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Delaware General AssemblyDelaware RegulationsMonthly Register of RegulationsOctober 2013

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5 DE Admin. Code 905
Other regulations issued by the State Bank Commissioner are not affected by this proposal. The State Bank Commissioner is issuing this proposed amendment in accordance with Title 5 of the Delaware Code. This notice is issued pursuant to the requirements of Subchapter III of Chapter 11 and Chapter 101 of Title 29 of the Delaware Code.
A copy of the proposed amendment to existing Regulation 905 is being published in the October 1, 2013 edition of the Delaware Register of Regulations. A copy is also on file in the Office of the State Bank Commissioner, 555 E. Loockerman Street, Suite 210, Dover, DE 19901 and is available for inspection during regular office hours. Copies are available upon request.
Interested parties may submit written comments, suggestions, data, briefs or other materials to the Office of the State Bank Commissioner at the above address as to whether the proposed amendment should be adopted, rejected or modified. Pursuant to 29 Del.C. §10118(a). Public comments must be received on or before October 31, 2013. Written materials submitted will be available for inspection at the above address.
Borrower means a person who is named as a borrower or debtor in a loan or extension of credit, including a person to whom a bank has credit exposure arising from a derivative transaction.
Contractual commitment to advance funds”:
Credit derivativemeans a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure) to another party (the protection provider).
Derivative transaction includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
Effective margining arrangement means a master legal agreement governing derivative transactions between a bank and a counterparty that requires the counterparty to post, on a daily basis, variation margin to fully collateralize that amount of the bank’s net credit exposure to the counterparty that exceeds $1 25 million created by the derivative transactions covered by the agreement.
Eligible credit derivative means a single-name credit derivative or a standard, non-tranched index credit derivative provided that:
Eligible guarantee means a guarantee that:
Eligible protection provider means:
Loans and extensions of credit
a. Loans or extensions of credit, for purposes of Section 909 of Title 5 of the Delaware Code include any credit exposure, as determined pursuant to Section 3.0 of this regulation, arising from a derivative transaction, and also include a contractual commitment to advance funds.
b. The following items do not constitute loans or extensions of credit for purposes of Section 909 of Title 5 of the Delaware Code and this regulation:
C. That portion of one or more loans or extensions of credit, not to exceed 10 percent of capital and surplus, with respect to which the bank has purchased protection in the form of a single-name credit derivative that meets the requirements of this regulation from an eligible protection provider if the reference obligor is the same legal entity as the borrower in the loan or extension of credit and the maturity of the protection purchased equals or exceeds the maturity of the loan or extension of credit.
Qualifying master netting agreement means any written, legally enforceable bilateral agreement, provided that:
3.1 Derivative transactions. For purposes of Section 909 of Title 5 of the Delaware Code, derivative transactions entered into by a bank shall be included for purposes of determining the bank’s loan limitations.
3.2 Non-credit derivatives. Subject to Subsections 3.3 and 3.4 of this section, a A bank shall calculate the credit exposure to a counterparty arising from a derivative transaction by one of the following methods. Subject to Subsection 3.4 of this section, a A bank shall use the same method for calculating counterparty credit exposure arising from all of its derivative transactions.
3.2.1 Internal Model Method.
3.2.1.1 Credit exposure. The credit exposure of a derivative transaction under the Internal Model Method shall equal the sum of the current credit exposure of the derivative transaction and the potential future credit exposure of the derivative transaction.
3.2.1.2 Calculation of current credit exposure. A bank shall determine its current credit exposure by the mark-to-market value of the derivative contract. If the mark-to-market value is positive, then the current credit exposure equals that mark-to-market value. If the mark to market value is zero or negative, than the current credit exposure is zero.
3.2.1.3 Calculation of potential future credit exposure. A bank shall calculate its potential future credit exposure by using an internal model that has been approved by the Commissioner and the appropriate Federal banking agency for purposes of Section 909 of Title 5 of the Delaware Code, or any other appropriate model approved by the Commissioner and the appropriate Federal banking agency either:
3.2.1.4 Net credit exposure. A bank that calculates its credit exposure by using the Internal Model Method pursuant to this paragraph may net credit exposures of derivative transactions arising under the same qualifying master netting agreement.
3.2.2 Conversion Factor Matrix Method. The credit exposure arising from a derivative transaction under the Conversion Factor Matrix Method shall equal and remain fixed at the potential future credit exposure of the derivative transaction which shall equal the product of the notional amount of the derivative transaction and a fixed multiplicative factor as determined at the execution of the transaction by reference to Table 1 below.
Other3 (includes commodities and precious metals except gold)
1 For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3 Transactions not explicitly covered by any other column in the Table are to be treated as “Other.”
3.2.3 Remaining Maturity Method. The credit exposure arising from a derivative transaction under the Remaining Maturity Method shall equal the greater of zero or the sum of the current mark-to-market value of the derivative transaction added to the product of the notional amount of the transaction, the remaining maturity in years of the transaction, and a fixed multiplicative factor determined by reference to Table 2, below.
Other4 (includes commodities and precious metals except gold)
4 Transactions not explicitly covered by any other column in the Table are to be treated as “Other.”
3.2.3 Current Exposure Method. The credit exposure arising from a derivative transaction (other than a credit derivative transaction) under the Current Exposure Method shall be calculated pursuant to 12 CFR part 3, Appendix C, Sections 32(c)(5), (6) and (7); 12 CFR part 167, Appendix C, Sections 32(c)(5), (6) and (7); or 12 CFR part 390, subpart Z, Appendix A, Sections 32(c)(5), (6) and (7), as appropriate.
3.3 Credit Derivatives.
3.3.1 Counterparty Exposure.
3.3.1.1 Notwithstanding Subsection 3.2 of this section, a bank that uses the Conversion Factor Matrix Method or Remaining Maturity Method, Current Exposure Method, or that uses the Internal Model Method without entering an effective margining arrangement, as defined in Section 2.0 of this regulation, shall calculate the counterparty credit exposure arising from credit derivatives entered by the bank by adding the net notional value of all protection purchased from the counterparty on each reference entity.
3.3.1.2 Special rule for certain effective margining arrangements. A bank must add the EMA threshold amount to the counterparty credit exposure arising from credit derivatives calculated under the Model Method. The EMA threshold is the amount under an effective margining arrangement with respect to which the counterparty is not required to post variation margin to fully collateralize the amount of the bank’s net credit exposure to the counterparty.
3.3.2 Reference Entity Exposure A bank shall calculate the credit exposure to a reference entity arising from credit derivatives entered by the bank by adding the net notional value of all protection sold on the reference entity. However, the bank may reduce its exposure to a reference entity by the amount of any eligible credit derivative purchased on that reference entity from an eligible protection provider.
3.4 Special Rule for Central Counterparties. In addition to amounts calculated under previous sections of this rule, the measure of counterparty exposure to a central counterparty shall also include the sum of the initial margin posted by the bank, plus any contributions made by it to a guaranty fund at the time such contribution is made. However, this does not apply to a bank or saving association that uses an internal model pursuant to this regulation if such model reflects the initial margin and any contributions to a guaranty fund.
3.45 Mandatory use of a certain method. The Commissioner or the appropriate Federal banking agency may, in their discretion, require or permit a bank to use the Internal Model Method set forth in Subsection 3.2.1, the Conversion Factor Matrix Method set forth in Subsection 3.2.2, or the Remaining Maturity Method set forth in Subsection 3.2.3 a specific method or methods set forth in this Section 3.0 to calculate the credit exposure of arising from all derivative transactions or any specific, or category of, derivative transactions, upon finding, in their discretion, that such method is necessary to promote consistent with the safety and soundness of the bank.
A loan or extension of credit, within the bank’s legal lending limit when made, will not be deemed a violation, but will be treated as nonconforming, if the loan or extension of credit is no longer in conformity with the bank’s lending limit because, in the case of a credit exposure arising from a derivative transaction identified in Section 3.0 of this regulation and measured by the Internal Model Method specified in Section 3.2.1 of this regulation, the credit exposure, subject to the lending limits of Section 909 of Title 5 of the Delaware Code or this regulation, increases after execution of the transaction. A bank must use reasonable efforts to bring a loan or extension of credit that is nonconforming as a result of this section into conformity with the bank’s lending limit unless to do so would be inconsistent with safe and sound banking practices.
Last Updated: December 31 1969 19:00:00.
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