On March 4, 2016, the Board of Governors of the Federal Reserve System (Board) proposed a modified single-counterparty credit limits rule, based on two earlier Board proposals from 2011 and 2012. The proposed rule would create single-counterparty credit limits for banks’ trading activity.

To address the risk associated with excessive credit exposures of large banking organizations to a single counterparty, section 165(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Board to establish single-counterparty credit limits for banks – including both bank holding companies and foreign banking organizations with total consolidated assets of US$50 billion or more. Section 165(e) prohibits covered banks from having credit exposure to any unaffiliated company that exceeds 25 percent of the capital stock and surplus of the bank. The proposed rule implements section 165(e).

Under the proposed rule, a bank holding company’s aggregate net credit exposure to a single counterparty would be subject to one of three exposure limits with stringency commensurate with the bank’s size and systemic importance:

  • A global systemically important bank would be restricted to a credit exposure of no more than 15 percent of the bank's tier 1 capital to another systemically important financial firm, and up to 25 percent of the bank's tier 1 capital to another counterparty;
  • A bank holding company with US$250 billion or more in total consolidated assets, or US$10 billion or more in on-balance-sheet foreign exposure, would be restricted to a credit exposure of no more than 25 percent of the bank's tier 1 capital to a counterparty; and
  • A bank holding company with US$50 billion or more in total consolidated assets would be restricted to a credit exposure of no more than 25 percent of the bank's total regulatory capital to another counterparty;

Foreign banks operating in the U.S. would be subject to similarly tailored credit exposure limits.

Implementation of the rule would follow a tiered schedule. Banks with US$250 billion or more in total consolidated assets, or US$10 billion or more in on-balance-sheet foreign exposure would have one year from the final rule’s effective date to comply. Banks under these US$250 billion/US$10 billion thresholds would be have two years from the effective date to comply. The compliance dates are subject to extension by the Board. 

If the rule is finalized as written, compliance will require banks to measure individual counterparty exposures against the bank’s regulatory capital. The proposed rule requires the credit exposure measurement to take into account exposures related to: extensions of credit, repurchase or reverse repurchase agreements, derivatives, and securities financings, among other transactions. The proposed rule also provides some key exemptions for the credit exposure calculation, including for derivatives, high-quality sovereign debt holdings, and positions with central counterparties. The compliance burden of the rule would thus involve understanding the requirements for measuring counterparty credit exposure and bringing counterparty credit exposures under the set limits.

The Board is seeking comments, due on June 3, 2016, including responses to the 58 questions incorporated into the proposed rule covering its various aspects, definitions and practical implications.