WASHINGTON -- Two Treasury Department agencies finalized their rules on bilateral netting agreements this week.

Under the new rules, banks and thrifts should see their minimum capital requirements reduced for many interest rate and foreign exchange rate contracts covered by the bilateral contracts.

Under a bilateral netting agreement, two parties agree to net what they owe each other on various interest rate and exchange rate contracts. With the new rules, institutions are required to hold risk-based capital against only the net amount of its current exposure under the contracts.

The new Office of Thrift Supervision and Office of the Comptroller of the Currency rules take effect Dec. 31. The Federal Reserve Board and the Federal Deposit Insurance Corp. have issued parallel rules that also take effect Dec. 31.

The new rules broaden current netting rules by including all interest rate and foreign exchange contracts that meet three key requirements: the contracts must be between the same two parties; the contract results in a single netted amount being payable or receivable in case of an insolvency or default; and the institutions subject to the contract have legal opinions concluding that the netting agreement would be upheld by the courts and other legal authorities.

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