SIFI standards: Single counterparty exposure limits

April 2012
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SIFI standards: Single counterparty exposure limits

At a glance

April 2012 - In this A Closer Look, we review and analyze the Federal Reserve Board's new standards for systemically important financial institutions (SIFIs) that introduce a single counterparty exposure (concentration) limit.

This A Closer Look focuses on one of the most significant proposed standards in the package of enhanced requirements for Systemically Important Financial Institutions (SIFIs) — single counterparty credit limits. The proposal introduces a two-tier limit, with a more stringent limit applied to the largest covered companies. A covered company's credit exposure to a counterparty would have to be calculated on a consolidated basis. The definition of a counterparty includes a company and all of its subsidiaries and governments (federal, state and foreign) calculated to include collectively agencies, instrumentalities and political subdivisions.

Depending on how the final rule reflects concerns of the industry and others, it is possible that the proposed limit could:

  • Reduce credit availability, especially for the largest financial firms and some states and municipalities and foreign governments;
  • Increase the cost of derivatives transactions with counterparties that don’t have master netting agreements; and
  • Impact the cost and availability of securities lending and borrowing activities.

In this A Closer Look, we review and analyze the proposal, including the scope of application, applicable counterparties, limit level and the definition of capital and exposure.

To read this edition, please click here.

This A Closer Look follows our FS Regulatory Brief: The Federal Reserve’s proposal to implement enhanced prudential standards for large bank holding companies, issued in December, 2011, which reviewed at a high level the full menu of proposed SIFI standards.

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