Texas Register, Volume 37, Number 35, Pages 6819-7008, August 31, 2012 Page: 6,840
The following text was automatically extracted from the image on this page using optical character recognition software:
rowing transactions by proposed 12.2(14). These methods rec-
ognize that the size of the state bank and complexity and vol-
ume of the securities financing transactions engaged in by the
state bank may warrant different approaches. As with derivative
transactions, unless required to use a specific method pursuant
to proposed 12.12(c)(2), a state bank may choose which of the
two methods it will use and would be required to use this same
method for calculating credit exposure arising from all securities
The first option, the "internal model method," provides that a
state bank may calculate the credit exposure of a securities fi-
nancing transaction by using an internal model approved for pur-
poses of 32(d) of the federal capital adequacy guidelines, or
another approved model.
Calculation of the credit exposure under the second option, the
"non-model method," is based on the type of securities financing
transaction at issue. As with derivative transactions, the depart-
ment finds that, for non-complex state banks engaged in these
transactions, the simpler approach to measuring credit expo-
sure in the non-model method adequately protects the safety and
soundness of the state bank while mitigating regulatory burden.
The specific method for calculating credit exposure under the
non-model method for each type of securities financing transac-
tion is addressed in the following discussion.
Repurchase agreements and securities lending transactions. In
a repurchase agreement, also known as a liability repo, a state
bank that owns securities borrows funds by selling the specified
securities to another party under a simultaneous agreement to
repurchase the same securities at a specified price and date. In
a securities lending transaction, a state bank lends securities to
a counterparty (who may use them to cover a short sale or satisfy
some other obligation). A securities loan is collateralized, usu-
ally by cash but sometimes by other securities. The econom-
ics of a securities lending transaction are identical to a repur-
chase agreement when the collateral received by the state bank
is cash. If the collateral is securities, the economics are slightly
different because there is the risk of market price changes on
both the securities loaned and the securities received as col-
lateral. For example, the value of the security loaned could in-
crease, and the value of the collateral received could decrease.
The non-model method provides that for a repurchase agree-
ment or a securities loan where the collateral is cash, exposure
under the lending limit will be equal to and remain fixed at the
net current exposure, i.e., the market value at execution of the
transaction of securities transferred to the other party, less cash
received from the other party. For securities lending transactions
where the collateral is other securities (i.e., not cash), the pro-
posed rule provides that the exposure will be equal to and remain
fixed at the product of the higher of the two "haircuts" associated
with the securities, as determined by a look-up table included
in the regulation (Table 3), and the higher of the two par values
of the securities. (In finance, a "haircut" is a percentage that is
subtracted from the market value of an asset that is being used
as collateral. The size of the haircut reflects the perceived risk
associated with holding the asset.)
Reverse repurchase agreements (asset repos) and securities
borrowing transactions. In a reverse repurchase agreement,
also known as an asset repo, a state bank lends money to a
counterparty by purchasing a security and agreeing to resell the
security to the counterparty at a future date. For example, a state
bank may enter into an asset repo to invest excess liquidity or
to obtain securities to use as collateral in other transactions, or
a state bank may need securities to cover short positions or to
pledge against public funds to obtain a low-cost source of fund-
In a typical securities borrowing transaction, a state bank need-
ing to borrow securities obtains the securities from a securities
lender and posts collateral in the form of cash and/or marketable
securities with the securities lender (or an agent acting on be-
half of the securities lender) in an amount that fully covers the
value of the securities borrowed plus an additional margin, usu-
ally ranging from two to five percent. The economics of a securi-
ties borrowing transaction are identical to a reverse repurchase
agreement (asset repo) when the collateral posted by the state
bank is cash.
Under the alternative, non-model method in proposed 12.12(c),
the credit exposure arising from a reverse repurchase agree-
ment or a securities borrowing transaction where the collateral
is cash will equal and remain fixed at the product of the haircut
associated with the collateral received, as determined in Table 3,
and the amount of cash transferred to the other party. The credit
exposure arising from a securities borrowed transaction where
the collateral is other securities (i.e., not cash) must equal and
remain fixed at the product of the higher of the two haircuts as-
sociated with the securities, as determined in Table 3, and the
higher of the two par values of the securities.
Mandatory use of method. Finally, as with derivative transac-
tions, 12.12(c)(2) provides that the commissioner may require
a state bank to use a specific method to calculate the credit ex-
posure of securities financing transactions if the commissioner
finds that this method is necessary to promote the safety and
soundness of the state bank.
The OCC provided an explanatory table to aid in understand-
ing its interim final rule, published with the interim final rule in
the June 21, 2012 edition of the Federal Register (77 Fed. Reg.
37265, at 37271-37273). The department has prepared a similar
explanatory table that lists each transaction subject to proposed
12.12 by type, a description of what happens in the transac-
tion, the nature of the credit risk assumed in the transaction, the
purpose of the transaction, and how credit exposure would be
calculated under 12.12 as proposed, followed by an illustrative
example for each type.
The explanatory table is intended to aid in understanding the pro-
posal and can be viewed at www.dob.texas.gov/legal/1212_ta-
ble.pdf. Upon request, a copy of the table can be obtained by
email, fax or U.S. mail. The table is not a substitute for reviewing
proposed 12.12 itself.
FISCAL AND ECONOMIC IMPACT ANALYSIS
Robert L. Bacon, Deputy Commissioner, Texas Department of
Banking, has determined that for the first five-year period the
proposed new and amndded rules are in effect, there will be no
fiscal implications for state government or for local government
as a result of enforcing or administering the rule.
Mr. Bacon also has determined that, for each year of the first
five years the rules as proposed are in effect, the public bene-
fit anticipated as a result of enforcing the rules is improved risk
management by state banks engaged in derivative or securities
financing transactions, primarily through the routine capture and
evaluation of, and limits placed upon, the aggregate credit expo-
sure of the bank to each counterparty with whom the bank does
37 TexReg 6840 August 31, 2012 Texas Register
Here’s what’s next.
This issue can be searched. Note: Results may vary based on the legibility of text within the document.
Tools / Downloads
Get a copy of this page or view the extracted text.
Citing and Sharing
Basic information for referencing this web page. We also provide extended guidance on usage rights, references, copying or embedding.
Reference the current page of this Periodical.
Texas. Secretary of State. Texas Register, Volume 37, Number 35, Pages 6819-7008, August 31, 2012, periodical, August 31, 2012; Austin, Texas. (texashistory.unt.edu/ark:/67531/metapth253227/m1/22/: accessed January 23, 2018), University of North Texas Libraries, The Portal to Texas History, texashistory.unt.edu; crediting UNT Libraries Government Documents Department.