GAAP Consolidation vs. SCCL Aggregation: A Two-Step Framework for Identifying a Single Counterparty

GAAP Consolidation vs. SCCL Aggregation: A Two-Step Framework for Identifying a Single Counterparty

1. Overview

The Single Counterparty Credit Limits (SCCL) rule sets strict limits on how much credit exposure a large U.S. bank holding company or intermediate holding company (IHC) can have to any single counterparty. To comply with this rule, firms must correctly identify what counts as “a single counterparty.”

This is not always straightforward. Some counterparties are part of complex corporate structures. Others may not be consolidated under accounting rules but are still closely tied through control relationship or economic interdependence. The SCCL rule addresses this challenge through a two-step framework:

1. Step 1: Determine the counterparty based on GAAP consolidation (specifically, for the counterparty type of "company").
2. Step 2: Aggregate additional exposures based on control relationship or economic interdependence.

2. Regulatory Requirement

The SCCL rule applies a financial consolidation standard to define the terms “affiliate” and “subsidiary.”

According to the FASB Accounting Standards Codification (ASC) Master Glossary:

• Affiliate refers to a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.
• Subsidiary is an entity, including unincorporated entities such as partnerships or trusts, in which another entity (its parent) holds a controlling financial interest. This also includes variable interest entities consolidated by a primary beneficiary.
• Consolidated Affiliate means an entity whose assets and liabilities are included in the consolidated, combined, or other financial statements being presented.

Under 12 CFR § 252.71 of the SCCL rule:

• Affiliate of a company includes:
  • Any subsidiary and any other company consolidated with the company under applicable accounting standards (e.g., U.S. GAAP or IFRS); or
  • For companies not subject to such standards, any entities that would have been consolidated had those standards applied.
• Subsidiary is defined as:
  • Any company consolidated by another under applicable accounting standards; or
  • Any company that would be consolidated if such standards had applied.

§ 252.71(e)(2) clarifies that for any company not a subsidiary of the covered company, the counterparty includes the company and its affiliates collectively.

Note: Both the FASB ASC and 12 CFR § 252.71 define 'affiliate' more broadly than 'subsidiary.' While a subsidiary is an entity specifically consolidated under a parent's control for accounting purposes, 'affiliate' extends to encompass not only subsidiaries but also other entities under common control, often referred to as 'sibling' entities.

Step 1: GAAP Consolidation

The first step is grounded in accounting rules. Under § 252.71(b) and § 252.71(e)(2) of the SCCL regulation, a “counterparty” includes, but is not limited to, any company and its affiliates that are consolidated with it under applicable accounting standards, such as U.S. GAAP or IFRS.

For example, consolidation occurs through two models under U.S. GAAP (ASC 810):

• Voting Interest Entity (VOE) model - Applied when the reporting company holds more than 50% of the voting equity.
• Variable Interest Entity (VIE) model - Applied when a controlling financial interest exists without majority voting rights, based on the company being the primary beneficiary of the VIE, meaning it has both:
  • Power to direct the activities of a VIE that most significantly impact the VIE’s economic performance [ASC 810-10-25-38A(a)]; and
  • Economics, which refers to the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE [ASC 810-10-25-38A(b)]

Example: Federal Home Loan Mortgage Corporation (Freddie Mac) – 2024 Form 10-K

NOTE 3
Securitization and Consolidation
Consolidated VIEs
We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered the primary beneficiary of the VIE. We are the primary beneficiary of a VIE when we have both the power to direct the activities of the VIE that most significantly impact its economic performance and exposure to losses or benefits of the VIE that could potentially be significant to the VIE.

[...]

Single-Family Securitization Products
Level 1 Securitization Products
The economic performance of these trusts is most significantly affected by the performance of the underlying loans. Our rights as administrator and guarantor provide us with the power to direct the activities that most significantly affect the performance of the underlying loans. We also have the obligation to absorb losses of these trusts that could potentially be significant through our guarantee of principal and interest payments. Accordingly, we concluded that we are the primary beneficiary of and, therefore, consolidate these trusts.

Source: Freddie Mac 2024 10-K (SEC.gov)

In simple terms, this means that if you're dealing with a corporate group that prepares consolidated financial statements, the entire consolidated group is treated as a counterparty for SCCL purposes. This captures the legal and financial structure reflected in financial reporting.

Important Clarification: Step 1 (GAAP consolidation) is required for all counterparties and is not subject to the 5% Tier 1 Capital threshold that applies to aggregation under § 252.76. In other words, the determination of the consolidated counterparty under § 252.71 must be performed for every exposure, regardless of size. Additionally, GAAP consolidation is not reported on Schedules A-1 or A-2 of FR 2590, as those schedules only capture regulatory aggregation determinations based on control relationship or economic interdependence under § 252.76.

Step 2: Aggregation Based on Control or Economic Interdependence

After identifying the GAAP-consolidated counterparty, covered companies must determine whether additional counterparties should be grouped together based on regulatory aggregation criteria under § 252.76. This step is required when the aggregate net credit exposure to any consolidated counterparty (identified in Step 1) exceeds 5% of Tier 1 capital.

Covered companies must evaluate:

• Economic Interdependence – Under § 252.76(b), counterparties must be aggregated if the financial distress, default, or insolvency of one would likely cause the same in another. Institutions must assess whether:
  • 50% or more of one counterparty’s gross revenue or expenditures is with the other;
  • One counterparty guarantees the other’s credit exposure representing 50% or more of that exposure;
  • 25% or more of one counterparty’s production or output is sold to the other and cannot easily be redirected;
  • Both counterparties rely on the same expected repayment source and lack independent income;
  • Both counterparties share a common funding provider, with no viable replacement in case of default.
• Control Relationships – Under § 252.76(c), aggregation is also required when one counterparty:
  • Owns or controls 25% or more of any voting class of the other counterparty’s securities; or
  • Has the ability to elect a majority of the board of directors, trustees, or equivalent of the other.

This second step ensures that even if counterparties are not GAAP-consolidated, their exposures are still combined when risk is significantly concentrated due to control or financial dependence. Aggregated exposures must be reported and included for compliance with the SCCL credit limits.

Summary Table

Step	Purpose	Rule	What’s Included
Step 1: Consolidation	Define each consolidated counterparty using GAAP-based consolidation	§ 252.71(b), § 252.71(e)(2)	The counterparty legal entity and all of its affiliates consolidated under GAAP
Step 2: Aggregation	Group together distinct counterparties that are linked	§ 252.76	Multiple counterparties that are connected by economic interdependence or control relationships

3. Common Challenges

Many firms find this two-step process difficult to implement because real-world structures are not always clear-cut. Common issues include:

• Incomplete legal entity data – GAAP consolidation requires accurate knowledge of corporate hierarchies and financial reporting relationships.
• Overlapping roles – Entities may act as guarantors, borrowers, and counterparties in different roles, complicating risk aggregation.
• Opaque ownership or funding ties – Economic interdependence is often based on judgment and hard-to-measure financial links.

Firms need disciplined processes and data governance to correctly apply both steps and avoid under- or over-stating exposure.

4. Peer Approaches

Leading banks and IHCs are adopting structured frameworks to manage this complexity. Common practices include:

• Entity resolution engines – Tools that map legal entities into consolidated groups and flag potential aggregation triggers.
• Rule-based logic – Automated rules that apply § 252.71 and § 252.76 consistently across portfolios.
• Periodic reviews – Regular reassessment of counterparty relationships, especially for high exposure accounts.
• Cross-functional committees – Involving finance, risk, legal, and credit teams to validate counterparty mappings.

Firms that take a proactive and systematic approach are better positioned to meet supervisory expectations and avoid surprises in FR 2590 reporting.

5. GLOBAL ABAS View

At GLOBAL ABAS, we advise clients to treat counterparty exposure identification as a formal process with two distinct but connected steps:

1. Anchor in GAAP consolidation – This provides a consistent and auditable foundation. It aligns with financial reporting and avoids duplication.
2. Layer on regulatory aggregation – Use aggregation rules (§ 252.76) to expand the counterparty when economic or control risks are present, even if the entities are not consolidated under GAAP.

This approach ensures that exposure limits reflect both structural and economic realities. It also supports accurate and defensible reporting on FR 2590 Schedules A-1 and A-2, where exposure to each aggregated counterparty unit must be clearly reported and justified.

We help clients implement this framework by:

• Designing counterparty hierarchy models
• Building rule-based aggregation logic
• Training teams to apply interdependence criteria
• Reviewing existing exposures for compliance gaps

6. Final Thoughts

The SCCL rule was designed to prevent excessive concentration to any single counterparty. But the definition of “single counterparty” is broader than it first appears. It includes both formal accounting affiliates and economically connected entities.

By applying a two-step framework, first GAAP consolidation, then risk-based aggregation, firms can ensure their counterparty exposure calculations are both accurate and complete. This is essential for meeting the 15% or 25% Tier 1 capital thresholds and for delivering accurate FR 2590 reports.

Getting this right reduces regulatory risk and improves internal risk management. It also strengthens transparency and credibility with supervisors.

To learn more about how GLOBAL ABAS can support your SCCL compliance program, visit our website or subscribe for future updates.

Disclaimer: This blog post is for informational purposes only and reflects our understanding of the SCCL rule and FR 2590 reporting as of the date of publication. It does not constitute legal, regulatory, or professional advice. Institutions should consult with internal and external advisors and refer directly to the SCCL rule (12 CFR Part 252, Subpart H) and FR 2590 instructions for specific guidance. GLOBAL ABAS disclaims any liability for actions taken or not taken based on this information.

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