1. (a) Scope. This section sets forth the rules for calculating the credit exposure arising from a derivative transaction or a securities financing transaction entered into by a state bank for purposes of determining the bank's lending limit pursuant to Finance Code, §34.201, and this subchapter.

2. (b) Derivative transactions.

   1. (1) Non-credit derivatives. Subject to paragraphs (2) and (3) of this subsection, a state bank shall calculate the credit exposure to a counterparty arising from a derivative transaction by one of the following methods. Subject to paragraph (3) of this subsection, a bank shall use the same method for calculating counterparty credit exposure arising from all of its derivative transactions.

      1. (A) Internal model method.

         1. (i) 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.
         2. (ii) 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, then the current credit exposure is zero.
         3. (iii) Calculation of potential future credit exposure. A bank shall calculate its potential future credit exposure by using an internal model that has been approved for purposes of §53 of the federal capital adequacy guidelines, or another approved model.
         4. (iv) Net credit exposure. A bank that calculates its credit exposure by using the internal model method pursuant to this subparagraph may net credit exposures of derivative transactions arising under the same qualifying master netting agreement.
      2. (B) 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 as determined at the execution of the transaction by reference to the following Table 1.
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      3. (C) 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 the following Table 2.
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   2. (2) Credit derivatives.

      1. (A) Notwithstanding paragraph (1) of this subsection, a state bank that uses the conversion factor matrix method or remaining maturity method, or that uses the internal model method without entering an effective margining arrangement as defined in §12.2 of this title (relating to Definitions), 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.
      2. (B) A state bank shall calculate the credit exposure to a reference entity arising from credit derivatives entered by the bank by adding the 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. (3) Mandatory use of method. The commissioner may require a state bank to use the internal model method set forth in paragraph (1)(A) of this subsection, the conversion factor matrix method set forth in paragraph (1)(B) of this subsection, or the remaining maturity method set forth in paragraph (1)(C) of this subsection to calculate the credit exposure of derivative transactions if the commissioner finds that such method is necessary to promote the safety and soundness of the bank.

3. (c) Securities financing transactions.

   1. (1) In general. Except as provided by paragraph (2) of this subsection, a state bank shall calculate the credit exposure arising from a securities financing transaction by one of the following methods. A state bank shall use the same method for calculating credit exposure arising from all of its securities financing transactions.

      1. (A) Internal model method. A state bank may calculate the credit exposure of a securities financing transaction by using an internal model approved for purposes of §32(d) of the federal capital adequacy guidelines, or another approved model.

      2. (B) Non-model method. A state bank may calculate the credit exposure of a securities financing transaction as follows:

         1. (i) Repurchase agreement. The credit exposure arising from a repurchase agreement shall equal and remain fixed at the market value at execution of the transaction of the securities transferred to the other party less cash received.

         2. (ii) Securities lending.

            1. (I) Cash collateral transactions. The credit exposure arising from a securities lending transaction where the collateral is cash shall equal and remain fixed at the market value at execution of the transaction of securities transferred less cash received.
            2. (II) Non-cash collateral transactions. The credit exposure arising from a securities lending transaction where the collateral is other securities shall equal and remain fixed as the product of the higher of the two haircuts associated with the two securities, as determined in the following Table 3, and the higher of the two par values of the securities.
         3. (iii) Reverse repurchase agreements. The credit exposure arising from a reverse repurchase agreement shall equal and remain fixed as the product of the haircut associated with the collateral received, as determined in the following Table 3, and the amount of cash transferred.

         4. (iv) Securities borrowing.

            1. (I) Cash collateral transactions. The credit exposure arising from a securities borrowed transaction where the collateral is cash shall equal and remain fixed as the product of the haircut on the collateral received, as determined in the following Table 3, and the amount of cash transferred to the other party.
            2. (II) Non-cash collateral transactions. The credit exposure arising from a securities borrowed transaction where the collateral is other securities shall equal and remain fixed as the product of the higher of the two haircuts associated with the two securities, as determined in the following Table 3, and the higher of the two par values of the securities.
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   2. (2) Mandatory use of method. The commissioner may require a state bank to use either the internal model method set forth in paragraph (1)(A) of this subsection or the non-model method set forth in paragraph (1)(B) of this subsection to calculate the credit exposure of securities financing transactions if the commissioner finds that such method is necessary to promote the safety and soundness of the bank.
4. (d) Temporary exception. The requirements of this section do not apply to credit exposure arising from a derivative transaction or a securities financing transaction until May 1, 2013.

Source Note:The provisions of this §12.12 adopted to be effective January 3, 2013, 37 TexReg 10195.