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Regulators update guidance on derivative contracts' capital treatment

Three federal regulators notified national banks and federal savings associations of guidance on the capital treatment of certain derivative contracts, following modifications in central counterparties' rulebooks.

Central counterparties have treated variation margins — used to cover risk exposure in centrally cleared derivative contracts and their netting sets — as collateral, with the title to the collateral kept by the posting party (collateralized-to-market). Now, variation margins may be considered settlement payment, with the title to the payment transferred to the receiving party (settled-to-market).

Consequently, the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency have determined that, for capital rule purposes:

* In a derivative contract where the outstanding exposure is settled and the terms reset on certain dates so that the contract's fair value is zero, the remaining maturity equals the time until the next reset date; and

* If a bank — having determined that a variation margin may legally be considered settlement — decides that the payment settles outstanding exposure and the terms reset so the contract's fair value is zero, then the remaining maturity on the contract equals the time until its next exchange of variation margin.