly decline. In addition, adverse financial conditions may cause 
liquidity strains for firms seeking to sell or transfer their MSAs, 
further impacting the potential loss absorbing capacity of MSAs. For 
these and other reasons, the U.S. banking framework requires banks to 
capitalize MSAs through a combination of capital deductions and a 250 
percent risk weight, and the current ERCF requires the Enterprises to 
do the same.
    The ERCF defines an MSA as the contractual right to service for a 
fee mortgage loans that are owned by others. This definition reflects 
the traditional practice of acquiring MSRs for mortgage loans not 
already owned by the acquiring institution. However, it is unlikely 
that the value of MSRs would be less subjective or subject to less 
uncertainty if the underlying mortgage loans were already owned by the 
acquiring institution rather than by others. Therefore, the proposed 
rule would modify the definition of MSAs to include the contractual 
right to service any mortgage loans, regardless of the owner of the 
loan at the time the servicing rights are acquired.
    FHFA anticipates that the proposed rule would not affect the total 
CET1 capital required to meet the Enterprises' stability capital 
buffers as of June 30, 2022.
    Question 19: What, if any, changes should FHFA consider to the 
proposed definition for MSAs?
    Question 20: Does the proposed definition for MSAs include 
circumstances in which an Enterprise acquires a contractual right to 
service mortgage loans already owned by the Enterprise?
    Question 21: Does the proposed definition for MSAs include 
circumstances in which an Enterprise acquires a contractual right to 
service mortgage loans but, for reasons including compliance with 
generally accepted accounting principles, the servicing rights would 
not result in the creation of an MSA in the absence of the proposed 
requirement?

H. Time-Based Calls for CRT Exposures

    For mortgage exposures that are included in a CRT, an Enterprise 
has the option to calculate risk weights using the ``credit risk 
transfer approach'' \14\ only if the CRT satisfies the ERCF's 
``operational criteria for credit risk transfers.'' \15\ Under the 
current rule, these operational criteria include restrictions for 
clean-up calls. Clean-up calls are contractual provisions that permit 
an originating Enterprise to redeem securitization exposures before 
their stated maturity or call date. Time-based calls are contractual 
provisions that permit an issuing Enterprise to redeem a securitization 
exposure on one or more prespecified call dates. Time-based calls, 
which are integral to the Enterprises' credit risk management and are 
routinely used by the Enterprises to manage CRT economics, are not 
explicitly included as eligible clean-up calls. This lack of 
specificity has led to a lack of clarity about the eligibility of CRT 
transactions with time-based calls under the credit risk transfer 
approach in the ERCF.
---------------------------------------------------------------------------

    \14\ 12 CFR 1240.44.
    \15\ 12 CFR 1240.41(c).
---------------------------------------------------------------------------

    The proposed rule would define an eligible time-based call as a 
time-based call that:
    (i) Is exercisable solely at the discretion of the issuing 
Enterprise, and with a non-objection letter from FHFA prior to being 
exercised;
    (ii) Is not structured to avoid allocating losses to securitization 
exposures held by investors or otherwise structured to provide at most 
de minimis credit protection to the securitization; and
    (iii) Is only exercisable five years after the securitization 
exposure's issuance date.
    The proposed changes would clarify that the ERCF permits time-based 
calls, with restrictions. To ensure a significant length of time before 
the first prespecified exercise date, the proposed rule would require 
that the eligible time-based calls have a first exercise call date at 
least five years after issuance. Further, to ensure safety and 
soundness,

[[Page 15314]]

an Enterprise must request FHFA approval before exercising its time-
based calls.
    To satisfy the proposed operational criteria for CRT, any time-
based call associated with a CRT must be an eligible time-based call.
    FHFA anticipates that the proposed rule would result in an 
insignificant change to the total CET1 capital required to meet the 
risk-based capital requirements for the Enterprises' CRT exposures as 
of June 30, 2022.
    Question 22: What, if any, changes should FHFA consider to the 
proposed definitions of time-based calls and eligible time-based calls 
for CRT?

I. Interest-Only Mortgage-Backed Securities

    An IO MBS is a financial instrument that receives solely the 
interest payment stream generated by a pool of mortgages. An Enterprise 
may securitize the IO income stream from a pool of mortgages to better 
manage the interest rate risk exposure of the pool, or an Enterprise 
may buy IO securities of other issuers to hold in its portfolio as 
investment assets. Through the ownership of these investments, the 
Enterprises are exposed to both credit and market risk. This discussion 
pertains to credit risk only, as risk weights for market risk on IO 
securities are contemplated in subpart F of the ERCF.
    Under the current rule, an Enterprise must assign a zero percent 
risk weight to any MBS guaranteed by the Enterprise (other than any 
retained CRT exposure). Thus, by implication, IO MBS guaranteed by the 
securitizing Enterprise should receive a zero percent risk weight. 
However, the ERCF also states that the risk weight for a non-credit-
enhancing IO MBS must not be less than 100 percent. Therefore, there is 
a need to clarify the risk weight for IO MBS to clarify whether a zero 
percent or 100 percent risk weight should apply.
    An Enterprise could be both the issuer of and investor in an IO 
MBS. The credit risk on IO MBS issued and guaranteed by an Enterprise 
is significantly different from that of an IO MBS issued by a non-
Enterprise entity and held in the Enterprise's retained portfolio as an 
investment.\16\ Therefore, the proposed rule would require an 
Enterprise to apply a different risk weight to IO MBS issued and 
guaranteed by the Enterprise versus an IO MBS issued by a non-
Enterprise entity. This bifurcation would better align the capital 
requirements for IO MBS to the risks inherent in the positions.
---------------------------------------------------------------------------

    \16\ Risk weights for an Enterprise's exposures to the other 
Enterprise are determined in 12 CFR 1240.32(c).
---------------------------------------------------------------------------

    For IO MBS issued and guaranteed by an Enterprise, the proposed 
rule would require the issuing Enterprise to assign a zero percent risk 
weight to that exposure. The zero percent risk weight reflects that the 
Enterprise has already capitalized the credit risk on the underlying 
single-family mortgage exposures and that there is no incremental 
credit risk due to the securitization process. For IO MBS issued by a 
non-Enterprise entity, the proposed rule would require the Enterprise 
to assign a 100 percent risk weight to that exposure. The 100 percent 
risk weight reflects that there is incremental credit risk accruing to 
the investing Enterprise through the acquisition of the IO MBS. 
Therefore, an Enterprise must hold credit risk capital against that 
asset. For IO MBS issued by the other Enterprise, the ERCF would 
continue to require an Enterprise to assign a 20 percent risk weight to 
that exposure.
    FHFA anticipates that the proposed rule would not affect the total 
CET1 capital required to meet the risk-based capital requirements for 
the Enterprises' IO MBS as of June 30, 2022.
    Question 23: Is the 100 percent risk weight assigned to the IO MBS 
issued by a non-Enterprise entity appropriately calibrated?
    Question 24: Is the 20 percent risk weight assigned to the IO MBS 
issued by the other Enterprise appropriated calibrated?

J. Single-Family Countercyclical Adjustment

    In the ERCF, the mark-to-market loan-to-value ratio (MTMLTV) of a 
single-family mortgage exposure is a key input to determining credit 
risk-weighted assets for these exposures. The rule requires an 
Enterprise to use the FHFA Purchase-only State-level House Price Index 
(HPI) to update a property value when calculating an MTMLTV. The MTMLTV 
is then adjusted up or down by the application of a single-family 
countercyclical adjustment. This adjustment seeks to reduce the 
procyclicality of the capital requirements by increasing requirements 
when house prices are significantly above their long-term trend and 
reducing requirements when house prices are significantly below their 
long-term trend.
    In calculating an MTMLTV, the ERCF mandates a six-month delay 
between loan origination and the first property value adjustment to 
reflect the time lag between loan origination and the publication of 
the FHFA HPI for the quarter following origination. However, there is 
no similar delay in the application of the single-family 
countercyclical adjustment. When house price appreciation is 
consistently high, such as in 2020 and 2021, this misalignment results 
in rapid increases to the risk-weighted assets for single-family 
mortgage exposures for the first six months due to the countercyclical 
adjustment, followed by a rapid decrease with the application of the 
first property value adjustment. In 2020 and 2021, this misalignment 
created a significant challenge for the Enterprises' reinsurance CRT 
programs. While FHFA has continually encouraged the Enterprises to 
reduce the time lag between loan origination and when they acquire 
credit protection, the misalignment created an incentive for the 
Enterprises to wait seven months before acquiring protection. By 
waiting until the capital requirement decreased mechanically, the 
Enterprises were able to reduce the amount of credit protection they 
acquired and save on premium costs.
    The proposed rule would correct this misalignment by requiring an 
Enterprise to apply the first single-family countercyclical adjustment 
simultaneously with the first property value adjustment. This 
modification would reduce the volatility in the capital requirement for 
a single-family mortgage exposure over the first six months after 
origination and mitigate the incentive for the Enterprises to delay 
acquiring credit protection.
    FHFA anticipates that adjusting the timing of the first single-
family countercyclical adjustment would not affect the total CET1 
capital required to meet the risk-based capital requirements for the 
Enterprises' single-family mortgage exposures as of June 30, 2022.
    Question 25: What, if any, changes should FHFA consider to the 
proposed adjustment to the timing and application of the single-family 
countercyclical adjustment?

K. Stability Capital Buffer

    The stability capital buffer is an Enterprise-specific amount of 
common equity tier 1 capital in excess of an Enterprise's risk-based 
capital requirements. It is tailored to the risk that an Enterprise's 
default or other financial distress could have on the liquidity, 
efficiency, competitiveness, or resiliency of the national housing 
finance markets. The stability capital buffer is based on an 
Enterprise's share of the total residential mortgage debt outstanding 
in the United States and is expressed as a percent of adjusted total 
assets.

[[Page 15315]]

    Under the current rule, an Enterprise's share of residential 
mortgage debt outstanding is assessed annually, and the stability 
capital buffer is derived from that assessment. Increases in the 
stability capital buffer are implemented with a two-year delay, while 
decreases are implemented with a one-year delay. These implementation 
delays contribute to the overall stability of the capital framework by 
providing the Enterprises with time to adjust their capital positions 
in response to changes in the stability capital buffer. However, having 
increases and decreases implemented with different delays potentially 
creates a situation where an increase and a decrease in the stability 
capital buffer are scheduled to become effective at the same time. To 
address this situation, the proposed rule would clarify that if an 
increase and decrease in the stability capital buffer are scheduled for 
the same date, the Enterprise should rely on the more recent data and 
implement the decrease, disregarding the increase.
    FHFA anticipates that the proposed rule would not affect the total 
CET1 capital required to meet the Enterprises' stability capital 
buffers as of June 30, 2022.
    Question 26: What, if any, changes should FHFA consider to the 
proposed change to the application of the stability capital buffer?

L. Advanced Approaches

    The ERCF's advanced approaches for determining risk-weighted assets 
rely on an Enterprise's internal models. These approaches require an 
Enterprise to maintain its own processes for identifying and assessing 
credit, market, and operational risk. They are intended to ensure that 
an Enterprise continues to enhance its risk management and analytical 
systems and not rely solely on its regulator's views on risk tolerance, 
risk measurement, and capital allocation. Because of the effort 
required to develop the governance processes and risk models necessary 
for effectuating the advanced approaches, the ERCF includes a 
transition period that delays the compliance date for the advanced 
approaches until January 1, 2025.
    In December 2017, the Basel Committee finalized its Basel III 
framework.\17\ As part of these post-crisis reforms, the Basel 
Committee sought to reduce excess variability of risk-weighted assets 
and restore credibility in the calculation of risk-weighted assets, in 
part by significantly constraining the use of internally-modeled 
approaches. Much of the finalized Basel III framework became effective 
in 2022.
---------------------------------------------------------------------------

    \17\ https://www.bis.org/bcbs/publ/d424.pdf.
---------------------------------------------------------------------------

    U.S. banking regulators have yet to implement many of the reforms 
outlined in the finalized Basel III framework. However, on September 9, 
2022, the U.S. banking regulators formally reaffirmed their commitment 
to implementing enhanced regulatory capital requirements that align 
with the finalized Basel III framework.\18\ Further, in a recent 
speech,\19\ the Vice Chair for Supervision of the Board of Governors of 
the Federal Reserve System noted that the last set of comprehensive 
adjustments to the Basel III framework, now under consideration in the 
U.S., would ``further strengthen capital rules by reducing reliance on 
internal bank models.''
---------------------------------------------------------------------------

    \18\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220909a.htm.
    \19\ https://www.federalreserve.gov/newsevents/speech/barr20221201a.htm.
---------------------------------------------------------------------------

    Because the U.S. banking regulators are currently contemplating the 
last set of comprehensive adjustments to the Basel III framework, 
including the reliance on internal models, and given the costly nature 
of developing suitable internal models and governance processes for the 
advanced approaches, the proposed rule would further extend the 
compliance date for an Enterprise's advanced approaches to January 1, 
2028. Until that time, the Enterprises will continue to rely on the 
standardized approach.

III. Effective Date

    Under the rule published on December 17, 2020 establishing the 
ERCF, an Enterprise will not be subject to any requirement in the ERCF 
until the compliance date for the requirement as detailed in the ERCF. 
The effective date for the ERCF was February 16, 2021. The effective 
date for the ERCF amendments in this proposed rule would be 60 days 
after the day of publication of the final rule in the Federal Register.

IV. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires 
that regulations involving the collection of information receive 
clearance from the Office of Management and Budget (OMB). The proposed 
rule contains no such collection of information requiring OMB approval 
under the PRA. Therefore, no information has been submitted to OMB for 
review.

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. FHFA need not undertake such an 
analysis if the agency has certified that the regulation will not have 
a significant economic impact on a substantial number of small entities 
(5 U.S.C. 605(b)). FHFA has considered the impact of the proposed rule 
under the Regulatory Flexibility Act. FHFA certifies that the proposed 
rule, if adopted as a final rule, would not have a significant economic 
impact on a substantial number of small entities because the proposed 
rule is applicable only to the Enterprises, which are not small 
entities for purposes of the Regulatory Flexibility Act.

List of Subjects for 12 CFR Part 1240

    Capital, Credit, Enterprise, Investments, Reporting and 
recordkeeping requirements.

    Accordingly, for the reasons stated in the Preamble, under the 
authority of 12 U.S.C. 4511, 4513, 4513b, 4514, 4515-17, 4526, 4611-
4612, 4631-36, FHFA proposes to amend part 1240 of title 12 of the Code 
of Federal Regulations as follows:

PART 1240--CAPITAL ADEQUACY OF ENTERPRISES

0
1. The authority citation for part 1240 continues to read as follows:

    Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526, 
4611-4612, 4631-36.

0
2. Amend Sec.  1240.2 by:
0
a. Revising paragraphs (1) through (3) in the definition of ``Adjusted 
total assets'';
0
b. Adding in alphabetical order the definitions of ``Backtesting,'' 
``Basis derivative contract,'' ``Commercial end-user,'' ``Commingled 
security,'' ``Credit default swap,'' and ``Credit valuation 
adjustment'';
0
c. Removing the definitions of ``Current exposure'' and ``Current 
exposure methodology'';
0
d. Adding in alphabetical order the definition of ``Eligible time-based 
call'';
0
e. In the definition of ``Exposure amount'':
0
i. In paragraph (1), removing the words ``; an OTC derivative 
contract'' and adding in their place the words ``(other than an OTC 
derivative contract''; and
0
ii. In paragraph (3), adding the words ``or exposure at default (EAD)'' 
after the word ``amount'';
0
f. Revising paragraph (2) in the definition of ``Financial 
collateral'';

[[Page 15316]]

0
g. Adding in alphabetical order the definitions of ``Guarantee asset,'' 
and ``Independent collateral'';
0
h. Revising the definition of ``Mortgage servicing assets'';
0
i. Adding in alphabetical order the definition of ``Net independent 
collateral amount'';
0
j. Revising the definition of ``Netting set'';
0
k. Adding in alphabetical order the definitions of ``Qualifying cross-
product master netting agreement,'' and ``Speculative grade'';
0
l. In the definition of ``Standardized total risk-weighted assets'', 
redesignating paragraphs (1)(vi) and (1)(vii) as paragraphs (1)(vii) 
and (1)(viii), adding new paragraph (1)(vi), and revising newly 
designated paragraph (1)(viii); and
0
m. Adding in alphabetical order the definitions of ``Sub-speculative 
grade,'' ``Time-based call,'' ``Uniform Mortgage-backed Security,'' 
``Value-at-Risk,'' ``Variation margin,'' ``Variation margin amount,'' 
and ``Volatility derivative contract'';
    The additions and revisions read as follows:


Sec.  1240.2  Definitions.

* * * * *
    Adjusted total assets * * *
    (1) The balance sheet carrying value of all of the Enterprise's on-
balance sheet assets, plus the value of securities sold under a 
repurchase transaction or a securities lending transaction that 
qualifies for sales treatment under Generally Accepted Accounting 
Principles (GAAP), less amounts deducted from tier 1 capital under 
Sec.  1240.22(a), (c), and (d), and less the value of securities 
received in security-for-security repo-style transactions, where the 
Enterprise acts as a securities lender and includes the securities 
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received, less the fair value of any 
derivative contracts;
    (2)(i) The potential future exposure (PFE) for each netting set to 
which the Enterprise is a counterparty (including cleared transactions 
except as provided in paragraph (9) of this definition and, at the 
discretion of the Enterprise, excluding a forward agreement treated as 
a derivative contract that is part of a repurchase or reverse 
repurchase or a securities borrowing or lending transaction that 
qualifies for sales treatment under GAAP), as determined under Sec.  
1240.36(c)(7), in which the term C in Sec.  1240.36(c)(7)(i) equals 
zero, and, for any counterparty that is not a commercial end-user, 
multiplied by 1.4. For purposes of this paragraph, an Enterprise may 
set the value of the term C in Sec.  1240.36(c)(7)(i) equal to the 
amount of collateral posted by a clearing member client of the 
Enterprise in connection with the client-facing derivative transactions 
within the netting set; and
    (ii) An Enterprise may choose to exclude the PFE of all credit 
derivatives or other similar instruments through which it provides 
credit protection when calculating the PFE under Sec.  1240.36(c), 
provided that it does so consistently over time for the calculation of 
the PFE for all such instruments;
    (3)(i)(A) The replacement cost of each derivative contract or 
single product netting set of derivative contracts to which the 
Enterprise is a counterparty, calculated according to the following 
formula, and, for any counterparty that is not a commercial end-user, 
multiplied by 1.4:

Replacement Cost = max {V-CVMr + CVMp;0{time} 


Where:

    (1) V equals the fair value for each derivative contract or each 
single-product netting set of derivative contracts (including a cleared 
transaction except as provided in paragraph (9) of this definition and, 
at the discretion of the Enterprise, excluding a forward agreement 
treated as a derivative contract that is part of a repurchase or 
reverse repurchase or a securities borrowing or lending transaction 
that qualifies for sales treatment under GAAP);
    (2) CVMr equals the amount of cash collateral received from a 
counterparty to a derivative contract and that satisfies the conditions 
in paragraphs (3)(ii) through (vi) of this definition, or, in the case 
of a client-facing derivative transaction, the amount of collateral 
received from the clearing member client; and
    (3) CVMp equals the amount of cash collateral that is posted to a 
counterparty to a derivative contract and that has not offset the fair 
value of the derivative contract and that satisfies the conditions in 
paragraphs (3)(ii) through (vi) of this definition, or, in the case of 
a client-facing derivative transaction, the amount of collateral posted 
to the clearing member client;
    (B) Notwithstanding paragraph (3)(i)(A) of this definition, where 
multiple netting sets are subject to a single variation margin 
agreement, an Enterprise must apply the formula for replacement cost 
provided in Sec.  1240.36(c)(10)(i), in which the term CMA 
may only include cash collateral that satisfies the conditions in 
paragraphs (3)(ii) through (vi) of this definition; and
    (C) For purposes of paragraph (3)(i)(A) of this definition, an 
Enterprise must treat a derivative contract that references an index as 
if it were multiple derivative contracts each referencing one component 
of the index if the Enterprise elected to treat the derivative contract 
as multiple derivative contracts under Sec.  1240.36(c)(5)(vi);
    (ii) For derivative contracts that are not cleared through a QCCP, 
the cash collateral received by the recipient counterparty is not 
segregated (by law, regulation, or an agreement with the counterparty);
    (iii) Variation margin is calculated and transferred on a daily 
basis based on the mark-to-fair value of the derivative contract;
    (iv) The variation margin transferred under the derivative contract 
or the governing rules of the CCP or QCCP for a cleared transaction is 
the full amount that is necessary to fully extinguish the net current 
credit exposure to the counterparty of the derivative contracts, 
subject to the threshold and minimum transfer amounts applicable to the 
counterparty under the terms of the derivative contract or the 
governing rules for a cleared transaction;
    (v) The variation margin is in the form of cash in the same 
currency as the currency of settlement set forth in the derivative 
contract, provided that for the purposes of this paragraph, currency of 
settlement means any currency for settlement specified in the governing 
qualifying master netting agreement and the credit support annex to the 
qualifying master netting agreement, or in the governing rules for a 
cleared transaction; and
    (vi) The derivative contract and the variation margin are governed 
by a qualifying master netting agreement between the legal entities 
that are the counterparties to the derivative contract or by the 
governing rules for a cleared transaction, and the qualifying master 
netting agreement or the governing rules for a cleared transaction must 
explicitly stipulate that the counterparties agree to settle any 
payment obligations on a net basis, taking into account any variation 
margin received or provided under the contract if a credit event 
involving either counterparty occurs;
* * * * *
    Backtesting means the comparison of an Enterprise's internal 
estimates with actual outcomes during a sample period not used in model 
development. In this

[[Page 15317]]

context, backtesting is one form of out-of-sample testing.
* * * * *
    Basis derivative contract means a non-foreign-exchange derivative 
contract (i.e., the contract is denominated in a single currency) in 
which the cash flows of the derivative contract depend on the 
difference between two risk factors that are attributable solely to one 
of the following derivative asset classes: Interest rate, credit, 
equity, or commodity.
* * * * *
    Commercial end-user means an entity that:
    (1)(i) Is using derivative contracts to hedge or mitigate 
commercial risk; and
    (ii)(A) Is not an entity described in section 2(h)(7)(C)(i)(I) 
through (VIII) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(C)(i)(I) 
through (VIII)); or
    (B) Is not a ``financial entity'' for purposes of section 2(h)(7) 
of the Commodity Exchange Act (7 U.S.C. 2(h)) by virtue of section 
2(h)(7)(C)(iii) of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or
    (2)(i) Is using derivative contracts to hedge or mitigate 
commercial risk; and
    (ii) Is not an entity described in section 3C(g)(3)(A)(i) through 
(viii) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-
3(g)(3)(A)(i) through (viii)); or
    (3) Qualifies for the exemption in section 2(h)(7)(A) of the 
Commodity Exchange Act (7 U.S.C. 2(h)(7)(A)) by virtue of section 
2(h)(7)(D) of the Act (7 U.S.C. 2(h)(7)(D)); or
    (4) Qualifies for an exemption in section 3C(g)(1) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) by virtue of 
section 3C(g)(4) of the Act (15 U.S.C. 78c-3(g)(4)).
    Commingled security means a resecuritization of UMBS in which one 
or more of the underlying exposures is a UMBS guaranteed by the other 
Enterprise or is a resecuritization of UMBS guaranteed by the other 
Enterprise.
* * * * *
    Credit default swap (CDS) means a financial contract executed under 
standard industry documentation that allows one party (the protection 
purchaser) to transfer the credit risk of one or more exposures 
(reference exposure(s)) to another party (the protection provider) for 
a certain period of time.
* * * * *
    Credit valuation adjustment (CVA) means the fair value adjustment 
to reflect counterparty credit risk in valuation of OTC derivative 
contracts.
* * * * *
    Eligible time-based call means a time-based call that:
    (1) Is exercisable solely at the discretion of the originating 
Enterprise, provided the Enterprise obtains FHFA's non-objection prior 
to exercising the time-based call;
    (2) Is not structured to avoid allocating credit losses to 
investors or otherwise structured to provide at most de minimis credit 
protection to the securitization or credit risk transfer; and
    (3) Is exercisable no less than five years after the securitization 
or credit risk transfer issuance date.
* * * * *
    Financial collateral * * *
    (2) In which the Enterprise has a perfected, first-priority 
security interest or, outside of the United States, the legal 
equivalent thereof, (with the exception of cash on deposit; and 
notwithstanding the prior security interest of any custodial agent or 
any priority security interest granted to a CCP in connection with 
collateral posted to that CCP).
* * * * *
    Guarantee asset means the present value of a future consideration 
to be received for providing a financial guarantee on a portfolio of 
mortgage exposures not recognized on the balance sheet.
    Independent collateral means financial collateral, other than 
variation margin, that is subject to a collateral agreement, or in 
which an Enterprise has a perfected, first-priority security interest 
or, outside of the United States, the legal equivalent thereof (with 
the exception of cash on deposit; notwithstanding the prior security 
interest of any custodial agent or any prior security interest granted 
to a CCP in connection with collateral posted to that CCP), and the 
amount of which does not change directly in response to the value of 
the derivative contract or contracts that the financial collateral 
secures.
* * * * *
    Mortgage servicing assets (MSAs) means the contractual rights to 
service mortgage loans for a fee.
* * * * *
    Net independent collateral amount means the fair value amount of 
the independent collateral, as adjusted by the standard supervisory 
haircuts under Sec.  1240.39(b)(2)(ii), as applicable, that a 
counterparty to a netting set has posted to an Enterprise less the fair 
value amount of the independent collateral, as adjusted by the standard 
supervisory haircuts under Sec.  1240.39(b)(2)(ii), as applicable, 
posted by the Enterprise to the counterparty, excluding such amounts 
held in a bankruptcy remote manner or posted to a QCCP and held in 
conformance with the operational requirements in Sec.  1240.3.
    Netting set means a group of transactions with a single 
counterparty that are subject to a qualifying master netting agreement 
or a qualifying cross-product master netting agreement. For derivative 
contracts, netting set also includes a single derivative contract 
between an Enterprise and a single counterparty.
* * * * *
    Qualifying cross-product master netting agreement means a 
qualifying master netting agreement that provides for termination and 
close-out netting across multiple types of financial transactions or 
qualifying master netting agreements in the event of a counterparty's 
default, provided that the underlying financial transactions are OTC 
derivative contracts, eligible margin loans, or repo-style 
transactions. In order to treat an agreement as a qualifying cross-
product master netting agreement for purposes of this subpart, an 
Enterprise must comply with the requirements of Sec.  1240.3(c) with 
respect to that agreement.
* * * * *
    Speculative grade means the reference entity has adequate capacity 
to meet financial commitments in the near term, but is vulnerable to 
adverse economic conditions, such that should economic conditions 
deteriorate, the reference entity would present an elevated default 
risk.
* * * * *
    Standardized total risk-weighted assets * * *
    (1) * * *
    (vi) Credit valuation adjustment (CVA) risk-weighted assets as 
calculated under Sec.  1240.36(d);
* * * * *
    (viii) Standardized market risk-weighted assets, as calculated 
under Sec.  1240.204; minus
* * * * *
    Sub-speculative grade means the reference entity depends on 
favorable economic conditions to meet its financial commitments, such 
that should such economic conditions deteriorate the reference entity 
likely would default on its financial commitments.
* * * * *
    Time-based call means a contractual provision that permits an 
originating Enterprise to redeem a securitization exposure on or after 
a specified redemption or cancellation date.
* * * * *

[[Page 15318]]

    Uniform Mortgage-backed Security (UMBS) means the same as that 
defined in Sec.  1248.1.
    Value-at-Risk (VaR) means the estimate of the maximum amount that 
the value of one or more exposures could decline due to market price or 
rate movements during a fixed holding period within a stated confidence 
interval.
    Variation margin means financial collateral that is subject to a 
collateral agreement provided by one party to its counterparty to meet 
the performance of the first party's obligations under one or more 
transactions between the parties as a result of a change in value of 
such obligations since the last time such financial collateral was 
provided.
* * * * *
    Variation margin amount means the fair value amount of the 
variation margin, as adjusted by the standard supervisory haircuts 
under Sec.  1240.39(b)(2)(ii), as applicable, that a counterparty to a 
netting set has posted to an Enterprise less the fair value amount of 
the variation margin, as adjusted by the standard supervisory haircuts 
under Sec.  1240.39(b)(2)(ii), as applicable, posted by the Enterprise 
to the counterparty.
* * * * *
    Volatility derivative contract means a derivative contract in which 
the payoff of the derivative contract explicitly depends on a measure 
of the volatility of an underlying risk factor to the derivative 
contract.
* * * * *


Sec.  1240.4  [Amended]

0
3. Amend Sec.  1240.4(c) by removing the year ``2025'' and adding, in 
its place, the year ``2028''.
0
4. Amend Sec.  1240.31 by:
0
a. In paragraph (a)(1)(iv) removing the word ``or'' after the ``;'';
0
b. In paragraph (a)(1)(v) removing the ``.'' after ``1240.52'' and 
adding ``; or'' in its place; and
0
c. Adding paragraph (a)(1)(vi) to read as follows:


Sec.  1240.31  Mechanics for calculating risk-weighted assets for 
general credit risk.

    (a) * * *
    (1) * * *
    (vi) CVA risk-weighted assets subject to Sec.  1240.36(d).
* * * * *
0
5. Amend Sec.  1240.32 by:
0
a. Redesignating paragraph (c)(2) as paragraph (c)(3), adding new 
paragraph (c)(2), and revising redesignated paragraph (c)(3); and
0
b. Redesignating paragraph (i)(5) as paragraph (i)(6) and adding new 
paragraph (i)(5).
    The additions and revision read as follows:


Sec.  1240.32  General risk weights.

    (c) * * *
    (2) An Enterprise must assign a 5 percent risk weight to an 
exposure to the other Enterprise in a commingled security.
    (3) An Enterprise must assign a 20 percent risk weight to an 
exposure to another GSE, including an MBS guaranteed by the other 
Enterprise, except for exposures under paragraph (c)(2) of this 
section.
* * * * *
    (i) * * *
    (5) An Enterprise must assign a 20 percent risk weight to guarantee 
assets.
* * * * *
0
6. Amend Sec.  1240.33 by:
0
a. Revising paragraph (ii) in the definition of ``Adjusted MTMLTV''; 
and
0
b. Revising table 1 to paragraph (a).
    The revisions read as follows:


Sec.  1240.33  Single-family mortgage exposures.

    (a) * * *
    Adjusted MTMLTV * * *
    (ii) The amount equal to 1 plus either:
    (A) The single-family countercyclical adjustment available at the 
time of the exposure's origination if the loan age of the single-family 
mortgage exposure is less than or equal to 5; or
    (B) The single-family countercyclical adjustment available as of 
that time if the loan age of the single-family mortgage exposure is 
greater than or equal to 6.
* * * * *

                    Table 1 to Paragraph (a)--Permissible Values and Additional Instructions
----------------------------------------------------------------------------------------------------------------
             Defined term                        Permissible values                Additional instructions
----------------------------------------------------------------------------------------------------------------
Cohort burnout........................  ``No burnout,'' if the single-       High if unable to determine.
                                         family mortgage exposure has not
                                         had a refinance opportunity since
                                         the loan age of the single-family
                                         mortgage exposure was 6.
                                        ``Low,'' if the single-family
                                         mortgage exposure has had 12 or
                                         fewer refinance opportunities
                                         since the loan age of the single-
                                         family mortgage exposure was 6.
                                        ``Medium,'' if the single-family
                                         mortgage exposure has had between
                                         13 and 24 refinance opportunities
                                         since the loan age of the single-
                                         family mortgage exposure was 6.
                                        ``High,'' if the single-family
                                         mortgage exposure has had more
                                         than 24 refinance opportunities
                                         since the loan age of the single-
                                         family mortgage exposure was 6.
Coverage percent......................  0 percent <= coverage percent <=     0 percent if outside of permissible
                                         100 percent.                         range or unable to determine.
Days past due.........................  Non-negative integer...............  210 if negative or unable to
                                                                              determine.
Debt-to-income (DTI) ratio............  0 percent < DTI < 100 percent......  42 percent if outside of
                                                                              permissible range or unable to
                                                                              determine.
Interest-only (IO)....................  Yes, no............................  Yes if unable to determine.
Loan age..............................  0 <= loan age <= 500...............  500 if outside of permissible range
                                                                              or unable to determine.
Loan documentation....................  None, low, full....................  None if unable to determine.
Loan purpose..........................  Purchase, cashout refinance, rate/   Cashout refinance if unable to
                                         term refinance.                      determine.
MTMLTV................................  0 percent < MTMLTV <= 300 percent..  If the property securing the single-
                                                                              family mortgage exposure is
                                                                              located in Puerto Rico or the U.S.
                                                                              Virgin Islands, use the FHFA House
                                                                              Price Index of the United States.
                                                                             If the property securing the single-
                                                                              family mortgage exposure is
                                                                              located in Hawaii, use the FHFA
                                                                              Purchase-only State-level House
                                                                              Price Index of Guam.
                                                                             If the single-family mortgage
                                                                              exposure was originated before
                                                                              1991, use the Enterprise's
                                                                              proprietary housing price index.
                                                                             Use geometric interpolation to
                                                                              convert quarterly housing price
                                                                              index data to monthly data.
                                                                             300 percent if outside of
                                                                              permissible range or unable to
                                                                              determine.
Mortgage concentration risk...........  High, not high.....................  High if unable to determine.

[[Page 15319]]

 
MI cancellation feature...............  Cancellable mortgage insurance, non- Cancellable mortgage insurance, if
                                         cancellable mortgage insurance.      unable to determine.
Occupancy type........................  Investment, owner-occupied, second   Investment if unable to determine.
                                         home.
OLTV..................................  0 percent < OLTV <= 300 percent....  300 percent if outside of
                                                                              permissible range or unable to
                                                                              determine.
Original credit score.................  300 <= original credit score <= 850  The original credit score for the
                                                                              single-family mortgage exposure is
                                                                              determined based on the original
                                                                              credit scores of each borrower on
                                                                              the exposure using the following
                                                                              procedure.
                                                                             Determine the borrower credit score
                                                                              for each borrower:
                                                                                 If there are original
                                                                                 credit scores from multiple
                                                                                 credit repositories for a
                                                                                 borrower, the borrower credit
                                                                                 score is the mean across the
                                                                                 borrower's original credit
                                                                                 scores.
                                                                                 If there is only one
                                                                                 original credit score for the
                                                                                 borrower from one repository,
                                                                                 the borrower credit score is
                                                                                 the one available original
                                                                                 credit score.
                                                                             Determine the original credit score
                                                                              for the single-family mortgage
                                                                              exposure:
                                                                                 If there is only one
                                                                                 borrower, the borrower credit
                                                                                 score is the original credit
                                                                                 score for the single-family
                                                                                 mortgage exposure.
                                                                                 If there are multiple
                                                                                 borrowers, the lowest borrower
                                                                                 credit score across all
                                                                                 borrowers is the original
                                                                                 credit score for the single-
                                                                                 family mortgage exposure.
                                                                                 If a borrower does not
                                                                                 have a borrower credit score,
                                                                                 determine the original credit
                                                                                 score for the single-family
                                                                                 mortgage exposure based on the
                                                                                 borrower credit scores of the
                                                                                 other borrowers on the loan.
                                                                             The original credit score for the
                                                                              single-family mortgage exposure is
                                                                              680 if the Enterprise has verified
                                                                              that no borrower has a credit
                                                                              score at any of the three
                                                                              repositories.
                                                                             The original credit score for the
                                                                              single-family mortgage exposure is
                                                                              600 if (i) an Enterprise is unable
                                                                              to determine the original credit
                                                                              score using the above procedure or
                                                                              (ii) the original credit score
                                                                              calculated using the procedure
                                                                              falls outside of the permissible
                                                                              range.
Origination channel...................  Retail, third-party origination      TPO includes broker and
                                         (TPO).                               correspondent channels.
                                                                             TPO if unable to determine.
Payment change from modification......  -80 percent < payment change from    If the single-family mortgage
                                         modification < 50 percent.           exposure initially had an
                                                                              adjustable or step-rate feature,
                                                                              the monthly payment after a
                                                                              permanent modification is
                                                                              calculated using the initial
                                                                              modified rate.
                                                                             0 percent if unable to determine.
                                                                             -79 percent if less than or equal
                                                                              to -80 percent.
                                                                             49 percent if greater than or equal
                                                                              to 50 percent.
Previous maximum days past due........  Non-negative integer...............  181 months if negative or unable to
                                                                              determine.
Product type..........................  ``FRM30'' means a fixed-rate single- Product types other than FRM30,
                                         family mortgage exposure with an     FRM20, FRM15 or ARM 1/1 should be
                                         original amortization term greater   assigned to FRM30.
                                         than 309 months and less than or    Use the post-modification product
                                         equal to 429 months.                 type for modified mortgage
                                        ``FRM20'' means a fixed-rate single-  exposures.
                                         family mortgage exposure with an    ARM 1/1 if unable to determine.
                                         original amortization term greater
                                         than 189 months and less than or
                                         equal to 309 months.
                                        ``FRM15'' means a fixed-rate single-
                                         family mortgage exposure with an
                                         original amortization term less
                                         than or equal to 189 months.
                                        ``ARM1/1'' is an adjustable-rate
                                         single-family mortgage exposure
                                         that has a mortgage rate and
                                         required payment that adjust
                                         annually.
Property type.........................  1-unit, 2-4 units, condominium,      Use condominium for cooperatives.
                                         manufactured home.                  2-4 units if unable to determine.
Refreshed credit score................  300 <= refreshed credit score <=     The refreshed credit score for the
                                         850.                                 single-family mortgage exposure is
                                                                              determined based on the refreshed
                                                                              credit scores of each borrower on
                                                                              the exposure using the following
                                                                              procedure.
                                                                             Determine the borrower credit score
                                                                              for each borrower:
                                                                                 If the Enterprise
                                                                                 acquires refreshed credit
                                                                                 scores from multiple
                                                                                 repositories for a borrower,
                                                                                 the borrower credit score is
                                                                                 the mean across the borrower's
                                                                                 refreshed credit scores.
                                                                                 If the Enterprise
                                                                                 acquires only one refreshed
                                                                                 credit score for the borrower
                                                                                 from one repository, the
                                                                                 borrower credit score is the
                                                                                 one available refreshed credit
                                                                                 score.
                                                                                 If the Enterprise does
                                                                                 not acquire refreshed credit
                                                                                 scores, the borrower's
                                                                                 refreshed credit score is the
                                                                                 borrower's most recently
                                                                                 available credit score, which
                                                                                 could be the borrower's
                                                                                 original credit score.
                                                                             Determine the refreshed credit
                                                                              score for the single-family
                                                                              mortgage exposure:
                                                                                 If there is only one
                                                                                 borrower, the borrower credit
                                                                                 score is the refreshed credit
                                                                                 score for the single-family
                                                                                 mortgage exposure.
                                                                                 If there are multiple
                                                                                 borrowers, the lowest borrower
                                                                                 credit score across all
                                                                                 borrowers is the refreshed
                                                                                 credit score for the single-
                                                                                 family mortgage exposure. If a
                                                                                 borrower does not have a
                                                                                 borrower credit score,
                                                                                 determine the refreshed credit
                                                                                 score for the single-family
                                                                                 mortgage exposure based on the
                                                                                 borrower credit scores of the
                                                                                 other borrowers on the loan.

[[Page 15320]]

 
                                                                                 If no refreshed credit
                                                                                 scores are available for any
                                                                                 borrowers on the loan, then the
                                                                                 refreshed credit score for the
                                                                                 single-family mortgage exposure
                                                                                 is the same as the original
                                                                                 credit score for the single-
                                                                                 family mortgage exposure.
Streamlined refi......................  Yes, no............................  No if unable to determine.
Subordination.........................  0 percent <= Subordination <= 80     80 percent if outside permissible
                                         percent.                             range.
----------------------------------------------------------------------------------------------------------------

* * * * *
0
7. Amend Sec.  1240.34 by:
0
a. Adding in alphabetical order the definition of ``Affordable unit'';
0
b. Adding in alphabetical order the definition of ``Government 
subsidy'';
0
c. Revising table 1 to paragraph (a); and
0
d. Revising table 4 to paragraph (d).
    The additions and revisions read as follows:


Sec.  1240.34  Multifamily mortgage exposures.

    (a) * * *
    Affordable unit means a unit within a property securing a 
multifamily mortgage exposure that can be rented by occupants with 
income less than or equal to 80 percent of the area median income where 
the property resides.
* * * * *
    Government subsidy means that the property satisfies both of the 
following criteria:
    (1) at least 20 percent of the property's units are restricted to 
be affordable units; and
    (2) the property benefits from one of the following three 
government programs:
    (i) Low Income Housing Tax Credits (LIHTC);
    (ii) Section 8 project-based rental assistance; or
    (iii) State/Local affordable housing programs that require the 
provision of affordable housing for the life of the loan.
* * * * *
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TP13MR23.019

* * * * *

[[Page 15321]]

[GRAPHIC] [TIFF OMITTED] TP13MR23.020

BILLING CODE 4910-13-C
0
8. Amend Sec.  1240.35 by revising paragraphs (b)(3) and (b)(4)(i) to 
read as follows:


Sec.  1240.35  Off-balance sheet exposures.

* * * * *
    (b) * * *
    (3) 50 percent CCF. An Enterprise must apply a 50 percent CCF to:
    (i) The amount of commitments with an original maturity of more 
than one year that are not unconditionally cancelable by the 
Enterprise; and
    (ii) Guarantees on exposures to the other Enterprise in commingled 
securities.
    (4) * * *
    (i) Guarantees, except guarantees included in paragraph (b)(3)(ii) 
of this section;
* * * * *
0
9. Revise Sec.  1240.36 to read as follows:


Sec.  1240.36  Derivative contracts.

    (a) Exposure amount for derivative contracts. An Enterprise must 
calculate the exposure amount or EAD for all its

[[Page 15322]]

derivative contracts using the standardized approach for counterparty 
credit risk (SA-CCR) in paragraph (c) of this section for purposes of 
standardized total risk-weighted assets. An Enterprise must apply the 
treatment of cleared transactions under Sec.  1240.37 to its derivative 
contracts that are cleared transactions and to all default fund 
contributions associated with such derivative contracts for purposes of 
standardized total risk-weighted assets.
    (b) Methodologies for collateral recognition. (1) An Enterprise may 
use the methodologies under Sec.  1240.39 to recognize the benefits of 
financial collateral in mitigating the counterparty credit risk of 
repo-style transactions, eligible margin loans, collateralized OTC 
derivative contracts and single product netting sets of such 
transactions.
    (2) An Enterprise must use the methodology in paragraph (c) of this 
section to calculate EAD for an OTC derivative contract or a set of OTC 
derivative contracts subject to a qualifying master netting agreement.
    (3) An Enterprise must also use the methodology in paragraph (d) of 
this section to calculate the risk-weighted asset amounts for CVA for 
OTC derivatives.
    (c) EAD for derivative contracts--(1) Options for determining EAD. 
An Enterprise must determine the EAD for a derivative contract using 
SA-CCR under paragraph (c)(5) of this section. The exposure amount 
determined under SA-CCR is the EAD for the derivative contract or 
derivatives contracts. An Enterprise must use the same methodology to 
calculate the exposure amount for all its derivative contracts. An 
Enterprise may reduce the EAD calculated according to paragraph (c)(5) 
of this section by the credit valuation adjustment that the Enterprise 
has recognized in its balance sheet valuation of any derivative 
contracts in the netting set. For purposes of this paragraph (c)(1), 
the credit valuation adjustment does not include any adjustments to 
common equity tier 1 capital attributable to changes in the fair value 
of the Enterprise's liabilities that are due to changes in its own 
credit risk since the inception of the transaction with the 
counterparty.
    (2) Definitions. For purposes of paragraph (c) of this section, the 
following definitions apply:
    (i) End date means the last date of the period referenced by an 
interest rate or credit derivative contract or, if the derivative 
contract references another instrument, by the underlying instrument, 
except as otherwise provided in paragraph (c) of this section.
    (ii) Start date means the first date of the period referenced by an 
interest rate or credit derivative contract or, if the derivative 
contract references the value of another instrument, by underlying 
instrument, except as otherwise provided in paragraph (c) of this 
section.
    (iii) Hedging set means:
    (A) With respect to interest rate derivative contracts, all such 
contracts within a netting set that reference the same reference 
currency;
    (B) With respect to exchange rate derivative contracts, all such 
contracts within a netting set that reference the same currency pair;
    (C) With respect to credit derivative contract, all such contracts 
within a netting set;
    (D) With respect to equity derivative contracts, all such contracts 
within a netting set;
    (E) With respect to a commodity derivative contract, all such 
contracts within a netting set that reference one of the following 
commodity categories: Energy, metal, agricultural, or other 
commodities;
    (F) With respect to basis derivative contracts, all such contracts 
within a netting set that reference the same pair of risk factors and 
are denominated in the same currency; or
    (G) With respect to volatility derivative contracts, all such 
contracts within a netting set that reference one of interest rate, 
exchange rate, credit, equity, or commodity risk factors, separated 
according to the requirements under paragraphs (c)(2)(iii)(A) through 
(E) of this section.
    (H) If the risk of a derivative contract materially depends on more 
than one of interest rate, exchange rate, credit, equity, or commodity 
risk factors, FHFA may require an Enterprise to include the derivative 
contract in each appropriate hedging set under paragraphs 
(c)(2)(iii)(A) through (E) of this section.
    (3) Credit derivatives. Notwithstanding paragraphs (c)(1) and 
(c)(2) of this section:
    (i) An Enterprise that purchases a credit derivative that is 
recognized under Sec.  1240.38 as a credit risk mitigant for an 
exposure is not required to calculate a separate counterparty credit 
risk capital requirement under this section so long as the Enterprise 
does so consistently for all such credit derivatives and either 
includes or excludes all such credit derivatives that are subject to a 
master netting agreement from any measure used to determine 
counterparty credit risk exposure to all relevant counterparties for 
risk-based capital purposes.
    (ii) An Enterprise that is the protection provider in a credit 
derivative must treat the credit derivative as an exposure to the 
reference obligor and is not required to calculate a counterparty 
credit risk capital requirement for the credit derivative under this 
section, so long as it does so consistently for all such credit 
derivatives and either includes all or excludes all such credit 
derivatives that are subject to a master netting agreement from any 
measure used to determine counterparty credit risk exposure to all 
relevant counterparties for risk-based capital purposes.
    (4) Equity derivatives. An Enterprise must treat an equity 
derivative contract as an equity exposure and compute a risk-weighted 
asset amount for the equity derivative contract under Sec.  1240.51. In 
addition, if an Enterprise is treating the contract as a covered 
position under subpart F of this part, the Enterprise must also 
calculate a risk-based capital requirement for the counterparty credit 
risk of an equity derivative contract under this section.
    (5) Exposure amount. (i) The exposure amount of a netting set, as 
calculated under paragraph (c) of this section, is equal to 1.4 
multiplied by the sum of the replacement cost of the netting set, as 
calculated under paragraph (c)(6) of this section, and the potential 
future exposure of the netting set, as calculated under paragraph 
(c)(7) of this section.
    (ii) Notwithstanding the requirements of paragraph (c)(5)(i) of 
this section, the exposure amount of a netting set subject to a 
variation margin agreement, excluding a netting set that is subject to 
a variation margin agreement under which the counterparty to the 
variation margin agreement is not required to post variation margin, is 
equal to the lesser of the exposure amount of the netting set 
calculated under paragraph (c)(5)(i) of this section and the exposure 
amount of the netting set calculated under paragraph (c)(5)(i) of this 
section as if the netting set were not subject to a variation margin 
agreement.
    (iii) Notwithstanding the requirements of paragraph (c)(5)(i) of 
this section, the exposure amount of a netting set that consists of 
only sold options in which the premiums have been fully paid by the 
counterparty to the options and where the options are not subject to a 
variation margin agreement is zero.
    (iv) Notwithstanding the requirements of paragraph (c)(5)(i) of 
this section, the exposure amount of a netting set in which the 
counterparty is a commercial end-user is equal to the sum of

[[Page 15323]]

replacement cost, as calculated under paragraph (c)(6) of this section, 
and the potential future exposure of the netting set, as calculated 
under paragraph (c)(7) of this section.
    (v) For purposes of the exposure amount calculated under paragraph 
(c)(5)(i) of this section and all calculations that are part of that 
exposure amount, an Enterprise may elect to treat a derivative contract 
that is a cleared transaction that is not subject to a variation margin 
agreement as one that is subject to a variation margin agreement, if 
the derivative contract is subject to a requirement that the 
counterparties make daily cash payments to each other to account for 
changes in the fair value of the derivative contract and to reduce the 
net position of the contract to zero. If an Enterprise makes an 
election under this paragraph (c)(5)(v) for one derivative contract, it 
must treat all other derivative contracts within the same netting set 
that are eligible for an election under this paragraph (c)(5)(v) as 
derivative contracts that are subject to a variation margin agreement.
    (vi) For purposes of the exposure amount calculated under paragraph 
(c)(5)(i) of this section and all calculations that are part of that 
exposure amount, an Enterprise may elect to treat a credit derivative 
contract, equity derivative contract, or commodity derivative contract 
that references an index as if it were multiple derivative contracts 
each referencing one component of the index.
    (6) Replacement cost of a netting set--(i) Netting set subject to a 
variation margin agreement under which the counterparty must post 
variation margin. The replacement cost of a netting set subject to a 
variation margin agreement, excluding a netting set that is subject to 
a variation margin agreement under which the counterparty is not 
required to post variation margin, is the greater of:
    (A) The sum of the fair values (after excluding any valuation 
adjustments) of the derivative contracts within the netting set less 
the sum of the net independent collateral amount and the variation 
margin amount applicable to such derivative contracts;
    (B) The sum of the variation margin threshold and the minimum 
transfer amount applicable to the derivative contracts within the 
netting set less the net independent collateral amount applicable to 
such derivative contracts; or
    (C) Zero.
    (ii) Netting sets not subject to a variation margin agreement under 
which the counterparty must post variation margin. The replacement cost 
of a netting set that is not subject to a variation margin agreement 
under which the counterparty must post variation margin to the 
Enterprise is the greater of:
    (A) The sum of the fair values (after excluding any valuation 
adjustments) of the derivative contracts within the netting set less 
the sum of the net independent collateral amount and variation margin 
amount applicable to such derivative contracts; or
    (B) Zero.
    (iii) Multiple netting sets subject to a single variation margin 
agreement. Notwithstanding paragraphs (c)(6)(i) and (ii) of this 
section, the replacement cost for multiple netting sets subject to a 
single variation margin agreement must be calculated according to 
paragraph (c)(10)(i) of this section.
    (iv) Netting set subject to multiple variation margin agreements or 
a hybrid netting set. Notwithstanding paragraphs (c)(6)(i) and (ii) of 
this section, the replacement cost for a netting set subject to 
multiple variation margin agreements or a hybrid netting set must be 
calculated according to paragraph (c)(11)(i) of this section.
    (7) Potential future exposure of a netting set. The potential 
future exposure of a netting set is the product of the PFE multiplier 
and the aggregated amount.
    (i) PFE multiplier. The PFE multiplier is calculated according to 
the following formula:
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TP13MR23.021


Where:

    (A) V is the sum of the fair values (after excluding any valuation 
adjustments) of the derivative contracts within the netting set;
    (B) C is the sum of the net independent collateral amount and the 
variation margin amount applicable to the derivative contracts within 
the netting set; and
    (C) A is the aggregated amount of the netting set.
    (ii) Aggregated amount. The aggregated amount is the sum of all 
hedging set amounts, as calculated under paragraph (c)(8) of this 
section, within a netting set.
    (iii) Multiple netting sets subject to a single variation margin 
agreement. Notwithstanding paragraphs (c)(7)(i) and (ii) of this 
section and when calculating the potential future exposure for purposes 
of adjusted total assets, the potential future exposure for multiple 
netting sets subject to a single variation margin agreement must be 
calculated according to paragraph (c)(10)(ii) of this section.
    (iv) Netting set subject to multiple variation margin agreements or 
a hybrid netting set. Notwithstanding paragraphs (c)(7)(i) and (ii) of 
this section and when calculating the potential future exposure for 
purposes of adjusted total assets, the potential future exposure for a 
netting set subject to multiple variation margin agreements or a hybrid 
netting set must be calculated according to paragraph (c)(11)(ii) of 
this section.
    (8) Hedging set amount--(i) Interest rate derivative contracts. To 
calculate the hedging set amount of an interest rate derivative 
contract hedging set, an Enterprise may use either of the formulas 
provided in paragraphs (c)(8)(i)(A) and (B) of this section:
    (A) Formula 1 is as follows:

Hedging set amount = [(AddOnTB1IR)2 + 
AddOnTB2IR)2 + 1.4 * AddOnTB1IR * AddOnTB2IR + 1.4 * 
AddOnTB2IR * AddOnTB3IR + 0.6 * AddOnTB1IR * 
AddOnTB3IR]\1/2\; or

    (B) Formula 2 is as follows:

Hedging set amount = [verbar]AddOnTB1IR[verbar] + 
[verbar]AddOnTB2IR[verbar] + [verbar]AddOnTB3IR[verbar].


Where in paragraphs (c)(8)(i)(A) and (B) of this section:
    (1) AddOnTB1IR is the sum of the adjusted derivative contract 
amounts, as calculated under paragraph (c)(9) of this section, within 
the hedging set with an end date of less than one year from the present 
date;
    (2) AddOnTB2IR is the sum of the adjusted derivative contract 
amounts, as calculated under paragraph (c)(9) of this section, within 
the hedging set with an end date of one to five years from the present 
date; and
    (3) AddOnTB3IR is the sum of the adjusted derivative contract 
amounts, as calculated under paragraph (c)(9) of this section, within 
the hedging set with an end date of more than five years from the 
present date.
    (ii) Exchange rate derivative contracts. For an exchange rate

[[Page 15324]]

derivative contract hedging set, the hedging set amount equals the 
absolute value of the sum of the adjusted derivative contract amounts, 
as calculated under paragraph (c)(9) of this section, within the 
hedging set.
    (iii) Credit derivative contracts and equity derivative contracts. 
The hedging set amount of a credit derivative contract hedging set or 
equity derivative contract hedging set within a netting set is 
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.022


Where:

    (A) k is each reference entity within the hedging set.
    (B) K is the number of reference entities within the hedging set.
    (C) AddOn(Refk) equals the sum of the adjusted derivative contract 
amounts, as determined under paragraph (c)(9) of this section, for all 
derivative contracts within the hedging set that reference reference 
entity k.
    (D) rk equals the applicable supervisory correlation factor, as 
provided in table 2 to paragraph (c)(11)(ii)(B)(2).
    (iv) Commodity derivative contracts. The hedging set amount of a 
commodity derivative contract hedging set within a netting set is 
calculated according to the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.023


Where:

    (A) k is each commodity type within the hedging set.
    (B) K is the number of commodity types within the hedging set.
    (C) AddOn(Typek) equals the sum of the adjusted derivative contract 
amounts, as determined under paragraph (c)(9) of this section, for all 
derivative contracts within the hedging set that reference reference 
commodity type.
    (D) [rho] equals the applicable supervisory correlation factor, as 
provided in table 2 to paragraph (c)(11)(ii)(B)(2).
    (v) Basis derivative contracts and volatility derivative contracts. 
Notwithstanding paragraphs (c)(8)(i) through (iv) of this section, an 
Enterprise must calculate a separate hedging set amount for each basis 
derivative contract hedging set and each volatility derivative contract 
hedging set. An Enterprise must calculate such hedging set amounts 
using one of the formulas under paragraphs (c)(8)(i) through (iv) that 
corresponds to the primary risk factor of the hedging set being 
calculated.
    (9) Adjusted derivative contract amount--(i) Summary. To calculate 
the adjusted derivative contract amount of a derivative contract, an 
Enterprise must determine the adjusted notional amount of derivative 
contract, pursuant to paragraph (c)(9)(ii) of this section, and 
multiply the adjusted notional amount by each of the supervisory delta 
adjustment, pursuant to paragraph (c)(9)(iii) of this section, the 
maturity factor, pursuant to paragraph (c)(9)(iv) of this section, and 
the applicable supervisory factor, as provided in table 2 to paragraph 
(c)(11)(ii)(B)(2).
    (ii) Adjusted notional amount. (A)(1) For an interest rate 
derivative contract or a credit derivative contract, the adjusted 
notional amount equals the product of the notional amount of the 
derivative contract, as measured in U.S. dollars using the exchange 
rate on the date of the calculation, and the supervisory duration, as 
calculated by the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.024


Where:

    (i) S is the number of business days from the present day until the 
start date of the derivative contract, or zero if the start date has 
already passed; and
    (ii) E is the number of business days from the present day until 
the end date of the derivative contract.
    (2) For purposes of paragraph (c)(9)(ii)(A)(1) of this section:
    (i) For an interest rate derivative contract or credit derivative 
contract that is a variable notional swap, the notional amount is equal 
to the time-weighted average of the contractual notional amounts of 
such a swap over the remaining life of the swap; and
    (ii) For an interest rate derivative contract or a credit 
derivative contract that is a leveraged swap, in which the notional 
amount of all legs of the derivative contract are divided by a factor 
and all rates of the derivative contract are multiplied by the same 
factor, the notional amount is equal to the notional amount of an 
equivalent unleveraged swap.
    (B)(1) For an exchange rate derivative contract, the adjusted 
notional amount is the notional amount of the non-U.S. denominated 
currency leg of the derivative contract, as measured in U.S. dollars 
using the exchange rate on the date of the calculation. If both legs of 
the exchange rate derivative contract are denominated in currencies 
other than U.S. dollars, the adjusted notional amount of the derivative 
contract is the largest leg of the derivative contract, as measured in 
U.S. dollars using the exchange rate on the date of the calculation.
    (2) Notwithstanding paragraph (c)(9)(ii)(B)(1) of this section, for 
an exchange rate derivative contract with

[[Page 15325]]

multiple exchanges of principal, the Enterprise must set the adjusted 
notional amount of the derivative contract equal to the notional amount 
of the derivative contract multiplied by the number of exchanges of 
principal under the derivative contract.
    (C)(1) For an equity derivative contract or a commodity derivative 
contract, the adjusted notional amount is the product of the fair value 
of one unit of the reference instrument underlying the derivative 
contract and the number of such units referenced by the derivative 
contract.
    (2) Notwithstanding paragraph (c)(9)(ii)(C)(1) of this section, 
when calculating the adjusted notional amount for an equity derivative 
contract or a commodity derivative contract that is a volatility 
derivative contract, the Enterprise must replace the unit price with 
the underlying volatility referenced by the volatility derivative 
contract and replace the number of units with the notional amount of 
the volatility derivative contract.
    (iii) Supervisory delta adjustments. (A) For a derivative contract 
that is not an option contract or collateralized debt obligation 
tranche, the supervisory delta adjustment is 1 if the fair value of the 
derivative contract increases when the value of the primary risk factor 
increases and -1 if the fair value of the derivative contract decreases 
when the value of the primary risk factor increases.
    (B)(1) For a derivative contract that is an option contract, the 
supervisory delta adjustment is determined by the following formulas, 
as applicable:
[GRAPHIC] [TIFF OMITTED] TP13MR23.025

    (2) As used in the formulas in table 1 to paragraph 
(c)(9)(iii)(B)(1):
    (i) [PHgr] is the standard normal cumulative distribution function;
    (ii) P equals the current fair value of the instrument or risk 
factor, as applicable, underlying the option;
    (iii) K equals the strike price of the option;
    (iv) T equals the number of business days until the latest 
contractual exercise date of the option;
    (v) [lambda] equals zero for all derivative contracts except 
interest rate options for the currencies where interest rates have 
negative values. The same value of [lambda] must be used for all 
interest rate options that are denominated in the same currency. To 
determine the value of [lambda] for a given currency, an Enterprise 
must find the lowest value L of P and K of all interest rate options in 
a given currency that the Enterprise has with all counterparties. Then, 
[lambda] is set according to this formula:

[lambda] = max{-L + 0.1%, 0{time} ; and

    (vi) [sigma] equals the supervisory option volatility, as provided 
in table 2 to paragraph (c)(11)(ii)(B)(2).
    (C)(1) For a derivative contract that is a collateralized debt 
obligation tranche, the supervisory delta adjustment is determined by 
the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.026

    (2) As used in the formula in paragraph (c)(9)(iii)(C)(1) of this 
section:
    (i) A is the attachment point, which equals the ratio of the 
notional amounts of all underlying exposures that are subordinated to 
the Enterprise's exposure to the total notional amount of all 
underlying exposures, expressed as a decimal value between zero and 
one; \1\
---------------------------------------------------------------------------

    \1\ In the case of a first-to-default credit derivative, there 
are no underlying exposures that are subordinated to the 
Enterprise's exposure. In the case of a second-or-subsequent-to-
default credit derivative, the smallest (n-1) notional amounts of 
the underlying exposures are subordinated to the Enterprise's 
exposure.
---------------------------------------------------------------------------

    (ii) D is the detachment point, which equals one minus the ratio of 
the notional amounts of all underlying exposures that are senior to the 
Enterprise's exposure to the total notional amount of all underlying 
exposures, expressed as a decimal value between zero and one; and
    (iii) The resulting amount is designated with a positive sign if 
the collateralized debt obligation tranche was purchased by the 
Enterprise and is designated with a negative sign if the collateralized 
debt obligation tranche was sold by the Enterprise.
    (iv) Maturity factor. (A)(1) The maturity factor of a derivative 
contract that is subject to a variation margin agreement, excluding 
derivative contracts that are subject to a variation margin agreement 
under which the counterparty is not required to post variation margin, 
is determined by the following formula:

[[Page 15326]]

[GRAPHIC] [TIFF OMITTED] TP13MR23.027

    Where Margin Period of Risk (MPOR) refers to the period from the 
most recent exchange of collateral covering a netting set of derivative 
contracts with a defaulting counterparty until the derivative contracts 
are closed out and the resulting market risk is re-hedged.
    (2) Notwithstanding paragraph (c)(9)(iv)(A)(1) of this section:
    (i) For a derivative contract that is not a client-facing 
derivative transaction, MPOR cannot be less than ten business days plus 
the periodicity of re-margining expressed in business days minus one 
business day;
    (ii) For a derivative contract that is a client-facing derivative 
transaction, cannot be less than five business days plus the 
periodicity of re-margining expressed in business days minus one 
business day; and
    (iii) For a derivative contract that is within a netting set that 
is composed of more than 5,000 derivative contracts that are not 
cleared transactions, or a netting set that contains one or more trades 
involving illiquid collateral or a derivative contract that cannot be 
easily replaced, MPOR cannot be less than twenty business days.
    (3) Notwithstanding paragraphs (c)(9)(iv)(A)(1) and (2) of this 
section, for a netting set subject to more than two outstanding 
disputes over margin that lasted longer than the MPOR over the previous 
two quarters, the applicable floor is twice the amount provided in 
paragraphs (c)(9)(iv)(A)(1) and (2) of this section.
    (B) The maturity factor of a derivative contract that is not 
subject to a variation margin agreement, or derivative contracts under 
which the counterparty is not required to post variation margin, is 
determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.028


BILLING CODE 4910-13-C

Where M equals the greater of 10 business days and the remaining 
maturity of the contract, as measured in business days.
    (C) For purposes of paragraph (c)(9)(iv) of this section, if an 
Enterprise has elected pursuant to paragraph (c)(5)(v) of this section 
to treat a derivative contract that is a cleared transaction that is 
not subject to a variation margin agreement as one that is subject to a 
variation margin agreement, the Enterprise must treat the derivative 
contract as subject to a variation margin agreement with maturity 
factor as determined according to (c)(9)(iv)(A) of this section, and 
daily settlement does not change the end date of the period referenced 
by the derivative contract.
    (v) Derivative contract as multiple effective derivative contracts. 
An Enterprise must separate a derivative contract into separate 
derivative contracts, according to the following rules:
    (A) For an option where the counterparty pays a predetermined 
amount if the value of the underlying asset is above or below the 
strike price and nothing otherwise (binary option), the option must be 
treated as two separate options. For purposes of paragraph 
(c)(9)(iii)(B) of this section, a binary option with strike K must be 
represented as the combination of one bought European option and one 
sold European option of the same type as the original option (put or 
call) with the strikes set equal to 0.95 * K and 1.05 * K so that the 
payoff of the binary option is reproduced exactly outside the region 
between the two strikes. The absolute value of the sum of the adjusted 
derivative contract amounts of the bought and sold options is capped at 
the payoff amount of the binary option.
    (B) For a derivative contract that can be represented as a 
combination of standard option payoffs (such as collar, butterfly 
spread, calendar spread, straddle, and strangle), an Enterprise must 
treat each standard option component as a separate derivative contract.
    (C) For a derivative contract that includes multiple-payment 
options, (such as interest rate caps and floors), an Enterprise may 
represent each payment option as a combination of effective single-
payment options (such as interest rate caplets and floorlets).
    (D) An Enterprise may not decompose linear derivative contracts 
(such as swaps) into components.
    (10) Multiple netting sets subject to a single variation margin 
agreement--(i) Calculating replacement cost. Notwithstanding paragraph 
(c)(6) of this section, an Enterprise shall assign a single replacement 
cost to multiple netting sets that are subject to a single variation 
margin agreement under which the counterparty must post variation 
margin, calculated according to the following formula:

Replacement Cost = max{[Sigma]NSmax{VNS; 0{time}  -max{CMA; 0{time} ; 
0{time}  + max{[Sigma]NSmin{VNS; 0{time}  -min{CMA; 0{time} ; 0{time} 


Where:
    (A) NS is each netting set subject to the variation margin 
agreement MA;
    (B) VNS is the sum of the fair values (after excluding 
any valuation adjustments) of the derivative contracts within the 
netting set NS; and
    (C) CMA is the sum of the net independent collateral 
amount and the variation margin amount applicable to the derivative 
contracts within the netting sets subject to the single variation 
margin agreement.
    (ii) Calculating potential future exposure. Notwithstanding 
paragraph (c)(5) of this section, an Enterprise shall assign a single 
potential future exposure to multiple netting sets that are subject to 
a single variation margin agreement under which the counterparty must 
post variation margin equal to the sum of the potential future exposure 
of each such netting set, each calculated according to paragraph (c)(7) 
of this section as if such nettings sets were not subject to a 
variation margin agreement.
    (11) Netting set subject to multiple variation margin agreements or 
a hybrid netting set--(i) Calculating replacement cost. To calculate 
replacement cost for either a netting set subject to multiple variation 
margin agreements under which the counterparty to each variation margin 
agreement must post variation margin, or a netting set composed of at 
least one derivative contract subject to variation margin agreement 
under which the counterparty must post variation margin and at least 
one derivative contract that is not subject to such a variation margin

[[Page 15327]]

agreement, the calculation for replacement cost is provided under 
paragraph (c)(6)(i) of this section, except that the variation margin 
threshold equals the sum of the variation margin thresholds of all 
variation margin agreements within the netting set and the minimum 
transfer amount equals the sum of the minimum transfer amounts of all 
the variation margin agreements within the netting set.
    (ii) Calculating potential future exposure. (A) To calculate 
potential future exposure for a netting set subject to multiple 
variation margin agreements under which the counterparty to each 
variation margin agreement must post variation margin, or a netting set 
composed of at least one derivative contract subject to variation 
margin agreement under which the counterparty to the derivative 
contract must post variation margin and at least one derivative 
contract that is not subject to such a variation margin agreement, an 
Enterprise must divide the netting set into sub-netting sets (as 
described in paragraph (c)(11)(ii)(B) of this section) and calculate 
the aggregated amount for each sub-netting set. The aggregated amount 
for the netting set is calculated as the sum of the aggregated amounts 
for the sub-netting sets. The multiplier is calculated for the entire 
netting set.
    (B) For purposes of paragraph (c)(11)(ii)(A) of this section, the 
netting set must be divided into sub-netting sets as follows:
    (1) All derivative contracts within the netting set that are not 
subject to a variation margin agreement or that are subject to a 
variation margin agreement under which the counterparty is not required 
to post variation margin form a single sub-netting set. The aggregated 
amount for this sub-netting set is calculated as if the netting set is 
not subject to a variation margin agreement.
    (2) All derivative contracts within the netting set that are 
subject to variation margin agreements in which the counterparty must 
post variation margin and that share the same value of the MPOR form a 
single sub-netting set. The aggregated amount for this sub-netting set 
is calculated as if the netting set is subject to a variation margin 
agreement, using the MPOR value shared by the derivative contracts 
within the netting set.

 Table 2 to Paragraph (c)(11)(ii)(B)(2)--Supervisory Option Volatility, Supervisory Correlation Parameters, and
                                  Supervisory Factors for Derivative Contracts
----------------------------------------------------------------------------------------------------------------
                                                                         Supervisory   Supervisory
                                                                           option      correlation   Supervisory
          Asset class                Category              Type          volatility      factor      factor \1\
                                                                          (percent)     (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
Interest rate.................  N/A..............  N/A................            50           N/A          0.50
Exchange rate.................  N/A..............  N/A................            15           N/A           4.0
Credit, single name...........  Investment grade.  N/A................           100            50          0.46
                                Speculative grade  N/A................           100            50           1.3
                                Sub-speculative    N/A................           100            50           6.0
                                 grade.
Credit, index.................  Investment Grade.  N/A................            80            80          0.38
                                Speculative Grade  N/A................            80            80          1.06
Equity, single name...........  N/A..............  N/A................           120            50            32
Equity, index.................  N/A..............  N/A................            75            80            20
Commodity.....................  Energy...........  Electricity........           150            40            40
                                                   Other..............            70            40            18
                                Metals...........  N/A................            70            40            18
                                Agricultural.....  N/A................            70            40            18
                                Other............  N/A................            70            40            18
----------------------------------------------------------------------------------------------------------------
\1\ The applicable supervisory factor for basis derivative contract hedging sets is equal to one-half of the
  supervisory factor provided in this table 2, and the applicable supervisory factor for volatility derivative
  contract hedging sets is equal to 5 times the supervisory factor provided in this table 2.

    (d) Credit valuation adjustment (CVA) risk-weighted assets--(1) In 
general. With respect to its OTC derivative contracts, an Enterprise 
must calculate a CVA risk-weighted asset amount for its portfolio of 
OTC derivative transactions that are subject to the CVA capital 
requirement using the simple CVA approach described in paragraph (d)(5) 
of this section.
    (2) [Reserved]
    (3) Recognition of hedges. (i) An Enterprise may recognize a single 
name CDS, single name contingent CDS, any other equivalent hedging 
instrument that references the counterparty directly, and index credit 
default swaps (CDSind) as a CVA hedge under paragraph 
(d)(5)(ii) of this section or paragraph (d)(6) of this section, 
provided that the position is managed as a CVA hedge in accordance with 
the Enterprise's hedging policies.
    (ii) An Enterprise shall not recognize as a CVA hedge any tranched 
or n\th\-to-default credit derivative.
    (4) Total CVA risk-weighted assets. Total CVA risk-weighted assets 
is the CVA capital requirement, KCVA, calculated for an 
Enterprise's entire portfolio of OTC derivative counterparties that are 
subject to the CVA capital requirement, multiplied by 12.5.
    (5) Simple CVA approach. (i) Under the simple CVA approach, the CVA 
capital requirement, KCVA, is calculated according to the 
following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.029


[[Page 15328]]



Where:
[GRAPHIC] [TIFF OMITTED] TP13MR23.030

    (A) wi = the weight applicable to counterparty i under 
table 3 to paragraph (d)(5)(ii);
    (B) Mi = the EAD-weighted average of the effective 
maturity of each netting set with counterparty i (where each netting 
set's effective maturity can be no less than one year.)
    (C) EADitotal = the sum of the EAD for all netting sets of OTC 
derivative contracts with counterparty i calculated using the 
standardized approach to counterparty credit risk described in 
paragraph (c) of this section. When the Enterprise calculates EAD under 
paragraph (c) of this section, such EAD may be adjusted for purposes of 
calculating EADitotal by multiplying EAD by (1-exp(-0.05 x 
Mi))/(0.05 x Mi), where ``exp'' is the 
exponential function.
    (D) Mihedge = the notional weighted average maturity of the hedge 
instrument.
    (E) Bi = the sum of the notional amounts of any 
purchased single name CDS referencing counterparty i that is used to 
hedge CVA risk to counterparty i multiplied by (1-exp(-0.05 x 
Mihedge))/(0.05 x Mihedge).
    (F) Mind = the maturity of the CDSind or the 
notional weighted average maturity of any CDSind purchased 
to hedge CVA risk of counterparty i.
    (G) Bind = the notional amount of one or more 
CDSind purchased to hedge CVA risk for counterparty i 
multiplied by (1-exp(-0.05 x Mind))/(0.05 x Mind)
    (H) wind = the weight applicable to the 
CDSind based on the average weight of the underlying 
reference names that comprise the index under table 3 to paragraph 
(d)(5)(ii).
    (ii) The Enterprise may treat the notional amount of the index 
attributable to a counterparty as a single name hedge of counterparty i 
(Bi,) when calculating KCVA, and subtract the 
notional amount of Bi from the notional amount of the 
CDSind. An Enterprise must treat the CDSind hedge 
with the notional amount reduced by Bi as a CVA hedge.

   Table 3 to Paragraph (d)(5)(ii)--Assignment of Counterparty Weight
------------------------------------------------------------------------
      Internal PD (in percent)              Weight w (in percent)
------------------------------------------------------------------------
                0.00-0.07                                 0.70
              >0.070-0.15                                 0.80
               >0.15-0.40                                 1.00
               >0.40-2.00                                 2.00
               >2.00-6.00                                 3.00
                    >6.00                                10.00
------------------------------------------------------------------------

0
10. Revise Sec.  1240.37 to read as follows:


Sec.  1240.37  Cleared transactions.

    (a) General requirements--(1) Clearing member clients. An 
Enterprise that is a clearing member client must use the methodologies 
described in paragraph (b) of this section to calculate risk-weighted 
assets for a cleared transaction.
    (2) Clearing members. An Enterprise that is a clearing member must 
use the methodologies described in paragraph (c) of this section to 
calculate its risk-weighted assets for a cleared transaction and 
paragraph (b) of this section to calculate its risk-weighted assets for 
its default fund contribution to a CCP.
    (b) Clearing member client Enterprises--(1) Risk-weighted assets 
for cleared transactions. (i) To determine the risk-weighted asset 
amount for a cleared transaction, an Enterprise that is a clearing 
member client must multiply the trade exposure amount for the cleared 
transaction, calculated in accordance with paragraph (b)(2) of this 
section, by the risk weight appropriate for the cleared transaction, 
determined in accordance with paragraph (b)(3) of this section.
    (ii) A clearing member client Enterprise's total risk-weighted 
assets for cleared transactions is the sum of the risk-weighted asset 
amounts for all of its cleared transactions.
    (2) Trade exposure amount. (i) For a cleared transaction that is a 
derivative contract or a netting set of derivative contracts, trade 
exposure amount equals the EAD for the derivative contract or netting 
set of derivative contracts calculated using the methodology used to 
calculate EAD for derivative contracts set forth in Sec.  1240.36(c), 
plus the fair value of the collateral posted by the clearing member 
client Enterprise and held by the CCP or a clearing member in a manner 
that is not bankruptcy remote.
    (ii) For a cleared transaction that is a repo-style transaction or 
netting set of repo-style transactions, trade exposure amount equals 
the EAD for the repo-style transaction calculated using the methodology 
set forth in Sec.  1240.39(b)(2) or (3), plus the fair value of the 
collateral posted by the clearing member client Enterprise and held by 
the CCP or a clearing member in a manner that is not bankruptcy remote.
    (3) Cleared transaction risk weights. (i) For a cleared transaction 
with a QCCP, a clearing member client Enterprise must apply a risk 
weight of:
    (A) 2 percent if the collateral posted by the Enterprise to the 
QCCP or clearing member is subject to an arrangement that prevents any 
loss to the clearing member client Enterprise due to the joint default 
or a concurrent insolvency, liquidation, or receivership proceeding of 
the clearing member and any other clearing member clients of the 
clearing member; and the clearing member client Enterprise has 
conducted sufficient legal review to conclude with a well-founded basis 
(and maintains sufficient written documentation of that legal review) 
that in the event of a legal challenge (including one resulting from an 
event of default or from liquidation, insolvency, or receivership 
proceedings) the relevant court and administrative authorities would 
find the arrangements to be legal, valid, binding, and enforceable 
under the law of the relevant jurisdictions.
    (B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of 
this section are not met.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member client Enterprise must apply the risk weight applicable 
to the CCP under this subpart D.
    (4) Collateral. (i) Notwithstanding any other requirement of this 
section, collateral posted by a clearing member client Enterprise that 
is held by a custodian (in its capacity as a custodian) in a manner 
that is bankruptcy remote from the CCP, clearing member, and other 
clearing member clients of the clearing member, is not subject to a 
capital requirement under this section.
    (ii) A clearing member client Enterprise must calculate a risk-
weighted asset amount for any collateral provided to a CCP, clearing 
member or a custodian in connection with a cleared transaction in 
accordance with requirements under this subpart D, as applicable.
    (c) Clearing member Enterprise--(1) Risk-weighted assets for 
cleared transactions. (i) To determine the risk-weighted asset amount 
for a cleared transaction, a clearing member

[[Page 15329]]

Enterprise must multiply the trade exposure amount for the cleared 
transaction, calculated in accordance with paragraph (c)(2) of this 
section by the risk weight appropriate for the cleared transaction, 
determined in accordance with paragraph (c)(3) of this section.
    (ii) A clearing member Enterprise's total risk-weighted assets for 
cleared transactions is the sum of the risk-weighted asset amounts for 
all of its cleared transactions.
    (2) Trade exposure amount. A clearing member Enterprise must 
calculate its trade exposure amount for a cleared transaction as 
follows:
    (i) For a cleared transaction that is a derivative contract or a 
netting set of derivative contracts, trade exposure amount equals the 
EAD calculated using the methodology used to calculate EAD for 
derivative contracts set forth in Sec.  1240.36(c), plus the fair value 
of the collateral posted by the clearing member Enterprise and held by 
the CCP in a manner that is not bankruptcy remote.
    (ii) For a cleared transaction that is a repo-style transaction or 
netting set of repo-style transactions, trade exposure amount equals 
the EAD calculated under Sec.  1240.39(b)(2) or (3), plus the fair 
value of the collateral posted by the clearing member Enterprise and 
held by the CCP in a manner that is not bankruptcy remote.
    (3) Cleared transaction risk weights. (i) A clearing member 
Enterprise must apply a risk weight of 2 percent to the trade exposure 
amount for a cleared transaction with a QCCP.
    (ii) For a cleared transaction with a CCP that is not a QCCP, a 
clearing member Enterprise must apply the risk weight applicable to the 
CCP according to this subpart D.
    (iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this 
section, a clearing member Enterprise may apply a risk weight of zero 
percent to the trade exposure amount for a cleared transaction with a 
QCCP where the clearing member Enterprise is acting as a financial 
intermediary on behalf of a clearing member client, the transaction 
offsets another transaction that satisfies the requirements set forth 
in Sec.  1240.3(a), and the clearing member Enterprise is not obligated 
to reimburse the clearing member client in the event of the QCCP 
default.
    (4) Collateral. (i) Notwithstanding any other requirement of this 
section, collateral posted by a clearing member Enterprise that is held 
by a custodian (in its capacity as a custodian) in a manner that is 
bankruptcy remote from the CCP, clearing member, and other clearing 
member clients of the clearing member, is not subject to a capital 
requirement under this section.
    (ii) A clearing member Enterprise must calculate a risk-weighted 
asset amount for any collateral provided to a CCP, clearing member or a 
custodian in connection with a cleared transaction in accordance with 
requirements under this subpart D.
    (d) Default fund contributions--(1) General requirement. A clearing 
member Enterprise must determine the risk-weighted asset amount for a 
default fund contribution to a CCP at least quarterly, or more 
frequently if, in the opinion of the Enterprise or FHFA, there is a 
material change in the financial condition of the CCP.
    (2) Risk-weighted asset amount for default fund contributions to 
nonqualifying CCPs. A clearing member Enterprise's risk-weighted asset 
amount for default fund contributions to CCPs that are not QCCPs equals 
the sum of such default fund contributions multiplied by 1,250 percent, 
or an amount determined by FHFA, based on factors such as size, 
structure, and membership characteristics of the CCP and riskiness of 
its transactions, in cases where such default fund contributions may be 
unlimited.
    (3) Risk-weighted asset amount for default fund contributions to 
QCCPs. A clearing member Enterprise's risk-weighted asset amount for 
default fund contributions to QCCPs equals the sum of its capital 
requirement, KCM for each QCCP, as calculated under the 
methodology set forth in paragraph (d)(4) of this section, multiplied 
by 12.5.
    (4) Capital requirement for default fund contributions to a QCCP. A 
clearing member Enterprise's capital requirement for its default fund 
contribution to a QCCP (KCM) is equal to:
[GRAPHIC] [TIFF OMITTED] TP13MR23.031


Where:

    (i) KCCP is the hypothetical capital requirement of the QCCP, as 
determined under paragraph (d)(5) of this section;
    (ii) DFpref is prefunded default fund contribution of the clearing 
member Enterprise to the QCCP;
    (iii) DFCCP is the QCCP's own prefunded amount that are contributed 
to the default waterfall and are junior or pari passu with prefunded 
default fund contributions of clearing members of the QCCP; and
    (iv) DFprefCCPCM is the total prefunded default fund contributions 
from clearing members of the QCCP to the QCCP.
    (5) Hypothetical capital requirement of a QCCP. Where a QCCP has 
provided its KCCP, an Enterprise must rely on such disclosed 
figure instead of calculating KCCP under this paragraph 
(d)(5), unless the Enterprise determines that a more conservative 
figure is appropriate based on the nature, structure, or 
characteristics of the QCCP. The hypothetical capital requirement of a 
QCCP (KCCP), as determined by the Enterprise, is equal to:

KCCP = [Sigma]CMi EADi * 1.6 percent


Where:

    (i) CMi is each clearing member of the QCCP; and
    (ii) EADi is the exposure amount of the QCCP to each 
clearing member of the QCCP, as determined under paragraph (d)(6) of 
this section.
    (6) EAD of a QCCP to a clearing member. (i) The EAD of a QCCP to a 
clearing member is equal to the sum of the EAD for derivative contracts 
determined under paragraph (d)(6)(ii) of this section and the EAD for 
repo-style transactions determined under paragraph (d)(6)(iii) of this 
section.
    (ii) With respect to any derivative contracts between the QCCP and 
the clearing member that are cleared transactions and any guarantees 
that the clearing member has provided to the QCCP with respect to 
performance of a clearing member client on a derivative contract, the 
EAD is equal to the exposure amount of the QCCP to the clearing member 
for all such derivative contracts and guarantees of derivative 
contracts calculated under SA-CCR in Sec.  1240.36(c) (or, with respect 
to a QCCP located outside the United States, under a substantially 
identical methodology in effect in the jurisdiction) using a value of 
10 business days for purposes of Sec.  1240.36(c)(9)(iv); less the 
value of all collateral held by the QCCP posted by the clearing member 
or a client of the clearing member in connection with a derivative 
contract for which the

[[Page 15330]]

clearing member has provided a guarantee to the QCCP and the amount of 
the prefunded default fund contribution of the clearing member to the 
QCCP.
    (iii) With respect to any repo-style transactions between the QCCP 
and a clearing member that are cleared transactions, EAD is equal to:

EADi = max{EBRMi-IMi-
DFi;0{time} 


Where:
    (A) EBRMi is the exposure amount of the QCCP to each 
clearing member for all repo-style transactions between the QCCP and 
the clearing member, as determined under Sec.  1240.39(b)(2) and 
without recognition of the initial margin collateral posted by the 
clearing member to the QCCP with respect to the repo-style transactions 
or the prefunded default fund contribution of the clearing member 
institution to the QCCP;
    (B) IMi is the initial margin collateral posted by each 
clearing member to the QCCP with respect to the repo-style 
transactions; and
    (C) DFi is the prefunded default fund contribution of 
each clearing member to the
    (D) QCCP that is not already deducted in paragraph (d)(6)(ii) of 
this section.
    (iv) EAD must be calculated separately for each clearing member's 
sub-client accounts and sub-house account (i.e., for the clearing 
member's proprietary activities). If the clearing member's collateral 
and its client's collateral are held in the same default fund 
contribution account, then the EAD of that account is the sum of the 
EAD for the client-related transactions within the account and the EAD 
of the house-related transactions within the account. For purposes of 
determining such EADs, the independent collateral of the clearing 
member and its client must be allocated in proportion to the respective 
total amount of independent collateral posted by the clearing member to 
the QCCP.
    (v) If any account or sub-account contains both derivative 
contracts and repo-style transactions, the EAD of that account is the 
sum of the EAD for the derivative contracts within the account and the 
EAD of the repo-style transactions within the account. If independent 
collateral is held for an account containing both derivative contracts 
and repo-style transactions, then such collateral must be allocated to 
the derivative contracts and repo-style transactions in proportion to 
the respective product specific exposure amounts, calculated, excluding 
the effects of collateral, according to Sec.  1240.39(b) for repo-style 
transactions and to Sec.  1240.36(c)(5) for derivative contracts.
0
11. Revise Sec.  1240.39 to read as follows:


Sec.  1240.39  Collateralized transactions.

    (a) General. (1) An Enterprise may use the following methodologies 
to recognize the benefits of financial collateral (other than with 
respect to a retained CRT exposure) in mitigating the counterparty 
credit risk of repo-style transactions, eligible margin loans, 
collateralized OTC derivative contracts and single product netting sets 
of such transactions:
    (i) The collateral haircut approach set forth in paragraph (b)(2) 
of this section; and
    (ii) For single product netting sets of repo-style transactions and 
eligible margin loans, the simple VaR methodology set forth in 
paragraph (b)(3) of this section.
    (2) An Enterprise may use any combination of the two methodologies 
for collateral recognition; however, it must use the same methodology 
for similar exposures or transactions.
    (b) EAD for eligible margin loans and repo-style transactions--(1) 
General. An Enterprise may recognize the credit risk mitigation 
benefits of financial collateral that secures an eligible margin loan, 
repo-style transaction, or single-product netting set of such 
transactions by determining the EAD of the exposure using:
    (i) The collateral haircut approach described in paragraph (b)(2) 
of this section; or
    (ii) For netting sets only, the simple VaR methodology described in 
paragraph (b)(3) of this section.
    (2) Collateral haircut approach--(i) EAD equation. An Enterprise 
may determine EAD for an eligible margin loan, repo-style transaction, 
or netting set by setting EAD equal to

max{0, [([Sigma]E - [Sigma]C) + [Sigma](Es x Hs) 
+ [Sigma](Efx x Hfx)]{time} ,

Where:

    (A) [Sigma]E equals the value of the exposure (the sum of the 
current fair values of all instruments, gold, and cash the Enterprise 
has lent, sold subject to repurchase, or posted as collateral to the 
counterparty under the transaction (or netting set));
    (B) [Sigma]C equals the value of the collateral (the sum of the 
current fair values of all instruments, gold, and cash the Enterprise 
has borrowed, purchased subject to resale, or taken as collateral from 
the counterparty under the transaction (or netting set));
    (C) Es equals the absolute value of the net position in 
a given instrument or in gold (where the net position in a given 
instrument or in gold equals the sum of the current fair values of the 
instrument or gold the Enterprise has lent, sold subject to repurchase, 
or posted as collateral to the counterparty minus the sum of the 
current fair values of that same instrument or gold the Enterprise has 
borrowed, purchased subject to resale, or taken as collateral from the 
counterparty);
    (D) Hs equals the market price volatility haircut 
appropriate to the instrument or gold referenced in Es;
    (E) Efx equals the absolute value of the net position of 
instruments and cash in a currency that is different from the 
settlement currency (where the net position in a given currency equals 
the sum of the current fair values of any instruments or cash in the 
currency the Enterprise has lent, sold subject to repurchase, or posted 
as collateral to the counterparty minus the sum of the current fair 
values of any instruments or cash in the currency the Enterprise has 
borrowed, purchased subject to resale, or taken as collateral from the 
counterparty); and
    (F) Hfx equals the haircut appropriate to the mismatch 
between the currency referenced in Efx and the settlement 
currency.
    (ii) Standard supervisory haircuts. Under the standard supervisory 
haircuts approach:
    (A) An Enterprise must use the haircuts for market price volatility 
(Hs) in table 1 to paragraph (b)(2)(ii)(A) as adjusted in 
certain circumstances as provided in paragraphs (b)(2)(ii)(C) and (D) 
of this section;

[[Page 15331]]



                              Table 1 to Paragraph (b)(2)(ii)(A)--Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Haircut (in percent) assigned based on:
                                                                  ------------------------------------------------------------------
                                                                    Sovereign issuers risk weight      Non-sovereign issuers risk      Investment grade
                        Residual maturity                            under Sec.   1240.32 \2\ (in   weight under Sec.   1240.32 (in     securitization
                                                                               percent)                         percent)                exposures (in
                                                                  ------------------------------------------------------------------       percent)
                                                                      Zero     20 or 50     100         20         50        100
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year.....................................        0.5        1.0       15.0        1.0        2.0        4.0                 4.0
Greater than 1 year and less than or equal to 5 years............        2.0        3.0       15.0        4.0        6.0        8.0                12.0
Greater than 5 years.............................................        4.0        6.0       15.0        8.0       12.0       16.0                24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold............................15.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds)..........................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mutual funds.......................................................Highest haircut applicable to any security
                                                                          in which the fund can invest.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash collateral held..................................................................Zero........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other exposure types..................................................................25.0........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in this table 1 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.

    (B) For currency mismatches, an Enterprise must use a haircut for 
foreign exchange rate volatility (Hfx) of 8 percent, as 
adjusted in certain circumstances as provided in paragraphs 
(b)(2)(ii)(C) and (D) of this section.
    (C) For repo-style transactions and client-facing derivative 
transactions, an Enterprise may multiply the supervisory haircuts 
provided in paragraphs (b)(2)(ii)(A) and (B) of this section by the 
square root of \1/2\ (which equals 0.707107). If the Enterprise 
determines that a longer holding period is appropriate for client-
facing derivative transactions, then it must use a larger scaling 
factor to adjust for the longer holding period pursuant to paragraph 
(b)(2)(ii)(F) of this section.
    (D) An Enterprise must adjust the supervisory haircuts upward on 
the basis of a holding period longer than ten business days (for 
eligible margin loans) or five business days (for repo-style 
transactions), using the formula provided in paragraph (b)(2)(ii)(F) of 
this section where the conditions in this paragraph (b)(2)(ii)(D) 
apply. If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, an Enterprise must adjust the supervisory 
haircuts upward on the basis of a minimum holding period of twenty 
business days for the following quarter (except when an Enterprise is 
calculating EAD for a cleared transaction under Sec.  1240.37). If a 
netting set contains one or more trades involving illiquid collateral, 
an Enterprise must adjust the supervisory haircuts upward on the basis 
of a minimum holding period of twenty business days. If over the two 
previous quarters more than two margin disputes on a netting set have 
occurred that lasted longer than the holding period, then the 
Enterprise must adjust the supervisory haircuts upward for that netting 
set on the basis of a minimum holding period that is at least two times 
the minimum holding period for that netting set.
    (E)(1) An Enterprise must adjust the supervisory haircuts upward on 
the basis of a holding period longer than ten business days for 
collateral associated with derivative contracts (five business days for 
client-facing derivative contracts) using the formula provided in 
paragraph (b)(2)(ii)(F) of this section where the conditions in this 
paragraph (b)(2)(ii)(E)(1) apply. For collateral associated with a 
derivative contract that is within a netting set that is composed of 
more than 5,000 derivative contracts that are not cleared transactions, 
an Enterprise must use a minimum holding period of twenty business 
days. If a netting set contains one or more trades involving illiquid 
collateral or a derivative contract that cannot be easily replaced, an 
Enterprise must use a minimum holding period of twenty business days.
    (2) Notwithstanding paragraph (b)(2)(ii)(A) or (C) or 
(b)(2)(ii)(E)(1) of this section, for collateral associated with a 
derivative contract in a netting set under which more than two margin 
disputes that lasted longer than the holding period occurred during the 
two previous quarters, the minimum holding period is twice the amount 
provided under paragraph (b)(2)(ii)(A) or (C) or (b)(2)(ii)(E)(1) of 
this section.
    (F) An Enterprise must adjust the standard supervisory haircuts 
upward, pursuant to the adjustments provided in paragraphs 
(b)(2)(ii)(C) through (E) of this section, using the following formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.032


Where:

    (1) TM equals a holding period of longer than 10 
business days for eligible margin loans and derivative contracts other 
than client-facing derivative transactions or longer than 5 business 
days for repo-style transactions and client-facing derivative 
transactions;
    (2) Hs equals the standard supervisory haircut; and
    (3) Ts equals 10 business days for eligible margin loans 
and derivative contracts other than client-facing derivative 
transactions or 5 business days for repo-style transactions and client-
facing derivative transactions.
    (G) If the instrument an Enterprise has lent, sold subject to 
repurchase, or posted as collateral does not meet the definition of 
financial collateral, the Enterprise must use a 25.0 percent haircut 
for market price volatility (Hs).
    (iii) Own internal estimates for haircuts. With the prior written 
notice to FHFA, an Enterprise may calculate haircuts (Hs and 
Hfx) using its own internal estimates of the volatilities of 
market prices and foreign exchange rates.
    (A) To use its own internal estimates, an Enterprise must satisfy 
the following minimum quantitative standards:
    (1) An Enterprise must use a 99th percentile one-tailed confidence 
interval.
    (2) The minimum holding period for a repo-style transaction is five 
business days and for an eligible margin loan is ten business days 
except for transactions or netting sets for which paragraph 
(b)(2)(iii)(A)(3) of this section applies. When an Enterprise 
calculates

[[Page 15332]]

an own-estimates haircut on a TN-day holding period, which 
is different from the minimum holding period for the transaction type, 
the applicable haircut (HM) is calculated using the 
following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TP13MR23.033


Where:

    (i) TM equals 5 for repo-style transactions and 10 for 
eligible margin loans;
    (ii) TN equals the holding period used by the Enterprise 
to derive HN; and
    (iii) HN equals the haircut based on the holding period 
TN
    (3) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, an Enterprise must calculate the haircut using a 
minimum holding period of twenty business days for the following 
quarter (except when an Enterprise is calculating EAD for a cleared 
transaction under Sec.  1240.37). If a netting set contains one or more 
trades involving illiquid collateral or an OTC derivative that cannot 
be easily replaced, an Enterprise must calculate the haircut using a 
minimum holding period of twenty business days. If over the two 
previous quarters more than two margin disputes on a netting set have 
occurred that lasted more than the holding period, then the Enterprise 
must calculate the haircut for transactions in that netting set on the 
basis of a holding period that is at least two times the minimum 
holding period for that netting set.
    (4) An Enterprise is required to calculate its own internal 
estimates with inputs calibrated to historical data from a continuous 
12-month period that reflects a period of significant financial stress 
appropriate to the security or category of securities.
    (5) An Enterprise must have policies and procedures that describe 
how it determines the period of significant financial stress used to 
calculate the Enterprise's own internal estimates for haircuts under 
this section and must be able to provide empirical support for the 
period used. The Enterprise must obtain the prior approval of FHFA for, 
and notify FHFA if the Enterprise makes any material changes to, these 
policies and procedures.
    (6) Nothing in this section prevents FHFA from requiring an 
Enterprise to use a different period of significant financial stress in 
the calculation of own internal estimates for haircuts.
    (7) An Enterprise must update its data sets and calculate haircuts 
no less frequently than quarterly and must also reassess data sets and 
haircuts whenever market prices change materially.
    (B) With respect to debt securities that are investment grade, an 
Enterprise may calculate haircuts for categories of securities. For a 
category of securities, the Enterprise must calculate the haircut on 
the basis of internal volatility estimates for securities in that 
category that are representative of the securities in that category 
that the Enterprise has lent, sold subject to repurchase, posted as 
collateral, borrowed, purchased subject to resale, or taken as 
collateral. In determining relevant categories, the Enterprise must at 
a minimum take into account:
    (1) The type of issuer of the security;
    (2) The credit quality of the security;
    (3) The maturity of the security; and
    (4) The interest rate sensitivity of the security.
    (C) With respect to debt securities that are not investment grade 
and equity securities, an Enterprise must calculate a separate haircut 
for each individual security.
    (D) Where an exposure or collateral (whether in the form of cash or 
securities) is denominated in a currency that differs from the 
settlement currency, the Enterprise must calculate a separate currency 
mismatch haircut for its net position in each mismatched currency based 
on estimated volatilities of foreign exchange rates between the 
mismatched currency and the settlement currency.
    (E) An Enterprise's own estimates of market price and foreign 
exchange rate volatilities may not take into account the correlations 
among securities and foreign exchange rates on either the exposure or 
collateral side of a transaction (or netting set) or the correlations 
among securities and foreign exchange rates between the exposure and 
collateral sides of the transaction (or netting set).
    (3) Simple VaR methodology. With the prior written notice to FHFA, 
an Enterprise may estimate EAD for a netting set using a VaR model that 
meets the requirements in paragraph (b)(3)(iii) of this section. In 
such event, the Enterprise must set EAD equal to max {0, [([Sigma]E - 
[Sigma]C) + PFE]{time} , where:
    (i) [Sigma]E equals the value of the exposure (the sum of the 
current fair values of all instruments, gold, and cash the Enterprise 
has lent, sold subject to repurchase, or posted as collateral to the 
counterparty under the netting set);
    (ii) [Sigma]C equals the value of the collateral (the sum of the 
current fair values of all instruments, gold, and cash the Enterprise 
has borrowed, purchased subject to resale, or taken as collateral from 
the counterparty under the netting set); and
    (iii) PFE (potential future exposure) equals the Enterprise's 
empirically based best estimate of the 99th percentile, one-tailed 
confidence interval for an increase in the value of ([Sigma]E - 
[Sigma]C) over a five-business-day holding period for repo-style 
transactions, or over a ten-business-day holding period for eligible 
margin loans except for netting sets for which paragraph (b)(3)(iv) of 
this section applies using a minimum one-year historical observation 
period of price data representing the instruments that the Enterprise 
has lent, sold subject to repurchase, posted as collateral, borrowed, 
purchased subject to resale, or taken as collateral. The Enterprise 
must validate its VaR model by establishing and maintaining a rigorous 
and regular backtesting regime.
    (iv) If the number of trades in a netting set exceeds 5,000 at any 
time during a quarter, an Enterprise must use a twenty-business-day 
holding period for the following quarter (except when an Enterprise is 
calculating EAD for a cleared transaction under Sec.  1240.37). If a 
netting set contains one or more trades involving illiquid collateral, 
an Enterprise must use a twenty-business-day holding period. If over 
the two previous quarters more than two margin disputes on a netting 
set have occurred that lasted more than the holding period, then the 
Enterprise must set its PFE for that netting set equal to an estimate 
over a holding period that is at least two times the minimum holding 
period for that netting set.
0
12. Amend Sec.  1240.41 by revising paragraph (c)(5), redesignating 
paragraph (c)(6) as paragraph (c)(7), and adding new paragraph (c)(6) 
to read as follows:


Sec.  1240.41  Operational requirements for CRT and other 
securitization exposures.

* * * * *
    (c) * * *
    (5) Any clean-up calls relating to the credit risk transfer are 
eligible clean-up calls;
    (6) Any time-based calls relating to the credit risk transfer are 
eligible time-based calls; and
* * * * *
0
13. Amend Sec.  1240.42 by revising paragraph (f) to read as follows:


Sec.  1240.42  Risk-weighted assets for CRT and other securitization 
exposures.

* * * * *
    (f) Interest-only mortgage-backed securities. For non-credit-
enhancing interest-only mortgage-backed securities that are not subject 
to Sec.  1240.32(c), the

[[Page 15333]]

risk weight may not be less than 100 percent.
* * * * *
0
14. Amend Sec.  1240.400 by revising paragraph (c)(1), and removing 
paragraph (d) to read as follows:


Sec.  1240.400  Stability capital buffer.

* * * * *
    (c) * * *
    (1) Increase in stability capital buffer. An increase in the 
stability capital buffer of an Enterprise under this section will take 
effect (i.e., be incorporated into the maximum payout ratio under table 
1 to paragraph (b)(5) in Sec.  1240.11) on January 1 of the year that 
is one full calendar year after the increased stability capital buffer 
was calculated, provided that where a stability capital buffer under 
paragraph (c)(2) of this section is calculated to be a decrease in the 
stability capital buffer from the previously calculated scheduled 
increase applicable on the same January 1, the decreased stability 
capital buffer under paragraph (c)(2) of this section shall take 
effect.
* * * * *

Clinton Jones,
General Counsel, Federal Housing Finance Agency.
[FR Doc. 2023-04041 Filed 3-10-23; 8:45 am]
BILLING CODE 8070-01-P