12 CFR Part 1240 — Capital Adequacy of Enterprises

PART 1240—CAPITAL ADEQUACY OF ENTERPRISES Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4515, 4517, 4526, 4611-4612, 4631-36. Source: 85 FR 82198, Dec. 17, 2020, unless otherwise noted. Subpart A—General Provisions § 1240.1 Purpose, applicability, reservations of authority, reporting, and timing. (a) Purpose. (b) Authorities Limitations of authority. (2) Permissible activities. (c) Applicability Covered regulated entities. (2) Capital requirements and overall capital adequacy standards. (3) Regulatory capital. (4) Risk-weighted assets. (ii) Subject to § 1240.4, each Enterprise must use the methodologies in subparts E and F of this part to calculate advanced approaches total risk-weighted assets. (d) Reservation of authority regarding capital. (1) Additional capital in the aggregate. (2) Regulatory capital elements. (ii) Notwithstanding the criteria for regulatory capital instruments set forth in subpart C of this part, FHFA may find that a capital element may be included in an Enterprise's common equity tier 1 capital, additional tier 1 capital, or tier 2 capital on a permanent or temporary basis consistent with the loss absorption capacity of the element and in accordance with § 1240.20(e). (3) Risk-weighted asset amounts. (4) Total leverage. (5) Consolidation of certain exposures. (6) Other reservation of authority. (e) Corrective action and enforcement. (2) FHFA also may enforce the total capital requirement established under § 1240.10(a) and the core capital requirement established under § 1240.10(e) pursuant to section 1364 of the Safety and Soundness Act (12 U.S.C. 4614). (3) This part is also a prudential standard adopted under section 1313B of the Safety and Soundness Act (12 U.S.C. 4513b), excluding § 1240.11, which is a prudential standard only for purposes of § 1240.4. Section 1313B of the Safety and Soundness Act (12 U.S.C. 4513b) authorizes the Director to require that an Enterprise submit a corrective plan under § 1236.4 specifying the actions the Enterprise will take to correct the deficiency if the Director determines that an Enterprise is not in compliance with this part. (f) Reporting procedure and timing Capital Reports In general. (ii) Required content. (A) The common equity tier 1 capital, core capital, tier 1 capital, total capital, and adjusted total capital of the Enterprise; (B) The stress capital buffer, the capital conservation buffer amount (if prescribed by FHFA), the stability capital buffer, and the maximum payout ratio of the Enterprise; (C) The adjusted total assets of the Enterprise; and (D) The standardized total risk-weighted assets of the Enterprise. (2) Timing. (3) Approval. (4) Adjustment. (5) Public disclosure. § 1240.2 Definitions. As used in this part: Acquired CRT exposure (1) Any exposure that arises from a credit risk transfer of the Enterprise and has been acquired by the Enterprise since the issuance or entry into the credit risk transfer by the Enterprise; or (2) Any exposure that arises from a credit risk transfer of the other Enterprise. Additional tier 1 Adjusted allowances for credit losses (AACL) 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 § 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 (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 § 1240.36(c)(7), in which the term C in § 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 § 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 § 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 V CVM r CVM p ; Where: ( 1 V ( 2 CVM r ( 3 CVM p (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 § 1240.36(c)(10)(i), in which the term C MA (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 § 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; (4) The effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of a credit derivative, or other similar instrument, through which the Enterprise provides credit protection, provided that: (i) The Enterprise may reduce the effective notional principal amount of the credit derivative by the amount of any reduction in the mark-to-fair value of the credit derivative if the reduction is recognized in common equity tier 1 capital; (ii) The Enterprise may reduce the effective notional principal amount of the credit derivative by the effective notional principal amount of a purchased credit derivative or other similar instrument, provided that the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the credit derivative through which the Enterprise provides credit protection and that: (A) With respect to a credit derivative that references a single exposure, the reference exposure of the purchased credit derivative is to the same legal entity and ranks pari passu (B) With respect to a credit derivative that references multiple exposures, the reference exposures of the purchased credit derivative are to the same legal entities and rank pari passu pari passu (C) Where an Enterprise has reduced the effective notional amount of a credit derivative through which the Enterprise provides credit protection in accordance with paragraph (4)(i) of this definition, the Enterprise must also reduce the effective notional principal amount of a purchased credit derivative used to offset the credit derivative through which the Enterprise provides credit protection, by the amount of any increase in the mark-to-fair value of the purchased credit derivative that is recognized in common equity tier 1 capital; and (D) Where the Enterprise purchases credit protection through a total return swap and records the net payments received on a credit derivative through which the Enterprise provides credit protection in net income, but does not record offsetting deterioration in the mark-to-fair value of the credit derivative through which the Enterprise provides credit protection in net income (either through reductions in fair value or by additions to reserves), the Enterprise may not use the purchased credit protection to offset the effective notional principal amount of the related credit derivative through which the Enterprise provides credit protection; (5) Where an Enterprise acting as a principal has more than one repo-style transaction with the same counterparty and has offset the gross value of receivables due from a counterparty under reverse repurchase transactions by the gross value of payables under repurchase transactions due to the same counterparty, the gross value of receivables associated with the repo-style transactions less any on-balance sheet receivables amount associated with these repo-style transactions included under paragraph (1) of this definition, unless the following criteria are met: (i) The offsetting transactions have the same explicit final settlement date under their governing agreements; (ii) The right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding; and (iii) Under the governing agreements, the counterparties intend to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement, (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where both transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement; (6) The counterparty credit risk of a repo-style transaction, including where the Enterprise acts as an agent for a repo-style transaction and indemnifies the customer with respect to the performance of the customer's counterparty in an amount limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, calculated as follows: (i) If the transaction is not subject to a qualifying master netting agreement, the counterparty credit risk (E*) for transactions with a counterparty must be calculated on a transaction by transaction basis, such that each transaction i is treated as its own netting set, in accordance with the following formula, where Ei is the fair value of the instruments, gold, or cash that the Enterprise has lent, sold subject to repurchase, or provided as collateral to the counterparty, and Ci is the fair value of the instruments, gold, or cash that the Enterprise has borrowed, purchased subject to resale, or received as collateral from the counterparty: E i i i (ii) If the transaction is subject to a qualifying master netting agreement, the counterparty credit risk (E*) must be calculated as the greater of zero and the total fair value of the instruments, gold, or cash that the Enterprise has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in the qualifying master netting agreement (ΣE i i E* = max {0, [ΣE i i (7) If an Enterprise acting as an agent for a repo-style transaction provides a guarantee to a customer of the security or cash its customer has lent or borrowed with respect to the performance of the customer's counterparty and the guarantee is not limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, the amount of the guarantee that is greater than the difference between the fair value of the security or cash its customer has lent and the value of the collateral the borrower has provided; (8) The credit equivalent amount of all off-balance sheet exposures of the Enterprise, excluding repo-style transactions, repurchase or reverse repurchase or securities borrowing or lending transactions that qualify for sales treatment under GAAP, and derivative transactions, determined using the applicable credit conversion factor under § 1240.35(b), provided, however, that the minimum credit conversion factor that may be assigned to an off-balance sheet exposure under this paragraph is 10 percent; and (9) For an Enterprise that is a clearing member: (i) A clearing member Enterprise that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its adjusted total assets; (ii) A clearing member Enterprise that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its adjusted total assets; (iii) A clearing member Enterprise that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its adjusted total assets; (iv) An Enterprise that is a clearing member may exclude from its adjusted total assets the effective notional principal amount of credit protection sold through a credit derivative contract, or other similar instrument, that it clears on behalf of a clearing member client through a CCP as calculated in accordance with paragraph (4) of this definition; and (v) Notwithstanding paragraphs (9)(i) through (iii) of this definition, an Enterprise may exclude from its adjusted total assets a clearing member's exposure to a clearing member client for a derivative contract, if the clearing member client and the clearing member are affiliates and consolidated for financial reporting purposes on the Enterprise's balance sheet. Adjusted total capital Advanced approaches total risk-weighted assets (1) The sum of: (i) Credit-risk-weighted assets for general credit risk (including for mortgage exposures), cleared transactions, default fund contributions, unsettled transactions, securitization exposures (including retained CRT exposures), equity exposures, and the fair value adjustment to reflect counterparty credit risk in valuation of OTC derivative contracts, each as calculated under § 1240.123. (ii) Risk-weighted assets for operational risk, as calculated under § 1240.162(c); and (iii) Advanced market risk-weighted assets; minus (2) Excess eligible credit reserves not included in the Enterprise's tier 2 capital. Advanced market risk-weighted assets Affiliate Allowances for loan and lease losses (ALLL) ALLL Backtesting Bankruptcy remote Basis derivative contract i.e., Carrying value Central counterparty (CCP) CFTC Clean-up call Cleared transaction (1) The following transactions are cleared transactions: (i) A transaction between a CCP and an Enterprise that is a clearing member of the CCP where the Enterprise enters into the transaction with the CCP for the Enterprise's own account; (ii) A transaction between a CCP and an Enterprise that is a clearing member of the CCP where the Enterprise is acting as a financial intermediary on behalf of a clearing member client and the transaction offsets another transaction that satisfies the requirements set forth in § 1240.3(a); (iii) A transaction between a clearing member client Enterprise and a clearing member where the clearing member acts as a financial intermediary on behalf of the clearing member client and enters into an offsetting transaction with a CCP, provided that the requirements set forth in § 1240.3(a) are met; or (iv) A transaction between a clearing member client Enterprise and a CCP where a clearing member guarantees the performance of the clearing member client Enterprise to the CCP and the transaction meets the requirements of § 1240.3(a)(2) and (3). (2) The exposure of an Enterprise that is a clearing member to its clearing member client is not a cleared transaction where the Enterprise is either acting as a financial intermediary and enters into an offsetting transaction with a CCP or where the Enterprise provides a guarantee to the CCP on the performance of the client. Clearing member Clearing member client Client-facing derivative transaction Collateral agreement (1) Under applicable law in the relevant jurisdictions, other than (i) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (1)(i) in order to facilitate the orderly resolution of the defaulting counterparty; (ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(i) of this definition; or (2) Other than to the extent necessary for the counterparty to comply with applicable law. Commercial end-user (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 Commitment Common equity tier 1 capital Company Core capital Corporate exposure (1) An exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, a multi-lateral development bank (MDB), a depository institution, a foreign bank, a credit union, or a public sector entity (PSE); (2) An exposure to a GSE; (3) A mortgage exposure; (4) A cleared transaction; (5) A default fund contribution; (6) A securitization exposure; (7) An equity exposure; (8) An unsettled transaction; or (9) A separate account. Credit default swap (CDS) Credit derivative Credit-enhancing interest-only strip (CEIO) (1) Represents a contractual right to receive some or all of the interest and no more than a minimal amount of principal due on the underlying exposures of a securitization; and (2) Exposes the holder of the CEIO to credit risk directly or indirectly associated with the underlying exposures that exceeds a pro rata share of the holder's claim on the underlying exposures, whether through subordination provisions or other credit-enhancement techniques. Credit risk mitigant Credit risk transfer (CRT) Credit union et seq. Credit valuation adjustment (CVA) CRT special purpose entity (CRT SPE) Current Expected Credit Losses (CECL) Custodian Default fund contribution Depository institution Derivative contract Discretionary bonus payment (1) The Enterprise retains discretion as to whether to make, and the amount of, the payment until the payment is awarded to the executive officer; (2) The amount paid is determined by the Enterprise without prior promise to, or agreement with, the executive officer; and (3) The executive officer has no contractual right, whether express or implied, to the bonus payment. Distribution (1) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means, except when an Enterprise, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for: (i) A common equity tier 1 capital instrument if the instrument being repurchased was part of the Enterprise's common equity tier 1 capital, or (ii) A common equity tier 1 or additional tier 1 capital instrument if the instrument being repurchased was part of the Enterprise's tier 1 capital; (2) A reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means, except when an Enterprise, within the same quarter when the repurchase or redemption is announced, fully replaces a tier 2 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument; (3) A dividend declaration or payment on any tier 1 capital instrument; (4) A dividend declaration or interest payment on any tier 2 capital instrument if the Enterprise has full discretion to permanently or temporarily suspend such payments without triggering an event of default; or (5) Any similar transaction that FHFA determines to be in substance a distribution of capital. Dodd-Frank Act Early amortization provision (1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating Enterprise (such as material changes in tax laws or regulations); or (2) Leaves investors fully exposed to future draws by borrowers on the underlying exposures even after the provision is triggered. Effective notional amount Eligible clean-up call (1) Is exercisable solely at the discretion of the originating Enterprise or servicer; (2) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and (3)(i) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding; or (ii) For a synthetic securitization or credit risk transfer, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding. Eligible credit derivative (1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider; (2) Any assignment of the contract has been confirmed by all relevant parties; (3) If the credit derivative is a credit default swap or nth-to-default swap, the contract includes the following credit events: (i) 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 (ii) Receivership, insolvency, liquidation, conservatorship or inability of the reference exposure issuer 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 contract is to be settled are incorporated into the contract; (5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure; (6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld; (7) If the credit derivative is a credit default swap or nth-to-default swap, the contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event; and (8) If the credit derivative is a total return swap and the Enterprise records net payments received on the swap as net income, the Enterprise records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves). Eligible credit reserves Eligible funded synthetic risk transfer (1) A CRT SPE that is bankruptcy remote from the Enterprise and not consolidated with the Enterprise under GAAP is contractually obligated to reimburse the Enterprise for specified losses on a reference pool of mortgage exposures of the Enterprise upon designated credit events and designated modification events; (2) The credit risk transferred to the CRT SPE is transferred to one or more third parties through two or more classes of securities of different seniority issued by the CRT SPE; (3) The performance of each class of securities issued by the CRT SPE depends on the performance of the reference pool; and (4) The proceeds of the securities issued by the CRT SPE— (i) Are, at the time of entry into the transaction, in the aggregate no less than the maximum obligation of the CRT SPE to the Enterprise; and (ii) Are invested in financial collateral that secures the payment obligations of the CRT SPE to the Enterprise. Eligible guarantee (1) Is written; (2) Is either: (i) Unconditional, or (ii) A contingent obligation of the U.S. government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements); (3) Covers all or a pro rata portion of all contractual payments of the obligated party on the reference exposure; (4) Gives the beneficiary a direct claim against the protection provider; (5) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary; (6) Except for a guarantee by a sovereign, is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced; (7) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligated party on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment; (8) Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; (9) Is not provided by an affiliate of the Enterprise; and (10) Is provided by an eligible guarantor. Eligible guarantor (1) A sovereign, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage Corporation (Farmer Mac), the European Stability Mechanism, the European Financial Stability Facility, a multilateral development bank (MDB), a depository institution, a bank holding company as defined in section 2 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq. (2) An entity (other than a special purpose entity): (i) That at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade; (ii) Whose creditworthiness is not positively correlated with the credit risk of the exposures for which it has provided guarantees; and (iii) That is not an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer). Eligible margin loan (1) An extension of credit where: (i) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, or gold; (ii) The collateral is marked-to-fair value daily, and the transaction is subject to daily margin maintenance requirements; and (iii) The extension of credit is conducted under an agreement that provides the Enterprise the right to accelerate and terminate the extension of credit and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, conservatorship, or similar proceeding, of the counterparty, provided that, in any such case: (A) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than: ( 1 1 1 1 ( 2 1 (B) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with applicable law. (2) In order to recognize an exposure as an eligible margin loan for purposes of this subpart, an Enterprise must comply with the requirements of § 1240.3(b) with respect to that exposure. Eligible multifamily lender risk share Eligible reinsurance risk transfer Eligible senior-subordinated structure Eligible single-family lender risk share Eligible time-based call (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 (3) Is exercisable no less than five years after the securitization or credit risk transfer issuance date or effective date, where the underlying collateral is mortgage exposures with amortization terms greater than 20 years. (4) Is exercisable no less than four years after the securitization or credit risk transfer issuance date or effective date, where the underlying collateral is mortgage exposures with amortization terms of 20 years or less. Equity exposure (1) A security or instrument (whether voting or non-voting and whether certificated or not certificated) that represents a direct or an indirect ownership interest in, and is a residual claim on, the assets and income of a company, unless: (i) The issuing company is consolidated with the Enterprise under GAAP; (ii) The Enterprise is required to deduct the ownership interest from tier 1 or tier 2 capital under this part; (iii) The ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to make periodic payments); or (iv) The ownership interest is a securitization exposure; (2) A security or instrument that is mandatorily convertible into a security or instrument described in paragraph (1) of this definition; (3) An option or warrant that is exercisable for a security or instrument described in paragraph (1) of this definition; or (4) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in paragraph (1) of this definition. ERISA et seq. Executive officer Exposure amount (1) For the on-balance sheet component of an exposure (including a mortgage exposure); (other than an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the Enterprise determines the exposure amount under § 1240.39; a cleared transaction; a default fund contribution; or a securitization exposure), the Enterprise's carrying value of the exposure. (2) For the off-balance sheet component of an exposure (other than an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the Enterprise calculates the exposure amount under § 1240.39; a cleared transaction; a default fund contribution; or a securitization exposure), the notional amount of the off-balance sheet component multiplied by the appropriate credit conversion factor (CCF) in § 1240.35. (3) For an exposure that is an OTC derivative contract, the exposure amount or exposure at default (EAD) determined under § 1240.36. (4) For an exposure that is a cleared transaction, the exposure amount determined under § 1240.37. (5) For an exposure that is an eligible margin loan or repo-style transaction for which the Enterprise calculates the exposure amount as provided in § 1240.39, the exposure amount determined under § 1240.39. (6) For an exposure that is a securitization exposure, the exposure amount determined under § 1240.42. Federal Deposit Insurance Act Federal Reserve Board Financial collateral (1) In the form of: (i) Cash on deposit with the Enterprise (including cash held for the Enterprise by a third-party custodian or trustee); (ii) Gold bullion; (iii) Long-term debt securities that are not resecuritization exposures and that are investment grade; (iv) Short-term debt instruments that are not resecuritization exposures and that are investment grade; (v) Equity securities that are publicly traded; (vi) Convertible bonds that are publicly traded; or (vii) Money market fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; and (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). Gain-on-sale (1) The Enterprise's receipt of cash in connection with the securitization; or (2) The reporting of a mortgage servicing asset. General obligation Government-sponsored enterprise (GSE) Guarantee Guarantee asset Independent collateral Investment grade Minimum transfer amount Mortgage-backed security (MBS) Mortgage exposure Multifamily mortgage exposure Mortgage servicing assets (MSAs) Multilateral development bank (MDB) Net independent collateral amount Netting set Non-guaranteed separate account (1) Does not contractually guarantee either a minimum return or account value to the contract holder; and (2) Is not required to hold reserves (in the general account) pursuant to its contractual obligations to a policyholder. Nth-to-default credit derivative Original maturity (1) For a commitment that is not subject to extension or renewal, the stated expiration date of the commitment; or (2) For a commitment that is subject to extension or renewal, the earliest date on which the Enterprise can, at its option, unconditionally cancel the commitment. Originating Enterprise, Over-the-counter (OTC) derivative contract (1) Between an Enterprise that is a clearing member and a counterparty where the Enterprise is acting as a financial intermediary and enters into a cleared transaction with a CCP that offsets the transaction with the counterparty; or (2) In which an Enterprise that is a clearing member provides a CCP a guarantee on the performance of the counterparty to the transaction. Participation agreement Protection amount (P) Publicly-traded (1) Any exchange registered with the SEC as a national securities exchange under section 6 of the Securities Exchange Act; or (2) Any non-U.S.-based securities exchange that: (i) Is registered with, or approved by, a national securities regulatory authority; and (ii) Provides a liquid, two-way market for the instrument in question. Public sector entity (PSE) Qualifying central counterparty (QCCP) (1)(i) Is a designated financial market utility (FMU) under Title VIII of the Dodd-Frank Act; (ii) If not located in the United States, is regulated and supervised in a manner equivalent to a designated FMU; or (iii) Meets the following standards: (A) The central counterparty requires all parties to contracts cleared by the counterparty to be fully collateralized on a daily basis; (B) The Enterprise demonstrates to the satisfaction of FHFA that the central counterparty: ( 1 ( 2 ( 3 (2)(i) Provides the Enterprise with the central counterparty's hypothetical capital requirement or the information necessary to calculate such hypothetical capital requirement, and other information the Enterprise is required to obtain under § 1240.37(d)(3); (ii) Makes available to FHFA and the CCP's regulator the information described in paragraph (2)(i) of this definition; and (iii) Has not otherwise been determined by FHFA to not be a QCCP due to its financial condition, risk profile, failure to meet supervisory risk management standards, or other weaknesses or supervisory concerns that are inconsistent with the risk weight assigned to qualifying central counterparties under § 1240.37. (3) A QCCP that fails to meet the requirements of a QCCP in the future may still be treated as a QCCP under the conditions specified in § 1240.3(f). Qualifying cross-product master netting agreement Qualifying master netting agreement (1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty; (2) The agreement provides the Enterprise the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case: (i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than: (A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; or (B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and (ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with applicable law. Repo-style transaction (1) The transaction is based solely on liquid and readily marketable securities, cash, or gold; (2) The transaction is marked-to-fair value daily and subject to daily margin maintenance requirements; (3)(i) The transaction is a “securities contract” or “repurchase agreement” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act, or a netting contract between or among financial institutions; or (ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) of this definition, then either: (A) The transaction is executed under an agreement that provides the Enterprise the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case: ( 1 ( i 1 i ( ii 1 i ( 2 (B) The transaction is: ( 1 ( 2 ( 3 Resecuritization Resecuritization exposure (1) An on- or off-balance sheet exposure to a resecuritization; or (2) An exposure that directly or indirectly references a resecuritization exposure. Retained CRT exposure Revenue obligation Securities and Exchange Commission (SEC) Securities Exchange Act Securitization exposure (1) An on-balance sheet or off-balance sheet credit exposure that arises from a traditional securitization or synthetic securitization (including a resecuritization); (2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition; (3) A retained CRT exposure; or (4) An acquired CRT exposure. Securitization special purpose entity (securitization SPE) Separate account (1) The account must be legally recognized as a separate account under applicable law; (2) The assets in the account must be insulated from general liabilities of the insurance company under applicable law in the event of the insurance company's insolvency; (3) The insurance company must invest the funds within the account as directed by the contract holder in designated investment alternatives or in accordance with specific investment objectives or policies; and (4) All investment gains and losses, net of contract fees and assessments, must be passed through to the contract holder, provided that the contract may specify conditions under which there may be a minimum guarantee but must not include contract terms that limit the maximum investment return available to the policyholder. Servicer cash advance facility Single-family mortgage exposure Sovereign Sovereign default Sovereign exposure (1) A direct exposure to a sovereign; or (2) An exposure directly and unconditionally backed by the full faith and credit of a sovereign. Specific wrong-way risk (1) The counterparty and issuer of the collateral supporting the transaction; or (2) The counterparty and the reference asset of the transaction, are affiliates or are the same entity. Speculative grade Standardized market risk-weighted assets Standardized total risk-weighted assets (1) The sum of— (i) Total risk-weighted assets for general credit risk as calculated under § 1240.31; (ii) Total risk-weighted assets for cleared transactions and default fund contributions as calculated under § 1240.37; (iii) Total risk-weighted assets for unsettled transactions as calculated under § 1240.40; (iv) Total risk-weighted assets for retained CRT exposures, acquired CRT exposures, and other securitization exposures as calculated under § 1240.42; (v) Total risk-weighted assets for equity exposures as calculated under § 1240.52; (vi) Credit valuation adjustment (CVA) risk-weighted assets as calculated under § 1240.36(d); (vii) Risk-weighted assets for operational risk, as calculated under § 1240.162(c) or § 1240.162(d), as applicable; and (viii) Standardized market risk-weighted assets, as calculated under § 1240.204; minus (2) Excess eligible credit reserves not included in the Enterprise's tier 2 capital. Subsidiary Sub-speculative grade Synthetic securitization (1) All or a portion of the credit risk of one or more underlying exposures is retained or transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual mortgage exposure or other retail exposure); (2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; and (4) All or substantially all of the underlying exposures are financial exposures (such as mortgage exposures, loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities). Tier 1 capital Tier 2 capital Time-based call Total capital Traditional securitization (1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees; (2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; (4) All or substantially all of the underlying exposures are financial exposures (such as mortgage exposures, loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities); (5) The underlying exposures are not owned by an operating company; (6) The underlying exposures are not owned by a small business investment company defined in section 302 of the Small Business Investment Act; (7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under section 24 (Eleventh) of the National Bank Act; (8) FHFA may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a traditional securitization based on the transaction's leverage, risk profile, or economic substance; (9) FHFA may deem a transaction that meets the definition of a traditional securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a traditional securitization based on the transaction's leverage, risk profile, or economic substance; and (10) The transaction is not: (i) An investment fund; (ii) A collective investment fund held by a State member bank as fiduciary and, consistent with local law, invested collectively— (A) In a common trust fund maintained by such bank exclusively for the collective investment and reinvestment of monies contributed thereto by the bank in its capacity as trustee, executor, administrator, guardian, or custodian under the Uniform Gifts to Minors Act; or (B) In a fund consisting solely of assets of retirement, pension, profit sharing, stock bonus or similar trusts which are exempt from Federal income taxation under the Internal Revenue Code (26 U.S.C.). (iii) An employee benefit plan (as defined in 29 U.S.C. 1002(3)), a governmental plan (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code; (iv) A synthetic exposure to the capital of a financial institution to the extent deducted from capital under § 1240.22; or (v) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. Tranche Transition order Unconditionally cancelable Underlying exposures Uniform Mortgage-backed Security (UMBS) Value-at-Risk (VaR) Variation margin Variation margin agreement Variation margin amount Variation margin threshold Volatility derivative contract Wrong-way risk [85 FR 82198, Dec. 17, 2020, as amended at 87 FR 14770, Mar. 16, 2022; 88 FR 83474, Nov. 30, 2023] § 1240.3 Operational requirements for counterparty credit risk. For purposes of calculating risk-weighted assets under subpart D of this part: (a) Cleared transaction. (1) The offsetting transaction must be identified by the CCP as a transaction for the clearing member client. (2) The collateral supporting the transaction must be held in a manner that prevents the Enterprise from facing any loss due to an event of default, including from a liquidation, receivership, insolvency, or similar proceeding of either the clearing member or the clearing member's other clients. (3) The Enterprise must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from a default or receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the arrangements of paragraph (a)(2) of this section to be legal, valid, binding and enforceable under the law of the relevant jurisdictions. (4) The offsetting transaction with a clearing member must be transferable under the transaction documents and applicable laws in the relevant jurisdiction(s) to another clearing member should the clearing member default, become insolvent, or enter receivership, insolvency, liquidation, or similar proceedings. (b) Eligible margin loan. (1) Meets the requirements of paragraph (1)(iii) of the definition of “eligible margin loan” in § 1240.2, and (2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. (c) [Reserved] (d) Qualifying master netting agreement. (1) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that: (i) The agreement meets the requirements of paragraph (2) of the definition of “qualifying master netting agreement” in § 1240.2; and (ii) In the event of a legal challenge (including one resulting from default or from receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and (2) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of the definition of “qualifying master netting agreement” in § 1240.2. (e) Repo-style transaction. (1) Meets the requirements of paragraph (3) of the definition of “repo-style transaction” in § 1240.2, and (2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. (f) Failure of a QCCP to satisfy the rule's requirements. § 1240.4 Transition. (a) Compliance dates. (b) Reporting requirements. (2) For any reporting requirement under §§ 1240.61 through 1240.63, the compliance date will be no later than 10 business days after an Enterprise files its Annual Report on SEC Form 10-K for the fiscal year ending December 31, 2022. (3) For any reporting requirement under § 1240.205, the compliance date will be no later than 10 business days after an Enterprise files its Annual Report on SEC Form 10-K for the fiscal year ending December 31, 2022. (c) Advanced approaches requirements. (d) Capital requirements and buffers Requirements. (i) The date of the termination of the conservatorship of the Enterprise (or, if later, the effective date of this part); and (ii) Any later compliance date for § 1240.10 provided in a transition order applicable to the Enterprise. (2) Buffers. (3) Capital restoration plan. (i) The prescribed capital conservation buffer amount of the Enterprise will be the amount equal to the sum of— (A) The common equity tier 1 capital that would otherwise be required under § 1240.10(d); and (B) The prescribed capital conservation buffer amount that would otherwise apply under § 1240.11(a)(5); and (ii) The prescribed leverage buffer amount of the Enterprise will be equal to 4.0 percent of the adjusted total assets of the Enterprise. (4) Prudential standard. [85 FR 82198, Dec. 17, 2020, as amended at 87 FR 33429, June 2, 2022; 88 FR 83476, Nov. 30, 2023] Subpart B—Capital Requirements and Buffers § 1240.10 Capital requirements. (a) Total capital. (1) Standardized total risk-weighted assets; and (2) Advanced approaches total risk-weighted assets. (b) Adjusted total capital. (1) Standardized total risk-weighted assets; and (2) Advanced approaches total risk-weighted assets. (c) Tier 1 capital. (1) Standardized total risk-weighted assets; and (2) Advanced approaches total risk-weighted assets. (d) Common equity tier 1 capital. (1) Standardized total risk-weighted assets; and (2) Advanced approaches total risk-weighted assets. (e) Core capital. (f) Leverage ratio. (g) Capital adequacy. (2) An Enterprise must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital. § 1240.11 Capital conservation buffer and leverage buffer. (a) Definitions. (1) Capital conservation buffer. (2) Eligible retained income. (i) The Enterprise's net income, as defined under GAAP, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (ii) The average of the Enterprise's net income for the four calendar quarters preceding the current calendar quarter. (3) Leverage buffer. (4) Maximum payout ratio. (5) Prescribed capital conservation buffer amount. (6) Prescribed leverage buffer amount. (7) Stress capital buffer. (ii) If an Enterprise has not yet received a stress capital buffer requirement, its stress capital buffer for purposes of this part is 0.75 percent of the Enterprise's adjusted total assets, as of the last day of the previous calendar quarter. (b) Maximum payout amount Limits on distributions and discretionary bonus payments. (2) Maximum payout ratio. (3) No maximum payout amount limitation. (i) A capital conservation buffer that is greater than its prescribed capital conservation buffer amount; and (ii) A leverage buffer that is greater than its prescribed leverage buffer amount. (4) Negative eligible retained income. (i) The eligible retained income of the Enterprise is negative; and (ii) Either: (A) The capital conservation buffer of the Enterprise was less than its stress capital buffer; or (B) The leverage buffer of the Enterprise was less than its prescribed leverage buffer amount. (5) Prior approval. (c) Capital conservation buffer Composition of the capital conservation buffer. (2) Calculation of capital conservation buffer. (A) The Enterprise's adjusted total capital minus the minimum amount of adjusted total capital under § 1240.10(b); (B) The Enterprise's tier 1 capital minus the minimum amount of tier 1 capital under § 1240.10(c); or (C) The Enterprise's common equity tier 1 capital minus the minimum amount of common equity tier 1 capital under § 1240.10(d). (ii) Notwithstanding paragraphs (c)(2)(i)(A) through (C) of this section, if the Enterprise's adjusted total capital, tier 1 capital, or common equity tier 1 capital is less than or equal to the Enterprise's minimum adjusted total capital, tier 1 capital, or common equity tier 1 capital, respectively, the Enterprise's capital conservation buffer is zero. (d) Leverage buffer Composition of the leverage buffer. (2) Calculation of the leverage buffer. (ii) Notwithstanding paragraph (d)(2)(i) of this section, if the Enterprise's tier 1 capital is less than or equal to the minimum amount of tier 1 capital under § 1240.10(d), the Enterprise's leverage buffer is zero. (e) Countercyclical capital buffer amount Composition of the countercyclical capital buffer amount. (2) Amount Initial countercyclical capital buffer. (ii) Adjustment of the countercyclical capital buffer amount. (iii) Range of countercyclical capital buffer amount. (iv) Adjustment determination. (3) Effective date of adjusted countercyclical capital buffer amount Increase adjustment. (ii) Decrease adjustment. (iii) Twelve month sunset. (f) Stability capital buffer. [85 FR 82198, Dec. 17, 2020, as amended at 87 FR 14770, Mar. 16, 2022; 87 FR 33617, June 3, 2022] Subpart C—Definition of Capital § 1240.20 Capital components and eligibility criteria for regulatory capital instruments. (a) Regulatory capital components. (1) Common equity tier 1 capital; (2) Additional tier 1 capital; (3) Tier 2 capital; (4) Core capital; and (5) Total capital. (b) Common equity tier 1 capital. (1) Any common stock instruments (plus any related surplus) issued by the Enterprise, net of treasury stock, that meet all the following criteria: (i) The instrument is paid-in, issued directly by the Enterprise, and represents the most subordinated claim in a receivership, insolvency, liquidation, or similar proceeding of the Enterprise; (ii) The holder of the instrument is entitled to a claim on the residual assets of the Enterprise that is proportional with the holder's share of the Enterprise's issued capital after all senior claims have been satisfied in a receivership, insolvency, liquidation, or similar proceeding; (iii) The instrument has no maturity date, can only be redeemed via discretionary repurchases with the prior approval of FHFA to the extent otherwise required by law or regulation, and does not contain any term or feature that creates an incentive to redeem; (iv) The Enterprise did not create at issuance of the instrument through any action or communication an expectation that it will buy back, cancel, or redeem the instrument, and the instrument does not include any term or feature that might give rise to such an expectation; (v) Any cash dividend payments on the instrument are paid out of the Enterprise's net income, retained earnings, or surplus related to common stock, and are not subject to a limit imposed by the contractual terms governing the instrument. (vi) The Enterprise has full discretion at all times to refrain from paying any dividends and making any other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restrictions on the Enterprise; (vii) Dividend payments and any other distributions on the instrument may be paid only after all legal and contractual obligations of the Enterprise have been satisfied, including payments due on more senior claims; (viii) The holders of the instrument bear losses as they occur equally, proportionately, and simultaneously with the holders of all other common stock instruments before any losses are borne by holders of claims on the Enterprise with greater priority in a receivership, insolvency, liquidation, or similar proceeding; (ix) The paid-in amount is classified as equity under GAAP; (x) The Enterprise, or an entity that the Enterprise controls, did not purchase or directly or indirectly fund the purchase of the instrument; (xi) The instrument is not secured, not covered by a guarantee of the Enterprise or of an affiliate of the Enterprise, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (xii) The instrument has been issued in accordance with applicable laws and regulations; and (xiii) The instrument is reported on the Enterprise's regulatory financial statements separately from other capital instruments. (2) Retained earnings. (3) Accumulated other comprehensive income (AOCI) as reported under GAAP. 1 1 See (4) Notwithstanding the criteria for common stock instruments referenced above, an Enterprise's common stock issued and held in trust for the benefit of its employees as part of an employee stock ownership plan does not violate any of the criteria in paragraph (b)(1)(iii), (iv), or (xi) of this section, provided that any repurchase of the stock is required solely by virtue of ERISA for an instrument of an Enterprise that is not publicly-traded. In addition, an instrument issued by an Enterprise to its employee stock ownership plan does not violate the criterion in paragraph (b)(1)(x) of this section. (c) Additional tier 1 capital. (1) Subject to paragraph (e)(2) of this section, instruments (plus any related surplus) that meet the following criteria: (i) The instrument is issued and paid-in; (ii) The instrument is subordinated to general creditors and subordinated debt holders of the Enterprise in a receivership, insolvency, liquidation, or similar proceeding; (iii) The instrument is not secured, not covered by a guarantee of the Enterprise or of an affiliate of the Enterprise, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iv) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem; and (v) If callable by its terms, the instrument may be called by the Enterprise only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called earlier than five years upon the occurrence of a regulatory event that precludes the instrument from being included in additional tier 1 capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (A) The Enterprise must receive prior approval from FHFA to exercise a call option on the instrument. (B) The Enterprise does not create at issuance of the instrument, through any action or communication, an expectation that the call option will be exercised. (C) Prior to exercising the call option, or immediately thereafter, the Enterprise must either: Replace the instrument to be called with an equal amount of instruments that meet the criteria under paragraph (b) of this section or this paragraph (c); 2 2 (vi) Redemption or repurchase of the instrument requires prior approval from FHFA. (vii) The Enterprise has full discretion at all times to cancel dividends or other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of other restrictions on the Enterprise except in relation to any distributions to holders of common stock or instruments that are pari passu (viii) Any distributions on the instrument are paid out of the Enterprise's net income, retained earnings, or surplus related to other additional tier 1 capital instruments. (ix) The instrument does not have a credit-sensitive feature, such as a dividend rate that is reset periodically based in whole or in part on the Enterprise's credit quality, but may have a dividend rate that is adjusted periodically independent of the Enterprise's credit quality, in relation to general market interest rates or similar adjustments. (x) The paid-in amount is classified as equity under GAAP. (xi) The Enterprise, or an entity that the Enterprise controls, did not purchase or directly or indirectly fund the purchase of the instrument. (xii) The instrument does not have any features that would limit or discourage additional issuance of capital by the Enterprise, such as provisions that require the Enterprise to compensate holders of the instrument if a new instrument is issued at a lower price during a specified time frame. (xiii) If the instrument is not issued directly by the Enterprise or by a subsidiary of the Enterprise that is an operating entity, the only asset of the issuing entity is its investment in the capital of the Enterprise, and proceeds must be immediately available without limitation to the Enterprise or to the Enterprise's top-tier holding company in a form which meets or exceeds all of the other criteria for additional tier 1 capital instruments. 3 3 De minimis (xiv) The governing agreement, offering circular, or prospectus of an instrument issued after February 16, 2021 must disclose that the holders of the instrument may be fully subordinated to interests held by the U.S. government in the event that the Enterprise enters into a receivership, insolvency, liquidation, or similar proceeding. (2) Notwithstanding the criteria for additional tier 1 capital instruments referenced above, an instrument issued by an Enterprise and held in trust for the benefit of its employees as part of an employee stock ownership plan does not violate any of the criteria in paragraph (c)(1)(iii) of this section, provided that any repurchase is required solely by virtue of ERISA for an instrument of an Enterprise that is not publicly-traded. In addition, an instrument issued by an Enterprise to its employee stock ownership plan does not violate the criteria in paragraphs (c)(1)(v) or (c)(1)(xi) of this section. (d) Tier 2 capital. (1) Subject to paragraph (e)(2) of this section, instruments (plus related surplus) that meet the following criteria: (i) The instrument is issued and paid-in. (ii) The instrument is subordinated to general creditors of the Enterprise. (iii) The instrument is not secured, not covered by a guarantee of the Enterprise or of an affiliate of the Enterprise, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims. (iv) The instrument has a minimum original maturity of at least five years. At the beginning of each of the last five years of the life of the instrument, the amount that is eligible to be included in tier 2 capital is reduced by 20 percent of the original amount of the instrument (net of redemptions) and is excluded from regulatory capital when the remaining maturity is less than one year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the Enterprise to redeem the instrument prior to maturity. 4 4 (v) The instrument, by its terms, may be called by the Enterprise only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in tier 2 capital, a tax event. In addition: (A) The Enterprise must receive the prior approval of FHFA to exercise a call option on the instrument. (B) The Enterprise does not create at issuance, through action or communication, an expectation the call option will be exercised. (C) Prior to exercising the call option, or immediately thereafter, the Enterprise must either: Replace any amount called with an equivalent amount of an instrument that meets the criteria for regulatory capital under this section; 5 5 (vi) The holder of the instrument must have no contractual right to accelerate payment of principal or interest on the instrument, except in the event of a receivership, insolvency, liquidation, or similar proceeding of the Enterprise. (vii) The instrument has no credit-sensitive feature, such as a dividend or interest rate that is reset periodically based in whole or in part on the Enterprise's credit standing, but may have a dividend rate that is adjusted periodically independent of the Enterprise's credit standing, in relation to general market interest rates or similar adjustments. (viii) The Enterprise, or an entity that the Enterprise controls, has not purchased and has not directly or indirectly funded the purchase of the instrument. (ix) If the instrument is not issued directly by the Enterprise or by a subsidiary of the Enterprise that is an operating entity, the only asset of the issuing entity is its investment in the capital of the Enterprise, and proceeds must be immediately available without limitation to the Enterprise or the Enterprise's top-tier holding company in a form that meets or exceeds all the other criteria for tier 2 capital instruments under this section. 6 6 de minimis (x) Redemption of the instrument prior to maturity or repurchase requires the prior approval of FHFA. (xi) The governing agreement, offering circular, or prospectus of an instrument issued after February 16, 2021 must disclose that the holders of the instrument may be fully subordinated to interests held by the U.S. government in the event that the Enterprise enters into a receivership, insolvency, liquidation, or similar proceeding. (2) Any eligible credit reserves that exceed expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of credit risk-weighted assets. (e) FHFA approval of a capital element. (i) Was included in an Enterprise's tier 1 capital or tier 2 capital prior to June 30, 2020 and the underlying instrument may continue to be included under the criteria set forth in this section; or (ii) Is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a regulatory capital element FHFA determined may be included in regulatory capital pursuant to paragraph (e)(3) of this section. (2) An Enterprise may not include an instrument in its additional tier 1 capital or a tier 2 capital unless FHFA has determined that the Enterprise has made appropriate provision, including in any resolution plan of the Enterprise, to ensure that the instrument would not pose a material impediment to the ability of an Enterprise to issue common stock instruments following the appointment of FHFA as conservator or receiver under the Safety and Soundness Act. (3) After determining that a regulatory capital element may be included in an Enterprise's common equity tier 1 capital, additional tier 1 capital, or tier 2 capital, FHFA will make its decision publicly available, including a brief description of the material terms of the regulatory capital element and the rationale for the determination. (f) FHFA prior approval. § 1240.21 [Reserved] § 1240.22 Regulatory capital adjustments and deductions. (a) Regulatory capital deductions from common equity tier 1 capital. (1) Goodwill, net of associated deferred tax liabilities (DTLs) in accordance with paragraph (e) of this section; (2) Intangible assets, other than MSAs, net of associated DTLs in accordance with paragraph (e) of this section; (3) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances and net of DTLs in accordance with paragraph (e) of this section; (4) Any gain-on-sale in connection with a securitization exposure; (5) Any defined benefit pension fund net asset, net of any associated DTL in accordance with paragraph (e) of this section, held by the Enterprise. With the prior approval of FHFA, this deduction is not required for any defined benefit pension fund net asset to the extent the Enterprise has unrestricted and unfettered access to the assets in that fund. An Enterprise must risk weight any portion of the defined benefit pension fund asset that is not deducted under this paragraph (a) as if the Enterprise directly holds a proportional ownership share of each exposure in the defined benefit pension fund. (6) The amount of expected credit loss that exceeds its eligible credit reserves. (b) Regulatory adjustments to common equity tier 1 capital. (i) An Enterprise must deduct any accumulated net gains and add any accumulated net losses on cash flow hedges included in AOCI that relate to the hedging of items that are not recognized at fair value on the balance sheet. (ii) An Enterprise must deduct any net gain and add any net loss related to changes in the fair value of liabilities that are due to changes in the Enterprise's own credit risk. An Enterprise must deduct the difference between its credit spread premium and the risk-free rate for derivatives that are liabilities as part of this adjustment. (2) [Reserved] (c) Deductions from regulatory capital related to investments in capital instruments. 1 1 (1) An Enterprise must deduct an investment in the Enterprise's own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 1240.20(b)(1); (2) An Enterprise must deduct an investment in the Enterprise's own additional tier 1 capital instruments from its additional tier 1 capital elements; and (3) An Enterprise must deduct an investment in the Enterprise's own tier 2 capital instruments from its tier 2 capital elements. (d) Items subject to the 10 and 15 percent common equity tier 1 capital deduction thresholds. (i) DTAs arising from temporary differences that the Enterprise could not realize through net operating loss carrybacks, net of any related valuation allowances and net of DTLs, in accordance with paragraph (e) of this section. An Enterprise is not required to deduct from the sum of its common equity tier 1 capital elements DTAs (net of any related valuation allowances and net of DTLs, in accordance with paragraph (e) of this section) arising from timing differences that the Enterprise could realize through net operating loss carrybacks. The Enterprise must risk weight these assets at 100 percent. (ii) MSAs net of associated DTLs, in accordance with paragraph (e) of this section. (2) An Enterprise must deduct from common equity tier 1 capital elements the items listed in paragraph (d)(1) of this section that are not deducted as a result of the application of the 10 percent common equity tier 1 capital deduction threshold, and that, in aggregate, exceed 17.65 percent of the sum of the Enterprise's common equity tier 1 capital elements, minus adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c) of this section, minus the items listed in paragraph (d)(1) of this section (the 15 percent common equity tier 1 capital deduction threshold). 2 2 (3) For purposes of calculating the amount of DTAs subject to the 10 and 15 percent common equity tier 1 capital deduction thresholds, an Enterprise may exclude DTAs and DTLs relating to adjustments made to common equity tier 1 capital under paragraph (b) of this section. An Enterprise that elects to exclude DTAs relating to adjustments under paragraph (b) of this section also must exclude DTLs and must do so consistently in all future calculations. An Enterprise may change its exclusion preference only after obtaining the prior approval of FHFA. (e) Netting of DTLs against assets subject to deduction. (i) The DTL is associated with the asset; and (ii) The DTL would be extinguished if the associated asset becomes impaired or is derecognized under GAAP. (2) A DTL may only be netted against a single asset. (3) For purposes of calculating the amount of DTAs subject to the threshold deduction in paragraph (d) of this section, the amount of DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and of DTAs arising from temporary differences that the Enterprise could not realize through net operating loss carrybacks, net of any related valuation allowances, may be offset by DTLs (that have not been netted against assets subject to deduction pursuant to paragraph (e)(1) of this section) subject to the conditions set forth in this paragraph (e). (i) Only the DTAs and DTLs that relate to taxes levied by the same taxation authority and that are eligible for offsetting by that authority may be offset for purposes of this deduction. (ii) The amount of DTLs that the Enterprise nets against DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and against DTAs arising from temporary differences that the Enterprise could not realize through net operating loss carrybacks, net of any related valuation allowances, must be allocated in proportion to the amount of DTAs that arise from net operating loss and tax credit carryforwards (net of any related valuation allowances, but before any offsetting of DTLs) and of DTAs arising from temporary differences that the Enterprise could not realize through net operating loss carrybacks (net of any related valuation allowances, but before any offsetting of DTLs), respectively. (4) An Enterprise must net DTLs against assets subject to deduction under this section in a consistent manner from reporting period to reporting period. An Enterprise may change its preference regarding the manner in which it nets DTLs against specific assets subject to deduction under this section only after obtaining the prior approval of FHFA. (f) Insufficient amounts of a specific regulatory capital component to effect deductions. (g) Treatment of assets that are deducted. Subpart D—Risk-Weighted Assets—Standardized Approach § 1240.30 Applicability. (a) This subpart sets forth methodologies for determining risk-weighted assets for purposes of the generally applicable risk-based capital requirements for the Enterprises. (b) This subpart is also applicable to covered positions, as defined in subpart F of this part. Risk-Weighted Assets for General Credit Risk § 1240.31 Mechanics for calculating risk-weighted assets for general credit risk. (a) General risk-weighting requirements. (1) An Enterprise must determine the exposure amount of each mortgage exposure, each other on-balance sheet exposure, each OTC derivative contract, and each off-balance sheet commitment, trade and transaction-related contingency, guarantee, repo-style transaction, forward agreement, or other similar transaction that is not: (i) An unsettled transaction subject to § 1240.40; (ii) A cleared transaction subject to § 1240.37; (iii) A default fund contribution subject to § 1240.37; (iv) A retained CRT exposure, acquired CRT exposure, or other securitization exposure subject to §§ 1240.41 through 1240.46; (v) An equity exposure (other than an equity OTC derivative contract) subject to §§ 1240.51 and 1240.52; or (vi) CVA risk-weighted assets subject to § 1240.36(d). (2) An Enterprise must multiply each exposure amount by the risk weight appropriate to the exposure based on the exposure type or counterparty, eligible guarantor, or financial collateral to determine the risk-weighted asset amount for each exposure. (b) Total risk-weighted assets for general credit risk. [88 FR 82198, Dec. 17, 2020, as amended at 88 FR 83476, Nov. 30, 2023] § 1240.32 General risk weights. (a) Exposures to the U.S. government. (i) An exposure to the U.S. government, its central bank, or a U.S. government agency; and (ii) The portion of an exposure that is directly and unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency. This includes a deposit or other exposure, or the portion of a deposit or other exposure, that is insured or otherwise unconditionally guaranteed by the FDIC or NCUA. (2) An Enterprise must assign a 20 percent risk weight to the portion of an exposure that is conditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency. This includes an exposure, or the portion of an exposure, that is conditionally guaranteed by the FDIC or NCUA. (b) Certain supranational entities and multilateral development banks (MDBs). (c) Exposures to GSEs. (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. (d) Exposures to depository institutions and credit unions. (2) An Enterprise must assign a 100 percent risk weight to an exposure to a financial institution if the exposure may be included in that financial institution's capital unless the exposure is: (i) An equity exposure; or (ii) Deducted from regulatory capital under § 1240.22. (e) Exposures to U.S. public sector entities (PSEs). (2) An Enterprise must assign a 50 percent risk weight to a revenue obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof. (f) Corporate exposures. (2) An Enterprise must assign a 2 percent risk weight to an exposure to a QCCP arising from the Enterprise posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 1240.37(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP arising from the Enterprise posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 1240.37(b)(3)(i)(B). (3) An Enterprise must assign a 2 percent risk weight to an exposure to a QCCP arising from the Enterprise posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 1240.37(c)(3)(i). (g) Residential mortgage exposures Single-family mortgage exposures. (2) Multifamily mortgage exposures. (h) Past due exposures. (1) An Enterprise must assign a 150 percent risk weight to the portion of the exposure that is not guaranteed or that is unsecured; (2) An Enterprise may assign a risk weight to the guaranteed portion of a past due exposure based on the risk weight that applies under § 1240.38 if the guarantee or credit derivative meets the requirements of that section; and (3) An Enterprise may assign a risk weight to the collateralized portion of a past due exposure based on the risk weight that applies under § 1240.39 if the collateral meets the requirements of that section. (i) Other assets. (2) An Enterprise must assign a 20 percent risk weight to cash items in the process of collection. (3) An Enterprise must assign a 100 percent risk weight to DTAs arising from temporary differences that the Enterprise could realize through net operating loss carrybacks. (4) An Enterprise must assign a 250 percent risk weight to the portion of each of the following items to the extent it is not deducted from common equity tier 1 capital pursuant to § 1240.22(d): (i) MSAs; and (ii) DTAs arising from temporary differences that the Enterprise could not realize through net operating loss carrybacks. (5) An Enterprise must assign a 20 percent risk weight to guarantee assets. (6) An Enterprise must assign a 100 percent risk weight to all assets not specifically assigned a different risk weight under this subpart and that are not deducted from tier 1 or tier 2 capital pursuant to § 1240.22. (j) Insurance assets. (2) An Enterprise must assign a zero percent risk weight to an asset that is held in a non-guaranteed separate account. [85 FR 82198, Dec. 17, 2020, as amended at 88 FR 83476, Nov. 30, 2023] § 1240.33 Single-family mortgage exposures. (a) Definitions. Adjusted MTMLTV (i) The MTMLTV of the single-family mortgage exposure (or, if the loan age of the single-family mortgage exposure is less than 6, the OLTV of the single-family mortgage exposure); divided by (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. Approved insurer Cancelable mortgage insurance Charter-level coverage Cohort burnout Coverage percent COVID-19-related forbearance Days past due Debt-to-income ratio (DTI) Deflated HPI (i) The national, not-seasonally adjusted Expanded-Data FHFA House Price Index® as of the end of the preceding calendar quarter; divided by (ii) The average of the three monthly observations of the preceding calendar quarter from the non-seasonally adjusted Consumer Price Index for All Urban Consumers, U.S. City Average, All Items Less Shelter. Guide Guide-level coverage Interest-only (IO) Loan age Loan-level credit enhancement (i) Mortgage insurance; or (ii) A participation agreement. Loan documentation Loan purpose Long-term HPI trend e (0.002619948*t) Where t 1 1 Long-term trend departure (i) The deflated HPI as of that time divided by the long-term HPI trend as of that time; minus (ii) 1.0. MI cancelation feature Modification Modified re-performing loan (modified RPL) Months since last modification Mortgage concentration risk MTMLTV (i) The unpaid principal balance of the single-family mortgage exposure; divided by (ii) The amount equal to: (A) The unpaid principal balance of the single-family mortgage exposure at origination; divided by (B) The OLTV of the single-family mortgage exposure; multiplied by (C) The most recently available FHFA Purchase-only State-level House Price Index of the State in which the property securing the single-family mortgage exposure is located; divided by (D) The FHFA Purchase-only State-level House Price Index, as of date of the origination of the single-family mortgage exposure, in which the property securing the single-family mortgage exposure is located. Non-cancelable mortgage insurance Non-modified re-performing loan (non-modified RPL) Non-performing loan (NPL) Occupancy type Original credit score OLTV (original loan-to-value) (i) The unpaid principal balance of the single-family mortgage exposure at origination; divided by (ii) The lesser of: (A) The appraised value of the property securing the single-family mortgage exposure; and (B) The sale price of the property securing the single-family mortgage exposure. Origination channel Participation agreement Past due Payment change from modification (i) The amount equal to: (A) The monthly payment of a single-family mortgage exposure after a modification; divided by (B) The monthly payment of the single-family mortgage exposure before the modification; minus (ii) 1.0. Performing loan Previous maximum days past due Product type Property type Refinance opportunity Refreshed credit score Single-family countercyclical adjustment (i) If the long-term trend departure as of that time is greater than 5 percent, the percent amount equal to: (A) 1.05 multiplied by the long-term HPI trend, as of that time, divided by the deflated HPI, as of that time, minus (B) 1.0. (ii) If the long-term trend departure as of that time is less than −5 percent, the percent amount equal to: (A) 0.95 multiplied by the long-term HPI trend, as of that time, divided by the deflated HPI, as of that time, minus (B) 1.0. Streamlined refi Subordination Table 1 to Paragraph ( a Defined term Permissible values Additional instructions Cohort burnout “No burnout,” if the single-family mortgage exposure has not had a refinance opportunity since the loan age of the single-family mortgage exposure was 6. High if unable to determine. “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 <= 100 percent 0 percent if outside of permissible 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/term refinance Cashout refinance if unable to 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. MI cancellation feature Cancellable mortgage insurance, non-cancellable mortgage insurance Cancellable mortgage insurance, if unable to determine. Occupancy type Investment, owner-occupied, second home Investment if unable to determine. 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 If there are credit scores from multiple credit repositories for a borrower, use the following logic to determine a single original credit score: • If there are credit scores from two repositories, take the lower credit score. • If there are credit scores from three repositories, use the middle credit score. • If there are credit scores from three repositories and two of the credit scores are identical, use the identical credit score. If there are multiple borrowers, use the following logic to determine a single original credit score: • Using the logic above, determine a single credit score for each borrower. • Select the lowest single credit score across all borrowers. 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. 600 if outside of permissible range or unable to determine. Origination channel Retail, third-party origination (TPO) TPO includes broker and correspondent channels. TPO if unable to determine. Payment change from modification −80 percent < payment change from modification < 50 percent If the single-family mortgage 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-family mortgage exposure with an original amortization term greater than 309 months and less than or equal to 429 months Product types other than FRM30, FRM20, FRM15 or ARM 1/1 should be assigned to FRM30. Property type 1-unit, 2-4 units, condominium, manufactured home Use condominium for cooperatives. Refreshed credit score 300 <= refreshed credit score <= 850 If there are credit scores from multiple credit repositories for a borrower, use the following logic to determine a single refreshed credit score: • If there are credit scores from two repositories, take the lower credit score. • If there are credit scores from three repositories, use the middle credit score. • If there are credit scores from three repositories and two of the credit scores are identical, use the identical credit score. If there are multiple borrowers, use the following logic to determine a single Refreshed Credit Score: • Using the logic above, determine a single credit score for each borrower. • Select the lowest single credit score across all borrowers. 600 if outside of permissible range or unable to determine. Streamlined refi Yes, no No if unable to determine. Subordination 0 percent <= Subordination <= 80 percent 80 percent if outside permissible range. (b) Risk weight In general. (i) The base risk weight for the single-family mortgage exposure as determined under paragraph (c) of this section; multiplied by (ii) The combined risk multiplier for the single-family mortgage exposure as determined under paragraph (d) of this section; multiplied by (iii) The adjusted credit enhancement multiplier for the single-family mortgage exposure as determined under paragraph (e) of this section. (2) Minimum risk weight. (c) Base risk weight Performing loan. (i) The original credit score of the single-family mortgage exposure, if the loan age of the single-family mortgage exposure is less than 6; or (ii) The refreshed credit score of the single-family mortgage exposure. (2) Non-modified RPL. (3) Modified RPL. (i) The months since last modification of the modified RPL; and (ii) The number of scheduled payment dates since the modified RPL was last an NPL. (4) NPL. (d) Combined risk multiplier In general. (2) Maximum combined risk multiplier. Table 6 to Paragraph (d)(2) Risk factor Value or range Single-family segment Performing Non- Modified NPL Loan Purpose Purchase 1.0 1.0 1.0 Cashout refinance 1.4 1.4 1.4 Rate/term refinance 1.3 1.2 1.3 Occupancy Type Owner-occupied or second home 1.0 1.0 1.0 1.0 Investment 1.2 1.5 1.3 1.2 Property Type 1-unit 1.0 1.0 1.0 1.0 2-4 unit 1.4 1.4 1.3 1.1 Condominium 1.1 1.0 1.0 1.0 Manufactured home 1.3 1.8 1.6 1.2 Origination Channel Retail 1.0 1.0 1.0 1.0 TPO 1.1 1.1 1.1 1.0 DTI DTI <= 25% 0.8 0.9 0.9 25% < DTI <= 40% 1.0 1.0 1.0 DTI >40% 1.2 1.2 1.1 Product Type FRM30 1.0 1.0 1.0 1.0 ARM1/1 1.7 1.1 1.0 1.1 FRM15 0.3 0.3 0.5 0.5 FRM20 0.6 0.6 0.5 0.8 Subordination No subordination 1.0 1.0 1.0 30% < OLTV <= 60% and 0% <subordination <= 5% 1.1 0.8 1.0 30% < OLTV <= 60% and subordination >5% 1.5 1.1 1.2 OLTV >60% and 0% <subordination <= 5% 1.1 1.2 1.1 OLTV >60% and subordination >5% 1.4 1.5 1.3 Loan Age Loan age <= 24 months 1.0 24 months <loan age <= 36 months 0.95 36 months <loan Age <= 60 months 0.80 Loan age >60 months 0.75 Cohort Burnout No burnout 1.0 Low 1.2 Medium 1.3 High 1.4 Interest-only No IO 1.0 1.0 1.0 Yes IO 1.6 1.4 1.1 Loan Documentation Full 1.0 1.0 1.0 None or low 1.3 1.3 1.2 Streamlined Refi No 1.0 1.0 1.0 Yes 1.0 1.2 1.1 Refreshed Credit Score for Modified RPLs and Non-modified RPLs Refreshed credit score <620 1.6 1.4 640 <= refreshed credit score <660 1.2 1.1 660 <= refreshed credit score <700 1.0 1.0 700 <= refreshed credit score <720 0.7 0.8 720 <= refreshed credit score <740 0.6 0.7 740 <= refreshed credit score <760 0.5 0.6 760 <= refreshed credit score <780 0.4 0.5 Refreshed credit score >= 780 0.3 0.4 Payment Change from Modification Payment change >= 0% 1.1 −20% <= payment change <0% 1.0 −30% <= payment change < −20% 0.9 Payment change < −30% 0.8 Previous Maximum Days Past Due 0-59 days 1.0 1.0 60-90 days 1.2 1.1 91-150 days 1.3 1.1 151+ days 1.5 1.1 Refreshed Credit Score for NPLs Refreshed credit score <580 1.2 580 <= refreshed credit score <640 1.1 640 <= refreshed credit score <700 1.0 700 <= refreshed credit score <720 0.9 720 <= refreshed credit score <760 0.8 760 <= refreshed credit score <780 0.7 Refreshed credit score >= 780 0.5 (e) Credit enhancement multiplier Amount In general. (A) 1.0 minus the credit enhancement multiplier for the single-family mortgage exposure as determined under paragraph (e)(2) of this section; multiplied by (B) 1.0 minus the counterparty haircut for the loan-level credit enhancement as determined under paragraph (e)(3) of this section. (ii) No loan-level credit enhancement. (2) Credit enhancement multiplier. (ii) Subject to paragraph (e)(2)(iii) of this section, the credit enhancement multiplier for— (A) A performing loan, non-modified RPL, or modified RPL that is subject to non-cancelable mortgage insurance is set forth on Table 7 to paragraph (e)(2)(iii)(E) of this section; (B) A performing loan or non-modified RPL that is subject to cancelable mortgage insurance is set forth on Table 8 to paragraph (e)(2)(iii)(E) of this section; (C) A modified RPL with a 30-year post-modification amortization that is subject to cancelable mortgage insurance is set forth on Table 9 to paragraph (e)(2)(iii)(E) of this section; (D) A modified RPL with a 40-year post-modification amortization that is subject to cancelable mortgage insurance is set forth on Table 10 to paragraph (e)(2)(iii)(E) of this section; and (E) NPL, whether subject to non-cancelable mortgage insurance or cancelable mortgage insurance, is set forth on Table 11 to paragraph (e)(2)(iii)(E) of this section. (iii) Notwithstanding anything to the contrary in this paragraph (e), for purposes of paragraph (e)(2)(ii) of this section: (A) The OLTV of a single-family mortgage exposure will be deemed to be 80 percent if the single-family mortgage exposure has an OLTV less than or equal to 80 percent. (B) If the single-family mortgage exposure has an interest-only feature, any cancelable mortgage insurance will be deemed to be non-cancelable mortgage insurance. (C) If the coverage percent of the mortgage insurance is greater than charter-level coverage and less than guide-level coverage, the credit enhancement multiplier is the amount equal to a linear interpolation between the credit enhancement multiplier of the single-family mortgage exposure for charter-level coverage and the credit enhancement multiplier of the single-family mortgage exposure for guide-level coverage. (D) If the coverage percent of the mortgage insurance is less than charter-level coverage, the credit enhancement multiplier is the amount equal to the midpoint of a linear interpolation between a credit enhancement multiplier of 1.0 and the credit enhancement multiplier of the single-family mortgage exposure for charter-level coverage. (E) If the coverage percent of the mortgage insurance is greater than guide-level coverage, the credit enhancement multiplier is determined as if the coverage percent were guide-level coverage. (3) Credit enhancement counterparty haircut Counterparty rating In general. ( 1 ( 2 ( 3 ( 4 ( 5 ( 6 ( 7 ( 8 (B) Required considerations. 1 ( 2 (ii) Counterparty haircut. (f) COVID-19-related forbearances During forbearance. (i) Is subject to a COVID-19-related forbearance; or (ii) Was subject to a COVID-19-related forbearance at any time in the prior 6 calendar months and is subject to a trial modification plan. (2) After forbearance. [85 FR 82198, Dec. 17, 2020, as amended at 87 FR 14770, Mar. 16, 2022; 88 FR 83476, Nov. 30, 2023] § 1240.34 Multifamily mortgage exposures. (a) Definitions. Acquisition debt-service-coverage ratio (acquisition DSCR) (i) The net operating income (NOI) (or, if not available, the net cash flow) of the multifamily property that secures the multifamily mortgage exposure, at the time of the acquisition by the Enterprise (or, if not available, at the time of the underwriting or origination) of the multifamily mortgage exposure; divided by (ii) The scheduled periodic payment on the multifamily mortgage exposure (or, if interest-only, fully amortizing payment), at the time of the acquisition by the Enterprise (or, if not available, at the time of the origination) of the multifamily mortgage exposure. Acquisition loan-to-value (acquisition LTV) (i) The unpaid principal balance of the multifamily mortgage exposure; divided by (ii) The value of the multifamily property securing the multifamily mortgage exposure. Affordable unit Debt-service-coverage ratio DSCR) (i) The acquisition DSCR of the multifamily mortgage exposure if the loan age of the multifamily mortgage exposure is less than 6; or (ii) The MTMDSCR of the multifamily mortgage exposure. Government subsidy (i) At least 20 percent of the property's units are restricted to be affordable units per a regulatory agreement, recorded use restriction, a housing-assistance payments contract, or other restrictions codified in loan agreements; and (ii) The property benefits from one of the following government programs: (A) Low Income Housing Tax Credits (LIHTC); (B) Section 8 project-based rental assistance; (C) Section 515 Rural Rental Housing Loans; or (D) State/Local affordable housing programs that require the provision of affordable housing for the life of the loan. Interest-only (IO) Loan age Loan term LTV (i) The acquisition LTV of the multifamily mortgage exposure if the loan age of the multifamily mortgage exposure is less than 6, or (ii) The MTMLTV of the multifamily mortgage exposure. Mark-to-market debt-service coverage ratio (MTMDSCR) (i) The net operating income (or, if not available, the net cash flow) of the multifamily property that secures the multifamily mortgage exposure, as reported on the most recently available property operating statement; divided by (ii) The scheduled periodic payment on the multifamily mortgage exposure (or, for interest-only, fully amortizing payment), as reported on the most recently available property operating statement. Mark-to-market loan-to-value (MTMLTV) (i) The unpaid principal balance of the multifamily mortgage exposure; divided by (ii) The current value of the property security the multifamily mortgage exposure, estimated using either: (A) The acquisition property value adjusted using a multifamily property value index; or (B) The property value estimated based on net operating income and capitalization rate indices. Multifamily adjustable-rate exposure Multifamily fixed-rate exposure (i) A multifamily mortgage exposure that has an interest rate that is fixed over the life of the loan; and (ii) A multifamily mortgage exposure that has an interest rate that may increase or decrease in the future, but is fixed at that time. Net cash flow (i) The net operating income of the multifamily mortgage exposure; minus (ii) Reserves for capital improvements; minus (iii) Other expenses not included in net operating income required for the proper operation of the multifamily property securing the multifamily mortgage exposure, including any commissions paid to leasing agents in securing renters and special improvements to the property to accommodate the needs of certain renters. Net operating income (i) The rental income generated by the multifamily property securing the multifamily mortgage exposure; minus (ii) The vacancy and property operating expenses of the multifamily property securing the multifamily mortgage exposure. Original amortization term Original loan size Payment performance Supplemental mortgage exposure Unpaid principal balance (UPB) Table 1 to Paragraph (a)—Permissible Values and Additional Instructions (b) Risk weight In general. (i) The base risk weight for the multifamily mortgage exposure as determined under paragraph (c) of this section; multiplied by (ii) The combined risk multiplier for the multifamily mortgage exposure as determined under paragraph (d) of this section. (2) Minimum risk weight. (3) Loan groups. (i) A multifamily mortgage exposure-specific base risk weight must be determined under paragraph (c) of this section using for each of these multifamily mortgage exposures a single DSCR and single LTV, both calculated as if all of the multifamily mortgage exposures secured by the multifamily property were consolidated into a single multifamily mortgage exposure; and (ii) A multifamily mortgage exposure-specific combined risk multiplier must be determined under paragraph (d) of this section based on the risk characteristics of the multifamily mortgage exposure (except with respect to the loan size multiplier, which would be determined using the aggregate unpaid principal balance of these multifamily mortgage exposures). (c) Base risk weight Multifamily fixed-rate exposure. (2) Multifamily adjustable-rate exposure. (d) Combined risk multiplier. Table 4 to Paragraph (d)—Multifamily Risk Multipliers 1 85 FR 82198, Dec. 17, 2020, as amended at 88 FR 83478, Nov. 30, 2023] § 1240.35 Off-balance sheet exposures. (a) General. (2) Where an Enterprise commits to provide a commitment, the Enterprise may apply the lower of the two applicable CCFs. (3) Where an Enterprise provides a commitment structured as a syndication or participation, the Enterprise is only required to calculate the exposure amount for its pro rata share of the commitment. (4) Where an Enterprise provides a commitment or enters into a repurchase agreement and such commitment or repurchase agreement, the exposure amount shall be no greater than the maximum contractual amount of the commitment or repurchase agreement, as applicable. (b) Credit conversion factors Zero percent CCF. (2) 20 percent CCF. (3) 50 percent CCF. (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) 100 percent CCF. (i) Guarantees, except guarantees included in paragraph (b)(3)(ii) of this section; (ii) Repurchase agreements (the off-balance sheet component of which equals the sum of the current fair values of all positions the Enterprise has sold subject to repurchase); (iii) Off-balance sheet securities lending transactions (the off-balance sheet component of which equals the sum of the current fair values of all positions the Enterprise has lent under the transaction); (iv) Off-balance sheet securities borrowing transactions (the off-balance sheet component of which equals the sum of the current fair values of all non-cash positions the Enterprise has posted as collateral under the transaction); and (v) Forward agreements. [85 FR 82198, Dec. 17, 2020, as amended at 88 FR 83480, Nov. 30, 2023] § 1240.36 Derivative contracts. (a) Exposure amount for derivative contracts. (b) Methodologies for collateral recognition. (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 Options for determining EAD. (2) Definitions. (i) End date (ii) Start date (iii) Hedging set (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 contracts, 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. (i) An Enterprise that purchases a credit derivative that is recognized under § 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. (5) Exposure amount. (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) 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 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 Netting set subject to a variation margin agreement under which the counterparty must post variation margin. (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. (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. (iv) Netting set subject to multiple variation margin agreements or a hybrid netting set. (7) Potential future exposure of a netting set. (i) PFE multiplier. 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. (iii) Multiple netting sets subject to a single variation margin agreement. (iv) Netting set subject to multiple variation margin agreements or a hybrid netting set. (8) Hedging set amount Interest rate derivative contracts. (A) Formula 1 is as follows: (B) Formula 2 is as follows: Where in paragraphs (c)(8)(i)(A) and (B) of this section: ( 1 AddOn TB 1 IR ( 2 AddOn TB 2 IR ( 3 AddOn TB 3 IR (ii) Exchange rate derivative contracts. (iii) Credit derivative contracts and equity derivative contracts. 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(Ref k (D) ρ k 2 (iv) Commodity derivative contracts. 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 (Type k ) (D) P 2 (v) Basis derivative contracts and volatility derivative contracts. (9) Adjusted derivative contract amount Summary. 2 (ii) Adjusted notional amount. 1 Where: ( i ( ii ( 2 1 ( i ( ii (B)( 1 ( 2 1 (C)( 1 ( 2 1 (iii) Supervisory delta adjustments. (B)( 1 Table 1 to Paragraph (c)(9)(iii)(B)( 1 ( 2 1 ( i E ( ii ( iii ( iv ( v λ = max{−L + 0.1%, 0}; and ( vi 2 (C)( 1 ( 2 ( i 1 1 ( ii ( iii (iv) Maturity factor. 1 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 1 ( i ( ii ( iii ( 3 1 2 1 2 (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: 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. (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 Calculating replacement cost. Replacement Cost = max NS max V NS ; max C MA ; + max NS min V NS ; min C MA ; Where: (A) NS is each netting set subject to the variation margin agreement MA; V NS (B) C MA (ii) Calculating potential future exposure. (11) Netting set subject to multiple variation margin agreements or a hybrid netting set Calculating replacement cost. (ii) Calculating potential future exposure. (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 ( 2 Table 2 to Paragraph ( c ii 2 Asset class Category Type Supervisory Supervisory Supervisory 1 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 grade N/A 100 50 6.0 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 (d) Credit valuation adjustment (CVA) risk-weighted assets In general. (2) [Reserved] (3) Recognition of hedges. ind (ii) An Enterprise shall not recognize as a CVA hedge any tranched or n th (4) Total CVA risk-weighted assets. CVA (5) Simple CVA approach. CVA Where: A i w i 2 M i EAD i total M i hedge B i 2 (A) w i (B) M i (C) EAD i total EAD i total i i (D) M i hedge (E) B i M i hedge M i hedge (F) M ind ind ind (G) B ind ind ind ind (H) w ind ind (ii) The Enterprise may treat the notional amount of the index attributable to a counterparty as a single name hedge of counterparty i (B i CVA i ind ind i Table 3 to Paragraph ( d ii Internal PD Weight w 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 [88 FR 83481, Nov. 30, 2023] § 1240.37 Cleared transactions. (a) General requirements Clearing member clients. (2) Clearing members. (b) Clearing member client Enterprises Risk-weighted assets for cleared transactions. (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. (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 § 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. (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. (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 Risk-weighted assets for cleared transactions. (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. (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 § 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 § 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. (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 § 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. (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 General requirement. (2) Risk-weighted asset amount for default fund contributions to nonqualifying CCPs. (3) Risk-weighted asset amount for default fund contributions to QCCPs. CM (4) Capital requirement for default fund contributions to a QCCP. CM Where: (i) K CCP (ii) DF pref (iii) DF CCP pari passu (iv) DF CCPCM pref (5) Hypothetical capital requirement of a QCCP. CCP CCP CCP Where: (i) CM i (ii) EAD i (6) EAD of a QCCP to a clearing member. (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 § 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 § 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 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: EAD i i i i Where: (A) EBRM i (B) IM i (C) DF i (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., (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 § 1240.39(b) for repo-style transactions and to § 1240.36(c)(5) for derivative contracts. [88 FR 83481, Nov. 30, 2023] § 1240.38 Guarantees and credit derivatives: substitution treatment. (a) Scope General. (2) Applicability. (i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or (ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the Enterprise and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative. (3) Tranching. (4) Multiple guarantees or credit derivatives. (5) Single guarantees or credit derivatives. (b) Rules of recognition. (2) An Enterprise may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event if: (i) The reference exposure ranks pari passu (ii) The reference exposure and the hedged exposure are to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to ensure payments under the credit derivative are triggered when the obligated party of the hedged exposure fails to pay under the terms of the hedged exposure. (c) Substitution approach Full coverage. (2) Partial coverage. (i) The Enterprise may calculate the risk-weighted asset amount for the protected exposure under this subpart D, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider. (ii) The Enterprise must calculate the risk-weighted asset amount for the unprotected exposure under this subpart D, where the applicable risk weight is that of the unprotected portion of the hedged exposure. (iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraph (d), (e), or (f) of this section. (d) Maturity mismatch adjustment. (2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s). (3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligated party of the hedged exposure is scheduled to fulfil its obligation on the hedged exposure. If a credit risk mitigant has embedded options that may reduce its term, the Enterprise (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the Enterprise (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the Enterprise to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant. (4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months. (5) When a maturity mismatch exists, the Enterprise must apply the following adjustment to reduce the effective notional amount of the credit risk mitigant: Pm = E × (t−0.25)/(T−0.25), where: (i) Pm = effective notional amount of the credit risk mitigant, adjusted for maturity mismatch; (ii) E = effective notional amount of the credit risk mitigant; (iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and (iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years. (e) Adjustment for credit derivatives without restructuring as a credit event. (1) Pr = effective notional amount of the credit risk mitigant, adjusted for lack of restructuring event (and maturity mismatch, if applicable); and (2) Pm = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch, if applicable). (f) Currency mismatch adjustment. FX (i) Pc = effective notional amount of the credit risk mitigant, adjusted for currency mismatch (and maturity mismatch and lack of restructuring event, if applicable); (ii) Pr = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch and lack of restructuring event, if applicable); and (iii) H FX (2) An Enterprise must set H FX (3) An Enterprise must adjust H FX where T M § 1240.39 Collateralized transactions. (a) General. (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 General. (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 EAD equation. max{0, [(ΣE−ΣC) + Σ(E s s fx fx Where: (A) ΣE 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) ΣC 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) E s (D) H s s (E) E fx (F) H fx (ii) Standard supervisory haircuts. (A) An Enterprise must use the haircuts for market price volatility (H s Table 1 to Paragraph ( b ii 1 Residual maturity Haircut (in percent) assigned based on: Investment grade securitization Sovereign issuers risk weight under § 1240.32 2 Non-sovereign issuers risk weight under § 1240.32 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 2 (B) For currency mismatches, an Enterprise must use a haircut for foreign exchange rate volatility (H fx (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 (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 § 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 1 ( 2 1 1 (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: Where: ( 1 M s ( 2 s (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 (H s (iii) Own internal estimates for haircuts. s fx (A) To use its own internal estimates, an Enterprise must satisfy the following minimum quantitative standards: ( 1 ( 2 3 N M Where: ( i M ( ii N N ( iii N N ( 3 ( 4 ( 5 ( 6 ( 7 (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 ( 2 ( 3 ( 4 (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. (i) ΣE 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) ΣC 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 (ΣE−ΣC) 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 § 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. [88 FR 83481, Nov. 30, 2023] Risk-Weighted Assets for Unsettled Transactions § 1240.40 Unsettled transactions. (a) Definitions. (1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment. (2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies. (3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days. (4) Positive current exposure of an Enterprise for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the Enterprise to the counterparty. (b) Scope. (1) Cleared transactions that are marked-to-market daily and subject to daily receipt and payment of variation margin; (2) Repo-style transactions, including unsettled repo-style transactions; (3) One-way cash payments on OTC derivative contracts; or (4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts as provided in § 1240.36). (c) System-wide failures. (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (2) From the business day after the Enterprise has made its delivery until five business days after the counterparty delivery is due, the Enterprise must calculate the risk-weighted asset amount for the transaction by treating the current fair value of the deliverables owed to the Enterprise as an exposure to the counterparty and using the applicable counterparty risk weight under this subpart D. (3) If the Enterprise has not received its deliverables by the fifth business day after counterparty delivery was due, the Enterprise must assign a 1,250 percent risk weight to the current fair value of the deliverables owed to the Enterprise. (f) Total risk-weighted assets for unsettled transactions. Risk-Weighted Assets for CRT and Other Securitization Exposures § 1240.41 Operational requirements for CRT and other securitization exposures. (a) Operational criteria for traditional securitizations. (1) The exposures are not reported on the Enterprise's consolidated balance sheet under GAAP; (2) The Enterprise has transferred to one or more third parties credit risk associated with the underlying exposures; (3) Any clean-up calls relating to the securitization are eligible clean-up calls; and (4) The securitization does not: (i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and (ii) Contain an early amortization provision. (b) Operational criteria for synthetic securitizations. (1) The credit risk mitigant is: (i) Financial collateral; (ii) A guarantee that meets all criteria as set forth in the definition of “eligible guarantee” in § 1240.2, except for the criteria in paragraph (3) of that definition; or (iii) A credit derivative that meets all criteria as set forth in the definition of “eligible credit derivative” in § 1240.2, except for the criteria in paragraph (3) of the definition of “eligible guarantee” in § 1240.2. (2) The Enterprise transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that: (i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures; (ii) Require the Enterprise to alter or replace the underlying exposures to improve the credit quality of the underlying exposures; (iii) Increase the Enterprise's cost of credit protection in response to deterioration in the credit quality of the underlying exposures; (iv) Increase the yield payable to parties other than the Enterprise in response to a deterioration in the credit quality of the underlying exposures; or (v) Provide for increases in a retained first loss position or credit enhancement provided by the Enterprise after the inception of the securitization; (3) The Enterprise obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and (4) Any clean-up calls relating to the securitization are eligible clean-up calls. (c) Operational criteria for credit risk transfers. (1) The credit risk transfer is any of the following— (i) An eligible funded synthetic risk transfer; (ii) An eligible reinsurance risk transfer; (iii) An eligible single-family lender risk share; (iv) An eligible multifamily lender risk share; or (v) An eligible senior-subordinated structure. (2) The credit risk transfer has been approved by FHFA as effective in transferring the credit risk of one or more mortgage exposures to another party, taking into account any counterparty, recourse, or other risk to the Enterprise and any capital, liquidity, or other requirements applicable to counterparties; (3) The Enterprise transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk transfer employed do not include provisions that: (i) Allow for the termination of the credit risk transfer due to deterioration in the credit quality of the underlying exposures; (ii) Require the Enterprise to alter or replace the underlying exposures to improve the credit quality of the underlying exposures; (iii) Increase the Enterprise's cost of credit protection in response to deterioration in the credit quality of the underlying exposures; (iv) Increase the yield payable to parties other than the Enterprise in response to a deterioration in the credit quality of the underlying exposures; or (v) Provide for increases in a retained first loss position or credit enhancement provided by the Enterprise after the inception of the credit risk transfer; (4) The Enterprise obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk transfer in all relevant jurisdictions; (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 (7) The Enterprise includes in its periodic disclosures under the Federal securities laws, or in other appropriate public disclosures, a reasonably detailed description of— (i) The material recourse or other risks that might reduce the effectiveness of the credit risk transfer in transferring the credit risk on the underlying exposures to third parties; and (ii) Each condition under paragraph (a) of this section (governing traditional securitizations) or paragraph (b) of this section (governing synthetic securitizations) that is not satisfied by the credit risk transfer and the reasons that each such condition is not satisfied. (d) Due diligence requirements for securitization exposures. (2) An Enterprise must demonstrate its comprehensive understanding of a securitization exposure under paragraph (d)(1) of this section, for each securitization exposure by: (i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure, and documenting such analysis within three business days after acquiring the exposure, considering: (A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the exposure, and deal-specific definitions of default; (B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s); (C) Relevant market data of the securitization, for example, bid-ask spread, most recent sales price and historic price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and (D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and (ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (d)(1) of this section for each securitization exposure. [85 FR 82198, Dec. 17, 2020, as amended at 88 FR 83481, Nov. 30, 2023] § 1240.42 Risk-weighted assets for CRT and other securitization exposures. (a) Securitization risk weight approaches. (1) An Enterprise must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and apply a 1,250 percent risk weight to the portion of a CEIO that does not constitute after-tax gain-on-sale. (2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section, an Enterprise may assign a risk weight to the securitization exposure either using the simplified supervisory formula approach (SSFA) in accordance with § 1240.43(a) through (d) for a securitization exposure that is not a retained CRT exposure or an acquired CRT exposure or using the credit risk transfer approach (CRTA) in accordance with § 1240.44 for a retained CRT exposure, and in either case, subject to the limitation under paragraph (e) of this section. (3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and the Enterprise cannot, or chooses not to apply the SSFA or the CRTA to the exposure, the Enterprise must assign a risk weight to the exposure as described in § 1240.45. (4) If a securitization exposure is a derivative contract (other than protection provided by an Enterprise in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), an Enterprise may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (c) of this section. (b) Total risk-weighted assets for securitization exposures. (c) Exposure amount of a CRT or other securitization exposure On-balance sheet securitization exposures. (2) Off-balance sheet securitization exposures. (3) Repo-style transactions, eligible margin loans, and derivative contracts. (d) Overlapping exposures. (e) Implicit support. (1) The Enterprise must include in risk-weighted assets all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and (2) The Enterprise must disclose publicly: (i) That it has provided implicit support to the securitization; and (ii) The risk-based capital impact to the Enterprise of providing such implicit support. (f) Interest-only mortgage-backed securities. (g) Nth-to-default credit derivatives Protection provider. (2) A ttachment and detachment points. (i) The attachment point (parameter A (ii) The detachment point (parameter D A (3) Risk weights. (4) Protection purchaser First-to-default credit derivatives. (ii) Second-or-subsequent-to-default credit derivatives. ( 1 ( 2 (B) If an Enterprise satisfies the requirements of paragraph (i)(4)(ii)(A) of this section, the Enterprise must determine its risk-based capital requirement for the underlying exposures as if the Enterprise had only synthetically securitized the underlying exposure with the nth smallest risk-weighted asset amount and had obtained no credit risk mitigant on the other underlying exposures. (C) An Enterprise must calculate a risk-based capital requirement for counterparty credit risk according to § 1240.36 for a nth-to-default credit derivative that does not meet the rules of recognition of § 1240.38(b). (h) Guarantees and credit derivatives other than nth-to-default credit derivatives Protection provider. (2) Protection purchaser. (ii) If an Enterprise cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 1240.46, the Enterprise must determine the exposure amount of the credit derivative under § 1240.36. (A) If the Enterprise purchases credit protection from a counterparty that is not a securitization SPE, the Enterprise must determine the risk weight for the exposure according to this subpart D. (B) If the Enterprise purchases the credit protection from a counterparty that is a securitization SPE, the Enterprise must determine the risk weight for the exposure according to § 1240.42, including § 1240.42(a)(4) for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments). [85 FR 82198, Dec. 17, 2020, as amended at 88 FR 83481, Nov. 30, 2023] § 1240.43 Simplified supervisory formula approach (SSFA). (a) General requirements for the SSFA. (b) SSFA parameters. (1) K G K G K G (2) Parameter W W (i) Ninety days or more past due; (ii) Subject to a bankruptcy or insolvency proceeding; (iii) In the process of foreclosure; (iv) Held as real estate owned; (v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on: (A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or (B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or (vi) Is in default. (3) Parameter A A A A (4) Parameter D D A pari passu D (5) A supervisory calibration parameter, p, p (c) Mechanics of the SSFA. K G W K A K G K A A D, K A (1) When the detachment point, parameter D, K A (2) When the attachment point, parameter A, K A (3) When A K A D K A K SSFA (i) The weight assigned to 1,250 percent equals (ii) The weight assigned to 1,250 percent times K SSFA (iii) The risk weight will be set equal to: (d) SSFA equation. e (2) Then the Enterprise must calculate K SSFA (3) The risk weight for the exposure (expressed as a percent) is equal to K SSFA (e) Limitations. [85 FR 82198, Dec. 17, 2020, as amended at 87 FR 14770, Mar. 16, 2022] § 1240.44 Credit risk transfer approach (CRTA). (a) General requirements for the CRTA. (b) CRTA parameters. (1) Parameter A A A A (2) Parameter AggUPB $ (3) Parameter CM % CM % (4) Parameter Collat % RIF Collat % RIF (5) Parameter D D A pari passu D (6) Parameter EL $ EL $ EL $ EL $ (7) Parameter HC (i) For a CRT with respect to single-family mortgage exposures, the counterparty haircut is set forth in table 12 to paragraph (e)(3)(ii) in § 1240.33, determined as if the counterparty to the CRT were a counterparty to loan-level credit enhancement (as defined in § 1240.33(a)) and considering the counterparty rating and mortgage concentration risk of the counterparty to the CRT and the single-family segment and product of the underlying single-family mortgage exposures. (ii) For a CRT with respect to multifamily mortgage exposures, the counterparty haircut is set forth in table 1 to this paragraph (b)(7)(ii), with counterparty rating and mortgage concentration risk having the meaning given in § 1240.33(a). (8) Parameter LS % LS % (9) Parameter LTF % LTF % (i) An Enterprise must have the following information to calculate LTF % (A) The remaining months to the contractual maturity of the CRT ( CRT RMM (B) The UPB-weighted-average remaining months to maturity of the underlying multifamily mortgage exposures that have remaining months to maturity greater than CRT RMM MME RMM CRT RMM MME RMM CRT RMM (C) The sum of UPB on the underlying multifamily mortgage exposures that have remaining loan terms less than or equal to CRT RMM LTF % LTFUPB % (D) An Enterprise must use the following method to calculate LTF % (ii) An Enterprise must have the following information to calculate LTF % (A) The original closing date (or effective date) of the CRT and the maturity date on the CRT. (B) UPB share of single-family mortgage exposures that have original amortization terms of less than or equal to 189 months ( CRTF15 % (C) UPB share of single-family mortgage exposures that have original amortization terms greater than 189 months and OLTVs of less than or equal to 80 percent( CRT80NotF15 % (D) The duration of seasoning. (E) An Enterprise must use the following method to calculate LTF % CRTMthstoMaturity ( 1 CRTMthstoMaturity ( i ( ii ( 2 CRTMthstoMaturity ( i CRTMthstoMaturity 2 iii CRTMthstoMaturity ( ii CRTMthstoMaturity 2 iii CRTMthstoMaturity CRTMthstoMaturity. ( iii LTF % , where: CRTLT M CRTLT S CRTMthstoMaturity CRTMthstoMaturity CRTLT CRTLT Not CRTLTGT Not (10) Parameter RWA $ (11) Parameter CntptyRWA $ CntptyRWA $ (i) Parameter RWA $ (ii) Aggregate credit risk-weighted assets associated with the underlying mortgage exposures where the counterparty haircuts for loan-level credit enhancements are set to zero. (c) Mechanics of the CRTA. RW % (1) When the detachment point, parameter D, K A AggEL % (2) When the attachment point, parameter A, K A AggEL % (3) When parameter A K A AggEL % D K A AggEL %, (i) 1,250 percent multiplied by the ratio of (A) the sum of K A AggEL % A D A (ii) 5 percent multiplied by the ratio of (A) parameter D K A AggEL % D A. (d) CRTA equations. If the contractual terms of the CRT do not provide for the transfer of the counterparty credit risk associated with any loan-level credit enhancement or other loss sharing on the underlying mortgage exposures, then the Enterprise shall calculate K A Otherwise the Enterprise shall calculate K A (e) Limitations. (f) Adjusted exposure amount (AEA) In general. (2) Inputs Enterprise adjusted exposure. Where the loss timing effectiveness adjustments (LTEA) for a retained CRT exposure are determined under paragraph (g) of this section, and the loss sharing effectiveness adjustment (LSEA) for a retained CRT exposure is determined under paragraph (h) of this section. (ii) Expected loss share. (iii) Risk weight. (g) Loss timing effectiveness adjustments. i SLS %,Tranche ELS %,Tranche then LTEA % ,Tranche,CM LTEA % ,Tranche,LS Otherwise LTEA % ,Tranche,CM and LTEA % ,Tranche,LS where K A A LTK A,CM K A AggEL % LTF % ,CM AggEL % LTK A,LS K A AggEL % LTF % ,LS AggEL % and LTF % ,CM % LTF % ,LS % (h) Loss sharing effectiveness adjustment. if RW % ,Tranche ELS % ,Tranche then Otherwise LSEA % ,Tranche where UnCollatUL % ,Tranche max SLS % ,Tranche max Collat % RIF,Tranche ELS % ,Tranche SRIF % ,Tranche max SLS % ,Tranche Collat % RIF,Tranche and the share of the tranche that is covered by expected loss (ELS) and the share of the tranche that is covered by stress loss (SLS) are as follows: (i) [Reserved] (j) RWA supplement for retained loan-level counterparty credit risk. RWASup $ RWASup $, Tranche CntptyRWA $ D A Otherwise the Enterprise shall add an RWASup $, Tranche (k) Retained CRT Exposure. RWA $, Tranche AEA $, Tranche RW % ,Tranche RWASup $, Tranche [85 FR 82198, Dec. 17, 2020, as amended at 87 FR 14770, Mar. 16, 2022] § 1240.45 Securitization exposures to which the SSFA and the CRTA do not apply. An Enterprise must assign a 1,250 percent risk weight to any acquired CRT exposure and all securitization exposures to which the Enterprise does not apply the SSFA under § 1240.43 or the CRTA under § 1240.44. § 1240.46 Recognition of credit risk mitigants for securitization exposures. (a) General. (2) An investing Enterprise that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant under § 1240.38 or § 1240.39, but only as provided in this section. (b) Mismatches. Risk-Weighted Assets for Equity Exposures § 1240.51 Introduction and exposure measurement. (a) General. (2) An Enterprise must treat an investment in a separate account (as defined in § 1240.2) as if it were an equity exposure to an investment fund. (b) Adjusted carrying value. (1) For the on-balance sheet component of an equity exposure, the Enterprise's carrying value of the exposure; (2) [Reserved] (3) For the off-balance sheet component of an equity exposure that is not an equity commitment, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) given a small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section; and (4) For a commitment to acquire an equity exposure (an equity commitment), the effective notional principal amount of the exposure is multiplied by the following conversion factors (CFs): (i) Conditional equity commitments with an original maturity of one year or less receive a CF of 20 percent. (ii) Conditional equity commitments with an original maturity of over one year receive a CF of 50 percent. (iii) Unconditional equity commitments receive a CF of 100 percent. § 1240.52 Simple risk-weight approach (SRWA). (a) General. (b) SRWA computation for individual equity exposures. (1) Community development equity exposures. (2) Other equity exposures. §§ 1240.53-1240.60 [Reserved] § 1240.61 Purpose and scope. Sections 1240.61 through 1240.63 of this subpart establish public disclosure requirements related to the capital requirements and buffers described in subpart B and subpart G. [87 FR 33429, June 2, 2022] § 1240.62 Disclosure requirements. (a) An Enterprise must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 1240.63, where for the purpose of these disclosure requirements timely means no later than 10 business days after an Enterprise files its corresponding Annual Report on SEC Form 10-K at the end of a fiscal year or its corresponding Quarterly Report on SEC Form 10-Q at the end of other calendar quarters. If a material change occurs, where for the purpose of these disclosure requirements a material change means a change such that the omission or misstatement of which could change or influence the assessment or decision of a user relying on that information for the purpose of making investment decisions, then an Enterprise must disclose a brief discussion of this change and its likely impact as soon as practicable thereafter, and no later than the end of the next calendar quarter. Qualitative disclosures that have not changed from the prior quarter may be omitted from the next quarterly disclosure but must be disclosed at least annually after the end of the fourth calendar quarter. (b) Unless otherwise directed by FHFA, the Enterprise's management may provide all of the disclosures required by §§ 1240.61 through 1240.63 in one place on the Enterprise's public website or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the Enterprise publicly provides a summary table specifically indicating the location(s) of all such disclosures. (c) An Enterprise must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. (d) The Enterprise's board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. The Chief Risk Officer and the Chief Financial Officer of the Enterprise must attest that the disclosures meet the requirements of this subpart. (e) If an Enterprise believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public certain information that is either proprietary or confidential in nature, the Enterprise is not required to disclose these specific items but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. [87 FR 33429, June 2, 2022] § 1240.63 Disclosures. (a) Except as provided in § 1240.62, an Enterprise must make the disclosures described in Tables 1 through 11 of this section publicly available for each of the last three years (that is, twelve quarters) or such shorter period until an Enterprise has made twelve quarterly disclosures pursuant to this part beginning with the disclosure for the quarter ending December 31, 2022. (b) An Enterprise must publicly disclose each quarter the following: (1) Regulatory capital ratios for common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, total capital, core capital, and adjusted total capital, including the regulatory capital elements and all the regulatory adjustments and deductions needed to calculate the numerator of such ratios; (2) Total risk-weighted assets, including the different regulatory adjustments and deductions needed to calculate total risk-weighted assets; and (3) A reconciliation of regulatory capital elements as they relate to its balance sheet in any audited consolidated financial statements. Table 1 to Paragraph ( b Qualitative disclosures (a) Summary information on the terms and conditions of the main features of all regulatory capital instruments. Quantitative disclosures (b) The amount of common equity tier 1 capital, with separate disclosure of: (1) Common stock and related surplus; (2) Retained earnings; (3) AOCI (net of tax) and other reserves; and (4) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) The amount of core capital, with separate disclosure of: (1) The par or stated value of outstanding common stock; (2) The par or stated value of outstanding perpetual, noncumulative preferred stock; (3) Paid-in capital; and (4) Retained earnings. (d) The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and (2) Regulatory adjustments and deductions made to tier 1 capital. (e) The amount of total capital, with separate disclosure of: (1) The general allowance for foreclosure losses; and (2) Other amounts from sources of funds available to absorb losses incurred by the Enterprise that the Director by regulation determines are appropriate to include in determining total capital. (f) The amount of adjusted total capital, with separate disclosure of: (1) Tier 2 capital elements, including tier 2 capital instruments; and (2) Regulatory adjustments and deductions made to adjusted total capital. Table 2 to Paragraph ( b Qualitative disclosures (a) A summary discussion of the Enterprise's approach to assessing the adequacy of its capital to support current and future activities. Quantitative disclosures (b) Risk-weighted assets for: (1) Exposures to sovereign entities; (2) Exposures to certain supranational entities and MDBs; (3) Exposures to GSEs; (4) Exposures to depository institutions and credit unions; (5) Exposures to PSEs; (6) Corporate exposures; (7) Aggregate single-family mortgage exposures categorized by: (i) Performing loans; (ii) Non-modified re-performing loans; (iii) Modified re-performing loans; (iv) Non-performing loans; (8) Aggregate multifamily mortgage exposures categorized by: (i) Multifamily fixed-rate exposures; (ii) Multifamily adjustable-rate exposures; (9) Past due loans; (10) Other assets; (11) Insurance assets; (12) Off-balance sheet exposures; (13) Cleared transactions; (14) Default fund contributions; (15) Unsettled transactions; (16) CRT and other securitization exposures; and (17) Equity exposures. (c) Standardized market risk-weighted assets as calculated under subpart F of this part. (d) Risk-weighted assets for operational risk. (e) Common equity tier 1, tier 1, and adjusted total risk-based capital ratios. (f) Total standardized risk-weighted assets. Table 3 to Paragraph ( b Qualitative disclosures (a) A summary discussion of the Enterprise's capital buffers. Quantitative disclosures (b) At least quarterly, the Enterprise must calculate and publicly disclose the prescribed capital conservation buffer amount and all its components as described under § 1240.11. (c) At least quarterly, the Enterprise must calculate and publicly disclose the prescribed leverage buffer amount as described under § 1240.11. (d) At least quarterly, the Enterprise must calculate and publicly disclose the eligible retained income of the Enterprise, as described under § 1240.11. (e) At least quarterly, the Enterprise must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital buffer framework described under § 1240.11, including the maximum payout amount for the quarter. (c) For each separate risk area described in Tables 4 through 9, the Enterprise must, as a general qualitative disclosure requirement, describe its risk management objectives and policies, including: Strategies and processes; the structure and organization of the relevant risk management function; the scope and nature of risk reporting and/or measurement systems; policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges and/or mitigants. Table 4 to Paragraph ( c 1 Qualitative disclosures (a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 5 of this section), including the: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Description of the methodology that the Enterprise uses to estimate its adjusted allowance for credit losses, including statistical methods used where applicable; (5) Policy for charging-off uncollectible amounts; and (6) Discussion of the Enterprise's credit risk management policy. Quantitative disclosures (b) Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, the Enterprises could use categories similar to that used for financial statement purposes. Such categories might include, for instance: (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; (2) Debt securities; and (3) OTC derivatives. (c) Geographic distribution of exposures, categorized in significant areas by major types of credit exposure. 2 (d) Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) By major industry or counterparty type: (1) Amount of loans not past due or past due less than 30 days; (2) Amount of loans past due 30 days but less than 90 days; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 3 (5) The balance in the adjusted allowance for credit losses at the end of each period, disaggregated on the basis of loans not past due or past due less than 30 days, loans past due 30 days but less than 90 days, loans past due 90 days and on nonaccrual, and loans past due 90 days and still accruing; and (6) Charge-offs during the period. (f) Amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 4 (g) Reconciliation of changes in the adjusted allowance for credit losses. 5 (h) Remaining contractual maturity delineation (for example, one year or less) of the whole portfolio, categorized by credit exposure. 1 2 3 4 5 Table 5 to Paragraph ( c Qualitative disclosures (a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including a discussion of: (1) The methodology used to assign credit limits for counterparty credit exposures; (2) Policies for securing collateral, valuing and managing collateral, and establishing credit reserves; (3) The primary types of collateral taken; and (4) The impact of the amount of collateral the Enterprise would have to provide given a deterioration in the Enterprise's own creditworthiness. Quantitative Disclosures (b) Gross positive fair value of contracts, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 2 (c) Notional amount of purchased and sold credit derivatives, segregated between use for the Enterprise's own credit portfolio and in its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. 1 2 Table 6 to Paragraph ( c 1 2 Qualitative disclosures (a) The general qualitative disclosure requirement with respect to credit risk mitigation, including: (1) Policies and processes for collateral valuation and management; (2) A description of the main types of collateral taken by the Enterprise; (3) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (4) Information about (market or credit) risk concentrations with respect to credit risk mitigation. Quantitative Disclosures (b) For each separately disclosed credit risk portfolio, the total exposure that is covered by eligible financial collateral, and after the application of haircuts. (c) For each separately disclosed portfolio, the total exposure that is covered by guarantees/credit derivatives and the risk-weighted asset amount associated with that exposure. 1 2 Table 7 to Paragraph ( c Qualitative disclosures (a) The general qualitative disclosure requirement with respect to a securitization (including synthetic securitizations), including a discussion of: (1) The Enterprise's objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the Enterprise to other entities and including the type of risks assumed and retained with resecuritization activity; 1 (2) The nature of the risks ( e.g., (3) The roles played by the Enterprise in the securitization process 2 (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The Enterprise's policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the Enterprise follows for its securitization exposures including the type of securitization exposure to which each approach applies. (b) A list of: (1) The type of securitization SPEs that the Enterprise, as sponsor, uses to securitize third-party exposures. The Enterprise must indicate whether it has exposure to these SPEs, either on- or off-balance sheet; and (2) Affiliated entities: (i) That the Enterprise manages or advises; and (ii) That invest either in the securitization exposures that the Enterprise has securitized or in securitization SPEs that the Enterprise sponsors. 3 (c) Summary of the Enterprise's accounting policies for CRT and securitization activities, including: (1) Whether the transactions are treated as sales ( i.e., (2) Recognition of gain-on-sale; (3) Methods and key assumptions applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the Enterprise to provide financial support for securitized assets. (d) An explanation of significant changes to any quantitative information since the last reporting period. Quantitative Disclosures (e) The total outstanding exposures securitized by the Enterprise in securitizations that meet the operational criteria provided in § 1240.41 (categorized into traditional and synthetic securitizations), by exposure type, separately for securitizations of third-party exposures for which the Enterprise acts only as sponsor. 4 (f) For exposures securitized by the Enterprise in securitizations that meet the operational criteria in § 1240.41: (1) Amount of securitized assets that are past due categorized by exposure type; and (2) Losses recognized by the Enterprise during the current period categorized by exposure type. 5 (g) The total amount of outstanding exposures intended to be securitized categorized by exposure type. (h) Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i)(1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach ( e.g., (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital; and (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. (j) Summary of current year's securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. (k) Aggregate amount of resecuritization exposures retained or purchased categorized according to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 2 3 4 5 Table 8 to Paragraph ( c Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to equity risk for equities, including: (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity holdings. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative Disclosures (b) Carrying value disclosed on the balance sheet of investments, as well as the fair value of those investments; for securities that are publicly traded, a comparison to publicly-quoted share values where the share price is materially different from fair value. (c) The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non publicly traded. (d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. (e)(1) Total unrealized gains (losses) recognized on the balance sheet but not through earnings. (2) Total unrealized gains (losses) not recognized either on the balance sheet or through earnings. (3) Any amounts of the above included in tier 1 or tier 2 capital. (f) Capital requirements categorized by appropriate equity groupings, consistent with the Enterprise's methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding regulatory capital requirements. 1 1 Table 9 to Paragraph ( c Qualitative disclosures (a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and frequency of measurement of interest rate risk for non-trading activities. Quantitative disclosures (b) The increase (decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to management's method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). Table 10 to Paragraph ( c Qualitative disclosures (a) The general qualitative disclosure requirement for operational risk. (b) Description of the AMA, when applicable, including a discussion of relevant internal and external factors considered in the Enterprise's measurement approach. (c) A description of the use of insurance for the purpose of mitigating operational risk. Table 11 to Paragraph ( c Dollar amounts in thousands Tril Bil Mil Thou Part 1: Summary comparison of accounting assets and adjusted total assets 1 Total consolidated assets as reported in published financial statements 2 Adjustment for fiduciary assets recognized on balance sheet but excluded from total leverage exposure 3 Adjustment for derivative exposures 4 Adjustment for repo-style transactions 5 Adjustment for off-balance sheet exposures (that is, conversion to credit equivalent amounts of off-balance sheet exposures) 6 Other adjustments 7 Adjusted total assets (sum of lines 1 to 6) Part 2: Tier 1 leverage ratio On-balance sheet exposures 1 On-balance sheet assets (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) 2 LESS: Amounts deducted from tier 1 capital 3 Total on-balance sheet exposures (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) (sum of lines 1 and 2) Derivative exposures 4 Current exposure for derivative exposures (that is, net of cash variation margin) 5 Add-on amounts for potential future exposure (PFE) for derivative exposures 6 Gross-up for cash collateral posted if deducted from the on-balance sheet assets, except for cash variation margin 7 LESS: Deductions of receivable assets for cash variation margin posted in derivative transactions, if included in on-balance sheet assets 8 LESS: Exempted CCP leg of client-cleared transactions 9 Effective notional principal amount of sold credit protection 10 LESS: Effective notional principal amount offsets and PFE adjustments for sold credit protection 11 Total derivative exposures (sum of lines 4 to 10) Repo-style transactions 12 On-balance sheet assets for repo-style transactions, except include the gross value of receivables for reverse repurchase transactions. Exclude from this item the value of securities received in a security-for-security repo-style transaction where the securities lender has not sold or re-hypothecated the securities received. Include in this item the value of securities that qualified for sales treatment that must be reversed 13 LESS: Reduction of the gross value of receivables in reverse repurchase transactions by cash payables in repurchase transactions under netting agreements 14 Counterparty credit risk for all repo-style transactions 15 Exposure for repo-style transactions where a banking organization acts as an agent 16 Total exposures for repo-style transactions (sum of lines 12 to 15) Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amounts 18 LESS: Adjustments for conversion to credit equivalent amounts 19 Off-balance sheet exposures (sum of lines 17 and 18) Capital and adjusted total assets 20 Tier 1 capital 21 Adjusted total assets (sum of lines 3, 11, 16, and 19) Tier 1 leverage ratio 22 Tier 1 leverage ratio (in percent) [87 FR 33429, June 2, 2022, as amended at 87 FR 37979, June 27, 2022] Subpart E—Risk-Weighted Assets—Internal Ratings-Based and Advanced Measurement Approaches § 1240.100 Purpose, applicability, and principle of conservatism. (a) Purpose. (1) Minimum requirements for using Enterprise-specific internal risk measurement and management processes for calculating risk-based capital requirements; and (2) Methodologies for the Enterprises to calculate their advanced approaches total risk-weighted assets. (b) Applicability. (2) An Enterprise must also include in its calculation of advanced credit risk-weighted assets under this subpart all covered positions, as defined in subpart F of this part. (c) Principle of conservatism. (1) The Enterprise can demonstrate on an ongoing basis to the satisfaction of FHFA that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required under this subpart; (2) The Enterprise appropriately manages the risk of each such exposure; (3) The Enterprise notifies FHFA in writing prior to applying this principle to each such exposure; and (4) The exposures to which the Enterprise applies this principle are not, in the aggregate, material to the Enterprise. § 1240.101 Definitions. (a) Terms that are set forth in § 1240.2 and used in this subpart have the definitions assigned thereto in § 1240.2. (b) For the purposes of this subpart, the following terms are defined as follows: Advanced internal ratings-based (IRB) systems Advanced systems Backtesting Benchmarking Business environment and internal control factors Dependence Economic downturn conditions Eligible operational risk offsets (i) Are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated consistent with GAAP; and (ii) Are available to cover expected operational losses with a high degree of certainty over a one-year horizon. Expected operational loss (EOL) External operational loss event data Internal operational loss event data Operational loss Operational loss event (i) Internal fraud, which means the operational loss event type category that comprises operational losses resulting from an act involving at least one internal party of a type intended to defraud, misappropriate property, or circumvent regulations, the law, or company policy excluding diversity- and discrimination-type events. (ii) External fraud, which means the operational loss event type category that comprises operational losses resulting from an act by a third party of a type intended to defraud, misappropriate property, or circumvent the law. All third-party-initiated credit losses are to be treated as credit risk losses. (iii) Employment practices and workplace safety, which means the operational loss event type category that comprises operational losses resulting from an act inconsistent with employment, health, or safety laws or agreements, payment of personal injury claims, or payment arising from diversity- and discrimination-type events. (iv) Clients, products, and business practices, which means the operational loss event type category that comprises operational losses resulting from the nature or design of a product or from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements). (v) Damage to physical assets, which means the operational loss event type category that comprises operational losses resulting from the loss of or damage to physical assets from natural disaster or other events. (vi) Business disruption and system failures, which means the operational loss event type category that comprises operational losses resulting from disruption of business or system failures. (vii) Execution, delivery, and process management, which means the operational loss event type category that comprises operational losses resulting from failed transaction processing or process management or losses arising from relations with trade counterparties and vendors. Operational risk Operational risk exposure Risk parameter Scenario analysis Unexpected operational loss (UOL) Unit of measure § 1240.121 Minimum requirements. (a) Process and systems requirements. (2) The systems and processes used by an Enterprise for risk-based capital purposes under this subpart must be consistent with the Enterprise's internal risk management processes and management information reporting systems. (3) Each Enterprise must have an appropriate infrastructure with risk measurement and management processes that meet the requirements of this section and are appropriate given the Enterprise's size and level of complexity. The Enterprise must ensure that the risk parameters and reference data used to determine its risk-based capital requirements are representative of long run experience with respect to its credit risk and operational risk exposures. (b) Risk rating and segmentation systems for exposures. (2) If an Enterprise uses multiple rating or segmentation systems, the Enterprise's rationale for assigning an exposure to a particular system must be documented and applied in a manner that best reflects the obligor or exposure's level of risk. An Enterprise must not inappropriately allocate exposures across systems to minimize regulatory capital requirements. (3) In assigning ratings to exposures, an Enterprise must use all relevant and material information and ensure that the information is current. (c) Quantification of risk parameters for exposures. (2) An Enterprise's estimates of risk parameters must incorporate all relevant, material, and available data that is reflective of the Enterprise's actual exposures and of sufficient quality to support the determination of risk-based capital requirements for the exposures. In particular, the population of exposures in the data used for estimation purposes, the underwriting standards in use when the data were generated, and other relevant characteristics, should closely match or be comparable to the Enterprise's exposures and standards. In addition, an Enterprise must: (i) Demonstrate that its estimates are representative of long run experience, including periods of economic downturn conditions, whether internal or external data are used; (ii) Take into account any changes in underwriting practice or the process for pursuing recoveries over the observation period; (iii) Promptly reflect technical advances, new data, and other information as they become available; (iv) Demonstrate that the data used to estimate risk parameters support the accuracy and robustness of those estimates; and (v) Demonstrate that its estimation technique performs well in out-of-sample tests whenever possible. (3) The Enterprise's risk parameter quantification process must produce appropriately conservative risk parameter estimates where the Enterprise has limited relevant data, and any adjustments that are part of the quantification process must not result in a pattern of bias toward lower risk parameter estimates. (4) The Enterprise's risk parameter estimation process should not rely on the possibility of U.S. government financial assistance. (5) Default, loss severity, and exposure amount data must include periods of economic downturn conditions, or the Enterprise must adjust its estimates of risk parameters to compensate for the lack of data from periods of economic downturn conditions. (6) If an Enterprise uses internal data obtained prior to becoming subject to this subpart or external data to arrive at risk parameter estimates, the Enterprise must demonstrate to FHFA that the Enterprise has made appropriate adjustments if necessary to be consistent with the Enterprise's definition of default. Internal data obtained after the Enterprise becomes subject to this subpart must be consistent with the Enterprise's definition of default. (7) The Enterprise must review and update (as appropriate) its risk parameters and its risk parameter quantification process at least annually. (8) The Enterprise must, at least annually, conduct a comprehensive review and analysis of reference data to determine relevance of the reference data to the Enterprise's exposures, quality of reference data to support risk parameter estimates, and consistency of reference data to the Enterprise's definition of default. (d) Operational risk Operational risk management processes. (i) Have an operational risk management function that: (A) Is independent of business line management; and (B) Is responsible for designing, implementing, and overseeing the Enterprise's operational risk data and assessment systems, operational risk quantification systems, and related processes; (ii) Have and document a process (which must capture business environment and internal control factors affecting the Enterprise's operational risk profile) to identify, measure, monitor, and control operational risk in the Enterprise's products, activities, processes, and systems; and (iii) Report operational risk exposures, operational loss events, and other relevant operational risk information to business unit management, senior management, and the board of directors (or a designated committee of the board). (2) Operational risk data and assessment systems. (i) Be structured in a manner consistent with the Enterprise's current business activities, risk profile, technological processes, and risk management processes; and (ii) Include credible, transparent, systematic, and verifiable processes that incorporate the following elements on an ongoing basis: (A) Internal operational loss event data. ( 1 ( 2 ( 3 (B) External operational loss event data. (C) Scenario analysis. (D) Business environment and internal control factors. (3) Operational risk quantification systems. (i) Must generate estimates of the Enterprise's operational risk exposure using its operational risk data and assessment systems; (ii) Must employ a unit of measure that is appropriate for the Enterprise's range of business activities and the variety of operational loss events to which it is exposed, and that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution; (iii) Must include a credible, transparent, systematic, and verifiable approach for weighting each of the four elements, described in paragraph (d)(2)(ii) of this section, that an Enterprise is required to incorporate into its operational risk data and assessment systems; (iv) May use internal estimates of dependence among operational losses across and within units of measure if the Enterprise can demonstrate to the satisfaction of FHFA that its process for estimating dependence is sound, robust to a variety of scenarios, and implemented with integrity, and allows for uncertainty surrounding the estimates. If the Enterprise has not made such a demonstration, it must sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure; and (v) Must be reviewed and updated (as appropriate) whenever the Enterprise becomes aware of information that may have a material effect on the Enterprise's estimate of operational risk exposure, but the review and update must occur no less frequently than annually. (e) Data management and maintenance. (2) An Enterprise must retain data using an electronic format that allows timely retrieval of data for analysis, validation, reporting, and disclosure purposes. (3) An Enterprise must retain sufficient data elements related to key risk drivers to permit adequate monitoring, validation, and refinement of its advanced systems. (f) Control, oversight, and validation mechanisms. (2) The Enterprise's board of directors (or a designated committee of the board) must at least annually review the effectiveness of, and approve, the Enterprise's advanced systems. (3) An Enterprise must have an effective system of controls and oversight that: (i) Ensures ongoing compliance with the minimum requirements in this section; (ii) Maintains the integrity, reliability, and accuracy of the Enterprise's advanced systems; and (iii) Includes adequate governance and project management processes. (4) The Enterprise must validate, on an ongoing basis, its advanced systems. The Enterprise's validation process must be independent of the advanced systems' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include: (i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the advanced systems; (ii) An ongoing monitoring process that includes verification of processes and benchmarking; and (iii) An outcomes analysis process that includes backtesting. (5) The Enterprise must have an internal audit function or equivalent function that is independent of business-line management that at least annually: (i) Reviews the Enterprise's advanced systems and associated operations, including the operations of its credit function and estimations of risk parameters; (ii) Assesses the effectiveness of the controls supporting the Enterprise's advanced systems; and (iii) Documents and reports its findings to the Enterprise's board of directors (or a committee thereof). (6) The Enterprise must periodically stress test its advanced systems. The stress testing must include a consideration of how economic cycles, especially downturns, affect risk-based capital requirements (including migration across rating grades and segments and the credit risk mitigation benefits of double default treatment). (g) Documentation. § 1240.122 Ongoing qualification. (a) Changes to advanced systems. (b) Failure to comply with qualification requirements. (2) The Enterprise must establish and submit a plan satisfactory to FHFA to return to compliance with the qualification requirements. (3) In addition, if FHFA determines that the Enterprise's advanced approaches total risk-weighted assets are not commensurate with the Enterprise's credit, market, operational, or other risks, FHFA may require such an Enterprise to calculate its advanced approaches total risk-weighted assets with any modifications provided by FHFA. § 1240.123 Advanced approaches credit risk-weighted asset calculations. (a) An Enterprise must use its advanced systems to determine its credit risk capital requirements for each of the following exposures: (1) General credit risk (including for mortgage exposures); (2) Cleared transactions; (3) Default fund contributions; (4) Unsettled transactions; (5) Securitization exposures; (6) Equity exposures; and (7) The fair value adjustment to reflect counterparty credit risk in valuation of OTC derivative contracts. (b) The credit-risk-weighted assets calculated under this subpart E equals the aggregate credit risk capital requirement under paragraph (a) of this section multiplied by 12.5. §§ 1240.124-1240.160 [Reserved] § 1240.161 Qualification requirements for incorporation of operational risk mitigants. (a) Qualification to use operational risk mitigants. (1) The Enterprise's operational risk quantification system is able to generate an estimate of the Enterprise's operational risk exposure (which does not incorporate qualifying operational risk mitigants) and an estimate of the Enterprise's operational risk exposure adjusted to incorporate qualifying operational risk mitigants; and (2) The Enterprise's methodology for incorporating the effects of insurance, if the Enterprise uses insurance as an operational risk mitigant, captures through appropriate discounts to the amount of risk mitigation: (i) The residual term of the policy, where less than one year; (ii) The cancelation terms of the policy, where less than one year; (iii) The policy's timeliness of payment; (iv) The uncertainty of payment by the provider of the policy; and (v) Mismatches in coverage between the policy and the hedged operational loss event. (b) Qualifying operational risk mitigants. (1) Insurance that: (i) Is provided by an unaffiliated company that the Enterprise deems to have strong capacity to meet its claims payment obligations and the Enterprise assigns the company a probability of default equal to or less than 10 basis points; (ii) Has an initial term of at least one year and a residual term of more than 90 days; (iii) Has a minimum notice period for cancellation by the provider of 90 days; (iv) Has no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed depository institution; and (v) Is explicitly mapped to a potential operational loss event; (2) In evaluating an operational risk mitigant other than insurance, FHFA will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding total capital. § 1240.162 Mechanics of operational risk risk-weighted asset calculation. (a) If an Enterprise does not qualify to use or does not have qualifying operational risk mitigants, the Enterprise's dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any). (b) If an Enterprise qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the Enterprise's dollar risk-based capital requirement for operational risk is the greater of: (1) The Enterprise's operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); or (2) 0.8 multiplied by the difference between: (i) The Enterprise's operational risk exposure; and (ii) Eligible operational risk offsets (if any). (c) The Enterprise's risk-weighted asset amount for operational risk equals the greater of: (1) The Enterprise's dollar risk-based capital requirement for operational risk determined under paragraphs (a) or (b) multiplied by 12.5; and (2) The Enterprise's adjusted total assets multiplied by 0.0015 multiplied by 12.5. (d) After January 1, 2022, and until the compliance date for this section under § 1240.4, the Enterprise's risk weighted amount for operational risk will equal the Enterprise's adjusted total assets multiplied by 0.0015 multiplied by 12.5. Subpart F—Risk-weighted Assets—Market Risk § 1240.201 Purpose, applicability, and reservation of authority. (a) Purpose. (b) Applicability. (c) Reservation of authority. (1) FHFA may require an Enterprise to hold an amount of capital greater than otherwise required under this subpart if FHFA determines that the Enterprise's capital requirement for spread risk as calculated under this subpart is not commensurate with the spread risk of the Enterprise's covered positions. (2) If FHFA determines that the risk-based capital requirement calculated under this subpart by the Enterprise for one or more covered positions or portfolios of covered positions is not commensurate with the risks associated with those positions or portfolios, FHFA may require the Enterprise to assign a different risk-based capital requirement to the positions or portfolios that more accurately reflects the risk of the positions or portfolios. (3) In addition to calculating risk-based capital requirements for specific positions or portfolios under this subpart, the Enterprise must also calculate risk-based capital requirements for covered positions under subpart D or subpart E of this part, as appropriate. (4) Nothing in this subpart limits the authority of FHFA under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law. § 1240.202 Definitions. (a) Terms set forth in § 1240.2 and used in this subpart have the definitions assigned in § 1240.2. (b) For the purposes of this subpart, the following terms are defined as follows: Backtesting Covered position de minimis (i) Any NPL, RPL, reverse mortgage loan, or other mortgage exposure that, in any case, does not secure an MBS guaranteed by the Enterprise; (ii) Any MBS guaranteed by an Enterprise, MBS guaranteed by Ginnie Mae, reverse mortgage security, PLS, commercial MBS, CRT exposure, or other securitization exposure, regardless of whether the position is held by the Enterprise for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits; and (iii) Any other trading asset or trading liability (whether on- or off-balance sheet). 1 1 Market risk Private label security (PLS) Reverse mortgage Reverse mortgage security Spread risk § 1240.203 Requirements for managing market risk. (a) Management of covered positions Active management. (i) Marking covered positions to market or to model on a daily basis; (ii) Daily assessment of the Enterprise's ability to hedge position and portfolio risks, and of the extent of market liquidity; (iii) Establishment and daily monitoring of limits on covered positions by a risk control unit independent of the business unit; (iv) Routine monitoring by senior management of information described in paragraphs (a)(1)(i) through (iii) of this section; (v) At least annual reassessment of established limits on positions by senior management; and (vi) At least annual assessments by qualified personnel of the quality of market inputs to the valuation process, the soundness of key assumptions, the reliability of parameter estimation in pricing models, and the stability and accuracy of model calibration under alternative market scenarios. (2) Valuation of covered positions. (b) Requirements for internal models. (2) An Enterprise must meet all of the requirements of this section on an ongoing basis. The Enterprise must promptly notify FHFA when: (i) The Enterprise plans to extend the use of a model to an additional business line or product type; (ii) The Enterprise makes any change to an internal model that would result in a material change in the Enterprise's risk-weighted asset amount for a portfolio of covered positions; or (iii) The Enterprise makes any material change to its modeling assumptions. (3) FHFA may determine an appropriate capital requirement for the covered positions to which a model would apply, if FHFA determines that the model no longer complies with this subpart or fails to reflect accurately the risks of the Enterprise's covered positions. (4) The Enterprise must periodically, but no less frequently than annually, review its internal models in light of developments in financial markets and modeling technologies, and enhance those models as appropriate to ensure that they continue to meet the Enterprise's standards for model approval and employ risk measurement methodologies that are most appropriate for the Enterprise's covered positions. (5) The Enterprise must incorporate its internal models into its risk management process and integrate the internal models used for calculating its market risk measure into its daily risk management process. (6) The level of sophistication of an Enterprise's internal models must be commensurate with the complexity and amount of its covered positions. An Enterprise's internal models may use any of the generally accepted approaches, including variance-covariance models, historical simulations, or Monte Carlo simulations, to measure market risk. (7) The Enterprise's internal models must properly measure all the material risks in the covered positions to which they are applied. (8) The Enterprise's internal models must conservatively assess the risks arising from less liquid positions and positions with limited price transparency under realistic market scenarios. (9) The Enterprise must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal models to ensure continued applicability and relevance. (c) Control, oversight, and validation mechanisms. (2) The Enterprise must validate its internal models initially and on an ongoing basis. The Enterprise's validation process must be independent of the internal models' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include: (i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the internal models; (ii) An ongoing monitoring process that includes verification of processes and the comparison of the Enterprise's model outputs with relevant internal and external data sources or estimation techniques; and (iii) An outcomes analysis process that includes backtesting. (3) The Enterprise must stress test the market risk of its covered positions at a frequency appropriate to each portfolio, and in no case less frequently than quarterly. The stress tests must take into account concentration risk (including concentrations in single issuers, industries, sectors, or markets), illiquidity under stressed market conditions, and risks arising from the Enterprise's trading activities that may not be adequately captured in its internal models. (4) The Enterprise must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the Enterprise's market risk measurement systems, including the activities of the business units and independent risk control unit, compliance with policies and procedures, and calculation of the Enterprise's measures for spread risk under this subpart. At least annually, the internal audit function must report its findings to the Enterprise's board of directors (or a committee thereof). (d) Internal assessment of capital adequacy. (e) Documentation. § 1240.204 Measure for spread risk. (a) General requirement In general. (2) Measure for spread risk. (b) Single point approach General. (i) The market value of the covered position; multiplied by (ii) The applicable single point shock assumption for the covered position under paragraph (b)(2) of this section. (2) Applicable single point shock assumption. (i) 0.0475 for an RPL or an NPL; (ii) 0.0160 for a reverse mortgage loan; and (iii) 0.0410 for a reverse mortgage security. (c) Spread duration approach General. (i) The market value of the covered position; multiplied by (ii) The spread duration of the covered position determined by the Enterprise using one or more of its internal models; multiplied by (iii) The applicable spread shock assumption under paragraph (c)(2) of this section. (2) Applicable spread shock assumption. (i) 0.0015 for a multifamily mortgage exposure; (ii) 0.0265 for a PLS; and (iii) 0.0100 for an MBS guaranteed by an Enterprise or by Ginnie Mae and secured by multifamily mortgage exposures (other than IO securities guaranteed by an Enterprise or Ginnie Mae). § 1240.205 Market risk disclosures. (a) Scope. (b) Location. (c) Disclosure policy. (d) Quantitative disclosures. (i) Exposure amounts for each product type included in covered positions as described in § 1240.202; and (ii) Risk-weighted assets for each product type included in covered positions as described in § 1240.202. (2) In addition, the Enterprise must disclose publicly the aggregate amount of on-balance sheet and off-balance sheet securitization positions by exposure type at least quarterly. (e) Qualitative disclosures. (1) The composition of material portfolios of covered positions; (2) The Enterprise's valuation policies, procedures, and methodologies for covered positions including, for securitization positions, the methods and key assumptions used for valuing such positions, any significant changes since the last reporting period, and the impact of such change; (3) The characteristics of the internal models used for purposes of this subpart; (4) A description of the approaches used for validating and evaluating the accuracy of internal models and modeling processes for purposes of this subpart; (5) For each market risk category (that is, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk), a description of the stress tests applied to the positions subject to the factor; (6) The results of the comparison of the Enterprise's internal estimates for purposes of this subpart with actual outcomes during a sample period not used in model development; and (7) A description of the Enterprise's processes for monitoring changes in the market risk of securitization positions, including how those processes differ for resecuritization positions. [87 FR 33434, June 2, 2022] Subpart G—Stability Capital Buffer § 1240.400 Stability capital buffer. (a) Definitions. (1) Mortgage assets (i) The unpaid principal balance of its single-family mortgage exposures, including any single-family loans that secure MBS guaranteed by the Enterprise; (ii) The unpaid principal balance of its multifamily mortgage exposures, including any multifamily mortgage exposures that secure MBS guaranteed by the Enterprise; (iii) The carrying value of its MBS guaranteed by an Enterprise, MBS guaranteed by Ginnie Mae, PLS, and other securitization exposures (other than its retained CRT exposures); and (iv) The exposure amount of any other mortgage assets. (2) Residential mortgage debt outstanding (b) Amount. (1) The ratio of: (i) The mortgage assets of the Enterprise as of December 31 of the previous calendar year; to (ii) The residential mortgage debt outstanding as of December 31 of the previous calendar year, as published by FHFA; (2) Minus 0.05; (3) Multiplied by 5; (4) Divided by 100; and (5) Multiplied by the adjusted total assets of the Enterprise, as of December 31 of the previous calendar year. (c) Effective date of an adjusted stability capital buffer Increase in stability capital buffer. i.e., (2) Decrease in stability capital buffer. i.e., [85 FR 82198, Dec. 17, 2020, as amended at 88 FR 83481, Nov. 30, 2023] Subpart H—Capital Planning and Stress Capital Buffer Determination Source: 87 FR 33617, June 3, 2022, unless otherwise noted. § 1240.500 Capital planning and stress capital buffer determination. (a) Purpose. (b) Scope and reservation of authority Applicability. (2) Reservation of authority. (c) Definitions. Adjusted total assets Advanced approaches Capital action Capital distribution Capital plan Capital plan cycle Capital policy Common equity tier 1 capital Effective capital distribution limitations Final planned capital distributions Internal baseline scenario Internal stress scenario Planning horizon Regulatory capital ratio Severely adverse scenario Stability capital buffer Stress capital buffer Supervisory stress test (d) Capital planning requirements and procedures Annual capital planning. (ii) An Enterprise must submit its complete capital plan to FHFA by May 20 of each calendar year, or such later date as directed by FHFA. (iii) The Enterprise's board of directors or a designated committee thereof must at least annually and prior to submission of the capital plan under paragraph (d)(1)(ii) of this section: (A) Review the robustness of the Enterprise's process for assessing capital adequacy; (B) Ensure that any deficiencies in the Enterprise's process for assessing capital adequacy are appropriately remedied; and (C) Approve the Enterprise's capital plan. (2) Mandatory elements of capital plan. (i) An assessment of the expected uses and sources of capital over the planning horizon that reflects the Enterprise's size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including: (A) Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels, including regulatory capital ratios, and any additional capital measures deemed relevant by the Enterprise, over the planning horizon under a range of scenarios, including the Internal baseline scenario and at least one Internal stress scenario, as well as any additional scenarios that FHFA may provide the Enterprise after giving notice to the Enterprise; (B) A discussion of the results of any stress test required by law or regulation, and an explanation of how the capital plan takes these results into account; and (C) A description of all planned capital actions over the planning horizon. Planned capital actions must be consistent with any effective capital distribution limitations, except as may be adjusted pursuant to paragraph (g) of this section. In determining whether an Enterprise's planned capital distributions are consistent with effective capital distribution limitations, an Enterprise must assume that: ( 1 ( 2 (ii) A detailed description of the Enterprise's process for assessing capital adequacy, including: (A) A discussion of how the Enterprise will, under expected and stressful conditions, maintain capital commensurate with its risks, and maintain capital above the regulatory capital ratios; (B) A discussion of how the Enterprise will, under expected and stressful conditions, maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary; (iii) The Enterprise's capital policy; and (iv) A discussion of any expected changes to the Enterprise's business plan that are likely to have a material impact on the Enterprise's capital adequacy or liquidity. (3) Data collection. (i) The Enterprise's financial condition, including its capital; (ii) The Enterprise's structure; (iii) Amount and risk characteristics of the Enterprise's on- and off-balance sheet exposures, including exposures within the Enterprise's trading account, other trading-related exposures (such as counterparty-credit risk exposures) or other items sensitive to changes in market factors, including, as appropriate, information about the sensitivity of positions to changes in market rates and prices; (iv) The Enterprise's relevant policies and procedures, including risk management policies and procedures; (v) The Enterprise's liquidity profile and management; (vi) The loss, revenue, and expense estimation models used by the Enterprise for stress scenario analysis, including supporting documentation regarding each model's development and validation; and (vii) Any other relevant qualitative or quantitative information requested by FHFA to facilitate review of the Enterprise's capital plan under this section. (4) Resubmission of a capital plan. (A) The Enterprise determines there has been or will be a material change in the Enterprise's risk profile, financial condition, or corporate structure since the Enterprise last submitted the capital plan to FHFA; or (B) FHFA instructs the Enterprise in writing to revise and resubmit its capital plan, as necessary to monitor risks to capital adequacy, for reasons including, but not limited to: ( 1 The ( 2 ( 3 (ii) FHFA may extend the 30-day period in paragraph (d)(4)(i) of this section for up to an additional 60 calendar days, or such longer period as FHFA determines appropriate. (iii) Any updated capital plan must satisfy all the requirements of this section; however, an Enterprise may continue to rely on information submitted as part of a previously submitted capital plan to the extent that the information remains accurate and appropriate. (5) Confidential treatment of information submitted. (e) Calculation of the stress capital buffer General. (2) Stress capital buffer calculation. (i) The following calculation: (A) The ratio of an Enterprise's common equity tier 1 capital to adjusted total assets, as of the final quarter of the previous capital plan cycle, unless otherwise determined by FHFA; minus (B) The lowest projected ratio of the Enterprise's common equity tier 1 capital to adjusted total assets, in any quarter of the planning horizon under a supervisory stress test; plus (C) The ratio of: ( 1 ( 2 (3) Recalculation of stress capital buffer. (f) Review of capital plans by FHFA. (1) The comprehensiveness of the capital plan, including the extent to which the analysis underlying the capital plan captures and addresses potential risks stemming from activities across the Enterprise and the Enterprise's capital policy; (2) The reasonableness of the Enterprise's capital plan, the assumptions and analysis underlying the capital plan, and the robustness of its capital adequacy process; (3) Relevant supervisory information about the Enterprise and its subsidiaries; (4) The Enterprise's regulatory and financial reports, as well as supporting data that would allow for an analysis of the Enterprise's loss, revenue, and reserve projections; (5) The results of any stress tests conducted by the Enterprise or FHFA; and (6) Other information requested or required by FHFA, as well as any other information relevant, or related, to the Enterprise's capital adequacy. (g) FHFA notice of stress capital buffer; final planned capital distributions Notice. (2) Response to notice Request for reconsideration of stress capital buffer. (ii) Adjustments to planned capital distributions. (A) Determine whether the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer provided by FHFA under paragraph (g)(1) or (h)(5) of this section, as applicable, in place of any stress capital buffer in effect; and ( 1 ( 2 (B) Notify FHFA of any adjustments made to planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario. (3) Final planned capital distributions. (i) The expiration of the time for requesting reconsideration under paragraph (i) of this section; and (ii) The expiration of the time for adjusting planned capital distributions pursuant to paragraph (g)(2)(ii) of this section. (4) Effective date of final stress capital buffer. (ii) Unless otherwise determined by FHFA, an Enterprise's final planned capital distributions and final stress capital buffer shall: (A) Be effective on October 1 of the calendar year in which a capital plan was submitted pursuant to paragraph (d)(1)(ii) of this section; and (B) Remain in effect until superseded. (5) Publication. (i) The stress capital buffer provided to an Enterprise under paragraph (g)(1) or (h)(5) of this section; (ii) Adjustments made pursuant to paragraph (g)(2)(ii) of this section; (iii) A summary of the results of the supervisory stress test; and (iv) Other information. (h) Administrative remedies; request for reconsideration. (1) General. (2) Timing of request. (3) Contents of request. (ii) A request for reconsideration may include a request for an informal hearing on the Enterprise's request for reconsideration. (4) Hearing. (ii) An informal hearing shall be held within 30 calendar days of a request, if granted, provided that FHFA may extend this period upon notice to the requesting party. (5) Response to request. (6) Distributions during the pendency of a request for reconsideration. (i) Approval requirements for certain capital actions Circumstances requiring approval resubmission of a capital plan. (2) Contents of request. (i) The Enterprise's capital plan or a discussion of changes to the Enterprise's capital plan since it was last submitted to FHFA; (ii) The purpose of the transaction; (iii) A description of the capital distribution, including for redemptions or repurchases of securities, the gross consideration to be paid and the terms and sources of funding for the transaction, and for dividends, the amount of the dividend(s); and (iv) Any additional information requested by FHFA (which may include, among other things, an assessment of the Enterprise's capital adequacy under a severely adverse scenario, a revised capital plan, and supporting data). (3) Approval of certain capital distributions. (ii) In acting on a request for prior approval of a capital distribution, FHFA will apply the considerations and principles in paragraph (f) of this section, as appropriate. In addition, FHFA may disapprove the transaction if the Enterprise does not provide all of the information required to be submitted under paragraph (i)(2) of this section. (4) Disapproval and hearing. (ii) FHFA may, in its sole discretion, order an informal hearing if FHFA finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact. An informal hearing shall be held within 30 calendar days of a request, if granted, provided that FHFA may extend this period upon notice to the requesting party. (iii) Written notice of the final decision of FHFA shall be given to the Enterprise within 60 calendar days of the conclusion of any informal hearing ordered by FHFA, provided that FHFA may extend this period upon notice to the requesting party. (iv) While FHFA's decision is pending and until such time as FHFA approves the capital distribution at issue, the Enterprise may not make such capital distribution. (j) Post notice requirement. (1) The capital distribution was approved pursuant to paragraph (i)(3) of this section; or (2) The dollar amount of the capital distribution will exceed the dollar amount of the Enterprise's final planned capital distributions, as measured on an aggregate basis beginning in the fourth quarter of the planning horizon through the quarter at issue. §§ 1240.501-1240.502 [Reserved]

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