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Part 117 of the General Regulations of the Superintendent of Financial Services
(Lending Limits: Inclusion of Credit Exposure Arising From Derivative Transactions)

October 6, 2013

§ 117.1  Definitions.

For the purposes of this Part:

  1. The appropriate Federal banking agency of a bank shall be the agency specified by Section 3(q) of the Federal Deposit Insurance Act (FDIA), 12 USC § 1813(q), or the successor to such provision.
  2. Bank includes a bank or trust company or a savings bank formed under the Banking Law whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
  3. Credit derivative means a financial contract that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure) to another party (the protection provider).
  4. The current credit exposure of a bank to a counterparty on a particular date with respect to a derivative transaction other than a credit derivative shall be the amount that the bank reasonably determines would be its loss under the terms of the derivative contract covering such transaction if the counterparty defaulted on such date.
  5. The credit exposure of a bank to a counterparty arising from derivative transactions other than credit derivatives is the higher of zero or the sum of the then positive current credit exposures with respect to such derivative transactions, provided, however, that in calculating such credit exposure, the bank may take into account netting to the extent specified in section 117.4(a).
  6. Derivative transaction  includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
  7. Effective margining arrangement means a master legal agreement governing derivative transactions between a bank and a counterparty that requires the counterparty to post, on a daily basis, variation margin to fully collateralize that amount of the bank’s net credit exposure to the counterparty that exceeds $1 million created by the derivative transactions covered by the agreement.
  8. Eligible credit derivative means a single-name credit derivative or a standard, non-tranched index credit derivative, provided that:
    1. The derivative contract is executed under standard industry credit derivative documentation and meets the requirements of an eligible guarantee and has been confirmed by both the protection purchaser and the protection provider;
    2. Any assignment of the derivative contract has been confirmed by all relevant parties;
    3. If the credit derivative is a credit default swap, the derivative contract includes the following credit events:
      1. Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
      2. Bankruptcy, insolvency, or inability of the obligor on the reference exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due and similar events;
    4. The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract; and
    5. If the derivative contract allows for cash settlement, the contract incorporates a robust valuation process.
  9. Eligible protection provider means:
    1. A sovereign entity (a central government, including the United States government; an agency; department; ministry; or central bank);
    2. This  state  or  any  city, county,  town,  village  or  school  district of this state, the New York  State  Thruway  Authority,  the Metropolitan Transportation Authority, the  Triborough Bridge and Tunnel Authority or The Port Authority of New York and New Jersey;
    3. Any  state other than the State of New York,
    4. The Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, or a multilateral development bank;
    5. A Federal Home Loan Bank;
    6. The Federal Agricultural Mortgage Corporation;
    7. A depository institution, as defined in Section 3(c) of the FDIA, 12 U.S.C. §1813(c);
    8. A bank holding company, as defined in Section 2 of the Bank Holding Company Act, 12 U.S.C. §1841;
    9. A savings and loan holding company, as defined in Section 10 of the Home Owners’ Loan Act, 12 U.S.C. §1467a;
    10. A securities broker or dealer registered with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, 15 U.S.C. §78a et seq.;
    11. An insurance company that is subject to the supervision of a state insurance regulator;
    12. A foreign banking organization;
    13. A non-United States-based securities firm or a non-United States-based insurance company that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies;
    14. A qualifying central counterparty; and
    15. Such other entity or entities as may be designated from time to time by the superintendent.
  10. Readily marketable collateral means financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market value.
  11. Financial market utility shall have the same meaning as used in Section 803(6) of the Dodd–Frank Wall Street Reform and Consumer Protection Act,       12 U.S.C. § 5462(6).
  12. The following terms shall have the same meaning as used in the Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches (Capital Adequacy Guidelines) of the bank’s appropriate Federal banking agency.1
    1. Eligible guarantee.
    2. Qualifying master netting agreement.
    3. Qualifying central counterparty.

§ 117.2  General Rule.

  1. In computing the amount of loans of a bank outstanding to a person under Section 103.1 of the Banking Law or to a borrower under Section 235.8−c of the Banking Law at any specific time, the credit exposures of the bank arising from derivative transactions with respect to such person or borrower shall be included.
  2. Such credit exposures shall be calculated as the sum of the bank’s  credit exposure to such person or borrower as a counterparty arising from derivative transactions other than credit derivatives plus the bank’s credit exposure to such person or borrower as a counterparty arising from credit derivatives plus, where such person or borrower is the obligor on a reference exposure, the bank’s credit exposure with respect to such person or borrower as obligor on  such reference exposure arising from credit derivatives.

§ 117.3 Credit Derivatives.

  1. Credit exposure to a counterparty.  A bank shall calculate its credit exposure to a counterparty arising from credit derivatives by adding the net notional value of all protection purchased from the counterparty with respect to each reference exposure.
  2. Credit exposure with respect to a reference exposure.  A bank shall calculate the credit exposure with respect to a reference exposure arising from credit derivatives entered by the bank by adding the notional value of all protection sold on such reference exposure.  
  3. Exposure mitigants. In computing the exposures in paragraphs a and b hereof, the bank may take into account exposure mitigants to the extent specified in section 117.4.

 § 117.4 Exposure Mitigants.

  1. Netting.  In computing the credit exposures arising from derivative transactions of a bank with a particular counterparty with whom such bank has in force a qualifying master netting agreement, such bank may net the credit exposures covered by such qualifying master netting agreement.
  2. Collateral. In computing the credit exposures arising from derivative transactions of a bank with a particular counterparty, such credit exposures may be reduced where such credit exposures have been secured with readily marketable collateralunder an effective margining arrangement.  The amount of such reduction shall be equal to the value of such collateral multiplied by the percentage applicable to such type of collateral as may be prescribed by the superintendent from time to time.
  3. Hedging. In computing the credit exposures arising from derivative transactions of a bank with a particular counterparty or with respect to a particular reference exposure, such credit exposures may be reduced to the extent hedged by an eligible credit derivative from an eligible protection provider.

§ 117.5 Exception.

In computing its credit exposures arising from derivative transactions, a bank need not include credit exposures to a qualifying central counterparty that has been designated by the Financial Stability Oversight Council as a financial market utility that is, or is likely to become, systemically important.

§ 117.6  Alternate Valuation Method.

With the permission of the superintendent, a bank may utilize an alternate method to evaluate its credit exposures arising from derivative transactions.

§117.7  Interim Method . Until and including June 30, 2013, a bank may calculate its credit exposures arising from derivative transactions utilizing any method, provided that the bank reasonably determine that such method appropriately reflects such exposures.  On and after July 1, 2013, a bank must calculate its credit exposures arising from derivative transactions in accordance with a method prescribed by, or otherwise permitted under, this part.

§ 117.8  Residual Authority of the Superintendent.

Where the method or methods used by a bank fails to appropriately reflect the credit exposures of the bank arising from derivative transactions, the superintendent may direct such bank to use an alternate  method or methods.

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1 In the case of a bank that is a member of the Federal Reserve System (member bank), the applicable definitions appear at Section 2 of Appendix F to 12 C.F.R. Part 208, and the case an Federally-insured bank that is not a member of the Federal Reserve System (nonmember insured bank), the applicable definitions appear at Section 2 of Appendix D to 12 C.F.R. Part 325.

Explanatory All Institutions Letter