WASHINGTON The Office of the Comptroller of the Currency has proposed capital standards that would more accurately reflect the credit risks of banks' derivatives transactions.
The standards, which were published in the Federal Register on Sept. 1 with, an Oct. 21 deadline for public comments, reflect what U.S. bank regulators and other members of the International Based Committee on Banking Supervision agreed
to in July.
Similar standards have already been proposed by the Federal Reserve Board and are expected to be proposed soon by the Federal Deposit Insurance Corp. bank regulators said.
The current capital standards for bank derivatives transactions contain a credit component that is based on two things: the positive mark-to-market value of the contract and an addition derived from the credit risk posed by future potential changes in interest rates or foreign exchange rates, an official with the comptroiler's office said.
These capital charges apply to, but are not really tailored for, commodity and equity-based derivatives contracts.
The capital charges also only differentiate' between derivatives contracts with maturities of less than a year and those with maturities of more than a year.
The proposed role would make three basic changes with regard to the credit risk component in the current capital charges.
It would increase the capital requirements for contracts with longer maturities by basing the add-on, in par on a higher percentage of the notional value of the contract.
The proposed rule would also more accurately capture the risk associated with commodity and equity contracts by specifically recognizing these contract types.
The rule would take into account, in determining the add-on, specified percentages of the notional contract amounts that more accurately reflect the volatility of underlying commodities and equities.
In addition, the proposed rule would allow banks to reduce their credit risk by taking into account the effects of legally enforceable bilateral netting arrangements on their future potential credit exposure.
Bilateral nettingarrangements permit counterparties, in the event of a
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