[Federal Register Volume 78, Number 230 (Friday, November 29, 2013)]
[Proposed Rules]
[Pages 71818-71868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27082]



[[Page 71817]]

Vol. 78

Friday,

No. 230

November 29, 2013

Part IV





 Department of the Treasury





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Office of the Comptroller of the Currency





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12 CFR Part 50





Federal Reserve System





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12 CFR Part 249





Federal Deposit Insurance Corporation





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12 CFR Part 329





 Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and 
Monitoring; Proposed Rule

  Federal Register / Vol. 78 , No. 230 / Friday, November 29, 2013 / 
Proposed Rules  

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 50

[Docket ID OCC-2013-0016]
RIN 1557 AD 74

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R-1466]
RIN 7100 AE-03

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AE04


Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, 
and Monitoring

AGENCIES: Office of the Comptroller of the Currency, Department of the 
Treasury; Board of Governors of the Federal Reserve System; and Federal 
Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking with request for public comment.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board 
of Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) are requesting comment on a 
proposed rule (proposed rule) that would implement a quantitative 
liquidity requirement consistent with the liquidity coverage ratio 
standard established by the Basel Committee on Banking Supervision. The 
requirement is designed to promote the short-term resilience of the 
liquidity risk profile of internationally active banking organizations, 
thereby improving the banking sector's ability to absorb shocks arising 
from financial and economic stress, as well as improvements in the 
measurement and management of liquidity risk. The proposed rule would 
apply to all internationally active banking organizations, generally, 
bank holding companies, certain savings and loan holding companies, and 
depository institutions with more than $250 billion in total assets or 
more than $10 billion in on-balance sheet foreign exposure, and to 
their consolidated subsidiaries that are depository institutions with 
$10 billion or more in total consolidated assets. The proposed rule 
would also apply to companies designated for supervision by the Board 
by the Financial Stability Oversight Council under section 113 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act that do not 
have significant insurance operations and to their consolidated 
subsidiaries that are depository institutions with $10 billion or more 
in total consolidated assets. The Board also is proposing on its own a 
modified liquidity coverage ratio standard that is based on a 21-
calendar day stress scenario rather than a 30 calendar-day stress 
scenario for bank holding companies and savings and loan holding 
companies without significant insurance or commercial operations that, 
in each case, have $50 billion or more in total consolidated assets.

DATES: Comments on this notice of proposed rulemaking must be received 
by January 31, 2014.

ADDRESSES: Comments should be directed to:
    OCC: Because paper mail in the Washington, DC area is subject to 
delay, commenters are encouraged to submit comments by the Federal 
eRulemaking Portal or email, if possible. Please use the title 
``Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and 
Monitoring'' to facilitate the organization and distribution of the 
comments. You may submit comments by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to 
http://www.regulations.gov. Enter ``Docket ID OCC-2013-0016'' in the 
Search Box and click ``Search''. Results can be filtered using the 
filtering tools on the left side of the screen. Click on ``Comment 
Now'' to submit public comments. Click on the ``Help'' tab on the 
Regulations.gov home page to get information on using Regulations.gov, 
including instructions for submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Mail Stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2013-0016'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide, such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2013-0016'' in the Search 
box and click ``Search''. Comments can be filtered by Agency using the 
filtering tools on the left side of the screen. Click on the ``Help'' 
tab on the Regulations.gov home page to get information on using 
Regulations.gov, including instructions for viewing public comments, 
viewing other supporting and related materials, and viewing the docket 
after the close of the comment period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    Board: You may submit comments, identified by Docket No. R-1466, by 
any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons.

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Accordingly, your comments will not be edited to remove any identifying 
or contact information. Public comments may also be viewed 
electronically or in paper form in Room MP-500 of the Board's Martin 
Building (20th and C Street NW) between 9:00 a.m. and 5:00 p.m. on 
weekdays.
    FDIC: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7:00 a.m. and 5:00 p.m.
     Email: [email protected].
    Instructions: Comments submitted must include ``FDIC'' and ``RIN 
3064-AE04.'' Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any 
personal information provided.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Kerri Corn, Director, Credit and Market Risk Division, (202) 
649-6398; Linda M. Jennings, National Bank Examiner, (980) 387-0619; 
Patrick T. Tierney, Special Counsel, or Tiffany Eng, Law Clerk, 
Legislative and Regulatory Activities Division, (202) 649-5490; or Adam 
S. Trost, Senior Attorney, Securities and Corporate Practices Division, 
(202) 649-5510 Office of the Comptroller of the Currency, 400 7th 
Street SW., Washington, DC 20219.
    Board: Anna Lee Hewko, Deputy Associate Director, (202) 530-6260; 
David Emmel, Manager, (202) 912-4612, Credit, Market and Liquidity Risk 
Policy; Ann McKeehan, Senior Supervisory Financial Analyst, (202) 972-
6903; Andrew Willis, Senior Financial Analyst, (202) 912-4323, Capital 
and Regulatory Policy; April C. Snyder, Senior Counsel, (202) 452-3099; 
or Dafina Stewart, Senior Attorney, (202) 452-3876, Legal Division, 
Board of Governors of the Federal Reserve System, 20th and C Streets 
NW., Washington, DC 20551. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Kyle Hadley, Chief, Examination Support Section, (202) 898-
6532; Rebecca Berryman, Senior Capital Markets Policy Specialist, (202) 
898-6901; Eric Schatten, Capital Markets Policy Analyst, (202) 898-
7063, Capital Markets Branch Division of Risk Management Supervision, 
(202) 898-6888; Gregory Feder, Counsel, (202) 898-8724; or Sue Dawley, 
Senior Attorney, (202) 898-6509, Supervision Branch, Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. Summary of the Proposed Rule
    B. Background
    C. Overview of the Proposed Rule
II. Minimum Liquidity Coverage Ratio
    A. High-Quality Liquid Assets
    1. Liquidity Characteristics of HQLA
    a. Risk Profile
    b. Market-based Characteristics
    c. Central Bank Eligibility
    2. Qualifying Criteria for Categories of HQLA
    a. Level 1 Liquid Assets
    b. Level 2A Liquid Assets
    c. Level 2B Liquid Assets
    3. Operational Requirements for HQLA
    4. Generally Applicable Criteria for HQLA
    a. Unencumbered
    b. Client Pool Security
    c. Treatment of HQLA held by U.S. Consolidated Subsidiaries
    e. Exclusion of Rehypothecated Assets
    f. Exclusion of Assets Designated as Operational
    5. Calculation of the HQLA Amount
    a. Calculation of Unadjusted Excess HQLA Amount
    b. Calculation of Adjusted Excess HQLA Amount
    c. Example HQLA Calculation
    B. Total Net Cash Outflow
    1. Determining the Maturity of Instruments and Transactions
    2. Cash Outflow Categories
    a. Unsecured Retail Funding Outflow Amount
    b. Structured Transaction Outflow Amount
    c. Net Derivative Cash Outflow Amount
    d. Mortgage Commitment Outflow Amount
    e. Commitment Outflow Amount
    f. Collateral Outflow Amount
    g. Brokered Deposit Outflow Amount for Retail Customers or 
Counterparties
    h. Unsecured Wholesale Funding Outflow Amount
    i. Debt Security Outflow Amount
    j. Secured Funding and Asset Exchange Outflow Amount
    k. Foreign Central Bank Borrowings
    l. Other Contractual Outflow Amounts
    m. Excluded Amounts for Intragroup Transactions
    3. Total Cash Inflow Amount
    a. Items not included as inflows
    b. Net Derivatives Cash Inflow Amount
    c. Retail Cash Inflow Amount
    d. Unsecured Wholesale Cash Inflow Amount
    e. Securities Cash Inflow Amount
    f. Secured Lending and Asset Exchange Cash Inflow Amount
III. Liquidity Coverage Ratio Shortfall
IV. Transition and Timing
V. Modified Liquidity Coverage Ratio Applicable to Bank and Savings 
and Loan Holding Companies
    A. Overview and Applicability
    B. High-Quality Liquid Assets
    C. Total Net Cash Outflow
VI. Solicitation of Comments on Use of Plain Language
VII. Regulatory Flexibility Act
VIII. Paperwork Reduction Act
IX. OCC Unfunded Mandates Reform Act of 1995 Determination

I. Introduction

A. Summary of the Proposed Rule

    The Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are 
requesting comment on a proposed rule (proposed rule) that would 
implement a liquidity coverage ratio requirement, consistent with the 
international liquidity standards published by the Basel Committee on 
Banking Supervision (BCBS),\1\ for large, internationally active 
banking organizations, nonbank financial companies designated by the 
Financial Stability Oversight Council for Board supervision that do not 
have substantial insurance activities (covered nonbank companies), and 
their consolidated subsidiary depository institutions with total assets 
greater than $10 billion. The BCBS published the international 
liquidity standards in December 2010 as a part of the Basel III reform 
package \2\ and revised the standards in January 2013 (as revised, the 
Basel III Revised Liquidity Framework).\3\ The Board also is proposing 
on its own to implement a modified version of the liquidity coverage 
ratio requirement as an enhanced prudential standard for bank holding 
companies and savings and loan holding companies with at least

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$50 billion in total consolidated assets that are not internationally 
active and do not have substantial insurance activities. This modified 
approach is described in section V of this preamble.
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    \1\ The BCBS is a committee of banking supervisory authorities 
that was established by the central bank governors of the G10 
countries in 1975. It currently consists of senior representatives 
of bank supervisory authorities and central banks from Argentina, 
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong 
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, 
the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, 
Sweden, Switzerland, Turkey, the United Kingdom, and the United 
States. Documents issued by the BCBS are available through the Bank 
for International Settlements Web site at http://www.bis.org.
    \2\ ``Basel III: International framework for liquidity risk 
measurement, standards and monitoring'' (December 2010), available 
at http://www.bis.org/publ/bcbs188.pdf (Basel III Liquidity 
Framework).
    \3\ ``Basel III: The Liquidity Coverage Ratio and liquidity risk 
monitoring tools'' (January 2013), available at http://www.bis.org/publ/bcbs238.htm.
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    As described in more detail below, the proposed rule would 
establish a quantitative minimum liquidity coverage ratio that builds 
upon the liquidity coverage methodologies traditionally used by banking 
organizations to assess exposures to contingent liquidity events. The 
proposed rule would complement existing supervisory guidance and the 
more qualitative liquidity requirements that the Board proposed, in 
consultation with the OCC and the FDIC, pursuant to section 165 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(Dodd-Frank Act) \4\ and would establish transition periods for 
conformance with the new requirements.
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    \4\ See ``Enhanced Prudential Standards and Early Remediation 
Requirements for Covered Companies,'' 77 FR 594 (Jan. 5, 2010); 
``Enhanced Prudential Standards and Early Remediation Requirements 
for Foreign Banking Organizations and Foreign Nonbank Financial 
Companies,'' 77 FR 76628 (Dec. 28, 2012).
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B. Background

    The recent financial crisis demonstrated significant weaknesses in 
the liquidity positions of banking organizations, many of which 
experienced difficulty meeting their obligations due to a breakdown of 
the funding markets. As a result, many governments and central banks 
across the world provided unprecedented levels of liquidity support to 
companies in the financial sector in an effort to sustain the global 
financial system. In the United States, the Board and the FDIC 
established various temporary liquidity facilities to provide sources 
of funding for a range of asset classes.
    These events came in the wake of a period characterized by ample 
liquidity in the financial system. The rapid reversal in market 
conditions and the declining availability of liquidity during the 
financial crisis illustrated both the speed with which liquidity can 
evaporate and the potential for protracted illiquidity during and 
following these types of market events. In addition, the recent 
financial crisis highlighted the pervasive detrimental effect of a 
liquidity crisis on the banking sector, the financial system, and the 
economy as a whole.
    Banking organizations' failure to adequately address these 
challenges was in part due to lapses in basic liquidity risk management 
practices. Recognizing the need for banking organizations to improve 
their liquidity risk management and to control their liquidity risk 
exposures, the agencies worked with regulators from foreign 
jurisdictions to establish international liquidity standards. These 
standards include the principles based on supervisory expectations for 
liquidity risk management in the ``Principles for Sound Liquidity 
Management and Supervision'' (Basel Liquidity Principles).\5\ In 
addition to these principles, the BCBS established quantitative 
standards for liquidity in the ``Basel III: International framework for 
liquidity risk measurement, standards and monitoring'' \6\ in December 
2010, which introduced a liquidity coverage ratio (2010 LCR) and a net 
stable funding ratio (NSFR), as well as a set of liquidity monitoring 
tools. These reforms were intended to strengthen liquidity and promote 
a more resilient financial sector by improving the banking sector's 
ability to absorb shocks arising from financial and economic stress. 
Subsequently, in January 2013, the BCBS issued ``Basel III: The 
Liquidity Coverage Ratio and liquidity risk monitoring tools'' (Basel 
III LCR),\7\ which updated key components of the 2010 LCR as part of 
the Basel III liquidity framework.\8\ The agencies acknowledge that 
there is ongoing international study of the interaction between the 
Basel III LCR and central bank operations. The agencies are working 
with the BCBS on these matters and would consider amending the proposal 
if the BCBS proposes modifications to the Basel III LCR.
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    \5\ Principles for Sound Liquidity Risk Management and 
Supervision (September 2008), available at http://www.bis.org/publ/bcbs144.htm.
    \6\ Basel III Liquidity Framework, supra note 2.
    \7\ Basel III Revised Liquidity Framework, supra note 3.
    \8\ Key provisions of the 2010 LCR that were updated by the BCBS 
in 2013 include expanding the definition of high-quality liquid 
assets, technical changes to the calculation of various inflow and 
outflow rates, introducing a phase-in period for implementation, and 
a variety of rules text clarifications. See http://www.bis.org/press/p130106b.pdf for a complete list of revisions to the 2010 LCR.
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    The Basel III LCR establishes for the first time an internationally 
harmonized quantitative liquidity standard that has the primary 
objective of promoting the short-term resilience of the liquidity risk 
profile of internationally active banking organizations. The Basel III 
LCR is designed to improve the banking sector's ability to absorb, 
without reliance on government support, shocks arising from financial 
and economic stress, whatever the source, thus reducing the risk of 
spillover from the financial sector to the broader economy.
    Beginning in January 2015, under the Basel III LCR, internationally 
active banking organizations would be required to hold sufficient high-
quality liquid assets (HQLA) to meet their obligations and other 
liquidity needs that are forecasted to occur during a 30 calendar-day 
stress scenario. To meet the Basel III LCR standard, the HQLA must be 
unencumbered by liens and other restrictions on transferability and 
must be convertible into cash easily and immediately in deep, active 
private markets.
    Current U.S. regulations do not require banking organizations to 
meet a quantitative liquidity standard. Rather, the agencies evaluate a 
banking organization's methods for measuring, monitoring, and managing 
liquidity risk on a case-by-case basis in conjunction with their 
supervisory processes.\9\ Since the financial crisis, the agencies have 
worked to establish a more rigorous supervisory and regulatory 
framework for U.S. banking organizations that would incorporate and 
build upon the BCBS standards. First, the agencies, together with the 
National Credit Union Administration and the Conference of State Bank 
Supervisors, issued guidance titled the ``Interagency Policy Statement 
on Funding and Liquidity Risk Management'' (Liquidity Risk Policy 
Statement) in March 2010.\10\ The Liquidity Risk Policy Statement 
incorporates elements of the Basel Liquidity Principles and is 
supplemented by other liquidity risk management principles previously 
issued by the agencies. The Liquidity Risk Policy Statement specifies 
supervisory expectations for fundamental liquidity risk management 
practices, including a comprehensive management process for 
identifying, measuring, monitoring, and controlling liquidity risk. The 
Liquidity Risk Policy Statement also emphasizes the central role of 
corporate governance, cash-flow projections, stress testing, ample 
liquidity resources, and formal contingency funding plans as necessary 
tools for effectively measuring and managing liquidity risk.
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    \9\ For instance, the Uniform Financial Rating System adopted by 
the Federal Financial Institutions Examination Council (FFIEC) 
requires examiners to assign a supervisory rating that assesses a 
banking organization's liquidity position and liquidity risk 
management.
    \10\ 75 FR 13656 (March 22, 2010).
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    Additionally, in 2012, pursuant to section 165 of the Dodd-Frank 
Act,\11\ the Board proposed enhanced liquidity standards for large U.S. 
banking firms,

[[Page 71821]]

certain foreign banking organizations, and nonbank financial companies 
designated by the Financial Stability Oversight Council for Board 
supervision.\12\ These enhanced liquidity standards include corporate 
governance provisions, senior management responsibilities, independent 
review, a requirement to hold highly liquidity assets to cover stressed 
liquidity needs based on internally developed stress models, a 
contingency funding plan, and specific limits on potential sources of 
liquidity risk.\13\
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    \11\ See 12 U.S.C. 5365.
    \12\ See 77 FR 594 (Jan. 5, 2012); 77 FR 76628 (Dec. 28, 2012).
    \13\ See 12 U.S.C. 5365.
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    The proposed rule would further enhance the supervisory efforts 
described above, which are aimed at measuring and managing liquidity 
risk, by implementing a minimum quantitative liquidity requirement in 
the form of a liquidity coverage ratio. This quantitative requirement 
would focus on short-term liquidity risks and would benefit the 
financial system as a whole by improving the ability of companies 
subject to the proposal to absorb potential market and liquidity shocks 
in a severe stress scenario over a short term. The agencies are 
proposing to establish a minimum liquidity coverage ratio that would be 
consistent with the Basel III LCR, with some modifications to reflect 
characteristics and risks of specific aspects of the U.S. market and 
U.S. regulatory framework, as described in this preamble. For instance, 
in recognition of the strong liquidity positions many U.S. banking 
organizations and other companies that would be subject to the proposal 
have achieved since the recent financial crisis, the proposed rule 
includes transition periods that are similar to, but shorter than, 
those set forth in the Basel III LCR. These proposed transition periods 
are designed to give companies subject to the proposal sufficient time 
to adjust to the proposed rule while minimizing any potential adverse 
impact that implementation could have on the U.S. banking system.
    The agencies note that the BCBS is in the process of reviewing the 
NSFR that was included in the BCBS liquidity framework when it was 
first published in 2010. While the Basel III LCR is focused on 
measuring liquidity resilience over a short-term period of severe 
stress, the NSFR is designed to promote resilience over a one-year time 
horizon by creating additional incentives for banking organizations and 
other financial companies that would be subject to the standard to fund 
their activities with more stable sources and encouraging a sustainable 
maturity structure of assets and liabilities. Currently, the NSFR is in 
an international observation period as the agencies work with other 
BCBS members and the banking industry to gather data and study the 
impact of the proposed NSFR standard on the banking system. The 
agencies are carefully considering what changes to the NSFR they may 
recommend to the BCBS based on the results of this assessment. The 
agencies anticipate that they would issue a proposed rulemaking 
implementing the NSFR in advance of its scheduled global implementation 
in 2018.

C. Overview of the Proposed Rule

    The proposed rule would establish a minimum liquidity coverage 
ratio applicable to all internationally active banking organizations, 
that is, banking organizations with $250 billion or more in total 
assets or $10 billion or more in on-balance sheet foreign exposure, and 
to consolidated subsidiary depository institutions of internationally 
active banking organizations with $10 billion or more in total 
consolidated assets (collectively, covered banking organizations). 
Thus, the rule would not apply to institutions that have opted in to 
the advanced approaches capital rule; \14\ the agencies are seeking 
comment on whether to apply the rule to opt-in banking organizations. 
The proposed rule would also apply to covered nonbank companies, and to 
consolidated subsidiary depository institutions of covered nonbank 
companies with $10 billion or more in total consolidated assets 
(together with covered banking organizations and covered nonbank 
companies, covered companies). The proposed rule would not apply to a 
bridge financial company or a subsidiary of a bridge financial company, 
a new depository institution or a bridge depository institution, as 
those terms are used in the resolution context.\15\ The agencies 
believe that requiring the FDIC to maintain a minimum liquidity 
coverage ratio in these entities would inappropriately constrain the 
FDIC's ability to resolve a depository institution or its affiliated 
companies in an orderly manner.\16\
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    \14\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve), 
and 12 CFR part 324 (FDIC).
    \15\ See 12 U.S.C. 1813(i) and 12 U.S.C. 5381(a)(3).
    \16\ Pursuant to the International Banking Act (IBA), 12 U.S.C. 
3101 et seq., and OCC regulation, 12 CFR 28.13(a)(1), a Federal 
branch or agency regulated and supervised by the OCC has the same 
rights and responsibilities as a national bank operating at the same 
location. Thus, as a general matter, Federal branches and agencies 
are subject to the same laws as national banks. The IBA and the OCC 
regulation state, however, that this general standard does not apply 
when the IBA or other applicable law provides other specific 
standards for Federal branches or agencies, or when the OCC 
determines that the general standard should not apply. This proposal 
would not apply to Federal branches and agencies of foreign banks 
operating in the United States. At this time, these entities have 
assets that are substantially below the proposed $250 billion asset 
threshold for applying the proposed liquidity standard to an 
internationally active banking organization. As part of its 
supervisory program for Federal branches and agencies of foreign 
banks, the OCC reviews liquidity risks and takes appropriate action 
to limit such risks in those entities. In addition, the OCC is 
monitoring other emerging initiatives in the U.S. that may impact 
liquidity risk supervision of Federal branches and agencies of 
foreign banks before considering applying a liquidity coverage ratio 
requirement to them.
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    The Board also is proposing on its own to implement a modified 
version of the liquidity coverage ratio as an enhanced prudential 
standard for bank holding companies and savings and loan holding 
companies without significant insurance or commercial operations that, 
in each case, have $50 billion or more in total consolidated assets, 
but are not covered companies for the purposes of the proposed 
rule.\17\
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    \17\ Total consolidated assets for the purposes of the proposed 
rule would be as reported on a covered banking organization's most 
recent year-end Consolidated Reports of Condition and Income or 
Consolidated Financial Statements for Bank Holding Companies, 
Federal Reserve Form FR Y-9C. Foreign exposure data would be 
calculated in accordance with the Federal Financial Institution 
Examination Council 009 Country Exposure Report.
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    The agencies are reserving the authority to apply the proposed rule 
to a company not meeting the asset thresholds described above if it is 
determined that the application of the proposed liquidity coverage 
ratio would be appropriate in light of a company's asset size, level of 
complexity, risk profile, scope of operations, affiliation with foreign 
or domestic covered companies, or risk to the financial system. A 
covered company would remain subject to the proposed rule until its 
primary Federal supervisor determines in writing that application of 
the proposed rule to the company is not appropriate in light of these 
same factors. Moreover, nothing in the proposed rule would limit the 
authority of the agencies under any other provision of law or 
regulation to take supervisory or enforcement actions, including 
actions to address unsafe or unsound practices or conditions, deficient 
liquidity levels, or violations of law. The agencies also are reserving 
the authority to require a covered company to hold an amount of HQLA 
greater than otherwise required under the proposed rule, or to take any 
other measure to improve the covered company's liquidity risk profile, 
if the relevant agency determines that the

[[Page 71822]]

covered company's liquidity requirements as calculated under the 
proposed rule are not commensurate with its liquidity risks. In making 
such determinations, the agencies will apply notice and response 
procedures as set forth in their respective regulations.
    The proposed liquidity coverage ratio would require a covered 
company to maintain an amount of HQLA meeting the criteria set forth in 
the proposed rule (the numerator of the ratio) that is no less than 100 
percent of its total net cash outflows over a prospective 30 calendar-
day period, as calculated in accordance with the proposed rule (the 
denominator of the ratio). Under the proposed rule, certain categories 
of assets may qualify as HQLA if they are unencumbered by liens and 
other restrictions on transfer so that they can be converted into cash 
quickly with little to no loss in value. Access to HQLA would enhance 
the ability of a covered company to meet its liquidity needs during an 
acute short-term liquidity stress scenario. A covered company's total 
net cash outflow amount would be determined by applying outflow and 
inflow rates, which reflect certain stressed assumptions, against the 
balances of a covered company's funding sources, obligations, and 
assets over a prospective 30 calendar-day period.
    As further described below, the measures of total cash outflow and 
total cash inflow, and the outflow and inflow rates used in their 
determination, are meant to reflect aspects of the stress events 
experienced during the recent financial crisis. Consistent with the 
Basel III LCR, these components of the proposed rule take into account 
the potential impact of idiosyncratic and market-wide shocks, including 
those that would result in: (1) A partial loss of retail deposits and 
brokered deposits for retail customers; (2) a partial loss of unsecured 
wholesale funding capacity; (3) a partial loss of secured, short-term 
financing with certain collateral and counterparties; (4) losses from 
derivative positions and the collateral supporting those positions; (5) 
unscheduled draws on committed credit and liquidity facilities that a 
covered company has provided to its clients; (6) the potential need for 
a covered company to buy back debt or to honor non-contractual 
obligations in order to mitigate reputational and other risks; and (7) 
other shocks which affect outflows linked to structured financing 
transactions, mortgages, central bank borrowings, and customer short 
positions.
    As noted above, covered companies generally would be required to 
maintain, on a consolidated basis, a liquidity coverage ratio equal to 
or greater than 100 percent. However, the agencies recognize that under 
certain circumstances, it may be necessary for a covered company's 
liquidity coverage ratio to briefly fall below 100 percent to fund 
unanticipated liquidity needs.
    However, a liquidity coverage ratio below 100 percent may also 
reflect a significant deficiency in a covered company's management of 
liquidity risk. Therefore, the proposed rule would establish a 
framework for flexible supervisory response when a covered company's 
liquidity coverage ratio falls below 100 percent. Under the proposed 
rule, a covered company would be required to notify its primary Federal 
supervisor on any business day that its liquidity coverage ratio is 
less than 100 percent. In addition, if the liquidity coverage ratio is 
below 100 percent for three consecutive business days, a covered 
company would be required to submit to its primary Federal supervisor a 
plan for remediation of the shortfall. These procedures, which are 
described in further detail in this preamble, are intended to enable 
supervisors to monitor and respond appropriately to the unique 
circumstances that are giving rise to a covered company's liquidity 
coverage ratio shortfall.
    Consistent with the BCBS liquidity framework, the proposed rule, 
once finalized, would be effective as of January 1, 2015, subject to a 
transition period. Under the proposed rule's transition provisions, 
covered companies would be required to comply with a minimum liquidity 
coverage ratio of 80 percent as of January 1, 2015. From January 1, 
2016, through December 31, 2016, the minimum liquidity coverage ratio 
would be 90 percent. Beginning on January 1, 2017 and thereafter, all 
covered companies would be required to maintain a liquidity coverage 
ratio of 100 percent.
    The proposed rule's liquidity coverage ratio is based on a 
standardized supervisory stress scenario. While the liquidity coverage 
ratio would establish one scenario for stress testing, supervisors 
expect companies that would be subject to the proposed rule to maintain 
robust stress testing frameworks that incorporate additional scenarios 
that are more tailored to the risks within their firms. Companies 
should use these additional scenarios in conjunction with the proposed 
rule's liquidity coverage ratio to appropriately determine their 
liquidity buffers. The agencies note that the liquidity coverage ratio 
is a minimum requirement and organizations that pose more systemic risk 
to the U.S. banking system or whose liquidity stress testing indicates 
a need for higher liquidity buffers may need to take additional steps 
beyond meeting the minimum ratio in order to meet supervisory 
expectations.
    The BCBS liquidity framework also establishes liquidity risk 
monitoring mechanisms designed to strengthen and promote global 
consistency in liquidity risk supervision. These mechanisms include 
information on contractual maturity mismatch, concentration of funding, 
available unencumbered assets, liquidity coverage ratio reporting by 
significant currency, and market-related monitoring tools. At this 
time, the agencies are not proposing to implement these monitoring 
mechanisms as regulatory standards or requirements. However, the 
agencies intend to obtain information from covered companies to enable 
the monitoring of liquidity risk exposure through reporting forms and 
from information the agencies collect through other supervisory 
processes.
    The proposed rule would provide enhanced information about the 
short-term liquidity profile of a covered company to managers and 
supervisors. With this information, the covered company's management 
and supervisors would be better able to assess the company's ability to 
meet its projected liquidity needs during periods of liquidity stress; 
take appropriate actions to address liquidity needs; and, in situations 
of failure, to implement an orderly resolution of the covered company. 
The agencies anticipate that they will separately seek comment upon 
proposed regulatory reporting requirements and instructions pertaining 
to a covered company's disclosure of the proposed rule's liquidity 
coverage ratio in a subsequent notice.
    The agencies request comment on all aspects of the proposed rule, 
including comment on the specific issues raised throughout this 
preamble. The agencies request that commenters provide detailed 
qualitative or quantitative analysis, as appropriate, as well as any 
relevant data and impact analysis to support their positions.

II. Minimum Liquidity Coverage Ratio

    Under the proposed rule, a covered company would be required to 
calculate its liquidity coverage ratio as of a particular date, which 
is defined in the proposed rule as the calculation date. The proposed 
rule would require a covered company to calculate its liquidity 
coverage ratio daily as of a set time selected by the covered company 
prior to the effective date of the rule and communicated in writing to 
its primary

[[Page 71823]]

Federal supervisor. Subsequent to this election, a covered company 
could only change the time as of which it calculates its liquidity 
coverage ratio daily with the written approval of its Federal 
supervisor.
    A covered company would calculate its liquidity coverage ratio by 
dividing its amount of HQLA by total net cash outflows, which would be 
equal to the highest daily amount of cumulative net cash outflows 
within the 30 calendar days following a calculation date (30 calendar-
day stress period). A covered company would not be permitted to double 
count items in this computation. For example, if an asset is included 
as a part of the stock of HQLA, such asset may not also be counted as 
cash inflows in the denominator.
    The following discussion addresses the proposed criteria for HQLA, 
which are meant to reflect the characteristics the agencies believe are 
associated with the most liquid assets banking organizations typically 
hold. The discussion also explains how HQLA would be calculated under 
the proposed rule, including its constituent components, and the 
proposed caps and haircuts applied to those components.
    Next, the discussion describes total net cash outflows, the 
denominator of the liquidity coverage ratio. This discussion explains 
the items that would be included in total cash outflows and total cash 
inflows, as well as rules for determining whether instruments mature or 
transactions occur within a 30 calendar-day stress period for the 
purposes of the liquidity coverage ratio's calculation. The discussion 
concludes by describing the regulatory framework for supervisory 
response if a covered company's liquidity coverage ratio falls below 
100 percent.
    1. What operational or other issues arise from requiring the 
calculation of the liquidity coverage ratio as of a set time selected 
by a covered company prior to the effective date of the rule? What 
significant operational costs, such as technological improvements, or 
other operational difficulties, if any, may arise from the requirement 
to calculate the liquidity coverage ratio on a daily basis? What 
alternatives to daily calculation should the agencies consider and why?
    2. The proposed rule would require a covered company to calculate 
its HQLA on a daily basis. Should the agencies impose any limits with 
regard to covered companies' ability to transfer HQLA on an intraday 
basis between entities? Why or why not? In particular, what appropriate 
limits should the agencies consider with regard to intraday movements 
of HQLA between domestic and foreign entities, including foreign 
branches?

A. High-Quality Liquid Assets

    The numerator of the proposed liquidity coverage ratio would be 
comprised of a covered company's HQLA, subject to the qualifying 
criteria and compositional limitations described below (HQLA amount). 
These proposed criteria and limitations are meant to ensure that a 
covered company's HQLA amount only includes assets with a high 
potential to generate liquidity through sale or secured borrowing 
during a stress scenario.
    Consistent with the Basel III LCR, the agencies are proposing to 
divide HQLA into three categories of assets: level 1, level 2A and 
level 2B liquid assets. Specifically and as described in greater detail 
below, the agencies are proposing that level 1 liquid assets, which are 
the highest quality and most liquid assets, be included in a covered 
company's HQLA amount without a limit. Level 2A and 2B liquid assets 
have characteristics that are associated with being relatively stable 
and significant sources of liquidity, but not to the same degree as 
level 1 liquid assets. Accordingly, level 2A liquid assets would be 
subject to a 15 percent haircut and, when combined with level 2B liquid 
assets, could not exceed 40 percent of the total stock of HQLA. Level 
2B liquid assets, which are associated with a lesser degree of 
liquidity and more volatility than level 2A liquid assets, would be 
subject to a 50 percent haircut and could not exceed 15 percent of the 
total stock of HQLA. These haircuts and caps are set forth in section 
21 of the proposed rule.
    A covered company would include assets in each HQLA category as 
required by the proposed rule as of a calculation date, irrespective of 
an asset's residual maturity. A description of the methodology for 
calculating the HQLA amount, including the caps on level 2A and level 
2B liquid assets and the requirement to calculate adjusted and 
unadjusted amounts of HQLA, is described in section II.A.5 below.
1. Liquidity Characteristics of HQLA
    Assets that would qualify as HQLA should be easily and immediately 
convertible into cash with little or no loss of value during a period 
of liquidity stress. In identifying the types of assets that would 
qualify as HQLA, the agencies considered the following categories of 
liquidity characteristics, which are generally consistent with those of 
the Basel III LCR: (a) Risk profile; (b) market-based characteristics; 
and (c) central bank eligibility.
    a. Risk Profile
    Assets that are appropriate for consideration as HQLA tend to be 
lower risk. There are various forms of risk that can be associated with 
an asset, including liquidity risk, market risk, credit risk, inflation 
risk, foreign exchange risk, and the risk of subordination in a 
bankruptcy or insolvency. Assets appropriate for consideration as HQLA 
would be expected to remain liquid across various stress scenarios and 
should not suddenly lose their liquidity upon the occurrence of a 
certain type of risk. Also, these assets generally experience ``flight 
to quality'' during a crisis, wherein investors sell their other 
holdings to buy more of these assets in order to reduce the risk of 
loss and increase the ability to monetize assets as necessary to meet 
their own obligations.
    Assets that may be highly liquid under normal conditions but 
experience wrong-way risk and could become less liquid during a period 
of stress would not be appropriate for consideration as HQLA. For 
example, securities issued or guaranteed by many companies in the 
financial sector \18\ have been more prone to lose value and, as a 
result, become less liquid and lose value in times of liquidity stress 
due to the high correlation between the health of these companies and 
the health of the financial markets generally. This correlation was 
evident during the recent financial crisis, as most debt issued by such 
companies traded at significant discounts for a prolonged period. 
Because of this high potential for wrong-way risk, consistent with the 
Basel III LCR standard, the proposed rule would exclude assets issued 
by companies that are primary actors in the financial sector from 
HQLA.\19\
---------------------------------------------------------------------------

    \18\ See infra section II.A.2.c.
    \19\ Identification of companies with high potential for wrong-
way risk under the proposal is discussed below in section II.A.2.
---------------------------------------------------------------------------

b. Market-Based Characteristics
    The agencies also have found that assets appropriate for 
consideration as HQLA generally exhibit characteristics that are 
market-based in nature. First, these assets tend to have active 
outright sale or repurchase markets at all times with significant 
diversity in market participants as well as high volume. This market-
based liquidity characteristic may be demonstrated by historical 
evidence, including evidence during recent periods of market liquidity 
stress, of low bid-ask spreads, high trading volumes, a large and 
diverse number of market participants, and other factors. Diversity of 
market participants, on both the buy and sell

[[Page 71824]]

sides, is particularly important because it tends to reduce market 
concentration and is a key indicator that a market will remain liquid. 
Also, the presence of multiple committed market makers is another sign 
that a market is liquid.
    Second, assets that are appropriate for consideration as HQLA 
generally tend to have prices that do not incur sharp price declines, 
even during times of stress. Volatility of traded prices and bid-ask 
spreads during normal times are simple proxy measures of market 
volatility; however, there should be historical evidence of relative 
stability of market terms (such as prices and haircuts) and volumes 
during stressed periods. To the extent that an asset exhibits price or 
volume fluctuation during times of stress, assets appropriate for 
consideration as HQLA tend to increase in value and experience a flight 
to quality during such times, as historically, the market moves into 
more liquid assets in times of systemic crisis.
    Third, assets that can serve as HQLA tend to be easily and readily 
valued. The agencies generally have found that an asset's liquidity is 
typically higher if market participants agree on its valuation. Assets 
with more standardized, homogenous, and simple structures tend to be 
more fungible, thereby promoting liquidity. The pricing formula of more 
liquid assets generally is easy to calculate when it is based upon 
sound assumptions and publicly available inputs. Whether an asset is 
listed on an active and developed exchange can serve as a key indicator 
of an asset's price transparency and liquidity.
c. Central Bank Eligibility
    Assets that a covered company can pledge at a central bank as 
collateral for intraday liquidity needs and overnight liquidity 
facilities in a jurisdiction and in a currency where the bank has 
access to the central bank generally tend to be liquid and, as such, 
are appropriate for consideration as HQLA. In the past, central banks 
have provided a backstop to the supply of banking system liquidity 
under conditions of severe stress. Central bank eligibility should, 
therefore, provide additional assurance that assets could be used in 
acute liquidity stress events without adversely affecting the broader 
financial system and economy. However, central bank eligibility is not 
itself sufficient to categorize an asset as HQLA; all of the proposed 
rule's requirements for HQLA would need to be met if central bank 
eligible assets are to qualify as HQLA.
    3. What, if any, other characteristics should be considered by the 
agencies in analyzing the liquidity of an asset?
2. Qualifying Criteria for Categories of HQLA
    The characteristics of HQLA discussed above are reflected in the 
proposed rule's qualifying criteria for HQLA. The criteria, set forth 
in section 20 of the proposed rule, are designed to identify assets 
that exhibit low risk and limited price volatility, are traded in high-
volume, deep markets with transparent pricing, and that are eligible to 
be pledged at a central bank. Consistent with these characteristics and 
the BCBS LCR framework, the proposed rule would establish general 
criteria for all HQLA and specific requirements for each category of 
HQLA. For example, most of the assets in these categories would need to 
meet the proposed rule's definition of ``liquid and readily-
marketable'' in order to be included in HQLA. Under the proposed rule, 
an asset would be liquid and readily-marketable if it is traded in an 
active secondary market with more than two committed market makers, a 
large number of committed non-market maker participants on both the 
buying and selling sides of transactions, timely and observable market 
prices, and high trading volumes. The ``liquid and readily-marketable'' 
requirement is meant to ensure that assets included in HQLA exhibit a 
level of liquidity that would allow a covered company to convert them 
into cash during times of stress and, therefore, to meet its 
obligations when other sources of funding may be reduced or 
unavailable. Timely and observable market prices make it likely that a 
buyer could be found and that a price could be obtained within a short 
period of time such that a covered company could convert the assets to 
cash, as needed.
    As noted above, assets that are included in HQLA should not be 
issued by financial sector entities since they would then be correlated 
with covered companies (or wrong-way risk assets). In the proposed 
rule, financial sector entities are defined as regulated financial 
companies, investment companies, non-regulated funds, pension funds, 
investment advisers, or a consolidated subsidiary of any of the 
foregoing. HQLA also could not be issued by any company (or any of its 
consolidated subsidiaries) that an agency has determined should be 
treated the same for the purposes of this proposed rule as a regulated 
financial company, investment company, non-regulated fund, pension 
fund, or investment adviser, based on activities similar in scope, 
nature, or operations to those entities (identified company).
    The term ``regulated financial company'' under the proposal would 
include bank holding companies and savings and loan holding companies 
(depository institution holding companies); nonbank financial companies 
supervised by the Board under Title I of the Dodd-Frank Act; depository 
institutions; foreign banks; credit unions; industrial loan companies, 
industrial banks, or other similar institutions described in section 2 
of the Bank Holding Company Act; national banks, state member banks, or 
state nonmember banks that are not depository institutions; insurance 
companies; securities holding companies (as defined in section 618 of 
the Dodd-Frank Act);\20\ broker-dealers or dealers registered with the 
SEC; futures commission merchants and swap dealers, each as defined in 
the Commodity Exchange Act;\21\ or security-based swap dealers defined 
in section 3 of the Securities Exchange Act.\22\ It would also include 
any designated financial market utility, as defined in section 803 of 
the Dodd-Frank Act.\23\ The definition also includes foreign companies 
if they are supervised and regulated in a manner similar to the 
institutions listed above.\24\
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 1850a(a)(4).
    \21\ 7 U.S.C. 1a(28) and (49).
    \22\ 15 U.S.C. 78c(a)(71).
    \23\ 12 U.S.C. 5462(4).
    \24\ Under paragraph (8) of the proposed rule's definition of 
``regulated financial company,'' the following would not be 
considered regulated financial companies: U.S. government-sponsored 
enterprises; small business investment companies, as defined in 
section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 
661 et seq.); entities designated as Community Development Financial 
Institutions (CDFIs) under 12 U.S.C. 4701 et seq. and 12 CFR part 
1805; and central banks, the Bank for International Settlements, the 
International Monetary Fund, or a multilateral development bank.
---------------------------------------------------------------------------

    In addition, a ``regulated financial company'' would include a 
company that is included in the organization chart of a depository 
institution holding company on the Form FR Y-6, as listed in the 
hierarchy report of the depository institution holding company produced 
by the National Information Center (NIC) Web site, provided that the 
top tier depository institution holding company is subject to the 
proposed rule (FR Y-6 companies).\25\
---------------------------------------------------------------------------

    \25\ See http://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx.
---------------------------------------------------------------------------

    FR Y-6 companies are typically controlled by the filing depository 
institution holding company under the Bank Holding Company Act. 
Although many such companies are not consolidated on the financial 
statements of a depository institution holding company, the links 
between the

[[Page 71825]]

companies are sufficiently significant that the agencies believe it 
would be appropriate to exclude securities issued by FR Y-6 companies 
(and their consolidated subsidiaries) from HQLA, for the same policy 
reasons that other regulated financial companies' securities would be 
excluded from HQLA under the proposal. The organizational hierarchy 
chart produced by the NIC Web site reflects (as updates regularly 
occur) the FR Y-6 companies a depository institution holding company 
must report on the form. The agencies are proposing this method for 
identifying these companies in order to reduce burden associated with 
obtaining the FR Y-6 organizational charts for all depository 
institution holding companies subject to the proposed rule, because the 
charts are not uniformly available by electronic means.
    Under the proposal, investment companies would include companies 
registered with the SEC under the Investment Company Act of 1940 \26\ 
and investment advisers would include companies registered with the SEC 
as investment advisers under the Investment Advisers Act of 1940,\27\ 
as well as the foreign equivalent of such companies. Non-regulated 
funds would include hedge funds or private equity funds whose 
investment advisers are required to file SEC Form PF (Reporting Form 
for Investment Advisers to Private Funds and Certain Commodity Pool 
Operators and Commodity Trading Advisors), and any consolidated 
subsidiary of such fund, other than a small business investment 
company, as defined in section 102 of the Small Business Investment Act 
of 1958 (15 U.S.C. 661 et seq.). Pension funds would be defined as 
employee benefit plans as defined in ERISA and government pension 
plans,\28\ as well as their foreign equivalents. Securities issued by 
the foregoing entities or their consolidated subsidiaries would be 
excluded from HQLA.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 80a-1 et seq.
    \27\ 15 U.S.C. 80b-1 et seq.
    \28\ See paragraph (7) of Sec.  ----.3 of the proposed rule's 
definition of ``regulated financial company.''
---------------------------------------------------------------------------

    4. What, if any, modifications should the agencies consider to the 
definition of ``regulated financial company''? What, if any, entities 
should be added to, or removed from, the definition and why? What 
operational difficulties may be involved in identifying a ``regulated 
financial company,'' including companies a depository institution 
holding company must report on the FR Y-6 organizational chart (or in 
identifying consolidated subsidiaries)? How should those operational 
difficulties be addressed? What alternatives for identifying companies 
reported on the FR Y-6 should be considered, and what difficulties may 
be associated with using the organizational hierarchy chart produced by 
the NIC Web site?
    5. What, if any, modifications should the agencies consider to the 
definition of ``non-regulated funds''? Should hedge funds or private 
equity funds whose managers are not required to file Form PF be 
included in the definition? What operational or other difficulties may 
covered companies encounter in identifying ``non-regulated'' funds and 
their consolidated subsidiaries? What other definitions would generally 
capture hedge funds and private equity funds in an appropriate and 
clear manner? Provide detailed suggestions and justifications.
    6. What, if any, modifications should the agencies consider to the 
definitions of ``investment company,'' ``pension fund,'' ``investment 
adviser,'' or ``identified company''? Should investment companies or 
investment advisers not required to register with the SEC be included 
in the respective definitions?
    7. What risk or operational issues should the agencies consider 
regarding the definitions and the exclusion of securities issued by the 
companies described above from HQLA, as well as the higher outflow 
rates applied to such companies, as described below?
    8. What additional factors or characteristics should the agencies 
consider with respect to identifying those companies whose securities 
should be excluded from HQLA and should be subject to the accompanying 
higher outflow rates for such companies, as discussed below?
    9. How well does the proposed definition of ``liquid and readily-
marketable'' meet the agencies' goal of identifying HQLA that could be 
converted into cash in order to meet a covered company's liquidity 
needs during times of stress? What other characteristics, if any, of a 
traded security and relevant markets should the agencies consider? What 
other approaches for capturing this liquidity characteristic should the 
agencies consider? Provide detailed description of and justifications 
for any alternative approaches.
a. Level 1 Liquid Assets
    Under the proposed rule, a covered company could include the full 
fair value of level 1 liquid assets in its HQLA amount. These assets 
have the highest potential to generate liquidity for a covered company 
during periods of severe liquidity stress and thus would be includable 
in a covered company's HQLA amount without limit. As discussed in 
further detail in this section, the proposed rule would include the 
following assets in level 1 liquid assets: (1) Federal Reserve Bank 
balances; (2) foreign withdrawable reserves; (3) securities issued or 
unconditionally guaranteed as to the timely payment of principal and 
interest by the U.S. Department of the Treasury; (4) liquid and 
readily-marketable securities issued or unconditionally guaranteed as 
to the timely payment of principal and interest by any other U.S. 
government agency (provided that its obligations are fully and 
explicitly guaranteed by the full faith and credit of the United States 
government); (5) certain liquid and readily marketable securities that 
are claims on, or claims guaranteed by, a sovereign entity, a central 
bank, the Bank for International Settlements, the International 
Monetary Fund, the European Central Bank and European Community, or a 
multilateral development bank; and (6) certain debt securities issued 
by sovereign entities.
Reserve Bank Balances
    Under the BCBS LCR framework, ``central bank reserves'' are 
included in HQLA. In the United States, Federal Reserve Banks are 
generally authorized under the Federal Reserve Act to maintain balances 
only for ``depository institutions'' and for other limited types of 
organizations.\29\ Pursuant to the Federal Reserve Act, there are 
different kinds of balances that depository institutions may maintain 
at Federal Reserve Banks, and they are maintained in different kinds of 
Federal Reserve Bank accounts. Balances that depository institutions 
must maintain to satisfy a reserve balance requirement must be 
maintained in the depository institution's ``master account'' at a 
Federal Reserve Bank or, if the institution has designated a pass-
through correspondent, in the correspondent's master account. A 
``reserve balance requirement'' is the amount that a depository 
institution must maintain in an account at a Federal Reserve Bank in 
order to satisfy that portion of the institution's reserve requirement 
that is not met with vault cash. Balances in excess of those required 
to be maintained to satisfy a reserve balance requirement, known as 
``excess balances,'' may be maintained in a master account or in an 
``excess balance account.'' Finally, balances maintained for a 
specified period of time, known as ``term deposits,'' are

[[Page 71826]]

maintained in a term deposit account offered by the Federal Reserve 
Banks. The proposed rule therefore uses the term ``Reserve Bank 
balances'' as the relevant term to capture central bank reserves in the 
United States.
---------------------------------------------------------------------------

    \29\ See 12 U.S.C. 342.
---------------------------------------------------------------------------

    Under the proposed rule, all balances a depository institution 
maintains at a Federal Reserve Bank (other than balances that an 
institution maintains on behalf of another institution, such as 
balances it maintains on behalf of a respondent or on behalf of an 
excess balance account participant) would be considered level 1 liquid 
assets, except for certain term deposits as explained immediately 
below.
    Consistent with the concept of ``central bank reserves'' in the 
BCBS LCR framework, the proposed rule includes in its definition of 
``Reserve Bank balances'' only those term deposits offered and 
maintained pursuant to terms and conditions that (1) explicitly and 
contractually permit such term deposits to be withdrawn upon demand 
prior to the expiration of the term, or that (2) permit such term 
deposits to be pledged as collateral for term or automatically-renewing 
overnight advances from a Federal Reserve Bank. None of the term 
deposits offered under the Federal Reserve's Term Deposit Facility as 
currently configured would be included in ``Reserve Bank balances'' 
because all term deposits offered to date by the Federal Reserve Banks 
are not explicitly and contractually repayable on notice. Similarly, 
all term deposits offered to date may not serve as collateral against 
which the depository institutions can borrow from a Federal Reserve 
Bank on a term or automatically renewable basis. Federal Reserve term 
deposits that are not included in ``Reserve Bank balances'' and, 
therefore, would not be considered level 1 liquid assets under the 
proposed rule could be included in a covered company's inflows, if the 
terms of such deposits expire within 30 days of the calculation date.
    Under the proposed rule, a covered company's reserve balance 
requirement would be subtracted from its level 1 liquid asset amount, 
because a depository institution generally satisfies its reserve 
requirement by maintaining vault cash or a balance in an account at a 
Federal Reserve Bank.\30\
---------------------------------------------------------------------------

    \30\ See Sec.  ----.21(b)(1) of the proposed rule.
---------------------------------------------------------------------------

Foreign Withdrawable Reserves
    The agencies are proposing that reserves held by a covered company 
in a foreign central bank that are not subject to restrictions on use 
be included in level 1 liquid assets. Similar to Reserve Bank balances, 
foreign withdrawable reserves should be able to serve as a medium of 
exchange in the currency of the country where they are held.
United States Government Securities
    The proposed rule would include in level 1 liquid assets securities 
issued by, or unconditionally guaranteed as to the timely payment of 
principal and interest by, the U.S Department of the Treasury. 
Generally, these types of securities have exhibited high levels of 
liquidity even in times of extreme stress to the financial system, and 
typically are the securities that experience the most ``flight to 
quality'' when investors adjust their holdings. Level 1 liquid assets 
would also include securities issued by any other U.S. government 
agency whose obligations are fully and explicitly guaranteed by the 
full faith and credit of the U.S. government, provided that they are 
liquid and readily-marketable.
Certain Sovereign and Multilateral Organization Securities
    The proposed rule would include in level 1 liquid assets securities 
that are a claim on, or a claim guaranteed by, a sovereign entity, a 
central bank, the Bank for International Settlements, the International 
Monetary Fund, the European Central Bank and European Community, or a 
multilateral development bank, provided that such securities meet the 
following three requirements.
    First, these securities must have been assigned a zero percent risk 
weight under the standardized approach for risk-weighted assets of the 
agencies' regulatory capital rules.\31\ Generally, securities issued by 
sovereigns that are assigned a zero percent risk weight have shown 
resilient liquidity characteristics. Second, the proposed rule would 
require these securities to be liquid and readily-marketable, as 
discussed above. Third, these securities would be required to be issued 
by an entity whose obligations have a proven record as a reliable 
source of liquidity in the repurchase or sales markets during stressed 
market conditions. A covered company could demonstrate a historical 
record that meets this criterion through reference to historical market 
prices during times of general liquidity stress, such as the period of 
financial market stress experienced from 2007 to 2008. Covered 
companies should also look to other periods of systemic and 
idiosyncratic stress to see if the asset under consideration has proven 
to be a reliable source of liquidity. Fourth, these securities could 
not be an obligation of a regulated financial company, non-regulated 
fund, pension fund, investment adviser, or identified company or any 
consolidated subsidiary of such entities.
---------------------------------------------------------------------------

    \31\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve), 
and 12 CFR part 324 (FDIC).
---------------------------------------------------------------------------

Certain Foreign Sovereign Debt Securities
    Debt securities issued by a foreign sovereign entity that are not 
assigned a zero percent risk weight under the standardized approach for 
risk-weighted assets of the agencies' regulatory capital rules may 
serve as level 1 liquid assets if they are liquid and readily 
marketable, the sovereign entity issues such debt securities in its own 
currency, and a covered company holds the debt securities to meet its 
cash outflows in the jurisdiction of the sovereign entity, as 
calculated in the outflow section of the proposed rule. These assets 
would be appropriately included as level 1 liquid assets despite having 
a risk weight greater than zero because a sovereign often is able to 
meet obligations in its own currency through control of its monetary 
system, even during fiscal challenges.
    10. What, if any, alternative factors should be considered in 
determining the assets that qualify as level 1 liquid assets? What, if 
any, additional assets should qualify as level 1 liquid assets based on 
the characteristics for HQLA that the agencies discussed above? Provide 
detailed justification based on the liquidity characteristics of any 
such assets, including historical data and observations.
    11. Are there any assets that would qualify as level 1 liquid 
assets under the proposed rule that should not qualify based on their 
liquidity characteristics? If so, which assets should not be included 
and why? Provide detailed justification based on the liquidity 
characteristics of an asset in question, including historical data and 
observations.
b. Level 2A Liquid Assets
    Under the proposed rule, level 2A liquid assets would include 
certain claims on, or claims guaranteed by a U.S. government sponsored 
enterprise (GSE) \32\ and certain claims on, or claims guaranteed by, a 
sovereign entity or a multilateral development bank. Assets would be 
required to be liquid and

[[Page 71827]]

readily-marketable, as described above, to be considered level 2A 
liquid assets.
---------------------------------------------------------------------------

    \32\ GSEs include the Federal Home Loan Mortgage Corporation 
(FHLMC), the Federal National Mortgage Association (FNMA), the Farm 
Credit System, and the Federal Home Loan Bank System.
---------------------------------------------------------------------------

    The agencies are aware that some securities issued and guaranteed 
by U.S. GSEs consistently trade in very large volumes and generally 
have been highly liquid, including during times of stress. However, the 
U.S. GSEs remain privately owned corporations, and their obligations do 
not have the explicit guarantee of the full faith and credit of the 
United States. The agencies have long held the view that obligations of 
U.S. GSEs should not be accorded the same treatment as obligations that 
carry the explicit guarantee of the U.S. government and under the 
agencies' regulatory capital rules, have currently and historically 
assigned a 20 percent risk weight to their obligations and guarantees, 
rather than the zero percent risk weight assigned to securities 
guaranteed by the full faith and credit of the United States. 
Consistent with the agencies' regulatory capital rules, the agencies 
are not assigning the most favorable regulatory treatment to U.S. GSEs' 
issuances and guarantees under the proposed rule and therefore are 
assigning them to the level 2A liquid asset category, so long as they 
are investment grade consistent with the OCC's investment regulation 
(12 CFR part 1) as of the calculation date. Additionally, consistent 
with the agencies' regulatory capital rules' higher risk weight for the 
preferred stock of U.S. GSEs, the agencies are proposing to exclude 
such preferred stock from HQLA.
    Level 2A liquid assets also would include claims on, or claims 
guaranteed by a sovereign entity or a multilateral development bank 
that: (1) is not included in level 1 liquid assets; (2) is assigned no 
higher than a 20 percent risk weight under the standardized approach 
for risk-weighted assets of the agencies' regulatory capital rules; 
\33\ (3) is issued by an entity whose obligations have a proven record 
as a reliable source of liquidity in repurchase or sales markets during 
stressed market conditions; and (4) is not an obligation of a regulated 
financial company, investment company, non-regulated fund, pension 
fund, investment adviser, identified company, or any consolidated 
subsidiary of the foregoing. A covered company could demonstrate that a 
claim on or claims guaranteed by a sovereign entity or a multilateral 
development bank that has issued obligations have a proven record as a 
reliable source of liquidity in repurchase or sales markets during 
stressed market conditions through reference to historical market 
prices during times of general liquidity stress.\34\ Covered companies 
should look to multiple periods of systemic and idiosyncratic liquidity 
stress in compiling such records.
---------------------------------------------------------------------------

    \33\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve), 
and 12 CFR part 324 (FDIC).
    \34\ This would be demonstrated if the market price of the 
security or equivalent securities of the issuer declined by no more 
than 10 percent or the market haircut demanded by counterparties to 
secured funding or lending transactions that are collateralized by 
such security or equivalent securities of the issuer increased by no 
more than 10 percentage points during a 30 calendar-day period of 
significant stress.
---------------------------------------------------------------------------

    The proposed rule likely would not permit covered bonds and 
securities issued by public sector entities, such as a state, local 
authority, or other government subdivision below the level of a 
sovereign (including U.S. states and municipalities) to qualify as HQLA 
at this time. While these assets are assigned a 20 percent risk weight 
under the standardized approach for risk-weighted assets in the 
agencies' regulatory capital rules, the agencies believe that, at this 
time, these assets are not liquid and readily-marketable in U.S. 
markets and thus do not exhibit the liquidity characteristics necessary 
to be included in HQLA under this proposed rule. For example, 
securities issued by public sector entities generally have low average 
daily trading volumes. Covered bonds, in particular, exhibit 
significant risks regarding interconnectedness and wrong-way risk among 
companies in the financial sector such as regulated financial 
companies, investment companies, and non-regulated funds.
    12. What other assets, if any, should the agencies include in level 
2A liquid assets? How should such assets be identified and what are the 
characteristics of those assets that would justify their inclusion in 
level 2A liquid assets?
    13. Are there any assets that would qualify as level 2A liquid 
assets under the proposed rule that should not qualify based on their 
liquidity characteristics? If so, which assets and why? Provide a 
detailed justification based on the liquidity characteristics of the 
asset in question, including historical data and observations.
    14. What alternative treatment, if any, should the agencies 
consider for obligations of U.S. GSEs and why? Provide justification 
and supporting data.
c. Level 2B Liquid Assets
    Under the proposed rule, level 2B liquid assets would include 
certain publicly traded corporate debt securities and publicly traded 
shares of common stock that are liquid and readily-marketable, as 
discussed above. The limitation of level 2B liquid assets to those that 
are publicly traded is meant to ensure a minimum level of liquidity, as 
privately traded assets are less liquid. Under the proposed rule, the 
definition of ``publicly traded'' would be consistent with the 
definition used in the agencies' regulatory capital rules and would 
identify securities traded on registered exchanges with liquid two-way 
markets.\35\ A two-way market would be defined as market where there 
are independent bona fide offers to buy and sell, so that a price 
reasonably related to the last sales price or current bona fide 
competitive bid and offer quotations can be determined within one day 
and settled at that price within a relatively short time frame, 
conforming to trade custom. This definition is also consistent with the 
definition in the agencies' capital rules \36\ and is designed to 
identify markets with transparent and readily available pricing, which, 
for the reasons discussed above, is fundamental to the liquidity of an 
asset.
---------------------------------------------------------------------------

    \35\ See id.
    \36\ Id.
---------------------------------------------------------------------------

Publicly Traded Corporate Debt Securities
    Publicly traded corporate debt securities would be considered level 
2B liquid assets under the proposed rule if they meet three 
requirements (in addition to being liquid and readily-marketable). 
First, the securities would be required to meet the definition of 
``investment grade'' under 12 CFR part 1 as of a calculation date.\37\ 
This standard would ensure that assets not meeting the required credit 
quality standard for bank investment would not be included in HQLA. The 
agencies believe that meeting this standard is indicative of lower risk 
and, therefore, higher liquidity for a corporate debt security. Second, 
the securities would be required to have been issued by an entity whose 
obligations have a proven record as a reliable source of liquidity in 
repurchase or sales markets during stressed market conditions. A 
covered company would be required to demonstrate this record of 
liquidity reliability and lower volatility during times of stress by 
showing that the market price of the publicly traded debt securities or 
equivalent securities of the issuer declined by no more than 20 percent 
or the market haircut demanded by counterparties to secured lending and 
secured funding transactions that were collateralized by such debt

[[Page 71828]]

securities or equivalent securities of the issuer increased by no more 
than 20 percentage points during a 30 calendar-day period of 
significant stress. As discussed above, a covered company could 
demonstrate a historical record that meets this criterion through 
reference to historical market prices of the debt security during times 
of general liquidity stress.
---------------------------------------------------------------------------

    \37\ 12 CFR 1.2(d).
---------------------------------------------------------------------------

    Finally, for the reasons discussed above, the debt securities could 
not be obligations of a regulated financial company, investment 
company, non-regulated fund, pension fund, investment adviser, 
identified company, or any consolidated subsidiary of the foregoing.
Publicly Traded Shares of Common Stock
    Under the proposed rule, publicly traded shares of common stock 
could be included in a covered company's level 2B liquid assets if the 
shares meet the five requirements set forth below (in addition to being 
liquid and readily-marketable). Because of general statutory 
prohibitions on holding equity investments for their own account,\38\ 
depository institutions subject to the proposed rule would not be able 
to include common stock in their level 2B liquid assets (including 
common stock held pursuant to authority for debt previously contracted, 
as discussed further below). However, a depository institution could 
include in its consolidated level 2B liquid assets common stock 
permissibly held by a consolidated subsidiary, where the investments 
meet the proposed level 2B requirements for publicly traded shares of 
common stock. Furthermore, a depository institution could only include 
in its level 2B assets the amount of a consolidated subsidiary's 
publicly traded shares of common stock if it is held to cover the net 
cash outflows for the consolidated subsidiary. For example, if 
Subsidiary A holds level 2B publicly traded common stock of $100 in a 
legally permissible manner and has outflows of $80, Subsidiary A could 
not contribute more than $80 of its level 2B publicly traded common 
stock to its parent depository institution's consolidated level 2B 
assets.
---------------------------------------------------------------------------

    \38\ 12 U.S.C. 24(Seventh) (national banks); 12 U.S.C. 1464(c) 
(federal savings associations); 12 U.S.C. 1831a (state banks); 12 
U.S.C. 1831e (state savings associations).
---------------------------------------------------------------------------

    Under the rule, to be considered a level 2B liquid asset, the 
publicly traded common stock would be required to be included in 
either: (1) the Standard & Poor's 500 Index (S&P 500); (2) if the stock 
is held in a non-U.S. jurisdiction to meet liquidity risks in that 
jurisdiction, an index that the covered company's supervisor in that 
jurisdiction recognizes for purposes of including the equities as level 
2B liquid assets under applicable regulatory policy; or (3) any other 
index for which the covered company can demonstrate to the satisfaction 
of its primary federal supervisor that the stock is as liquid and 
readily-marketable as equities traded on the S&P 500.
    The agencies believe that being included in a major stock index is 
an important indicator of the liquidity of a stock, because such stock 
tends to have higher trading volumes and lower bid-ask spreads during 
stressed market conditions than those that are not listed. The agencies 
identified the S&P 500 as being appropriate for this purpose given that 
it is considered a major index in the United States and generally 
includes the most liquid and actively traded stocks. Moreover, stocks 
that are included in the S&P 500 are selected by a committee that 
considers, among other characteristics, the volume of trading activity 
and length of time the stock has been publicly traded.
    Second, to be considered a level 2B liquid asset, a covered 
company's publicly traded common stock would be required to be issued 
in: (1) U.S. dollars; or (2) the currency of a jurisdiction where the 
covered company operates and the stock offsets its net cash outflows in 
that jurisdiction. This requirement is meant to ensure that, upon 
liquidation of the stock, the currency received from the sale matches 
the outflow currency.
    Third, the common stock would be required to have been issued by an 
entity whose common stock has a proven record as a reliable source of 
liquidity in the repurchase or sales markets during stressed market 
conditions. Under the proposed rule, a covered company would be 
required to demonstrate this record of reliable liquidity by showing 
that the market price of the common stock or equivalent securities of 
the issuer declined by no more than 40 percent or that the market 
haircut, as evidenced by observable market prices, of secured funding 
or lending transactions collateralized by such common stock or 
equivalent securities of the issuer increased by no more than 40 
percentage points during a 30 calendar-day period of significant 
stress. This limitation is meant to account for the volatility inherent 
in equities, which is a risk to the preservation of liquidity value. As 
above, a covered company could demonstrate this historical record 
through reference to the historical market prices of the common stock 
during times of general liquidity stress.
    Fourth, as with the other asset categories of HQLA and for the same 
reasons, common stock included in level 2B liquid assets may not be 
issued by a regulated financial company, investment company, non-
regulated fund, pension fund, investment adviser, identified company, 
or any consolidated subsidiary of the foregoing. During the recent 
financial crisis, the common stock of such companies experienced 
significant declines in value and the agencies believe that such 
declines indicate those assets would be less likely to provide 
substantial liquidity during future periods of stress and, therefore, 
are not appropriate for inclusion in a covered company's stock of HQLA.
    Fifth, if held by a depository institution, the publicly traded 
common stock could not be acquired in satisfaction of a debt previously 
contracted (DPC). In general, publicly traded common stock may be 
acquired by a depository institution to prevent a loss from a DPC. 
However, in order for a depository institution to avail itself of the 
authority to hold DPC assets, such as by holding publicly traded common 
stock, such assets typically must be divested in a timely manner.\39\ 
The agencies believe that depository institutions should make a good 
faith effort to dispose of DPC publicly traded common stock as soon as 
commercially reasonable, subject to the applicable legal time limits 
for disposition. The agencies are concerned that permitting depository 
institutions to include DPC publicly traded common stock in level 2B 
liquid assets may provide an inappropriate incentive for depository 
institutions to hold such assets beyond a commercially reasonable 
period for disposition. Therefore, the proposal would prohibit 
depository institutions from including DPC publicly traded common stock 
in level 2B liquid assets.
---------------------------------------------------------------------------

    \39\ See generally 12 CFR 1.7 (OCC); 12 U.S.C. 1843(c)(2) 
(Board); 12 CFR 362.1(b)(3) (FDIC).
---------------------------------------------------------------------------

    15. What, if any, additional criteria should the agencies consider 
in determining the type of securities that should qualify as level 2B 
liquid assets? What alternatives to the S&P 500 should be considered in 
determining the liquidity of an equity security and why? In addition to 
an investment grade classification, what additional characteristics 
denote the liquidity quality of corporate debt that the agencies would 
be legally permitted to use in light of the Dodd-Frank Act prohibition 
against agencies' regulations referencing credit ratings? The agencies

[[Page 71829]]

solicit detailed comment, with supporting data, on the advantages and 
disadvantages of the proposed investment grade criteria as well as 
recommended alternatives.
    16. Are there any assets that would qualify as level 2B liquid 
assets under the proposed rule that should not qualify based on their 
liquidity characteristics? If so, which assets and why? Provide a 
detailed justification based on the liquidity characteristics of the 
asset in question, including historical data and observations.
    17. What other criteria, if any, should the agencies consider for 
establishing an adequate historical record during times of liquidity 
stress in order to meet the relevant criteria under the proposed rule? 
What operational burdens, if any, are associated with this requirement? 
What other standards, if any, should the agencies consider to achieve 
the same result?
    18. Is the proposed treatment for publicly traded common stock 
appropriate? Why or why not? Are there circumstances under which a 
depository institution may permissibly hold publicly traded common 
stock that the agencies should not prohibit from being included in 
level 2B liquid assets? Please provide specific examples. Under what 
circumstances, if any, should DPC publicly traded common stock be 
included in a depository institution's level 2B liquid assets and why? 
What liquidity risks, if any, are introduced or mitigated if DPC 
publicly traded common stock are permitted in a depository 
institution's level 2B liquid assets?
3. Operational Requirements for HQLA
    Under the proposed rule, an asset that a covered company includes 
in its HQLA would need to meet the following operational requirements. 
These operational requirements are intended to better ensure that a 
covered company's HQLA can be liquidated in times of stress. Several of 
these requirements relate to the monetization of an asset, by which the 
agencies mean the receipt of funds from the outright sale of an asset 
or from the transfer of an asset pursuant to a repurchase agreement.
    First, a covered company would be required to have the operational 
capability to monetize the HQLA. This capability would be demonstrated 
by: (1) implementing and maintaining appropriate procedures and systems 
to monetize the asset at any time in accordance with relevant standard 
settlement periods and procedures; and (2) periodically monetizing a 
sample of HQLA that reasonably reflects the composition of the covered 
company's total HQLA portfolio, including with respect to asset type, 
maturity, and counterparty characteristics. This requirement is 
designed to ensure a covered company's access to the market, the 
effectiveness of its processes for monetization, and the availability 
of the assets for monetization and to minimize the risk of negative 
signaling during a period of actual stress. The agencies would monitor 
the procedures, systems, and periodic sample liquidations through their 
supervisory process.
    Second, a covered company would be required to implement policies 
that require all HQLA to be under the control of the management 
function of the covered company that is charged with managing liquidity 
risk. To do so, a covered company would be required either to segregate 
the assets from other assets, with the sole intent to use them as a 
source of liquidity or to demonstrate its ability to monetize the 
assets and have the resulting funds available to the risk management 
function, without conflicting with another business or risk management 
strategy. Thus, if an HQLA were being used to hedge a specific 
transaction, such as holding an asset to hedge a call option that the 
covered company had written, it could not be included in the HQLA 
amount because its sale would conflict with another business or risk 
management strategy. However, if HQLA were being used as a general 
macro hedge, such as interest rate risk of the covered company's 
portfolio, it could still be included in the HQLA amount. This 
requirement is intended to ensure that a central function of a covered 
company has the authority and capability to liquidate HQLA to meet its 
obligations in times of stress without exposing the covered company to 
risks associated with specific transactions and structures that had 
been hedged. There were instances at specific firms during the recent 
financial crisis where unencumbered assets of the firms were not 
available to meet liquidity demands because the firms' treasuries were 
restricted or did not have access to such assets.
    Third, a covered company would be required to include in its total 
net cash outflow amount the amount of cash outflow that would result 
from the termination of any specific transaction hedging HQLA. The 
impact of the hedge would be required to be included in the outflow 
because if the covered company were to liquidate the asset, it would be 
required to close out the hedge to avoid creating a risk exposure. This 
requirement is not intended to apply to general macro hedges such as 
holding interest rate derivatives to adjust internal duration or 
interest rate risk measurements, but is intended to cover specific 
hedges that would become risk exposures if the asset were sold.
    Fourth, a covered company would be required to implement and 
maintain policies and procedures that determine the composition of the 
assets in its HQLA amount on a daily basis by (1) identifying where its 
HQLA is held by legal entity, geographical location, currency, 
custodial or bank account, and other relevant identifying factors, (2) 
determining that the assets included in a covered company's HQLA amount 
continue to qualify as HQLA, (3) ensuring that the HQLA in the HQLA 
amount are appropriately diversified by asset type, counterparty, 
issuer, currency, borrowing capacity or other factors associated with 
the liquidity risk of the assets, and (4) ensuring that the amount and 
type of HQLA included in a covered company's HQLA amount that is held 
in foreign jurisdictions is appropriate with respect to the covered 
company's net cash outflows in foreign jurisdictions.
    The agencies also recognize that significant international banking 
activity occurs through non-U.S. branches of legal entities organized 
in the United States and that a foreign branch's activities may give 
rise to the need to hold HQLA in the jurisdiction where it is located. 
While the agencies believe that holding HQLA in a geographic location 
where it is needed to meet liquidity needs such as those envisioned by 
the LCR is appropriate, they are concerned that other factors such as 
taxes, re-hypothecation rights, and legal and regulatory restrictions 
may encourage certain companies to hold a disproportionate amount of 
their HQLA in locations outside the United States where unforeseen 
impediments may prevent timely repatriation of liquidity during a 
crisis. Nonetheless, establishing quantitative limits on the amount of 
HQLA that can be held abroad and still count towards a U.S. domiciled 
legal entity's LCR requirement is complex and can be overly restrictive 
in some cases.
    Therefore, the agencies are proposing to require a covered company 
to establish policies to ensure that HQLA maintained in locations is 
appropriate with respect to where the net cash outflows arise. By 
requiring that there be a correlation between the HQLA amount held 
outside of the United States and the net cash outflows attributable to 
non-U.S. operations, the agencies intend to increase the likelihood 
that HQLA is available to a covered company and to avoid

[[Page 71830]]

repatriation concerns from HQLA held in another jurisdiction.
    The agencies note that assets that meet the criteria of HQLA and 
are held by a covered company as either ``available-for-sale'' or 
``held-to-maturity'' can be included in HQLA, regardless of such 
designation.
    19. Are the proposed operational criteria sufficiently clear to 
determine whether an asset could be included in the pool of HQLA? Why 
or why not? If not, what requirements need clarification?
    20. What costs or other burdens would be incurred as a result of 
the proposed operational requirements? What modifications should the 
agencies consider to mitigate such costs or burdens, while establishing 
appropriate operational criteria for HQLA to ensure its liquidity? 
Please provide detailed explanations and justifications.
    21. Given that, absent the requirement that a covered company 
develop and maintain policies and procedures to ensure sufficient HQLA 
is held domestically, a covered company could theoretically hold its 
entire HQLA in a foreign branch located in a jurisdiction that could 
impede its use to support U.S. operations, should the proposed rule be 
supplemented with quantitative restrictions on the amount of HQLA that 
can be held in foreign branches and included in the liquidity coverage 
ratio calculation? If so, how should the rule require a correlation 
between the geographic location of a covered company's HQLA and the 
location of the outflows the HQLA is intended to cover?
    22. The agencies seek comment on all aspects of the criteria for 
HQLA, including issues of domestic and international competitive 
equity, and the adequacy of the proposed HQLA criteria in meeting the 
agencies' goal of requiring a covered company to maintain a buffer of 
liquid assets sufficient to withstand a 30 calendar-day stress period.
4. Generally Applicable Criteria for HQLA
    Under the proposed rule, assets would be required to meet the 
following generally applicable criteria to be considered as HQLA.
a. Unencumbered
    To be included in HQLA, an asset would be required to be 
unencumbered as defined under the proposed rule. First, the asset would 
be required to be free of legal, regulatory, contractual, or other 
restrictions on the ability of a covered company to monetize asset. The 
agencies believe that, as a general matter, HQLA should only include 
assets that could be converted easily into cash. Second, the asset 
could not be pledged, explicitly or implicitly, to secure or provide 
credit-enhancement to any transaction, except that the asset could be 
pledged to a central bank or a U.S. GSE to secure potential borrowings 
if credit secured by the asset has not been extended to the covered 
company or its consolidated subsidiaries. This exception is meant to 
account for the ability of central banks and U.S. GSEs to lend against 
the posted HQLA or to return the posted HQLA, in which case a covered 
company could sell or engage in a repurchase agreement with the assets 
to receive cash. This exception is also meant to permit collateral that 
is covered by a blanket lien from a U.S. GSE to be included in HQLA.
b. Client Pool Security
    An asset included in HQLA could not be a client pool security held 
in a segregated account or cash received from a repurchase agreement on 
client pool securities held in a segregated account. The proposed rule 
defines a client pool security as one that is owned by a customer of a 
covered company and is not an asset of the organization, regardless of 
the organization's hypothecation rights to the security. Since client 
pool securities held in a segregated account are not freely available 
to meet all possible liquidity needs, they should not count as a source 
of liquidity.
c. Treatment of HQLA Held by U.S. Consolidated Subsidiaries
    Under the proposal, HQLA held in a legal entity that is a U.S. 
consolidated subsidiary of a covered company would be included in HQLA 
subject to specific limitations depending on whether the subsidiary is 
subject to the proposed rule and is therefore required to calculate a 
liquidity coverage ratio under the proposed rule.
    If the consolidated subsidiary is subject to a minimum liquidity 
coverage ratio under the proposed rule, then a covered company could 
include in its HQLA amount the HQLA held in the consolidated subsidiary 
in an amount up to the consolidated subsidiary's net cash outflows 
calculated to meet its liquidity coverage ratio requirement. The 
covered company could also include in its HQLA amount any additional 
amount of HQLA the monetized proceeds from which would be available for 
transfer to the covered company's top-tier parent entity during times 
of stress without statutory, regulatory, contractual, or supervisory 
restrictions. Regulatory restrictions would include, for example, 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 12 
U.S.C. 371c-1) and Regulation W (12 CFR part 223). Supervisory 
restrictions may include, but would not be limited to, enforcement 
actions, written agreements, supervisory directives or requests to a 
particular subsidiary that would directly or indirectly restrict the 
subsidiary's ability to transfer the HQLA to the parent covered 
company.
    If the consolidated subsidiary is not subject to a minimum 
liquidity coverage ratio under section 10 of the proposed rule, a 
covered company could include in its HQLA amount the HQLA held in the 
consolidated subsidiary in an amount up to the net cash outflows of the 
consolidated subsidiary that are included in the covered company's 
calculation of its liquidity coverage ratio, plus any additional amount 
of HQLA held by the consolidated subsidiary the monetized proceeds from 
which would be available for transfer to the covered company's top tier 
parent entity during times of stress without statutory, regulatory, 
contractual, or supervisory restrictions. This treatment is consistent 
with the Basel III LCR and ensures that assets in the pool of HQLA can 
be freely monetized and the proceeds can be freely transferred to a 
covered company's top-tier parent entity in times of a liquidity 
stress.
d. Treatment of HQLA Held by Non-U.S. Consolidated Subsidiaries
    Consistent with the BCBS liquidity framework, HQLA held by a non-
U.S. legal entity that is a consolidated subsidiary of a covered 
company could be included in a covered company's HQLA in an amount up 
to the net cash outflows of the non-U.S. consolidated subsidiary that 
are included in the covered company's net cash outflows, plus any 
additional amount of HQLA held by the non-U.S. consolidated subsidiary 
that is available for transfer to the covered company's top-tier parent 
entity during times of stress without statutory, regulatory, 
contractual, or supervisory restrictions. The proposal would require 
covered companies with foreign operations to identify the location of 
HQLA and net cash outflows and exclude any HQLA above net cash outflows 
that is not freely available for transfer due to statutory, regulatory, 
contractual or supervisory restrictions. Such transfer restrictions 
would include liquidity coverage ratio requirements greater than those 
that would be established by the proposed rule, counterparty exposure 
limits, and any other regulatory, statutory, or supervisory 
limitations. While the

[[Page 71831]]

agencies believe it is appropriate for a covered company to hold HQLA 
in a particular geographic location in order to meet liquidity needs 
there, they do not believe it is appropriate for a covered company to 
hold a disproportionate amount of HQLA in locations outside the United 
States given that unforeseen impediments may prevent timely 
repatriation of liquidity during a crisis. Therefore, under section 
20(f) of the proposal, a covered company would be generally expected to 
maintain in the United States an amount and type of HQLA that is 
sufficient to meet its total net cash outflow amount in the United 
States.
    23. What effects may the provision in section 20(f) that a covered 
company is generally expected to maintain HQLA in the United States 
sufficient to meet its total net cash outflow amount in the United 
States have on a company's management of HQLA? Should the agencies be 
concerned about the transferability of liquidity between national 
jurisdictions during a time of financial distress and, if so, would 
such a requirement be sufficient to allay these concerns? Would holding 
HQLA in a foreign jurisdiction in an amount beyond such jurisdiction's 
estimated outflow limit the operational capacity of HQLA to meet 
liquidity needs in the United States; conversely, would the proposed 
general requirement unnecessarily disrupt overall banking operations? 
What changes, if any, to section 20(f) should the agencies consider to 
ensure that a covered company has sufficient HQLA readily available to 
meet its outflows in the United States? Should the agencies consider 
quantitative limits to ensure that a covered company has sufficient 
HQLA readily available in the United States to meet its net outflows in 
the United States and support its operations during periods of stress? 
Why or why not?
e. Exclusion of Rehypothecated Assets
    Under the proposed rule, assets that a covered company received 
under a rehypothecation right where the beneficial owner has a 
contractual right to withdraw the asset without remuneration at any 
time during a 30 calendar-day stress period would not be included in 
HQLA under the proposed rule. This exclusion extends to assets 
generated from another asset that was received under such a 
rehypothecation right. If the beneficial owner has such a right and 
were to exercise it within a 30 calendar-day stress period, the asset 
would not be available to support the covered company's liquidity 
position.
f. Exclusion of Assets Designated as Operational
    Assets included in a covered company's HQLA amount could not be 
specifically designated to cover operational costs. The agencies 
believe that assets specifically designated to cover costs such as 
wages or facility maintenance generally would not be available to cover 
liquidity needs that arise during stressed market conditions.
    24. The agencies seek comment on the proposed rule's description of 
an unencumbered asset. What, if any, additional criteria should be 
considered in determining whether an asset is unencumbered for purposes 
of consideration as HQLA?
    25. What difficulties or lack of clarity, if any, may arise from 
the proposed operational requirement that HQLA not be a client pool 
security be held in a segregated account? What, if any, terms could the 
agencies consider to clarify what securities are captured in this 
provision? For example, what characteristics should be included to 
describe the types of accounts that should cause client pool securities 
to be excluded from HQLA treatment?
    26. What, if any, modifications should the agencies consider to the 
treatment of HQLA held by consolidated U.S. subsidiaries and why?
    27. The agencies solicit comment on the proposed method for 
including the HQLA held at non-U.S. consolidated subsidiaries in a 
covered company's HQLA. Is it appropriate to include in HQLA some 
amount of HQLA that is held in non-U.S. consolidated subsidiaries? If 
not, why not? Should the proposed rule be supplemented with 
quantitative restrictions on the amount of HQLA that can be held in 
foreign branches and subsidiaries for the liquidity coverage ratio 
calculation of the consolidated U.S. entity? If so, how should the rule 
require a correlation between the geographic locations of a covered 
company's HQLA and the location of the outflows the HQLA is intended to 
cover? What portion of HQLA held by non-U.S. consolidated subsidiaries 
is freely available for use in connection with a covered company's U.S. 
operations during times of stress? In determining the amount of HQLA 
held at a non-U.S. consolidated subsidiary that a covered company can 
include in its HQLA, should a covered company be required to take into 
account any net cash outflows arising in connection with transactions 
between a non-U.S. entity and another affiliate? What challenges, if 
any, of the proposed methodology are not addressed? Please suggest 
specific solutions.
5. Calculation of the HQLA Amount
    Instructions for calculating the HQLA amount, including the 
calculation of the required haircuts and asset caps that the agencies 
are proposing to apply to level 2 liquid assets, are set forth in 
section 21 of the proposed rule. For the purposes of calculating a 
covered company's HQLA amount, the value of level 1, level 2A, and 
level 2B liquid assets would be equal to the fair value of the assets 
as determined under U.S. Generally Accepted Accounting Principles 
(GAAP), multiplied by the appropriate haircut factor and taking in 
consideration the unwinding of certain transactions.
    Consistent with the Basel III LCR, the proposed rule would apply a 
15 percent haircut to level 2A liquid assets and a 50 percent haircut 
to level 2B liquid assets.\40\ These haircuts are meant to recognize 
that level 2 liquid assets generally are less liquid, have larger 
haircuts in the repurchase markets, and have more volatile prices in 
the outright sales markets. Also consistent with the Basel III LCR, the 
proposed rule would cap the amount of level 2 liquid assets that could 
be included in the HQLA amount. Specifically, level 2 liquid assets 
could account for no more than 40 percent of the HQLA amount and level 
2B liquid assets could account for no more than 15 percent of the HQLA 
amount. These caps are meant to ensure that these types of assets, 
which provide less liquidity as compared to level 1 liquid assets, 
comprise a smaller portion of a covered company's total HQLA amount 
such that the majority of the HQLA amount is comprised of level 1 
liquid assets.
---------------------------------------------------------------------------

    \40\ See Basel III Revised Liquidity Framework, paragraphs 46-54 
and Annex 1, supra note 3; proposed rule Sec.  ----.21(b).
---------------------------------------------------------------------------

    As discussed in more detail in section II.A.5.b of this preamble, 
the agencies believe the proposed level 2 caps and haircuts should be 
applied to a covered company's HQLA amount both before and after 
certain transactions are unwound, such as transactions where HQLA will 
be exchanged for HQLA within the next 30 calendar days in order to 
ensure that the HQLA portfolio is appropriately diversified. The 
calculation of adjusted HQLA would prevent a covered company from being 
able to manipulate its HQLA portfolio by engaging in transactions such 
as certain repurchase or reverse repurchase transactions because the 
HQLA amount, including the caps and haircuts, would be calculated both 
before and after unwinding those transactions. Formulas for calculating 
the HQLA amount are provided in section 21 of the proposed

[[Page 71832]]

rule. Under these provisions, the HQLA amount would be the sum of the 
three liquid asset category amounts after the application of 
appropriate haircuts, less the greater of the amount of HQLA that 
exceeds the level 2 caps on the first day of a calculation period 
(unadjusted excess HQLA amount) or the amount of HQLA that exceeds the 
level 2 caps at the end of a 30 calendar-day stress period after 
unwinding certain transactions (adjusted excess HQLA amount).[
a. Calculation of Unadjusted Excess HQLA Amount
    The unadjusted excess HQLA amount is the sum of the level 2 cap 
excess amount and the level 2B cap excess amount. The calculation of 
the unadjusted excess HQLA amount applies the 40 percent level 2 liquid 
asset cap and the 15 percent level 2B liquid asset cap at the start of 
a 30 calendar-day stressed period by subtracting the amount of level 2 
liquid assets that are in excess of the limits. The unadjusted HQLA 
excess amount enforces the cap limits without unwinding any 
transactions.
    The method of calculating the level 2 cap excess amount and level 
2B cap excess amounts is set forth in sections 21(d) and (e) of the 
proposed rule, respectively. Under those provisions, the level 2 cap 
excess amount would be calculated by taking the greater of: (1) the 
level 2A liquid asset amount plus the level 2B liquid asset amount that 
exceeds 0.6667 (or 40/60, which is the ratio of the allowable level 2 
liquid assets to the level 1 liquid assets) times the level 1 liquid 
asset amount; or (2) zero.\41\ The calculation of the level 2B cap 
excess amount would be calculated by taking the greater of: (1) the 
level 2B liquid asset amount less the level 2 cap excess amount and 
less 0.1765 (or 15/85, which is the ratio of allowable level 2B liquid 
assets to the sum of level 1 and level 2A liquid assets) times the sum 
of the level 1 and level 2A liquid asset amount; or (2) zero.\42\ 
Subtracting the level 2 cap excess amount from the level 2B liquid 
asset amount when applying the 15 percent level 2B cap is appropriate 
because the level 2B liquid assets should be excluded before the level 
2A liquid assets when applying the 40 percent level 2 cap.
---------------------------------------------------------------------------

    \41\ See Sec.  ----.21(d) of the proposed rule.
    \42\ See Sec.  ----. 21(e) of the proposed rule.
---------------------------------------------------------------------------

b. Calculation of Adjusted Excess HQLA Amount
    To determine its adjusted HQLA excess amount, a covered company 
must unwind all secured funding transactions, secured lending 
transactions, asset exchanges, and collateralized derivatives 
transactions, each as defined by the proposed rule, that mature within 
a 30 calendar-day stress period where HQLA is exchanged. The unwinding 
of these transactions and the calculation of adjusted excess HQLA 
amount is intended to prevent a covered company from having a 
substantial amount of transactions that would create the appearance of 
a significant level 1 liquid asset amount at the beginning of a 30 
calendar-day stress period, but that would unwind by the end of the 30 
calendar-day stress period. For example, absent the unwinding of these 
transactions, a firm that has all level 2 liquid assets could appear 
compliant with the level 2 liquid asset cap on a calculation date by 
borrowing a level 1 liquid asset (such as cash or Treasuries) secured 
by a level 2 liquid asset overnight. While doing so would lower the 
covered company's amount of level 2 liquid assets and increase its 
amount of level 1 liquid assets, the organization would have a 
concentration of level 2 liquid assets above the 40 percent cap after 
the transaction is unwound. Therefore, the calculation of the adjusted 
excess HQLA amount and its subtraction from the HQLA amount, if greater 
than unadjusted excess HQLA amount, would prevent covered companies 
from avoiding the liquid asset cap limitations.
    The adjusted level 1 liquid asset amount would be the fair value, 
as determined under GAAP, of the level 1 liquid assets that are held by 
a covered company upon the unwinding of any secured funding 
transaction, secured lending transaction, asset exchanges, or 
collateralized derivatives transaction that mature within a 30 
calendar-day stress period and that involves an exchange of HQLA. 
Similarly, adjusted level 2A and adjusted level 2B liquid assets would 
only include those transactions involving an exchange HQLA. After 
unwinding all the appropriate transactions, the asset haircuts of 15 
percent and 50 percent would be applied to the level 2A and 2B liquid 
assets, respectively.
    The adjusted excess HQLA amount calculated pursuant to section 
21(g) of the proposed rule would be comprised of the adjusted level 2 
cap excess amount and adjusted level 2B cap excess amount calculated 
pursuant to sections 21(h) and 21(i) of the proposed rule, 
respectively. These excess amounts are calculated in order to maintain 
the 40 percent cap on level 2 liquid assets and the 15 percent cap on 
level 2B liquid assets after unwinding a covered company's secured 
funding transactions, secured lending transactions, asset exchanges, 
and collateralized derivatives transactions.
    The adjusted level 2 cap excess amount would be calculated by 
taking the greater of: (1) the adjusted level 2A liquid asset amount 
plus the adjusted level 2B liquid asset amount minus 0.6667 (or 40/60, 
which is the ratio of the allowable level 2 liquid assets to level 1 
liquid assets) times the adjusted level 1 liquid asset amount; or (2) 
zero.\43\ The adjusted level 2B cap excess amount would be calculated 
by taking the greater of: (1) the adjusted 2B liquid asset amount less 
the adjusted level 2 cap excess amount less 0.1765 (or 15/85, which is 
the ratio of allowable level 2B liquid assets to the sum of level 1 
liquid assets and level 2A liquid assets) times the sum of the adjusted 
level 1 liquid asset amount and the adjusted level 2A liquid asset 
amount; or (2) zero.\44\ As noted above, the adjusted excess HQLA 
amount is the sum of the adjusted level 2 cap excess amount and the 
adjusted level 2B cap excess amount.\45\ Also as noted above, 
subtracting out the adjusted level 2 cap excess amount from the 
adjusted level 2B liquid asset amount when applying the 15 percent 
level 2B cap is appropriate because the adjusted level 2B liquid assets 
should be excluded before the adjusted level 2A liquid assets when 
applying the 40 percent level 2 cap.
---------------------------------------------------------------------------

    \43\ See Sec.  ----.21(h) of the proposed rule.
    \44\ See Sec.  ----.21(i) of the proposed rule.
    \45\ See Sec.  ----.21(g) of the proposed rule.
---------------------------------------------------------------------------

c. Example HQLA Calculation
    The following is an example calculation of the HQLA amount that 
would be required under the proposed rule. Note that the given liquid 
asset amounts and adjusted liquid asset amounts already reflect the 
level 2A and 2B haircuts.

Level 1 liquid asset amount: 15
Level 2A liquid asset amount: 25
Level 2B liquid asset amount: 140
Adjusted level 1 liquid asset amount: 120
Adjusted level 2A liquid asset amount: 50
Adjusted level 2B liquid asset amount: 10

Calculate unadjusted excess HQLA amount (section 21(c))

    Step 1: Calculate the level 2 cap excess amount (section 21(d)):

Level 2 cap excess amount = Max (level 2A liquid asset amount + level 
2B liquid asset amount -0.6667*Level 1 liquid asset amount, 0)

    = Max (25 + 140 - 0.6667*15, 0)

[[Page 71833]]

    = Max (165 - 10.00, 0)
    = Max (155.00, 0)
    = 155.00

    Step 2: Calculate the level 2B cap excess amount (section 21(e)).

Level 2B cap excess amount = Max (level 2B liquid asset amount - level 
2 cap excess amount - 0.1765*(level 1 liquid asset amount + level 2 
liquid asset amount), 0)

    = Max (140-155.00 - 0.1765*(15+25), 0)
    = Max (-15 - 7.06, 0)
    = Max (-22.06, 0)
    = 0

    Step 3: Calculate the unadjusted excess HQLA amount (section 
21(c)).

Unadjusted excess HQLA amount = Level 2 cap excess amount + Level 2B 
cap excess amount
    = 155.00 + 0
    = 155

Calculate adjusted excess HQLA amount (sections 21(g))

Step 1: Calculate the adjusted level 2 cap excess amount (section 
21(h)).

Adjusted level 2 cap excess amount = Max (adjusted level 2A liquid 
asset amount + adjusted level 2B liquid asset amount - 0.6667*adjusted 
level 1 liquid asset amount, 0)
= Max (50 + 10 - 0.6667*120, 0)
    = Max (60-80.00, 0)
    = Max (-20.00, 0)
    = 0

    Step 2: Calculate the adjusted level 2B cap excess amount (section 
21(i)).

Adjusted level 2B cap excess amount = Max (adjusted level 2B liquid 
asset amount-adjusted level 2 cap excess amount-0.1765*(adjusted level 
1 liquid asset amount + adjusted level 2 liquid asset amount, 0)
    = Max (10-0-0.1765*(120+50), 0)
    = Max (10-30.00, 0)
    = Max (-20.00, 0)
    = 0

    Step 3: Calculate the adjusted excess HQLA amount (section 21(g)).

Adjusted excess HQLA amount = adjusted level 2 cap excess amount + 
adjusted level 2B cap excess amount
    = 0 + 0
    = 0

Determine the HQLA amount (section 21(a))

HQLA = Level 1 liquid asset amount + level 2A liquid asset amount + 
level 2B liquid asset amount-Max(unadjusted excess HQLA amount, 
adjusted excess HQLA amount)
    = 15 + 25 + 140-Max (155, 0)
    = 180-155
    = 25

B. Total Net Cash Outflow

    To determine the liquidity coverage ratio as of a calculation date, 
the proposed rule would require a covered company to calculate its 
total stressed net cash outflow amount for each of the 30 calendar days 
following the calculation date, thereby establishing the dollar value 
that must be offset by the HQLA amount.
    Under section 30 of the proposed rule, the total net cash outflow 
amount would be the dollar amount on the day within a 30 calendar-day 
stress period that has the highest amount of net cumulative cash 
outflows. The agencies believe that using the largest daily calculation 
as the denominator of the liquidity coverage ratio (rather than using 
total cash outflows over a 30 calendar-day stress period, which is the 
method employed by the Basel III LCR) is necessary because it takes 
into account potential maturity mismatches between a covered company's 
outflows and inflows, that is, the risk that a covered company could 
have a substantial amount of contractual inflows late in a 30 calendar-
day stress period while also having substantial outflows early in the 
same period. Such mismatches could threaten the liquidity of the 
organization. By requiring the recognition of the highest net 
cumulative outflow day of a particular 30 calendar-day stress period, 
the agencies believe that the proposed liquidity coverage ratio would 
better capture a covered company's liquidity risk and help foster more 
sound liquidity management.
    To determine the denominator of the liquidity coverage ratio as of 
a calculation date, the proposed rule would require a covered company 
to calculate its total cumulative stressed net cash outflows occurring 
on each of the 30 calendar days following the calculation date. Under 
section 30 of the proposed rule, the total net cash outflow amount for 
each of the next 30 calendar days would be the sum of the cumulative 
stressed outflow amounts less the sum of the cumulative stressed inflow 
amounts, with cumulative stressed inflow amounts limited to 75 percent 
of cumulative stressed outflow amounts. Stressed outflow and inflow 
amounts would be calculated by multiplying an outflow or inflow rate 
(designed to reflect a stress scenario) to each category of outflows 
and inflows. The cumulative stressed outflow amount would be comprised 
of different groupings of outflow categories, including categories 
where the instruments and transactions do not have maturity dates \46\ 
and categories where the instruments mature and transactions occur on 
or prior to a day 30 calendar days or less after the calculation 
date.\47\ The cumulative stressed inflow amount, which would be 
deducted from the cumulative stressed outflow amount, would equal the 
lesser of (1) the sum of categories where the inflows are grouped 
together and categories where the instruments mature and transactions 
occur on or prior to that calendar day \48\ and (2) 75 percent of the 
cumulative stressed outflow amount for that calendar day.\49\ The 
largest of these total net cash outflow amounts calculated for each of 
the 30 calendar days after the calculation date would be equal to the 
amount of HQLA that a covered company would be required to hold under 
the proposed rule.
---------------------------------------------------------------------------

    \46\ See Sec.  ----.30(b) of the proposed rule.
    \47\ See Sec.  ----.30(c) of the proposed rule.
    \48\ See Sec.  ----.30(d)(1) of the proposed rule.
    \49\ See Sec.  ----.30(d)(2) of the proposed rule.
---------------------------------------------------------------------------

    Consistent with the Basel III LCR and as noted above, in 
calculating total net cash outflow, cumulative cash inflows would be 
capped at 75 percent of aggregate cash outflows. This limit would 
prevent a covered company from relying exclusively on cash inflows 
(which may not materialize in a period of stress) to cover its 
liquidity needs under the proposal's stress scenario and ensure that 
covered companies maintain a minimum level of HQLA to meet unexpected 
liquidity demands during the 30 calendar-day period of liquidity 
stress.
    Table 1 illustrates the determination of the total net cash outflow 
amount by applying the daily outflow and inflow calculations for a 
given 30 calendar-day stress period. Using Table 1, a covered company 
would, for each day, add (A) cash outflows as calculated under sections 
32(a) through 32(g)(2) and cash outflows as calculated under sections 
32(g)(3) through 32(l) for instruments and transactions that have no 
contractual maturity date and (C) cumulative cash outflows as 
calculated under sections 32(g)(3) through 32(l) for instruments or 
transactions that have a contractual maturity date up to and including 
the calculation date (the cumulative sum of amounts in column (B)) to 
arrive at (D) total cumulative cash outflows. Next, a covered company 
would subtract the lesser of (F) cumulative cash inflows as calculated 
under sections 33(b) through 33(f) where the instruments or 
transactions have a contractual maturity date up to and including the 
calculation date (the cumulative sum of amounts in column

[[Page 71834]]

(E)) or (G) 75 percent of (D) total cumulative cash outflows to 
determine (H) the net cumulative cash outflow. Based on the example 
provided below, the peak outflow would occur on Day 18, resulting in a 
total net cash outflow amount of 285.

                                                Table 1--Determination of Peak Net Contractual Outflow Day
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Cumulative                             Cumulative
                                                               Contractual  contractual               Contractual  contractual
                                                                   cash         cash                      cash         cash
                                                                 outflows     outflows                  inflows      inflows
                                                      Non-         with         with        Total         with         with       Maximum        Net
                                                    maturity     maturity     maturity    cumulative    maturity     maturity     inflows     cumulative
                                                      cash      date up to   date up to      cash      date up to   date up to   permitted       cash
                                                    outflows       and          and        outflows       and          and       due to 75%    outflow
                                                   (constant)   including    including                 including    including    inflow cap
                                                                   the          the                       the          the
                                                               calculation  calculation               calculation  calculation
                                                                   date         date                      date         date
                                                            A            B            C            D            E            F            G            H
--------------------------------------------------------------------------------------------------------------------------------------------------------
Day 1...........................................          200          100          100          300           90           90          225          210
Day 2...........................................          200           20          120          320            5           95          240          225
Day 3...........................................          200           10          120          330            5          100          248          230
Day 4...........................................          200           15          145          345           20          120          259          225
Day 5...........................................          200           20          165          365           15          135          274          230
Day 6...........................................          200            0          165          365            0          135          274          230
Day 7...........................................          200            0          165          365            0          135          274          230
Day 8...........................................          200           10          175          375            8          143          281          232
Day 9...........................................          200           15          190          390            7          150          293          240
Day 10..........................................          200           25          215          415           20          170          311          245
Day 11..........................................          200           35          250          450            5          175          338          275
Day 12..........................................          200           10          260          460           15          190          345          270
Day 13..........................................          200            0          260          460            0          190          345          270
Day 14..........................................          200            0          260          460            0          190          345          270
Day 15..........................................          200            5          265          465            5          195          349          270
Day 16..........................................          200           15          280          480            5          200          360          280
Day 17..........................................          200            5          285          485            5          205          364          280
Day 18..........................................          200           10          295          495            5          210          371          285
Day 19..........................................          200           15          310          510           20          230          383          280
Day 20..........................................          200            0          310          510            0          230          383          280
Day 21..........................................          200            0          310          510            0          230          383          280
Day 22..........................................          200           20          330          530           45          275          398          255
Day 23..........................................          200           20          350          550           40          315          413          235
Day 24..........................................          200            5          355          555           20          335          416          220
Day 25..........................................          200           40          395          595            5          340          446          255
Day 26..........................................          200            8          403          603          125          465          452          151
Day 27..........................................          200            0          403          603            0          465          452          151
Day 28..........................................          200            0          403          603            0          465          452          151
Day 29..........................................          200            5          408          608           10          475          456          152
Day 30..........................................          200            2          410          610            5          480          458          153
--------------------------------------------------------------------------------------------------------------------------------------------------------

    28. Does the method the agencies are proposing for determining net 
cash outflows appropriately capture the potential mismatch between the 
timing of inflows and outflows under the 30 calendar-day stress period? 
Why or why not? Are there alternative methodologies for determining the 
net cumulative cash outflows that would more appropriately capture the 
maturity mismatch risk within 30 days about which the agencies are 
concerned? Provide specific suggestions and supporting data or other 
information.
    29. What costs or other burdens would be incurred as a result of 
the proposed method for calculating net cash outflows? What 
modifications should the agencies consider to mitigate such costs or 
burdens, while establishing appropriate means to capture potential 
mismatches between the timing of inflows and outflows within a 30 
calendar-day stress period?
1. Determining the Maturity of Instruments and Transactions
    Under the proposal, a covered company generally would be required 
to identify the maturity or transaction date that is the most 
conservative for an instrument or transaction in calculating inflows 
and outflows (that is, the earliest possible date for outflows and the 
latest possible date for inflows). In addition, under section 30 of the 
proposed rule, a covered company's total outflow amount as of a 
calculation date would include outflow amounts for certain instruments 
that do not have contractual maturity dates and that mature prior to or 
on a day 30 calendar days or less after the calculation date. Section 
33 of the proposed rule would expressly exclude instruments with no 
maturity date from a covered company's total inflow amount.
    Section 31 of the proposed rule describes how covered companies 
would determine whether instruments mature or transactions occur within 
the 30 calendar-day stress period for the purposes of calculating 
outflows and inflows. Section 31 would require covered companies to 
assess whether any options, either explicit or embedded, exist that 
would modify maturity dates such that they would fall within or beyond 
the 30 calendar-day stress period. If such an option exists for an 
outflow instrument or transaction, the proposed rule would direct a 
covered company to assume that the option would be exercised at the 
earliest possible date. If such an option exists for an inflow 
instrument or transaction, the proposed rule would require covered 
companies to assume that the option would be exercised at the latest 
possible date.
    In addition, if an option to adjust the maturity date of an 
instrument is subject to a notice period, a covered company would be 
required to either disregard or take into account the notice period, 
depending upon whether the instrument was an outflow or inflow 
instrument, respectively.

[[Page 71835]]

    30. The agencies solicit commenters' views on the proposed 
treatment for maturing instruments and for determining the date of 
transactions. Specifically, what are commenters' views on the proposed 
provisions that would require covered companies to apply the most 
conservative treatment with the respect to inflow and outflow dates and 
embedded options?
    31. What notice requirements, if any, should a covered company be 
able to recognize for counterparties that have options to accelerate 
the maturity of transactions and instruments included as outflows? 
Should a distinction be drawn between wholesale and retail customers or 
counterparties? Provide justification and supporting information.
2. Cash Outflow Categories
    Section 32 of the proposed rule sets forth the outflow categories 
for calculating cumulative cash outflows and their respective outflow 
rates, each as described below. The outflow rates are designed to 
reflect the 30 calendar-day stress scenario that is the basis for the 
proposed rule. Consistent with the Basel III LCR, the agencies are 
proposing to assign outflow rates for each category, ranging from 0 
percent to 100 percent. These outflow rates would be multiplied by the 
outstanding balance of each category of funding to arrive at the 
applicable outflow amount.
a. Unsecured Retail Funding Outflow Amount
    Under the proposed rule, unsecured retail funding would include 
retail deposits (other than brokered deposits), that are not secured 
under applicable law by a lien on specifically designated assets owned 
by the covered company and that are provided by a retail customer or 
counterparty. Unsecured retail funding would be divided into 
subcategories of stable retail deposits, other retail deposits, and 
funding from a retail customer or counterparty that is not a retail 
deposit or a brokered deposit provided by a retail customer or 
counterparty, each subject to the outflow rates set forth in section 
32(a) of the proposed rule, as explained below.
    Under the proposed rule, retail customers and counterparties would 
include individuals and certain small businesses. A small business 
would qualify as a retail customer or counterparty if its transactions 
have liquidity risks similar to those of individuals and are managed by 
a covered company in the same way as comparable transactions with 
individuals. In addition, to qualify as a small business under the 
proposed rule the total aggregate funding raised from the small 
business must be less than $1.5 million. If an entity provides $1.5 
million or more in total funding, if it has liquidity risks that are 
not similar to individuals, or if the covered company manages the 
customer like corporate customers rather than individual customers, it 
would be a wholesale customer under the proposed rule. This treatment 
reflects the agencies' understanding that, during the recent financial 
crisis, small business customers generally behaved similarly to 
individual customers with respect to the stability of their deposits.
    Supervisory data from stressed or failed institutions indicates 
that retail depositors withdrew term deposits at a similar rate to 
deposits without a contractual term. Therefore, the proposed rule would 
require covered companies to hold the same amount of HQLA to meet 
retail customer withdrawals in a stressed environment, regardless of 
whether the deposits have a contractual term. A retail deposit would 
thus be defined under the proposed rule as a demand or term deposit 
that is placed with a covered company by a retail customer or 
counterparty. This definition would not include wholesale brokered 
deposits or brokered deposits for retail customers or counterparties, 
which are covered in separate outflow categories.
i. Stable Retail Deposits
    The proposed rule would define a stable retail deposit as a retail 
deposit, the entire amount of which is covered by deposit 
insurance,\50\ and either (1) held in a transactional account by the 
depositor or (2) the depositor has another established relationship 
with a covered company, such that withdrawal of the deposit would be 
unlikely. Under the proposed rule, the established relationship could 
be another deposit account, a loan, bill payment services, or any other 
service or product provided to the depositor, provided that the banking 
organization demonstrates to the satisfaction of its primary Federal 
supervisor that the relationship would make deposit withdrawal highly 
unlikely during a liquidity stress event.
---------------------------------------------------------------------------

    \50\ For purposes of the proposed rule, ``deposit insurance'' is 
defined to mean deposit insurance provided by the FDIC and does not 
include other deposit insurance schemes that may exist.
---------------------------------------------------------------------------

    The agencies observe that in the recent financial crisis, retail 
customers and counterparties with deposit balances below the FDIC's 
standard maximum deposit insurance amount did not generally withdraw 
their deposits in such a way as to cause liquidity strains for banking 
organizations. However, the agencies do not believe the presence of 
deposit insurance alone is sufficient to consider a retail deposit 
stable because depositors with only one insured account are generally 
less stable than depositors with multiple accounts or relationships in 
a stress scenario. The combination of deposit insurance covering the 
entire amount of the deposit and the depositors' relationship with the 
bank, however, makes this category of retail deposits very unlikely to 
be subject to withdrawal in a stress scenario, due to confidence in 
FDIC deposit insurance and the inconvenience of moving transactional or 
multiple accounts. Historical experience has demonstrated that retail 
customers and counterparties have tended to avoid restructuring direct 
deposits, automatic payments, and similar banking products that are 
insured during a stress scenario because they generally have sufficient 
confidence that insured funds would not be lost in the event of a bank 
failure and the difficulty of such restructuring does not seem to be 
worthwhile when funds are insured.
    Therefore, under the proposed rule, stable retail deposit balances 
would be multiplied by the relatively low outflow rate of 3 percent. 
Notwithstanding the above, the agencies note that a stressed 
environment could cause a surge in retail deposit inflows, as customers 
seek the safety of deposit insurance. Over several months or quarters, 
a surge in deposit inflows could distort a banking organization's 
liquidity coverage ratio calculation because these funds may not remain 
in the institution once market conditions and public confidence 
improves. A covered company's management should be cognizant of this 
potential distortion and consider appropriate steps to maintain 
adequate liquidity for the potential future withdrawals.
    32. What, if any, aggregate funding thresholds should the agencies 
consider for application to individuals, such as the $1.5 million 
aggregate funding threshold applicable to qualify as a small business 
under the proposed rule? Provide justification and supporting 
information.
ii. Other Retail Deposits
    Under the proposed rule, other retail deposits would include all 
deposits from retail customers that are not stable retail deposits as 
described above. Supervisory data supports a higher outflow rate for 
deposits that are partially insured in the United States as

[[Page 71836]]

compared to entirely insured. During the recent financial crisis, to 
the extent that retail depositors whose deposits partially exceeded the 
FDIC's insurance limit withdrew deposits from a banking organization, 
they tended to withdraw not only the uninsured portion of the deposit, 
but the entire deposit. Furthermore, as discussed above, the agencies 
believe that insured retail deposits that are not either transactional 
account deposits or deposits of a customer with another relationship 
with the institution are less stable than those that are.
    Accordingly, the agencies are proposing to assign an outflow rate 
of 10 percent for those retail deposits that are not entirely covered 
by deposit insurance, or that otherwise do not meet the proposed 
criteria for a stable retail deposit.
    All other retail deposits would include retail deposits not insured 
by the FDIC, whether entirely insured, or insured by other 
jurisdictions. While the Basel III Liquidity Framework contemplates 
recognition of foreign deposit insurance, the agencies are proposing to 
recognize only FDIC deposit insurance in defining stable retail 
deposits because of the level of variability in terms of coverage and 
structure found in different foreign deposit insurance systems and 
because of the forthcoming potential revision of international best 
practices for deposit insurance. As discussed more fully below, the 
agencies are contemplating how best to identify and give comparable 
treatment to foreign deposit insurance systems that are similar to FDIC 
insurance once international best practices are further developed.
    Congress created the FDIC in 1933 to end the banking crisis during 
the Great Depression, to restore public confidence in the banking 
system, and to safeguard bank deposits through deposit insurance. In 
the most recent crisis, the FDIC's deposit insurance guarantee 
contributed significantly to financial stability in an otherwise 
unstable financial environment. FDIC insurance has several 
characteristics that make it effective in stabilizing deposit outflows 
during liquidity stress events, including, but not limited to: capacity 
to make insured funds promptly available, usually the next business day 
after a bank closure; coverage levels sufficient to protect most retail 
depositors in full; an ex-ante funding mechanism; a rigorous prudential 
supervision process; timely intervention and resolution protocols; 
public awareness of deposit insurance; and backing by the full faith 
and credit of the U.S. government.
    National adoption of deposit insurance systems has become prevalent 
since the 1980s, in part because of similar experiences to the Great 
Depression (for example, the Mexican peso crisis of the 1990s and the 
1997 Asian financial crisis). Numerous international organizations have 
recognized the necessity of deposit insurance as part of a 
comprehensive financial stability framework, and there are now at least 
112 recognized deposit insurers, with several more jurisdictions in the 
process of implementing deposit insurance.
    Although many countries have implemented deposit insurance 
programs, deposit insurance around the globe is uneven along a number 
of dimensions, including terms of coverage, deposit insurer powers, 
financial resources, and public awareness. At one end of the deposit 
insurance system spectrum, some systems appear to be similar to the 
FDIC's insurance framework in terms of uniform coverage and back-up 
funding options. At the other end, a variety of less structured models 
exist, including private organizations with only implied or no 
sovereign support, sovereign guarantees with no deposit insurer, and 
minimal deposit insurance systems with limited powers.
    The international regulatory community has recognized the variance 
in global deposit insurance as a significant issue. In 2002, the 
International Association of Deposit Insurers (IADI) was formed to 
promote best practices in deposit insurance and has developed core 
principles that are recognized by both the IMF and the World Bank. IADI 
recently announced that its core principles would be assessed and 
updated, as necessary, to reflect enhanced guidance, international 
regulatory developments, and the results of compliance assessment 
reviews conducted to date.\51\
---------------------------------------------------------------------------

    \51\ Today, IADI consists of 70 members, 9 associates, and 12 
partner organizations, and is considered to be the standard-setter 
for deposit insurance by the Financial Stability Board (FSB), the 
BCBS, the International Monetary Fund (IMF), and the World Bank.
---------------------------------------------------------------------------

    The agencies considered whether foreign deposit insurance systems, 
particularly those with sovereign backing, should be given the same 
treatment as FDIC insurance in the proposed rule. While credible 
sovereign guarantees are useful in reassuring depositors of the safety 
of their principal balances, experience has proven that without 
established operational infrastructure or explicit funding arrangement, 
depositors may not be assured that their funds will be available in a 
reasonable timeframe. History has shown that if depositors believe that 
their funds will be unavailable for a protracted period, they may 
withdraw funds in large numbers to avoid the resulting hardship. The 
ability of foreign deposit insurers to make funds promptly available 
varies widely and is often in contrast to the FDIC's next-business-day 
standard.\52\
---------------------------------------------------------------------------

    \52\ See Financial Stability Board, Thematic Review on Deposit 
Insurance Systems (February 8, 2012), available at http://www.financialstabilityboard.org/publications/r_120208.pdf.
---------------------------------------------------------------------------

    33. The agencies solicit comments on the proposed rule's treatment 
of deposits that are insured in foreign jurisdictions, views on the 
stability of foreign-entity insured deposits in a stressed environment, 
and how to best determine if foreign deposit insurance system is 
similar to FDIC insurance.
iii. Other Unsecured Retail Funding
    The other unsecured retail funding category would apply an outflow 
rate of 100 percent to all funding provided by retail customers or 
counterparties that is not a retail deposit or a retail brokered 
deposit and that matures within 30 days. This is intended to capture 
all additional types of retail funding that are not otherwise 
categorized.
    34. The agencies solicit commenters' views on the proposed outflow 
rates associated with stable retail deposits (3 percent outflow), less-
stable retail deposits (10 percent outflow), and other unsecured retail 
funding (100 percent outflow). What, if any, additional factors should 
be taken into consideration regarding the proposed outflow rates for 
these deposit types? Do the proposed outflow rates reflect industry 
experience? Why or why not? Please provide supporting data.
    35. Is it appropriate to treat certain small business customers 
like retail customers? Why or why not? What additional criteria, if 
any, would serve as more appropriate indicators?
    36. The agencies solicit comment on the outflow rate for the 
insured portion of those deposits that are in excess of deposit 
insurance limit. Specifically, should the insured portion of a deposit 
that exceeds $250,000 (e.g., the portion of deposit balances up to and 
including $250,000) receive a different outflow rate than the uninsured 
portion of the deposit? Why or why not? Please provide supporting data.
b. Structured Transaction Outflow Amount
    The proposed rule's structured transaction outflow amount would 
capture obligations and exposures associated with structured 
transactions

[[Page 71837]]

sponsored by a covered company, without regard to whether the 
structured transaction vehicle that is the issuing entity is 
consolidated on the covered company's balance sheet. Under the proposed 
rule, the outflow amount for each of a covered company's structured 
transactions would be the greater of (1) 100 percent of the amount of 
all debt obligations of the issuing entity that mature 30 days or less 
from a calculation date and all commitments made by the issuing entity 
to purchase assets within 30 calendar days or less from the calculation 
date and (2) the maximum contractual amount of funding the covered 
company may be required to provide to the issuing entity 30 calendar 
days or less from such calculation date through a liquidity facility, a 
return or repurchase of assets from the issuing entity, or other 
funding agreement.
    The agencies believe that the maximum potential amount that a 
covered company may be required to provide to support its sponsored 
structured transactions, including potential obligations arising out of 
commitments to an issuing entity, that arise from structured finance 
transactions should be fully included in outflows when calculating the 
proposed liquidity coverage ratio because such transactions, whether 
issued directly or sponsored by covered companies, have caused severe 
liquidity demands at covered companies during stressed environments. 
Their inclusion is important to measuring a covered company's short-
term susceptibility to unexpected funding requirements.
    37. What, if any modifications to the structured transaction 
outflows should the agencies consider? In particular, what, if any, 
modifications to the definition of structured transaction should be 
considered? Please provide justifications and supporting data.
c. Net Derivative Cash Outflow Amount
    Under the proposed rule, a covered company's net derivative cash 
outflow amount would equal the sum of the payments and collateral that 
a covered company will make or deliver to each counterparty under 
derivative transactions, less, if subject to a valid qualifying master 
netting agreement,\53\ the sum of payments and collateral due from each 
counterparty. This calculation would incorporate the amounts due to and 
from counterparties under the applicable transactions within 30 
calendar days of a calculation date. Netting would be permissible at 
the highest level permitted by a covered company's contracts with its 
counterparties and could not include inflows where a covered company is 
already including assets in its HQLA that the counterparty has posted 
to support those inflows. If the derivative transactions are not 
subject to a valid qualifying master netting agreement, then the 
derivative cash outflow for that counterparty would be included in the 
net derivative cash outflow amount and the derivative cash inflows for 
that counterparty would be included in the net derivative cash inflow 
amount, without any netting. Net derivative cash outflow should be 
calculated in accordance with existing valuation methodologies and 
expected contractual derivatives cash flows. In the event that net 
derivative cash outflow for a particular counterparty is less than 
zero, such amount would be required to be included in a covered 
company's net derivative cash inflow for that counterparty.
---------------------------------------------------------------------------

    \53\ Under the proposal, a ``qualifying master netting 
agreement'' would be defined as under the agencies' regulatory 
capital rules as a legally binding agreement that gives the covered 
company contractual rights to terminate, accelerate, and close out 
transactions upon the event of default and liquidate collateral or 
use it to set off its obligation. The agreement also could not be 
subject to a stay under bankruptcy or similar proceeding and the 
covered company would be required to meet certain operational 
requirements with respect to the agreement, as set forth in section 
4 of the proposed rule.
---------------------------------------------------------------------------

    Under the proposed rule, a covered company's net derivative cash 
outflow amount would not include amounts arising in connection with 
forward sales of mortgage loans or any derivatives that are mortgage 
commitments subject to section 32(d) of the proposed rule. Net 
derivative cash outflow would still include derivatives that hedge 
interest rate risk associated with a mortgage pipeline.
    This category is important to the proposed rule's liquidity 
coverage ratio in that many covered companies actively use derivatives 
across their business lines. In a short-term stressed situation, the 
amount of potential cash outflow associated with derivatives positions 
can change as positions are adjusted for market conditions and as 
counterparties demand additional collateral or more conservative 
contract terms.
    38. What, if any, additional factors or aspects of derivatives 
transactions should be considered for the treatment of derivatives 
contracts under the proposed rule?
    39. Is it appropriate to exclude forward sales of mortgage loans 
from the treatment of derivatives contracts under the proposed rule? 
Why or why not?
d. Mortgage Commitment Outflow Amount
    During the recent financial crisis, it was evident that financial 
institutions were not able to curtail mortgage loan pipelines and had 
difficulty liquidating loans held for sale. Accordingly, the proposed 
rule would require a covered company to recognize potential cash 
outflows related to commitments to fund retail mortgage loans that 
could be drawn upon within 30 days of a calculation date. Under the 
proposal, a retail mortgage would be a mortgage that is primarily 
secured by a first or subsequent lien on a one-to-four family property.
    The proposed rule would require a covered company to use an outflow 
rate of 10 percent for all retail mortgage commitments that can be 
drawn upon within a 30 calendar-day stress period. In addition, the 
proposed rule would not include in inflows proceeds from the potential 
sale of mortgages in the to-be-announced, specified pool, or similar 
forward sales market.\54\ The agencies believe that, in a crisis, such 
inflows may not materialize as investors may curtail most or all of 
their investment in the mortgage market.
---------------------------------------------------------------------------

    \54\ See Sec.  ----.33(a) of the proposed rule.
---------------------------------------------------------------------------

    40. What, if any, modifications should the agencies make to the 
mortgage commitment outflow amount? Provide data and other supporting 
information.
    41. What effect may the treatment for retail mortgage funding under 
the proposed rule have on the banking system and the mortgage markets, 
including in combination with the effects of other regulations that 
apply to the mortgage market? What other treatments, if any, should the 
agencies consider? Provide data and other supporting information.
e. Commitment Outflow Amount
    This category would include the undrawn portion of committed credit 
and liquidity facilities provided by a covered company to its customers 
and counterparties that can be drawn down within 30 days of the 
calculation date. A liquidity facility would be defined under the 
proposed rule as a legally binding agreement to extend funds at a 
future date to a counterparty that is made expressly for the purpose of 
refinancing the debt of the counterparty when it is unable to obtain a 
primary or anticipated source of funding. A liquidity facility would 
include an agreement to provide liquidity support to asset-backed 
commercial paper by lending to, or purchasing assets from, any 
structure, program, or conduit in

[[Page 71838]]

the event that funds are required to repay maturing asset-backed 
commercial paper. Liquidity facilities would exclude general working 
capital facilities, such as revolving credit facilities for general 
corporate or working capital purposes.
    A credit facility would be defined as a legally binding agreement 
to extend funds if requested at a future date, including a general 
working capital facility such as a revolving credit facility for 
general corporate or working capital purposes. Under the proposed rule, 
a credit facility would not include a facility extended expressly for 
the purpose of refinancing the debt of a counterparty that is otherwise 
unable to meet its obligations in the ordinary course of business. 
Facilities that have aspects of both credit and liquidity facilities 
would be classified as liquidity facilities for the purposes of the 
proposed rule.
    Under the proposed rule, a liquidity or credit facility would be 
considered committed when the terms governing the facility prohibit a 
covered company from refusing to extend credit or funding under the 
facility, except where certain conditions specified by the terms of the 
facility--other than customary notice, administrative conditions, or 
changes in financial condition of the borrower--have been met. The 
undrawn amount for a committed credit or liquidity facility would be 
the entire undrawn amount of the facility that could be drawn upon 
within 30 calendar days of the calculation date under the governing 
agreement, less the fair value of level 1 or level 2A liquid assets, if 
any, which secure the facility, after recognizing the applicable 
haircut for the assets serving as collateral. In the case of a 
liquidity facility, the undrawn amount would not include the portion of 
the facility that supports customer obligations that do not mature 30 
calendar days or less after the calculation date. A covered company's 
proportionate ownership share of a syndicated credit facility also 
would be included in the appropriate category of wholesale credit 
commitments.
    The proposed rule would assign the outflow amounts to commitments 
as set forth in section 32(e) of the proposed rule. First, in contrast 
to the outflow rates applied to other commitments, those between 
affiliated depository institutions subject to the proposed rule would 
receive an outflow rate of 0 percent because the agencies recognize 
that both institutions should have adequate liquidity to meet their 
obligations during a stress scenario and therefore should not rely 
extensively on such liquidity facilities. The other outflow rates are 
meant to reflect the characteristics of each class of customers and 
counterparties in a stress scenario, as well as the reputational and 
legal risks covered companies face if they try to restructure a 
commitment during a crisis to avoid drawdowns by customers. 
Accordingly, a relatively low outflow rate of 5 percent is proposed for 
retail facilities because individuals and small businesses would likely 
have a lesser need for committed credit facilities in stressed 
scenarios than institutional or wholesale customers (that is, the 
correlation between draws on such facilities and the stress scenario of 
the liquidity coverage ratio is low). The agencies are proposing to 
assign outflow rates of 10 percent for credit facilities and 30 percent 
for liquidity facilities committed to entities that are not financial 
sector companies whose securities are excluded from HQLA \55\ based on 
their typically longer-term funding structures and perceived higher 
credit quality profile in the capital markets, particularly during 
times of financial stress. The proposed rule would assign a 50 percent 
outflow rate to credit and liquidity facilities committed to depository 
institutions, depository institution holding companies, and foreign 
banks (other than commitments between affiliated depository 
institutions). Commitments to all other regulated financial companies, 
investment companies, non-regulated funds, pension funds, investment 
advisers, or identified companies (or to a consolidated subsidiary of 
any of the foregoing) would be subject to a 40 percent outflow rate for 
credit facilities and 100 percent for liquidity facilities.
---------------------------------------------------------------------------

    \55\ See section II.A.2. These financial sector companies are 
regulated financial companies, investment companies, non-regulated 
funds, pension funds, investment adviser, or identified companies, 
and consolidated subsidiaries of the foregoing, as defined in the 
proposal.
---------------------------------------------------------------------------

    The agencies are generally proposing higher outflow rates for 
liquidity facilities than credit facilities as described above because 
the crisis scenario that is incorporated into the proposed rule focuses 
on liquidity pressures increasing the likelihood of large draws on 
liquidity lines as compared to credit lines, which typically are used 
more during the normal course of business and not as substantially 
during a liquidity stress. The lower liquidity commitment outflow rate 
for depository institutions, depository institution holding companies, 
and foreign banks compared to other financial sector entities, is 
reflective of historical experience, which indicates these entities 
drew on liquidity lines less than other financial sector entities did 
during periods of liquidity stress. The higher outflow rate for 
commitments to other types of companies in the financial sector 
reflects their likely high need to use every available liquidity source 
during a liquidity crisis in order to meet their obligations and the 
fact that these entities are less likely to be able to immediately 
access government liquidity sources.
    The agencies are proposing a 100 percent outflow rate for a covered 
company's liquidity facilities with special purpose entities (SPEs), 
given SPEs' sensitivity to emergency cash and backstop needs in a 
short-term stress environment, such as those experienced with SPEs 
during the recent financial crisis. During that period, many SPEs 
experienced severe cash shortfalls, as they could not rollover debt and 
had to rely on borrowing and backstop lines.
    Under the proposed rule, the amount of level 1 or level 2A liquid 
assets securing the undrawn portion of a commitment would reduce the 
outflow associated with the commitment if certain conditions are met. 
The amount of level 1 or level 2A liquid assets securing a committed 
credit or liquidity facility would be the fair value (as determined 
under GAAP) of all level 1 liquid assets and 85 percent of the fair 
value of level 2A liquid assets posted or required to be posted upon 
funding of the commitment as collateral to secure the facility, 
provided that the following conditions are met during the applicable 30 
calendar-day period: (1) the pledged assets meet the criteria for HQLA 
as set forth in section 20 of the proposed rule; and (2) the covered 
company has not included the assets in its HQLA amount as calculated 
under subpart C of the proposed rule.
    42. What, if any, additional factors should be considered in 
determining the treatment of unfunded commitments under the proposal? 
What, if any, additional distinctions between different types of 
unfunded commitments should the agencies consider? If necessary, how 
might the definitions of credit facility and liquidity facility be 
further clarified or distinguished? Are the various proposed treatments 
for unfunded commitments consistent with industry experience? Provide 
detailed explanations and supporting information.
    43. Is the proposed rule's definition of SPE appropriate, under-
inclusive, or over-inclusive? Why?
    Consistent with the BCBS LCR, specified run-off rates are not 
provided for credit card lines, since they are

[[Page 71839]]

typically unconditionally cancelable and therefore do not meet the 
proposed definition of a committed facility. The agencies believe that 
during a financial crisis, draws on credit card lines would remain 
relatively constant and predictable; thus, outstanding lines should not 
materially affect a covered company's liquidity demands in a crisis. 
Accordingly, undrawn retail credit card lines are not included in cash 
outflows in the proposed rule. However, for a few banking 
organizations, these lines are significant relative to their balance 
sheet and these banking organizations may experience reputational or 
other risks if lines are withdrawn or significantly reduced during a 
crisis.
    44. What, if any, outflow rate should the agencies apply to 
outstanding credit card lines? What factors associated with these lines 
should the agencies consider?
f. Collateral Outflow Amount
    The proposed rule would require a covered company to recognize 
outflows related to changes in collateral positions that could arise 
during a period of financial stress. Such changes could include posting 
additional or higher quality collateral, returning excess collateral, 
accepting lower quality collateral as a substitute for already-posted 
collateral, or changing collateral value, all of which could have a 
significant impact upon a covered company's liquidity profile. The 
following discussion describes the subcategories of collateral outflow 
addressed by the proposed rule.
Changes in Financial Condition
    Certain contractual clauses in derivatives and other transaction 
documents, such as material adverse change clauses and downgrade 
triggers, are aimed at capturing changes in a covered company's 
financial condition and, if triggered, would require a covered company 
to post more collateral or accelerate demand features in certain 
obligations that require collateral. During the recent financial 
crisis, various companies that would be subject to the proposed rule 
came under severe liquidity stress as the result of contractual 
requirements to post collateral following a credit rating downgrade.
    Accordingly, the proposed rule would require a covered company to 
count as an outflow 100 percent of all additional amounts that the 
covered company would need to post or fund as additional collateral 
under a contract as a result of a change in its financial condition. A 
covered company would calculate this outflow amount by evaluating the 
terms of such contracts and calculating any incremental additional 
collateral or higher quality collateral that would need to be posted as 
a result of the triggering of clauses tied to a ratings downgrade or 
similar event, or change in the covered company's financial condition. 
If multiple methods of meeting the requirement for additional 
collateral are available (i.e., providing more collateral of the same 
type or replacing existing collateral with higher quality collateral) 
the banks may use the lower calculated outflow amount in its 
calculation.
    45. What are the operational difficulties in identifying the 
collateral outflows related to changes in financial condition? What, if 
any, additional factors should be considered?
Potential Valuation Changes
    The proposed rule would apply a 20 percent outflow rate to the fair 
value of any assets posted as collateral that are not level 1 liquid 
assets to recognize that a covered company likely would be required to 
post additional collateral if market prices fell. The agencies are not 
proposing to apply outflow rates to level 1 liquid assets that are 
posted as collateral, as they are not expected to face mark-to-market 
losses in times of stress.
Excess Collateral
    The agencies believe that a covered company's counterparty would 
not maintain any more collateral at the covered company than is 
required. Therefore, the proposed rule would apply an outflow rate of 
100 percent on the fair value of the collateral posted by 
counterparties that exceeds the current collateral requirement in a 
governing contract. Under the proposed rule, this category would 
include unsegregated excess collateral that a covered company may be 
required to return to a counterparty based on the terms of a derivative 
or other financial agreement and which is not already excluded from the 
covered company's HQLA amount.
Contractually-Required Collateral
    The proposed rule would require that 100 percent of the fair value 
of collateral that a covered company is contractually obligated to 
post, but has not yet posted, be included in the cash outflows 
calculation. Where a covered company has not yet posted such 
collateral, the agencies believe that, in stressed market conditions, a 
covered company's counterparties would likely demand all contractually 
required collateral.
Collateral Substitution
    The proposed rule's collateral substitution outflow amount would be 
the differential between the post-haircut fair value of HQLA collateral 
posted by a counterparty and the lower quality HQLA or non-HQLA with 
which it could be substituted under an applicable contract. This 
outflow category assumes that, in a stress scenario, a covered 
company's counterparty would post the lowest quality collateral 
permissible under the governing contract. For example, an agreement 
could require a minimum of level 2A liquid assets as collateral, but 
allow a customer to pledge level 1 or level 2A liquid assets as 
collateral to meet such requirement. If a covered company is currently 
holding a level 1 liquid asset as collateral, the proposed rule would 
impose an outflow rate of 15 percent, which results from discounting 
the equivalent market value of the level 2A liquid asset. For a level 
2B liquid asset, the amount of the market value included as an outflow 
would be 50 percent, which is equal to the market value of the level 2B 
liquid asset discounted by 50 percent. If the minimum required 
collateral under an agreement is comprised of assets that are not HQLA, 
a covered company currently holding level 1 assets would be required to 
include 100 percent of such assets' market value. The proposed rule 
provides outflow rates for each possible permutation.
Derivative Collateral Change
    The proposed rule would require a covered company to use a two-year 
look-back approach in calculating its market valuation change outflow 
amounts for collateral securing its derivative positions. This approach 
is intended to capture the risk of a covered company facing additional 
collateral calls as a result of asset price fluctuations. The risk of 
such fluctuations can be particularly acute for a covered company with 
significant derivative operations and other business lines that rely on 
collateral postings.
    Under the proposed rule, the derivative collateral amount would 
equal the absolute value of the largest consecutive 30 calendar-day 
cumulative net mark-to-market collateral outflow or inflow resulting 
from derivative transactions realized during the preceding 24 months.
    46. What, if any, additional factors or aspects for collateral 
outflow amounts should be considered under the proposal? For example, 
should the outflow include initial margin collateral flows in addition 
to variation margin

[[Page 71840]]

collateral flows? Why or why not? Does the 24 month look back approach 
adequately capture mark to market valuation changes, or are there 
alternative treatments that would better capture this risk?
g. Brokered Deposit Outflow Amount for Retail Customers or 
Counterparties
    Under the proposed rule, a brokered deposit would be defined as any 
deposit held at the covered company that is obtained directly or 
indirectly, from or through the mediation or assistance of a deposit 
broker, as that term is defined in section 29(g) of the Federal Deposit 
Insurance Act.\56\ The agencies consider brokered deposits for retail 
customers or counterparties to be a more volatile form of funding than 
stable retail deposits, even if deposit insurance coverage is present, 
because of the structure of the attendant third-party relationship and 
the potential instability of such deposits during a liquidity stress 
event. The agencies are also concerned that statutory restrictions on 
certain brokered deposits make this form of funding less stable than 
other deposit types. Specifically, a covered company that is not ``well 
capitalized'' or becomes less than ``well capitalized'' \57\ is subject 
to prohibitions on accepting funds obtained through a deposit broker. 
In addition, because the retention of brokered deposits from retail 
customers or counterparties is highly correlated with a covered 
company's ability to legally accept such brokered deposits and continue 
offering competitive interest rates, the agencies are proposing higher 
outflow rates for this class of liabilities. The agencies are proposing 
to assign outflow rates to brokered deposits for retail customers or 
counterparties based on the type of account, whether deposit insurance 
is in place, and the maturity date of the deposit agreement. Outflow 
rates for retail brokered deposits would be further subdivided into 
reciprocal brokered deposits, brokered sweep deposits, and all other 
brokered deposits.
---------------------------------------------------------------------------

    \56\ 12 U.S.C. 1831f(g).
    \57\ As defined by section 38 of the Federal Deposit Insurance 
Act, 12 U.S.C. 1831o.
---------------------------------------------------------------------------

    A reciprocal brokered deposit is defined in the proposed rule as a 
brokered deposit that a covered company receives through a deposit 
placement network on a reciprocal basis such that for any deposit 
received, the covered company (as agent for the depositor) places the 
same amount with other depository institutions through the network and 
each member of the network sets the interest rate to be paid on the 
entire amount of funds it places with other network members.
    Reciprocal brokered deposits generally have been observed to be 
more stable than typical brokered deposits because each institution 
within the deposit placement network typically has an established 
relationship with the retail customer or counterparty making the 
initial over-the-insurance-limit deposit that necessitates placing the 
deposit through the network. The proposed rule would therefore apply a 
10 percent outflow rate to all reciprocal brokered deposits at a 
covered company that are entirely covered by deposit insurance. 
Reciprocal brokered deposits would receive an outflow rate of 25 
percent if less than the entire amount of the deposit is covered by 
deposit insurance.
    Brokered sweep deposits involve securities firms or investment 
companies that ``sweep'' or transfer idle customer funds into deposit 
accounts at one or more banks. Accordingly, such deposits are defined 
under the proposed rule as those that are held at the covered company 
by a customer or counterparty through a contractual feature that 
automatically transfers to the covered company from another regulated 
financial company at the close of each business day amounts identified 
under the agreement governing the account from which the amount is 
being transferred. The proposed rule would assign brokered sweep 
deposits progressively higher outflow rates depending on deposit 
insurance coverage and the affiliation of the broker sweeping the 
deposits. Under the proposed rule, brokered sweep deposits that are 
entirely covered by deposit insurance and that are deposited in 
accordance with a contract between a retail customer or counterparty 
and a covered company, a covered company's consolidated subsidiary, or 
a company that is a consolidated subsidiary of the same top tier 
company would be subject to a 10 percent outflow rate. Brokered sweep 
deposits that are entirely covered by deposit insurance but that do not 
originate with a covered company, a covered company's consolidated 
subsidiary, or a company that is a consolidated subsidiary of the same 
top tier company of a covered company would be assigned a 25 percent 
outflow rate. Brokered sweep deposits that are not entirely covered by 
deposit insurance would be subject to a 40 percent outflow rate because 
they have been observed to be more volatile during stressful periods, 
as customers seek alternative investment vehicles or use those funds 
for other purposes.
    Under the proposed rule, all other brokered deposits would include 
those brokered deposits that are not reciprocal deposits or are not 
part of a brokered sweep arrangement. These accounts would be subject 
to an outflow rate of 10 percent if they mature later than 30 calendar 
days from a calculation date or 100 percent if they mature 30 calendar 
days or less from a calculation date.
    47. The agencies seek commenters' views on the proposed outflow 
rates for brokered deposits. Specifically, what are commenters' views 
on the range of outflow rates to brokered deposits? Where commenters 
disagree with the proposed treatment, please provide alternative 
proposals supported by sound analysis as well as the associated 
advantages and disadvantages for such alternative proposals.
    48. Is it appropriate to assign a particular outflow rate to 
brokered sweep deposits entirely covered by deposit insurance that 
originate with a consolidated subsidiary of a covered company, and 
different outflow rates to other brokered deposits entirely covered by 
deposit insurance? Why or why not? What different outflow rates, if any 
should the agencies consider for application to all brokered sweep 
deposits entirely covered by deposit insurance? Provide justification 
and supporting information.
h. Unsecured Wholesale Funding Outflow Amount
    The proposed rule includes three general categories of unsecured 
wholesale funding: (1) unsecured wholesale funding transactions; (2) 
operational deposits; and (3) other unsecured wholesale funding. 
Funding instruments within these categories are not secured under 
applicable law by a lien on specifically designated assets. The 
proposed rule would assign a range of outflow rates depending upon 
whether deposit insurance is covering the funding, the counterparty, 
and other characteristics that cause these instruments to be more or 
less stable when compared to other instruments in this category. 
Unsecured wholesale funding instruments typically would include 
wholesale deposits,\58\ federal funds purchased, unsecured advances 
from a public sector entity, sovereign entity, or U.S. government 
enterprise, unsecured notes and bonds, or other unsecured debt 
securities issued by a covered company (unless sold exclusively in 
retail markets to retail customers or counterparties), brokered

[[Page 71841]]

deposits from non-retail customers and any other transactions where an 
on-balance sheet unsecured credit obligation has been contracted.
---------------------------------------------------------------------------

    \58\ Certain small business deposits are included within 
unsecured retail funding. See section II.B.2.a.i supra.
---------------------------------------------------------------------------

    The agencies are proposing to assign three separate outflow rates 
to unsecured wholesale funding that is not an operational deposit. 
These outflow rates are meant to address the stability of these 
obligations based on deposit insurance and the nature of the 
counterparty. Unsecured wholesale funding that is provided by an entity 
that is not a financial sector company whose securities are excluded 
from HQLA, as described above,\59\ generally would be subject to an 
outflow rate of 20 percent where the entire amount is covered by 
deposit insurance, whereas deposits that are less than fully covered by 
deposit insurance or the funding is a brokered deposit would have a 40 
percent outflow rate. However, the proposed rule would require that all 
other unsecured wholesale funding, including that provided by a 
consolidated subsidiary or affiliate of a covered company, be subject 
to an outflow rate of 100 percent. This higher outflow rate is 
associated with the elevated refinancing or roll-over risk in a 
stressed situation and the interconnectedness of financial 
institutions.
---------------------------------------------------------------------------

    \59\ See section II.A.2 for a description of these companies.
---------------------------------------------------------------------------

    Some covered companies provide services, such as those related to 
clearing, custody, and cash management services, that require their 
customers to maintain certain deposit balances with them. These 
services are defined in the proposed rule as operational services, and 
the corresponding deposits, which are termed ``operational deposits,'' 
can be a key component of unsecured wholesale funding for certain 
covered companies. The proposed rule would define an operational 
deposit as wholesale funding that is required for a covered company to 
provide operational services, as defined by the proposed rule, as an 
independent third-party intermediary to the wholesale customer or 
counterparty providing the unsecured wholesale funding.
    In developing the proposed outflow rates for these assets, the 
agencies contemplated the nature of operational deposits, their deposit 
insurance coverage, the customers' rights under their deposit 
agreements, and the economic incentives associated with customers' 
accounts. The agencies expect operational deposits to have a lower 
impact on a covered company's liquidity in a stressed environment 
because these accounts have significant legal or operational 
limitations that make significant withdrawals within 30 calendar days 
unlikely. For example, an entity that relies on a covered company for 
payroll processing services is not likely to move that operation to 
another covered company during a liquidity stress because it needs 
stability in providing payroll, regardless of stresses in the broader 
financial markets.
    Under the proposed rule, operational deposits (other than escrow 
accounts) that meet the criteria in section 4(b) would be assigned a 5 
percent outflow rate where the entire deposit amount is fully covered 
by deposit insurance. All other operational deposits (including all 
escrow deposits) would be assigned a 25 percent outflow rate. The 
agencies believe that insured operational deposits eligible for 
inclusion at the lower outflow rate exhibit relatively stable funding 
characteristics in a 30 calendar-day stress period and have a reduced 
likelihood of rapid outflow. Escrow deposits, while operational in 
nature, are more likely to be withdrawn upon the occurrence of a 
motivating event regardless of deposit insurance coverage, and the 25 
percent outflow rate approximately reflects this aspect of escrow 
deposits. The agencies believe that operational deposits that are not 
fully covered by deposit insurance also are a less stable source of 
funding for covered companies. The higher outflow rate reflects the 
higher likelihood of withdrawal by the wholesale customer if any part 
of the deposit is uninsured.
    Balances in these accounts should be recognized as operational 
deposits only to the extent that they are critically important to 
customers to utilize operational services offered by a covered company. 
The agencies believe that amounts beyond that which is critically 
important for the customer's operations should not be included in the 
operational deposit category. Section 4(b) of the proposed rule 
enumerates specific criteria for operational deposits that seek to 
limit operational deposit amounts to those that are held for 
operational needs, such as by excluding from operational deposits those 
deposit products that create economic incentives for the customer to 
maintain funds in the deposit in excess of what is needed for 
operational services.\60\ The criteria for a deposit to qualify as 
operational are intended to be restrictive because the agencies expect 
these deposits to be truly operational in nature, meaning they are used 
for the enumerated operational services related to clearing, custody, 
and cash management and have contractual terms that make it unlikely 
that a counterparty would significantly shift this activity to other 
organizations within 30 days. The agencies intend to closely monitor 
classification of operational deposits by covered companies to ensure 
that the deposits meet these operational criteria.
---------------------------------------------------------------------------

    \60\ See Sec.  ----.4(b) of the proposed rule.
---------------------------------------------------------------------------

    Covered companies would be expected to develop internal policies 
and methodologies to ensure that amounts categorized as operational 
deposits are limited to only those funds needed to facilitate the 
customer's operational service needs. Amounts in excess of what 
customers have historically held to facilitate such purposes, such as 
surge balances, would be considered excess operational deposits. The 
agencies believe it would be inappropriate to give excess operational 
deposit amounts the same favorable treatment as deposits truly needed 
for operational purposes, because such treatment would provide 
opportunities for regulatory arbitrage and distort the proposed 
liquidity coverage ratio calculation. The agencies, therefore, are 
proposing that funds in excess of those required for the provision of 
operational services be excluded from operational deposit balances and 
treated on a counterparty-by-counterparty basis as a non-operational 
deposit. If a covered company is unable to separately identify excess 
balances and balances needed for operational services, the entire 
balance would be ineligible for treatment as an operational deposit. 
The agencies do not intend for covered companies to allow customers to 
retain funds in this operational deposit category unless doing so is 
necessary to utilize the actual services offered by a covered company.
    Consistent with the Basel III LCR, deposits maintained in 
connection with the provision of prime brokerage services are excluded 
from operational deposits by focusing on the type of customer that uses 
operational services linked to an operational account. Under the 
proposal, an account cannot qualify as an operational deposit if it is 
provided in connection with operational services provided to an 
investment company, non-regulated fund, or investment adviser.
    While prime brokerage clients typically use operational services 
related to clearing, custody, and cash management, the agencies believe 
that balances maintained by prime brokerage clients should not be 
considered operational deposits because such balances, owned by hedge 
funds and other institutional investors, are at risk of margin and 
other immediate cash

[[Page 71842]]

calls in stressed scenarios and have proven to be more volatile during 
stress periods. Moreover, after finding themselves with limited access 
to liquidity in the recent financial crisis, most prime brokerage 
customers maintain multiple prime brokerage relationships and are able 
to quickly shift from one covered company to another. Accordingly, the 
agencies are proposing that deposit balances maintained in connection 
with the provision of prime brokerage services be treated the same as 
unsecured wholesale funding provided by a financial entity or affiliate 
of a covered company, and thus be assigned a 100 percent outflow rate.
    Finally, operational deposits exclude correspondent banking 
arrangements under which a covered company holds deposits owned by 
another depository institution bank that temporarily places excess 
funds in an overnight deposit with the covered company. While these 
deposits may meet some of the operational requirements, historically 
they are not stable during stressed liquidity events and therefore are 
assigned a 100 percent outflow rate.
    The proposed rules would assign an outflow rate of 100 percent to 
all unsecured wholesale funding not described above.
    49. The agencies solicit commenters' views on the criteria for, and 
treatment of, operational deposits. What, if any, of the identified 
operational services should not be included or what other services not 
identified should be included? What, if any, additional conditions 
should be considered with regard to the definition of operational 
deposits? Is the proposed outflow rate consistent with industry 
experience, particularly during the recent financial crisis? Why or why 
not?
    50. What are commenters' views on the proposed treatment of excess 
operational deposits? What operational burdens or other issues may be 
associated with identifying excess amounts in operational deposits? 
What other factors, if any, should be considered in determining whether 
to classify an unsecured wholesale deposit as an operational deposit?
    51. Have the agencies appropriately identified prime brokerage 
services for the purposes of the exclusion of prime brokerage deposits 
from operational deposits? Should additional categories of customer be 
included, such as insurance companies or pension funds? What additional 
characteristics could identify prime brokerage deposits? Should the 
proposed rule include a definition of prime brokerage services or prime 
brokerage deposits and if so, how should those terms be defined? Is the 
higher outflow rate for prime brokerage deposits appropriate? Why or 
why not? What other treatments, if any, should the agencies consider?
i. Debt Security Outflow Amount
    The agencies are proposing that where a covered company is the 
primary market maker for its own debt securities, the outflow rate for 
such funding would equal 3 percent for all debt securities that are not 
structured securities that mature outside of a 30 calendar-day stress 
period and 5 percent for all debt securities that are structured debt 
securities that mature outside of a 30 calendar-day stress period. 
Under the proposal, a structured security would be a security whose 
cash flow characteristics depend upon one or more indices or that have 
embedded forwards, options, or other derivatives or a security where an 
investor's investment return and the issuer's payment obligations are 
contingent on, or highly sensitive to, changes in the value of 
underlying assets, indices, interest rates or cash flows. This outflow 
is in addition to any outflow that must be included in net cash 
outflows due to the maturity of the underlying security during a 30 
calendar-day stress period.
    Institutions that make markets in their own debt by quoting buy and 
sell prices for such instruments implicitly or explicitly indicate that 
they will provide bids on their own debt issuances. In such cases, a 
covered company may be called upon to provide liquidity to the market 
by purchasing its debt securities without having an offsetting sale 
through which it can readily recoup the cash outflow. Based on 
historical experience, including the recent financial crisis, in which 
institutions went to great lengths to ensure the liquidity of their 
debt securities, the agencies are proposing relatively low outflow 
rates for a covered company's own debt securities. The proposed rule 
would differentiate between structured and non-structured debt on the 
basis of data from stressed institutions that indicate the likelihood 
that structured debt require more liquidity support.
    52. What, if any, other factors should the agencies consider in 
identifying structured securities and the treatment for such securities 
under the proposal?
    53. What additional criteria could be considered in determining 
whether certain unsecured wholesale funding activities should receive a 
3 or 5 percent outflow rate associated with primary market maker 
activity?
j. Secured Funding and Asset Exchange Outflow Amount
    A secured funding transaction would be defined under the proposed 
rule as any funding transaction that gives rise to a cash obligation of 
a covered company that is secured under applicable law by a lien on 
specifically designated assets owned by the covered company that gives 
the counterparty, as holder of the lien, priority over the assets in 
the case of bankruptcy, insolvency, liquidation, or resolution. In 
practice, secured funding can be borrowings from repurchase 
transactions, Federal Home Loan Bank advances, secured deposits from 
municipalities or other public sector entities (which typically require 
collateralization in the United States), loans of collateral to effect 
customer short positions, and other secured wholesale funding 
arrangements with Federal Reserve Banks, regulated financial companies, 
non-regulated funds, or other counterparties.
    Secured funding could give rise to cash outflows or increased 
collateral requirements in the form of additional collateral or higher 
quality collateral to support a given level of secured debt. In the 
proposed rule, this risk is reflected through the proposed secured 
funding transaction outflow rates, which are based on the quality and 
liquidity of assets posted as collateral under the terms of the 
transaction.\61\ Secured funding outflow rates progressively increase 
on a spectrum that ranges from funding secured by levels 1, 2A, and 2B 
liquid assets to funding secured by assets that are not HQLA. For the 
reasons described above, the agencies believe that rather than applying 
an outflow treatment that is based on the nature of the funding 
provider, the proposed rule would generally apply a treatment that is 
based on the nature of the collateral securing the funding. The 
proposed rule recognizes customer short positions covered by other 
customers' collateral that is not HQLA as secured funding and applies 
to them an outflow rate of 50 percent. This outflow reflects the 
agencies' recognition that clients will not be able to close all short 
positions without also reducing leverage, which would offset a portion 
of the liquidity outflows associated with closing the short. Section 
32(j)(1) of the proposed rule sets forth the outflow rates for various 
secured funding transactions.
---------------------------------------------------------------------------

    \61\ In section ----.32(g) of the proposed rule, the agencies 
have proposed outflow rates related to changes in collateral.
---------------------------------------------------------------------------

    The agencies are proposing to treat borrowings from Federal Reserve 
Banks

[[Page 71843]]

the same as other secured funding transactions because these borrowings 
are not automatically rolled over, and a Federal Reserve Bank may 
choose not to renew the borrowing. Therefore, an outflow rate based on 
the collateral posted is most appropriate for purposes of the proposed 
rule. Should the Federal Reserve Banks offer alternative facilities 
with different terms than the current primary credit facility, or 
modify the terms on the primary credit facility, outflow rates for the 
proposed liquidity coverage ratio may be modified.
    An asset exchange would be defined under the proposed rule as a 
transaction that requires the counterparties to exchange non-cash 
assets at a future date. Asset exchanges could give rise to actual cash 
outflows or increased collateral requirements if the covered company is 
contractually obligated to provide higher-quality assets in return for 
less liquid, lower-quality assets. In the proposed rule, this risk is 
reflected through the proposed asset exchange outflow rates, which are 
based on the HQLA levels of the assets exchanged by each party. Asset 
exchange outflow rates progressively increase from the covered company 
posting assets that are the same HQLA level as the assets it will 
receive to the covered company posting assets that are of significantly 
lower quality than the assets it will receive. Section 32(j)(2) of the 
proposed rule sets forth the outflow rates for various asset exchanges.
    54. The agencies solicit commenters' views on the proposed 
treatment of secured funding activities. Do commenters agree with the 
proposed outflow rates as they relate to the collateral? Why or why 
not? Should municipal and other public sector entity deposits be 
treated as secured funding transactions? What, if any, additional 
secured-funding risk factors should be reflected in the rule?
    55. What, if any, alternative treatments should the agencies 
consider for borrowings from a Federal Reserve Bank? Provide 
justification and support.
    56. The agencies solicit commenters' views on the proposed 
treatment of asset exchanges. Do commenters agree with the proposed 
outflow rates as they relate to the collateral? Why or why not? What, 
if any, additional asset exchange risk factors should be reflected in 
the rule?
k. Foreign Central Bank Borrowings
    The agencies recognize central banks' lending terms and 
expectations differ by jurisdiction. Accordingly, for a covered 
company's borrowings from a particular foreign jurisdiction's central 
bank, the proposed rule would assign an outflow rate equal to the 
outflow rate that such jurisdiction has established for central bank 
borrowings under a minimum liquidity standard. If such an outflow rate 
has not been established in a foreign jurisdiction, the outflow rate 
for such borrowings would be calculated as secured funding pursuant to 
section 32(j) of the proposed rule.
    57. What, if any, alternative treatments should the agencies 
consider for foreign central bank borrowings? Should borrowings from 
foreign central banks be treated as borrowings from the Federal Reserve 
Bank? What effects on the behavior of covered companies may the 
difference in the treatment between Federal Reserve Bank borrowings and 
foreign central bank create? What unintended results may occur?
l. Other Contractual Outflow Amounts
    Under the proposed rule, a covered company would apply a 100 
percent outflow rate to amounts payable 30 days or less after a 
calculation date under applicable contracts that are not otherwise 
specified in the proposed rule. These would include contractual 
payments such as salaries and any other payments owed 30 days or less 
from a calculation date that is not otherwise enumerated in section 32 
of the proposed rule.
    58. The Basel III LCR standard suggests that national authorities 
provide outflow rates for stable value funds. Should the agencies do 
so? Why or why not? If so, please provide suggestions as to specific 
outflow rates for stable value funds. Please provide justification and 
supporting information.
    59. The agencies solicit commenters' views on the proposed criteria 
for each of the categories discussed above, their proposed outflow 
rates, and the associated underlying assumptions for the proposed 
treatment. Are there specific outflow rates for other types of 
transactions that have not been included, but should be? If so, please 
specify the types of transactions and the applicable outflow rates that 
should be applied and the reasons for doing so. Alternatively, are 
there outflow rates that have been provided that should not be?
m. Excluded Amounts for Intragroup Transactions
    Under the proposed rule, a covered company would exclude all 
transactions from its outflows and inflows between the covered company 
and a consolidated subsidiary of the covered company or a consolidated 
subsidiary of the covered company and another consolidated subsidiary 
of the covered company. Such transactions are excluded because they 
involve outflows that would transfer to a company that is itself 
included in the financials of the covered company, so the inflows and 
outflows at the consolidated level should net to zero.
3. Total Cash Inflow Amount
    As explained above, the total cash inflow amount for the proposed 
rule's liquidity coverage ratio would be limited to the lesser of (1) 
the sum of cash inflow amounts as described in section 33 of the 
proposed rule; and (2) 75 percent of expected cash outflows as 
calculated under section 32 of the proposed rule. The total cash inflow 
amount would be calculated by multiplying the outstanding balances of 
contractual receivables and other cash inflows as of a calculation date 
by the inflow rates described in section 33 of the proposed rule. The 
proposed rule also sets forth certain exclusions from cash inflow 
amounts, as described immediately below.
a. Items not included as inflows
    The agencies have identified six categories of items that are 
explicitly excluded from cash inflows under the proposed rule. These 
exclusions are meant to ensure that the denominator of the proposed 
rule's liquidity coverage ratio would not be influenced by potential 
cash inflows that may not be reliable sources of liquidity during a 
stressed scenario.
    The first excluded category would be amounts a covered company 
holds in operational deposits at other regulated financial companies. 
Because these deposits are for operational purposes, it is unlikely 
that a covered company would be able to withdraw these funds in a 
crisis to meet other liquidity needs, and they are therefore excluded.
    The second excluded category would be amounts that a covered 
company expects to receive or is contractually entitled to receive from 
derivative transactions due to forward sales of mortgage loans and any 
derivatives that are mortgage commitments. The agencies recognize that 
covered companies may be receiving inflows as a result of the sale of 
mortgages or derivatives that are mortgage commitments within 30 days 
after the calculation date. However, as discussed above, the agencies 
believe that inflow amounts from such transactions may not materialize 
during a liquidity crisis or may be delayed beyond the 30 calendar-day 
time horizon. During the recent financial crisis, it was evident that 
many institutions were unable to rapidly reduce the mortgage lending 
pipeline

[[Page 71844]]

even as market demand for mortgages slowed.
    The third excluded category would be amounts arising from any 
credit or liquidity facility extended to a covered company. The 
agencies believe that in a stress scenario, inflows from such 
facilities may not materialize. Furthermore, to the extent that a 
covered company relies upon inflows from credit facilities with other 
financial entities, it would increase the interconnectedness within the 
system and a stress at one institution could result in additional 
strain throughout the financial system as the company draws down its 
lines of credit. Because of these likelihoods, a covered company's 
credit and liquidity facilities would not be counted as inflows.
    The fourth excluded category would be the amounts of any asset 
included in a covered company's HQLA amount under section 21 of the 
proposed rule and any amount payable to the covered company with 
respect to those assets. Given that HQLA is already included in the 
numerator at fair market value (as determined under GAAP), including 
such amounts as inflows would result in double counting. Consistent 
with the Basel III LCR, this exclusion also includes all HQLA that 
mature within 30 days.
    The fifth excluded category would be any amounts payable to the 
covered company or any outstanding exposure to a customer or 
counterparty that is a nonperforming asset as of a calculation date, or 
the covered company has reason to expect will become a nonperforming 
exposure 30 calendar days or less from a calculation date. Under the 
proposed rule, a nonperforming exposure is any exposure that is past 
due by more than 90 calendar days or on nonaccrual. This is meant to 
recognize that it is not likely that a covered company will receive 
inflow amounts due from a nonperforming customer.
    The sixth excluded category includes those items that have no 
contractual maturity date. The agencies' stress scenario assumes that 
in a time of liquidity stress a covered company's counterparties will 
not pay amounts not contractually required in order to maintain 
liquidity for other purposes.
    60. What, if any, additional items the agencies should explicitly 
exclude from inflows? What, if any excluded items should the agencies 
consider including in inflows? Please provide justification and 
supporting information.
    61. Should the agencies treat credit and liquidity facility inflows 
differently than proposed? For example, should credit and liquidity 
facilities extended by certain counterparties be counted as inflows 
while others are prohibited? If so, which entities and why?
b. Net Derivatives Cash Inflow Amount
    Under the proposed rule, a covered company's net derivative cash 
inflow amount would equal the sum of the payments and collateral that a 
covered company will receive from each counterparty under derivative 
transactions, less, if subject to a qualifying master netting 
agreement, the sum of payments and collateral that the covered company 
will make or deliver to each counterparty. This calculation would 
incorporate the amounts due from and to counterparties under applicable 
transactions within 30 calendar days of a calculation date. Netting 
would be permissible at the highest level permitted by a covered 
company's contracts with its counterparties and could not include 
outflows where a covered company is already including assets in its 
HQLA that the counterparty has posted to support those outflows. If the 
derivatives transactions are not subject to a valid qualifying master 
netting agreement, then the derivative cash inflow amount for that 
counterparty would be included in the net derivative cash inflow amount 
and the derivative cash outflows for that counterparty would be 
included in the net derivative cash outflow amount, without any 
netting. Net derivative cash inflow should be calculated in accordance 
with existing valuation methodologies and expected contractual 
derivative cash flows. In the event that net derivative cash inflow for 
a particular counterparty is less than zero, such amount would be 
required to be included in a covered company's net derivative cash 
outflow amount.
    As with net derivative cash outflow, net derivative cash inflow 
would not include amounts arising in connection with forward sales of 
mortgage loans and derivatives that are mortgage commitments subject to 
section 32(d) of the proposed rule. Net derivative cash inflow would 
still include derivatives that hedge interest rate risk associated with 
a mortgage pipeline.
c. Retail Cash Inflow Amount
    The proposed rule would allow a covered company to count as inflow 
50 percent of all contractual payments it expects to receive within a 
particular 30 calendar-day stress period from retail customers and 
counterparties. This inflow rate is reflective of the agencies' 
expectation that covered companies will need to maintain a portion of 
their retail lending even during periods of liquidity stress, albeit 
not to the same extent as they have in the past. During the recent 
financial crisis, several stressed institutions tightened their credit 
standards but continued to make loans to maintain customer 
relationships and avoid further signaling of distress to the market.
    62. Is the proposed retail cash inflow rate reflective of industry 
experience? Why or why not? What, if any, additional funding activities 
could be included in this category? What, if any, inflow sources should 
be excluded from this category?
d. Unsecured Wholesale Cash Inflow Amount
    The agencies believe that for purposes of this proposed rule, all 
wholesale inflows (e.g., principal and interest) from regulated 
financial companies, investment companies, non-regulated funds, pension 
funds, investment advisers, and identified companies (and consolidated 
subsidiaries of any of the foregoing), and from central banks generally 
would be available to meet a covered company's liquidity needs. 
Therefore, the agencies are proposing to assign such inflows a rate of 
100 percent. This rate also reflects the assumption that covered 
companies would stop extending credits to such counterparties when 
faced with the stress envisioned by the proposed rule.
    However, the agencies also expect covered companies to maintain 
ample liquidity to sustain core businesses lines, including continuing 
to extend credit to retail customers and wholesale customers and 
counterparties that are not financial sector companies whose securities 
are excluded from HQLA.\62\ Indeed, one purpose of the proposed rule is 
to ensure that covered companies have sufficient liquidity to sustain 
such business lines during a period of liquidity stress. While the 
agencies acknowledge that, in times of liquidity stress, covered 
companies can curtail this activity to a limited extent, due to 
reputational and business considerations, covered companies would 
likely continue to renew at least a portion of maturing credits and 
extend some new loans. Therefore, the agencies are proposing to apply 
an inflow rate of 50 percent for inflows due from wholesale customers 
or counterparties that are not regulated financial companies, 
investment companies, non-regulated funds, pension funds, investment 
advisers, or identified companies, or consolidated subsidiary of any of 
the foregoing. With respect to revolving credit facilities, already 
drawn

[[Page 71845]]

amounts would not be included in a covered company's inflow amount, and 
undrawn amounts would be treated as outflows under section 32(e) of the 
proposed rule. This is based upon the agencies' assumption that a 
covered company's counterparty would not repay funds it is not 
contractually obligated to repay in a stressed scenario.
---------------------------------------------------------------------------

    \62\ See section II.A.2 for a description of these companies.
---------------------------------------------------------------------------

     63. What are commenters' views regarding the differing rates for 
unsecured wholesale inflows? What, if any, modifications should the 
agencies consider making to the proposed inflow rates? Provide 
justification and supporting data.
e. Securities Cash Inflow Amount
    Inflows from securities owned by a covered company that are not 
included in a covered company's HQLA amount would receive a 100 percent 
inflow rate. Accordingly, if an asset is not included in the HQLA 
amount, all contractual dividend, interest, and principal payments due 
and expected to be paid to a covered company, regardless of their 
quality or liquidity, would receive an inflow rate of 100 percent.
    64. What, if any, modifications should the agencies consider for 
the proposed rate for securities inflows? Please provide justification 
and supporting data.
f. Secured Lending and Asset Exchange Cash Inflow Amount
    Under the proposed rule, a covered company would be able to 
recognize cash inflows from secured lending transactions. The proposed 
rule would define a secured lending transaction as any lending 
transaction that gives rise to a cash obligation of a counterparty to a 
covered company that is secured under applicable law by a lien on 
specifically designated assets owned by the counterparty and included 
in the covered company's HQLA amount that gives the covered company, as 
a holder of the lien, priority over the assets in the case of 
bankruptcy, insolvency, liquidation, or resolution and includes reverse 
repurchase transactions and securities borrowing transactions. If the 
specifically designated assets are not included in a covered company's 
HQLA amount but are still held by the covered company, then the 
transaction would be included in the unsecured wholesale cash inflow 
amount. Secured lending transactions could give rise to cash inflows or 
additional or higher quality collateral being provided to a covered 
company to support a given level of secured debt.
    Under the proposed rule, secured lending transaction inflow rates 
progressively increase on a spectrum that ranges from funding secured 
by levels 2B and 2A liquid assets to lending secured by assets that are 
not HQLA.\63\ A covered company also may apply a 50 percent inflow rate 
to the contractual payments due from customers that have borrowed on 
margin, where such loans are collateralized. These inflows could only 
be counted if a covered company is not including the collateral it 
received in its HQLA amount or using it to cover any of its short 
positions.
---------------------------------------------------------------------------

    \63\ See proposed rule Sec. Sec.  ----.33(f)(1)(i)-(iv).
---------------------------------------------------------------------------

    Similarly, asset exchanges could give rise to actual cash inflow or 
decreased collateral requirements if the covered company's counterparty 
is contractually obligated to provide higher-quality assets in return 
for less liquid, lower-quality assets. In the proposed rule, this is 
reflected through the proposed asset exchange inflow rates, which are 
based on the HQLA level of the asset to be posted by a covered company 
and the HQLA level of the asset posted by the counterparty. Asset 
exchange inflow rates progressively increase on a spectrum that ranges 
from receiving assets that are the same HQLA level as the assets a 
covered company is required to post to receiving assets that are of 
significantly higher quality than the assets that the covered company 
is required to post. Section 33(f)(2) of the proposed rule sets forth 
the inflow amounts for various asset exchanges.
    65. The agencies solicit commenters' views on the treatment of 
secured lending transaction and asset exchange inflows. What, if any, 
modifications should the agencies consider? Specifically, what are 
commenters' perspectives on when an inflow should be reflected in the 
ratio's denominator as opposed to the HQLA amount? Provide 
justification and supporting data.

III. Liquidity Coverage Ratio Shortfall

    While the Basel III LCR provides that a banking organization is 
required to maintain an adequate amount of HQLA in order to meet its 
liquidity needs within a 30 calendar-day stress period, it also makes 
clear that it may be necessary for a banking organization to fall below 
the requirement during a period of liquidity stress. The Basel III LCR 
therefore provides that any supervisory decisions in response to a 
reduction of a banking organization's liquidity coverage ratio should 
take into consideration the objectives and definitions of the Basel III 
LCR. This provision of the Basel III LCR indicates that supervisory 
actions should not discourage or deter a banking organization from 
using its HQLA when necessary to meet unforeseen liquidity needs 
arising from financial stress that exceeds normal business 
fluctuations.
    The agencies are proposing a supervisory framework for addressing a 
shortfall with respect to the proposed rule's liquidity coverage ratio 
that is consistent with the intent of having HQLA available for use 
during stressed conditions as described in the Basel III LCR. This 
approach also reflects the agencies' views on the appropriate 
supervisory response to such shortfalls. The agencies understand that 
there are a wide variety of potential liquidity stresses that a covered 
company may experience (both idiosyncratic and market-wide), and that 
it is difficult to foresee the different circumstances that may 
precipitate or accompany such stress scenarios. Therefore, the agencies 
believe that the regulatory framework for the proposed rule's liquidity 
coverage ratio must be sufficiently flexible to allow supervisors to 
respond appropriately under the given circumstances surrounding a 
liquidity coverage ratio shortfall.
    Accordingly, the proposed rule sets forth notice and response 
procedures that would require a covered company to notify its primary 
Federal supervisor of any liquidity coverage ratio shortfall on any 
business day and provides the necessary flexibility in the supervisory 
response. In addition, if a covered company's liquidity coverage ratio 
is below the minimum requirement for three consecutive business days or 
if its supervisor has determined that the covered company is otherwise 
materially noncompliant with the proposed rule, the covered company 
would be required to provide to its supervisor a plan for remediation. 
As set forth in section 40(b) of the proposed rule, the remediation 
plan would need to include an assessment of the covered company's 
liquidity position, the actions the covered company has taken and will 
take to achieve full compliance with the proposed rule, an estimated 
timeframe for achieving compliance, and a commitment to report to its 
supervisor no less than weekly on progress to achieve compliance with 
the plan until full compliance with the proposed rule has been 
achieved.
    A supervisory or enforcement action may be appropriate based on 
operational issues at a covered company, whether the violation is a 
part of a pattern, whether the liquidity shortfall was temporary or 
caused by an unusual event, and the extent of the shortfall or the 
noncompliance. Depending on the circumstances, a liquidity coverage 
ratio shortfall below

[[Page 71846]]

100 percent would not necessarily result in supervisory action, but, at 
a minimum, would result in heightened supervisory monitoring. For 
example, as with other regulatory violations, a covered company may be 
required to enter into a written agreement if it does not meet the 
proposed minimum requirement within an appropriate period of time.
    The agencies would use existing supervisory processes and 
procedures for addressing a covered company's liquidity coverage ratio 
shortfall under the proposed rule. As with existing supervisory actions 
to address deficiencies in regulatory compliance or in risk management, 
the actions to be taken if a covered company's liquidity coverage ratio 
were to fall below 100 percent would be at the discretion of the 
appropriate Federal banking agency.
    66. Is the current banking supervisory regime sufficient to address 
situations in which a covered company needs to utilize its stock of 
HQLA? Why or why not?
    67. Are there additional supervisory tools that the agencies could 
rely on to address situations in which a covered company needs to 
utilize its stock of HQLA? If so, provide detailed examples and 
explanations.
    68. Should a de minimis exception to a liquidity coverage ratio 
shortfall be implemented, such that a covered company would not need to 
report such a shortfall, provided its liquidity coverage ratio returns 
to the required minimum within a short grace period? If so, what de 
minimis amount would be appropriate and why? What duration of grace 
period would be appropriate and why?
    69. Should a covered company be required to submit a separate 
remediation plan to address its liquidity coverage ratio shortfall or 
should a modification to existing plans, such as contingency funding 
plans that include provisions to address the liquidity shortfalls, be 
sufficient? Please provide justifications supporting such a view.
    70. Should the supervisory response differ depending on the cause 
of the stress event? Why or why not?
    71. Should restrictions be imposed on the circumstances under which 
a covered company's liquidity coverage ratio may fall below 100 
percent? If so, provide detailed examples and explanations.

IV. Transition and Timing

    The agencies are proposing to implement a transition period for the 
proposed rule's liquidity coverage ratio that is more accelerated than 
the transition provided in the Basel III Revised LCR Framework. The 
proposed rule would require covered companies to comply with the 
minimum liquidity coverage ratio as follows: 80 percent on January 1, 
2015, 90 percent on January 1, 2016, and 100 percent on January 1, 2017 
and thereafter. The agencies are proposing an accelerated transition 
period for covered companies to build on the strong liquidity positions 
these companies have achieved since the recent financial crisis, 
thereby providing greater stability to the firms and the financial 
system. The proposed transition period accounts for the potential 
implications of the proposed rule on financial markets, credit 
extension, and economic growth and seeks to balance these concerns with 
the proposed liquidity coverage ratio's important role in promoting a 
more robust and resilient banking sector.
    While these transition periods are intended to facilitate 
compliance with a new minimum liquidity requirement, the agencies 
expect that covered companies with liquidity coverage ratios at or near 
the 100 percent minimum generally would not reduce their liquidity 
coverage during the transition period, as reflected by this proposed 
requirement. The agencies emphasize that the proposed rule's liquidity 
coverage ratio is a minimum requirement, and that companies should have 
internal liquidity management systems and policies in place to ensure 
they hold liquid assets sufficient to meet their liquidity needs that 
could arise in a period of stress. The transition provisions of the 
final rule are also set forth in table 2 below.

       Table 2: Transition Period for the Liquidity Coverage Ratio
------------------------------------------------------------------------
                                                              Liquidity
                     Transition Period                         coverage
                                                                ratio
------------------------------------------------------------------------
Calendar year 2015.........................................         0.80
Calendar year 2016.........................................         0.90
Calendar year 2017 and thereafter..........................         1.00
------------------------------------------------------------------------

    72. What concerns, if any, do commenters have in meeting the 
proposed transitional arrangements?
    73. Are the proposed transition periods appropriate for all covered 
companies? Are there any situations that may prevent a covered company 
from achieving compliance within the proposed transition periods? Are 
there alternatives to the proposed transition periods that would better 
achieve the agencies' goal of establishing a quantitative liquidity 
requirement in a timely fashion while not disrupting lending and the 
real economy?

V. Modified Liquidity Coverage Ratio Applicable to Covered Depository 
Institution Holding Companies

A. Overview and Applicability

    As noted above, all bank holding companies subject to the proposed 
rule are subject to enhanced liquidity requirements under section 165 
of the Dodd-Frank Act.\64\ Section 165 additionally authorizes the 
Board to tailor the application of the standards, including 
differentiating among covered companies on an individual basis or by 
category. When differentiating among companies for purposes of applying 
the standards established under section 165, the Board may consider the 
companies' size, capital structure, riskiness, complexity, financial 
activities, and any other risk-related factor the Board deems 
appropriate.\65\
---------------------------------------------------------------------------

    \64\ See 12 U.S.C. 5365(a) and (b).
    \65\ See 12 U.S.C. 5365(a)(2).
---------------------------------------------------------------------------

    The Basel III LCR was developed for internationally active banking 
organizations, taking into account the complexity of their funding 
sources and structure. While covered depository institution holding 
companies with at least $50 billion in total consolidated assets that 
are not covered companies (modified LCR holding companies) are large 
financial companies with extensive operations in banking, brokerage, 
and other financial activities, they generally are smaller in size, 
less complex in structure, and less reliant on riskier forms of market 
funding. These companies tend to have simpler balance sheets, better 
enabling management and supervisors to take corrective actions more 
quickly than is the case with an internationally active banking 
organization in a stressed scenario.
    Accordingly, the Board is tailoring the proposed rule's liquidity 
coverage ratio requirement as applied to the modified LCR holding 
companies pursuant to its authority under section 165 of the Dodd-Frank 
Act. While the Board believes it is important for all bank holding 
companies subject to section 165 of the Dodd-Frank Act (and similarly 
situated savings and loan holding companies) to be subject to a 
quantitative liquidity requirement as an enhanced prudential standard, 
it recognizes that these companies would likely not have as great a 
systemic impact as larger, more complex companies if they experienced 
liquidity stress. Therefore, because the options for addressing their 
liquidity needs under such a scenario (or, if necessary, for resolving 
such companies) would likely be less complex and therefore more likely 
to be implemented in a

[[Page 71847]]

shorter period of time, the Board is proposing to establish a modified 
liquidity coverage ratio incorporating a shorter (21-calendar day) 
stress scenario for the modified LCR holding companies.
    The modified liquidity coverage ratio would be a simpler, less 
stringent form of the proposed rule's liquidity coverage ratio (for the 
purposes of this section V, unmodified liquidity coverage ratio) and 
would have outflow rates based on a 21calendar-day rather than a 30 
calendar-day stress scenario. As a result, outflow rates for the 
modified liquidity coverage ratio generally would be 70 percent of the 
unmodified liquidity coverage ratio's outflow rates. In addition, 
modified LCR holding companies would not have to calculate a peak 
maximum cumulative outflow day for total net cash outflows as required 
for covered companies subject to the unmodified liquidity coverage 
ratio.\66\ The requirements of the modified liquidity coverage ratio 
standard would otherwise be the same as the unmodified liquidity 
coverage ratio as described above, including the proposed HQLA criteria 
and the calculation of the HQLA amount, and modified LCR holding 
companies would have to comply with all unmodified aspects of the 
standard to the same extent as covered companies.
---------------------------------------------------------------------------

    \66\ See supra section II.B.
---------------------------------------------------------------------------

B. High-Quality Liquid Assets

    Modified LCR holding companies generally would calculate their HQLA 
amount as covered companies do pursuant to section 21 of the proposed 
rule. However, when calculating the adjusted liquid asset amounts, 
modified LCR holding companies would incorporate the unwinding of 
secured funding and lending transactions, asset exchanges, and 
collateralized derivative transactions that mature within 21 calendar 
days (rather than 30 calendar days) of a calculation date. All other 
aspects of the calculation would remain the same and assets that do not 
qualify as HQLA under the proposed rule could not be included into the 
HQLA amount of a modified LCR holding company.
    The adjustments of the modified liquidity coverage ratio reflect 
the lesser size and complexity of modified LCR holding companies 
through a shorter stress scenario, which is not relevant to the quality 
of liquid assets that a company would need to cover its needs during 
any stress scenario. Therefore, the HQLA amount would be calculated on 
the same basis under the modified liquidity coverage ratio as the 
unmodified liquidity coverage ratio, with the only adjustment 
reflecting the shorter stress scenario period of the modified liquidity 
coverage ratio. The policy purposes and rationales for applying the 
unmodified requirements to covered companies, articulated above, also 
pertain to the application of these requirements to modified LCR 
holding companies.

C. Total Net Cash Outflow

    Under the unmodified liquidity coverage ratio, the outflow and 
inflow rates applied to different sources of outflows and inflows are 
based on a 30 calendar-day stress scenario. Because the modified 
liquidity coverage ratio is based on a 21calendar-day stress scenario, 
70 percent of each outflow and inflow rate for outflows and inflows 
without a contractual maturity date, as described above, would be 
applied in calculating total net cash outflow under the modified 
liquidity coverage ratio, as set forth in Table 3. Outflows and inflows 
with a contractual maturity date would be calculated on the basis of 
the maturity (as determined under the proposal and described above) 
occurring within 21 calendar days from a calculation date, rather than 
30 calendar days.
    In addition, as explained above, a modified LCR holding company 
would not be required to use its peak maximum cumulative outflow day as 
its total net cash outflow amount. Instead, the total net cash outflow 
amount under the modified liquidity coverage ratio would be the 
difference between a modified LCR company's outflows amounts and 
inflows amounts, calculated as required under the proposed rule. The 
Board believes this approach is appropriate as a modified LCR holding 
company would likely be less dependent on cash inflows to meet the 
proposed rule's liquidity coverage ratio requirement, thereby reducing 
its likelihood of having a significant maturity mismatch within a 21 
calendar-day stress period. However, as part of sound liquidity risk 
management, modified LCR holding companies should be aware of any 
potential mismatches within the 21 calendar-day stress period and 
ensure that a sufficient amount of HQLA is available to meet any net 
cash outflow gaps throughout the period.

                 Table 3--Non-Maturity Modified Outflows
------------------------------------------------------------------------
                                             Agencies'       Modified
                                             liquidity       liquidity
                Category                     coverage        coverage
                                           ratio outflow   ratio outflow
                                              amount          amount
------------------------------------------------------------------------
Unsecured retail funding:
  Stable retail deposits................            3.0%            2.1%
  Other retail deposits.................            10.0             7.0
  Other retail funding..................           100.0            70.0
Retail brokered deposits:
  Brokered deposits that mature later               10.0             7.0
   than 30 calendar days from the
   calculation date.....................
  Reciprocal brokered deposits, entirely            10.0             7.0
   covered by deposit insurance.........
  Reciprocal brokered deposits, not                 25.0            17.5
   entirely covered by deposit insurance
  Brokered sweep deposits, issued by a              10.0             7.0
   consolidated subsidiary, entirely
   covered by deposit insurance.........
  Brokered sweep deposits, not issued by            25.0            17.5
   a consolidated subsidiary, entirely
   covered by deposit insurance.........
  Brokered sweep deposits, not entirely             40.0            28.0
   covered by deposit insurance.........
  All other retail brokered deposits....           100.0            70.0
Unsecured wholesale funding:
  Non-operational, entirely covered by              20.0            14.0
   deposit insurance....................
  Non-operational, not entirely covered             40.0            28.0
   by deposit insurance.................
  Non-operational, from financial entity           100.0            70.0
   or consolidated subsidiary...........
  Operational deposit, entirely covered              5.0             3.5
   by deposit insurance.................

[[Page 71848]]

 
  Operational deposit, not entirely                 25.0            17.5
   covered by deposit insurance.........
  All other wholesale funding...........           100.0            70.0
Commitments:
  Undrawn credit and liquidity                       5.0             3.5
   facilities to retail customers.......
  Undrawn credit facility to wholesale              10.0             7.0
   customers............................
  Undrawn liquidity facility to                     30.0            21.0
   wholesale customers..................
  Undrawn credit and liquidity                      50.0            35.0
   facilities to certain banking
   organizations........................
  Undrawn credit facility to financial              40.0            28.0
   entities.............................
  Undrawn liquidity facility to                    100.0            70.0
   financial entities...................
  Undrawn liquidity facilities to SPEs             100.0            70.0
   or any other entity..................
------------------------------------------------------------------------

    74. What, if any, modifications to the modified liquidity coverage 
ratio should the Board consider? In particular, what, if any, 
modifications to incorporation of the 21-calendar day stress period 
should be considered? Please provide justification and supporting data.
    75. What, if any, modifications to the calculation of total net 
cash outflow rate should the Board consider? What versions of the peak 
maximum cumulative outflow day might be appropriate for the modified 
liquidity coverage ratio? Please provide justification and supporting 
data.
    76. What operational burdens may modified LCR holding companies 
face in complying with the proposal? What modifications to transition 
periods should the Board consider for modified LCR holding companies?

VI. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec. 
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The Federal banking agencies invite 
your comments on how to make this proposal easier to understand. For 
example:
     Have the agencies organized the material to suit your 
needs? If not, how could this material be better organized?
     Are the requirements in the proposed rule clearly stated? 
If not, how could the proposed rule be more clearly stated?
     Does the proposed rule contain language or jargon that is 
not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the proposed rule easier to 
understand? If so, what changes to the format would make the proposed 
rule easier to understand?
     What else could the agencies do to make the regulation 
easier to understand?

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act \67\ (RFA), requires an agency to 
either provide an initial regulatory flexibility analysis with a 
proposed rule for which general notice of proposed rulemaking is 
required or to certify that the proposed rule will not have a 
significant economic impact on a substantial number of small entities 
(defined for purposes of the RFA to include banks with assets less than 
or equal to $500 million). In accordance with section 3(a) of the RFA, 
the Board is publishing an initial regulatory flexibility analysis with 
respect to the proposed rule. The OCC and FDIC are certifying that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \67\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

Board

    Based on its analysis and for the reasons stated below, the Board 
believes that this proposed rule will not have a significant economic 
impact on a substantial number of small entities. Nevertheless, the 
Board is publishing an initial regulatory flexibility analysis. A final 
regulatory flexibility analysis will be conducted after comments 
received during the public comment period have been considered.
    The proposed rule is intended to implement a quantitative liquidity 
requirement consistent with the liquidity coverage ratio standard 
established by the Basel Committee on Banking Supervision applicable 
for bank holding companies, savings and loan holding companies, nonbank 
financial companies, and state member banks.
    Under regulations issued by the Small Business Administration, a 
``small entity'' includes firms within the ``Finance and Insurance'' 
sector with asset sizes that vary from $7 million or less in assets to 
$500 million or less in assets.\68\ The Board believes that the Finance 
and Insurance sector constitutes a reasonable universe of firms for 
these purposes because such firms generally engage in activities that 
are financial in nature. Consequently, bank holding companies, savings 
and loan holding companies, nonbank financial companies, and state 
member banks with asset sizes of $500 million or less are small 
entities for purposes of the RFA.
---------------------------------------------------------------------------

    \68\ 13 CFR 121.201.
---------------------------------------------------------------------------

    As discussed previously in this preamble, the proposed rule 
generally would apply to Board-regulated institutions with (i) 
consolidated total assets equal to $250 billion or more; (ii) 
consolidated total on-balance sheet foreign exposure equal to $10 
billion or more; or (iii) consolidated total assets equal to $10 
billion or more if that Board-regulated institution is a consolidated 
subsidiary of a company subject to the proposed rule or if a company 
subject to the proposed rule owns, controls, or holds with the power to 
vote 25 percent or more of a class of voting securities of the company. 
The Board is also proposing to implement a modified version of the 
liquidity coverage ratio as enhanced prudential standards for top-tier 
bank holding companies and savings and loan holding companies domiciled 
in the United States that have consolidated total assets equal to $50 
billion or more. The modified version of the liquidity coverage ratio 
would not apply to (i) a grandfathered unitary savings and loan

[[Page 71849]]

holding company that derived 50 percent or more of its total 
consolidated assets or 50 percent of its total revenues on an 
enterprise-wide basis from activities that are not financial in nature 
under section 4(k) of the Bank Holding Company Act; (ii) a top-tier 
bank holding company or savings and loan holding company that is an 
insurance underwriting company; or (iii) a top-tier bank holding 
company or savings and loan holding company that had 25 percent or more 
of its total consolidated assets in subsidiaries that are insurance 
underwriting companies and either calculates its total consolidated 
assets in accordance with GAAP or estimates its total consolidated 
assets, subject to review and adjustment by the Board.
    Companies that are subject to the proposed rule therefore 
substantially exceed the $500 million asset threshold at which a 
banking entity is considered a ``small entity'' under SBA regulations. 
The proposed rule would apply to a nonbank financial company designated 
by the Council under section 113 of the Dodd-Frank Act regardless of 
such a company's asset size. Although the asset size of nonbank 
financial companies may not be the determinative factor of whether such 
companies may pose systemic risks and would be designated by the 
Council for supervision by the Board, it is an important 
consideration.\69\ It is therefore unlikely that a financial firm that 
is at or below the $500 million asset threshold would be designated by 
the Council under section 113 of the Dodd-Frank Act because material 
financial distress at such firms, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of its activities, are not 
likely to pose a threat to the financial stability of the United 
States.
---------------------------------------------------------------------------

    \69\ See 77 FR 21637 (April 11, 2012).
---------------------------------------------------------------------------

    As noted above, because the proposed rule is not likely to apply to 
any company with assets of $500 million or less, if adopted in final 
form, it is not expected to apply to any small entity for purposes of 
the RFA. The Board does not believe that the proposed rule duplicates, 
overlaps, or conflicts with any other Federal rules. In light of the 
foregoing, the Board does not believe that the proposed rule, if 
adopted in final form, would have a significant economic impact on a 
substantial number of small entities supervised. Nonetheless, the Board 
seeks comment on whether the proposed rule would impose undue burdens 
on, or have unintended consequences for, small organizations, and 
whether there are ways such potential burdens or consequences could be 
minimized in a manner consistent with standards established by the 
Basel Committee on Banking Supervision.

OCC

    The RFA requires an agency to provide an initial regulatory 
flexibility analysis with a proposed rule or to certify that the rule 
will not have a significant economic impact on a substantial number of 
small entities (defined for purposes of the RFA to include banking 
entities with total assets of $500 million or less and trust companies 
with assets of $35.5 million or less).
    As discussed previously in this Supplementary Information section, 
the proposed rule generally would apply to national banks and Federal 
savings associations with: (i) consolidated total assets equal to $250 
billion or more; (ii) consolidated total on-balance sheet foreign 
exposure equal to $10 billion or more; or (iii) consolidated total 
assets equal to $10 billion or more if a national bank or Federal 
savings association is a consolidated subsidiary of a company subject 
to the proposed rule. As of December 31, 2012, the OCC supervises 1,291 
small entities. Since the proposed rule would only apply to 
institutions that have total consolidated total assets or consolidated 
total on-balance sheet foreign exposure equal to $10 billion or more, 
the proposed rule would not have any impact on small banks and small 
Federal savings associations. Therefore, the proposed rule would not 
have a significant economic impact on a substantial number of small 
OCC-supervised entities.
    The OCC certifies that the proposed rule would not have a 
significant economic impact on a substantial number of small national 
banks and small Federal savings associations.

FDIC

    The RFA requires an agency to provide an initial regulatory 
flexibility analysis with a proposed rule or to certify that the rule 
will not have a significant economic impact on a substantial number of 
small entities (defined for purposes of the RFA to include banking 
entities with total assets of $500 million or less).
    As described in section I of this preamble, the proposed rule would 
establish a quantitative liquidity standard for internationally active 
banking organizations with $250 billion or more in total assets or $10 
billion or more of on-balance sheet foreign exposure (internationally 
active banking organizations), covered nonbank companies, and their 
consolidated subsidiary depository institutions with $10 billion or 
more in in total consolidated assets. Two FDIC-supervised institutions 
satisfy the foregoing criteria, and neither is a small entity. As of 
June 30, 2013, based on a $500 million threshold, 2 (out of 3,363) 
small state nonmember banks, and zero (out of 53) small state savings 
associations were subsidiaries of a covered company that is subject to 
the proposed rule. Therefore, the FDIC does not believe that the 
proposed rule will result in a significant economic impact on a 
substantial number of small entities under its supervisory 
jurisdiction.
    The FDIC certifies that the NPR would not have a significant 
economic impact on a substantial number of small FDIC-supervised 
institutions.

VIII. Paperwork Reduction Act

Request for Comment on Proposed Information Collection

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the agencies may not conduct or sponsor, 
and the respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The information collection 
requirements contained in this joint notice of proposed rulemaking are 
being submitted by the FDIC and OCC to OMB for approval under section 
3507(d) of the PRA and section 1320.11 of OMB's implementing 
regulations (5 CFR part 1320). The Board reviewed the proposed rule 
under the authority delegated to the Board by OMB.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the agencies' estimates of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.

[[Page 71850]]

    All comments will become a matter of public record. Commenters may 
submit comments on aspects of this notice that may affect burden 
estimates at the addresses listed in the ADDRESSES section. A copy of 
the comments may also be submitted to the OMB desk officer for the 
agencies: By mail to U.S. Office of Management and Budget, 725 17th 
Street NW., 10235, Washington, DC 20503; by facsimile to 202-
395-6974; or by email to: [email protected]. Attention, 
Federal Banking Agency Desk Officer.

Proposed Information Collection

    Title of Information Collection: Reporting and Recordkeeping 
Requirements Associated with Liquidity Coverage Ratio: Liquidity Risk 
Measurement, Standards, and Monitoring.
    Frequency of Response: Event generated.

Affected Public

    FDIC: Insured state non-member banks, insured state branches of 
foreign banks, state savings associations, and certain subsidiaries of 
these entities.
    OCC: National banks, Federal savings associations, or any operating 
subsidiary thereof.
    Board: Insured state member banks, bank holding companies, savings 
and loan holding companies, nonbank financial companies supervised by 
the Board, and any subsidiary thereof.
    Abstract: The notice sets forth implementing a quantitative 
liquidity requirement consistent with the liquidity coverage ratio 
standard established by the Basel Committee on Banking Supervision. The 
proposed rule contains requirements subject to the PRA. The reporting 
and recordkeeping requirements in the joint proposed rule are found in 
Sec.  ----.40. Compliance with the information collections would be 
mandatory. Responses to the information collections would be kept 
confidential and there would be no mandatory retention period for the 
proposed collections of information.
    Section ----.40 would require that an institution must notify its 
primary Federal supervisor on any day when its liquidity coverage ratio 
is calculated to be less than the minimum requirement in Sec.  ----.10. 
If an institution's liquidity coverage ratio is below the minimum 
requirement in Sec.  ----.10 for three consecutive days, or if its 
primary Federal supervisor has determined that the institution is 
otherwise materially noncompliant, the institution must promptly 
provide a plan for achieving compliance with the minimum liquidity 
requirement in Sec.  ----.10 and all other requirements of this part to 
its primary Federal supervisor.
    The liquidity plan must include, as applicable, (1) an assessment 
of the institution's liquidity position; (2) the actions the 
institution has taken and will take to achieve full compliance 
including a plan for adjusting the institution's risk profile, risk 
management, and funding sources in order to achieve full compliance and 
a plan for remediating any operational or management issues that 
contributed to noncompliance; (3) an estimated timeframe for achieving 
full compliance; and (4) a commitment to provide a progress report to 
its primary Federal supervisor at least weekly until full compliance is 
achieved.

Estimated Paperwork Burden

    Estimated Burden Per Response: reporting--0.25 hours; 
recordkeeping--100 hours.
    Frequency: reporting--5; recordkeeping--1.

FDIC

    Estimated Number of Respondents: 2.
    Total Estimated Annual Burden: reporting--3 hours; recordkeeping--
200 hours.

OCC

    Estimated Number of Respondents: 3.
    Total Estimated Annual Burden: reporting--4 hours; recordkeeping--
300 hours.

Board

    Estimated Number of Respondents: 3.
    Total Estimated Annual Burden: reporting--4 hours; recordkeeping--
300 hours.

IX. OCC Unfunded Mandates Reform Act of 1995 Determination

    The Unfunded Mandates Reform Act of 1995 (UMRA) requires federal 
agencies to prepare a budgetary impact statement before promulgating a 
rule that includes a federal mandate that may result in the expenditure 
by state, local, and tribal governments, in the aggregate, or by the 
private sector of $100 million or more (adjusted annually for 
inflation) in any one year. The current inflation-adjusted expenditure 
threshold is $141 million. If a budgetary impact statement is required, 
section 205 of the UMRA also requires an agency to identify and 
consider a reasonable number of regulatory alternatives before 
promulgating a rule.
    In conducting the regulatory analysis, UMRA requires each federal 
agency to provide:
     The text of the draft regulatory action, together with a 
reasonably detailed description of the need for the regulatory action 
and an explanation of how the regulatory action will meet that need;
     An assessment of the potential costs and benefits of the 
regulatory action, including an explanation of the manner in which the 
regulatory action is consistent with a statutory mandate and, to the 
extent permitted by law, promotes the President's priorities and avoids 
undue interference with State, local, and tribal governments in the 
exercise of their governmental functions;
     An assessment, including the underlying analysis, of 
benefits anticipated from the regulatory action (such as, but not 
limited to, the promotion of the efficient functioning of the economy 
and private markets, the enhancement of health and safety, the 
protection of the natural environment, and the elimination or reduction 
of discrimination or bias) together with, to the extent feasible, a 
quantification of those benefits;
     An assessment, including the underlying analysis, of costs 
anticipated from the regulatory action (such as, but not limited to, 
the direct cost both to the government in administering the regulation 
and to businesses and others in complying with the regulation, and any 
adverse effects on the efficient functioning of the economy, private 
markets (including productivity, employment, and competitiveness), 
health, safety, and the natural environment), together with, to the 
extent feasible, a quantification of those costs;
     An assessment, including the underlying analysis, of costs 
and benefits of potentially effective and reasonably feasible 
alternatives to the planned regulation, identified by the agencies or 
the public (including improving the current regulation and reasonably 
viable non-regulatory actions), and an explanation why the planned 
regulatory action is preferable to the identified potential 
alternatives;
     An estimate of any disproportionate budgetary effects of 
the federal mandate upon any particular regions of the nation or 
particular State, local, or tribal governments, urban or rural or other 
types of communities, or particular segments of the private sector; and
     An estimate of the effect the rulemaking action may have 
on the national economy, if the OCC determines that such estimates are 
reasonably feasible and that such effect is relevant and material.

Need for Regulatory Action

    Liquidity is defined as a financial institution's capacity to 
readily meet its

[[Page 71851]]

cash and collateral obligations at a reasonable cost. As discussed in 
the preamble of the proposed rule, the recent financial crisis saw 
unprecedented levels of liquidity support from governments and central 
banks around the world, suggesting that banks and other financial 
market participants were not adequately prepared to meet their cash and 
collateral obligations at reasonable cost. Table 1 provides a list of 
some of the liquidity facilities provided by the Federal Reserve and 
the FDIC during the financial crisis. The proposed rule introduces the 
U.S. implementation of one of the two international liquidity standards 
(the liquidity coverage ratio and the net stable funding ratio) 
intended by the Basel Committee on Banking Supervision and the U.S. 
banking agencies to create a more resilient financial sector by 
strengthening the banking sector's liquidity risk management.
    A maturity mismatch in a bank's balance sheet creates liquidity 
risk. Banks will typically manage this liquidity risk by holding enough 
liquid assets to meet their usual net outflow demands. The presence of 
a central bank that can serve as a lender of last resort provides an 
element of liquidity insurance, which, as is often the case with 
insurance, creates moral hazard. Because of the presence of a lender of 
last resort, banks may not hold socially optimal levels of liquid 
assets. The LCR buffer established by the proposed rule offsets the 
moral hazard to a degree, and lowers the probability of a liquidity 
crisis and may limit the severity of liquidity crises when they do 
occur. Reducing the severity of liquidity crises will also limit the 
damage from negative externalities associated with liquidity crises, 
e.g., asset fire sales, rapid deleveraging, liquidity hoarding, and 
reduced credit availability.\70\ Furthermore, the LCR buffer at 
institutions affected by the proposed rule could help alleviate 
liquidity stress at smaller institutions that may still hold less than 
the socially optimal level of liquid assets because of ongoing moral 
hazard problems. As van den End and Kruidhof (2013) point out, the 
degree of systemic liquidity stress will ultimately depend on the size 
of liquidity shocks the financial system encounters, the size of the 
initial liquidity buffer, regulatory constraints on the buffer, and 
behavioral reactions by banks and other market participants.
---------------------------------------------------------------------------

    \70\ For a discussion of liquidity risk and problems associated 
with liquidity risk, see Douglas W. Diamond and Philip H. Dybvig, 
``Bank Runs, Deposit Insurance, and Liquidity'', Journal of 
Political Economy, Vol. 91, No. 3, June 1983, pp. 401-419 and Jan 
Willem van den End and Mark Kruidhof, ``Modelling the liquidity 
ratio as macroprudential instrument'', Journal of Banking 
Regulation, Vol. 14, No. 2, 2013, pp. 91-106.
---------------------------------------------------------------------------

    Capital and liquidity in the banking sector provide critical 
buffers to the broader economy. Capital allows the banking sector to 
absorb unexpected losses from some customers while continuing to extend 
credit to others. Liquidity in the banking sector allows banks to 
provide cash to customers who have unexpected demands for liquidity. 
The financial crisis of 2007-2009 began with a severe liquidity crisis 
when the asset-backed commercial paper market (ABCP) essentially froze 
in August of 2007 and the demand for liquidity from the banking sector 
quickly outstripped its supply of liquid assets. Acharya, Afonso, and 
Kovner (2013) discuss the problems in the ABCP market in 2007 and how 
foreign and domestic banks scrambled for liquidity in U.S. financial 
markets.\71\ They find that U.S. banks sought to increase liquidity by 
increasing deposits and borrowing through Federal Home Loan Bank 
advances. Foreign banks operating in the United States were generally 
not eligible for Federal Home Loan Bank advances and sought liquidity 
by decreasing overnight interbank lending and borrowed from the Federal 
Reserve's Term Auction Facility when that became available.
---------------------------------------------------------------------------

    \71\ See Acharya, Viral V., Gara Afonso, and Anna Kovner, 
(2013), ``How Do Global Banks Scramble for Liquidity? Evidence from 
the Asset-Backed Commercial Paper Freeze of 2007'', Federal Reserve 
Bank of New York, Staff Report No. 623, August 2013.

             Table 1--Special Liquidity Facilities Introduced During the 2007-2009 Financial Crisis
----------------------------------------------------------------------------------------------------------------
         Facility or program                    Dates               Type of activity         Activity levels
----------------------------------------------------------------------------------------------------------------
Agency Mortgage-Backed Security (MBS)  Began 11/2008..........  Purchase of Agency       $1.25 trillion
 Purchase Program.                                               guaranteed MBS.          purchased between 1/
                                                                                          2009 and 3/2010.
Term Auction Facility................  12/12/2007-3/8/2010....  28-day and 84-day loans  Maximum one day auction
                                                                 to depository            of $142.3 billion on 2/
                                                                 institutions.            12/2009.
Central Bank Liquidity Swap Lines....  Began 12/12/2007.......  1-day to 90-day swap     Maximum one day
                                                                 lines of credit with     extension of $422.5
                                                                 certain foreign          billion on 10/15/2008.
                                                                 central banks.
Primary Dealer Credit Facility.......  Announced 3/16/2008....  Overnight loan facility  Maximum of $155.8
                                                                 for primary dealers.     billion on 9/29/2008.
Term Securities Lending Facility.....  Announced 3/11/2008....  One-month loans of       One-day Maximum of
                                                                 Treasury Securities to   $75.0 billion on 3/28/
                                                                 primary dealers.         2008.
Asset-Backed Commercial Paper Money    Announced 9/19/2008....  Nonrecourse loans to     One-day Maximum of
 Market Mutual Fund Liquidity                                    financial institutions   $31.1 billion on 9/23/
 Facility.                                                       to purchase eligible     2008.
                                                                 ABCP from Money Market
                                                                 Mutual Funds.
Commercial Paper Funding Facility....  Announced 10/7/2008....  Three-month loans to     One-day Maximum lent of
                                                                 specially created        $56.6 billion on 10/29/
                                                                 company that purchased   2008.
                                                                 commercial paper from
                                                                 eligible issuers.
Term Asset-Backed Securities Loan      Announced 11/25/2008...  Nonrecourse loans of up  Loan Total of $71.1
 Facility.                                                       to five years to         billion.
                                                                 holders of eligible
                                                                 asset-backed
                                                                 securities.

[[Page 71852]]

 
FDIC Temporary Liquidity Guarantee     10/14/2008.............  Transaction Account      TAGP covered $834.5
 Program.                                                        Guarantee Program        billion in eligible
                                                                 (TAGP) guaranteed        deposits as of 12/31/
                                                                 noninterest-bearing      2009; DGP peak
                                                                 transaction accounts;    guarantee of $348.5
                                                                 Debt Guarantee Program   billion of outstanding
                                                                 (DGP) guaranteed         debt.
                                                                 certain newly issued
                                                                 senior unsecured debt.
----------------------------------------------------------------------------------------------------------------
Source: Federal Reserve, FDIC.

    A study by Cornett, McNutt, Strahan, and Tehranian (2011) suggests 
that banks with less liquid assets at the start of the crisis reduced 
lending, and that the overall effort by banks to manage the liquidity 
crisis led to a decrease in credit supply.\72\ Cornett et al also point 
out that through new and existing credit lines, banks provide crucial 
liquidity to the overall market during a liquidity drought. This 
sentiment is shared in an earlier study by Gatev and Strahan (2006), 
which suggests that large firms that use the commercial paper and bond 
markets during normal times, depend upon banks for liquidity during 
periods of market stress. Gatev and Strahan also provide evidence that 
banks tend to experience funding inflows during liquidity crises, for 
instance, when commercial-paper spreads widen. Gatev and Strahan's 
results show that when commercial-paper spreads widen, banks increase 
their reliance on transaction deposits and yields on large 
certificates-of-deposit tend to fall. They attribute these inflows at 
least partially to implicit government support for banks. They also 
point out that deposit outflows during the Great Depression led to a 
severe credit contraction.\73\
---------------------------------------------------------------------------

    \72\ See Cornett, Marcia Millon, Jamie John McNutt, Philip E. 
Strahan, and Hassan Tehranian, (2011), ``Liquidity risk management 
and credit supply in the financial crisis,'' Journal of Financial 
Economics, Vol. 101, pp. 297-312.
    \73\ See Gatev, Evan, and Philip E. Strahan, (2006), ``Banks' 
Advantage in Hedging Liquidity Risk: Theory and Evidence from the 
Commercial Paper Market,'' Journal of Finance, Vol. 61, No. 2, pp. 
867-892.
---------------------------------------------------------------------------

    This evidence of the role that banks play in providing liquidity 
during a liquidity crisis highlights the importance of ensuring that 
banks are properly managing their liquidity risk so that they are able 
to provide liquidity to others under all but the most dire of 
circumstances. The proposed rule does not seek to ensure that banks 
always have a specific amount of high quality liquid assets, because 
such a requirement could prove counterproductive during a liquidity 
crisis. Rather, the proposed rule seeks to ensure that certain banks 
have an amount of high quality liquid assets that will enable them to 
meet their own liquidity needs and the liquidity needs of their 
customers, even during periods of market stress.

The Proposed Rule

    The proposed rule would require covered institutions to maintain a 
liquidity coverage ratio (LCR) according to the transition schedule 
(shown in table 2) beginning January 1, 2015.

   Table 2--Transition Period for the Minimum Liquidity Coverage Ratio
------------------------------------------------------------------------
                                                              Minimum
                                                             liquidity
                      Calendar year                       coverage ratio
                                                           (in percent)
------------------------------------------------------------------------
2015....................................................              80
2016....................................................              90
2017, and beyond........................................             100
------------------------------------------------------------------------

    The proposed rule would require covered institutions to calculate 
their LCR on a daily basis at a set time selected by the institution. 
The proposed rule does not require a covered institution to report its 
LCR to the appropriate regulatory agency unless the institution expects 
a shortfall at its selected reporting time.
    The LCR is equal to the bank's qualifying high-quality liquid 
assets (HQLA) divided by the bank's total net cash outflows over a 
prospective 30-day liquidity stress scenario:
    LCR = [(HQLA)/(Total net cash outflow)] * 100.
    HQLA = (Level 1 liquid assets-Required Reserves) + .85*(Level 2A 
liquid assets) + .5*(Level 2B liquid assets)-(the maximum of the 
Adjusted or Unadjusted Excess HQLA Amount).
    Total net cash outflow = (Total cash outflow)-(Limited Total cash 
inflow), where the total net cash outflow is equal to total net cash 
outflow on the day within the 30-day stress period that has the largest 
net cumulative cash outflows after limiting cash inflow amounts to 75 
percent of cash outflows.
    When the LCR of a covered institution falls below the minimum LCR 
on a particular day, the institution must notify its primary federal 
supervisor. If the LCR is below the minimum LCR for three consecutive 
business days, the institution must submit a plan for remediation of 
the shortfall to its primary federal supervisor. In addition to public 
disclosure requirements described later in this section, the proposed 
rule includes various reporting requirements that a covered institution 
must make to its primary federal regulator on a periodic basis.
    Both the Basel III LCR framework and the proposed rule recognize 
the importance of allowing a covered institution to use its HQLA when 
necessary to meet liquidity needs. The proposed rule would require a 
covered banking organization to report to its appropriate federal 
banking agency when its liquidity coverage ratio falls below 100 
percent on any business day. In addition, if a covered banking 
organization's LCR is below 100 percent for three consecutive business 
days, then the covered banking organization would be required to 
provide its supervisory agency with (1) the reasons its liquidity 
coverage ratio has fallen below the minimum, and (2) a plan for 
remediation. While an LCR shortfall will always result in supervisory 
monitoring, circumstances will dictate whether the shortfall results in 
supervisory enforcement action. Existing supervisory processes and 
procedures related to regulatory compliance and risk management would 
help determine the appropriate response to LCR non-compliance by the 
appropriate federal banking agency.

Institutions Affected by the Proposed Rule

    The proposed rule would apply to (1) all internationally active 
banking organizations with more than $250 billion in total assets or 
more than $10 billion in on-balance sheet foreign exposure and to their 
subsidiary depository institutions with $10 billion or more in total 
consolidated assets, and

[[Page 71853]]

(2) companies designated for supervision by the Federal Reserve Board 
by the Financial Stability Oversight Council under section 113 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act that do not 
have significant insurance operations, and to their consolidated 
subsidiaries that are depository institutions with $10 billion or more 
in total consolidated assets. As of June 30, 2013, we estimate that 
approximately 16 bank holding companies will be subject to the proposed 
rule and 27 subsidiary depository institutions with $10 billion or more 
in consolidated assets. Of these, 13 holding companies include OCC-
supervised institutions (national bank or federal savings association), 
and within these 13 holding companies, there are a total of 21 OCC-
supervised subsidiaries with $10 billion or more in consolidated 
assets. Thus, we estimate that 21 OCC-supervised banks will be subject 
to the proposed rule.

Estimated Costs and Benefits of the Proposed Rule

    The proposed rule entails costs in two principal areas: the 
operational costs associated with establishing programs and procedures 
to calculate and report the LCR on a daily basis, and the opportunity 
costs of adjusting the bank's assets and liabilities to comply with the 
minimum LCR standard on a daily basis. The benefits of the proposed 
rule are qualitative in nature, but substantial nonetheless. As 
described by the Basel Committee on Banking Supervision, ``the 
objective of the LCR is to promote the short-term resilience of the 
liquidity risk profile of banks.'' \74\ A principal benefit of the 
proposed rule is that, in the guise of the LCR, the proposed rule 
establishes a measure of liquidity that will be consistent across time 
and across covered institutions. A consistent measure of liquidity 
could prove invaluable to bank supervisors and bank managers during 
periods of financial market stress.
---------------------------------------------------------------------------

    \74\ See Basel Committee on Banking Supervision (2013), ``Basel 
III: The Liquidity Coverage Ratio and liquidity risk monitoring 
tools,'' Bank for International Settlements, January, p. 1.
---------------------------------------------------------------------------

    To help calibrate the LCR proposal and gauge the distance covered 
institutions may have to cover to comply with a liquidity rule, the 
banking agencies have been conducting a quantitative impact study (QIS) 
by collecting consolidated data from bank holding companies on various 
components of the LCR and the net stable funding ratio. We use QIS data 
from the fourth quarter of 2012, to estimate the current LCR shortfall 
across all OCC-supervised institutions subject to the proposed rule. 
Institutions facing an LCR shortfall have three options to meet the 
minimum LCR standard. They may either (1) increase their holdings of 
high quality liquid assets to increase the numerator of the LCR, (2) 
decrease the denominator of the LCR by decreasing their outflows, or 
(3) decrease the denominator by adjusting assets and liabilities to 
increase their inflows. Of course, they may also elect to meet the LCR 
standard by pursuing some combination of the three options.
    Data from the QIS for the fourth quarter of 2012 suggests that 
there is currently a shortfall of approximately $151 billion among OCC-
supervised institutions participating in the QIS. OCC-supervised 
institutions participating in the QIS account for approximately 90 
percent of the assets of all OCC-supervised institutions that we 
estimate may be subject to the proposed rule. To estimate the potential 
shortfall among OCC-supervised institutions that are subject to the 
proposal but do not participate in the QIS, we apply the ratio of the 
shortfall to total assets across QIS participants to the total assets 
across nonparticipants. This method yields an additional shortfall of 
approximately $9 billion. Combining these two shortfall amounts results 
in an overall shortfall estimate of approximately $160 billion for the 
OCC-supervised institutions' shortfall.
    In pursuing one or more of the options open to them to make up the 
shortfall and comply with the minimum LCR standard, we anticipate that 
affected institutions would have to surrender some yield to close the 
LCR gap. If they elect to close the gap by replacing assets that are 
not HQLAs with HQLAs, they would likely receive a lower rate of return 
on the HQLA relative to the non-HQLA. Similarly, they would likely have 
to pay a higher rate of interest to either reduce their outflows or 
increase their inflows. Although we do not know the exact size of the 
change in yield necessary to close the LCR gap, a recent industry 
report card by Standard & Poor's suggests that a recent quarter over 
quarter decline of 4 basis points in net interest margin at large, 
complex banks was due in part to an increase in HQLA to improve Basel 
III LCRs.\75\ The median year over year overall decline was 21 basis 
points. Table 3 shows the estimated cost of eliminating the $160 
billion LCR shortfall for a range of basis points. For the purposes of 
this analysis, we estimate that the cost of closing the LCR gap will be 
between 10 basis points and 15 basis points. As shown in table 3, this 
implies that our estimate of the opportunity cost of changes in the 
balance sheet to satisfy the requirements of the proposed rule will 
fall between $160 million and $241 million.
---------------------------------------------------------------------------

    \75\ See Standard & Poor's, RatingsDirect, ``Industry Report 
Card: U.S. Large, Complex Banks' Capital Markets Business Trumped 
Traditional Banking in the Second Quarter,'' August 8, 2013, p. 5.

                 Table 3--LCR Opportunity Cost Estimates
------------------------------------------------------------------------
                                                            Opportunity
                                           Estimated LCR      cost to
              Basis points                 shortfall (In     eliminate
                                             billion)      shortfall (In
                                                             million)
------------------------------------------------------------------------
0.......................................            $160              $0
5.......................................             160              80
10......................................             160             160
15......................................             160             241
20......................................             160             321
25......................................             160             401
30......................................             160             481
------------------------------------------------------------------------


[[Page 71854]]

    In addition to opportunity costs associated with changes in the 
banks' balance sheets, institutions affected by the rule also face 
compliance costs related to the time and effort necessary to establish 
programs and procedures to calculate and report the LCR on a daily 
basis. The principal compliance costs of the proposed rule will involve 
the costs of establishing procedures and maintaining the programs that 
calculate the LCR and report the results. These efforts will also 
involve various recordkeeping, reporting, and training requirements.
    In particular, the proposed rule would require each covered 
institution to:
    1. Establish and maintain a system of controls, oversight, and 
documentation for its LCR program.
    2. Establish and maintain a program to demonstrate an institutional 
capacity to liquidate their stock of HQLA, which requires a bank to 
periodically sell a portion of its HQLAs.
    3. Calculate the LCR on a daily basis.
    4. Establish procedures to report an LCR deficiency to the 
institution's primary federal supervisor.
    Table 4 shows our estimates of the hours needed to complete tasks 
associated with establishing systems to calculate the LCR, reporting 
the LCR, and training staff responsible for the LCR. In developing 
these estimates, we consider the requirements of the proposed rule and 
the extent to which these requirements extend current business 
practices. Because liquidity measurement and management are already 
integral components of a bank's ongoing operations, all institutions 
affected by the proposed rule already engage in some sort of liquidity 
measurement activity. Thus, our hour estimates reflect the additional 
time necessary to build upon current internal practices.\76\ As shown 
in table 4, we estimate that financial institutions covered by the 
proposed rule will spend approximately 2,760 hours during the first 
year the rule is in effect. Because most of these costs reflect start-
up costs associated with the introduction of systems to collect and 
process the data needed to calculate the LCR, we estimate that in 
subsequent years, after LCR systems are in place, annual compliance 
hours will taper off to 800 hours per year.
---------------------------------------------------------------------------

    \76\ For instance, certain operational requirements, especially 
with respect to demonstrating the liquidity of an institution's HQLA 
portfolio, could further increase operational costs if these 
requirements do not reflect current business practices. We do not 
include these potential costs in our current estimate, and we will 
look to comment letters especially with respect to this potential 
cost for information regarding deviation from current business 
practices.
---------------------------------------------------------------------------

    Table 5 shows our overall operational cost estimate for the 
proposed rule. This estimate is the product of our estimate of the 
hours required per institution, our estimate of the number of 
institutions affected by the rule, and an estimate of hourly wages. To 
estimate hours necessary per activity, we estimate the number of 
employees each activity is likely to need and the number of days 
necessary to assess, implement, and perfect the required activity. To 
estimate hourly wages, we reviewed data from May 2012 for wages (by 
industry and occupation) from the U.S. Bureau of Labor Statistics (BLS) 
for depository credit intermediation (NAICS 522100). To estimate 
compensation costs associated with the proposed rule, we use $92 per 
hour, which is based on the average of the 90th percentile for seven 
occupations (i.e., accountants and auditors, compliance officers, 
financial analysts, lawyers, management occupations, software 
developers, and statisticians) plus an additional 33 percent to cover 
inflation and private sector benefits.\77\
---------------------------------------------------------------------------

    \77\ According to BLS' employer costs of employee benefits data, 
thirty percent represents the average private sector costs of 
employee benefits.
---------------------------------------------------------------------------

    As shown in table 5, we estimate that the overall operational costs 
of the proposed rule in the first year of implementation will be 
approximately $5.3 million. Eliminating start-up costs after the first 
year, we expect annual operational costs in subsequent years to be 
approximately $2.0 million. We do not expect the OCC to incur any 
material costs as a result of the proposed rule. Combining our 
opportunity cost estimates (between $160 million and $241 million) and 
our operational cost estimate ($5.3 million) results in our overall 
cost estimate of between $165 million and $246 million for the proposed 
LCR rule. This estimate exceeds the threshold for a significant rule 
under the OCC's Unfunded Mandates Reform Act (UMRA) procedures.

           Table 4--Estimated Annual Hours for LCR Calculation
------------------------------------------------------------------------
                                             Estimated       Estimated
                                          start-up hours  ongoing  hours
                Activity                        per             per
                                            institution     institution
------------------------------------------------------------------------
Develop and maintain systems for LCR               2,400             520
 program................................
Daily internal reporting of LCR.........             260             260
Training................................             100              20
                                         -------------------------------
    Total...............................           2,760             800
------------------------------------------------------------------------


                              Table 5--Estimated Operational Costs for LCR Proposal
----------------------------------------------------------------------------------------------------------------
                                                                                                     Estimated
                                                                     Estimated    Estimated cost       total
               Number of covered OCC institutions                    hours per          per         operational
                                                                    institution     institution        costs
----------------------------------------------------------------------------------------------------------------
21..............................................................           2,760        $253,920      $5,332,320
----------------------------------------------------------------------------------------------------------------

Potential Costs
    In addition to the anticipated operational and opportunity costs 
described earlier, the introduction of an LCR as described in the 
proposed rule could also affect some broader markets. In this section 
we list some aspects of the proposed rule that we do not expect to 
carry substantial direct costs, but under some circumstances, could 
affect the intended outcome of the proposed rule. We will look to 
comment letters to see if any of these considerations warrant a more 
specific inclusion in our

[[Page 71855]]

analysis of the final rule. These potential costs include:
    1. Potential problems from liquidity hoarding: The proposed rule 
increases the potential for liquidity hoarding among covered 
institutions, especially during a crisis. To the extent that this 
possibility emerges as a significant concern among comment letters, an 
alternative proposal that allows the LCR to fall within a range of 90-
100 percent could alleviate some potential for hoarding. The study by 
van den End and Kruidhof (2013) suggest several possible policy 
responses to increasingly severe liquidity shocks. These policy 
responses include (1) reducing the minimum level of the LCR, (2) 
widening the LCR buffer definition to include more assets, and (3) 
acknowledge central bank funding in the LCR denominator. They also 
point out that in the most severe liquidity stress scenarios, the 
lender of last resort may still need to rescue the financial system. In 
the event of a liquidity crisis, Diamond and Dybvig (1983) suggest that 
the discount window or expanding deposit insurance on either a 
temporary or permanent basis are tools that can help prevent bank runs.
    2. No LCR reporting requirement in the proposal: While the LCR 
proposal does not include a reporting requirement, the agencies plan to 
do so in the future. Any such reporting requirement will be published 
for notice and comment. One of the principal benefits of the proposed 
rule is the introduction of a liquidity risk measurement that is 
consistent across time and across covered institutions. Knowledge of 
the LCR and its components across institutions makes the LCR an 
important supervisory tool and a lack of a standardized reporting 
requirement would mean a significant loss of the benefits of the 
proposal. For instance, a decrease in the LCR may occur because of 
changes in one or more of its three components: a decrease in HQLA, an 
increase in outflow, or a decrease in inflow. It is important for bank 
supervisors and the lender of last resort to know which element is 
changing. Bank supervisors also need to know if the change in the LCR 
is idiosyncratic or systemic. In particular, bank supervisors should 
know the number of banks reacting to the liquidity shock and the extent 
of these reactions to help determine the appropriate policy response, 
e.g., adjusting LCR requirements, discount window lending, expansion of 
deposit insurance coverage, or asset purchases. Furthermore, the 
current LCR formula is not likely to be a static formula, and banking 
supervisors will need information on the behavior of components in the 
LCR to calibrate it and update it over time.
    3. Public disclosure: While it is important for bank supervisors to 
be well informed regarding changes in the LCR and its components, the 
likelihood of liquidity hoarding increases if banks are required to 
publicly disclose their LCR. Thus, it is appropriate that the proposed 
rule does not include a public disclosure requirement, though there may 
be some public disclosure at the bank holding company level.
    4. Temporary Gaming Opportunity: The absence of a Net Stable 
Funding Ratio (NSFR) requirement creates some opportunity to game the 
LCR with maturity dates.
    5. Challenges to LCR Calibration: The components of the LCR tend to 
focus on the behavior of assets in the most recent financial crisis and 
may not capture asset performance during the next liquidity crisis, and 
the focus of the LCR should be on future liquidity events.
    6. HQLA Designation Should Enhance Liquidity: Including an asset in 
eligible HQLA will tend to increase the liquidity of that particular 
asset, except under stress conditions when there may be hoarding. 
Similarly, excluding assets from HQLA will tend to decrease the 
liquidity of those assets.
    7. Potential for additional operational costs: Certain operational 
requirements, especially with respect to demonstrating the liquidity of 
an institution's HQLA portfolio, could further increase operational 
costs if these requirements do not reflect current business practices. 
We will look to comment letters especially with respect to this 
potential cost for information regarding deviation from current 
business practices.

Comparison Between the Proposed Rule and the Baseline

    Under current rules, banks are subject to a general liquidity risk 
management requirement captured as part of the CAMELS rating system. 
The CAMELS rating system examines capital adequacy, asset quality, 
management quality, earnings, liquidity, and sensitivity to market 
risk. According to the Comptroller's Handbook, the liquidity component 
of this rating system requires banks to have a sound understanding of 
the following seven factors affecting a bank's liquidity risk.
    1. Projected funding sources and needs under a variety of market 
conditions.
    2. Net cash flow and liquid asset positions given planned and 
unplanned balance sheet changes.
    3. Projected borrowing capacity under stable conditions and under 
adverse scenarios of varying severity and duration.
    4. Highly liquid asset (which is currently defined as U.S. Treasury 
and Agency securities and excess reserves at the Federal Reserve) and 
collateral position, including the eligibility and marketability of 
such assets under a variety of market environments.
    5. Vulnerability to rollover risk, which is the risk that a bank is 
unable to renew or replace funds at reasonable costs when they mature 
or otherwise come due.
    6. Funding requirements for unfunded commitments over various time 
horizons.
    7. Projected funding costs, as well as earnings and capital 
positions under varying rate scenarios and market conditions.
    Under the baseline scenario, liquidity requirements incorporated in 
the CAMELS rating process and the Comptroller's Handbook on liquidity 
would continue to apply. Thus, under the baseline, institutions 
affected by the proposed rule would not have to calculate and report 
the LCR, and the banks would incur no additional costs related to 
liquidity risk measurement and management. Under the baseline, however, 
there would also be no added benefits related to the introduction of a 
consistent measure of liquidity.

Comparison Between the Proposed Rule and Alternatives

    With respect to OCC-supervised institutions, the proposed rule 
would apply to 21 national banks or federal savings associations that 
are subject to the advanced approaches risk-based capital rules and 
their subsidiary depository institutions with $10 billion or more in 
total consolidated assets. For our feasible alternatives, we consider 
applying the proposed rule using criteria other than use of the 
advanced approaches threshold. In particular, we consider the impact of 
the proposal if (1) the rule only applied to institutions designated as 
global systemically important banks (G-SIBs) and their subsidiary 
depository institutions with $10 billion or more in total consolidated 
assets, and (2) the rule applied to all depository institutions with 
$10 billion or more in total assets.
    The first alternative considers applying the LCR to U.S. bank or 
financial holding companies identified in November 2012, as global 
systemically important banking organizations by the Basel Committee on 
Banking Supervision. This implies that the U.S. banking organizations 
that would be subject to the proposed rule are Citigroup Inc., JP 
Morgan Chase &

[[Page 71856]]

Co., Bank of America Corporation, The Bank of New York Mellon 
Corporation, Goldman Sachs Group, Inc., Morgan Stanley, State Street 
Corporation, and Wells Fargo & Company. Together with their insured 
depository institution subsidiaries also covered by the proposed rule, 
12 OCC-supervised banks would be subject to the proposal.
    Applying the same methodology as before, we estimate that the LCR 
shortfall for OCC-supervised G-SIBS would be approximately $104 
billion, which yields an opportunity cost estimate of between $104 
million and $157 million. This opportunity cost estimate again assumes 
a 10-15 basis point cost to the balance sheet adjustment. Applying the 
same operational cost estimate as before to the 12 OCC institutions 
subject to the proposal under the first alternative scenario, results 
in an operational cost estimate of $3.0 million. Combining opportunity 
and operational costs provides a total cost estimate of between $107 
million and $160 million under the first alternative.
    The second alternative considers applying the LCR to all U.S. banks 
with total assets of $10 billion or more. This size threshold would 
increase the number of OCC-supervised banks to 59, and the estimated 
LCR shortfall would increase to $179 billion. The opportunity cost 
estimate would then be between $179 million and $269 million. The 
operational cost estimate would increase to $15.0 million across the 59 
institutions. Thus, the overall cost estimate under the second 
alternative would be between $194 million and $284 million.

The Unfunded Mandates Reform Act (UMRA) Conclusion

    UMRA requires federal agencies to assess the effects of federal 
regulatory actions on State, local, and tribal governments and the 
private sector. As required by the UMRA, our review considers whether 
the mandates imposed by the rule may result in an expenditure of 
approximately $141 million or more annually by state, local, and tribal 
governments, or by the private sector.\78\ Our estimate of the total 
cost is between $165 million and $246 million per year. We conclude 
that the proposed rule will result in private sector costs that exceed 
the UMRA threshold for a significant rule.\79\
---------------------------------------------------------------------------

    \78\ UMRA's aggregate expenditure threshold to determine the 
significance of regulatory actions is $100 million or more adjusted 
annually for inflation. Using the GDP deflator published by the 
Bureau of Economic Analysis, we apply the ratio of the 2012 GDP 
deflator to the 1995 deflator and multiply by $100 million to arrive 
at our inflation adjusted UMRA threshold of approximately $141 
million.
    \79\ UMRA describes costs as expenditures necessary to comply 
with federal private sector mandates, and could thus be interpreted 
to exclude opportunity costs. Our estimate of direct expenditures 
(excluding opportunity costs) is approximately $7 million per year.
---------------------------------------------------------------------------

    Other than the aforementioned costs to banking organizations 
affected by the proposed rule, we do not anticipate any 
disproportionate effects upon any particular regions of the United 
States or particular State, local, or tribal governments, or urban or 
rural communities. We do not expect an increase in costs or prices for 
consumers, individual industries, Federal, State, or local government 
agencies. Nor do we expect this proposed rule to have a significant 
adverse effect on economic growth, competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises.
Text of the Proposed Common Rules (All Agencies)
    The text of the proposed common rules appears below:

PART [INSERT PART]--LIQUIDITY RISK MEASUREMENT, STANDARDS AND 
MONITORING

Subpart A General Provisions
    Sec.  ----.1 Purpose and applicability.
    Sec.  ----.2 Reservation of authority.
    Sec.  ----.3 Definitions.
    Sec.  ----.4 Certain operational requirements.
Subpart B Liquidity Coverage Ratio
    Sec.  ----.10 Liquidity coverage ratio.
Subpart C High-Quality Liquid Assets
    Sec.  ----.20 High-Quality Liquid Asset Criteria.
    Sec.  ----.21 High-Quality Liquid Asset Amount.
Subpart D Total Net Cash Outflow
    Sec.  ----.30 Total net cash outflow amount.
    Sec.  ----.31 Determining maturity.
    Sec.  ----.32 Outflow amounts.
    Sec.  ----.33 Inflow amounts.
Subpart E Liquidity Coverage Shortfall
    Sec.  ----.40 Liquidity coverage shortfall: supervisory 
framework.
Subpart F Transitions
    Sec.  ----.50 Transitions.

Text of Common Rule

Subpart A--General Provisions

Sec.  ----.1 Purpose and applicability.

    (a) Purpose. This part establishes a minimum liquidity standard 
and disclosure requirements for certain [BANK]s, as set forth 
herein.
    (b) Applicability. (1) A [BANK] is subject to the minimum 
liquidity standard and other requirements of this part if:
    (i) It has consolidated total assets equal to $250 billion or 
more, as reported on the most recent year-end [REGULATORY REPORT];
    (ii) It has consolidated total on-balance sheet foreign exposure 
at the most recent year-end equal to $10 billion or more (where 
total on-balance sheet foreign exposure equals total cross-border 
claims less claims with a head office or guarantor located in 
another country plus redistributed guaranteed amounts to the country 
of head office or guarantor plus local country claims on local 
residents plus revaluation gains on foreign exchange and derivative 
transaction products, calculated in accordance with the Federal 
Financial Institutions Examination Council (FFIEC) 009 Country 
Exposure Report);
    (iii) It is a depository institution that is a consolidated 
subsidiary of a company described in paragraphs (b)(1)(i) or 
(b)(1)(ii) of this section and has consolidated total assets equal 
to $10 billion or more, as reported on the most recent year-end 
Consolidated Report of Condition and Income; or
    (iv) The [AGENCY] has determined that application of this part 
is appropriate in light of the [BANK]'s asset size, level of 
complexity, risk profile, scope of operations, affiliation with 
foreign or domestic covered entities, or risk to the financial 
system.
    (2) This part does not apply to:
    (i) A bridge financial company as defined in 12 U.S.C. 
5381(a)(3), or a subsidiary of a bridge financial company; or
    (ii) A new depository institution or a bridge depository 
institution, as defined in 12 U.S.C. 1813(i).
    (3) A [BANK] subject to a minimum liquidity standard under this 
part shall remain subject until the [AGENCY] determines in writing 
that application of this part to the [BANK] is not appropriate in 
light of the [BANK]'s asset size, level of complexity, risk profile, 
scope of operations, affiliation with foreign or domestic covered 
entities, or risk to the financial system.
    (4) In making a determination under paragraphs (b)(1)(iv) or (3) 
of this section, the [AGENCY] will apply notice and response 
procedures in the same manner and to the same extent as the notice 
and response procedures in [12 CFR 3.404 (OCC), 12 CFR 263.202 
(Board), and 12 CFR 324.5 (FDIC)].

Sec.  ----.2 Reservation of authority.

    (a) The [AGENCY] may require a [BANK] to hold an amount of high-
quality liquid assets (HQLA) greater than otherwise required under 
this part, or to take any other measure to improve the [BANK]'s 
liquidity risk profile, if the [AGENCY] determines that the [BANK]'s 
liquidity requirements as calculated under this part are not 
commensurate with the [BANK]'s liquidity risks. In making 
determinations under this section, the [AGENCY] will apply notice 
and response procedures as set forth in [12 CFR 3.404 (OCC), 12 CFR 
263.202 (Board), and 12 CFR 324.5 (FDIC)].
    (b) Nothing in this part limits the authority of the [AGENCY] 
under any other provision of law or regulation to take supervisory 
or enforcement action, including action to address unsafe or unsound 
practices or conditions, deficient liquidity levels, or violations 
of law.

[[Page 71857]]

Sec.  ----.3 Definitions.

    For the purposes of this part:
    Affiliated depository institution means with respect to a [BANK] 
that is a depository institution, another depository institution 
that is a consolidated subsidiary of a bank holding company or 
savings and loan holding company of which the [BANK] is also a 
consolidated subsidiary.
    Asset exchange means a transaction that requires the 
counterparties to exchange non-cash assets at a future date. Asset 
exchanges do not include secured funding and secured lending 
transactions.
    Bank holding company is defined in section 2 of the Bank Holding 
Company Act of 1956, as amended (12 U.S.C. 1841 et seq.).
    Brokered deposit means any deposit held at the [BANK] that is 
obtained, directly or indirectly, from or through the mediation or 
assistance of a deposit broker as that term is defined in section 29 
of the Federal Deposit Insurance Act (12 U.S.C. 1831f(g)), and 
includes a reciprocal brokered deposit and a brokered sweep deposit.
    Brokered sweep deposit means a deposit held at the [BANK] by a 
customer or counterparty through a contractual feature that 
automatically transfers to the [BANK] from another regulated 
financial company at the close of each business day amounts 
identified under the agreement governing the account from which the 
amount is being transferred.
    Calculation date means any date on which a [BANK] calculates its 
liquidity coverage ratio under Sec.  ----.10.
    Client pool security means a security that is owned by a 
customer of the [BANK] and is not an asset of the [BANK] regardless 
of a [BANK]'s hypothecation rights to the security.
    Committed means, with respect to a credit facility or liquidity 
facility, that under the terms of the legally binding agreement 
governing the facility:
    (1) The [BANK] may not refuse to extend credit or funding under 
the facility; or
    (2) The [BANK] may refuse to extend credit under the facility 
(to the extent permitted under applicable law) only upon the 
satisfaction or occurrence of one or more specified conditions not 
including change in financial condition of the borrower, customary 
notice, or administrative conditions.
    Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    Consolidated subsidiary means a company that is consolidated on 
a [BANK]'s balance sheet under GAAP.
    Covered depository institution holding company means a top-tier 
bank holding company or savings and loan holding company domiciled 
in the United States other than:
    (1) A top-tier savings and loan holding company that is:
    (i) A grandfathered unitary savings and loan holding company as 
defined in section 10(c)(9)(A) of the Home Owners' Loan Act (12 
U.S.C. 1461 et seq.); and
    (ii) As of June 30 of the previous calendar year, derived 50 
percent or more of its total consolidated assets or 50 percent of 
its total revenues on an enterprise-wide basis (as calculated under 
GAAP) from activities that are not financial in nature under section 
4(k) of the Bank Holding Company Act (12 U.S.C. 1842(k));
    (2) A top-tier depository institution holding company that is an 
insurance underwriting company; or
    (3)(i) A top-tier depository institution holding company that, 
as of June 30 of the previous calendar year, held 25 percent or more 
of its total consolidated assets in subsidiaries that are insurance 
underwriting companies (other than assets associated with insurance 
for credit risk); and
    (ii) For purposes of paragraph 3(i) of this definition, the 
company must calculate its total consolidated assets in accordance 
with GAAP, or if the company does not calculate its total 
consolidated assets under GAAP for any regulatory purpose (including 
compliance with applicable securities laws), the company may 
estimate its total consolidated assets, subject to review and 
adjustment by the Board.
    Covered nonbank company means a company that the Financial 
Stability Oversight Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (designated company) 
other than:
    (1) A designated company that is an insurance underwriting 
company; or
    (2)(i) A designated company that, as of June 30 of the previous 
calendar year, held 25 percent or more of its total consolidated 
assets in subsidiaries that are insurance underwriting companies 
(other than assets associated with insurance for credit risk); and
    (ii) For purposes of paragraph 2(i) of this definition, the 
company must calculate its total consolidated assets in accordance 
with GAAP, or if the company does not calculate its total 
consolidated assets under GAAP for any regulatory purpose (including 
compliance with applicable securities laws), the company may 
estimate its total consolidated assets, subject to review and 
adjustment by the Board.
    Credit facility means a legally binding agreement to extend 
funds if requested at a future date, including a general working 
capital facility such as a revolving credit facility for general 
corporate or working capital purposes. Credit facilities do not 
include facilities extended expressly for the purpose of refinancing 
the debt of a counterparty that is otherwise unable to meet its 
obligations in the ordinary course of business (including through 
its usual sources of funding or other anticipated sources of 
funding). See liquidity facility.
    Deposit means ``deposit'' as defined in section 3(l) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(l)) or an equivalent 
liability of the [BANK] in a jurisdiction outside of the United 
States.
    Depository institution is defined in section 3(c) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(c)).
    Depository institution holding company means a bank holding 
company or savings and loan holding company.
    Deposit insurance means deposit insurance provided by the 
Federal Deposit Insurance Corporation under the Federal Deposit 
Insurance Act (12 U.S.C. 1811 et seq.).
    Derivative transaction means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity 
derivative contracts, credit derivative contracts, and any other 
instrument that poses similar counterparty credit risks. Derivative 
contracts also include unsettled securities, commodities, and 
foreign currency exchange transactions with a contractual settlement 
or delivery lag that is longer than the lesser of the market 
standard for the particular instrument or five business days. A 
derivative does not include any identified banking product, as that 
term is defined in section 402(b) of the Legal Certainty for Bank 
Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 
403(a) of that Act (7 U.S.C. 27a(a)).
    Dodd-Frank Act means the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
    Foreign withdrawable reserves means a [BANK]'s balances held by 
or on behalf of the [BANK] at a foreign central bank that are not 
subject to restrictions on the [BANK]'s ability to use the reserves.
    GAAP means generally accepted accounting principles as used in 
the United States.
    High-quality liquid asset (HQLA) means an asset that meets the 
requirements for level 1 liquid assets, level 2A liquid assets, or 
level 2B liquid assets, as set forth in subpart C of this part.
    HQLA amount means the HQLA amount as calculated under Sec.  --
--.21.
    Identified company means any company that the [AGENCY] has 
determined should be treated the same for the purposes of this part 
as a regulated financial company, investment company, non-regulated 
fund, pension fund, or investment adviser, based on activities 
similar in scope, nature, or operations to those entities.
    Individual means a natural person, and does not include a sole 
proprietorship.
    Investment adviser means a company registered with the SEC as an 
investment adviser under the Investment Advisers Act of 1940 (15 
U.S.C. 80b-1 et seq.), or foreign equivalents of such company.
    Investment company means a company registered with the SEC under 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or 
foreign equivalents of such company.
    Liquid and readily-marketable means, with respect to a security, 
that the security is traded in an active secondary market with:
    (1) More than two committed market makers;
    (2) A large number of non-market maker participants on both the 
buying and selling sides of transactions;
    (3) Timely and observable market prices; and
    (4) A high trading volume.
    Liquidity facility means a legally binding agreement to extend 
funds at a future date to a counterparty that is made expressly for 
the

[[Page 71858]]

purpose of refinancing the debt of the counterparty when it is 
unable to obtain a primary or anticipated source of funding. A 
liquidity facility includes an agreement to provide liquidity 
support to asset-backed commercial paper by lending to, or 
purchasing assets from, any structure, program or conduit in the 
event that funds are required to repay maturing asset-backed 
commercial paper. Liquidity facilities exclude facilities that are 
established solely for the purpose of general working capital, such 
as revolving credit facilities for general corporate or working 
capital purposes. See credit facility.
    Multilateral development bank means the International Bank for 
Reconstruction and Development, the Multilateral Investment 
Guarantee Agency, the International Finance Corporation, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Bank for Reconstruction and 
Development, the European Investment Bank, the European Investment 
Fund, the Nordic Investment Bank, the Caribbean Development Bank, 
the Islamic Development Bank, the Council of Europe Development 
Bank, and any other entity that provides financing for national or 
regional development in which the U.S. government is a shareholder 
or contributing member or which the [AGENCY] determines poses 
comparable credit risk.
    Non-regulated fund means any hedge fund or private equity fund 
whose investment adviser is required to file SEC Form PF (Reporting 
Form for Investment Advisers to Private Funds and Certain Commodity 
Pool Operators and Commodity Trading Advisors), and any consolidated 
subsidiary of such fund, other than a small business investment 
company as defined in section 102 of the Small Business Investment 
Act of 1958 (15 U.S.C. 661 et seq.).
    Nonperforming exposure means an exposure that is past due by 
more than 90 days or nonaccrual.
    Operational deposit means unsecured wholesale funding that is 
required for the [BANK] to provide operational services as an 
independent third-party intermediary to the wholesale customer or 
counterparty providing the unsecured wholesale funding. In order to 
recognize a deposit as an operational deposit for purposes of this 
part, a [BANK] must comply with the requirements of Sec.  ----.4(b) 
with respect to that deposit.
    Operational services means the following services, provided they 
are performed as part of cash management, clearing, or custody 
services:
    (1) Payment remittance;
    (2) Payroll administration and control over the disbursement of 
funds;
    (3) Transmission, reconciliation, and confirmation of payment 
orders;
    (4) Daylight overdraft;
    (5) Determination of intra-day and final settlement positions;
    (6) Settlement of securities transactions;
    (7) Transfer of recurring contractual payments;
    (8) Client subscriptions and redemptions;
    (9) Scheduled distribution of client funds;
    (10) Escrow, funds transfer, stock transfer, and agency 
services, including payment and settlement services, payment of 
fees, taxes, and other expenses; and
    (11) Collection and aggregation of funds.
    Pension fund means an employee benefit plan as defined in 
paragraphs (3) and (32) of section 3 of the Employee Retirement 
Income and Security Act of 1974 (29 U.S.C. 1001 et seq.), a 
``governmental plan'' (as defined in 29 U.S.C. 1002(32)) that 
complies with the tax deferral qualification requirements provided 
in the Internal Revenue Code, or any similar employee benefit plan 
established under the laws of a foreign jurisdiction.
    Public sector entity means a state, local authority, or other 
governmental subdivision below the sovereign entity level.
    Publicly traded means, with respect to a security, that the 
security is traded on:
    (1) Any exchange registered with the SEC as a national 
securities exchange under section 6 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the security in 
question.
    Qualifying master netting agreement (1) Means a written, legally 
binding agreement that:
    (i) Creates a single obligation for all individual transactions 
covered by the agreement upon an event of default, including upon an 
event of receivership, insolvency, liquidation, or similar 
proceeding, of the counterparty;
    (ii) Provides the [BANK] the right to accelerate, terminate, and 
close out on a net basis all transactions under the agreement and to 
liquidate or set-off collateral promptly upon an event of default, 
including upon an event of receivership, insolvency, liquidation, or 
similar proceeding, of the counterparty, provided that, in any such 
case, any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than in receivership, conservatorship, resolution under the Federal 
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any 
similar insolvency law applicable to U.S. government-sponsored 
enterprises;
    (iii) Does not contain a walkaway clause (that is, a provision 
that permits a non-defaulting counterparty to make a lower payment 
than it otherwise would make under the agreement, or no payment at 
all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (2) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this part, a [BANK] must comply 
with the requirements of Sec.  ----.4(a) with respect to that 
agreement.
    Reciprocal brokered deposit means a brokered deposit that a 
[BANK] receives through a deposit placement network on a reciprocal 
basis, such that:
    (1) For any deposit received, the [BANK] (as agent for the 
depositors) places the same amount with other depository 
institutions through the network; and
    (2) Each member of the network sets the interest rate to be paid 
on the entire amount of funds it places with other network members.
    Regulated financial company means:
    (1) A bank holding company; savings and loan holding company (as 
defined in section 10(a)(1)(D) of the Home Owners' Loan Act (12 
U.S.C. 1467a(a)(1)(D)); nonbank financial institution supervised by 
the Board of Governors of the Federal Reserve System under Title I 
of the Dodd-Frank Act (12 U.S.C. 5323);
    (2) A company included in the organization chart of a depository 
institution holding company on the Form FR Y-6, as listed in the 
hierarchy report of the depository institution holding company 
produced by the National Information Center (NIC) Web site,\1\ 
provided that the top-tier depository institution holding company is 
subject to a minimum liquidity standard under this part;
---------------------------------------------------------------------------

    \1\ http://www.ffiec.gov/nicpubweb/nicweb/NicHome.aspx.
---------------------------------------------------------------------------

    (3) A depository institution; foreign bank; credit union; 
industrial loan company, industrial bank, or other similar 
institution described in section 2 of the Bank Holding Company Act 
of 1956, as amended (12 U.S.C. 1841 et seq.); national bank, state 
member bank, or state non-member bank that is not a depository 
institution;
    (4) An insurance company;
    (5) A securities holding company as defined in section 618 of 
the Dodd-Frank Act (12 U.S.C. 1850a); broker or dealer registered 
with the SEC under section 15 of the Securities Exchange Act (15 
U.S.C. 78o); futures commission merchant as defined in section 1a of 
the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.); swap dealer 
as defined in section 1a of the Commodity Exchange Act (7 U.S.C. 
1a); or security-based swap dealer as defined in section 3 of the 
Securities Exchange Act (15 U.S.C. 78c);
    (6) A designated financial market utility, as defined in section 
803 of the Dodd-Frank Act (12 U.S.C. 5462); and
    (7) Any company not domiciled in the United States (or a 
political subdivision thereof) that is supervised and regulated in a 
manner similar to entities described in paragraphs (1) through (6) 
of this definition (e.g., a foreign banking organization, foreign 
insurance company, foreign securities broker or dealer or foreign 
designated financial market utility).
    (8) A regulated financial institution does not include:
    (i) U.S. government-sponsored enterprises;
    (ii) Small business investment companies, as defined in section 
102 of the Small Business Investment Act of 1958 (15 U.S.C. 661 et 
seq.);
    (iii) Entities designated as Community Development Financial 
Institutions (CDFIs) under 12 U.S.C. 4701 et seq. and 12 CFR part 
1805; or
    (iv) Central banks, the Bank for International Settlements, the 
International Monetary Fund, or a multilateral development bank.

[[Page 71859]]

    Reserve Bank balances means:
    (1) Balances held in a master account of the [BANK] at a Federal 
Reserve Bank, less any balances that are attributable to any 
respondent of the [BANK] if the [BANK] is a correspondent for a 
pass-through account as defined in section 204.2(l) of Regulation D 
(12 CFR 204.2(l));
    (2) Balances held in a master account of a correspondent of the 
[BANK] that are attributable to the [BANK] if the [BANK] is a 
respondent for a pass-through account as defined in section 204.2(l) 
of Regulation D;
    (3) ``Excess balances'' of the [BANK] as defined in section 
204.2(z) of Regulation D (12 CFR 204.2(z)) that are maintained in an 
``excess balance account'' as defined in section 204.2(aa) of 
Regulation D (12 CFR 204.2(aa)) if the [BANK] is an excess balance 
account participant; and
    (4) ``Term deposits'' of the [BANK] as defined in section 
204.2(dd) of Regulation D (12 CFR 204.2(dd)) if such term deposits 
are offered and maintained pursuant to terms and conditions that:
    (i) Explicitly and contractually permit such term deposits to be 
withdrawn upon demand prior to the expiration of the term, or that
    (ii) Permit such term deposits to be pledged as collateral for 
term or automatically-renewing overnight advances from the Reserve 
Bank.
    Retail customer or counterparty means a customer or counterparty 
that is:
    (1) An individual; or
    (2) A business customer, but solely if and to the extent that:
    (i) The [BANK] manages its transactions with the business 
customer, including deposits, unsecured funding, and credit facility 
and liquidity facility transactions, in the same way it manages its 
transactions with individuals;
    (ii) Transactions with the business customer have liquidity risk 
characteristics that are similar to comparable transactions with 
individuals; and
    (iii) The total aggregate funding raised from the business 
customer is less than $1.5 million.
    Retail deposit means a demand or term deposit that is placed 
with the [BANK] by a retail customer or counterparty, other than a 
brokered deposit.
    Retail mortgage means a mortgage that is primarily secured by a 
first or subsequent lien on one-to-four family residential property.
    Savings and loan holding company means a savings and loan 
holding company as defined in section 10 of the Home Owners' Loan 
Act (12 U.S.C. 1467a).
    SEC means the Securities and Exchange Commission.
    Secured funding transaction means any funding transaction that 
gives rise to a cash obligation of the [BANK] to a counterparty that 
is secured under applicable law by a lien on specifically designated 
assets owned by the [BANK] that gives the counterparty, as holder of 
the lien, priority over the assets in the case of bankruptcy, 
insolvency, liquidation, or resolution, including repurchase 
transactions, loans of collateral to the [BANK]'s customers to 
effect short positions, and other secured loans. Secured funding 
transactions also include borrowings from a Federal Reserve Bank.
    Secured lending transaction means any lending transaction that 
gives rise to a cash obligation of a counterparty to the [BANK] that 
is secured under applicable law by a lien on specifically designated 
assets owned by the counterparty and included in the [BANK]'s HQLA 
amount that gives the [BANK], as holder of the lien, priority over 
the assets in the case of bankruptcy, insolvency, liquidation, or 
resolution, including reverse repurchase transactions and securities 
borrowing transactions. If the specifically designated assets are 
not included in the [BANK]'s HQLA amount but are still held by the 
[BANK], then the transaction is an unsecured wholesale funding 
transaction. See unsecured wholesale funding.
    Securities Exchange Act means the Securities Exchange Act of 
1934 (15 U.S.C. 78a et seq.).
    Short position means a legally binding agreement to deliver a 
non-cash asset to a counterparty in the future.
    Sovereign entity means a central government (including the U.S. 
government) or an agency, department, ministry, or central bank of a 
central government.
    Special purpose entity means a company organized for a specific 
purpose, the activities of which are significantly limited to those 
appropriate to accomplish a specific purpose, and the structure of 
which is intended to isolate the credit risk of the special purpose 
entity.
    Stable retail deposit means a retail deposit that is entirely 
covered by deposit insurance and:
    (1) Is held by the depositor in a transactional account; or
    (2) The depositor that holds the account has another established 
relationship with the [BANK] such as another deposit account, a 
loan, bill payment services, or any similar service or product 
provided to the depositor that the [BANK] demonstrates to the 
satisfaction of the [AGENCY] would make deposit withdrawal highly 
unlikely during a liquidity stress event.
    Structured security means a security whose cash flow 
characteristics depend upon one or more indices or that have 
imbedded forwards, options, or other derivatives or a security where 
an investor's investment return and the issuer's payment obligations 
are contingent on, or highly sensitive to, changes in the value of 
underlying assets, indices, interest rates or cash flows.
    Structured transaction means a secured transaction in which 
repayment of obligations and other exposures to the transaction is 
largely derived, directly or indirectly, from the cash flow 
generated by the pool of assets that secures the obligations and 
other exposures to the transaction.
    Two-way market means a market where there are independent bona 
fide offers to buy and sell so that a price reasonably related to 
the last sales price or current bona fide competitive bid and offer 
quotations can be determined within one day and settled at that 
price within a relatively short time frame conforming to trade 
custom.
    U.S. government-sponsored enterprise means an entity established 
or chartered by the Federal government to serve public purposes 
specified by the United States Congress, but whose debt obligations 
are not explicitly guaranteed by the full faith and credit of the 
United States government.
    Unsecured wholesale funding means a liability or general 
obligation of the [BANK] to a wholesale customer or counterparty 
that is not secured under applicable law by a lien on specifically 
designated assets owned by the [BANK], including a wholesale 
deposit.
    Wholesale customer or counterparty means a customer or 
counterparty that is not a retail customer or counterparty.
    Wholesale deposit means a demand or term deposit that is 
provided by a wholesale customer or counterparty.

Sec.  ------.4 Certain operational requirements.

    (a) Qualifying Master netting agreements. In order to recognize 
an agreement as a qualifying master netting agreement as defined in 
Sec.  ----.3, a [BANK] must:
    (1) Conduct sufficient legal review to conclude with a well-
founded basis (and maintain sufficient written documentation of that 
legal review) that:
    (i) The agreement meets the requirements of the definition of 
qualifying master netting agreement in Sec.  ----.3; and
    (ii) In the event of a legal challenge (including one resulting 
from default or from receivership, insolvency, liquidation, or 
similar proceeding) the relevant judicial and administrative 
authorities would find the agreement to be legal, valid, binding, 
and enforceable under the law of the relevant jurisdictions; and
    (2) Establish and maintain written procedures to monitor 
possible changes in relevant law and to ensure that the agreement 
continues to satisfy the requirements of the definition of 
qualifying master netting agreement in Sec.  ----.3.
    (b) Operational deposits. In order to recognize a deposit as an 
operational deposit as defined in Sec.  ----.3:
    (1) The deposit must be held pursuant to a legally binding 
written agreement, the termination of which is subject to a minimum 
30 calendar-day notice period or significant termination costs are 
borne by the customer providing the deposit if a majority of the 
deposit balance is withdrawn from the operational deposit prior to 
the end of a 30 calendar-day notice period;
    (2) There must not be significant volatility in the average 
balance of the deposit;
    (3) The deposit must be held in an account designated as an 
operational account;
    (4) The customer must hold the deposit at the [BANK] for the 
primary purpose of obtaining the operational services provided by 
the [BANK];
    (5) The deposit account must not be designed to create an 
economic incentive for the customer to maintain excess funds therein 
through increased revenue, reduction in fees, or other offered 
economic incentives;
    (6) The [BANK] must demonstrate that the deposit is empirically 
linked to the operational services and that it has a methodology for 
identifying any excess amount, which must be excluded from the 
operational deposit amount;
    (7) The deposit must not be provided in connection with the 
[BANK]'s provision of

[[Page 71860]]

operational services to an investment company, non-regulated fund, 
or investment adviser; and
    (8) The deposits must not be for correspondent banking 
arrangements pursuant to which the [BANK] (as correspondent) holds 
deposits owned by another depository institution bank (as 
respondent) and the respondent temporarily places excess funds in an 
overnight deposit with the [BANK].

Subpart B--Liquidity Coverage Ratio

Sec.  ----.10 Liquidity coverage ratio.

    (a) Minimum liquidity coverage ratio requirement. Subject to the 
transition provisions in subpart F of this part, a [BANK] must 
calculate and maintain a liquidity coverage ratio that is equal to 
or greater than 1.0 on each business day in accordance with this 
part. A [BANK] must calculate its liquidity coverage ratio as of the 
same time on each business day (elected calculation time). The 
[BANK] must select this time by written notice to the [AGENCY] prior 
to the effective date of this rule. The [BANK] may not thereafter 
change its elected calculation time without written approval from 
the [AGENCY].
    (b) Calculation of the liquidity coverage ratio. A [BANK]'s 
liquidity coverage ratio equals:
    (1) The [BANK]'s HQLA amount as of the calculation date, 
calculated under subpart C of this part; divided by
    (2) The [BANK]'s total net cash outflow amount as of the 
calculation date, calculated under subpart D of this part.

Subpart C--High-Quality Liquid Assets

Sec.  ----.20 High-Quality Liquid Asset Criteria.

    (a) Level 1 liquid assets. An asset is a level 1 liquid asset if 
it meets all of the criteria set forth in paragraphs (d) and (e) of 
this section and is one of the following types of assets:
    (1) Reserve Bank balances;
    (2) Foreign withdrawable reserves;
    (3) A security that is issued by, or unconditionally guaranteed 
as to the timely payment of principal and interest by, the U.S. 
Department of the Treasury;
    (4) A security that is issued by, or unconditionally guaranteed 
as to the timely payment of principal and interest by, a U.S. 
government agency (other than the U.S. Department of the Treasury) 
whose obligations are fully and explicitly guaranteed by the full 
faith and credit of the United States government, provided that the 
security is liquid and readily-marketable;
    (5) A security that is issued by, or unconditionally guaranteed 
as to the timely payment of principal and interest by, a sovereign 
entity, the Bank for International Settlements, the International 
Monetary Fund, the European Central Bank and European Community, or 
a multilateral development bank, that is:
    (i) Assigned a 0 percent risk weight under subpart D of [AGENCY 
CAPITAL REGULATION] as of the calculation date;
    (ii) Liquid and readily-marketable;
    (iii) Issued by an entity whose obligations have a proven record 
as a reliable source of liquidity in repurchase or sales markets 
during stressed market conditions;
    (iv) Not an obligation of a regulated financial company, 
investment company, non-regulated fund, pension fund, investment 
adviser, or identified company, and not an obligation of a 
consolidated subsidiary of any of the foregoing; and
    (6) A security issued by, or unconditionally guaranteed as to 
the timely payment of principal and interest by, a sovereign entity 
that is not assigned a 0 percent risk weight under subpart D of 
[AGENCY CAPITAL REGULATION], where the sovereign entity issues the 
security in its own currency, the security is liquid and readily-
marketable, and the [BANK] holds the security in order to meet its 
net cash outflows in the jurisdiction of the sovereign entity, as 
calculated under subpart D of [AGENCY CAPITAL REGULATION].
    (b) Level 2A liquid assets. An asset is a level 2A liquid asset 
if the asset is liquid and readily-marketable, meets all of the 
criteria set forth in paragraphs (d) and (e) of this section, and is 
one of the following types of assets:
    (1) A security issued by, or guaranteed as to the timely payment 
of principal and interest by, a U.S. government-sponsored 
enterprise, that is investment grade under 12 CFR part 1 as of the 
calculation date, provided that the claim is senior to preferred 
stock;
    (2) A security that is issued by, or guaranteed as to the timely 
payment of principal and interest by, a sovereign entity or 
multilateral development bank that is:
    (i) Not included in level 1 liquid assets;
    (ii) Assigned no higher than a 20 percent risk weight under 
subpart D of [AGENCY CAPITAL REGULATION] as of the calculation date;
    (iii) Issued by an entity whose obligations have a proven record 
as a reliable source of liquidity in repurchase or sales markets 
during stressed market conditions demonstrated by:
    (A) The market price of the security or equivalent securities of 
the issuer declining by no more than 10 percent during a 30 
calendar-day period of significant stress, or
    (B) The market haircut demanded by counterparties to secured 
lending and secured funding transactions that are collateralized by 
the security or equivalent securities of the issuer increasing by no 
more than 10 percentage points during a 30 calendar-day period of 
significant stress; and
    (iv) Not an obligation of a regulated financial company, 
investment company, non-regulated fund, pension fund, investment 
adviser, or identified company, and not an obligation of a 
consolidated subsidiary of any of the foregoing.
    (c) Level 2B liquid assets. An asset is a level 2B liquid asset 
if the asset is liquid and readily-marketable, meets all of the 
criteria set forth in paragraphs (d) and (e) of this section, and is 
one of the following types of assets:
    (1) A publicly traded corporate debt security that is:
    (i) Investment grade under 12 CFR part 1 as of the calculation 
date;
    (ii) Issued by an entity whose obligations have a proven record 
as a reliable source of liquidity in repurchase or sales markets 
during stressed market conditions, demonstrated by:
    (A) The market price of the publicly traded corporate debt 
security or equivalent securities of the issuer declining by no more 
than 20 percent during a 30 calendar-day period of significant 
stress, or
    (B) The market haircut demanded by counterparties to secured 
lending and secured funding transactions that are collateralized by 
the publicly traded corporate debt security or equivalent securities 
of the issuer increasing by no more than 20 percentage points during 
a 30 calendar-day period of significant stress; and
    (iii) Not an obligation of a regulated financial company, 
investment company, non-regulated fund, pension fund, investment 
adviser, or identified company, and not an obligation of a 
consolidated subsidiary of any of the foregoing; or
    (2) A publicly traded common equity share that is:
    (i) Included in:
    (A) The Standard & Poor's 500 Index;
    (B) An index that a [BANK]'s supervisor in a foreign 
jurisdiction recognizes for purposes of including equity shares in 
level 2B liquid assets under applicable regulatory policy, if the 
share is held in that foreign jurisdiction; or
    (C) Any other index for which the [BANK] can demonstrate to the 
satisfaction of the [AGENCY] that the equities represented in the 
index are as liquid and readily marketable as equities included in 
the Standard & Poor's 500 Index;
    (ii) Issued in:
    (A) U.S. dollars; or
    (B) In the currency of a jurisdiction where the [BANK] operates 
and the [BANK] holds the common equity share in order to cover its 
net cash outflows in that jurisdiction, as calculated under subpart 
D of this part;
    (iii) Issued by an entity whose publicly traded common equity 
shares have a proven record as a reliable source of liquidity in 
repurchase or sales markets during stressed market conditions, 
demonstrated by:
    (A) The market price of the security or equivalent securities of 
the issuer declining by no more than 40 percent during a 30 
calendar-day period of significant stress, or
    (B) The market haircut demanded by counterparties to securities 
borrowing and lending transactions that are collateralized by the 
publicly traded common equity shares or equivalent securities of the 
issuer increasing by no more than 40 percentage points, during a 30 
calendar day period of significant stress;
    (iv) Not issued by a regulated financial company, investment 
company, non-regulated fund, pension fund, investment adviser, or 
identified company, and not issued by a consolidated subsidiary of 
any of the foregoing;
    (v) If held by a depository institution, is not acquired in 
satisfaction of a debt previously contracted (DPC); and
    (vi) If held by a consolidated subsidiary of a depository 
institution, the depository institution can include the publicly 
traded common equity share in its level 2B liquid assets only if the 
share is held to cover net cash outflows of the depository 
institution's consolidated subsidiary, as calculated by the [BANK] 
under this part.

[[Page 71861]]

    (d) Operational requirements for HQLA. With respect to each 
asset that a [BANK] includes in its HQLA amount, a [BANK] must meet 
all of the following operational requirements:
    (1) The [BANK] must have the operational capability to monetize 
the HQLA by:
    (i) Implementing and maintaining appropriate procedures and 
systems to monetize any HQLA at any time in accordance with relevant 
standard settlement periods and procedures; and
    (ii) Periodically monetize a sample of HQLA that reasonably 
reflects the composition of the [BANK]'s HQLA amount, including with 
respect to asset type, maturity, and counterparty characteristics;
    (2) The [BANK] must implement policies that require all HQLA to 
be under the control of the management function in the [BANK] that 
is charged with managing liquidity risk, and this management 
function evidences its control over the HQLA by either:
    (i) Segregating the assets from other assets, with the sole 
intent to use the assets as a source of liquidity; or
    (ii) Demonstrating the ability to monetize the assets and making 
the proceeds available to the liquidity management function without 
conflicting with a business risk or management strategy of the 
[BANK];
    (3) The [BANK] must include in its total net cash outflow amount 
under subpart D of this part the amount of cash outflows that would 
result from the termination of any specific transaction hedging HQLA 
included in its HQLA amount; and
    (4) The [BANK] must implement and maintain policies and 
procedures that determine the composition of the assets in its HQLA 
amount on a daily basis, by:
    (i) Identifying where its HQLA is held by legal entity, 
geographical location, currency, custodial or bank account, or other 
relevant identifying factor as of the calculation date;
    (ii) Determining HQLA included in the [BANK]'s HQLA amount meet 
the criteria set forth in this section; and
    (iii) Ensuring the appropriate diversification of the assets 
included in the [BANK]'s HQLA amount by asset type, counterparty, 
issuer, currency, borrowing capacity, or other factors associated 
with the liquidity risk of the assets.
    (e) Generally applicable criteria for HQLA. Assets that a [BANK] 
includes in its HQLA amount must meet all of the following criteria:
    (1) The assets are unencumbered in accordance with the following 
criteria:
    (i) The assets are free of legal, regulatory, contractual, or 
other restrictions on the ability of the [BANK] to monetize the 
asset; and
    (ii) The assets are not pledged, explicitly or implicitly, to 
secure or to provide credit enhancement to any transaction, except 
that the assets may be pledged to a central bank or a U.S. 
government-sponsored enterprise if potential credit secured by the 
assets is not currently extended to the [BANK] or its consolidated 
subsidiaries.
    (2) The asset is not:
    (i) A client pool security held in a segregated account; or
    (ii) Cash received from a secured funding transaction involving 
client pool securities that were held in a segregated account.
    (3) For HQLA held in a legal entity that is a U.S. consolidated 
subsidiary of a [BANK]:
    (i) If the U.S. consolidated subsidiary is subject to a minimum 
liquidity standard under this part, the [BANK] may include the 
assets in its HQLA amount up to:
    (A) The amount of net cash outflows of the U.S. consolidated 
subsidiary calculated by the U.S. consolidated subsidiary for its 
own minimum liquidity standard under this part; plus
    (B) Any additional amount of assets, including proceeds from the 
monetization of assets, that would be available for transfer to the 
top-tier [BANK] during times of stress without statutory, 
regulatory, contractual, or supervisory restrictions, including 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
12 U.S.C. 371c-1) and Regulation W (12 CFR part 223);
    (ii) If the U.S. consolidated subsidiary is not subject to a 
minimum liquidity standard under this part, the [BANK] may include 
the assets in its HQLA amount up to:
    (A) The amount of the net cash outflows of the U.S. consolidated 
subsidiary as of the 30th calendar day after the calculation date, 
as calculated by the [BANK] for the [BANK]'s minimum liquidity 
standard under this part; plus
    (B) Any additional amount of assets, including proceeds from the 
monetization of assets, that would be available for transfer to the 
top-tier [BANK] during times of stress without statutory, 
regulatory, contractual, or supervisory restrictions, including 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
12 U.S.C. 371c-1) and Regulation W (12 CFR part 223); and
    (4) For HQLA held by a consolidated subsidiary of the [BANK] 
that is organized under the laws of a foreign jurisdiction, the 
[BANK] may only include the assets in its HQLA amount up to:
    (i) The amount of net cash outflows of the consolidated 
subsidiary as of the 30th calendar day after the calculation date, 
as calculated by the [BANK] for the [BANK]'s minimum liquidity 
standard under this part; plus
    (ii) Any additional amount of assets that are available for 
transfer to the top-tier [BANK] during times of stress without 
statutory, regulatory, contractual, or supervisory restrictions.
    (5) The [BANK] must not include in its HQLA amount any assets, 
or HQLA generated from an asset, that it received under a 
rehypothecation right if the beneficial owner has a contractual 
right to withdraw the assets without remuneration at any time during 
the 30 calendar days following the calculation date;
    (6) The [BANK] has not designated the assets to cover 
operational costs.
    (f) Maintenance of U.S. HQLA. A [BANK] is generally expected to 
maintain in the United States an amount and type of HQLA that is 
sufficient to meet its total net cash outflow amount in the United 
States under subpart D of this part.

Sec.  ----.21 High-Quality Liquid Asset Amount.

    (a) Calculation of the HQLA amount. As of the calculation date, 
a [BANK]'s HQLA amount equals:
    (1) The level 1 liquid asset amount; plus
    (2) The level 2A liquid asset amount; plus
    (3) The level 2B liquid asset amount; minus
    (4) The greater of:
    (i) The unadjusted excess HQLA amount; or
    (ii) The adjusted excess HQLA amount.
    (b) Calculation of liquid asset amounts. (1) Level 1 liquid 
asset amount. The level 1 liquid asset amount equals the fair value 
(as determined under GAAP) of all level 1 liquid assets held by the 
[BANK] as of the calculation date, less required reserves under 
section 204.4 of Regulation D (12 CFR 204.4).
    (2) Level 2A liquid asset amount. The level 2A liquid asset 
amount equals 85 percent of the fair value (as determined under 
GAAP) of all level 2A liquid assets held by the [BANK] as of the 
calculation date.
    (3) Level 2B liquid asset amount. The level 2B liquid asset 
amount equals 50 percent of the fair value (as determined under 
GAAP) of all level 2B liquid assets held by the [BANK] as of the 
calculation date.
    (c) Calculation of the unadjusted excess HQLA amount. As of the 
calculation date, the unadjusted excess HQLA amount equals:
    (1) The level 2 cap excess amount; plus
    (2) The level 2B cap excess amount.
    (d) Calculation of the level 2 cap excess amount. As of the 
calculation date, the level 2 cap excess amount equals the greater 
of:
    (1) The level 2A liquid asset amount plus the level 2B liquid 
asset amount minus 0.6667 times the level 1 liquid asset amount; or
    (2) 0.
    (e) Calculation of the level 2B cap excess amount. As of the 
calculation date, the level 2B excess amount equals the greater of:
    (1) The level 2B liquid asset amount minus the level 2 cap 
excess amount minus 0.1765 times the sum of the level 1 liquid asset 
amount and the level 2A liquid asset amount; or
    (2) 0.
    (f) Calculation of adjusted liquid asset amounts. (1) Adjusted 
level 1 liquid asset amount. A [BANK]'s adjusted level 1 liquid 
asset amount equals the fair value (as determined under GAAP) of all 
level 1 liquid assets that would be held by the [BANK] upon the 
unwind of any secured funding transaction, secured lending 
transaction, asset exchange, or collateralized derivatives 
transaction that matures within 30 calendar days of the calculation 
date and where the [BANK] and the counterparty exchange HQLA.
    (2) Adjusted level 2A liquid asset amount. A [BANK]'s adjusted 
level 2A liquid asset amount equals 85 percent of the fair value (as 
determined under GAAP) of all level 2A liquid assets that would be 
held by the [BANK] upon the unwind of any secured funding 
transaction, secured lending transaction, asset exchange, or 
collateralized derivatives transaction that matures within 30 
calendar days of the calculation date and where the [BANK] and the 
counterparty exchange HQLA.

[[Page 71862]]

    (3) Adjusted level 2B liquid asset amount. A [BANK]'s adjusted 
level 2B liquid asset amount equals 50 percent of the fair value (as 
determined under GAAP) of all level 2B liquid assets that would be 
held by the [BANK] upon the unwind of any secured funding 
transaction, secured lending transaction, asset exchange, or 
collateralized derivatives transaction that matures within 30 
calendar days of the calculation date and where the [BANK] and the 
counterparty exchange HQLA.
    (g) Calculation of the adjusted excess HQLA amount. As of the 
calculation date, the adjusted excess HQLA amount equals:
    (1) The adjusted level 2 cap excess amount; plus
    (2) The adjusted level 2B cap excess amount.
    (h) Calculation of the adjusted level 2 cap excess amount. As of 
the calculation date, the adjusted level 2 cap excess amount equals 
the greater of:
    (1) The adjusted level 2A liquid asset amount plus the adjusted 
level 2B liquid asset amount minus 0.6667 times the adjusted level 1 
liquid asset amount; or
    (2) 0.
    (i) Calculation of the adjusted level 2B excess amount. As of 
the calculation date, the adjusted level 2B excess liquid asset 
amount equals the greater of:
    (1) The adjusted level 2B liquid asset amount minus the adjusted 
level 2 cap excess amount minus 0.1765 times the sum of the adjusted 
level 1 liquid asset amount and the adjusted level 2A liquid asset 
amount; or
    (2) 0.

Subpart D--Total Net Cash Outflow

Sec.  ----.30 Total net cash outflow amount.

    As of the calculation date, a [BANK]'s total net cash outflow 
amount equals the largest difference between cumulative inflows and 
cumulative outflows, as calculated for each of the next 30 calendar 
days after the calculation date as:
    (a) The sum of the outflow amounts calculated under Sec. Sec.  
----.32(a) through ----.32(g)(2); plus
    (b) The sum of the outflow amounts calculated under Sec. Sec.  
----.32(g)(3) through ----.32(l) for instruments or transactions 
that have no contractual maturity date; plus
    (c) The sum of the outflow amounts for instruments or 
transactions identified in Sec. Sec.  ----.32(g)(3) through --
--.32(l) that have a contractual maturity date up to and including 
that calendar day; less
    (d) The lesser of:
    (1) The sum of the inflow amounts under Sec. Sec.  ----.33(b) 
through ----.33(f), where the instrument or transaction has a 
contractual maturity date up to and including that calendar day, and
    (2) 75 percent of the sum of paragraphs (a), (b), and (c) of 
this section as calculated for that calendar day.

Sec.  ----.31 Determining maturity.

    (a) For purposes of calculating its liquidity coverage ratio and 
the components thereof under this subpart, a [BANK] shall assume an 
asset or transaction matures:
    (1) With respect to an instrument or transaction subject to 
Sec.  ----.32, on the earliest possible contractual maturity date or 
the earliest possible date the transaction could occur, taking into 
account any option that could accelerate the maturity date or the 
date of the transaction as follows:
    (i) If an investor or funds provider has an option that would 
reduce the maturity, the [BANK] must assume that the investor or 
funds provider will exercise the option at the earliest possible 
date;
    (ii) If a [BANK] has an option that would extend the maturity of 
an obligation it issued, the [BANK] must assume the [BANK] will not 
exercise that option to extend the maturity; and
    (iii) If an option is subject to a contractually defined notice 
period, the [BANK] must determine the earliest possible contractual 
maturity date regardless of the notice period.
    (2) With respect to an instrument or transaction subject to 
Sec.  ----.33, on the latest possible contractual maturity date or 
the latest possible date the transaction could occur, taking into 
account any option that could extend the maturity date or the date 
of the transaction as follows:
    (i) If the borrower has an option that would extend the 
maturity, the [BANK] must assume that the borrower will exercise the 
option to extend the maturity to the latest possible date;
    (ii) If a [BANK] has an option that would accelerate a maturity 
of an instrument or transaction, the [BANK] must assume the [BANK] 
will not exercise the option to accelerate the maturity; and
    (iii) If an option is subject to a contractually defined notice 
period, the [BANK] must determine the latest possible contractual 
maturity date based on the borrower using the entire notice period.
    (b) [Reserved]

Sec.  ----.32 Outflow amounts.

    (a) Unsecured retail funding outflow amount. A [BANK]'s 
unsecured retail funding outflow amount as of the calculation date 
includes (regardless of maturity):
    (1) 3 percent of all stable retail deposits held at the [BANK];
    (2) 10 percent of all other retail deposits held at the [BANK]; 
and
    (3) 100 percent of all funding from a retail customer or 
counterparty that is not a retail deposit or a brokered deposit 
provided by a retail customer or counterparty.
    (b) Structured transaction outflow amount. If a [BANK] is a 
sponsor of a structured transaction, without regard to whether the 
issuing entity is consolidated on the [BANK]'s balance sheet under 
GAAP, the structured transaction outflow amount for each structured 
transaction as of the calculation date is the greater of:
    (1) 100 percent of the amount of all debt obligations of the 
issuing entity that mature 30 calendar days or less from such 
calculation date and all commitments made by the issuing entity to 
purchase assets within 30 calendar days or less from such 
calculation date; and
    (2) The maximum contractual amount of funding the [BANK] may be 
required to provide to the issuing entity 30 calendar days or less 
from such calculation date through a liquidity facility, a return or 
repurchase of assets from the issuing entity, or other funding 
agreement.
    (c) Net derivative cash outflow amount. The net derivative cash 
outflow amount as of the calculation date is the sum of the net 
derivative cash outflow, if greater than zero, for each 
counterparty. The net derivative cash outflow for a counterparty is 
the sum of the payments and collateral that the [BANK] will make or 
deliver to the counterparty 30 calendar days or less from the 
calculation date under derivative transactions less, if the 
derivative transactions are subject to a qualifying master netting 
agreement, the sum of the payments and collateral that the [BANK] 
will receive from the counterparty 30 calendar days or less from the 
calculation date under derivative transactions. This paragraph does 
not apply to forward sales of mortgage loans and any derivatives 
that are mortgage commitments subject to paragraph (d) of this 
section.
    (d) Mortgage commitment outflow amount. The mortgage commitment 
outflow amount as of a calculation date is 10 percent of the amount 
of funds the [BANK] has contractually committed for its own 
origination of retail mortgages that can be drawn upon 30 calendar 
days or less from such calculation date.
    (e) Commitment outflow amount. (1) A [BANK]'s commitment outflow 
amount as of the calculation date includes:
    (i) 0 percent of the undrawn amount of all committed credit and 
liquidity facilities extended by a [BANK] that is a depository 
institution to an affiliated depository institution that is subject 
to a minimum liquidity standard under this part;
    (ii) 5 percent of the undrawn amount of all committed credit and 
liquidity facilities extended by the [BANK] to retail customers or 
counterparties;
    (iii)(A) 10 percent of the undrawn amount of all committed 
credit facilities; and
    (B) 30 percent of the undrawn amount of all committed liquidity 
facilities extended by the [BANK] to a wholesale customer or 
counterparty that is not a regulated financial company, investment 
company, non-regulated fund, pension fund, investment adviser, or 
identified company, or to a consolidated subsidiary of any of the 
foregoing;
    (iv) 50 percent of the undrawn amount of all committed credit 
and liquidity facilities extended by the [BANK] to depository 
institutions, depository institution holding companies, and foreign 
banks, excluding commitments described in paragraph (e)(1)(i) of 
this section;
    (v)(A) 40 percent of the undrawn amount of all committed credit 
facilities; and
    (B) 100 percent of the undrawn amount of all committed liquidity 
facilities extended by the [BANK] to a regulated financial company, 
investment company, non-regulated fund, pension fund, investment 
adviser, or identified company, or to a consolidated subsidiary of 
any of the foregoing, excluding other commitments described in 
paragraph (e)(1)(i) or (e)(1)(iv) of this section;
    (vi) 100 percent of the undrawn amount of all committed credit 
and liquidity facilities extended to special purpose entities,

[[Page 71863]]

excluding liquidity facilities included in Sec.  --.32(b)(2); and
    (vii) 100 percent of the undrawn amount of all other committed 
credit or liquidity facilities extended by the [BANK].
    (2) For the purposes of this paragraph (e), the undrawn amount 
is:
    (i) For a committed credit facility, the entire undrawn amount 
of the facility that could be drawn upon within 30 calendar days of 
the calculation date under the governing agreement, less the amount 
of level 1 liquid assets and 85 percent of the amount of level 2A 
liquid assets securing the facility; and
    (ii) For a committed liquidity facility, the entire undrawn 
amount of the facility, that could be drawn upon within 30 calendar 
days of the calculation date under the governing agreement, less:
    (A) The amount of level 1 liquid assets and level 2A liquid 
assets securing the portion of the facility that could be drawn upon 
within 30 calendar days of the calculation date under the governing 
agreement; and
    (B) That portion of the facility that supports obligations of 
the [BANK]'s customer that do not mature 30 calendar days or less 
from such calculation date. If facilities have aspects of both 
credit and liquidity facilities, the facility must be classified as 
a liquidity facility.
    (3) For the purposes of this paragraph (e), the amount of level 
1 liquid assets and level 2A liquid assets securing a committed 
credit or liquidity facility is the fair value (as determined under 
GAAP) of level 1 liquid assets and 85 percent of the fair value (as 
determined under GAAP) of level 2A liquid assets that are required 
to be posted as collateral by the counterparty to secure the 
facility, provided that the following conditions are met as of the 
calculation date and for the 30 calendar days following such 
calculation date:
    (i) The assets pledged meet the criteria for level 1 liquid 
assets or level 2A liquid assets in Sec.  ----.20; and
    (ii) The [BANK] has not included the assets in its HQLA amount 
under subpart C of this part.
    (f) Collateral outflow amount. The collateral outflow amount as 
of the calculation date includes:
    (1) Changes in financial condition. 100 percent of all 
additional amounts of collateral the [BANK] could be contractually 
required to post or to fund under the terms of any transaction as a 
result of a change in the [BANK]'s financial condition.
    (2) Potential valuation changes. 20 percent of the fair value 
(as determined under GAAP) of any collateral posted to a 
counterparty by the [BANK] that is not a level 1 liquid asset.
    (3) Excess collateral. 100 percent of the fair value (as 
determined under GAAP) of collateral that:
    (i) The [BANK] may be required by contract to return to a 
counterparty because the collateral posted to the [BANK] exceeds the 
current collateral requirement of the counterparty under the 
governing contract;
    (ii) Is not segregated from the [BANK]'s other assets; and
    (iii) Is not already excluded from the [BANK]'s HQLA amount 
under Sec.  ----.20(e)(5).
    (4) Contractually required collateral. 100 percent of the fair 
value (as determined under GAAP) of collateral that the [BANK] is 
contractually required to post to a counterparty and, as of such 
calculation date, the [BANK] has not yet posted;
    (5) Collateral substitution. (i) 0 percent of the fair value of 
collateral posted to the [BANK] by a counterparty that the [BANK] 
includes in its HQLA amount as level 1 liquid assets, where under 
the contract governing the transaction the counterparty may replace 
the posted collateral with assets that qualify as level 1 liquid 
assets without the consent of the [BANK];
    (ii) 15 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 1 liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that qualify as level 2A liquid assets without the consent of 
the [BANK];
    (iii) 50 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 1 liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that qualify as level 2B liquid assets without the consent of 
the [BANK];
    (iv) 100 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 1 liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that do not qualify as HQLA without the consent of the 
[BANK];
    (v) 0 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 2A liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that qualify as level 1 or level 2A liquid assets without the 
consent of the [BANK];
    (vi) 35 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 2A liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that qualify as level 2B liquid assets without the consent of 
the [BANK];
    (vii) 85 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 2A liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that do not qualify as HQLA without the consent of the 
[BANK];
    (viii) 0 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 2B liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that qualify as HQLA without the consent of the [BANK];
    (ix) 50 percent of the fair value of collateral posted to the 
[BANK] by a counterparty that the [BANK] includes in its HQLA amount 
as level 2B liquid assets, where under the contract governing the 
transaction the counterparty may replace the posted collateral with 
assets that do not qualify as HQLA without the consent of the 
[BANK]; and
    (6) Derivative collateral change. The absolute value of the 
largest 30-consecutive calendar day cumulative net mark-to-market 
collateral outflow or inflow resulting from derivative transactions 
realized during the preceding 24 months.
    (g) Brokered deposit outflow amount for retail customers or 
counterparties. The brokered deposit outflow amount for retail 
customers or counterparties as of the calculation date includes:
    (1) 100 percent of all brokered deposits at the [BANK] provided 
by a retail customer or counterparty that are not described in 
paragraphs (g)(3) through (g)(7) of this section and which mature 30 
calendar days or less from the calculation date;
    (2) 10 percent of all brokered deposits at the [BANK] provided 
by a retail customer or counterparty that are not described in 
paragraphs (g)(3) through (g)(7) of this section and which mature 
later than 30 calendar days from the calculation date;
    (3) 10 percent of all reciprocal brokered deposits at the [BANK] 
provided by a retail customer or counterparty, where the entire 
amount is covered by deposit insurance;
    (4) 25 percent of all reciprocal brokered deposits at the [BANK] 
provided by a retail customer or counterparty, where less than the 
entire amount is covered by deposit insurance;
    (5) 10 percent of all brokered sweep deposits at the [BANK] 
provided by a retail customer or counterparty:
    (i) That are deposited in accordance with a contract between the 
retail customer or counterparty and the [BANK], a consolidated 
subsidiary of the [BANK], or a company that is a consolidated 
subsidiary of the same top-tier company of which the [BANK] is a 
consolidated subsidiary; and
    (ii) Where the entire amount of the deposits is covered by 
deposit insurance;
    (6) 25 percent of all brokered--sweep deposits at the [BANK] 
provided by a retail customer or counterparty:
    (i) That are not deposited in accordance with a contract between 
the retail customer or counterparty and the [BANK], a consolidated 
subsidiary of the [BANK], or a company that is a consolidated 
subsidiary of the same top-tier company of which the [BANK] is a 
consolidated subsidiary; and
    (ii) Where the entire amount of the deposits is covered by 
deposit insurance; and
    (7) 40 percent of all brokered sweep deposits at the [BANK] 
provided by a retail customer or counterparty where less than the 
entire amount of the deposit balance is covered by deposit 
insurance.
    (h) Unsecured wholesale funding outflow amount. A [BANK]'s 
unsecured wholesale funding outflow amount as of the calculation 
date includes:
    (1) For unsecured wholesale funding that is not an operational 
deposit and is not

[[Page 71864]]

provided by a regulated financial company, investment company, non-
regulated fund, pension fund, investment adviser, identified 
company, or consolidated subsidiary of any of the foregoing:
    (i) 20 percent of all such funding (not including brokered 
deposits), where the entire amount is covered by deposit insurance;
    (ii) 40 percent of all such funding, where:
    (A) Less than the entire amount is covered by deposit insurance, 
or
    (B) The funding is a brokered deposit;
    (2) 100 percent of all unsecured wholesale funding that is not 
an operational deposit and is not included in paragraph (h)(1) of 
this section, including funding provided by a consolidated 
subsidiary of the [BANK], or a company that is a consolidated 
subsidiary of the same top-tier company of which the [BANK] is a 
consolidated subsidiary;
    (3) 5 percent of all operational deposits, other than escrow 
accounts, where the entire deposit amount is covered by deposit 
insurance;
    (4) 25 percent of all operational deposits not included in 
paragraph (h)(3) of this section; and
    (5) 100 percent of all unsecured wholesale funding that is not 
otherwise described in this paragraph (h).
    (i) Debt security outflow amount. A [BANK]'s debt security 
outflow amount for debt securities issued by the [BANK] that mature 
more than 30 calendar days after the calculation date and for which 
the [BANK] is the primary market maker in such debt securities 
includes:
    (1) 3 percent of all such debt securities that are not 
structured securities; and
    (2) 5 percent of all such debt securities that are structured 
securities.
    (j) Secured funding and asset exchange outflow amount. (1) A 
[BANK]'s secured funding outflow amount as of the calculation date 
includes:
    (i) 0 percent of all funds the [BANK] must pay pursuant to 
secured funding transactions, to the extent that the funds are 
secured by level 1 liquid assets;
    (ii) 15 percent of all funds the [BANK] must pay pursuant to 
secured funding transactions, to the extent that the funds are 
secured by level 2A liquid assets;
    (iii) 25 percent of all funds the [BANK] must pay pursuant to 
secured funding transactions with sovereign, multilateral 
development banks, or U.S. government-sponsored enterprises that are 
assigned a risk weight of 20 percent under subpart D of [AGENCY 
CAPITAL REGULATION], to the extent that the funds are not secured by 
level 1 or level 2A liquid assets;
    (iv) 50 percent of all funds the [BANK] must pay pursuant to 
secured funding transactions, to the extent that the funds are 
secured by level 2B liquid assets;
    (v) 50 percent of all funds received from secured funding 
transactions that are customer short positions where the customer 
short positions are covered by other customers' collateral and the 
collateral does not consist of HQLA; and
    (vi) 100 percent of all other funds the [BANK] must pay pursuant 
to secured funding transactions, to the extent that the funds are 
secured by assets that are not HQLA.
    (2) A [BANK]'s asset exchange outflow amount as of the 
calculation date includes:
    (i) 0 percent of the fair value (as determined under GAAP) of 
the level 1 liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive level 1 
liquid assets from the asset exchange counterparty;
    (ii) 15 percent of the fair value (as determined under GAAP) of 
the level 1 liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive level 2A 
liquid assets from the asset exchange counterparty;
    (iii) 50 percent of the fair value (as determined under GAAP) of 
the level 1 liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive level 2B 
liquid assets from the asset exchange counterparty;
    (iv) 100 percent of the fair value (as determined under GAAP) of 
the level 1 liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive assets 
that are not HQLA from the asset exchange counterparty;
    (v) 0 percent of the fair value (as determined under GAAP) of 
the level 2A liquid assets that [BANK] must post to a counterparty 
pursuant to asset exchanges where [BANK] will receive level 1 or 
level 2A liquid assets from the asset exchange counterparty;
    (vi) 35 percent of the fair value (as determined under GAAP) of 
the level 2A liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive level 2B 
liquid assets from the asset exchange counterparty;
    (vii) 85 percent of the fair value (as determined under GAAP) of 
the level 2A liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive assets 
that are not HQLA from the asset exchange counterparty;
    (viii) 0 percent of the fair value (as determined under GAAP) of 
the level 2B liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive HQLA from 
the asset exchange counterparty; and
    (ix) 50 percent of the fair value (as determined under GAAP) of 
the level 2B liquid assets the [BANK] must post to a counterparty 
pursuant to asset exchanges where the [BANK] will receive assets 
that are not HQLA from the asset exchange counterparty.
    (k) Foreign central bank borrowing outflow amount. A [BANK]'s 
foreign central bank borrowing outflow amount is, in a foreign 
jurisdiction where the [BANK] has borrowed from the jurisdiction's 
central bank, the outflow amount assigned to borrowings from central 
banks in a minimum liquidity standard established in that 
jurisdiction. If the foreign jurisdiction has not specified a 
central bank borrowing outflow amount in a minimum liquidity 
standard, the foreign central bank borrowing outflow amount must be 
calculated under paragraph (j) of this section.
    (l) Other contractual outflow amount. A [BANK]'s other 
contractual outflow amount is 100 percent of funding or amounts 
payable by the [BANK] to counterparties under legally binding 
agreements that are not otherwise specified in this section.
    (m) Excluded amounts for intragroup transactions. The outflow 
amounts set forth in this section do not include amounts arising out 
of transactions between:
    (1) The [BANK] and a consolidated subsidiary of the [BANK]; or
    (2) A consolidated subsidiary of the [BANK] and another 
consolidated subsidiary of the [BANK].

Sec.  ----.33 Inflow amounts.

    (a) The inflows in paragraphs (b) through (g) of this section do 
not include:
    (1) Amounts the [BANK] holds in operational deposits at other 
regulated financial companies;
    (2) Amounts the [BANK] expects, or is contractually entitled to 
receive, 30 calendar days or less from the calculation date due to 
forward sales of mortgage loans and any derivatives that are 
mortgage commitments subject to Sec.  ----.32(d);
    (3) The amount of any credit or liquidity facilities extended to 
the [BANK];
    (4) The amount of any asset included in the [BANK]'s HQLA amount 
and any amounts payable to the [BANK] with respect to those assets;
    (5) Any amounts payable to the [BANK] from an obligation of a 
customer or counterparty that is a nonperforming asset as of the 
calculation date or that the [BANK] has reason to expect will become 
a nonperforming exposure 30 calendar days or less from the 
calculation date; and
    (6) Amounts payable to the [BANK] on any exposure that has no 
contractual maturity date or that matures after 30 calendar days of 
the calculation date.
    (b) Net derivative cash inflow amount. The net derivative cash 
inflow amount as of the calculation date is the sum of the net 
derivative cash inflow, if greater than zero, for each counterparty. 
The net derivative cash inflow amount for a counterparty is the sum 
of the payments and collateral that the [BANK] will receive from the 
counterparty 30 calendar days or less from the calculation date 
under derivative transactions less, if the derivative transactions 
are subject to a qualifying master netting agreement, the sum amount 
of the payments and collateral that the [BANK] will make or deliver 
to the counterparty 30 calendar days or less from the calculation 
date under derivative transactions. This paragraph does not apply to 
amounts excluded from inflows under paragraph (a)(2) of this 
section.
    (c) Retail cash inflow amount. The retail cash inflow amount as 
of the calculation date includes 50 percent of all payments 
contractually payable to the [BANK] from retail customers or 
counterparties.
    (d) Unsecured wholesale cash inflow amount. The unsecured 
wholesale cash inflow amount as of the calculation date includes:

[[Page 71865]]

    (1) 100 percent of all payments contractually payable to the 
[BANK] from regulated financial companies, investment companies, 
non-regulated funds, pension funds, investment advisers, or 
identified companies, or from a consolidated subsidiary of any of 
the foregoing, or central banks; and
    (2) 50 percent of all payments contractually payable to the 
[BANK] from wholesale customers or counterparties that are not 
regulated financial companies, investment companies, non-regulated 
funds, pension funds, investment advisers, or identified companies, 
or consolidated subsidiaries of any of the foregoing, provided that, 
with respect to revolving credit facilities, the amount of the 
existing loan is not included and the remaining undrawn balance is 
included in the outflow amount under Sec.  ----.32(e)(1).
    (e) Securities cash inflow amount. The securities cash inflow 
amount as of the calculation date includes 100 percent of all 
contractual payments due to the [BANK] on securities it owns that 
are not HQLA.
    (f) Secured lending and asset exchange cash inflow amount. (1) A 
[BANK]'s secured lending cash inflow amount as of the calculation 
date includes:
    (i) 0 percent of all contractual payments due to the [BANK] 
pursuant to secured lending transactions, to the extent that the 
payments are secured by level 1 liquid assets, provided that the 
level 1 liquid assets are included in the [BANK]'s HQLA amount.
    (ii) 15 percent of all contractual payments due to the [BANK] 
pursuant to secured lending transactions, to the extent that the 
payments are secured by level 2A liquid assets, provided that the 
[BANK] is not using the collateral to cover any of its short 
positions, and provided that the level 2A liquid assets are included 
in the [BANK]'s HQLA amount;
    (iii) 50 percent of all contractual payments due to the [BANK] 
pursuant to secured lending transactions, to the extent that the 
payments are secured by level 2B liquid assets, provided that the 
[BANK] is not using the collateral to cover any of its short 
positions, and provided that the level 2B liquid assets are included 
in the [BANK]'s HQLA amount;
    (iv) 100 percent of all contractual payments due to the [BANK] 
pursuant to secured lending transactions, to the extent that the 
payments are secured by assets that are not HQLA, provided that the 
[BANK] is not using the collateral to cover any of its short 
positions; and
    (v) 50 percent of all contractual payments due to the [BANK] 
pursuant to collateralized margin loans extended to customers, 
provided that the loans are not secured by HQLA and the [BANK] is 
not using the collateral to cover any of its short positions.
    (2) A [BANK]'s asset exchange inflow amount as of the 
calculation date includes:
    (i) 0 percent of the fair value (as determined under GAAP) of 
level 1 liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where [BANK] must post level 1 liquid 
assets to the asset exchange counterparty;
    (ii) 15 percent of the fair value (as determined under GAAP) of 
level 1 liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post level 2A 
liquid assets to the asset exchange counterparty;
    (iii) 50 percent of the fair value (as determined under GAAP) of 
level 1 liquid assets the [BANK] will receive from counterparty 
pursuant to asset exchanges where the [BANK] must post level 2B 
liquid assets to the asset exchange counterparty;
    (iv) 100 percent of the fair value (as determined under GAAP) of 
level 1 liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post assets that 
are not HQLA to the asset exchange counterparty;
    (v) 0 percent of the fair value (as determined under GAAP) of 
level 2A liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post level 1 or 
level 2A liquid assets to the asset exchange counterparty;
    (vi) 35 percent of the fair value (as determined under GAAP) of 
level 2A liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post level 2B 
liquid assets to the asset exchange counterparty;
    (vii) 85 percent of the fair value (as determined under GAAP) of 
level 2A liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post assets that 
are not HQLA to the asset exchange counterparty;
    (viii) 0 percent of the fair value (as determined under GAAP) of 
level 2B liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post assets that 
are HQLA to the asset exchange counterparty; and
    (ix) 50 percent of the fair value (as determined under GAAP) of 
level 2B liquid assets the [BANK] will receive from a counterparty 
pursuant to asset exchanges where the [BANK] must post assets that 
are not HQLA to the asset exchange counterparty.
    (g) Other cash inflow amounts. A [BANK]'s inflow amount as of 
the calculation date includes 0 percent of other cash inflow amounts 
not included in paragraphs (b) through (f) of this section.
    (h) Excluded amounts for intragroup transactions. The inflow 
amounts set forth in this section do not include amounts arising out 
of transactions between:
    (1) The [BANK] and a consolidated subsidiary of the [BANK]; or
    (2) A consolidated subsidiary of the [BANK] and another 
consolidated subsidiary of the [BANK].

Subpart E--Liquidity Coverage Shortfall

Sec.  ----.40 Liquidity coverage shortfall: supervisory framework.

    (a) Notification requirements. A [BANK] must notify the [AGENCY] 
on any business day when its liquidity coverage ratio is calculated 
to be less than the minimum requirement in Sec.  ----.10.
    (b) Liquidity Plan. If a [BANK]'s liquidity coverage ratio is 
below the minimum requirement in Sec.  ----.10 for three consecutive 
business days, or if the [AGENCY] has determined that the [BANK] is 
otherwise materially noncompliant with the requirements of this 
part, the [BANK] must promptly provide to the [AGENCY] a plan for 
achieving compliance with the minimum liquidity requirement in Sec.  
----.10 and all other requirements of this part. The plan must 
include, as applicable:
    (1) An assessment of the [BANK]'s liquidity position;
    (2) The actions the [BANK] has taken and will take to achieve 
full compliance with this part, including:
    (i) A plan for adjusting the [BANK]'s risk profile, risk 
management, and funding sources in order to achieve full compliance 
with this part; and
    (ii) A plan for remediating any operational or management issues 
that contributed to noncompliance with this part;
    (3) An estimated timeframe for achieving full compliance with 
this part; and
    (4) A commitment to report to the [AGENCY] no less than weekly 
on progress to achieve compliance in accordance with the plan until 
full compliance with this part is achieved.
    (c) Supervisory and enforcement actions. The [AGENCY] may, at 
its discretion, take additional supervisory or enforcement actions 
to address noncompliance with the minimum liquidity coverage ratio.

Subpart F--Transitions

Sec.  ----.50 Transitions.

    (a) Beginning January 1, 2015, through December 31, 2015, a 
[BANK] subject to a minimum liquidity standard under this part must 
calculate and maintain a liquidity coverage ratio on each 
calculation date in accordance with this part that is equal to or 
greater than 0.80.
    (b) Beginning January 1, 2016, through December 31, 2016, a 
[BANK] subject to a minimum liquidity standard under this part must 
calculate and maintain a liquidity coverage ratio on each 
calculation date in accordance with this part that is equal to or 
greater than 0.90.
    (c) On January 1, 2017, and thereafter, a [BANK] subject to 
subject to a minimum liquidity standard under this part must 
calculate and maintain a liquidity coverage ratio on each 
calculation date that is equal to or greater than 1.0.

List of Subjects

12 CFR Part 50

    Administrative practice and procedure; Banks, banking; Liquidity; 
Reporting and recordkeeping requirements; Savings associations.

12 CFR Part 249

    Administrative practice and procedure; Banks, banking; Federal 
Reserve System; Holding companies; Liquidity; Reporting and 
recordkeeping requirements.

[[Page 71866]]

12 CFR Part 329

    Administrative practice and procedure; Banks, banking; Federal 
Deposit Insurance Corporation, FDIC; Liquidity; Reporting and 
recordkeeping requirements.

Adoption of Proposed Common Rule

    The adoption of the proposed common rules by the agencies, as 
modified by the agency-specific text, is set forth below:

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the common preamble, the OCC proposes 
to add the text of the common rule as set forth at the end of the 
SUPPLEMENTARY INFORMATION as part 50 of chapter I of title 12 of the 
Code of Federal Regulations:

PART 50--LIQUIDITY RISK MEASUREMENT, STANDARDS AND MONITORING

0
1. The authority citation for part 50 is added to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, and 1462 et seq.

0
2. Part 50 is amended by:
0
a. Removing ``[AGENCY]'' and adding ``OCC'' in its place, wherever it 
appears;
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``(12 CFR part 
3)'' in its place, wherever it appears;
0
c. Removing ``[BANK]'' and adding ``national bank or Federal savings 
association'' in its place, wherever it appears;
0
d. Removing ``[BANK]s'' and adding ``national banks and Federal savings 
associations'' in its place, wherever it appears;
0
e. Removing ``[BANK]'s'' and adding ``national bank's or Federal 
savings association's'' in its place, wherever it appears;
0
f. Removing ``[PART]'' and adding ``part'' in its place, wherever it 
appears;
0
g. Removing ``[REGULATORY REPORT]'' and adding ``Consolidated Reports 
of Condition and Income'' in its place, wherever it appears; and
0
h. Removing ``[12 CFR 3.404 (OCC), 12 CFR 263.202 (Board), and 12 CFR 
324.5 (FDIC)]'' and adding ``12 CFR 3.404'' in its place, wherever it 
appears.
0
3. Section 50.1 is amended by:
0
a. Redesignating paragraph (b)(1)(iv) as paragraph (b)(1)(v);
0
b. Adding paragraph (b)(1)(iv);
0
c. Removing ``(b)(1)(iv)'' in paragraph (b)(4) and adding ``(b)(1)(v)'' 
in its place;
0
d. Removing the word ``or'' at the end of paragraph (b)(2)(i);
0
e. Removing the period at the end of paragraph (b)(2)(ii) and adding 
``; or'' in its place; and
0
f. Adding paragraph (b)(2)(iii).
    The additions read as follows.


Sec.  50.1  Purpose and applicability.

* * * * *
    (b)* * *
    (1) * * *
    (iv) It is a depository institution that has consolidated total 
assets equal to $10 billion or more, as reported on the most recent 
year-end Consolidated Report of Condition and Income and is a 
consolidated subsidiary of one of the following:
    (A) A covered depository institution holding company that has total 
assets equal to $250 billion or more, as reported on the most recent 
year-end FR Y-9C, or, if the covered depository institution holding 
company is not required to report on the FR Y-9C, its estimated total 
consolidated assets as of the most recent year end, calculated in 
accordance with the instructions to the FR Y-9C;
    (B) A depository institution that has consolidated total assets 
equal to $250 billion or more, as reported on the most recent year-end 
Consolidated Report of Condition and Income;
    (C) A covered depository institution holding company or depository 
institution that has consolidated total on-balance sheet foreign 
exposure at the most recent year-end equal to $10 billion or more 
(where total on-balance sheet foreign exposure equals total cross-
border claims less claims with a head office or guarantor located in 
another country plus redistributed guaranteed amounts to the country of 
head office or guarantor plus local country claims on local residents 
plus revaluation gains on foreign exchange and derivative transaction 
products, calculated in accordance with the Federal Financial 
Institutions Examination Council (FFIEC) 009 Country Exposure Report); 
or
    (D) A covered nonbank company.
* * * * *
    (2) * * *
    (iii) A Federal branch or agency as defined by 12 CFR 28.11.
* * * * *

Board of Governors of the Federal Reserve System

12 CFR CHAPTER II

Authority and Issuance

    For the reasons set forth in the common preamble, the Board 
proposes to add the text of the common rule as set forth at the end of 
the SUPPLEMENTARY INFORMATION as part 249 of chapter II of title 12 of 
the Code of Federal Regulations as follows:

PART 249--LIQUIDITY RISK MEASUREMENT, STANDARDS AND MONITORING 
(REGULATION WW)

0
4. The authority citation for part 249 shall read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1818, 1828, 
1831p-1, 1844(b), 5365, 5366, 5368.

0
5. Part 249 is amended as set forth below:
0
a. Remove ``[AGENCY]'' and add ``Board'' in its place wherever it 
appears.
0
b. Remove ``[AGENCY CAPITAL REGULATION]'' and add ``Regulation Q (12 
CFR part 217)'' in its place wherever it appears.
0
c. Remove ``[BANK]'' and add ``Board-regulated institution'' in its 
place wherever it appears.
0
d. Remove ``[BANK]s'' and add ``Board-regulated institutions'' in its 
place wherever it appears.
0
e. Remove ``[BANK]'s'' and add ``Board-regulated institution's'' in its 
place wherever it appears.
0
6. Amend Sec.  249.1 by:
0
a. Removing ``[REGULATORY REPORT]'' from paragraph (b)(1)(i) and adding 
``FR Y-9C, or, if the Board-regulated institution is not required to 
report on the FR Y-9C, then its estimated total consolidated assets as 
of the most recent year end, calculated in accordance with the 
instructions to the FR Y-9C, or Consolidated Report of Condition and 
Income (Call Report), as applicable'' in its place.
0
b. Redesignating paragraph (b)(1)(iv) as paragraph (b)(1)(vi);
0
c. Adding new paragraphs (b)(1)(iv) and (b)(1)(v) and;
0
d. Revising paragraph (b)(4).
    The additions and revisions read as follows:


Sec.  249.1  Purpose and applicability.

* * * * *
    (b) * * *
    (1) * * *
    (iv) It is a covered nonbank company;
    (v) It is a covered depository institution holding company that 
meets the criteria in Sec.  249.51(a) but does not meet the criteria in 
paragraphs (b)(1)(i)

[[Page 71867]]

or (b)(1)(ii) of this section, and is subject to complying with the 
requirements of this part in accordance with subpart G of this part; or
* * * * *
    (4) In making a determination under paragraphs (b)(1)(vi) or (3) of 
this section, the Board will apply, as appropriate, notice and response 
procedures in the same manner and to the same extent as the notice and 
response procedures set forth in 12 CFR 263.2.
0
7. In Sec.  249.2, revise paragraph (a) to read as follows:


Sec.  249.2  Reservation of authority.

    (a) The Board may require a Board-regulated institution to hold an 
amount of high quality liquid assets (HQLA) greater than otherwise 
required under this part, or to take any other measure to improve the 
Board-regulated institution's liquidity risk profile, if the Board 
determines that the Board-regulated institution's liquidity 
requirements as calculated under this part are not commensurate with 
the Board-regulated institution's liquidity risks. In making 
determinations under this section, the Board will apply, as 
appropriate, notice and response procedures as set forth in 12 CFR 
263.2.
* * * * *
0
8. In Sec.  249.3, add definitions for ``Board'', ``Board-regulated 
institution'', and ``State member bank'' in alphabetical order, to read 
as follows:


Sec.  249.3  Definitions.

* * * * *
    Board means the Board of Governors of the Federal Reserve System.
    Board-regulated institution means a state member bank, covered 
depository institution holding company, or covered nonbank company.
* * * * *
    State member bank means a state bank that is a member of the 
Federal Reserve System.
* * * * *
0
9. Add subpart G to read as follows:

Subpart G--Liquidity Coverage Ratio for Certain Bank Holding 
Companies


Sec.  249.51  Applicability.

    (a) Scope. This subpart applies to a covered depository institution 
holding company domiciled in the United States that has total 
consolidated assets equal to $50 billion or more, based on the average 
of the Board-regulated institution's four most recent FR Y-9Cs (or, if 
a savings and loan holding company is not required to report on the FR 
Y-9C, based on the average of its estimated total consolidated assets 
for the most recent four quarters, calculated in accordance with the 
instructions to the FR Y-9C) and does not meet the applicability 
criteria set forth in Sec.  249.1(b).
    (b) Applicable provisions. Except as otherwise provided in this 
subpart, the provisions of subparts A through F apply to covered 
depository institution holding companies that are subject to this 
subpart.


Sec.  249.52  High-Quality Liquid Asset Amount.

    A covered depository institution holding company subject to this 
subpart must calculate its HQLA amount in accordance with subpart C of 
this part; provided, however, that such covered BHC must incorporate 
into the calculation of its HQLA amount a 21 calendar day period 
instead of a 30 day calendar day period and must measure 21 calendar 
days from a calculation date instead of 30 calendar days from a 
calculation date, as provided in Sec.  249.21.


Sec.  249.53  Total Net Cash Outflow.

    (a) A covered depository institution holding company subject to 
this subpart must calculate its cash outflows and inflows in accordance 
with subpart D of this part, provided, however, that such company must:
    (1) Include only those outflow and inflow amounts with a 
contractual maturity date that are calculated for each day within the 
next 21 calendar days from a calculation date; and
    (2) Calculate its outflow and inflow amounts for instruments or 
transactions that have no contractual maturity date by applying 70 
percent of the applicable outflow or inflow amount as calculated under 
subpart D of this part to the instrument or transaction.
    (b) As of a calculation date, the total net cash outflow amount of 
a covered depository institution subject to this subpart equals:
    (1) The sum of the outflow amounts calculated under Sec. Sec.  --
--.32(a) through ----.32(g)(2); plus
    (2) The sum of the outflow amounts calculated under Sec. Sec.  --
--.32(g)(3) through ----.32(l); where the instrument or transaction has 
no contractual maturity date; plus
    (3) The sum of the outflow amounts under Sec. Sec.  ----.32(g)(3) 
through ----.32(l) where the instrument or transaction has a 
contractual maturity date up to and including that calendar day; less
    (4) The lesser of:
    (i) The sum of the inflow amounts under Sec. Sec.  ----.33(b) 
through ----.33(f), where the instrument or transaction has a 
contractual maturity date up to and including that calendar day, or
    (ii) 75 percent of the sum of paragraphs (a), (b), and (c) of this 
section as calculated for that calendar day.

Federal Deposit Insurance Corporation

12 CFR CHAPTER III

Authority and Issuance

    For the reasons set forth in the common preamble, the Federal 
Deposit Insurance Corporation amends chapter III of title 12 of the 
Code of Federal Regulations as follows:

PART 329--LIQUIDITY RISK MEASUREMENT, STANDARDS AND MONITORING

0
10. The authority citation for part 329 shall read as follows:

    Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1, 
5412.

0
11. Part 329 is added as set forth at the end of the common preamble.
0
12. Part 329 is amended as set forth below:
0
a. Remove ``[INSERT PART]'' and add ``329'' in its place wherever it 
appears.
0
b. Remove ``[AGENCY]'' and add ``FDIC'' in its place wherever it 
appears.
0
c. Remove ``[AGENCY CAPITAL REGULATION]'' and add ``12 CFR part 324'' 
in its place wherever it appears.
0
d. Remove ``A [BANK]'' and add ``An FDIC-supervised institution'' in 
its place wherever it appears.
0
e. Remove ``a [BANK]'' and add ``an FDIC-supervised institution'' in 
its place wherever it appears.
0
f. Remove ``[BANK]'' and add ``FDIC-supervised institution'' in its 
place wherever it appears.
0
g. Remove ``[REGULATORY REPORT]'' and add ``Consolidated Report of 
Condition and Income'' in its place wherever it appears.
0
h. Remove ``[12 CFR 3.404 (OCC), 12 CFR 263.202 (Board), and 12 CFR 
324.5 (FDIC)]'' and add ``12 CFR 324.5'' in its place wherever it 
appears.
0
13. In Sec.  329.1, revise paragraph (b)(1)(iii) to read as follows:


Sec.  329.1  Purpose and applicability.

* * * * *
    (b) * * *
    (1) * * *
    (iii) It is a depository institution that has consolidated total 
assets equal to $10 billion or more, as reported on the most recent 
year-end Consolidated Report of Condition and Income and is a 
consolidated subsidiary of one of the following:
    (A) A covered depository institution holding company that has total 
assets equal to $250 billion or more, as reported on the most recent 
year-end FR

[[Page 71868]]

Y-9C, or, if the covered depository institution holding company is not 
required to report on the FR Y-9C, its estimated total consolidated 
assets as of the most recent year end, calculated in accordance with 
the instructions to the FR Y-9C;
    (B) A depository institution that has consolidated total assets 
equal to $250 billion or more, as reported on the most recent year-end 
Consolidated Report of Condition and Income;
    (C) A covered depository institution holding company or depository 
institution that has consolidated total on-balance sheet foreign 
exposure at the most recent year-end equal to $10 billion or more 
(where total on-balance sheet foreign exposure equals total cross-
border claims less claims with a head office or guarantor located in 
another country plus redistributed guaranteed amounts to the country of 
head office or guarantor plus local country claims on local residents 
plus revaluation gains on foreign exchange and derivative transaction 
products, calculated in accordance with the Federal Financial 
Institutions Examination Council (FFIEC) 009 Country Exposure Report); 
or
    (D) A covered nonbank company.
* * * * *
0
14. In Sec.  329.3, add definitions for ``FDIC'' and ``FDIC-supervised 
institution'' in alphabetical order, to read as follows:


Sec.  329.3  Definitions.

* * * * *
    FDIC means the Federal Deposit Insurance Corporation.
    FDIC-supervised institution means any state nonmember bank or state 
savings association.
* * * * *

    Date: October 30, 2013.
Thomas J. Curry,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, November 6, 2013.
Robert deV. Frierson,
Secretary of the Board.
    By order of the Board of Directors of the Federal Deposit 
Insurance Corporation.

    Dated at Washington, DC, this 30th day of October, 2013.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2013-27082 Filed 11-27-13; 8:45 am]
BILLING CODE P