[Federal Register Volume 79, Number 197 (Friday, October 10, 2014)]
[Rules and Regulations]
[Pages 61440-61541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22520]
[[Page 61439]]
Vol. 79
Friday,
No. 197
October 10, 2014
Part III
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
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Liquidity Coverage Ratio: Liquidity Risk Measurement Standards; Final
Rule
Federal Register / Vol. 79 , No. 197 / Friday, October 10, 2014 /
Rules and Regulations
[[Page 61440]]
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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-AD74
FEDERAL RESERVE SYSTEM
12 CFR Part 249
[Regulation WW; Docket No. R-1466]
RIN 7100-AE03
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 329
RIN 3064-AE04
Liquidity Coverage Ratio: Liquidity Risk Measurement Standards
AGENCY: 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: Final rule.
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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 adopting a final rule that
implements a quantitative liquidity requirement consistent with the
liquidity coverage ratio standard established by the Basel Committee on
Banking Supervision (BCBS). The requirement is designed to promote the
short-term resilience of the liquidity risk profile of large and
internationally active banking organizations, thereby improving the
banking sector's ability to absorb shocks arising from financial and
economic stress, and to further improve the measurement and management
of liquidity risk. The final rule establishes a quantitative minimum
liquidity coverage ratio that requires a company subject to the rule to
maintain an amount of high-quality liquid assets (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 (the denominator of the
ratio). The final rule applies to large and internationally active
banking organizations, generally, bank holding companies, certain
savings and loan holding companies, and depository institutions with
$250 billion or more in total assets or $10 billion or more 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 final rule focuses on these financial
institutions because of their complexity, funding profiles, and
potential risk to the financial system. Therefore, the agencies do not
intend to apply the final rule to community banks. In addition, the
Board is separately adopting a modified minimum liquidity coverage
ratio requirement 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 that are not internationally active. The final
rule is effective January 1, 2015, with transition periods for
compliance with the requirements of the rule.
DATES: Effective Date: January 1, 2015. Comments must be submitted on
the Paperwork Reduction Act burden estimates only by December 9, 2014.
ADDRESSES: You may submit comments on the Paperwork Reduction Act
burden estimates only. Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
email if possible. Comments may be sent to: Legislative and Regulatory
Activities Division, Office of the Comptroller of the Currency,
Attention: 1557-0323, 400 7th Street SW., Suite 3E-218, Mail Stop 9W-
11, Washington, DC 20219. In addition, comments may be sent by fax to
(571) 465-4326 or by electronic mail to [email protected].
You may personally inspect and photocopy comments at the OCC, 400 7th
Street SW., Washington, DC 20219. 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.
For further information or to obtain a copy of the collection
please contact Johnny Vilela or Mary H. Gottlieb, OCC Clearance
Officers, (202) 649-5490, for persons who are hard of hearing, TTY,
(202) 649-5597, 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.
Board: You may submit comments, identified by Docket 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/apps/foia/proposedregs.aspx.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-Mail: [email protected].
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.aspx as submitted,
unless modified for technical reasons. 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.
A copy of the PRA OMB submission, including any reporting forms and
instructions, supporting statement, and other documentation will be
placed into OMB's public docket files, once approved. Also, these
documents may be requested from the agency clearance officer, whose
name appears below.
For further information contact the Federal Reserve Board Acting
Clearance Officer, John Schmidt, Office of the Chief Data Officer,
Board of Governors of the Federal Reserve System, Washington, DC 20551,
(202) 452-3829. Telecommunications Device for the Deaf (TDD) users may
contact (202) 263-4869, Board of Governors of the Federal Reserve
System, Washington, DC 20551.
FDIC: You may submit written comments by any of the following
methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the FDIC
Web site.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-Mail: [email protected]. Include ``Liquidity Coverage
Ratio Final Rule'' on the subject line of the message.
Mail: Gary A. Kuiper, Counsel, Executive Secretary
Section, NYA-5046, Attention: Comments, FDIC, 550 17th Street NW.,
Washington, DC 20429.
Hand Delivery/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street) on
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business days between 7:00 a.m. and 5:00 p.m.
Public Inspection: All comments received will be posted
without change to http://www.fdic.gov/regulations/laws/federal/
including any personal information provided.
For further information or to request a copy of the collection please
contact Gary Kuiper, Counsel, (202) 898-3719, Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW., Washington, DC
20429.
FOR FURTHER INFORMATION CONTACT:
OCC: Kerri Corn, Director, (202) 649-6398, or James Weinberger,
Technical Expert, (202) 649-5213, Credit and Market Risk Division;
Linda M. Jennings, National Bank Examiner, (980) 387-0619; Patrick T.
Tierney, Assistant Director, or Tiffany Eng, Attorney, Legislative and
Regulatory Activities Division, (202) 649-5490, for persons who are
deaf or hard of hearing, TTY, (202) 649-5597; or Tena Alexander, Senior
Counsel, or David Stankiewicz, 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: Constance Horsley, Assistant Director, (202) 452-5239, David
Emmel, Manager, (202) 912-4612, Adam S. Trost, Senior Supervisory
Financial Analyst, (202) 452-3814, or J. Kevin Littler, Senior
Supervisory Financial Analyst, (202) 475-6677, Credit, Market and
Liquidity Risk Policy, Division of Banking Supervision and Regulation;
April C. Snyder, Senior Counsel, (202) 452-3099, Dafina Stewart, Senior
Attorney, (202) 452-3876, Jahad Atieh, Attorney, (202) 452-3900, 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; 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 Suzanne 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. Overview
A. Background and Summary of the Proposed Rule
B. Summary of Comments on the Proposed Rule and Significant
Comment Themes
C. Overview of the Final Rule and Significant Changes From the
Proposal
D. Scope of Application of the Final Rule
1. Covered Companies
2. Covered Depository Institution Subsidiaries
3. Companies that Become Subject to the LCR Requirements
II. Minimum Liquidity Coverage Ratio
A. The LCR Calculation and Maintenance Requirement
1. A Liquidity Coverage Requirement
2. The Liquidity Coverage Ratio Stress Period
3. The Calculation Date, Daily Calculation Requirement, and
Comments on LCR Reporting
B. High-Quality Liquid Assets
1. Liquidity Characteristics of HQLA
2. Qualifying Criteria for Categories of HQLA
3. Requirements for Inclusion as Eligible HQLA
4. Generally Applicable Criteria for Eligible HQLA
5. Calculation of the HQLA Amount
C. Net Cash Outflows
1. The Total Net Cash Outflow Amount
2. Determining Maturity
3. Outflow Amounts
4. Inflow Amounts
III. Liquidity Coverage Ratio Shortfall
IV. Transition and Timing
V. Modified Liquidity Coverage Ratio
A. Threshold for Application of the Modified Liquidity Coverage
Ratio Requirement.
B. 21 Calendar-Day Stress Period
C. Calculation Requirements and Comments on Modified LCR
Reporting
VI. Plain Language
VII. Regulatory Flexibility Act
VIII. Paperwork Reduction Act
IX. OCC Unfunded Mandates Reform Act of 1995 Determination
I. Overview
A. Background and Summary of the Proposed Rule
On November 29, 2013, 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) invited comment on a proposed rule (proposed rule or
proposal) to implement a liquidity coverage ratio (LCR) requirement
that would be consistent with the international liquidity standards
published by the Basel Committee on Banking Supervision (BCBS).\1\ The
proposed rule would have applied to nonbank financial companies
designated by the Financial Stability Oversight Council (Council) for
supervision by the Board that do not have substantial insurance
activities (covered nonbank companies), large, internationally active
banking organizations, and their consolidated subsidiary depository
institutions with total assets of $10 billion or more (each, a covered
company).\2\ The Board also proposed to implement a modified version of
the liquidity coverage ratio requirement (modified LCR) as an enhanced
prudential standard for bank holding companies and savings and loan
holding companies with $50 billion or more in total consolidated assets
that are not internationally active and do not have substantial
insurance activities (each, a modified LCR holding company).
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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. The OCC, Board, and FDIC actively participate in BCBS and
its international efforts. Documents issued by the BCBS are
available through the Bank for International Settlements Web site at
http://www.bis.org.
\2\ 78 FR 71818 (November 29, 2013).
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The BCBS published the international liquidity standards in
December 2010 as a part of the Basel III reform package \3\ and revised
the standards in January 2013 (as revised, the Basel III Revised
Liquidity Framework).\4\ The agencies are actively involved in the BCBS
and its international efforts, including the development of the Basel
III Revised Liquidity Framework.
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\3\ BCBS, ``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).
\4\ BCBS, ``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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To devise the Basel III Revised Liquidity Framework, the BCBS
gathered supervisory data from multiple jurisdictions, including a
substantial amount of data related to U.S. financial institutions,
which was reflective of a variety of time periods and types of
historical liquidity stresses. These historical stresses included both
idiosyncratic and systemic stresses across a range of financial
institutions. The BCBS determined the LCR parameters based on a
combination of historical data analysis and supervisory judgment.
The proposed rule would have established a quantitative minimum LCR
requirement that builds upon the liquidity coverage methodologies
traditionally used by banking organizations to assess exposures to
contingent liquidity events. The
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proposed rule was designed to complement existing supervisory guidance
and the requirements of the Board's Regulation YY (12 CFR part 252) on
internal liquidity stress testing and liquidity risk management that
the Board issued, 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).\5\ The proposed rule also
would have established transition periods for conformance with the
requirements.
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\5\ See Board, ``Enhanced Prudential Standards for Bank Holding
Companies and Foreign Banking Organizations,'' 79 FR 17240 (March
27, 2014) (Board's Regulation YY); OCC, Board, FDIC, Office of
Thrift Supervision, and National Credit Union Administration,
``Interagency Policy Statement on Funding and Liquidity Risk
Management,'' 75 FR 13656 (March 22, 2010) (Interagency Liquidity
Policy Statement).
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The proposed LCR would have required a covered company to maintain
an amount of unencumbered high-quality liquid assets (HQLA amount)
sufficient to meet its total stressed net cash outflows over a
prospective 30 calendar-day period, as calculated in accordance with
the proposed rule. The proposed rule outlined certain categories of
assets that would have qualified as high-quality liquid assets (HQLA)
if they were unencumbered and able to be monetized during a period of
stress. HQLA that are unencumbered and controlled by a covered
company's liquidity risk management function would enhance the ability
of a covered company to meet its liquidity needs during an acute short-
term liquidity stress scenario. A covered company would have determined
its total net cash outflow amount by applying the proposal's outflow
and inflow rates, which reflected a standardized stress scenario, to
the covered company's funding sources, obligations, and assets over a
prospective 30 calendar-day period. The net cash outflow amount for
modified LCR holding companies would have reflected a 21 calendar-day
period. The proposed rule would have been generally consistent with the
Basel III Revised Liquidity Framework; however, there were instances
where the agencies believed supervisory or market conditions unique to
the United States required the proposal to differ from the Basel III
standard.
B. Summary of Comments on the Proposed Rule and Significant Comment
Themes
Each of the agencies received over 100 comments on the proposal
from U.S. and foreign firms, public officials (including state and
local government officials and members of the U.S. Congress), public
interest groups, private individuals, and other interested parties. In
addition, agency staffs held a number of meetings with members of the
public and obtained supplementary information from certain commenters.
Summaries of these meetings are available on the agencies' public Web
sites.\6\
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\6\ See http://www.regulations.gov/index.jsp#!docketDetail;D=OCC-2013-0016 (OCC); http://www.fdic.gov/regulations/laws/federal/2013/2013_liquidity_coverage_ae04.html
(FDIC); http://www.federalreserve.gov/newsevents/reform_systemic.htm
(Board).
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Although many commenters generally supported the purpose of the
proposed rule to create a standardized minimum liquidity requirement,
most commenters either expressed concern regarding the proposal overall
or criticized specific aspects of the proposed rule. The agencies
received a number of comments regarding the differences between the
proposed rule and the Basel III Revised Liquidity Framework, together
with comments on the interaction of this proposal with other
rulemakings issued by the agencies. Comments about differences between
the proposed rule and the Basel III standard were mixed. Some
commenters expressed support for the areas in which the proposed rule
was more stringent than the Basel III Revised Liquidity Framework and
others stated that having more conservative treatment for assessing the
LCR could disadvantage the U.S. banking system. Commenters questioned
whether the proposal should impose heightened standards compared to the
Basel III Revised Liquidity Framework and requested that the final
rule's calculation of the LCR conform to the Basel III standard in
order to maintain consistency and comparability internationally. A
commenter noted that the proposed rule would create a burden for those
institutions required to comply with more than one liquidity standard
throughout their global operations. Another commenter argued that the
proposed rule's divergence from the Basel III Revised Liquidity
Framework would make it more difficult to harmonize with global
standards. Commenters also expressed concern about the interaction
between the proposed rule and other proposed or recently finalized
rules that affect a covered company's LCR, such as the agencies'
supplementary leverage ratio \7\ and the Commodity Futures Trading
Commission's liquidity requirements for derivatives clearing
organizations.\8\
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\7\ 79 FR 24528 (May 1, 2014).
\8\ 76 FR 69334 (November 8, 2011).
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Additionally, a few commenters expressed concerns about the overall
impact of the requirements, citing the impact of the standard on
covered companies' costs, competitiveness, and existing business
practices, as well as the impact upon non-financial companies more
broadly. As described in more detail below, the agencies have addressed
these issues by reducing burdens where appropriate, while ensuring that
the final rule serves the purpose of promoting the safety and soundness
of covered companies. The agencies found that certain comments
concerning the costs and benefits of the proposed rule to be relevant
to their deliberations, and, on the basis of these and other
considerations, made the changes discussed below.
The proposed rule would have required covered companies to comply
with a minimum LCR of 80 percent beginning on January 1, 2015, 90
percent beginning on January 1, 2016, and 100 percent beginning on
January 1, 2017, and thereafter. These transition periods were similar
to, but shorter than, those set forth in the Basel III Revised
Liquidity Framework, and were intended to preserve the strong liquidity
positions many U.S. banking organizations have achieved since the
recent financial crisis. The proposed rule also would have required
covered companies to calculate their LCR daily, beginning on January 1,
2015. A number of commenters expressed concerns with the proposed
transition periods as well as the operational difficulties of meeting
the proposed requirement for daily calculation of the LCR.
Additionally, some commenters expressed concerns regarding the scope of
application of the proposed rule, with regard to both the application
of the proposed rule to covered nonbank companies and the proposed
rule's delineation between covered companies and modified LCR holding
companies.
Commenters generally expressed a desire to see a wider range of
asset classes included as HQLA or to have some asset classes and
funding sources treated as having greater liquidity than proposed. The
agencies received comments that highlighted the differences between the
types of assets included as HQLA under the U.S. proposal and those that
might be included under the Basel III Revised Liquidity Framework. For
example, the agencies proposed excluding some asset classes from HQLA
that may have qualified under the Basel III Revised Liquidity Framework
given the agencies' concerns about their relative lack of liquidity.
Many of these comments related to the exclusion in
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the proposed rule of state and municipal securities from HQLA.
Commenters expressed concern that the exclusion of municipal securities
from HQLA could lead to higher funding costs for municipalities, which
could affect local economies and infrastructure.
Likewise, the agencies' proposed method for determining a covered
company's HQLA amount elicited many comments. A number of these
comments focused on the treatment of deposits from public sector
entities that are required by law to be secured by eligible collateral
and would have been treated as secured funding transactions under the
proposed rule. Commenters expressed concern that the treatment of
secured deposits in the calculation of a covered company's HQLA amount
would lead to distortions in the LCR calculation and to reduced
acceptance of public deposits by covered companies.
The proposed rule would have required covered companies to hold an
amount of HQLA to meet their greatest liquidity need within a
prospective 30 calendar-day period rather than at the end of that
period. By requiring a covered company to calculate its total net cash
outflow amount using its peak cumulative net outflow day, the proposal
would have taken into account potential maturity mismatches between a
covered company's contractual outflows and inflows during the 30
calendar-day period. The agencies received many comments on the
methodology for calculating the peak cumulative net cash outflow
amount, specifically in regard to the treatment of non-maturity
outflows. Some commenters felt that the approach had merits because it
captured potential liquidity shortfalls within the 30 calendar-day
period, whereas others argued that that it was overly conservative,
unrealistic, and inconsistent with the Basel III Revised Liquidity
Framework.
Generally, commenters expressed that the outflow rates used to
determine total net cash outflows were too high with respect to
specific outflow categories. Commenters also expressed concern that
specific outflow rates were applied to overly narrow or overly broad
categories of exposures in certain cases. Several commenters requested
the agencies to clarify whether the outflow and inflow rates under the
final rule are designed to reflect an idiosyncratic stress at a
particular institution or general market distress. The agencies
received a number of comments on the criteria for determining whether a
deposit was an operational deposit and on the definitions of certain
related terms. Commenters generally approved of the potential
categorization of certain deposits as operational deposits but
expressed concern that other deposits were excluded from the category.
Similarly, some commenters expressed concern that the outflow rates
assigned to committed facilities extended to special purpose entities
(SPEs) did not differentiate between different types of SPEs.
Several commenters expressed concern that the proposed modified LCR
would have required net cash outflows to be calculated over a 21
calendar-day stress period. Commenters argued that using a 21 calendar-
day period would create significant operational burden as it is an
atypical period that does not align well with their existing systems
and processes. Commenters also expressed concerns regarding the
transition periods and the daily calculation requirement applicable to
modified LCR holding companies.
C. Overview of the Final Rule and Significant Changes From the Proposal
Consistent with the proposed rule, the final rule establishes a
minimum LCR requirement applicable, on a consolidated basis, to large,
internationally active banking organizations with $250 billion or more
in total consolidated assets or $10 billion or more in total on-balance
sheet foreign exposure, and to consolidated subsidiary depository
institutions of these banking organizations with $10 billion or more in
total consolidated assets.\9\ Unlike the proposed rule, however, the
final rule will not apply to covered nonbank companies or their
consolidated subsidiary depository institutions. Instead, as discussed
further below in section I.D, the Board will establish any LCR
requirement for such companies by order or rule. The final rule does
not apply to foreign banking organizations or U.S. intermediate holding
companies that are required to be established under the Board's
Regulation YY, other than those companies that are otherwise covered
companies.\10\
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\9\ Like the proposed rule, the final rule does not apply to
institutions that have opted to use the advanced approaches risk-
based capital rule. See 12 CFR part 3 (OCC), 12 CFR part 217
(Board), and 12 CFR part 324 (FDIC).
\10\ 12 CFR 252.153.
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As discussed in section V of this Supplementary Information
section, and consistent with the proposal, the Board also is separately
adopting a modified version of the LCR for bank holding companies and
savings and loan holding companies without significant insurance
operations (or, in the case of savings and loan holding companies, also
without significant 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 final rule.\11\
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\11\ Total consolidated assets for the purposes of the proposed
rule would have been as reported on a covered company'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 Institutions
Examination Council 009 Country Exposure Report. The agencies have
retained these standards in the final rule as proposed.
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The final rule requires a covered company to maintain an amount of
HQLA meeting the criteria set forth in this final rule (the HQLA
amount, which is 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 (the denominator of the ratio). The agencies recognize that,
under certain circumstances, it may be necessary for a covered
company's LCR to fall briefly below 100 percent to fund unanticipated
liquidity needs.\12\ However, a LCR below 100 percent may also reflect
a significant deficiency in a covered company's management of liquidity
risk. Therefore, consistent with the proposed rule, the final rule
establishes a framework for a flexible supervisory response when a
covered company's LCR falls below 100 percent. Under the final rule, a
covered company must notify the appropriate Federal banking agency on
any business day that its LCR is less than 100 percent. In addition, if
a covered company's LCR is below 100 percent for three consecutive
business days, the covered company must submit to its appropriate
Federal banking agency a plan for remediation of the shortfall.\13\
These procedures, which are described in further detail in section III
of this Supplementary Information section, are intended to enable
supervisors to monitor and respond appropriately to the unique
circumstances that give rise to a covered company's LCR shortfall.
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\12\ During the transition period, for covered companies, the
agencies will consider a shortfall to be a liquidity coverage ratio
lower than 80 percent in 2015 and lower than 90 percent in 2016.
\13\ During the period when a covered company is required to
calculate its LCR monthly, the covered company must promptly consult
with the appropriate Federal banking agency to determine whether a
plan would be required if the covered company's LCR is below the
minimum requirement for any calculation date that is the last
business day of the calendar month.
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The agencies emphasize that the LCR 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
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for higher liquidity reserves may need to take additional steps beyond
meeting the minimum ratio in order to meet supervisory expectations.
The LCR will complement existing supervisory guidance and the more
qualitative and internal stress test requirements in the Board's
Regulation YY.
Under the final rule, certain categories of assets may qualify as
eligible HQLA and may contribute to the HQLA amount if they are
unencumbered by liens and other restrictions on transfer and can
therefore be converted quickly into cash without reasonably expecting
to incur losses in excess of the applicable LCR haircuts during a
stress period. Consistent with the proposal, the final rule establishes
three categories of HQLA: level 1 liquid assets, level 2A liquid assets
and level 2B liquid assets. The fair value, as determined under U.S.
generally accepted accounting principles (GAAP), of a covered company's
level 2A liquid assets and level 2B liquid assets are subject to
haircuts of 15 percent and 50 percent respectively. The amount of level
2 liquid assets (that is, level 2A and level 2B liquid assets) may not
comprise more than 40 percent of the covered company's HQLA amount. The
amount of level 2B liquid assets may not comprise more than 15 percent
of the covered company's HQLA amount.
Certain adjustments have been made to the final rule to address
concerns raised by a number of commenters with respect to assets that
would have qualified as HQLA. With respect to the inclusion of
corporate debt securities as HQLA, the agencies have removed the
requirement that corporate debt securities have to be publicly traded
on a national securities exchange in order to qualify for inclusion as
HQLA. Additionally, in response to requests by several commenters, the
agencies have expanded the pool of publicly traded common equity shares
that may be included as HQLA. Consistent with the proposed rule, the
final rule does not include state and municipal securities as HQLA. As
discussed fully in section II.B.2 of this Supplementary Information
section, the liquidity characteristics of municipal securities range
significantly and many of these assets do not exhibit the
characteristics for inclusion as HQLA. With respect to the calculation
of the HQLA amount and in response to comments received, the agencies
are removing collateralized deposits, as defined in the final rule,
from the calculation of amounts exceeding the composition caps, as
described in section II.B.5, below.
A covered company's total net cash outflow amount is determined
under the final rule by applying outflow and inflow rates, which
reflect certain standardized stressed assumptions, against the balances
of a covered company's funding sources, obligations, transactions, and
assets over a prospective 30 calendar-day period. Inflows that can be
included to offset outflows are limited to 75 percent of outflows to
ensure that covered companies are maintaining sufficient on-balance
sheet liquidity and are not overly reliant on inflows, which may not
materialize in a period of stress.
As further described in section II.C of this Supplementary
Information section and discussed in the proposal, the measure of net
cash outflow and the outflow and inflow rates used in its determination
are meant to reflect aspects of historical stress events including the
recent financial crisis. Consistent with the Basel III Revised
Liquidity Framework and the agencies' evaluation of relevant
supervisory information, these net outflow components of the final rule
take into account the potential impact of idiosyncratic and market-wide
shocks, including those that would result in: (1) A partial loss of
unsecured wholesale funding capacity; (2) a partial loss of secured,
short-term financing with certain collateral and counterparties; (3)
losses from derivative positions and the collateral supporting those
positions; (4) unscheduled draws on committed credit and liquidity
facilities that a covered company has provided to its customers; (5)
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; (6) a partial loss of retail deposits and brokered deposits from
retail customers; and (7) other shocks that affect outflows linked to
structured financing transactions, mortgages, central bank borrowings,
and customer short positions.
The agencies revised certain elements of the calculation of net
cash outflows in the final rule, which are also described in section
II.C below. The methodology for determining the peak cumulative net
outflow has been amended to address certain comments relating to the
treatment in the proposed rule of non-maturity outflows. The revised
methodology focuses more explicitly on the maturity mismatch of
contractual outflows and inflows as well as overnight funding from
financial institutions.
The agencies have also changed the definition of operational
services and the list of operational requirements. In making these
changes, the agencies have addressed certain issues raised by
commenters relating to the types of operational services that would be
covered by the rule and the requirement to exclude certain deposits
from being classified as operational. Additionally, the agencies have
limited the outflow rate that must be applied to maturing secured
funding transactions such that the outflow rate should generally not be
greater than the outflow rate for an unsecured funding transaction with
the same wholesale counterparty. The agencies have also revised the
outflow rates for committed credit and liquidity facilities to SPEs so
that only SPEs that rely on the market for funding receive the 100
percent outflow rate. This change should address commenters' concerns
about inappropriate outflow rates for SPEs that are wholly funded by
long-term bank loans and similar facilities and do not have the same
liquidity risk characteristics as those that rely on the market for
funding.
Consistent with the Basel III Revised Liquidity Framework, the
final rule is effective as of January 1, 2015, subject to the
transition periods in the final rule. Under the final rule, covered
companies will be required to maintain a minimum LCR of 80 percent
beginning January 1, 2015. From January 1, 2016, through December 31,
2016, the minimum LCR would be 90 percent. Beginning on January 1,
2017, and thereafter, all covered companies would be required to
maintain an LCR of 100 percent. Transition periods are described fully
in section IV of this Supplementary Information section.
The agencies made changes to the final rule's transition periods to
address commenters' concerns that the proposed transition periods would
not have provided covered companies enough time to establish the
required infrastructure to ensure compliance with the proposed rule's
requirements, including the proposed daily calculation requirement.
These changes reflect commenters' concern regarding the operational
challenges of implementing the daily calculation requirement, while
still requiring firms to maintain sufficient HQLA to comply with the
rule. Although the agencies will still require compliance with the
final rule starting January 1, 2015, the agencies have delayed
implementation of the daily calculation requirement. With respect to
the daily calculation requirements, covered companies that are
depository institution holding companies with $700 billion or more in
total consolidated assets or $10 trillion or more in assets under
custody, and any depository institution that is a consolidated
subsidiary of such depository institution holding
[[Page 61445]]
companies that has total consolidated assets equal to $10 billion or
more, are required to calculate their LCR on the last business day of
the calendar month from January 1, 2015, to June 30, 2015, and
beginning on July 1, 2015, must calculate their LCR on each business
day. All other covered companies are required to calculate the LCR on
the last business day of the calendar month from January 1, 2015, to
June 30, 2016, and beginning on July 1, 2016, and thereafter, must
calculate their LCR each business day.
As detailed in section V of this Supplementary Information section,
in response to comments, the Board is also adjusting the transition
periods and calculation frequency requirements for the modified LCR in
the final rule. Modified LCR holding companies will not be subject to
the final rule in 2015 and will calculate their LCR monthly starting
January 1, 2016. Furthermore, the Board is increasing the stress period
over which modified LCR net cash outflows are to be calculated from 21
calendar days to 30 calendar days and is amending the methodology
required to calculate total net cash outflows under the modified LCR.
The Basel III Revised Liquidity Framework also establishes
liquidity risk monitoring mechanisms to strengthen and promote global
consistency in liquidity risk supervision. These mechanisms include
information on contractual maturity mismatch, concentration of funding,
available unencumbered assets, LCR reporting by significant currency,
and market-related monitoring tools. At this time, the agencies are not
implementing 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 information the agencies collect through
other supervisory processes.
The final rule will provide enhanced information about the short-
term liquidity profile of a covered company to managers, supervisors,
and market participants. With this information, the covered company's
management and supervisors should 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, 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
final rule's LCR in a subsequent notice under the Paperwork Reduction
Act.
The final rule is consistent with the Basel III Revised Liquidity
Framework, with some modifications to reflect the unique
characteristics and risks of the U.S. market and U.S. regulatory
frameworks. The agencies believe that these modifications support the
goal of enhancing the short-term liquidity resiliency of covered
companies and do not unduly diminish the consistency of the LCR on an
international basis.
The agencies note that the BCBS is in the process of reviewing the
Net Stable Funding Ratio (NSFR) that was included in the Basel III
Liquidity Framework when it was first published in 2010. The NSFR is a
standard focused on a longer time horizon that is intended to limit
overreliance on short-term wholesale funding, to encourage better
assessment of funding risks across all on- and off-balance sheet items,
and to promote funding stability. The agencies anticipate a separate
rulemaking regarding the NSFR once the BCBS adopts a final
international version of the NSFR.
D. Scope of Application of the Final Rule
1. Covered Companies
Consistent with the Basel III Revised Liquidity Framework, the
proposed rule would have established a minimum LCR applicable to all
U.S. internationally active banking organizations, and their
consolidated subsidiary depository institutions with total consolidated
assets of $10 billion or more. In implementing internationally agreed
upon standards in the United States, such as the capital framework
developed by the BCBS, the agencies have historically applied a
consistent threshold for determining whether a U.S. banking
organization should be subject to such standards. The threshold,
generally banking organizations with $250 billion or more in total
consolidated assets or $10 billion or more in total on-balance sheet
foreign exposure, is based on the size, complexity, risk profile, and
interconnectedness of such organizations.\14\
---------------------------------------------------------------------------
\14\ See e.g., OCC, Board, and FDIC, ``Regulatory Capital Rules:
Regulatory Capital, Implementation of Basel III, Capital Adequacy,
Transition Provisions, Prompt Corrective Action, Standardized
Approach for Risk-weighted Assets, Market Discipline and Disclosure
Requirements, Advanced Approaches Risk-Based Capital Rule, and
Market Risk Capital Rule,'' 78 FR 62018 (October 11, 2013).
---------------------------------------------------------------------------
A number of commenters asserted that the agencies' definition of
internationally active would apply the quantitative minimum liquidity
standard to an inappropriate set of companies. Several commenters
argued that the internationally active thresholds would capture several
large banking organizations even though the business models,
operations, and funding profiles of these organizations have some
characteristics that are similar to those bank holding companies that
would be subject to the modified LCR proposed by the Board. Commenters
stated that it would be more appropriate for all ``regional banks'' to
be subject to the modified LCR as described under section V of the
Supplementary Information section to the proposed rule. One commenter
requested that the agencies not apply the standard based on the foreign
exposure threshold, but use a threshold that takes into account changes
in industry structure, considerations of competitive equality across
jurisdictions, and differences in capital and liquidity regulation.
The Board also proposed to apply the proposed rule to covered
nonbank companies as an enhanced liquidity standard pursuant to its
authority under section 165 of the Dodd-Frank Act. The Board believed
those organizations should maintain appropriate liquidity commensurate
with their contribution to overall systemic risk in the United States
and believed the proposal properly reflected such firms' funding
profiles. One commenter stated that the proposed rule would adversely
impact covered nonbank companies that own banks to facilitate customer
transactions, and would create a mismatch of regulations that will
hamper the ability of such businesses to operate. This commenter
further noted that because of their different business models, covered
nonbank companies are likely to engage in significantly less deposit-
taking than large bank holding companies, which generally translates
into less access to one of a few sources of level 1 liquid assets,
Federal Reserve Bank balances. The commenter requested specific
tailoring of the LCR or a delay in the implementation of the final rule
for covered nonbank companies.
One commenter noted that although the proposed rule would have
exempted depository institution holding companies with substantial
insurance operations and savings and loan holding companies with
substantial commercial operations, it would not have exempted
depository holding companies with significant retail securities
brokerage operations, which the commenter argued also have liquidity
risk profiles that should not be covered by the
[[Page 61446]]
liquidity requirements. Another commenter suggested that the agencies
consider waiving the LCR requirement for certain covered companies,
subject to satisfactory compliance with other metrics such as capital
ratios, stress tests, or the NSFR.
The final rule seeks to calibrate the net cash outflow requirement
for a covered company based on the composition of the organization's
balance sheet, off-balance sheet commitments, business activities, and
funding profile. Sources of funding that are considered less likely to
be affected at a time of a liquidity stress are assigned significantly
lower 30 calendar-day outflow rates. Conversely, the types of funding
that are historically vulnerable to liquidity stress events are
assigned higher outflow rates. Consistent with the Basel III Revised
Liquidity Framework, in the proposed rule, the agencies expected that
covered companies with less complex balance sheets and less risky
funding profiles would have lower net cash outflows and would therefore
require a lower amount of HQLA to meet the proposed rule's minimum
liquidity standard. For example, under the proposed rule, covered
companies that rely to a greater extent on retail deposits that are
fully covered by deposit insurance and less on short-term unsecured
wholesale funding would have had a lower total net cash outflow amount
when compared to a banking organization that was heavily reliant on
wholesale funding.
Furthermore, systemic risks that could impair the safety of covered
companies were also reflected in the minimum requirement, including
provisions to address wrong-way risk, shocks to asset prices, and other
industry-wide risks that materialized in the 2007-2009 financial
crisis. Under the proposed rule, covered companies that have greater
interconnectedness to financial counterparties and have liquidity risks
related to risky capital market instruments may have larger net cash
outflows when compared to covered companies that do not have such
dependencies. Large consolidated banking organizations engage in a
diverse range of business activities and have a liquidity risk profile
commensurate with the breadth of these activities. The scope and volume
of these organizations' financial transactions lead to
interconnectedness between banking organizations and between the
banking sector and other financial and non-financial market
participants.
The agencies believe that the proposed scope of application
thresholds were properly calibrated to capture companies with the most
significant liquidity risk profiles. The agencies believe that covered
depository institution holding companies with total consolidated assets
of $250 billion or more have a riskier liquidity profile relative to
smaller firms based on their breadth of activities and
interconnectedness with the financial sector. Likewise, the foreign
exposure threshold identifies firms with a significant international
presence, which may also be subject to greater liquidity risks for the
same reasons. In finalizing this rule, the agencies are promoting the
short-term liquidity resiliency of institutions engaged in a broad
variety of activities, transactions, and forms of financial
interconnectedness. For the reasons discussed above, the agencies
believe that the consistent scope of application used across several
regulations is appropriate for the final rule.\15\
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
The agencies believe that providing a waiver to covered companies
that meet alternate metrics would be contrary to the express purpose of
the proposed rule to provide a standardized quantitative liquidity
metric for covered companies. Moreover, with respect to commenters'
requests to exclude certain covered companies with large retail
securities brokerage and other non-depository operations from the scope
of the final rule, the agencies believe that such companies have
heightened liquidity risk profiles due to the range and volume of
financial transactions entered into by such organizations and that the
LCR is appropriately calibrated to reflect those business models.
The proposed rule exempted depository institution holdings
companies and nonbank financial companies designated by the Council for
Board supervision with large insurance operations or savings and loan
holding companies with large commercial operations, because their
business models differ significantly from covered companies. The Board
recognizes that the companies designated by the Council may have a
range of businesses, structures, and activities, that the types of
risks to financial stability posed by nonbank financial companies will
likely vary, and that the enhanced prudential standards applicable to
bank holding companies may not be appropriate, in whole or in part, for
all nonbank financial companies. Accordingly, the Board is not applying
the LCR requirement to nonbank financial companies supervised by the
Board through this rulemaking. Instead, following designation of a
nonbank financial company for supervision by the Board, the Board
intends to assess the business model, capital structure, and risk
profile of the designated company to determine how the proposed
enhanced prudential standards should apply, and if appropriate, would
tailor application of the LCR by order or rule to that nonbank
financial company or to a category of nonbank financial companies. The
Board will ensure that nonbank financial companies receive notice and
opportunity to comment prior to determination of the applicability of
any LCR requirement.
Upon the issuance of an order or rule that causes a nonbank
financial company to become a covered nonbank company subject to the
LCR requirement, any state nonmember bank or state savings association
with $10 billion or more in total consolidated assets that is a
consolidated subsidiary of such covered nonbank company also would be
subject to the final rule. When a nonbank financial company parent of a
national bank or Federal savings association becomes subject to the LCR
requirement by order or rule, the OCC will apply its reservation of
authority under Sec. _--.1(b)(1)(iv) of the final rule, including
applying the notice and response procedures described in Sec.
_--.1(b)(5) of the final rule, to determine if application of the LCR
requirement is appropriate for the national bank or Federal savings
association in light of its asset size, level of complexity, risk
profile, scope of operations, affiliation with foreign or domestic
covered entities, or risk to the financial system.
As in the proposed rule, the final rule does 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.\16\ The agencies believe that
requiring the FDIC to maintain a minimum LCR at these entities would
inappropriately constrain the FDIC's ability to resolve a depository
institution or its affiliated companies in an orderly manner.\17\
---------------------------------------------------------------------------
\16\ See 12 U.S.C. 1813(i); 5381(a)(3).
\17\ Pursuant to the International Banking Act (IBA), 12 U.S.C.
3102(b), and OCC regulation, 12 CFR 28.13(a)(1), the operations of a
Federal branch or agency regulated and supervised by the OCC are
subject to 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 and regulations
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 or regulations provide other specific standards for
Federal branches or agencies, or when the OCC determines that the
general standard should not apply. This final rule 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.
---------------------------------------------------------------------------
[[Page 61447]]
A company will remain subject to this final rule until its
appropriate Federal banking agency determines in writing that
application of the rule to the company is not appropriate. Moreover,
nothing in the final rule limits 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.
As proposed, the agencies are reserving the authority to apply the
final rule to a bank holding company, savings and loan holding company,
or depository institution that does not meet the asset thresholds
described above if it is determined that the application of the LCR
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. The
agencies also are reserving the authority to require a covered company
to hold an amount of HQLA greater than otherwise required under the
final rule, or to take any other measure to improve the covered
company's liquidity risk profile, if the appropriate Federal banking
agency determines that the covered company's liquidity requirements as
calculated under the final rule are not commensurate with its liquidity
risks. In making such determinations, the agencies will apply the
notice and response procedures as set forth in their respective
regulations.
2. Covered Depository Institution Subsidiaries
The proposed rule would have applied the LCR requirements to
depository institutions that are the consolidated subsidiaries of
covered companies and have $10 billion or more in total consolidated
assets. Several commenters argued that the agencies should not apply a
separate LCR requirement to subsidiary depository institutions of
covered companies. Another commenter noted that foreign banking
organizations would be subject to separate liquidity requirements for
the entire organization, for any U.S. intermediate holding company that
the foreign banking organization would be required to form under the
Board's Regulation YY, and for depository institution subsidiaries that
would be subject to the proposed rule, which, the commenter asserted,
could result in unnecessarily duplicative holdings of liquid assets
within the organization. In addition, several commenters argued that
the separate LCR requirement for depository institution subsidiaries
would result in excess liquidity being trapped at the covered
subsidiaries, especially if the final rule capped the inflows from
affiliated entities at 75 percent of their outflows. To alleviate this
burden, one commenter requested that the final rule permit greater
reliance on support by the top-tier holding company.
One commenter argued that excess liquidity at the holding company
should be considered when calculating the LCR for the subsidiary in
order to recognize the requirement that a bank holding company serve as
a source of strength for its subsidiary depository institutions. The
commenter also argued that requiring subsidiary depository institutions
to calculate the LCR does not recognize the relationship between
consolidated depository institutions that are subsidiaries of the same
holding company and requested that the rule permit a depository
institution to count any excess HQLA held by an affiliated depository
institution, consistent with the sister bank exemption in section 23A
of the Federal Reserve Act.\18\
---------------------------------------------------------------------------
\18\ 12 U.S.C. 371c.
---------------------------------------------------------------------------
One commenter argued that the rule should not require less complex
banking organizations to calculate the LCR for consolidated subsidiary
depository institutions with total consolidated assets of $10 billion
or more. Another commenter expressed concern that although subsidiary
depository institutions with total consolidated assets between $1
billion and $10 billion would not be required to comply with the
requirements of the proposed rule, agency examination staff would
pressure such subsidiary depository institutions to conform to the
requirements of the final rule. A few commenters requested that the
agencies clarify that these subsidiary depository institutions would
not be required by agency examination staff to conform to the rule.
In promoting short-term, asset-based liquidity resiliency at
covered companies, the agencies are seeking to limit the consequences
of a potential liquidity stress event on the covered company and on the
broader financial system in a manner that does not rely on potential
government support. Large depository institution subsidiaries play a
significant role in a covered company's funding structure, and in the
operation of the payments system. These large subsidiaries generally
also have access to deposit insurance coverage. Accordingly, the
agencies believe that the application of the LCR requirement to these
large depository institution subsidiaries is appropriate.
To reduce the potential systemic impact of a liquidity stress event
at such large depository institution subsidiaries, the agencies believe
that such entities should have a sufficient amount of HQLA to meet
their own net cash outflows and should not be overly reliant on inflows
from their parents or affiliates. Accordingly, the agencies do not
believe that the separate LCR requirement for certain depository
institution subsidiaries is duplicative of the requirement at the
consolidated holding company level, and the agencies have adopted this
provision of the final rule as proposed.
The Board is not applying the requirements of the final rule to
foreign banking organizations and intermediate holding companies
required to be formed under the Board's Regulation YY that are not
otherwise covered companies at this time. The Board anticipates
implementing an LCR-based standard through a future separate rulemaking
for the U.S. operations of some or all foreign banking organizations
with $50 billion or more in combined U.S. assets.
3. Companies That Become Subject to the LCR Requirements
The agencies have added Sec. _.1(b)(2) to address the final rule's
applicability to companies that become subject to the LCR requirements
before and after September 30, 2014. Companies that are subject to the
minimum liquidity standard under Sec. _.1(b)(1) as of September 30,
2014 must comply with the rule beginning January 1, 2015, subject to
the transition periods provided in subpart F of the final rule. A
company that meets the thresholds for applicability after September 30,
2014, based on an applicable regulatory year-end report under Sec.
_.1(b)(1)(i) through (b)(1)(iii) must comply with the final rule
beginning on April 1 of the following year.
The final rule provides newly covered companies with a transition
period for the daily calculation requirement, recognizing that a daily
calculation requirement could impose significant operational and
technology demands.
[[Page 61448]]
Specifically, a newly covered company must calculate its LCR monthly
from April 1 to December 1 of its first year of compliance. Beginning
on January 1 of the following year, the covered company must calculate
its LCR daily.
For example, a company that meets the thresholds for applicability
under Sec. _.1(b)(1)(i) through (b)(1)(iii) based on its regulatory
report filed for fiscal year 2017 must comply with the final rule
requirements beginning on April 1, 2018. From April 1, 2018 to December
31, 2018, the final rule requires the covered company to calculate its
LCR monthly. Beginning January 1, 2019, and thereafter, the covered
company must calculate its LCR daily.
When a covered company becomes subject to the final rule after
September 30, 2014, as a result of an agency determination under Sec.
_.1(b)(1)(iv) that the LCR requirement is appropriate in light of the
covered company's asset size, level of complexity, risk profile, scope
of operations, affiliation with foreign or domestic covered entities,
or risk to the financial system, the company must comply with the final
rule requirements according to a transition period specified by the
agency.
II. Minimum Liquidity Coverage Ratio
A. The LCR Calculation and Maintenance Requirement
As described above, under the proposed rule, a covered company
would have been required to maintain an HQLA amount that was no less
than 100 percent of its total net cash outflows.
1. A Liquidity Coverage Requirement
One commenter argued that the proposed rule's requirements would
reduce incentives to maintain diversified liquid asset portfolios and
other funding sources, which would result in the loss of
diversification in banking organizations' sources of funding and liquid
asset composition. Another commenter asserted that restoring and
strengthening the authorities of the Federal Reserve as the lender of
last resort would be a more effective and efficient alternative to
bolstering a covered company's liquidity reserves. One commenter stated
that the LCR requirement would introduce additional system complexities
without taking into account the benefits of long-term funding stability
afforded by the NSFR.
The agencies believe that the most recent financial crisis
demonstrated that large, internationally active banking organizations
were exposed to substantial wholesale market funding risks, as well as
contingent liquidity risks, that were not well mitigated by the then-
prevailing liquidity risk management practices and liquidity portfolio
compositions. For a number of large financial institutions, this led to
failure, bankruptcy, restructuring, merger, or only maintaining
operations with financial support from the Federal government. The
agencies believe that covered companies should not overly rely on
wholesale market funding that may be elusive in a time of stress, not
rely on expectations of government support, and not rely on asset
classes that have a significant liquidity discount if sold during a
period of stress. The agencies do not believe that the final rule's
minimum standard will constrain the diversity of a covered company's
funding sources or unduly restrict the types of assets that a covered
company may hold for general liquidity risk purposes. Covered companies
are expected to maintain appropriate levels of liquidity without
reliance on central banks acting in the capacity of lenders of last
resort. With respect to the NSFR, the agencies continue to engage in
and support the ongoing development of the ratio as an international
standard, and anticipate the standard will be implemented in the United
States at the appropriate time. In the meantime, the agencies expect
covered companies to maintain appropriate stable structural funding
profiles.
For these reasons, the overall structure of the LCR requirement is
being adopted as proposed. Under the final rule, a covered company is
required to maintain an HQLA amount that is no less than 100 percent of
its total net cash outflows over a prospective 30 calendar-day period,
in accordance with the calculation requirements for the HQLA amount and
total net cash outflows, as discussed below.
2. The Liquidity Coverage Ratio Stress Period
The proposed rule would have required covered companies to
calculate the LCR based on a 30 calendar-day stress period. Some
commenters requested that the liquidity coverage ratio calculation
instead be based on a calendar-month stress period. Another commenter
noted that supervisors should be attentive to the possibility that
excess liquidity demands can build up just outside the 30 calendar-day
window.
Consistent with the Basel III Revised Liquidity Framework, the
final rule uses a standardized 30 calendar-day stress period. The LCR
is intended to facilitate comparisons across covered companies and to
provide consistent information about historical trends. The agencies
are retaining the prospective 30 calendar-day period because a calendar
month stress period is not compatible with the daily calculation
requirement, which requires a forward-looking calculation of liquidity
stress for the 30 calendar days following the calculation date, and a
30 calendar-day stress period would provide for an accurate historical
comparison. Furthermore, while the LCR would establish one scenario for
stress testing, the agencies expect companies subject to the final rule
to maintain robust stress testing frameworks that incorporate
additional scenarios that are more tailored to the risks within their
companies.\19\ The agencies also expect covered companies to
appropriately monitor and manage liquidity risk both within and beyond
the 30-day stress period. Accordingly, the agencies are adopting this
aspect of the final rule as proposed.
---------------------------------------------------------------------------
\19\ Covered companies that are subject to the Board's
Regulation YY are required to conduct internal liquidity stress
tests that include a minimum of four periods over which the relevant
stressed projections extend: Overnight, 30-day, 90-day, and one-year
time horizons, and additional time horizons as appropriate. 12 CFR
253.35 (domestic bank holding companies); (12 CFR 235.175 (foreign
banking organizations).
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3. The Calculation Date, Daily Calculation Requirement, and Comments on
LCR Reporting
Under the proposed rule, a covered company would have been required
to calculate its LCR on each business day as of that date (the
calculation date), with the horizon for each calculation ending 30 days
from the calculation date. The proposed rule would have required a
covered company to calculate its LCR on each business day as of a set
time selected by the covered company prior to the effective date of the
rule and communicated in writing to its appropriate Federal banking
agency.
The proposed rule did not include a proposal to establish a
reporting requirement for the LCR. The agencies anticipate separately
seeking comment on proposed regulatory reporting requirements and
instructions pertaining to a covered company's disclosure of the final
rule's LCR in a subsequent notice under the Paperwork Reduction Act.
A number of commenters stated that the daily calculation
requirement imposes significant operational burdens on covered
companies. These include costs associated with building and testing new
information technology systems, developing governance and
[[Page 61449]]
internal control frameworks for the LCR, and collecting and reviewing
the requisite data to comply with the requirements of the proposed
rule. Commenters argued that developing systems is challenging,
expensive, and time consuming for those organizations that do not
currently have such reporting capabilities in place. For example, one
commenter said that capturing the data to perform the LCR calculation
on a daily basis would require banking organizations to implement
entirely new and custom data systems and mechanics. Several commenters
expressed concerns generally that the additional system development
costs would outweigh the benefits from the LCR to supervisors.
In addition to the costs of developing new systems, commenters also
raised concerns about the time frame between the adoption of the final
rule and the effective date of the proposed rule and indicated that
there would be insufficient time in which to develop operational
capabilities to comply with the proposed rule. For instance, one
commenter argued that because the rule was not yet final, there would
not be enough time to implement systems before the January 1, 2015
compliance date. Several commenters echoed a similar concern and
contended that the burden associated with implementing and testing
systems for the daily calculation is heightened by a short time frame.
Some of these commenters requested a delay in the implementation of the
final rule to better develop operational capabilities for compliance.
Several commenters argued that the requirement to calculate the LCR
daily would require large changes to data systems, processes,
reporting, and governance and were concerned that their institutions
would not have the capability to perform accurately the required
calculations. In particular, the commenters expressed concern with the
level of certainty required for such calculation and its relation to
their disclosure obligations under securities laws. Other commenters
observed that there are limits to the number of large scale projects
that covered companies can implement at one time, and building LCR
reporting systems would require significant resources.
Other commenters preferred a monthly calculation given the
significant information technology costs and short time frame until
implementation. Further, several commenters stated that much of the
data necessary to calculate a daily LCR currently is available only on
systems that report monthly, rather than daily. These commenters also
expressed concern over developing the necessary internal controls to
ensure that the data is sufficiently accurate. Several commenters
requested that the agencies require certain ``regional'' banking
organizations that met the proposed rule's scope of applicability
threshold, but have not been identified as Global Systemically
Important Banks (G-SIBs) by the Financial Stability Board, to calculate
the LCR on a monthly, rather than daily, basis. Commenters argued that
the daily calculation for such organizations is unnecessary and that
the monitoring of daily liquidity risk management should be established
through the supervisory process. One commenter argued that it may not
be necessary to perform detailed calculations every business day during
periods of ample liquidity and suggested that the agencies impose the
daily requirement only during periods of stress.
Covered companies that would not be subject to supervisory daily
liquidity reporting requirements under the Board's information
collection and Complex Institution Liquidity Monitoring Report (FR
2052a) liquidity reporting program \20\ raised concerns about the time
needed to develop systems to comply with a daily LCR requirement. Those
companies asserted they should not be subject to a daily calculation
or, in the alternative, that they should be provided with additional
time to develop operational capabilities relative to those institutions
submitting the FR 2052a report. A commenter suggested that covered
companies that have not previously been subject to bank or bank holding
company liquidity reporting requirements should be given additional
time to develop the necessary systems. Another commenter requested that
the agencies clarify the mechanics for calculating the LCR and
reporting it to regulators. Several commenters requested that, if the
final rule would require daily calculation of the LCR, the agencies
establish a transition period for firms to implement this calculation
methodology.
---------------------------------------------------------------------------
\20\ Board, ``Agency Information Collection Activities:
Announcement of Board Approval Under Delegated Authority and
Submission to OMB,'' 79 FR 48158 (August 15, 2014).
---------------------------------------------------------------------------
The agencies recognize that a daily calculation requirement for a
new regulatory requirement imposes significant operational and
technology demands upon covered companies. However, the agencies
continue to believe the daily calculation requirement is appropriate
for covered companies under the final rule. Covered companies with $250
billion or more in total consolidated assets or $10 billion or more in
total on-balance sheet foreign exposures are large, complex
organizations with significant trading and other activities. Moreover,
idiosyncratic or market driven liquidity stress events have the
potential to become significant in a short period of time even for
covered companies that have not been designated as G-SIBs by the
Financial Stability Board and that have relatively less complex balance
sheets and more consistent funding profiles than G-SIBs in the normal
course of business. In contrast to the entities that would be subject
to the Board's modified LCR requirement discussed in section V of this
Supplementary Information section, such organizations tend to have more
significant trading activities, interconnectedness in the financial
system, and are a significant source of credit to the areas of the
United States in which they operate. Supervisors expect an organization
that is a covered company under this rule to have robust, forward-
looking liquidity risk monitoring tools that enable the organization to
be responsive to changing liquidity risks. These tools are expected to
be in place even during periods when the organization considers that it
has ample liquidity, so that emerging risks may be identified and
mitigated. The agencies also note that during periods of stress, it may
be difficult for companies to implement a daily reporting requirement
if the necessary technological systems have not previously been
established.
Therefore, the agencies continue to believe the daily calculation
requirement is appropriate for covered companies under the final rule.
However, the agencies recognize that the calculation requirements under
this rule, including the daily calculation requirement, may necessitate
certain enhancements to a covered company's liquidity risk data
collection and monitoring infrastructure. Accordingly, the agencies
have changed the proposed rule to include certain transition periods as
described fully in section IV of this Supplementary Information
section. With these revisions, the agencies believe that the final rule
achieves its overall objective of promoting better liquidity management
and reducing liquidity risk. To that end, the agencies have sought to
achieve a balance between operational concerns and the overall
objectives of the LCR by providing covered companies with additional
time to implement the daily calculation requirement. Likewise, with
respect to the level of precision
[[Page 61450]]
required, the agencies believe that the transition period should
provide covered companies with an appropriate time frame to upgrade
systems, develop controls, train employees, and enhance other
operational capabilities so that covered companies will have the
requisite operational tools to effectively implement a daily
calculation requirement.
With respect to reporting frequencies, the agencies continue to
anticipate that they will separately seek comment on proposed
regulatory reporting requirements and instructions for the LCR in a
subsequent notice.
B. High-Quality Liquid Assets
The agencies received a number of comments on the criteria for HQLA
and the designation of the liquidity level for various assets. Under
the proposed rule, the numerator of the LCR would have been a covered
company's HQLA amount, which would have been the HQLA held by the
covered company subject to the qualifying operational control criteria
and compositional limitations. These proposed criteria and limitations
were meant to ensure that a covered company's HQLA amount would include
only assets with a high potential to generate liquidity through
monetization (sale or secured borrowing) during a stress scenario.
Consistent with the Basel III Revised Liquidity Framework, the
agencies proposed classifying HQLA into three categories of assets:
Level 1, level 2A, and level 2B liquid assets. Specifically, the
agencies proposed that level 1 liquid assets, which are the highest
quality and most liquid assets, would have been included in a covered
company's HQLA amount without a limit and without haircuts. 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, the proposed
rule would have subjected level 2A liquid assets to a 15 percent
haircut and, when combined with level 2B liquid assets, they could not
have exceeded 40 percent of the total HQLA amount. Level 2B liquid
assets, which are associated with a lesser degree of liquidity and more
volatility than level 2A liquid assets, would have been subject to a 50
percent haircut and could not have exceeded 15 percent of the total
HQLA amount. All other classes of assets would not qualify as HQLA.
Commenters expressed concerns about several proposed criteria for
identifying the types of assets that qualify as HQLA. Commenters also
suggested that the agencies designate certain additional assets as HQLA
and change the categorization of certain assets as level 1, level 2A,
or level 2B liquid assets. A commenter cautioned that the proposed
rule's stricter definition of HQLA compared to the Basel III Revised
Liquidity Framework could lead to distortions in the market, such as
dramatically increased demand for limited supplies of asset classes and
hoarding of HQLA by financial institutions.
The final rule adopts the proposed rule's overall structure for the
classification of assets as HQLA and the compositional limitations for
certain classes of HQLA in the HQLA amount. As discussed more fully
below, the agencies considered the issues raised by commenters and
incorporated a number of modifications in the final rule to address
commenters' concerns.
1. Liquidity Characteristics of HQLA
Assets that qualify as HQLA should be easily and immediately
convertible into cash with little or no expected loss of value during a
period of liquidity stress. In identifying the types of assets that
would qualify as HQLA in the proposed and final rules, the agencies
considered the following categories of liquidity characteristics, which
are generally consistent with those of the Basel III Revised Liquidity
Framework: (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 have
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. Another characteristic of these assets is that
they generally experience ``flight to quality'' during a crisis, which
is where investors sell their other holdings to buy more of these
assets in order to reduce the risk of loss and thereby increase their
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 that 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 have been more prone to lose value when the banking
sector is experiencing stress and become less liquid due to the high
correlation between the health of these companies and the health of the
financial sector 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, and consistent with the Basel III Revised
Liquidity Framework, the final rule excludes from HQLA assets that are
issued by companies that are primary actors in the financial sector.
Identification of these companies is discussed in section II.B.2,
below.
b. Market-Based Characteristics
The agencies also have found that assets appropriate to be included
as HQLA generally exhibit certain market-based characteristics. 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 trading volume. This market-based liquidity characteristic may be
demonstrated by historical evidence, including evidence observed during
recent periods of market liquidity stress. Such assets should
demonstrate: Low bid-ask spreads, high trading volumes, a large and
diverse number of market participants, and other appropriate factors.
Diversity of market participants, on both the buying and selling sides
of transactions, is particularly important because it tends to reduce
market concentration and is a key indicator that a market will remain
liquid during periods of stress. 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 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) as well as trading 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 these periods of stress because historically market
participants move into more liquid assets in times of systemic crisis.
[[Page 61451]]
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 can readily 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 final
rule's requirements for HQLA must be met if central bank eligible
assets are to qualify as HQLA.
d. Comments About Liquidity Characteristics
In their proposal, the agencies requested comments on whether the
agencies should consider other characteristics in analyzing the
liquidity of an asset. Although several commenters expressed concerns
about the agencies' evaluation of the proposed liquidity
characteristics to designate certain assets as HQLA, the agencies
received only a few comments on the set of liquidity characteristics.
One commenter suggested that the agencies evaluate secondary trading
levels over time, specifically for level 1 liquid assets. The commenter
also recommended that the agencies consider various factors to assess
security issuances, including the absolute size of parent issuer
holdings, credit ratings, and average credit spreads. Another commenter
expressed its belief that the inclusion of an asset as HQLA should be
determined based on objective criteria for market liquidity and
creditworthiness.
In response to the commenter's concerns, the agencies agree that
trading volume is an important characteristic of an asset's liquidity.
The agencies believe that high trading volume across dynamic market
environments is one of several factors that evidences market-based
characteristics of HQLA. The final rule continues to consider trading
volume to assess the liquidity of an asset.
In response to the commenter's suggestion for the final rule to
include factors such as credit ratings and average credit spreads, the
agencies recognize that indicators of credit risk include credit
ratings and average credit spreads. The risk profile of an asset also
includes many other types of risks. The agencies note that the final
rule incorporates assessments of credit risk in certain level 1 and
level 2A liquid assets criteria by referring to the risk weights
assigned to securities under the agencies' risk-based capital rules.
The agencies are not including the additional factors suggested by the
commenter because in some cases, it would be legally impermissible, and
additionally, the agencies believe the link to risk weights in the
risk-based capital rules for level 1 and level 2A qualifying criteria
sufficiently captures credit risk factors for purposes of the LCR.\21\
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\21\ A credit rating is one potential perspective on credit risk
that may be used by a covered company in its assessment of the risk
profile of a security. However, covered companies should avoid over
reliance upon credit ratings in isolation. In addition, the Dodd-
Frank Act prohibits the reference to or reliance on credit ratings
in an agency's regulations. Public Law 111-203, section 939A, 124
Stat 1376 (2010).
---------------------------------------------------------------------------
Finally, in response to one commenter's request that the agencies
incorporate objective criteria in the liquidity characteristics of the
final rule, the agencies highlight that certain objective criteria
relating to price decline scenarios are included as qualifying criteria
for level 2A and level 2B liquid assets, as discussed in section
II.B.2. The agencies believe that the liquidity characteristics in the
final rule, combined with certain objective criteria for specific
categories of HQLA, provide an appropriate basis for evaluating a
variety of asset classes for inclusion as HQLA.
2. Qualifying Criteria for Categories of HQLA
Based on the analysis of the liquidity characteristics above, the
proposed rule would have included a number of classes of assets meeting
these characteristics as HQLA. However, within certain of the classes
of assets that the agencies proposed to include as HQLA, the proposed
rule would have set forth a number of qualifying criteria and specific
requirements for a particular asset to qualify as HQLA. With certain
modifications to address commenters' concerns regarding certain classes
of assets, discussed below, the agencies are adopting these criteria
and requirements generally as proposed.
a. The Liquid and Readily-Marketable Standard
Most of the assets in the HQLA categories would have been required
to meet the proposed rule's definition of ``liquid and readily-
marketable'' in order to be included as HQLA. Under the proposed rule,
an asset would have been 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 agencies
proposed this ``liquid and readily-marketable'' requirement to ensure
that assets included as HQLA would 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.
Commenters raised several concerns with the proposed rule's
definition of ``liquid and readily-marketable.'' Several commenters
urged the agencies to provide more detail on the liquid and readily-
marketable standard. One of these commenters highlighted that the
definition included undefined terms and suggested that the agencies
either provide specific securities or asset classes or refer to
instrument characteristics similar to those listed in the Board's
Regulation YY. One commenter urged the agencies to pursue a more
quantitative approach to identifying securities that would meet the
standard. Another commenter noted that the agencies did not provide
guidance on how to document that HQLA meets the market-based
characteristics or the liquid and readily-marketable standard.
Separately, another commenter suggested that the liquid and readily-
marketable standard should account for indicators of liquidity other
than those related to the secondary market. In particular, the
commenter highlighted that covered companies can monetize securities
outside of the outright sales market through repurchase transactions
and through posting securities as collateral
[[Page 61452]]
securing over-the-counter or exchange-traded derivative transactions.
Another commenter interpreted the liquid and readily-marketable
standard to require a security-by-security analysis incorporating data
on market makers and market participants and trading volumes to
determine eligibility under the criteria. The commenter contended that
such analysis could be burdensome on covered companies with significant
trading operations. One commenter requested that the agencies remove
this standard for all level 1 and level 2A liquid assets. Another
stated that there was a difference between the regulatory text of the
proposed rule and the discussion in the Supplementary Information
section to the proposed rule, which indicated that HQLA would need to
exhibit certain market-based characteristics, such as no sharp price
declines, and standardized, homogeneous, and simple securities
structures. The commenter stated that these characteristics were not
included in the liquid and readily-marketable standard and requested
clarification on how much the structure of a security would be
questioned by the supervisors of a covered company.
After reviewing the comments, the agencies have determined to
retain the proposed definition of ``liquid and readily-marketable'' in
the final rule. The agencies believe that defining an asset as 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 provides an appropriate standard for determining whether an
asset can be readily sold in times of stress. These elements of the
requirement are meant to ensure that assets included as HQLA are traded
in deep, active markets to allow a covered company to convert them into
cash by sale or repurchase transactions during times of stress. In
particular, the agencies believe that an active secondary market for an
asset is an indicator of the ease with which a covered company may
monetize that asset. In response to a commenter's concern that a
covered company may only monetize securities through outright sales to
meet the liquid and readily-marketable standard, the agencies are
clarifying that a covered company may monetize assets through
repurchase transactions in addition to outright sales.
Although one commenter requested that the final rule include
specific securities or instrument characteristics to further define
``liquid and readily-marketable,'' the agencies believe that the
specific types of securities set forth in the categories of level 1,
level 2A, and level 2B liquid assets provide sufficient detail of the
types of securities and instruments that may be liquid and readily-
marketable and may be considered HQLA. In addition, the final rule
retains from the proposed rule certain price decline scenarios to
identify certain level 2A and level 2B liquid assets.\22\ The agencies
believe that price decline scenarios are appropriate for certain types
of assets included in level 2A and 2B liquid assets to evaluate the
liquidity and market-based characteristics of those assets. As the
criteria for these categories of HQLA incorporate price decline
scenarios, the agencies do not believe it is necessary to separately
include price decline scenarios as part of the liquid and readily-
marketable standard.
---------------------------------------------------------------------------
\22\ See Sec. _--.20(b) and (c).
---------------------------------------------------------------------------
One commenter requested that the agencies clarify the Supplementary
Information section discussion in the proposed rule indicating that
HQLA should exhibit standardized, homogeneous, and simple security
structures. The agencies believe that the criteria for HQLA set forth
in Sec. _--.20 of the final rule includes assets that meet these
criteria. The final rule continues to require that certain HQLA
categories meet the final rule's definition of liquid and readily-
marketable. The agencies emphasize that securities with unique,
bespoke, or complex structures which are difficult to value on a
routine basis, regardless of issuer or capital risk weight, may not
meet the liquid and readily-marketable standard.
In response to a commenter's concern about the burden of a
security-by-security analysis to demonstrate that a security qualifies
as liquid and readily-marketable, the agencies recognize that certain
companies may trade or hold a significant number of different
securities. Although the exercise of assessing unique securities for
the purpose of determining whether they are liquid and readily-
marketable may involve operational burden, the agencies believe this
analysis and determination is critical to ensuring that only securities
that will serve as a reliable source of liquidity during times of
stress are included in a company's HQLA. A covered company may choose
not to determine whether a security is liquid and readily-marketable
for LCR purposes if it determines that the cost of performing the
analysis exceeds the benefit of including the security as HQLA. Thus,
the agencies decline to remove the liquid and readily-marketable
standard for all level 1 and level 2A liquid assets, as requested by
one commenter.
Furthermore, in response to requests that the agencies clarify any
documentation requirements in determining whether an asset is liquid
and readily-marketable, the agencies expect that a covered company
should be able to demonstrate to its appropriate Federal banking agency
its security-by-security analysis (which may include time-series
analyses about the specific security or comparative analysis of similar
securities from the same issuer) that HQLA held by the covered company
meets the liquid and readily-marketable standard.
b. Financial Sector Entities
Consistent with the Basel III Revised Liquidity Framework, the
proposed rule would have provided that assets that are included as HQLA
could not be issued by a financial sector entity, because these assets
could exhibit similar risks and correlation with covered companies
(wrong-way risk) during a liquidity stress period. In the proposed
rule, financial sector entities would have included regulated financial
companies, investment companies, non-regulated funds, pension funds,
investment advisers, or a consolidated subsidiary of any of the
foregoing. In addition, under the proposed rule, securities issued by
any company (or any of its consolidated subsidiaries) that an agency
has determined should, for the purposes of the proposed rule, be
treated the same as a regulated financial company, investment company,
non-regulated fund, pension fund, or investment adviser, based on its
engagement in activities similar in scope, nature, or operations to
those entities (identified company) would not have been included as
HQLA.
The term regulated financial company under the proposed rule would
have included bank holding companies and savings and loan holding
companies (depository institution holding companies); nonbank financial
companies supervised by the Board; 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 (BHC Act); national banks, state member banks, and state
nonmember banks (including those that are not depository institutions);
insurance companies; securities holding companies (as defined in
section 618 of the Dodd-
[[Page 61453]]
Frank Act); \23\ broker-dealers or dealers registered with the
Securities and Exchange Commission (SEC); futures commission merchants
and swap dealers, each as defined in the Commodity Exchange Act; \24\
or security-based swap dealers defined in section 3 of the Securities
Exchange Act.\25\ It would also have included any designated financial
market utility, as defined in section 803 of the Dodd-Frank Act.\26\
The proposed definition would have also included foreign companies that
are supervised and regulated in a manner similar to the institutions
listed above.\27\
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\23\ 12 U.S.C. 1850a(a)(4).
\24\ 7 U.S.C. 1a(28) and (49).
\25\ 15 U.S.C. 78c(a)(71).
\26\ 12 U.S.C. 5462(4).
\27\ 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, the proposed definition of regulated financial company
would have included 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 was
subject to the proposed rule (FR Y-6 companies).\28\ FR Y-6 companies
are typically controlled by the filing depository institution holding
company under the BHC Act. Although many of these companies may not be
consolidated on the financial statements of a depository institution
holding company, the links between the companies are sufficiently
significant that the agencies believed that it would have been
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 have been
excluded from HQLA under the proposal. The organizational hierarchy
chart produced by the NIC Web site reflects (as updated regularly) the
FR Y-6 companies a depository institution holding company must report
on the form. The agencies proposed 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.
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\28\ See National Information Center, A repository of financial
data and institution characteristics collected by the Federal
Reserve System, available at http://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx.
---------------------------------------------------------------------------
Commenters suggested that the proposed definition of ``regulated
financial company'' was overly broad. For example, one commenter stated
that for the purposes of deposit classification, the definition of
``financial institution'' needs to be limited to those entities that
contribute to the risk of interconnectedness to ensure the accurate
capture of the underlying risk of the depositor, noting that the NAICS
codes for ``Finance and Insurance'' and ``Commercial Banking'' include
over 816,000 and 79,000 business, respectively. The commenter stated
that, depending on the definition, certain financial institutions may
have operational needs and transactional deposits that are more similar
to a non-financial institution.\29\
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\29\ The agencies note that the proposed rule would have
recognized that financial sector entities have operational needs and
deposits that are similar to non-financial entities by treating the
deposits of financial sector entities that meet the operational
deposit criteria as operational deposits. The non-operational
deposits of a financial would have been subject to a higher outflow
rate than a non-financial wholesale counterparty due to correlation
of liquidity risks between financial sector entities and covered
companies. The final rule retains each of these provisions as
discussed below under section II.C.3.h.
---------------------------------------------------------------------------
Overall, the agencies believe that the overall scope of the
proposed definition of ``regulated financial company'' appropriately
captured the types of the companies whose assets could exhibit similar
risks and correlation with covered companies during a liquidity stress
period. Although the number of financial entities are large, due to the
prominence of the financial services industry to the economy of the
United States, the agencies continue to believe that the liquidity
risks presented by securities and obligations of such companies would
be difficult to monetize during a period of significant financial
distress, as shown in the recent financial crisis. Accordingly, similar
to the proposed rule, the final rule will exclude the securities and
obligations of financial sector entities from being HQLA.
In addition to comments regarding the scope of the entities that
would have been included under the proposed rule, several commenters
expressed concerns regarding the specific inclusion of certain
entities.
i. Companies Listed on a Covered Company's FR Y-6
Commenters expressed concern about the definition's inclusion of
any company that is included in the organizational chart of a covered
company as reported on the Form FR Y-6 and reflected on the NIC Web
site within the definition of regulated financial company. These
commenters contended that the FR Y-6 is an expansive form that captures
a substantial range of activities and investments of depository
institution holding companies, including companies in which the covered
company has a minority, non-controlling interest, as well as merchant
banking investments. Commenters reasoned that merchant banking
investments may be non-financial enterprises and may not contribute to
the ``wrong-way risk'' contemplated by the agencies in defining
regulated financial company. The commenters believed that such entities
should not be included as regulated financial companies and requested
that the final rule's definition of regulated financial company not
include all companies reported by a covered company on the Form FR Y-6.
The agencies recognize that there are certain shortcomings in the
scope of the entities that are listed on a covered company's FR Y-6,
including the potential capture of non-financial, passive merchant
banking subsidiaries. The Board is actively considering options to
adjust the reporting mechanism which may be used in determining the
population of regulated financial companies. Moreover, because entities
listed on a covered company's FR Y-6 that are non-financial, merchant
banking investments or that do not meet the definition of control under
the BHC Act are not currently separated from other entities controlled
by a covered company, the agencies do not believe it would be
appropriate at this time to provide a blanket exemption for merchant
banking or non-control investments. The Board anticipates that it will
revise the reporting requirements used for this purpose in the near
future. However, because any revisions to reporting requirements would
be subject to public comment, for purposes of the final rule, the
agencies are finalizing the definition of regulated financial company
as proposed. The agencies do not believe that any change to the
definition of regulated financial company would be appropriate without
subjecting such a revision to public
[[Page 61454]]
comment, together with other revisions to the reporting requirements
that would be used to identify regulated financial companies.
ii. Foreign Regulated Financial Entities
The definition of regulated financial company under the proposed
rule would have included a non-U.S.-domiciled company that is
supervised and regulated in a manner similar to the other entities
described in the definition, including bank holding companies. One
commenter requested that the agencies clarify that the definition of
regulated financial company would not include non-U.S. government-
sponsored entities and public sector entities. The commenter argued
that certain public sector entities are not engaged in a full range of
banking activities, but are, however, typically subject to prudential
regulation. Two commenters also requested that the preamble to the
final rule explain how the ``supervised and regulated in a similar
manner'' standard should be construed.
The final rule adopts this provision of the rule as proposed. The
agencies are clarifying that, for purposes of the final rule, a foreign
company, including a non-U.S. public sector entity, that is similar in
structure to a U.S. regulated financial company (e.g., a foreign bank
or foreign insurance company) and that is subject to prudential
supervision and regulation in a manner that is similar to a U.S.
regulated financial company would be considered a regulated financial
company under the final rule. In considering the similarity of the
supervision and regulation of a foreign company, a covered company can
consider whether the non-U.S. activities and operations of the company
would be subject to supervision and regulation in the United States and
whether such activities are subject to supervision and regulation
abroad.
iii. Investment Companies and Investment Advisers
Under the proposed rule, investment companies would have included
companies registered with the SEC under the Investment Company Act of
1940 \30\ and investment advisers would have included companies
registered with the SEC as investment advisers under the Investment
Advisers Act of 1940,\31\ as well as the foreign equivalent of such
companies.
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\30\ 15 U.S.C. 80a-1 et seq.
\31\ 15 U.S.C. 80b-1 et seq.
---------------------------------------------------------------------------
One commenter expressed concern with the proposed rule's treatment
of investment companies as financial sector entities. The commenter
argued that if an investment company does not invest in financial
sector entities, the value of its shares would not correlate with
covered companies. The commenter recommended that an investment
company's HQLA eligibility should be based on the investment company's
investment policies, such that if an investment company has a policy of
investing 80 percent of its assets in HQLA or in securities and
obligations of non-financial sector entities, its securities would be
treated as HQLA of the same level as the lowest level HQLA permitted
under the policy.
After considering the commenter's concerns, the agencies decline to
adopt the commenter's recommendation in the final rule. Similar to
other entities in the financial sector, investment companies have been
more prone to lose value and, as a result, become less liquid in times
of liquidity stress regardless of the investment company's investment
policies or portfolio composition, due to the potentially higher
correlation between the health of these companies and the health of the
financial markets generally. The agencies believe that a covered
company can be exposed to the interconnectedness of financial markets
through its investment in investment companies. Thus, consistent with
the Basel III Revised Liquidity Framework, the final rule would exclude
assets issued by companies that are primary actors in the financial
sector from HQLA, including investment company shares.
iv. Non-Regulated Funds
Under the proposed rule, non-regulated funds would have included
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.\32\
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\32\ 15 U.S.C. 661 et seq.
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Commenters expressed concerns about the proposed definition of
``non-regulated fund.'' One of these commenters stated that the
proposed definition would have included the undefined terms ``hedge
fund'' and ``private equity fund.'' The commenter also argued that the
definition should not include portfolio companies that are consolidated
subsidiaries of non-regulated funds and those funds that invest
primarily in real estate and related assets. The commenter suggested
that the definition exclude any fund that does not issue redeemable
securities that provide investors with redemption rights in the
ordinary course and should also exclude closed-end funds. The commenter
also stated that although the definition requires a banking
organization to determine whether the investment adviser of a fund is
required to file Form PF, this information on whether a particular fund
is the subject of a Form PF is not publicly available.
Generally, a manager of a ``private fund'' that is required to
register with the SEC as an investment adviser and manages more than
$150 million in private fund assets is required to file SEC Form PF.
Although the final rule does not define hedge funds or private equity
funds, the agencies believe that such terms are commonly understood in
the financial services industry and note that the instructions to the
SEC's Form PF provide a definition for private equity funds and hedge
funds that are captured under the form.\33\ Therefore the agencies
believe that defining ``non-regulated fund'' by referencing the private
equity and hedge funds whose investment advisers are required to file
SEC Form PF adequately defines the universe of hedge funds and private
equity funds captured under the final rule.
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\33\ See Reporting Form for Investment Advisers to Private Funds
and Certain Commodity Pool Operations and Commodity Trading Advisors
(Form PF), available at http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf.
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In response to commenter concerns that the definition of ``non-
regulated fund'' includes portfolio companies that are consolidated
subsidiaries of private funds, the agencies have modified the
definition of ``non-regulated fund.'' The agencies recognize that
consolidated subsidiaries of private funds may not conduct financial
activities, but would have received treatment as financial sector
entities under the proposed rule. Accordingly, the final rule's
definition of ``non-regulated fund'' no longer includes consolidated
subsidiaries of hedge funds and private equity funds whose investment
adviser is required to file SEC Form PF.
With respect to the commenter's request to exclude any fund that
does not issue redeemable securities and closed-end funds from the
definition of non-regulated fund, although investors in these funds are
unable to redeem securities and may not appear to present liquidity
risk, the agencies believe these obligations and securities do pose
similar liquidity risks and will behave similarly to those of other
financial entities.
[[Page 61455]]
Finally, the agencies recognize that Form PF filings are not
publicly disclosed. However, the agencies expect that a covered company
should understand whether its customer is a private equity fund or a
hedge fund. The agencies further expect that when identifying HQLA a
covered company should undertake the necessary diligence to confirm
whether an investment adviser to such fund, which is typically the
manager of the fund, is required to file Form PF and meets the final
rule's definition of ``non-regulated fund.''
c. Level 1 Liquid Assets
Under the proposed rule, a covered company could have included the
full fair value of level 1 liquid assets in its HQLA amount.\34\ The
proposed rule would have recognized that these assets have the highest
potential to generate liquidity for a covered company during periods of
severe liquidity stress and thus would have been includable in a
covered company's HQLA amount without limit. The proposed rule would
have included the following assets as 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.
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\34\ Assets that meet the criteria of eligible HQLA may be held
by a covered company designated as either ``available-for-sale'' or
``held-to-maturity,'' but must be included in the HQLA amount
calculation at fair value (as determined under GAAP).
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As discussed in more detail below, a number of commenters suggested
including additional assets in the level 1 liquid asset category. After
considering the comments received, the final rule includes the criteria
for the level 1 liquid asset category substantially as proposed.
i. Reserve Bank Balances
Under the Basel III Revised Liquidity Framework, ``central bank
reserves'' are included as 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.\35\ 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 maintained in a term deposit account offered by the Federal Reserve
Banks. The proposed rule used the term ``Reserve Bank balances'' as the
relevant term to capture central bank reserves in the United States.
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\35\ See 12 U.S.C. 342.
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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 have been considered level 1
liquid assets, except for certain term deposits as explained below.
Consistent with the concept of ``central bank reserves'' in the
Basel III Revised Liquidity Framework, the proposed rule included 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.
Regarding the first point, term deposits offered under the Federal
Reserve's Term Deposit Facility that include an early withdrawal
feature that allows a depository institution to obtain a return of
funds prior to the deposit maturity date, subject to an early
withdrawal penalty, would be included in ``Reserve Bank balances''
because such term deposits would be explicitly and contractually
repayable on notice. The amount associated with a term deposit that
would be included as ``Reserve Bank balances'' is equal to the amount
that would be received upon withdrawal of such a term deposit. Those
term deposits that do not include this feature would not be included in
``Reserve Bank balances.'' The terms and conditions for each term
deposit offering specify whether the term deposits being offered
include an early withdrawal feature. Regarding the second point,
although term deposits may be pledged as collateral for discount window
borrowing, the Federal Reserve's current discount window lending
programs do not generally provide term or automatically-renewing
overnight advances.
Commenters suggested various assets related to Reserve Bank
balances to include as level 1 liquid assets or to be reflected in the
level 1 liquid asset amount. One commenter recommended that the final
rule include required reserves in the level 1 liquid asset amount,
alleging that the proposed rule circumvented Regulation D, which allows
covered companies to manage their reserves over a 14-day period.\36\ A
few commenters argued that the final rule should include vault cash,
whether held in branches or ATMs, as a level 1 liquid asset. The
commenter argued that the final rule should be consistent with the
Basel III Revised Liquidity Framework, which recognizes the intrinsic
liquidity value of cash and includes coins and banknotes as level 1
liquid assets. Commenters further contended that vault cash, which can
be used to satisfy the bank's reserve requirement under Regulation D,
is a fundamental feature of daily liquidity management for banks and
should be included as level 1 liquid assets.\37\ One commenter
requested confirmation whether gold bullion meets the definition of
level 1 liquid assets, arguing that it is low risk, highly liquid, has
an active outright sale market, high trading volumes, a diverse number
of
[[Page 61456]]
market participants, and has historically been a flight-to-quality
asset.
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\36\ 12 CFR part 204.
\37\ 12 CFR 204.5(a)(1).
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After considering the comments, the agencies are adopting the
proposed criteria in the final rule with respect to central bank
reserves. The agencies are not adopting a commenter's suggestion to
include required reserves in the level 1 liquid asset amount because
the assets held to satisfy required reserves, whether vault cash or
balances maintained at a Federal Reserve Bank, are required for the
covered company to manage reserves over the maintenance period pursuant
to Regulation D and the agencies do not believe that the assets held to
satisfy a covered company's required reserves would entirely be
available for use during a liquidity stress event due to the reserve
requirements.\38\
---------------------------------------------------------------------------
\38\ 12 CFR 204.5(b)(1).
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The final rule does not include cash, whether held in branches or
ATMs, in level 1 liquid assets, as such cash may be necessary to meet
daily business transactions and due to logistical concerns associated
with ensuring that the cash can be immediately used to meet the covered
company's outflows. However, as noted in section II.B.5 of this
Supplementary Information section, the final rule does modify the
calculation of the HQLA amount. Under the proposed rule, the level 1
liquid asset amount would have equaled the fair value of all level 1
liquid assets held by the covered company as of the calculation date,
less required reserves under section 204.4 of Regulation D (12 CFR
204.4). Under the final rule, agencies have clarified that the amount
to be deducted from the fair value of eligible level 1 assets is the
covered company's reserve balance requirement under section 204.5 of
Regulation D (12 CFR 204.5). 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.
The agencies also decline to adopt a commenter's suggestion to
include gold bullion as a level 1 liquid asset given the concerns about
the volatility in market value of the asset and the logistical factors
associated with holding and liquidating the asset.
ii. Foreign Withdrawable Reserves
The agencies proposed that reserves held by a covered company in a
foreign central bank that are not subject to restrictions on use
(foreign withdrawable reserves) would have been included as 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. The agencies received no
comments on the definition of foreign withdrawable reserves. The final
rule includes foreign withdrawable reserves as level 1 liquid assets as
proposed.
iii. United States Government Securities
The proposed rule would have included as 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 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 have
also included 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.
One commenter suggested that the agencies' inclusion in level 1
liquid assets of only agency securities that are fully and explicitly
guaranteed by the full faith and credit of the U.S. government was too
narrow and this would increase the demand for Government National
Mortgage Association (GNMA) securities by large banking organizations,
resulting in increased market pricing for such securities that would
impact the profitability of investments at smaller banking
organizations. The agencies believe that securities that are issued by,
or unconditionally guaranteed as to the timely payment of principal and
interest by, a U.S. government agency whose obligations are fully and
explicitly guaranteed by the full faith and credit of the U.S.
government have credit and liquidity risk that is comparable to
securities issued by the U.S. Treasury. Thus, due to the inherent low
risk of such securities and obligations, the agencies believe that it
is appropriate to classify such securities as level 1 liquid assets.
The agencies believe that any increased holdings of such securities by
covered companies should not result in significant price increases for
the securities due to the requirement of the final rule that each
covered company ensure that it maintains policies and procedures that
ensure the appropriate diversification of its HQLA by asset type,
counterparty, issuer, and other factors. The final rule adopts this
provision as proposed and continues to include U.S. government
securities as level 1 liquid assets.
iv. Certain Sovereign and Multilateral Organization Securities
The proposed rule would have included as level 1 liquid assets
securities that are a claim on, or a claim unconditionally 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 met the following four requirements.
First, these securities must have been assigned a zero percent risk
weight under the standardized approach for risk-weighted assets of the
agencies' risk-based capital rules.\39\ Generally, securities issued by
sovereigns that are assigned a zero percent risk weight have shown
resilient liquidity characteristics. Second, the proposed rule would
have required these securities to be liquid and readily-marketable, as
discussed above. Third, these securities would have been required to
have been 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 have
demonstrated a historical record that met this criterion through
reference to historical market prices during times of stress, such as
the period of financial market stress experienced from 2007 to 2009.
Covered companies should also have looked 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.
---------------------------------------------------------------------------
\39\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve),
and 12 CFR part 324 (FDIC).
---------------------------------------------------------------------------
One commenter expressed concern about the inclusion of all
sovereign obligations that qualify for a zero percent risk weight as
level 1 liquid assets. The commenter argued that a broad range of
sovereign debt may receive a zero percent risk weight under the Basel
III capital accord and may include sovereign entities whose commitments
pose credit, liquidity, or exchange rate risk, and suggested that the
agencies include a minimum sovereign rating classification.
The agencies considered the commenter's concerns, but are adopting
[[Page 61457]]
the criteria for sovereign obligations to be included as level 1 liquid
assets as proposed. The agencies believe that sovereign obligations
that continue to qualify for a zero percent risk weight have shown
resilient liquidity characteristics. The agencies believe that the risk
weight assigned to sovereign obligations under the agencies' risk-based
capital rules is an appropriate standard and decline to require a
minimum sovereign rating classification. The agencies continue to
retain the proposed criteria for determining whether sovereign and
multilateral organization securities qualify as level 1 liquid assets
under the final rule such as requiring them to be liquid and readily-
marketable.\40\ The agencies believe that these criteria limit the
concerns raised by the commenter that capital risk weight alone is
insufficient to preclude all illiquid foreign debt issuances.
Consistent with the inclusion of level 1 liquid assets as HQLA, the
agencies believe that qualifying sovereign securities should continue
to be includable in a covered company's HQLA amount without limit.
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\40\ The agencies note that an asset's ability to qualify under
this criterion may change over time.
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v. Certain Foreign Sovereign Debt Securities
Under the proposed rule, 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'
risk-based capital rules could have served as level 1 liquid assets if
they were liquid and readily-marketable, the sovereign entity issued
such debt securities in its own currency, and a covered company held
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 have been 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. The agencies received no significant comments on this
section of the proposed rule and so the final rule adopts this standard
as proposed.
vi. Level 1 Liquid Assets at a Foreign Parent
Several commenters requested that the agencies permit a covered
company that is a U.S. subsidiary of a foreign company subject to the
LCR in another country to treat assets that are permitted to be
included as level 1 liquid assets under the laws of that country as
level 1 liquid assets for purposes of the final rule. After considering
the commenters' request, the agencies decline to adopt the commenter's
request. The agencies believe that assets should exhibit the liquidity
characteristics required in the final rule, which have been calibrated
for the outflows of U.S. covered companies, to be included as level 1
liquid assets for purposes of the U.S. LCR requirement. The agencies
intend to ensure that the requirements for level 1 liquid assets are
consistent for all covered companies, regardless of the ownership of an
individual covered company. As noted above, the agencies have included
certain foreign sovereign obligations as level 1 liquid assets and
believe that these asset classes appropriately reflect the outflows of
U.S. covered companies.
vii. Deposits by Covered Nonbank Companies in Third-Party Commercial
Banks
One commenter requested that the agencies permit covered nonbank
companies to include as level 1 liquid assets, subject to a haircut,
overnight deposits in third-party commercial banks or holding companies
that are subject to the final rule or a foreign equivalent standard, so
long as the deposits are not concentrated in any one affiliated group
of banks. After considering the commenter's request, the agencies have
decided not to adopt the suggestion and believe all covered companies
have several investment options to fulfill their HQLA requirement. The
agencies recognize that covered nonbank companies do not have access to
certain services available to banking entities and may place
significant deposits with third-party banking organizations. Such
deposits do not meet the agencies' criteria for level 1 liquid assets
because during a liquidity stress event many commercial banks may
exhibit the same liquidity stress correlation and wrong-way risk
discussed above in relation to excluded financial sector entity
securities. However, the agencies note that amounts in these deposits
may qualify as an inflow, with a 100 percent inflow rate, to offset
outflows, depending upon their operational nature.
viii. Liquidity Up-Front Fee
The proposed rule briefly noted there has been ongoing work on the
Basel III LCR and central bank operations. The BCBS announced on
January 12, 2014, an amendment to the Basel III Revised Liquidity
Framework that included allowing capacity from restricted committed
liquidity facilities of central banks as HQLA. One commenter stated
that any concerns expressed by the banking industry regarding the
availability of liquid assets could be addressed by permitting
financial institutions to pay the Federal Reserve an up-front fee for a
committed liquidity line.
The agencies are considering the merits of including central bank
restricted committed facility capacity as HQLA for purposes of the U.S.
LCR requirement and may propose at a future date to include such
capacity as HQLA.
d. Level 2A Liquid Assets
Under the proposed rule, level 2A liquid assets would have included
certain obligations issued or guaranteed by a U.S. government sponsored
enterprise (GSE) \41\ and certain obligations issued or guaranteed by a
sovereign entity or a multilateral development bank. Assets in these
categories would have been required to be liquid and readily-
marketable, as described above, to be considered level 2A liquid
assets. The agencies received a number of comments on the treatment of
GSE securities under the proposed rule. After reviewing the comments
received, for the reasons discussed below, the agencies are adopting
the proposed criteria for level 2A liquid assets in the final rule.
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\41\ GSEs currently include the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association
(FNMA), the Farm Credit System, and the Federal Home Loan Bank
(FHLB) System.
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i. U.S. GSE Securities
Commenters suggested a variety of approaches to change the final
rule's treatment of U.S. GSE securities. Under the proposed rule, U.S.
GSE securities are classified as level 2A liquid assets, which are
subject to a 15 percent haircut and, when combined with level 2B liquid
assets, have a 40 percent maximum composition limit in the HQLA amount,
as discussed in section II.B.5 of this Supplementary Information
section.
Several commenters requested that the agencies designate debt
securities issued and guaranteed by a U.S. GSEs as level 1 liquid
assets in the final rule. Commenters also stated that the 15 percent
haircut for such obligations was too high. A few commenters recommended
that the agencies remove the 40 percent composition cap on level 2
liquid assets for U.S. GSE securities if the final rule does not
include U.S. GSE securities as level 1 liquid assets. Other commenters
suggested that the agencies
[[Page 61458]]
remove the ``liquid and readily-marketable'' requirement for the
inclusion of U.S. GSE securities as level 2A liquid assets because the
securities clearly meet these requirements. One commenter suggested a
graduated cap approach, whereby U.S. GSE securities in excess of the 40
percent composition limit in the HQLA amount would be subject to a
haircut that would increase as the proportion of U.S. GSE securities to
total HQLA increases.
To support their request, commenters made various observations
about the liquidity characteristics of U.S. GSE securities. Many
commenters highlighted that the market for U.S. GSE securities is one
of the deepest and most liquid in the world, with over $4 trillion in
GSE mortgage backed securities (MBS) outstanding and a daily trading
volume in GSE MBS that averages almost $230 billion. In particular,
some commenters argued that MBS issued by FNMA and FHLMC are among the
highest quality and most liquid assets. A number of commenters
mentioned that U.S. GSE securities comprise a significant amount of the
liquidity portfolios of banking organizations because they are
recognized by the market as trading in deep and liquid markets.
Commenters also contended that GSE securities, like U.S. Treasury
securities, have the highest potential to generate liquidity for a
covered company during periods of severe liquidity stress. For example,
one commenter pointed out that during the 2007-2009 financial crisis,
demand for FHLB consolidated obligations increased during the dramatic
flight-to-quality event.
Commenters also urged the agencies to consider the potential
adverse impact of classifying GSE securities as level 2A liquid assets.
These commenters argued that the level 2A liquid asset designation
would discourage banking organizations from investing in the securities
and would therefore decrease liquidity in the secondary mortgage
market. A commenter asserted that the 40 percent cap on level 2A and
level 2B liquid assets would result in U.S. banking industry positions
being concentrated in the U.S. Treasury and U.S. agency markets, rather
than being more broadly diversified across those markets and the GSE
market. Another commenter suggested that the agencies assess the impact
to the value of U.S. GSE securities should banking organizations
liquidate their holdings, which could in turn increase mortgage funding
costs and decrease the availability of credit for mortgages.
Some commenters argued that other agency guidance and rules
consider or imply that U.S. GSE securities are highly liquid. For
example, one commenter stated that the agencies have provided previous
guidance encouraging institutions to hold an amount of high-quality
liquid assets and cited securities issued by U.S. GSEs as an example of
such assets and urged the agencies to explain any deviation from this
guidance.\42\ Another commenter raised the issue that the Board's then-
proposed enhanced liquidity standards under section 165 of the Dodd-
Frank Act classified U.S. GSE securities as ``fully liquid.'' \43\
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\42\ See Interagency Liquidity Policy Statement.
\43\ See 12 CFR 252.35(b)(3).
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Commenters also urged the agencies to consider the fact that
certain U.S. GSEs currently operate under the conservatorship of the
Federal Housing Finance Agency (FHFA) and receive capital support from
the U.S. Treasury. These commenters argued that GSE securities should
receive level 1 liquid asset designation while the U.S. GSEs receive
support from the U.S. government because the obligations are
effectively guaranteed by the full faith and credit of the U.S.
government. One commenter suggested that, while the U.S. GSEs are in
conservatorship, the agencies permit these securities to receive a 10
percent risk weight under the capital rules and permit them to be in
level 1 liquid assets.
Finally, commenters compared the treatment of U.S. GSE securities
as level 2A liquid assets under the proposed rule to the classification
of securities issued by certain multilateral development banks, such as
the International Bank for Reconstruction and Development, the Inter-
American Development Bank, the International Finance Corporation, the
German Development Bank, the European Investment Bank, the German
Agriculture Bank, and the Asian Development Bank as level 1 liquid
assets. Commenters argued that the size and liquidity of the markets
for these securities is much less than the size and liquidity of the
market for U.S. GSE securities.
The agencies recognize 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, as indicated
by commenters. The agencies also recognize that certain U.S. GSEs
currently operate under the conservatorship of FHFA and receive capital
support from the U.S. Treasury. However, the obligations of the U.S.
GSEs are currently effectively, but not explicitly, guaranteed by the
full faith and credit of the United States. Under the agencies' risk-
based capital rules, the obligations and guarantees of U.S. GSEs--
including those operating under conservatorship of FHFA--continue to be
assigned a 20 percent risk weight, rather than the zero percent risk
weight assigned to securities explicitly guaranteed by 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, unconditional guarantee of the
U.S. government and that are assigned a zero percent risk weight.
Moreover, the agencies feel that the events related to the 2007-2009
financial stress that required these entities to be placed under
conservatorship do not support temporarily improving GSE securities'
HQLA status.
Consistent with the agencies' risk-based capital rules, the
agencies are not assigning the most favorable regulatory treatment to
securities issued and guaranteed by U.S. GSEs under the final rule,
even while certain GSEs temporarily operate under the conservatorship
of FHFA. The final rule assigns GSE securities to the level 2A liquid
asset category, as long as they are investment grade consistent with
the OCC's investment securities regulation (12 CFR part 1) as of the
calculation date and are liquid and readily-marketable. Additionally,
consistent with the agencies' risk-based capital rules' higher risk
weight for the preferred stock of U.S. GSEs, the final rule excludes
such preferred stock from HQLA.
The agencies are aware that certain previous agency guidance and
rules recognize the liquid nature of U.S. GSE securities; \44\ however,
the guidance and rules do not specifically address the types of
diversification requirements that are being required by the final
rule's inclusion of different levels of HQLA. The final rule continues
to recognize U.S. GSE securities as highly liquid instruments that
trade in deep and active markets by including them as a level 2A liquid
asset.
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\44\ See, e.g., Interagency Liquidity Policy Statement.
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In response to commenters' suggestions to remove the 40 percent
composition cap, or apply a graduated cap to U.S. GSE securities
included as level 2A liquid assets, the agencies believe that the
proposed 40 percent cap (when combined with level 2B liquid assets)
should continue to apply to all level 2A liquid assets, including U.S.
GSE securities. In this regard, commenters also expressed concerns
[[Page 61459]]
that the cap on level 2A liquid assets would result in concentrated
positions in U.S. Treasury and agency markets. The agencies continue to
believe that the 40 percent composition cap is appropriate to ensure
that level 2 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, which are the assets that have
consistently demonstrated the most liquidity during periods of market
distress. The designation of certain assets as level 2A liquid assets
indicates that the 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. The agencies believe that
the level 2 liquid asset cap appropriately prevents concentrations of
less liquid assets and ensures a sufficient stock of the most liquid
assets to meet stressed outflows during a period of significant market
distress. As a result, level 2A liquid assets, when combined with level
2B liquid assets, cannot exceed 40 percent of the HQLA amount under the
final rule.
Commenters expressed concerns that the proposed designation of U.S.
GSE securities as level 2A liquid assets would result in broad market
consequences, including decreased liquidity in the secondary mortgage
market, increased mortgage funding costs, and impact to the fair value
of U.S. GSE securities. The agencies do not believe the treatment of
U.S. GSE securities will have broad market consequences as the largest
market participants generally have already adjusted their funding
profile and assets in anticipation of the LCR requirement with little
impact on the overall market. Furthermore, the agencies highlight that
the final rule does not prohibit covered companies from investing in
U.S. GSE securities and instead continues to allow covered companies to
participate fully in U.S. GSE securities markets.
ii. Certain Sovereign and Multilateral Organization Securities
The proposed rule also would have included as a level 2A liquid
asset a claim on, or a claim guaranteed by, a sovereign entity or a
multilateral development bank that was: (1) Not included in level 1
liquid assets; (2) assigned no higher than a 20 percent risk weight
under the standardized approach for risk-weighted assets of the
agencies' risk-based capital rules; \45\ (3) 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)
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 would have been required to demonstrate that a claim on or
claims guaranteed by a sovereign entity or a multilateral development
bank had 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 stress.\46\
Covered companies should have looked to multiple periods of systemic
and idiosyncratic liquidity stress in compiling such records. The
agencies did not receive any comments on the proposed treatment of
sovereign and multilateral organization securities that would have
qualified as level 2A liquid assets under the proposed criteria. Thus,
the final rule classifies them as level 2A liquid assets as proposed.
---------------------------------------------------------------------------
\45\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Board), and 12
CFR part 324 (FDIC).
\46\ 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.
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e. Level 2B Liquid Assets
Under the proposed rule, level 2B liquid assets would have included
certain publicly traded corporate debt securities and publicly traded
shares of common stock that are liquid and readily-marketable. The
limitation of level 2B liquid assets to those that are publicly traded
was meant to ensure a minimum level of liquidity, as privately traded
assets are typically less liquid. Under the proposed rule, the
definition of ``publicly traded'' would have been consistent with the
definition used in the agencies' regulatory capital rules and would
identify securities traded on registered exchanges with liquid two-way
markets. A two-way market would have been defined as 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. This definition was designed to identify
markets with transparent and readily available pricing, which, for the
reasons discussed above, is fundamental to the liquidity of an asset.
The agencies received comments requesting clarification on the
types of publicly traded corporate debt securities that may be included
in level 2B liquid assets. Several commenters also suggested that the
agencies broaden the scope of publicly traded corporate debt securities
and publicly traded shares of common stock to be included in level 2B
liquid assets. After considering commenters' concerns, the agencies
adopted several modifications to the final rule's criteria for level 2B
liquid assets, as discussed below.
i. Corporate Debt Securities
Publicly traded corporate debt securities would have been
considered level 2B liquid assets under the proposed rule if they met
three requirements (in addition to being liquid and readily-
marketable). First, the securities would have been required to meet the
definition of ``investment grade'' under 12 CFR part 1 as of the
calculation date.\47\ This standard would ensure that assets that did
not meet the required credit quality standard for bank investment would
not have been included in HQLA. The agencies believed that meeting this
standard is indicative of lower overall risk and, therefore, higher
liquidity for a corporate debt security. Second, the securities would
have been required to be 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 could have
demonstrated 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 during a 30 calendar-day period of
significant stress, or that the market haircut demanded by
counterparties to secured lending and secured funding transactions that
were collateralized by such debt 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 and available
funding haircuts of the debt security during times of stress. Third,
the proposed rule also provided that the debt securities could not be
obligations of a regulated financial company,
[[Page 61460]]
investment company, non-regulated fund, pension fund, investment
adviser, identified company, or any consolidated subsidiary of the
foregoing.
---------------------------------------------------------------------------
\47\ 12 CFR 1.2(d).
---------------------------------------------------------------------------
The proposed rule would have defined ``publicly traded'' consistent
with the definition used in the agencies' regulatory capital rules and
would have identified securities traded on registered exchanges with
liquid two-way markets. Commenters stated that the proposed rule's
definition of ``publicly traded'' would exclude a substantial portion
of corporate debt securities because they were not traded on a public
market or exchange. Commenters pointed out that unlike equity
securities, corporate debt securities are not generally listed on a
national securities exchange. Instead, corporate debt securities are
generally traded in active, liquid secondary markets. Commenters argued
that applying the ``publicly traded'' requirement to corporate debt
securities would severely limit the universe of corporate debt
securities that could be included as level 2B liquid assets.
To address concerns that the ``publicly traded'' requirement is
overly restrictive for corporate debt securities, some commenters
suggested that the final rule include non-publicly traded debt if the
issuer's equity is publicly traded. These commenters noted that
unlisted debt securities of public companies are actively traded in
liquid markets.
After considering the comments received, the agencies have decided
to remove the ``publicly traded'' requirement for corporate debt
securities to be included as level 2B liquid assets. The agencies
acknowledge that corporate debt securities are frequently traded in
over-the-counter secondary markets and are less frequently listed and
regularly traded on national securities exchanges, as required by the
``publicly traded'' definition. Thus, the ``publicly traded''
requirement would have unduly narrowed the scope of corporate debt
securities that can be designated as level 2B liquid assets.
The final rule continues to impose certain other requirements that
the agencies proposed on level 2B corporate debt securities. First, the
final rule continues to require that the securities meet the liquid and
readily-marketable standard to be included in level 2B assets. Second,
the final rule also continues to require that the securities meet the
definition of ``investment grade'' under 12 CFR part 1 as of a
calculation date.\48\ Third, the securities are required to be 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. The covered company must demonstrate that the market
price of the 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 securities or equivalent securities of
the issuer increased by no more than 20 percentage points during a 30
calendar-day period of significant stress, or that the market haircut
demanded by counterparties to secured lending and secured funding
transactions that were collateralized by such debt securities or
equivalent securities of the issuer increased by no more than 20
percentage points during a 30 calendar-day period of significant
stress. Lastly, the final rule provides that the debt securities may
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.
---------------------------------------------------------------------------
\48\ 12 CFR 1.2(d).
---------------------------------------------------------------------------
ii. Publicly Traded Shares of Common Stock
Under the proposed rule, publicly traded shares of common stock
could have been included as level 2B liquid assets if the shares met
the five requirements set forth below (in addition to being liquid and
readily-marketable).
First, to be considered a level 2B liquid asset under the proposed
rule, publicly traded common stock would have been required to be
included in: (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 appropriate Federal banking agency that the equity
in such index is as liquid and readily-marketable as equities traded on
the S&P 500.
As discussed in the Supplementary Information section to the
proposed rule, the agencies believed that listing of a common stock in
a major stock index is an important indicator of the liquidity of the
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.
Second, to be considered a level 2B liquid asset, the publicly
traded common stock would have been required to have been issued in:
(1) U.S. dollars; or (2) the currency of a jurisdiction where the
covered company operated and the stock offset its net cash outflows in
that jurisdiction. This requirement was meant to ensure that, upon
liquidation of the stock, the currency received from the sale would
match the outflow currency.
Third, the common stock would have been 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
could have demonstrated 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 during a 30 calendar-day
period of significant stress, 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 requirement was
intended to exclude volatile equities from inclusion as level 2B liquid
assets, which is a risk to the preservation of liquidity value. As
discussed above, a covered company could have demonstrated this
historical record through reference to the historical market prices of
the common stock during times of 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 have
been 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 correlated to other financial
institutions and the agencies believe that such declines indicate those
assets would be less likely to provide substantial liquidity during
future periods of stress in the banking system and, therefore, are not
appropriate for inclusion in a covered company's HQLA.
[[Page 61461]]
Fifth, if held by a depository institution, the publicly traded
common stock could not have been acquired in satisfaction of a debt
previously contracted (DPC). Because of general statutory prohibitions
on holding equity investments for their own account,\49\ depository
institutions subject to the proposed rule would not be able to include
common stock as level 2B liquid assets. 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.\50\ 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 have prohibited depository institutions from including
DPC publicly traded common stock as level 2B liquid assets.
---------------------------------------------------------------------------
\49\ 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).
\50\ See generally 12 CFR 1.7 (OCC); 12 U.S.C. 1843(c)(2)
(Board); 12 CFR 362.1(b)(3) (FDIC).
---------------------------------------------------------------------------
Finally, under the proposed rule, a depository institution could
have eligible publicly traded common stock permissibly held by a
consolidated subsidiary as level 2B liquid assets if the assets were
held to cover the net cash outflows for the consolidated subsidiary.
For example, if Subsidiary A holds level 2B publicly traded common
stock of $200 in a legally permissible manner and has net outflows of
$80, the parent depository institution could not count more than $80 of
Subsidiary A's level 2B publicly traded common stock in the parent
depository institution's consolidated level 2B liquid assets after the
50 percent haircut discussed below.
The agencies received several comments on the criteria for publicly
traded equity securities to be included in level 2B liquid assets. Some
commenters suggested that the agencies broaden the scope of eligible
equity securities beyond those included in the S&P 500. One of these
commenters stated that the proposed rule favors a small group of equity
issuers included in the S&P 500, which could lead to market distortions
and unforeseeable consequences. Several commenters suggested that the
agencies consider other major stock indices for the level 2B liquid
asset criteria. For U.S. equities, a few commenters recommended that
the final rule include equities that comprise the Russell 3000 index.
Another commenter suggested the Russell 1000 index. These commenters
provided analysis of the volatility and trading volumes of stocks
within these indices showing the comparability of the most and least
liquid securities in these indices with the S&P 500.
In addition, although the proposed rule would have provided that
common equities in any other index for which the covered company can
demonstrate to the satisfaction of the agencies that the index is as
liquid and readily-marketable as the S&P 500 may be included in level
2B liquid assets, commenters argued that identifying specific indices
in the final rule would allow covered companies to avoid waiting for
agency approval of indices and promote certainty for banking
organizations structuring secured financing transactions. Accordingly,
some commenters suggested that the final rule designate all equities
included in major equity indices in G-20 jurisdictions as level 2B
liquid assets under the final rule. Finally, other commenters argued
that exchange traded funds (ETFs) based on the indices included as HQLA
should be included, because the ETFs add incremental liquidity on top
of that seen in the market for the underlying equities.
After considering commenters' concerns and the liquidity
characteristics of the indices commenters proposed to be included as
HQLA, the agencies have determined to adjust the scope of U.S. equities
that may be included as level 2B liquid assets. Specifically, the final
rule includes common equity securities of companies included in the
Russell 1000 index in the criteria for level 2B liquid assets in place
of the companies included in the S&P 500. The proposed rule 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. The agencies have
determined that the Russell 1000 index would be a more appropriate
index after considering comments evidencing the similarities in trading
volumes, volatilities, and price movements of the two indices.
Moreover, stocks that are included in the Russell 1000 index are
selected based on predetermined criteria, whereas a committee evaluates
and selects stocks for inclusion in the S&P 500. The agencies believe
that the systematic selection of stocks for inclusion in the Russell
1000 index, combined with the liquidity characteristics of stocks
included in the index, support replacing the S&P 500 index with the
Russell 1000 index in the criteria for level 2B liquid assets.
As mentioned above, some commenters recommended including equities
in the Russell 3000 index in level 2B liquid assets. The agencies
evaluated the Russell 3000 index and were concerned that it includes a
wider universe of stocks and captures the equities of certain smaller
U.S. companies by market capitalization. As a result, equities in the
Russell 3000 index exhibit a greater range of liquidity characteristics
and include equities that demonstrate less favorable trading volumes,
volatilities, and price changes. Thus, the agencies believe that the
Russell 1000 index, which includes a broader set of stocks than the S&P
500, provides an appropriate universe of stocks that may be eligible as
level 2B liquid assets.
The agencies emphasize, however, that equities included in the
Russell 1000 index must also meet certain other requirements to be
level 2B liquid assets, which the final rule adopts as proposed. Thus,
to be considered a level 2B liquid asset, an equity included in the
Russell 1000 index must meet other requirements provided in the final
rule, such as meeting the liquid and readily-marketable standard and
being issued by an entity whose shares have a proven record as a
reliable source of liquidity in the sales or repurchase market during a
stressed scenario.
In response to commenters' requests for the final rule to identify
other indices that include equities that may be designated as level 2B
liquid assets, the agencies have determined that the final rule should
no longer include the provision to allow a covered company to
demonstrate that the equity securities included in another index should
be eligible for level 2B liquid assets because the final rule includes
the significantly broader Russell 1000 index. In addition, the agencies
are unaware of another existing index the components of which would be
appropriate for inclusion as level 2B liquid assets.
The final rule does not include ETFs that are based on the indices
as level 2B liquid assets. The agencies believe that the liquidity
characteristics of ETFs are
[[Page 61462]]
not identical to the liquidity characteristics of the underlying index
or the individual components of the fund. Rather, ETFs have their own
risk profiles, trading volumes, and market-based characteristics
separate from the underlying index. Accordingly, the final rule does
not include ETFs as level 2B liquid assets.
The proposed rule would have required publicly traded common stocks
to have been issued in: (1) U.S. dollars; or (2) the currency of a
jurisdiction where the covered company operated and the stock offset
its net cash outflows in that jurisdiction in order to be considered a
level 2B liquid asset. The final rule adopts the provision as proposed.
The agencies clarify that the provision's second requirement limits a
covered company to including as level 2B liquid assets equities issued
in the currency of a jurisdiction where the covered company operates.
For example, a covered company may hold a stock issued in Japanese yen
as a level 2B liquid asset only if: (1) The covered company operates in
Japan, and (2) the stock is available to support the covered company's
yen denominated net cash outflows in Japan.
iii. Assets Securing a Transaction
Lastly, one commenter suggested that there are narrow situations
where the agencies should expand level 2B liquid asset recognition for
purposes of the LCR denominator, even when those assets are not
recognized as HQLA in the LCR numerator. Specifically, the commenter
requested that the agencies include additional classes of assets as
level 2B liquid assets solely for the purposes of determining the
applicable outflow and inflow rates for transactions secured by the
asset. The commenter argued that failure to do so would result in
anomalous LCR results even with otherwise reliable secured lending
transactions. After considering the commenters' suggestion, the
agencies believe that assets should be designated consistently as HQLA
for purposes of calculating both the LCR numerator and denominator. In
determining HQLA designation, the agencies considered the liquidity
characteristics of assets to ensure that a covered company's HQLA
amount only includes assets with a high potential to generate liquidity
during a stress scenario. The agencies believe that such an approach is
appropriate for determining the designation of assets as HQLA for all
aspects of the LCR calculation, including the determination of outflow
and inflow rates for transactions secured by the asset.
f. Assets Recommended for HQLA Designation
A number of commenters requested that the agencies consider
designating additional assets as HQLA. In particular, commenters
suggested including as HQLA municipal securities, asset-backed
securities (ABS), state and local authority housing bonds backed by
Federal Housing Association and Department of Veterans Affairs
guarantees, covered bonds, private label MBS, and investment company
shares. Several commenters also argued that permissible collateral
pledged to FHLBs, FHLB letters of credit, and unused borrowing
commitments from FHLBs should be considered as HQLA. The agencies
considered commenters' requests and have declined to designate
additional assets as HQLA for the reasons discussed below.
i. Municipal Securities
Many commenters urged the agencies to include municipal securities
as HQLA, noting that the Basel III Revised Liquidity Framework would
include them in its definition of HQLA. Commenters raised a number of
policy justifications to support the inclusion of investment grade
municipal securities as HQLA, either as level 2A or level 2B liquid
assets, including assertions that municipal securities exhibit
liquidity characteristics consistent with HQLA status and that the
exclusion of municipal securities from HQLA could lead to higher
funding costs for municipalities, which could affect local economies
and infrastructure.
Several commenters contended that U.S. municipal securities should
satisfy the proposed rule's qualifying criteria for HQLA. Many of these
commenters argued that municipal bonds meet the liquid and readily-
marketable requirement of HQLA because they exhibited limited price
volatility particularly during the recent financial crisis, high
trading volumes, and deep and stable secured funding markets.
Commenters also focused on the high credit quality and low historical
default rates of these securities. Furthermore, commenters asserted
that the risk and liquidity profiles of municipal securities were
comparable, if not superior, to the profiles of other types of assets
the agencies proposed for inclusion as HQLA, such as corporate bonds,
equities, certain foreign sovereign obligations, and certain securities
of GSEs. A number of commenters expressed concerns that the proposed
rule would have included certain sovereign securities for countries
that have smaller GDPs than some U.S. states as HQLA while excluding
obligations of U.S. states and local governments. Some of these
commenters argued that the credit ratings of certain states compare
favorably with those of countries whose obligations could be included
as level 1 or level 2A liquid assets. Commenters also contended that
municipal securities perform well and experience increased demand
during times of stress. Several commenters asserted that banking
organizations could liquidate large holdings of municipal securities
with minimal market or price disruption during a crisis scenario.
Many commenters asserted that municipal securities have active
markets with high trading volumes, a large number of registered broker-
dealers who make markets in the municipal securities, and significant
diversity in market participants. These commenters maintained that
certain large issuers of municipal securities markets have regular and
active trading. In particular, commenters argued that municipal
securities are actively traded by a number of nonbank financial sector
entities and retail customers and have a low degree of
interconnectedness with banking organizations. A few commenters
acknowledged that the municipal bond market includes numerous, diverse
issuers and that certain individual municipal securities may have low
trading volumes. However, these commenters argued that the securities
typically trade on a per issuer basis rather than a per security basis
and urged the agencies to evaluate the municipal security market as a
whole when assessing their liquidity characteristics for HQLA status.
Several commenters asserted that many municipal securities exhibit
the HQLA characteristics of being easily and readily valued. Some of
these commenters highlighted that although municipal securities are not
traded on an exchange, most of them can be readily valued on a daily
basis from a variety of pricing services. Certain commenters
highlighted that municipal securities are eligible collateral for loans
at the Federal Reserve discount window.
Many commenters focused on the potential consequences of excluding
municipal securities from HQLA. Commenters asserted that their
exclusion would discourage banking organizations from purchasing the
securities. Consequently, state and local entities would face increased
funding costs for infrastructure and essential public services.
Commenters stated that municipal securities are a vital source of
credit for local communities, and the proposed rule's exclusion of the
[[Page 61463]]
securities from HQLA would have limited a source of funding for local
economies. Some commenters stated that the proposed rule's treatment of
municipal securities would have led states and municipalities to pass
on increased funding costs for infrastructure and essential public
services to local businesses and the general public in the form of
increased taxes.
Several commenters asserted that although municipal securities are
not typically used as collateral for repurchase agreements, they are
rehypothecated by tender options bonds, which did not see significant
haircuts or price changes during the recent financial crisis.
Commenters also compared the proposed rule's treatment of municipal
securities to the standards of other jurisdictions. A few of these
commenters noted that the proposed rule's exclusion of municipal
securities was inconsistent with the Basel III Revised Liquidity
Framework, which potentially recognizes securities issued by state and
municipal governments that qualify for 20 percent risk weighting under
the Basel capital standards as level 2A assets. One commenter noted
that the European Bank Authority has recommended including certain
bonds issued by European local government institutions as HQLA.
Some commenters noted that encouraging covered companies to invest
in municipal securities would compel covered companies to diversify
their holdings of HQLA with securities that have a varied investor
base. Commenters pointed out that the financial sector is underexposed
to the municipal securities market and asserted that this
diversification would improve the liquidity risk profiles of banking
organizations.
Finally, several commenters argued that the agencies could limit
municipal securities included as HQLA through a number of criteria
including: (1) Only those securities that would be ``investment grade''
under 12 CFR part 1 as of a calculation date; (2) only those securities
that have a 20 percent risk-weighting under the agencies risk-based
capital rules; or (3) a separate 25 percent composition cap on
municipal securities included in a covered company's HQLA amount.
Under the final rule, 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) do
not qualify as HQLA. The goal of the LCR is to ensure that covered
companies are able to meet their short-term liquidity needs during
times of stress. Inability to meet those liquidity needs proved to be a
significant cause of the failure or near failure of several large
financial firms during the recent financial crisis. To ensure adequate
liquidity, the final rule only includes as HQLA securities that can be
easily and immediately convertible into cash with little or no loss of
value during a period of stress, either by sale or through a repurchase
transaction.
With respect to municipal securities, the agencies have observed
that the liquidity characteristics of municipal securities range
significantly, and overall, many municipal securities are not ``liquid
and readily-marketable'' in U.S. markets as defined in Sec. _--.3 of
the final rule. For instance, many securities issued by public sector
entities exhibit low average daily trading volumes and have generally
demonstrated less favorable price changes and volatility
characteristics. In addition, the agencies have found that the funding
of many municipal securities is very limited in the repurchase market,
which indicates that the securities may not be able to be quickly
converted into cash during a period of stress. Generally, the agencies
believe that covered companies would be limited in their ability to
rapidly monetize many municipal securities in the event of a severe
systemic liquidity stress scenario.
Several commenters pointed to other characteristics, such as credit
quality, default rates, and central bank eligibility, in urging the
agencies to include municipal securities as HQLA. As discussed, the
final rule considers certain liquidity characteristics, including risk
profile, market-based characteristics, and central bank eligibility to
identify types of assets that would qualify as HQLA. Although the
agencies consider the credit risk and central bank eligibility
associated with an asset in determining HQLA eligibility, the agencies
also consider other characteristics, such as trading volumes, price
characteristics, and the presence of active sales or repurchase markets
for the securities at all times. After considering the relevant
characteristics taken together, the agencies believe that many
municipal securities do not demonstrate the requisite liquidity
characteristics to qualify as HQLA under the final rule.
Some commenters questioned the basis for excluding municipal
securities from HQLA when the agencies proposed to include corporate
bonds, equities, and securities of sovereign countries that have
recently experienced financial difficulties. The agencies note that
although the credit risk of a security may be an important aspect for
determining the liquidity of a class of assets, the agencies also
believe that trading volumes and the presence of deep, active sale or
repurchase markets for an asset class are important aspects of any
potential class of HQLA. As discussed above, the agencies have
determined that the liquidity characteristics of other assets, such as
corporate bonds, equities, and certain sovereign securities, meet the
requirements for HQLA eligibility because of their trading volumes and
the presence of deep, active sale or repurchase markets for those
assets. For many municipal securities, the agencies have not found that
the markets and trading volume is as deep and active on an ongoing
basis such that there is a high level of confidence that a banking
organization could quickly convert these municipal securities into cash
during a severe liquidity stress event. The agencies observe that the
final rule's treatment of municipal securities is consistent with the
treatment of other assets that also, as a class, significantly vary in
trading volume and lack access to deep and active repurchase markets
and therefore do not qualify as HQLA, such as covered bonds and ABS.
Commenters also compared the proposed rule's treatment of municipal
securities to the potential standards of other jurisdictions and the
Basel III Revised Liquidity Framework, which contemplate that certain
securities issued by public sector entities such as states and
municipalities may be included as HQLA. However, for the reasons
discussed above, the agencies believe that many municipal securities
are not liquid and readily-marketable in U.S. markets and thus do not
exhibit the liquidity characteristics necessary to be included as HQLA
under the final rule.
In response to commenters' suggested criteria for including certain
municipal securities as HQLA, although some commenters noted that
pricing services can offer daily values for certain municipal
securities, the agencies recognize that financial data from municipal
issuers can be inconsistent and vary in timing. The agencies believe
that challenges in data availability can impact the ability of covered
companies and supervisors to determine the eligibility of certain
municipal securities based on suggested sets of criteria. Furthermore,
generally, the agencies have concluded that the criteria suggested by
commenters would lead to inclusion of municipal securities that exhibit
a range of liquidity characteristics, including those with
[[Page 61464]]
less favorable characteristics that are not compatible with HQLA
eligibility and that would not be a sufficiently reliable source of
liquidity for a banking organization during a period of stress.
Finally, as discussed above, commenters expressed concerns about
the market impact of excluding municipal securities from HQLA. A few
commenters also stated that encouraging covered companies to invest in
municipal securities would help diversify the covered companies'
holdings. The agencies highlight that the final rule does not prohibit
covered companies from investing in municipal securities and
diversifying their investment portfolios. The agencies are aware that
covered companies continue to actively invest in municipal securities,
evidenced by covered companies' increased holdings of municipal
securities since the financial crisis, for reasons unrelated to
liquidity risk management practices. Under the final rule, covered
companies may continue to participate fully in municipal security
markets. The agencies continue to believe that municipal securities can
be appropriate investments for covered companies and expect the banking
sector to continue to participate in this market. Many covered
companies did not include municipal securities in their holdings of
liquid assets for contingent liquidity stress purposes prior to the
LCR, yet continued to invest in municipal securities for yield, credit
quality, and other factors; therefore, the agencies do not believe the
final rule will have a significant impact on overall demand for
municipal securities.
ii. ABS, Covered Bonds, Private Label MBS, and Mortgage Loans
A number of commenters recommended that the agencies designate
certain securitization exposures, specifically certain high credit
quality ABS, covered bonds, and private label MBS (commercial,
multifamily, and residential real estate), as level 2B liquid assets.
Commenters asserted that banking organizations are key investors in
these securitization products that serve as important long-term
financing instruments supporting the economy. These commenters warned
that failure to include these securities as HQLA could adversely impact
the private U.S. mortgage market.
Some commenters suggested that the final rule include ``high-
quality'' ABS as level 2B liquid assets. For example, one commenter
suggested that the final rule include a set of criteria to identify
high-quality ABS having liquidity characteristics similar to those of
corporate debt securities that are included as level 2B liquid assets,
so that the ABS meeting those criteria could also be included as level
2B liquid assets. In support of that recommendation, some commenters
asserted that certain publicly traded ABS exhibited similar historical
performance to investment grade publicly traded corporate debt
securities, even during the recent financial crisis. Some commenters
asserted that excluding ABS from HQLA could undermine investment in the
ABS market and increase the cost of securitization financing available
to customers of banking organizations. A commenter requested that the
final rule include investment grade senior unsubordinated ABS
collateralized or otherwise backed solely by loans originated under the
Federal Family Education Loan Program as level 2A liquid assets.
Some commenters recommended that the agencies include covered bonds
as level 2B liquid assets. Commenters argued that the proposed rule's
exclusion of covered bonds from HQLA deviated from the Basel III
Revised Liquidity Framework's designation of certain high credit
quality covered bonds as level 2A liquid assets with a 15 percent
haircut. One commenter suggested a set of criteria to identify high
credit quality covered bonds that could be included as level 2B liquid
assets.\51\ The commenter suggested that the agencies consider
including covered bonds that meet the criteria and have a proven track
record as a reliable source of liquidity in a stressed market
environment as level 2B liquid assets. Another commenter noted that the
risk characteristics of covered bonds are fundamentally different from
other securitizations and highlighted that the liquidity of covered
bonds in Europe during recent crises was not significantly impaired.
One commenter acknowledged that the U.S. covered bond market is not
highly developed, but supported including covered bonds as HQLA to
encourage development of the market.
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\51\ Specifically, the commenter suggested that a covered bond
should qualify as a level 2B liquid asset if the security: (1) Is
registered under the Securities Act of 1933 or exempt under the
SEC's Rule 144A; (2) is senior debt that is issued by a regulated,
unaffiliated financial institution located in an Organization for
Economic Co-Operation and Development country; (3) grants the
holders the right to sell the covered asset pool upon default and
that the sale could not be stayed or delayed due to the insolvency
of the issuer; and (4) meets the other criteria required for a level
2B liquid asset.
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Some commenters suggested that the final rule include private label
MBS as level 2B liquid assets. A few commenters argued that the
proposed rule's exclusion of private label MBS from HQLA deviated from
the Basel III Revised Liquidity Framework, which includes certain high
credit quality private label residential MBS (RMBS) as level 2B liquid
assets with a 25 percent haircut, and suggested that the agencies
follow the Basel standard. One of these commenters suggested that the
agencies adopt a set of criteria to identify high credit quality RMBS
that could be considered level 2B liquid assets that is similar to the
criteria the agencies proposed to adopt for corporate debt securities
that would have been level 2B liquid assets under the proposed rule.
The commenter recommended that the eligible RMBS would qualify for
level 2B treatment to the extent that the RMBS could be shown to have a
proven track record as a reliable source of liquidity during stressed
market environments as demonstrated by: (i) The market price of the
RMBS or equivalent securities of the sponsor declining by no more than
20 percent during a 30 calendar-day period of significant stress, or
(ii) the market haircut demanded by counterparties to secured lending
and secured funding transactions that are collateralized by the RMBS or
equivalent securities of the sponsor declining no more than 20
percentage points during a 30-calendar day period of significant
stress.
A few commenters stated that in the agencies' proposed rule on
credit risk retention, the agencies have proposed to exempt from risk
retention certain RMBS backed by ``qualified mortgages'' as defined
under the Truth in Lending Act in part because of their credit
characteristics and requested that the agencies consider including RMBS
backed by ``qualified mortgages'' as HQLA.\52\ Some commenters asserted
that failing to include RMBS as HQLA could negatively impact the
residential mortgage market by impeding the return of private capital.
Commenters also requested that mortgage loans be included as HQLA,
arguing that the failure to do so could have unintended consequences
for the mortgage market.
---------------------------------------------------------------------------
\52\ See OCC, Board, FDIC, FHFA, SEC, U.S. Department of Housing
and Urban Development, ``Credit Risk Retention,'' 78 FR 57989
(September 20, 2013).
---------------------------------------------------------------------------
After considering the comments, the agencies have determined not to
include ABS, covered bonds, private label MBS and mortgage loans as
level 2B liquid assets. The agencies are aware that specific issuances
of ABS, RMBS, or covered bonds may exhibit some liquidity
characteristics that are similar
[[Page 61465]]
to those of assets included as HQLA. However, the agencies continue to
believe that ABS, covered bonds, private label MBS, and mortgage loans
do not meet the liquid and readily-marketable standard in U.S. markets,
and thus do not exhibit the liquidity characteristics necessary to be
included as HQLA under the final rule. Evidence from the 2007-2009
financial crisis and the period following indicates that the market
demand for a variety of securitization issuances can decline rapidly
during a period of stress, and that such demand may not rapidly
recover. ABS may be dependent on a diverse range of underlying asset
classes, each of which may be impacted in a period of significant
stress. Furthermore, the bespoke characteristics of securitization
structures may be tailored to a limited range of investors. The ability
to monetize securitization issuances and whole loans through or in the
repurchase market may be limited in a period of stress.
Moreover, although certain ABS issuances, such as ABS backed by
loans under the Federal Family Education Loan Program and RMBS backed
solely by securitized ``qualified mortgages'' or mortgages guaranteed
by the Federal Housing Authority or the Department of Veterans Affairs,
may have lower credit risk, the liquidity risk profile of such
securities, including the inability to monetize the issuance during a
period of stress, would not warrant treatment as HQLA. The agencies
note that ABS and RMBS issuances have substantially lower trading
volumes than MBS that are guaranteed by U.S. GSEs and demand for such
securities has decreased, as shown by the substantial decline in the
number of issuances since the recent financial crisis. The agencies
note that the inclusion of RMBS under the Basel III Revised Liquidity
Framework was limited to those securitizations where the underlying
mortgages were full recourse loans, which is not permissible in a
number of states, and therefore would complicate any inclusion of RMBS
as HQLA in the United States.
Likewise, with respect to mortgage loans, including qualified
mortgage loans or those guaranteed by the Federal Housing Authority or
the Department of Veterans Affairs, the agencies note that due to legal
requirements for transfer and the lack of use of mortgages as
collateral for repurchase agreements, such loans cannot typically be
rapidly monetized during a period of financial stress, prohibiting
their classification as HQLA. Moreover, although such assets can be
pledged to the FHLB, the agencies do not believe that the FHLB should
represent the sole method of rapid monetization for any class of assets
included as HQLA, as discussed further below.
As one commenter mentioned, the U.S. market for covered bonds is
not highly developed, with few issuances. The agencies do not believe
that it is appropriate for the agencies to use the LCR as the mechanism
for encouraging or developing the liquidity of an asset class. Rather,
the LCR is designed to ensure that covered institutions have sufficient
liquid assets that already have been proven sources of liquidity in the
event of a liquidity crisis. Furthermore, the agencies observe that
covered bonds, which are typically issued by companies in the financial
sector, exhibit significant risks regarding interconnectedness and
wrong-way risk among companies in the financial sector.
Several commenters highlighted that excluding RMBS and covered
bonds from HQLA could cause a detrimental impact on the U.S.
residential mortgage market. The agencies recognize the importance of
capital funding to the U.S. residential mortgage markets and highlight
that the final rule does not prohibit covered companies from continuing
to invest in ABS, covered bonds, and private label MBS, and does not
restrict a covered company from making mortgage loans or loans
underlying ABS and covered bonds. As discussed above, the agencies do
not expect, and have not observed, that banking organizations base
their investment decisions solely on regulatory considerations and do
not anticipate that exclusion of these assets from HQLA will
significantly deter investment in these assets.
iii. Investment Company Shares
A few commenters requested that the agencies consider including
certain investment company shares, such as shares of mutual funds and
money market funds (MMFs), as HQLA. Commenters argued that investment
companies should not be treated as financial sector entities for
purposes of determining whether shares of the investment company may be
included as HQLA. As discussed above, the proposed rule would have
excluded securities issued by a financial sector entity from HQLA to
avoid the potential for wrong-way risk. Commenters suggested that the
agencies look through to the investments of the fund to determine HQLA
eligibility. In particular, a commenter requested clarification that
mutual funds such as open-end GNMA funds should be considered level 1
liquid assets, because the underlying assets are zero percent risk
weighted GNMA securities.
Specifically for MMFs, one commenter highlighted that the SEC
introduced enhanced liquidity requirements for MMFs in 2010. The
commenter contended that the new regulations have sufficiently improved
the stability of MMFs to justify their inclusion in HQLA. The commenter
also suggested that the agencies include certain high-quality MMFs,
such as government MMFs and tax-exempt funds, as HQLA.
After considering these comments, the agencies have determined not
to include shares of investment companies, including mutual funds and
MMFs, as HQLA. The agencies recognize that certain underlying
investments of the investment companies may include high-quality
assets. However, similar to securities issued by many companies in the
financial sector, shares of investment companies have been prone to
lose value and become less liquid during periods of severe market
stress or an idiosyncratic event involving the fund's sponsor. As
recognized by some commenters, certain shares in MMFs exhibited
liquidity stress during the recent financial crisis. Further, the
recently finalized SEC rules regarding money markets may impose some
barriers on investors' ability to withdraw all of their funds during a
stress.\53\ Therefore, the agencies do not believe that shares of
investment companies demonstrate the liquidity characteristics
necessary to be included as HQLA.
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\53\ See SEC, ``Money Market Fund Reform; Amendments to Form
PF,'' 79 FR 47736 (August 14, 2014).
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iv. FHLB Collateral and Commitments
Certain commenters urged the agencies to consider including
collateral pledged to FHLBs and unused borrowing capacity from FHLBs as
HQLA. One commenter supported the agencies' proposal to treat as
unencumbered those HQLA currently pledged to a U.S. GSE that are
subject to a blanket, but not asset-specific, lien, where potential
credit secured by the HQLA is not currently extended. However, the
commenter requested that the agencies also consider including any
assets that are pledged to FHLBs in support of FHLB advance
availability as HQLA, rather than only those assets that are currently
specified as level 1, level 2A, and level 2B liquid assets. The
commenter contended that FHLB-eligible collateral is highly liquid
because it can be readily converted into cash advances from a FHLB.
Separately,
[[Page 61466]]
a few commenters recommended that the agencies include FHLB
collateralized advance availability, FHLB letters of credit, or FHLB
borrowing capacity as HQLA. The commenters emphasized that depository
institutions have the ability to access liquidity from FHLBs even
during times of stress and therefore argued that FHLB capacity would be
a reliable source of liquidity during a crisis.
The agencies have considered the commenters' suggestions and have
determined not to include as HQLA collateral pledged to FHLBs that are
not otherwise HQLA under the proposed rule, FHLB letters of credit, or
FHLB collateralized advance availability. In determining the types of
assets that would qualify as HQLA, the agencies considered certain
liquidity characteristics that are reflected in the criteria in Sec.
_--.20 of the final rule, as discussed above. The agencies have
determined that assets, including those that are considered permissible
collateral for FHLB advances, must meet the criteria set forth in Sec.
_--.20 of the final rule to qualify as HQLA, including low bid-ask
spreads, high trading volumes, a large and diverse number of market
participants, and other appropriate factors. As discussed above,
although certain collateral, such as mortgages, may be accepted by the
FHLB, a covered company may not be able to rapidly liquidate a
portfolio of such assets other than as collateral for the extension of
credit by the FHLB. The agencies do not believe that it would be
appropriate to rely on the extension of credit by the FHLB as the sole
method of monetization during a period of market distress.
Separately, the agencies believe that FHLB collateralized advance
availability and FHLB letters of credit should not be included as HQLA.
The LCR is designed to encourage the holding of liquid assets that may
be immediately and reliably converted to cash in times of liquidity
stress as borrowing capacity may be constrained, particularly borrowing
capacity tied to lower quality assets. The agencies observe that
reliance on market borrowing capacity has proved problematic in the
past for many covered companies during periods of severe market stress.
Accordingly, the LCR is designed to ensure that companies hold
sufficient assets to cover outflows during a period of market distress.
Thus the final rule would not include such borrowing capacity as HQLA.
v. Including Other Securities
One commenter requested that the agencies adopt in the final rule
provisions from the Board's Regulation YY's liquidity risk-management
requirements that permit covered institutions to hold certain ``highly
liquid assets'' for purposes of its liquidity stress tests under that
rule. Unlike the proposed rule, the Board's Regulation YY includes
certain government securities, cash, and any other assets that the bank
holding company demonstrates to the Board are highly liquid.
Specifically, the commenter requested that the agencies incorporate
each of the criteria set forth in Regulation YY for assets that are
demonstrated to be ``highly liquid'' and to also permit assets that
meet such criteria to qualify as HQLA in the final rule.
The proposed rule and Regulation YY were designed to complement one
another. Whereas the Regulation YY's internal liquidity stress-test
requirements provide a view of an individual firm under multiple
scenarios, and include assumptions tailored to the idiosyncratic
aspects of the company's liquidity profile, the standardized measure of
liquidity adequacy under the proposed rule would have facilitated a
transparent assessment of covered companies' liquidity positions under
a standard stress scenario and comparison across covered companies. Due
to the tailoring of the liquidity stress assumptions under Regulation
YY to the risk profile of the company, Regulation YY provided companies
discretion to determine whether an asset would be liquid under a
particular scenario. Although the criteria set forth in Regulation YY
share broad themes with the final rule's requirements for determining
HQLA, the agencies believe that the final rule's standardized asset
requirements are appropriate for determining the assets that would be
easily and immediately convertible to cash with little or no loss of
value during a period of liquidity stress and are designed to provide
for comparability across covered companies due to the standardized
outflow assumptions. Thus, the final rule does not incorporate specific
criteria from Regulation YY.
3. Requirements for Inclusion as Eligible HQLA
For HQLA to be eligible to be included in the HQLA amount (LCR
numerator), the proposed rule would have required level 1 liquid
assets, level 2A liquid assets and level 2B liquid assets to meet all
the operational requirements and generally applicable criteria set
forth in Sec. _.20(d) and (e) of the proposed rule. Because certain
assets may have met the high-quality liquid asset criteria set forth in
Sec. _.20(a)-(c) of the proposed rule, but may not have met the
operational or generally applicable criteria requirements (and thus not
be eligible to be included in the calculation of the HQLA amount), the
agencies are adding a new construct in the final rule (eligible HQLA).
The purpose of this addition is to more clearly draw a distinction
between those assets that are HQLA under Sec. _.20 (a)-(c) of the
final rule and eligible HQLA which also meet the operational, generally
applicable criteria, and maintenance of U.S. eligible requirements
which have been adopted in Sec. _.22 of the final rule. In other
words, only eligible HQLA meeting all the necessary requirements set
forth in Sec. _.22 are to be included in the calculation steps to
determine the HQLA amount. For the purpose of consistency and ease of
reference, this Supplementary Information section also uses this
distinction between HQLA and eligible HQLA when referring to the
requirements that the proposed rule would have implemented.
The final rule continues to permit a covered company to include
assets in each HQLA category as of a calculation date without regard to
the asset's residual maturity. For all HQLA, the residual maturity of
the asset will be reflected in the asset's fair value and should not
have an effect on the covered company's ability to monetize the asset.
a. Operational Requirements
Under the proposed rule, an asset that a covered company could have
included in its HQLA amount would have needed to meet a set of
operational requirements. These operational requirements were intended
to better ensure that a covered company's eligible HQLA can be
liquidated in times of stress. Several of these requirements related to
the monetization of an asset, meaning the receipt of funds from the
outright sale of an asset or from the transfer of an asset pursuant to
a repurchase agreement. A number of commenters requested clarification
on the operational requirements. The final rule retains the proposed
operational requirements and clarifies certain aspects of the
requirements as discussed below.
i. Operational Capability To Monetize HQLA
The proposed rule would have required a covered company to have the
operational capability to monetize the HQLA held as eligible HQLA. This
capability would have been demonstrated by: (1) Implementing and
[[Page 61467]]
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 eligible HQLA
that reasonably reflects the composition of the covered company's total
eligible HQLA portfolio, including with respect to asset type,
maturity, and counterparty characteristics. This requirement was
designed to ensure a covered company's access to the market, the
effectiveness of its processes for monetization, the availability of
the assets for monetization, and to minimize the risk of negative
signaling during a period of actual stress. The agencies would have
monitored such procedures, systems, and periodic sample liquidations
through their supervisory process.
One commenter requested that the agencies clarify that a covered
company may demonstrate its operational capacity to monetize HQLA
through its ordinary business activities. The commenter claimed that
requiring monetization solely to demonstrate access to the market for
purposes of the rule could lead the covered company to incur a profit
and loss for a transaction that lacks a business purpose. A separate
commenter questioned whether actual sales of assets were required to
meet the requirement that a covered company have the operational
capacity to monetize HQLA.
Commenters requested that the agencies include additional methods
of monetization. One commenter argued that monetization of an asset
should include transfer of the asset in exchange for cash in the
settlement of an overnight reverse repurchase agreement. The commenter
clarified that the counterparty of the overnight reverse repurchase
agreement could be a Federal Reserve Bank or another entity that
provides the reliable monetization of assets held under the reverse
repurchase agreement. The commenter contended that such assets should
be eligible HQLA even when they do not meet all other requirements
related to the monetization of the asset.
After considering commenters' concerns, the agencies are retaining
the proposed requirement that a covered company demonstrate its
operational capacity to monetize HQLA by periodically monetizing a
sample of the assets either through an outright sale or pursuant to a
repurchase agreement. The agencies expect actual sales or repurchase
agreements to occur for a covered company to demonstrate periodic
monetization. Furthermore, as requested by commenters and as discussed
above, the agencies clarify that monetization includes receiving funds
pursuant to a repurchase agreement. To the extent that a covered
company monetizes certain assets, such as U.S. Treasury securities, on
a regular, frequent basis through business-as-usual activities, the
company may rely on evidence of sales during the ordinary course of
business and repurchase transactions of those assets to demonstrate its
operational capability to monetize them. However, the agencies are
aware that a company may monetize certain assets on a sporadic or less
frequent basis due to the nature of the assets or business. The
agencies expect that in order to meet the operational capability
requirement for eligible HQLA, the covered company monetize those types
of assets through specific steps that go beyond ordinary business
activities. In particular, to meet the requirement, the agencies expect
a covered company to more thoroughly demonstrate the periodic
monetization of assets that exhibit less favorable liquidity
characteristics than other HQLA.
Under the proposed and final rules, reverse repurchase agreements
subject to a legally binding agreement at the calculation date are
secured lending transactions and these transactions do not count as
HQLA. The assets that are provided to the covered company by some
overnight reverse repurchase agreements may potentially meet the
operational requirements for eligible HQLA described in the rule. The
agencies do not believe that the presence of the overnight reverse
repurchase agreement and the anticipated exchange of the assets for
cash is sufficient in itself to meet the monetization standard, as for
operational or business reasons such transactions may be required to be
rolled over on an ongoing basis. The agencies are clarifying that in
order to meet this monetization standard, covered companies must show
that they are not rolling over the overnight reverse repurchase
agreement indefinitely and must hold or use the cash received from the
maturing transaction for a sustained period; or the covered company
must periodically monetize the underlying asset through outright sale
or transfer pursuant to a repurchase agreement.
Another commenter expressed concern that the requirement to
periodically monetize HQLA conflicted with a previous interagency
policy statement on liquidity risk management that provided that
``affirmative testing . . . may be impractical.'' \54\ This statement
in the 2010 Interagency Liquidity Policy Statement referred to a
banking organization's required contingency funding plan (CFP) that set
forth strategies for addressing liquidity shortfalls in emergency
scenarios. The policy statement acknowledged that while affirmative
testing of certain components of the CFP may be impractical,
``institutions should be sure to test operational components of the
CFP.'' Therefore, the proposed rule's requirement that a covered
company demonstrate its operational capability to monetize assets did
not conflict with the previous interagency policy statement.
---------------------------------------------------------------------------
\54\ See Interagency Liquidity Policy Statement.
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ii. HQLA Under the Control of the Liquidity Management Function
Under the proposed rule, a covered company would have been required
to implement policies that required all eligible 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
have been required either to segregate the HQLA from other assets, with
the sole intent to use them as a source of liquidity, or to demonstrate
its ability to monetize the HQLA and have the resulting funds available
to the risk management function, without conflicting with another
business or risk management strategy. Thus, if an HQLA had been 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 have been
included in the covered company's eligible HQLA if the sale of the
asset or its use in a repurchase transaction would have conflicted with
another business or risk management strategy. If the use of the asset
in the repurchase transaction would not have conflicted with the hedge,
the HQLA may have been eligible under the proposed rule. If HQLA had
been used as a general macro hedge, such as interest rate risk of the
covered company's portfolio, it could still have been included as
eligible HQLA. This requirement was intended to ensure that a central
function of a covered company had the authority and capability to
liquidate eligible 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
during the recent financial crisis where unencumbered assets of some
firms were not available to meet liquidity demands because the firms'
treasuries did not have access to such assets.
A few commenters requested that the agencies clarify the
requirement for
[[Page 61468]]
segregating assets. One commenter questioned whether an electronic flag
was adequate to demonstrate segregation or whether separate accounts
are required. Another commenter requested clarification on whether
segregated assets could be placed in multiple consolidated
subsidiaries. The agencies continue to believe that a covered company
may demonstrate that the eligible HQLA is under the control of the
liquidity risk management function by segregating the HQLA with the
sole intent to use the HQLA as a source of liquidity. Although the
agencies have not adopted a preferred method of showing such
segregations, a covered company should be able to demonstrate that the
segregated assets are under the control of the management function
charged with managing liquidity risk at the covered company. The
agencies expect a covered company to be able to demonstrate that the
chosen form of segregation facilitates the liquidity management
function's use of the assets for liquidity purposes.
iii. Termination of Transaction Hedging HQLA
The proposed rule would have required a covered company to have
included in its total net cash outflow amount the amount of cash
outflow that would have resulted from the termination of any specific
transaction hedging eligible HQLA. The proposal would have required a
covered company to include the impact of the hedge 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 was not intended to apply to general macro hedges such as
holding interest rate derivatives to adjust internal duration or
interest rate risk measurements, but was intended to cover specific
hedges that would become risk exposures if the asset were sold. The
agencies did not receive comments on this operational requirement.
However, the agencies are clarifying that, consistent with the Basel
III Revised Liquidity Framework, the amount of the outflow resulting
from the termination of the hedging transaction should be deducted from
the fair value of the applicable eligible HQLA instead of being
included as an outflow in the LCR denominator. Section _.22(a)(3) of
the final rule has been amended to clarify this requirement.
iv. Policies and Procedures To Determine Eligible HQLA Composition
Under the proposed rule, a covered company would have been required
to implement and maintain policies and procedures that determined the
composition of the assets held as eligible HQLA on a daily basis by:
(1) Identifying where its eligible HQLA were held by legal entity,
geographical location, currency, custodial or bank account, and other
relevant identifying factors; (2) determining that the assets included
as eligible HQLA continued to qualify as eligible HQLA; and (3)
ensuring that the HQLA held by a covered company as eligible HQLA are
appropriately diversified by asset type, counterparty, issuer,
currency, borrowing capacity or other factors associated with the
liquidity risk of the assets.
The agencies also recognized 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 eligible HQLA in the jurisdiction where it is
located. While the agencies believed that holding HQLA in a geographic
location where it is needed to meet liquidity needs such as those
envisioned by the LCR was appropriate, they were concerned that other
factors such as taxes, rehypothecation rights, and legal and regulatory
restrictions may encourage certain companies to hold a disproportionate
amount of their eligible HQLA in locations outside the United States
where unforeseen impediments may prevent timely repatriation of HQLA
during a liquidity crisis. Nonetheless, establishing quantitative
limits on the amount of eligible HQLA that can be held abroad and still
count towards a U.S. domiciled legal entity's LCR requirement is
complex and may be overly restrictive in some cases. Therefore, the
agencies proposed to require a covered company to establish policies to
ensure that eligible HQLA maintained in foreign locations was
appropriate with respect to where the net cash outflows could arise. By
requiring that there be a correlation between the eligible HQLA held
outside of the United States and the net cash outflows attributable to
non-U.S. operations, the agencies intended to increase the likelihood
that eligible HQLA would be available to a covered company in the
United States and to avoid repatriation concerns from eligible HQLA
held in another jurisdiction.
Commenters did not express significant concerns about the
requirement to implement and maintain policies and procedures to
determine the composition of the assets in eligible HQLA.
The agencies incorporated two clarifying changes in the final rule.
Although the proposed rule would have required a covered company to
have policies and procedures to determine its eligible HQLA composition
on a daily basis, the final rule clarifies that the requirement applies
on each calculation date. The agencies incorporated the modification to
clarify that the requirement applies on each date a covered company
calculates its LCR, subject to the transition provisions in subpart F
of the final rule. The agencies also emphasized in Sec. _.22(a)(5) of
the final rule that the methodology a covered company uses to determine
the eligibility of its HQLA must be documented and must be applied
consistently. For example, a covered company cannot make inconsistent
determinations in terms of eligible HQLA requirements for HQLA with the
same operational characteristics, either across different assets or
across time. Additionally, a covered company cannot treat the same
asset as eligible HQLA for one part of the final rule, while not
treating it as eligible HQLA for another part of the final rule.
4. Generally Applicable Criteria for Eligible HQLA
Under the proposed rule, assets would have been required to meet
the following generally applicable criteria to be considered as
eligible HQLA.
a. Unencumbered
The proposed rule required that an asset be unencumbered in order
for it to be included as eligible HQLA. First, the asset would have
been required to be free of legal, regulatory, contractual, or other
restrictions on the ability of a covered company to monetize the asset.
The agencies believed that, as a general matter, eligible HQLA should
only include assets that could be converted easily into cash. Second,
the asset could not have been 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 was 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
[[Page 61469]]
company could sell or engage in a repurchase agreement with the assets
to receive cash. This exception was also meant to permit collateral
that is covered by a blanket (rather than asset-specific) lien from a
U.S. GSE to be included as eligible HQLA.
The final rule includes a clarifying change to the proposed
requirement. The final rule adopts the proposed exception that an asset
may be considered unencumbered if the asset is pledged to a central
bank or a U.S. GSE to secure potential borrowings and credit secured by
the asset has not been extended to the covered company or its
consolidated subsidiaries. Under the final rule, the agencies clarify
that the assets may also be considered unencumbered if the pledge of
these assets is not required to support access to the payment services
of a central bank. In certain circumstances, a central bank may have
the ability to encumber the pledged assets to avoid losses that may
occur when a troubled institution fails to fulfill its payments. The
agencies are concerned that such a scenario is more likely to occur
during a period of market stress. Thus, the agencies believe that
assets pledged by a covered company to access a central bank's payment
services are considered encumbered. This provision of the final rule
would apply only to assets that a covered company is required to pledge
to receive access to the payment services of a central bank, and would
not encompass assets that are voluntarily pledged by a covered company
to support additional services that may be offered by the central bank,
such as overdraft capability.
One commenter expressed concerns that segregated funds held by a
covered company pursuant to SEC's customer protection rule 15c3-3 (Rule
15c3-3) would be considered encumbered assets. The commenter noted that
Rule 15c3-3 is an SEC rule requiring the segregation of customer assets
and places limits on the broker-dealer's use of customer funds. After
reviewing the commenter's concerns, the agencies believe that funds
held in a Rule 15c3-3 segregated account should be considered
encumbered assets. Rule 15c3-3 requires a covered company to set aside
assets in a segregated account to ensure that broker-dealers have
sufficient assets to meet the needs of their customers. Accordingly,
the assets in Rule 15c3-3 segregated accounts are not freely available
to the covered company to meet its liquidity needs and are not
considered unencumbered for purposes of the final rule. However, while
these accounts are excluded from eligible HQLA, the agencies are
including treatment of an inflow amount with respect to certain amounts
related to broker-dealer segregated accounts as detailed in Sec.
_.33(g) of the final rule.
Some commenters noted that the subsidiaries of some covered
companies are subject to the SEC's proposed rules to implement
liquidity requirements on broker-dealers and security-based swap
dealers that use the alternative net capital computation methodology.
The SEC's proposed rule would be a potential regulatory restriction on
the transfer of HQLA and the commenter expressed concern that the
proposed rule would lead to broad disqualification of the HQLA of SEC-
regulated entities. The agencies believe it is appropriate that in
cases where legal restrictions exist that do not allow the transfer of
HQLA between entities, that only HQLA that is equal to the amount of
the net outflows of that legal entity should be included in the
consolidated LCR, as discussed further below in section II.B.4.c and
II.B.4.d. However, the agencies clarify that in cases where such
restrictions would result in an amount of HQLA subject to restrictions
on transfer that is less than the amount of net outflows as calculated
under the final rule for the legal entity, the covered company may
include all of the HQLA of the legal entity subject to the restriction
in its consolidated LCR HQLA amount, assuming that the HQLA meets the
operational requirements specified above, as well as other requirements
in the final rule.
One commenter requested that the agencies clarify that securities
acquired through reverse repurchase agreements that have not been
rehypothecated and are legally and contractually available for a
covered company's use are unencumbered for purposes of the rule. Two
commenters requested that the agencies clarify that all borrowed assets
are legally and contractually available for the covered company's use.
The agencies clarify that borrowed securities, including those that are
acquired through reverse repurchase agreements, that have not been
rehypothecated may be considered unencumbered if the covered company
has rehypothecation rights with respect to the securities and the
securities are free of legal, regulatory, contractual, or other
restrictions on the ability of the covered company to monetize them and
have not been pledged to secure or provide credit-enhancement to any
transaction, with certain exceptions. The agencies highlight that HQLA,
including assets received through reverse repurchase agreements and
other borrowed assets, must meet all requirements set forth in Sec.
_.22 of the final rule to qualify as eligible HQLA.
b. Segregated Client Pool Securities
Under the proposed rule, an asset included as eligible HQLA could
not have been 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 defined 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. Because client pool securities
held in a segregated account are not freely available to meet all
possible liquidity needs of the covered company, they should not count
as a source of liquidity.
Commenters did not raise significant concerns on the exclusion of
assets in client pool securities from HQLA. The agencies have therefore
largely adopted the proposed requirement in the final rule.
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 have been included
as eligible HQLA subject to specific limitations depending on whether
the subsidiary was subject to the proposed rule and was therefore
required to calculate a LCR under the proposed rule.
If the consolidated subsidiary was subject to a minimum LCR under
the proposed rule, then a covered company could have included eligible
HQLA held in the consolidated subsidiary in an amount up to the
consolidated subsidiary's net cash outflows, as calculated to meet its
LCR requirement. The covered company could also have included in its
HQLA amount any additional amount of HQLA if the monetized proceeds
from that HQLA would be available for transfer to the top-tier covered
company 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
\55\ and Regulation W.\56\ 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
[[Page 61470]]
subsidiary's ability to transfer the HQLA to the parent covered
company.
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\55\ 12 U.S.C. 371c, 371c-1.
\56\ 12 CFR part 223.
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If the consolidated subsidiary was not subject to a minimum LCR
under Sec. _.10 of the proposed rule, a covered company could have
included the HQLA held in the consolidated subsidiary in an amount up
to the net cash outflows of the consolidated subsidiary that would have
been included in the covered company's calculation of its LCR, plus any
additional amount of HQLA held by the consolidated subsidiary the
monetized proceeds from which would be available for transfer to the
top-tier covered company during times of stress without statutory,
regulatory, contractual, or supervisory restrictions.
Section _.22(b)(3) of the final rule adopts the treatment of HQLA
held by U.S. consolidated subsidiaries as proposed. This treatment is
consistent with the Basel III Revised Liquidity Framework and ensures
that assets in the pool of eligible HQLA can be freely monetized and
the proceeds can be freely transferred to a covered company in times of
a liquidity stress. In response to a commenter's request for
clarification, the agencies clarify that a covered company is required
only to apply the statutory, regulatory, contractual, or supervisory
restrictions that are in effect as of the calculation date.
d. Treatment of HQLA Held by Non-U.S. Consolidated Subsidiaries
Consistent with the Basel III Revised Liquidity Framework, the
proposed rule provided that a covered company could have included
eligible HQLA held by a non-U.S. legal entity that is a consolidated
subsidiary of the covered company in an amount up to: (1) The net cash
outflows of the non-U.S. consolidated subsidiary that are included in
the covered company's net cash outflows, plus (2) any additional amount
of HQLA held by the non-U.S. consolidated subsidiary that is available
for transfer to the top-tier covered company during times of stress
without statutory, regulatory, contractual, or supervisory
restrictions. The proposed rule would have required covered companies
with foreign operations to identify the location of HQLA and net cash
outflows in foreign jurisdictions and exclude any HQLA above the amount
of net cash outflows for those jurisdictions that is not freely
available for transfer due to statutory, regulatory, contractual or
supervisory restrictions. Such transfer restrictions would have
included LCR requirements greater than those that would be established
by the proposed rule, counterparty exposure limits, and any other
regulatory, statutory, or supervisory limitations.
One commenter supported the proposed rule's approach to permitting
a covered company to include as eligible HQLA a certain level of HQLA
of its non-U.S. consolidated subsidiary. One commenter argued that the
final rule should permit a covered company to include as eligible HQLA
assets held in a non-U.S. consolidated subsidiary that qualify as HQLA
in the host jurisdiction of that subsidiary. The commenter contended
that jurisdictions adopting the Basel III Revised Liquidity Framework
would consider certain assets as HQLA depending on the liquidity
characteristics of the assets in the market of the relevant
jurisdiction. This approach, the commenter noted, is also consistent
with the recommendation of the European Banking Authority for the
treatment of HQLA in jurisdictions outside of the Eurozone.
Another commenter requested that the agencies acknowledge that HQLA
held in foreign entities that are not subject to prudential regulation
or capital requirements are less likely to present repatriation issues.
After reviewing commenters' concerns, the agencies have determined
to adopt the proposed liquidity requirements for non-U.S. consolidated
subsidiaries without change. The agencies have declined to adopt a
commenter's suggestion that the final rule permit a covered company's
eligible HQLA to include the HQLA of its non-U.S. consolidated
subsidiaries as defined in the host jurisdiction of the subsidiary. The
agencies recognize that jurisdictions will likely vary in their
adoption of the Basel III Revised Liquidity Framework. However, the
final rule was designed to implement the LCR standard as appropriate
for the United States and its markets, and, for the purposes of the LCR
in the United States, only those assets that meet the liquidity
characteristics and criteria of the final rule can be included as HQLA.
The agencies decline to differentiate between foreign entities that are
subject to prudential regulation or capital requirements and those that
are not for purposes of determining whether HQLA is more or less
subject to risk of restriction on transfer from those jurisdictions.
The agencies believe that generally HQLA held in foreign entities may
encounter challenges during a severe period of stress that prevent the
timely repatriation of assets. Furthermore, the agencies do not believe
it would be appropriate to provide favorable regulatory treatment for
assets held in a jurisdiction where there is less, rather than more,
explicit prudential regulation.
e. Maintenance of Eligible HQLA in the United States
The agencies believe it is appropriate for a covered company to
hold eligible HQLA in a particular geographic location in order to meet
local liquidity needs there. However, they do not believe it is
appropriate for a covered company to hold a disproportionate amount of
eligible HQLA in locations outside the United States, given that
unforeseen impediments may prevent timely repatriation of liquidity
during a crisis. Therefore, under the proposal, a covered company would
have been generally expected to maintain in the United States an amount
and type of eligible HQLA that is sufficient to meet its total net cash
outflow amount in the United States.
A commenter requested that the agencies confirm that that the
general expectation that a covered company 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 would be monitored through
a supervisory approach.
The final rule maintains the requirement that a covered company is
generally expected to maintain as eligible HQLA an amount and type of
eligible HQLA in the United States that is sufficient to meet its total
net cash outflow amount in the United States. In response to the
commenter's request for clarification, the agencies expect to monitor
this requirement through the supervisory process.
f. Exclusion of Certain 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 have been
included in HQLA. This exclusion extended to assets generated from
another asset that was received under such a rehypothecation right. If
the beneficial owner had 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.
The agencies have included a clarifying change to the proposed
requirement in the final rule. The final rule provides that any asset
which a covered company received with rehypothecation rights would not
be considered eligible HQLA if the
[[Page 61471]]
counterparty that provided the asset, or the beneficial owner, has a
contractual right to withdraw the asset without paying non-de minimis
remuneration at any time during the 30 calendar days following the
calculation date.
g. Exclusion of Assets Designated To Cover Operational Costs
In the proposed rule, assets specifically designated to cover
operational costs could not be included as eligible HQLA. 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.
The agencies did not receive comment on this provision and are
adopting the proposed requirement in Sec. _.22(b)(6) of the final rule
without change. The treatment of outflows for operational costs are
discussed in section II.C.3.l of this Supplementary Information
section.
5. Calculation of the HQLA Amount
Instructions for calculating the HQLA amount, including the
calculation of the required haircuts and caps for level 2 liquid
assets, were set forth in Sec. _--.21 of the proposed rule. The
agencies received several comments relating to the calculation of the
HQLA amount, particularly relating to the calculations of the adjusted
level 1, adjusted level 2A, and adjusted level 2B liquid asset amounts
that are used to calculate the adjusted excess HQLA amount and that
incorporate the unwind of certain secured transactions as described
below. After considering the comments, the agencies adopted the HQLA
amount calculation instructions largely as proposed, with two
modifications to the treatment of collateralized deposits and reserve
balance requirements. The final rule sets forth instructions for
calculating the HQLA amount in Sec. _.21.
Under the final rule, the HQLA amount equals the sum of the level
1, level 2A and level 2B liquid asset amounts, less the greater of the
unadjusted excess HQLA amount or the adjusted excess HQLA amount, as
described below.
a. Calculation of Liquid Asset Amounts
For the purposes of calculating a covered company's HQLA amount
under the proposed rule, each of the level 1 liquid asset amount, the
level 2A liquid asset amount, and the level 2B liquid asset amount
would have been calculated using the fair value of the eligible level 1
liquid assets, level 2A liquid assets, or level 2B liquid assets,
respectively, as determined under GAAP, multiplied by the appropriate
haircut factor prescribed for each level of HQLA.
Under the proposed rule, the level 1 liquid asset amount would have
equaled the fair value of all level 1 liquid assets held by the covered
company as of the calculation date, less required reserves under
section 204.4 of Regulation D (12 CFR 204.4). Consistent with the Basel
III Revised Liquidity Framework, and as discussed in section II.B.2 of
this Supplementary Information section, the proposed rule would have
applied a 15 percent haircut to level 2A liquid assets and a 50 percent
haircut to level 2B liquid assets. These haircuts were meant to
recognize that level 2 liquid assets generally are less liquid, have
larger haircuts in the repurchase markets, and may have more volatile
prices in the outright sales markets, particularly in times of stress.
Thus, the level 2A liquid asset amount would have equaled 85 percent of
the fair value of the level 2A liquid assets held by the covered
company as eligible HQLA, and the level 2B liquid asset amount would
have equaled 50 percent of the fair value of the level 2B liquid assets
held by the covered company as eligible HQLA.
The agencies are adopting under Sec. _.21(b) of the final rule the
calculation of the level 1, level 2A and level 2B liquid asset amounts
largely as proposed, with one clarification. In the calculation of the
level 1 liquid asset amount, the agencies have clarified that the
amount to be deducted from the fair value of all eligible level 1
liquid assets is the covered company's reserve balance requirement
under section 204.5 of Regulation D (12 CFR 204.5), not its entire
reserve requirement. Therefore, under the final rule, the level 1
liquid asset amount equals the fair value of all level 1 liquid assets
that are in the covered company's eligible HQLA as of the calculation
date, less the covered company's reserve balance requirement under
section 204.5 of Regulation D (12 CFR 204.5). Similarly, the level 2A
liquid asset amount equals 85 percent of the fair value of all level 2A
liquid assets, and the level 2B liquid asset amount equals 50 percent
of the fair value of all level 2B liquid assets, that are held by the
covered company as of the calculation date that are eligible HQLA. All
assets that are eligible HQLA at the calculation date are therefore to
be included in these three liquid asset amounts.
b. Calculation of Unadjusted Excess HQLA Amount
Consistent with the Basel III Revised Liquidity Framework, the
proposed rule would have capped 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. Under Sec. _.21 of the proposed rule, if the amounts of
level 2 liquid assets or level 2B liquid assets had exceeded their
respective caps, the excess amounts as calculated under the proposed
rule would have been deducted from the sum of the level 1 liquid asset,
level 2A liquid asset, and level 2B liquid asset amounts. The level 2
caps were meant to ensure that level 2 liquid assets, which may 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 composed of level 1 liquid assets.
The unadjusted excess HQLA amount, under the proposed rule, equaled
the sum of the level 2 cap excess amount and the level 2B cap excess
amount. The calculation of the unadjusted excess HQLA amount applied
the 40 percent level 2 liquid asset cap and the 15 percent level 2B
liquid asset cap at the calculation date by subtracting from the sum of
the level 1, level 2A and level 2B liquid asset amounts, the amount of
level 2 liquid assets that is in excess of the limits. The unadjusted
HQLA excess amount would have enforced the cap limits at the
calculation date without unwinding any transactions.
The methods of calculating the level 2 cap excess amount and level
2B cap excess amounts were set forth in Sec. _.21(d) and (e) of the
proposed rule, respectively. Under those provisions, the level 2 cap
excess amount would have been 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 maximum
allowable level 2 liquid assets to the level 1 liquid assets) times the
level 1 liquid asset amount; or (2) zero. The calculation of the level
2B cap excess amount would have been 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 maximum 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. 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
[[Page 61472]]
assets when applying the 40 percent level 2 cap.
Several commenters requested that the agencies modify the level 2
and level 2B liquid assets caps, arguing that the agencies have not
provided any analysis on the appropriateness of the caps. In
particular, these commenters argued that the caps could cause banking
organizations to ``hoard'' level 1 liquid assets, reducing the
liquidity and volume of level 2A and level 2B liquid assets.
The agencies continue to believe that the majority of a covered
company's HQLA amount should consist of the highest quality liquid
assets, namely, level 1 liquid assets. In establishing the requirement
that the level 1 liquid asset amount should represent at least 60
percent of the HQLA amount, the agencies are seeking to ensure that a
covered company will be able to rapidly meet its liquidity needs in a
period of stress. The agencies recognize that covered companies may
make investment decisions pertaining to individual assets within HQLA
categories and the agencies believe that there is adequate availability
of level 1 liquid assets. In choosing the assets that would have
qualified as level 1 liquid assets under the proposed rule, the
agencies considered whether there would be adequate availability of
such assets during a stress period, to ensure the appropriateness of
the asset's designation as the highest quality asset under the proposed
rule. Further, given the liquidity characteristics of the asset classes
included in level 2B liquid assets, the agencies continue to believe
that these assets should constitute no more than 15 percent of a
covered company's HQLA amount. Therefore the final rule adopts the
unadjusted calculations as proposed in Sec. _.21(c)-(e).
c. Calculation of Adjusted Excess HQLA Amount
The agencies believed that the proposed level 2 caps and haircuts
should apply to the covered company's HQLA amount both before and after
the unwinding of certain types of secured transactions where eligible
HQLA is exchanged for eligible HQLA in the next 30 calendar days, in
order to ensure that the HQLA amount is appropriately diversified and
not the subject of manipulation. The proposed calculation of the
adjusted excess HQLA amount on this basis sought to prevent a covered
company from being able to manipulate its eligible HQLA 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.
Under the proposed rule, to determine its adjusted HQLA excess
amount, a covered company would have been required to unwind all
secured funding transactions, secured lending transactions, asset
exchanges, and collateralized derivatives transactions, as defined by
the proposed rule, in which eligible HQLA, including cash, were
exchanged and that would have matured within 30 calendar days of the
calculation date. The unwinding of these transactions and the
calculation of the adjusted excess HQLA amount was intended to prevent
a covered company from having a substantial amount of transactions that
would have created the appearance of a significant level 1 liquid asset
amount at the beginning of a 30 calendar-day stress period, but that
would have matured by the end of the 30 calendar-day stress period. For
example, absent the unwinding of these transactions, a covered company
that held only level 2 liquid assets could have appeared to be
compliant with the level 2 liquid asset composition cap at the
calculation date by borrowing on an overnight term a level 1 liquid
asset (such as cash or U.S. Treasuries) secured by level 2 liquid
assets. While doing so would have lowered the covered company's amount
of level 2 liquid assets and increased its amount of level 1 liquid
assets, the covered company would have had a concentration of level 2
liquid assets above the 40 percent cap after the transaction was
unwound. Therefore, the calculation of the adjusted excess HQLA amount
and, if greater than unadjusted excess HQLA amount, its subtraction
from the sum of the level 1, level 2A, and level 2B liquid asset
amounts, would have prevented a covered company from avoiding the level
2 liquid asset cap limitations.
In order to calculate the adjusted excess HQLA amount, the proposed
rule would have required a covered company, for this purpose only, to
calculate adjusted level 1, level 2A, and level 2B liquid asset
amounts. The adjusted level 1 liquid asset amount would have been 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 matures within a 30
calendar-day period and that involves an exchange of eligible HQLA, or
cash. Similarly, the adjusted level 2A and adjusted level 2B liquid
asset amounts would only have included the unwinding of those
transactions involving an exchange of eligible HQLA or cash. After
unwinding all the appropriate transactions, the asset haircuts of 15
percent and 50 percent would have been applied to the level 2A and 2B
liquid assets, respectively.
The adjusted excess HQLA amount calculated pursuant to Sec.
_.21(g) of the proposed rule would have been comprised of the adjusted
level 2 cap excess amount and adjusted level 2B cap excess amount
calculated pursuant to Sec. _.21(h) and Sec. _.21(i) of the proposed
rule, respectively.
The adjusted level 2 cap excess amount would have been 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 maximum ratio of allowable level 2 liquid assets to level
1 liquid assets) times the adjusted level 1 liquid asset amount; or (2)
zero. The adjusted level 2B cap excess amount would be calculated by
taking the greater of: (1) The adjusted level 2B liquid asset amount
less the adjusted level 2 cap excess amount less 0.1765 (or 15/85,
which is the maximum 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. The adjusted excess HQLA amount would
have been the sum of the adjusted level 2 cap excess amount and the
adjusted level 2B cap excess amount.
One commenter requested that the agencies remove the unwind
requirement from the rule because of the operational complexity
required to calculate the covered institution's HQLA both before and
after the unwind. Another commenter asked whether the agencies have
considered permitting covered companies to calculate the value of their
HQLA under the International Financial Reporting Standards method of
accounting rather than GAAP.
The agencies believe that it is crucial for a covered company to
assess the composition of its HQLA amount both on an unadjusted basis
and on a basis adjusted for certain transactions that directly impact
the composition of eligible HQLA. The agencies believe that these
calculations are justified in order to ensure an HQLA amount of
adequate quality of composition and diversification and to ensure that
covered companies actually have the ability to monetize such assets
during a stress period. The agencies do not
[[Page 61473]]
believe that it would be appropriate to use alternative methods of
accounting beyond GAAP in determining the HQLA amount. The agencies
note that for regulatory reporting purposes, generally, a covered
company must report data using GAAP. It would likely increase burden on
covered companies that typically apply GAAP, which includes the vast
majority of covered companies, to use another method of accounting to
calculate HQLA. In addition, to permit certain covered companies to use
an alternate method of accounting would reduce the comparability of the
information across covered companies. As noted above, the LCR is
intended to be a standardized liquidity metric, designed to promote a
consistent and comparable view of the liquidity of covered companies.
The agencies are finalizing the adjusted excess HQLA amount calculation
with two amendments to the proposed rule. First, the agencies are
clarifying that, in a manner similar to the calculation of the level 1
liquid asset amount, the adjusted level 1 liquid asset amount (used
solely for the purpose of calculating the adjusted excess HQLA amount)
must include the deduction of the covered company's reserve balance
requirement under section 204.5 of Regulation D (12 CFR 204.5). Second,
the agencies are exempting certain secured funding transactions from
inclusion in the unwind as described below.
d. Unwind Treatment of Collateralized Deposits
A number of commenters pointed out that certain deposits are
legally required to be collateralized. For instance, deposits placed by
states and municipalities, known as preferred deposits, are often
required to be collateralized under state law. Commenters further
pointed out that in some instances, deposits are required to be
collateralized by specific collateral which would not have been HQLA
under the proposed rule. Additionally, federal law requires certain
corporate trust deposits to be collateralized.\57\ Several commenters
highlighted that these types of collateralized deposits would have been
treated as secured funding transactions under the proposed rule,
requiring a covered company to unwind these deposit relationships when
determining the adjusted excess HQLA amount. Commenters argued that the
unwind treatment effectively leads covered companies to exclude from
their HQLA amounts both the cash from the deposits, which would be
eligible HQLA, and also any collateral pledged to secure the deposit.
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\57\ Pursuant to OCC regulations, a national bank or federal
savings association may place funds for which the bank is a
fiduciary on deposit in the bank (such deposits are often referred
to as ``self-deposits''). The regulations require that the bank set
aside collateral to secure self-deposits to the extent they are not
insured by the FDIC. See 12 CFR 9.10(b) (national banks); 12 CFR
150.300-50.320 (federal savings associations).
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Several commenters pointed out that the agencies proposed the
unwind treatment of secured transactions to ensure that banking
organizations do not manipulate their HQLA amounts through repurchase
and reverse repurchase transactions. These commenters contended that
covered companies would not use preferred deposits and collateralized
corporate trust deposits to inflate their HQLA amounts because of the
long-term nature of the banking relationships. Commenters expressed the
opinion that collateralized deposits represent stable, relationship-
based deposits and are generally placed in connection with certain
operational services provided by the bank. These commenters maintained
that collateralized deposits are very different in nature from other
secured funding transactions, such as repurchase agreements where
collateralization is a function of the transaction between
counterparties, rather than imposed by a third party, and should not
raise the concerns the agencies were seeking to address with the unwind
calculation relating to the manipulation of the HQLA amount.
Commenters urged the agencies to exclude collateralized deposits
from the requirement to unwind secured funding transactions for the
purposes of determining a covered company's adjusted excess HQLA
amount. These commenters contended that the proposed unwind treatment
of municipal fund deposits would have a major impact, limiting the
choice of banks from which state and municipal treasurers could obtain
treasury management and other banking services. Certain commenters
asserted that the proposed rule would lead banks to accept limited
municipal fund deposits, thereby increasing the costs to municipalities
who rely on earning credits generated by deposits to pay for banking
services. Commenters also were concerned that applying the unwind
mechanism to preferred public sector deposits would discourage banks
from accepting these deposits because of the potential negative impact
on their LCR calculations. This in turn could raise the cost of capital
for municipalities and undermine public policy goals of infrastructure
maintenance and development. These commenters stated that banking
organizations likely would have to limit the amount of preferred
deposits and collateralized corporate trust deposits they accept,
further reducing the interest paid on preferred deposits and corporate
trust deposits, or eliminating earnings credits extended to state and
municipal depositors. Furthermore, as preferred deposits may be
collateralized with municipal securities, commenters contended that
banks' decreased appetite for accepting municipal fund deposits would
also lead to reduced investments in municipal securities.
Finally, several commenters requested that, if the agencies do not
exclude collateralized deposits from the secured transaction unwind,
that the agencies should apply a maximum outflow for such deposits that
(for example, 15 or 25 percent), irrespective of the collateral being
used to secure the deposit.
In response to commenters' concerns, the final rule does not
require a covered company to unwind certain secured funding
transactions that are collateralized deposits. As several commenters
noted, the proposed unwind methodology was intended to prevent a
covered company from manipulating the composition of its HQLA amount by
engaging in transactions such as repurchase or reverse repurchase
agreements that could ultimately unwind within the 30 calendar-day
stress period. The agencies are aware that certain preferred deposits
and corporate trust deposits are required to be collateralized under
applicable law and agree with commenters that the longer-term, deposit
banking relationships associated with preferred deposits and
collateralized corporate trust deposits can be different in nature from
shorter-term repurchase and reverse repurchase agreements. After
considering commenters' concerns, the agencies believe that certain
collateralized deposits do not raise the concerns the agencies were
seeking to address with the unwind calculation. The agencies believe
that a covered company would be unlikely to pursue these collateralized
deposit relationships for the purposes of manipulating the composition
of their HQLA amounts. Therefore, the final rule does not require a
covered company to unwind secured funding transactions that are
collateralized deposits as defined in the final rule when determining
its adjusted excess HQLA amount. The agencies highlight that these
deposits continue to be subject to an outflow assumption, as addressed
in section II.C.3.j.(ii) of this Supplementary Information section.
[[Page 61474]]
In the final rule, the agencies included a definition for
collateralized deposits in order to implement the exclusion of these
specific types of transactions from the unwind calculation and to
identify the transactions as potentially eligible for certain outflow
rates. The final rule defines collateralized deposits as either: (1) A
deposit of a public sector entity held at the covered company that is
secured under applicable law by a lien on assets owned by the covered
company and that gives the depositor, as holder of the lien, priority
over the assets in the event the covered company enters into
receivership, bankruptcy, insolvency, liquidation, resolution, or
similar proceeding, or (2) a deposit of a fiduciary account held at the
covered company for which the covered company is a fiduciary and sets
aside assets owned by the covered company as security under 12 CFR 9.10
(national banks) or 12 CFR 150.300 through 150.320 (Federal savings
associations) and that gives the depositor priority over the assets in
the event the covered company enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or similar proceeding.
e. Unwind Treatment of Transactions Involving Eligible HQLA
One commenter requested that the agencies clarify that only
transactions that are conducted by or for the benefit of the liquidity
management function receive unwind treatment when a covered company
calculates its adjusted excess HQLA amount. The commenter expressed the
view that the proposed rule did not limit the unwind methodology to
only transactions involving the eligible HQLA that were under the
control of the liquidity management function for purposes of Sec.
_.20(d)(2) in the proposed rule. This commenter urged that transactions
undertaken outside of the liquidity management function would be
reflected in the calculation of net cash outflows and should not be
incorporated in the HQLA amount calculation. Moreover, the commenter
contended that excluding secured funding transactions that are not
under the liquidity management function is consistent with the
agencies' intent to capture only those transactions that a covered
company may use to manipulate its HQLA amount. Lastly, the commenter
noted that the Basel III Revised Liquidity Framework only applied the
unwind methodology to transactions that met operational requirements.
In response to the commenter's request, the agencies are clarifying
that a covered company should apply the unwind treatment to secured
funding transactions (other than secured funding transactions that are
collateralized deposits), secured lending transactions, asset exchanges
and collateralized derivatives where the maturity of the transaction
within 30 calendar days of the calculation date will involve the
covered company providing an asset that is eligible HQLA or cash and
the counterparty providing an asset that will be eligible HQLA or cash.
Eligible HQLA meet the operational requirements set forth in Sec. _.22
of the final rule, including the requirement that the eligible HQLA are
under the control of the liquidity management function. Consistent with
the Basel III Revised Liquidity Framework, the agencies believe that a
covered company should not be required to unwind transactions involving
assets that do not meet or will not meet these operational requirements
when calculating its adjusted excess HQLA amount. A covered company
should, however, consider all such transactions in determining its net
cash outflow amount under the final rule.
Consistent with the Basel III Revised Liquidity Framework and Sec.
_.32(j)(1) of the final rule, secured funding transactions maturing
within 30 calendar days of the calculation date that involve the
exchange of eligible HQLA are those where the HQLA securing the secured
funding transaction would otherwise qualify as eligible HQLA if they
were not already securing the particular transaction in question.
Similarly, and consistent with Sec. _.33(f)(1) of the final rule,
secured lending transactions that involve the exchange of eligible HQLA
are those where the assets securing the secured lending transaction
are: (1) Eligible HQLA at the calculation date, or (2) would be
eligible HQLA at the calculation date if they had not been reused to
secure a secured funding transaction, or delivered in an asset
exchange, maturing within 30 calendar days of the calculation date and
which is also being unwound in determining the adjusted level 1,
adjusted level 2A, and adjusted level 2B liquid asset amounts.
Consistent with Sec. _.32(j)(3) and Sec. _.33(f)(2) of the final
rule, asset exchange transactions involving the exchange of eligible
HQLA are those where the covered company will, at the maturity of the
asset exchange transaction within 30 calendar days of the calculation
date: (1) Receive assets from the asset exchange counterparty that will
be eligible HQLA upon receipt, and (2) the assets that the covered
company must post to the counterparty are either: (a) eligible HQLA at
the calculation date, or (b) would be eligible HQLA at the calculation
date if they were not already securing a secured funding transaction,
or delivered in an asset exchange, that will mature within 30 calendar
days of the calculation date and which is also being unwound in
determining the adjusted level 1, adjusted level 2A, and adjusted level
2B liquid asset amounts.
f. Example HQLA Calculation
The following is an example calculation of the HQLA amount that
would be required under the final rule. Note that the given liquid
asset amounts and adjusted liquid asset amounts already reflect the
level 2A and 2B haircuts.
(a) Calculate the liquid asset amounts (Sec. _.21(b))
The following values are given:
Fair value of all level 1 liquid assets that are eligible HQLA: 17
Covered company's reserve balance requirement: 2
Level 1 liquid asset amount (Sec. _.21(b)(1)): 15
Level 2A liquid asset amount: 25
Level 2B liquid asset amount: 140
Sum of level 1, level 2A, and level 2B liquid asset amounts: 180
(b) Calculate unadjusted excess HQLA amount (Sec. _.21(c))
Step 1: Calculate the level 2 cap excess amount (Sec. _.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)
= Max (165--10.00, 0)
= Max (155.00, 0)
= 155.00
Step 2: Calculate the level 2B cap excess amount (Sec.
_.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 2A 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 (Sec.
_.21(c)).
Unadjusted excess HQLA amount = Level 2 cap excess amount + Level 2B
cap excess amount
= 155.00 + 0
= 155
(c) Calculate the adjusted liquid asset amounts, based upon the
unwind of certain transactions involving the exchange of eligible
HQLA or cash (Sec. _.21(f)).
The following values are given:
Adjusted level 1 liquid asset amount: 120
Adjusted level 2A liquid asset amount: 50
Adjusted level 2B liquid asset amount: 10
(d) Calculate adjusted excess HQLA amount (Sec. _.21(g)).
[[Page 61475]]
Step 1: Calculate the adjusted level 2 cap excess amount (Sec.
_.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 (Sec.
_.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 2A 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 (Sec.
_.21(g)).
Adjusted excess HQLA amount = adjusted level 2 cap excess amount +
adjusted level 2B cap excess amount
= 0 + 0
= 0
(e) Determine the HQLA amount (Sec. _.21(a)).
HQLA Amount = 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
C. Net Cash Outflows
Subpart D of the proposed rule established the total net cash
outflows (the denominator of the LCR), which sets the minimum dollar
amount that is required to be offset by a covered company's HQLA
amount. As set forth in the proposed rule, a covered company would have
first determined outflow and inflow amounts by applying a standardized
set of outflow and inflow rates to various asset and liability
balances, together with off-balance-sheet commitments, as specified in
Sec. Sec. _.32 and 33 of the proposed rule. These outflow and inflow
rates reflected key aspects of liquidity stress events including those
experienced during the most recent financial crises. To identify when
outflow and inflow amounts occur within the 30 calendar-day period
following the calculation date, a covered company would have been
required to employ a set of maturity assumptions, as set forth in Sec.
_.31 of the proposed rule. A covered company would have then calculated
the largest daily difference between cumulative inflow amounts and
cumulative outflow amounts over a period of 30 calendar days following
a calculation date (the peak day approach) to arrive at its total net
cash outflows.
The agencies received comments requesting modification to the
calculation of net cash outflows and to the maturity assumptions set
forth in the proposed rule. In addition, commenters argued that some of
the proposed outflow and inflow rates should be adjusted. To address
commenters' concerns, the agencies are modifying the net outflow
calculation by including an add-on, as well as modifying the provisions
on determining maturity. With respect to outflow and inflow rates, the
agencies are generally finalizing the rule as proposed with few
changes.
1. The Total Net Cash Outflow Amount
Under the proposed rule, the total net cash outflow amount would
have equaled the largest daily difference between cumulative inflow and
cumulative outflow amounts, as calculated over the 30 calendar days
following a calculation date. For purposes of this calculation,
outflows addressed in Sec. _.32(a) through Sec. _.32(g)(2) of the
proposed rule that did not have a contractual maturity date would have
been assumed to occur on the first day of the 30 calendar-day period.
These outflow amounts included those for unsecured retail funding,
structured transactions, net derivatives, mortgage commitments,
commitments, collateral, and certain brokered deposits. Also, the
proposed rule treated transactions in Sec. _.32(g)(3) through Sec.
_.32(l) as maturing on their contractual maturity date or on the first
day of the 30 calendar-day period, if such transaction did not have a
contractual maturity date. These transactions included certain brokered
deposits, unsecured wholesale funding, debt securities, secured funding
and asset exchanges, foreign central bank borrowings, and other
contractual and excluded transactions. Inflows, which would have been
netted against outflows on a daily basis, included derivatives, retail
cash, unsecured wholesale funding, securities, secured lending and
asset exchanges, and other inflows. Inflows from transactions without a
stated maturity date would have been excluded under the proposed rule
based on the assumption that the inflows from such non-maturity
transactions would occur after the 30 calendar-day period. Allowable
inflow amounts were capped at 75 percent of aggregate cash outflows.
The proposed rule set the denominator of the LCR as the largest
daily net cumulative cash outflow amount within the following 30
calendar-day period rather than using total net cash outflows over a 30
calendar-day period, which is the method employed by the Basel III
Revised Liquidity Framework. The agencies elected to employ this peak
day approach to take into account potential maturity mismatches between
a covered company's outflows and inflows during the 30 calendar-day
period; that is, the risk that a covered company could have a
substantial amount of contractual inflows that occur late in a 30
calendar-day period while also having substantial outflows that occur
early in the same period. Such mismatches have the potential to
threaten the liquidity position of the organization during a time of
stress and would not be apparent under the Basel III Revised Liquidity
Framework denominator calculation. By requiring the recognition of the
largest net cumulative outflow day within the 30 calendar-day period,
the proposed rule aimed to more effectively capture a covered company's
liquidity risk and foster more sound liquidity management.
As noted above, cumulative cash inflows would have been capped at
75 percent of aggregate cash outflows in the calculation of total net
cash outflows. This limit would have prevented a covered company from
relying exclusively on cash inflows, which may not materialize in a
period of stress, to cover its liquidity needs and ensure that covered
companies maintain a minimum HQLA amount to meet unexpected liquidity
demands during the 30 calendar-day period.
Comments related to the method of calculation of the total net cash
outflow amount in Sec. _.30 of the proposed rule focused around two
general concerns: the peak day approach calculation and the 75 percent
inflow cap.
a. Peak Day Approach
Commenters expressed mixed views on the requirement to calculate
the total net cash outflow amount using the largest daily difference
between cumulative cash outflows and inflows. Some commenters
recognized the concerns of the agencies in addressing the risk that a
banking organization may not have sufficient liquidity to meet all its
obligations throughout the 30 calendar-day period. One commenter
supported the approach, noting the importance of measuring a covered
company's ability to withstand the largest liquidity demands within a
30 calendar-day period. However, several commenters expressed concern
that the
[[Page 61476]]
approach deviated too far from the Basel III Revised Liquidity
Framework and was unrealistic or impractical in assuming that cash
flows without contractual maturity dates would occur on the first day
of a 30 calendar-day period, thereby effectively rendering a 30-day
liquidity standard a one-day standard. Some of these commenters
suggested that the agencies adopt a different treatment for non-
maturity outflows, such as assuming that the outflows occur
consistently throughout the month, i.e., a straight-line approach, or
more rapidly at the beginning of the month, i.e., a front-loaded
approach. Further, a number of commenters asserted that the peak day
approach created operational complexities and requested that the
agencies perform additional diligence before implementing this
requirement in the final rule.
Many commenters argued that the peak day approach was a significant
departure from the Basel III Revised Liquidity Framework that could
have international competitive repercussions, as U.S. covered companies
could be required to hold more HQLA than their foreign counterparts.
Several commenters indicated that requirements to determine net cash
outflows using the ``worst day'' over the 30 calendar-day period was
not contemplated in the Basel III Revised Liquidity Framework, and thus
should not be incorporated into the final rule. Other commenters were
concerned about the international challenges that could result from a
divergence and argued that the peak day approach should first be
implemented internationally to provide a greater acceptance and
understanding of the requirement. A few commenters requested that the
agencies conduct a quantitative study and analysis to form the basis of
any net cash outflow calculation that addresses maturity mismatches.
Commenters indicated that assumptions underlying the net cumulative
peak day approach were unrealistic, involved significant operational
challenges, and could cause unintended consequences. Commenters argued
that deposits with indeterminate maturities, including operational
deposits, could not all be drawn on the first day of a stress scenario
because a banking organization does not have the necessary operational
capability to fulfill such outflow requests. Several commenters had
specific concerns relating to retail deposits being drawn on the first
day of a 30 calendar-day period, arguing that such an assumption
materially overstates a banking organization's liquidity needs in the
early portion of a 30 calendar-day period. Another commenter stated
that the largest U.S. banking organizations did not experience a 100
percent runoff on any single day for any class of deposits during the
most recent financial crisis and that such a runoff would be impossible
because withdrawals of that magnitude could not be processed by the
U.S. Automated Clearing House system. Commenters further argued that
certain assumptions were unrealistic by stating that no market would
even be deep enough to absorb the volume of HQLA monetized to meet the
assumed outflows. Another commenter argued that the proposed rule could
reduce banking organizations' provision of non-deposit, non-maturity
funding, such as floating rate demand notes, due to the higher outflow
assumption and the accelerated maturity assumption.
The agencies are addressing commenters' concerns by modifying the
proposed net cumulative peak day approach. First, as in the proposed
rule, a covered company would calculate its outflow and inflow amounts
by applying the final rule's standardized set of outflow and inflow
rates to various asset and liability balances, together with off-
balance-sheet commitments. However, unlike the proposed rule and in
response to commenters' concerns, the modified calculation does not
assume that all transactions and instruments that do not have a
contractual maturity date have an outflow amount on the first day of
the 30 calendar-day period. Instead, the calculation would use an add-
on approach that would substantively achieve the proposal's goal of
addressing potential maturity mismatches between a covered company's
outflows and inflows.
The add-on approach involves two steps. First, cash outflows and
inflows over the 30 calendar-day period are aggregated and netted
against one another, with the aggregated inflows capped at 75 percent
of the aggregated outflows. This first step is similar to the method
for calculating net cash outflows in the Basel III Revised Liquidity
Framework. The second step calculates the add-on, which requires a
covered company to identify the largest single-day maturity mismatch
within the 30 calendar-day period by calculating the daily difference
in cumulative outflows and inflows that have set maturity dates, as
specified by Sec. _.31 of the final rule, within the 30 calendar-day
period. The day with the largest difference reflects the net cumulative
peak day. The covered company then calculates the difference between
that peak day amount and the net cumulative outflow amount on the last
day of the 30 calendar-day period for those same outflow and inflow
categories that have maturity dates within the 30 calendar-day period.
This difference equals the add-on.
In calculating the add-on, both the net cumulative peak day amount
and the net cumulative outflow amount on the last day of the 30
calendar-day period cannot be less than zero. The categories of inflows
and outflows included in the add-on calculation comprise those
categories that are the most likely to expose covered companies to
maturity mismatches within the 30 calendar-day period, such as
repurchase agreements and reverse repurchase agreements with financial
sector entities, whereas outflows such as non-maturity retail deposits
are not a part of the add-on calculation. The final rule clarifies that
the only non-maturity outflows included in the calculation of the add-
on are those that are determined to have a maturity date of the day
after the calculation date, pursuant to Sec. _.31(a)(4) as described
below.
The amounts calculated in steps one and two are then added together
to determine the total net cash outflow. This approach ensures that the
final rule avoids potential unintended consequences by eliminating the
proposed rule's assumption that all non-maturity outflows occur on the
first day of a 30 calendar-day period while still achieving the
underlying goal of recognizing maturity mismatches. The agencies
recognize that the revised approach involves calculations and
operational complexity not contemplated by the Basel III Revised
Liquidity Framework and could potentially require some covered
companies to hold more HQLA than under the Basel III Revised Liquidity
Framework. However, the agencies have concluded that the liquidity
risks posed by maturity mismatches are significant and must be
addressed to ensure that the LCR in the U.S. will be a sufficiently
rigorous measure of a covered company's liquidity resiliency.
Table 1 illustrates the final rule's determination of the total net
cash outflow amount using the add-on approach. Using Table 1, which is
populated with similar values as the corresponding table in the
proposed rule, a covered company would implement the first step of the
add-on approach by aggregating the cash outflow amounts in columns (A)
and (B), as calculated under Sec. _.32, and subtract from that
aggregated amount the lesser of 75 percent of that aggregated amount
and the aggregated
[[Page 61477]]
cash inflow amounts in columns (D) and (E), as calculated under Sec.
_.33. The second step of the add-on approach calculates the add-on. The
covered company would cumulate the cash outflows determined under Sec.
_.32(g), (h)(1), (h)(2), (h)(5), (j), (k), and (l) (column C) and cash
inflows determined under Sec. _.33(c), (d), (e), and (f) (column F)
that have maturity dates pursuant to Sec. _.31 for each day within the
30 calendar-day period. The covered company would then determine (G),
the net cumulative cash outflows, by subtracting column (F) from column
(C) for each day. The net cumulative peak day amount would be the
largest value of column (G). The greater of that peak value and zero
less the greater of the day 30 value of column (G) and zero is the add-
on. To determine the total net cash outflow amount, the covered company
would add the aggregated net cash outflow amount calculated in the
first step and the add-on.
Table 1--Determination of Total Net Cash Outflow Using the Add-On Approach
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-maturity
outflows and Outflows Cumulative Cumulative
outflows that determined under outflows Inflows that have Inflows inflows
have a maturity sections 32(g), determined under a maturity date determined under determined
date pursuant to (h)(1), (h)(2), sections 32(g), pursuant to sections 33(c), pursuant to Net cumulative
section 31, but (h)(5), (j), (k), (h)(1), (h)(2), section 31, but (d), (e), and sections 33(c), maturity
not under and (l) that have (h)(5), (j), (k), not under (f) that have a (d), (e), and (f) outflows
sections 32(g), a maturity date and (l) that have sections 33(c), maturity date that have a
(h)(1), (h)(2), pursuant to a maturity date (d), (e), and (f) pursuant to maturity date
(h)(5), (j), (k), section 31 pursuant to section 31 pursuant to
(l) section 31 section 31
A B C D E F G
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Day 1...................................................... ................. 100 100 ................. 90 90 10
Day 2...................................................... ................. 20 120 ................. 5 95 25
Day 3...................................................... ................. 10 130 ................. 5 100 30
Day 4...................................................... ................. 15 145 ................. 20 120 25
Day 5...................................................... ................. 20 165 ................. 15 135 30
Day 6...................................................... ................. 0 165 ................. 0 135 30
Day 7...................................................... ................. 0 165 ................. 0 135 30
Day 8...................................................... ................. 10 175 ................. 8 143 32
Day 9...................................................... ................. 15 190 ................. 7 150 40
Day 10..................................................... ................. 25 215 ................. 20 170 45
Day 11..................................................... ................. 35 250 ................. 5 175 75
Day 12..................................................... ................. 10 260 ................. 15 190 70
Day 13..................................................... ................. 0 260 ................. 0 190 70
Day 14..................................................... ................. 0 260 ................. 0 190 70
Day 15..................................................... ................. 5 265 ................. 5 195 70
Day 16..................................................... ................. 15 280 ................. 5 200 80
Day 17..................................................... ................. 5 285 ................. 5 205 80
Day 18..................................................... ................. 10 295 ................. 5 210 85
Day 19..................................................... ................. 15 310 ................. 20 230 80
Day 20..................................................... ................. 0 310 ................. 0 230 80
Day 21..................................................... ................. 0 310 ................. 0 230 80
Day 22..................................................... ................. 20 330 ................. 45 275 55
Day 23..................................................... ................. 20 350 ................. 40 315 35
Day 24..................................................... ................. 5 355 ................. 20 335 20
Day 25..................................................... ................. 40 395 ................. 5 340 55
Day 26..................................................... ................. 8 403 ................. 125 465 -62
Day 27..................................................... ................. 0 403 ................. 0 465 -62
Day 28..................................................... ................. 0 403 ................. 0 465 -62
Day 29..................................................... ................. 5 408 ................. 10 475 -67
Day 30..................................................... ................. 2 410 ................. 5 480 -70
------------------------------------------------------------------------------------------------------------------------------------
Total.................................................. 300 410 ................. 100 480 ................. .................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Net Cash Outflows = Aggregated Outflows - MIN (.75*Aggregated Outflows,Aggregated Inflows) + Add-On.
= 300 + 410-MIN (100 + 480, .75 * (300 + 410)) + (MAX (0,85) - MAX(0,-70)).
= 710 - 532.5 + (85 - 0).
= 262.5.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
b. Inflow Cap
Under the proposed rule, a covered company's total cash inflow
amount would have been capped at 75 percent of its total cash outflows.
This was designed to ensure that covered companies would hold a minimum
HQLA amount equal to at least 25 percent of total cash outflows. The
agencies received a number of comments on this provision of the
proposed rule, including requests for modifications to the cap.
However, for the reasons discussed below, the agencies are adopting
this provision of the rule largely as proposed, except for a
modification relating to the netting of certain foreign currency
derivative transactions.
One commenter noted that while there is a recognizable policy
rationale for the 75 percent inflow cap, application of the rule in all
circumstances may result in unwarranted or unintended outcomes. Some
commenters suggested application of the inflow cap to individual types
of inflows rather than as a restriction on the entire LCR denominator.
For instance, one commenter recommended that the agencies make a
distinction between contractual and contingent inflows, and only apply
the inflow cap to the latter category. The commenter also noted that
the application of the cap could cause asymmetric treatment of certain
categories of transactions that may be perceived as being linked in the
normal course of business. For example, the commenter suggested that
the inflow leg of a foreign exchange swap transaction should not be
subject to the 75 percent inflow cap. Rather, the full amount of the
inflow leg should be counted and netted against the
[[Page 61478]]
corresponding outflow leg in the net derivative outflow amount (under
Sec. _.32(c) of the proposed rule). Other commenters requested that
loans of securities to cover customer short positions be exempt from
the 75 percent inflow cap in the final rule where the covered company
obtains the security through a repurchase agreement because all related
transactions would unwind simultaneously and net out. Commenters opined
that the application of the proposed rule's inflow cap would result in
a net liquidity outflow across the secured transactions despite the
transactions' symmetry and result in an overestimation of net outflows,
instead of full recognition of secured lending inflows where the
banking organization has the contractual right and practical ability to
terminate the loan and receive cash back from a counterparty in
response to a change in offsetting customer positions.
Other commenters indicated that the release of previously
segregated funds held to comply with Rule 15c3-3 should not be subject
to the 75 percent inflow cap, but should be given full inflow
credit.\58\ Another commenter noted that certain covered nonbank
companies cannot deposit excess cash in Federal Reserve Banks, and
instead tend to deposit such funds in third-party commercial banks.
This commenter recommended that the inflows from such deposits should
not be subject to the 75 percent cap. Several commenters requested that
the agencies eliminate the application of inflow caps for covered
subsidiaries of covered companies in the calculation of the
subsidiaries' own LCR.
---------------------------------------------------------------------------
\58\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------
The agencies continue to believe the total inflow cap is a key
requirement of the LCR calculation because it ensures covered companies
hold a minimum HQLA amount equal to 25 percent of total cash outflows
that will be available during a stress period. The agencies believe it
is critical for firms to maintain on-balance sheet assets to meet
outflows and not be overly reliant on inflows that may not materialize
in a stress scenario. The agencies decline to significantly modify this
provision to relax the cap on inflows because, without it, a covered
company may be holding an amount of HQLA that is not commensurate with
the risks of its funding structure under stress conditions. Reducing
the inflow cap and allowing covered companies to rely more heavily on
inflows to offset outflows likely would increase the interconnectedness
of the financial system, as a substantial amount of inflows are from
other financial institutions. Consequently, the agencies are retaining
the limitation of inflows at 75 percent of total cash outflows in the
final rule. No inflow cap will apply to the calculation of the maturity
mismatch add-on.
Notwithstanding the agencies' general view regarding the inflow
cap, the agencies have made a change to the proposed rule in response
to the comments received. Certain foreign currency exchange derivative
cash flows are to be treated on a net basis and have therefore
effectively been removed from the gross inflow cap calculation. This
change is described in more detail in section II.C.3.c of this
Supplementary Information section.
2. Determining Maturity
Section _.31 of the proposed rule would have required a covered
company to identify the maturity date or date of occurrence of a
transaction that is the most conservative when calculating inflow and
outflow amounts; that is, the earliest possible date for outflows and
the latest possible date for inflows. In addition, under Sec. _.30 of
the proposed rule, a covered company's total net outflow amount as of a
calculation date would have included outflow amounts for certain
instruments that do not have contractual maturity dates and outflows
and inflows that mature prior to or on a day 30 calendar days or less
after the calculation date. Section _.33 of the proposed rule would
have expressly excluded instruments with no maturity date from a
covered company's total inflow amount.
The proposed rule described how covered companies would have
determined whether certain instruments mature or transactions occur
within the 30 calendar-day period when calculating outflows and
inflows. The proposed rule also would have required covered companies
to take the most conservative approach when determining maturity with
respect to any options, either explicit or embedded, that would have
modified maturity dates and with respect to any notice periods. If such
an option existed for an outflow instrument or transaction, the
proposed rule would have directed a covered company to assume that the
option would be exercised at the earliest possible date. If such an
option existed for an inflow instrument or transaction, the proposed
rule would have required covered companies to assume that the option
would be exercised at the latest possible date. In addition, the
proposed rule would have provided that if an option to adjust the
maturity date of an instrument is subject to a notice period, a covered
company would have been required to either disregard or take into
account the notice period, depending upon whether the instrument was an
outflow or inflow instrument and whether the notice requirement
belonged to the covered company or its counterparty.
Many commenters expressed concern that the proposed requirements
for determining maturity with respect to options may conflict with the
legal agreements underlying those transactions. One commenter argued
that the proposed rule would have assumed that covered companies would
disregard customer contractual 30-day notice periods. The commenter
requested that commitment outflows that are subject to a mandatory
notice period of more than 30 days not be subject to an outflow amount
because the notice period practically prevents an outflow and therefore
the notice period should be recognized. Other commenters requested
clarification as to whether an acceleration provision that may be
exercised in the event of a default or other remote contingencies, such
as the right to call certain funding facilities, would count as an
option for the purposes of determining maturity. Another commenter
argued that the proposed requirements for determining maturity should
have taken into account the timing of a redemption period and whether
or not the period had lapsed. Commenters also objected to the
application of the ``nearest possible date'' assumption to commitment
outflows supporting debt maturing within a 30 calendar-day period
because it would assume that such commitment outflows would occur on
the first day of a 30 calendar-day period rather than the debt
instrument's actual maturity date.
Several commenters indicated that the assumptions underlying the
requirements in Sec. _.31 of the proposed rule were counterintuitive
and not consistent with economic behavior. For instance, one commenter
argued that requiring a covered company to assume that options are
always exercised would imply that the covered company must always
disadvantage itself in a stress scenario. Another commenter observed
that no market expectation exists for a covered company to exercise a
call option on long-term debt in a stressed environment and such
behavior was not evident in the recent financial crisis, and therefore
should not be an assumption of the final rule.
Several commenters requested that the agencies clarify the
treatment of legal notice periods for obligations such
[[Page 61479]]
as wholesale deposit agreements or revolving credit facilities. Another
commenter argued that in times of stress, certain customers with non-
maturity obligations, including retail or operational deposits, engage
in ``flight to quality behavior,'' making it unlikely that all such
customers would liquidate their positions simultaneously. Other
commenters recognized that while covered companies might make certain
disadvantageous decisions to benefit retail customer relations, they
and their wholesale counterparties should be assumed to act rationally
with respect to exercising options, and should be assumed to abide by
their contractual obligations.
Commenters expressed concern that the maturity assumptions employed
in the proposed rule overstated near-term liquidity risk. Several
commenters argued that the maturity assumptions of the proposed rule
would require that certain maturity deposits, including brokered time
deposits, be treated as non-maturity deposits because the customer was
provided an accommodation to allow for early withdrawal. These
commenters requested that the agencies undertake an empirical analysis
of the maturity assumptions for such instruments. Another commenter
argued that the combination of a peak cumulative net cash outflow or
``worst day'' denominator requirement with the maturity assumptions
were unrealistic and would have overstated a banking organization's
liquidity risk. Several commenters requested clarification that a
covered company would not be required to assume to have exercised call
options or rights to redeem its own debt on wholesale funding
instruments and long-term debt issued by the covered company.
The agencies have considered the comments and have modified the
provisions on determining maturity in the final rule to ensure that all
option types are addressed. The modifications result in a more accurate
reflection of likely market behavior during a time of liquidity stress,
based on comments and the agencies' observations. The provisions in the
final rule for determining maturity remain conservative. The final rule
contains the following maturity assumptions for options: (a) For an
investor or funds provider holding an option to reduce the maturity of
a transaction subject to Sec. _--.32, assume the option will be
exercised; (b) for an investor or funds provider holding an option to
extend the maturity of a transaction subject to Sec. _.32, assume the
option will not be exercised; (c) for a covered company holding an
option to reduce the maturity of a transaction subject to Sec. _.32,
assume the option will be exercised; (d) for a covered company holding
an option to extend the maturity of a transaction subject to Sec.
_.32, assume the option will not be exercised; (e) for a borrower
holding an option to extend the maturity of a transaction subject to
Sec. _.33, assume the option will be exercised; (f) for a borrower
holding an option to reduce the maturity of a transaction subject to
Sec. _.33, assume the option will not be exercised; (g) for a covered
company holding an option to reduce the maturity of a transaction
subject to Sec. _.33, assume the option will not be exercised; and (h)
for a covered company holding an option to extend the maturity of a
transaction subject to Sec. _.33, assume the option will be exercised.
The final rule makes an exception for longer-term callable bonds
and treats the original maturity of the instrument as the maturity for
purposes of the LCR. The final rule provides that when a bond issued by
a covered company has an original maturity greater than one year and
the call option held by the covered company does not go into effect
until at least six months after the issuance, the original maturity of
the bond will determine the maturity for purposes of the LCR. The
agencies have adjusted this provision in the final rule because they
have concluded that covered companies would not likely be susceptible
during a period of liquidity stress to significant market pressure to
exercise these call options. Similarly, the agencies are amending the
maturity provisions of the final rule so that a covered company does
not have to presume acceleration of the maturity of its obligation
where the covered company holds an option permitting it to repurchase
its obligation from a sovereign entity, U.S. GSE, or public sector
entity. In those circumstances, the maturity of the obligation under
the final rule will be the original maturity of the obligation. This
change reflects the fact that, for example, the agencies believe there
is less reputational pressure to exercise an option to redeem FHLB
advances early.
Another of the final rule's modifications of the proposed maturity
determination requirements clarifies how a covered company should
address certain outflows and inflows that do not have maturity dates,
as these were not explicitly addressed in the proposed rule. Under the
proposed rule, all non-maturity inflows would have been excluded from
the LCR. Under the final rule, transactions, except for operational
deposits, subject to Sec. _.32(h)(2), (h)(5), (j), or (k), or Sec.
_.33(d) or (f) that do not have maturity dates will be considered to
have a maturity date on the first calendar day after the calculation
date. This change will primarily affect certain transactions with
financial sector entities. The maturity of these transactions is often
referred to as ``open.'' The agencies believe these transactions are
similar to overnight deposits from financial institutions and for
purposes of the LCR, are treating them the same. Therefore, for these
types of ``open'' transactions with financial sector entities and other
transactions subject to Sec. _.32(h)(2), (h)(5), (j), or (k), or Sec.
_.33(d) or (f) that do not have maturity dates and are not operational
deposits, the final rule provides that for purposes of the LCR, the
maturity date will be the first calendar day after the calculation
date.
An additional change in the final rule for determining maturity
pertains to matched secured lending transactions or asset exchanges
with a contractual maturity of 30 days or less that generate an inflow
to the covered company in the form of collateral (inflow-generating
asset exchange) and the company then uses the received collateral in a
secured funding transaction or asset exchange with a contractual
maturity of 30 days or less that results in an outflow from the covered
company in the form of collateral (outflow-generating asset exchange)
(see section II.C.4.f below). In the final rule, the maturity date of
secured lending transactions or inflow-generating asset exchanges will
be the later of the contractual maturity date of the secured lending
transaction or inflow-generating asset exchange and the maturity date
of the secured funding transaction or outflow-generating asset exchange
for which the received collateral was used. This treatment is a
clarifying change consistent with the intent of the proposed rule,
which was to prevent a covered company from recognizing inflows
resulting from secured lending transactions or asset exchanges earlier
in the 30 calendar-day period than outflows resulting from secured
funding transactions or asset exchanges, even though the collateral
needed to cover the maturing secured lending transaction or asset
exchange will not be available until the related outflow occurs.
The final rule also adds to the maturity provisions of the proposed
rule a clarification that any inflow amount available under Sec.
_.33(g) will be deemed to occur on the day on which the covered company
or its consolidated subsidiary calculates the release of assets under
statutory or regulatory
[[Page 61480]]
requirements for the protection of customer trading assets, such as
Rule 15c3-3, consistent with the covered company's or consolidated
subsidiary's past practice with respect to such calculation. Under the
final rule, this inflow will be assumed to occur on the date of the
next regular calculation. Therefore if, for example, a broker-dealer
performs this calculation on a daily basis, the inflow would occur on
the first day of the 30 calendar-day period, but if a broker-dealer
typically performs the calculation on a weekly basis, the inflow would
occur on the date of the next regularly scheduled calculation. This
maturity determination provision is necessary because of the inclusion
of the related inflow under Sec. _.33(g) of the final rule, which was
added in response to comments received by the agencies, as discussed
below in section II.C.4.g.
Several commenters requested that the agencies clarify that time
deposits that can be withdrawn at any time (subject to the forfeiture
of interest) would be subject to the earliest possible maturity date
assumption under the proposal, while deposits that cannot be withdrawn
(but for death or incompetence) would be assumed to mature on the
applicable maturity date. The agencies are clarifying that, for
purposes of the final rule, deposits that can only be withdrawn in the
event of death or incompetence are assumed to mature on the applicable
maturity date, and deposits that can be withdrawn following notice or
the forfeiture of interest are subject to the rule's assumptions for
non-maturity transactions.
Though not resulting in a change in the final rule, the agencies
are clarifying that remote contingencies in funding contracts that
allow acceleration, such as withdrawal rights arising solely upon death
or incompetence or material adverse condition clauses, are not
considered options for determining maturity. The agencies did not
change the treatment of notice periods in the final rule as commenters
requested because reputational considerations may drive a covered
company's behavior with regard to notice periods. Further, these
reputational considerations exist for all types of counterparties,
including wholesale and not just retail, and regardless of whether
there are contractual provisions favoring the covered company.
Regarding commenters' arguments that the proposed requirements for
determining maturity do not reflect a likely flight to quality during a
period of liquidity stress, the agencies believe that such behavior
cannot be relied upon and may not occur for all institutions, so the
conservative assumptions in the proposed and final rule with respect to
maturity are appropriate. The agencies understand that the requirements
for determining maturity may not comport with the stated requirements
for call options in some legal agreements, but believe that the
conservative assumptions in the final rule ensure a more accurate
assessment of a covered company's liquidity resiliency through the LCR.
Similarly, the agencies believe that taking a more conservative view of
likely behavior during a liquidity stress event is critical to
achieving this goal. With respect to commenters' request that the
agencies provide data for the maturity assumptions in the final rule,
the agencies note that during the recent financial crisis, many options
were exercised in a manner that was disadvantageous to the banking
organization or financial institution to protect its market reputation.
3. Outflow Amounts
The proposed rule set forth outflow categories for calculating cash
outflows and their respective outflow rates, each as described below.
The outflow rates were designed to reflect the 30 calendar-day stress
scenario that formed the basis of the proposed rule, and included
outflow assumptions for the following categories: (a) Unsecured retail
funding; (b) structured transactions; (c) net derivatives; (d) mortgage
commitments; (e) commitments; (f) collateral; (g) brokered deposits for
retail customers or counterparties; (h) unsecured wholesale funding;
(i) debt securities; (j) secured funding; (k) foreign central bank
borrowing; (l) other contractual outflows; and (m) excluded amounts for
intragroup transactions. The agencies proposed outflow rates for each
category, ranging from zero percent to 100 percent, in a manner
generally consistent with the Basel III Revised Liquidity Framework.
Under the proposed rule, the outstanding balance of each category of
funding or obligation that matured within 30 calendar days of the
calculation date (under the maturity assumptions described above in
section II.C.2) would have been multiplied by these outflow rates to
arrive at the applicable outflow amount.
a. Retail Funding Outflow Amount
The proposed rule defined retail customers or counterparties to
include individuals and certain small businesses. Under the proposal, a
small business would have qualified as a retail customer or
counterparty if its transactions had liquidity risks similar to those
of individuals and were managed by a covered company in a manner
comparable to the management of transactions of individuals. In
addition, to qualify as a small business, the proposed rule would have
required that the total aggregate funding raised from the small
business be less than $1.5 million. If an entity provides $1.5 million
or more in total funding, has liquidity risks that are not similar to
individuals, or the covered company manages the customer like a
corporate customer rather than an individual customer, the entity would
have been a wholesale customer under the proposed rule.
The proposed rule included in the category of unsecured retail
funding 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. The proposed rule divided unsecured retail
funding into subcategories of: (i) Stable retail deposits, (ii) other
retail deposits, and (iii) 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 of which would have
been subject to the outflow rates set forth in Sec. _.32(a) of the
proposed rule, as explained below. Outflow rates would have been
applied to the balance of each unsecured retail funding outflow
category regardless of maturity date.
i. Stable Retail Deposits
The proposed rule defined a stable retail deposit as a retail
deposit, the entire amount of which is covered by deposit insurance,
and either: (1) Held in a transactional account by the depositor, or
(2) where the depositor has another established relationship with a
covered company, such that withdrawal of the deposit would be
unlikely.\59\ Under the proposed rule, the established relationship
could have been 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
appropriate Federal banking agency that the relationship would make
withdrawal of the deposit highly unlikely during a liquidity stress
event. The proposed rule assigned stable retail deposit balances an
outflow rate of 3 percent.
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\59\ For purposes of the proposed rule, ``deposit insurance''
was defined to mean deposit insurance provided by the FDIC and did
not include other deposit insurance schemes.
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[[Page 61481]]
ii. Other Retail Deposits
The proposed rule categorized all deposits from retail customers
that are not stable retail deposits, as described above, as other
retail deposits. Supervisory data supported a higher outflow rate for
deposits that are partially FDIC-insured as compared to entirely FDIC-
insured. The agencies proposed 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.
iii. Other Unsecured Retail Funding
Under the proposed rule, the other unsecured retail funding
category included funding provided by retail customers or
counterparties that is not a retail deposit or a retail brokered
deposit and received an outflow rate of 100 percent. This outflow
category was intended to capture all other types of retail funding that
were not stable retail deposits or other retail deposits, as defined by
the proposal.
iv. Comments on Retail Funding Outflows
Comments related to the unsecured retail funding outflow category
addressed applicable definitions, the types of transactions that would
qualify as retail funding, the treatment of retail maturities,
requirements related to deposit insurance, applicable outflow rates,
and requests for additional information from the agencies.
Several commenters requested a broadening of the definition of
retail customer or counterparty to include additional entities and to
exclude certain transactions from the other unsecured retail funding
category. For example, two commenters argued that the proposed $1.5
million limit on aggregate funding, which would apply to small
businesses in the retail customer or counterparty definition, should be
raised to $5 million, which would be consistent with annual receipts
criteria used by the U.S. Small Business Administration's definition
for small business. Other commenters requested a broadening of the
retail funding category to include certain trusts and other personal
fiduciary accounts, such as personal and charitable trusts, estates,
certain payments to minors, and guardianships formed by retail
customers, because they exhibit characteristics of retail funding.
Another commenter argued that revocable trusts should qualify as retail
funding because such trusts have risk characteristics similar to that
of individuals, in that the grantor keeps control of the assets and has
the option to terminate the trust at any point in the future.
One commenter stated that a 3 percent outflow rate in cases where
the entire deposit is covered by deposit insurance was appropriately
low, but that a 10 percent outflow rate did not sufficiently reflect
the stability of deposits partially covered by deposit insurance.
Another commenter requested zero outflows relating to prepaid cards
issued by nonbank money transmitter subsidiaries because they are
functionally regulated by individual states and are subject to
collateral requirements similar to those for secured transactions. This
commenter indicated that certain non-deposit, prepaid retail products
covered by FDIC insurance that is deemed to ``pass-through'' the holder
of the account to the owner of the funds should merit an outflow rate
significantly less than 100 percent, as these products are similar to
retail deposits and have exhibited stability throughout economic
cycles, including during the recent financial crisis.
Some commenters also requested that the definition of deposit
insurance be expanded beyond FDIC insurance to include foreign deposit
insurance programs where (i) insurance is prefunded by levies on the
institutions that hold insured deposits; (ii) the insurance is backed
by the full faith and credit of the national government; (iii) the
obligations of the national government are assigned a zero percent risk
weight under the agencies' risk-based capital rules; and (iv)
depositors have access to their funds within a reasonable time frame.
The commenters also requested that the outflow rate assigned to
partially-insured deposits reflect the benefit of partial insurance,
rather than treating the entire deposit as uninsured. This would lead
to treatment of the portion of a deposit that is below the $250,000
FDIC insurance limit as a stable retail deposit subject to a 3 percent
outflow, and any excess balance as a less stable retail deposit subject
to the 10 percent outflow rate.
Finally, some commenters requested the agencies share the empirical
data that was the basis for the proposed rule's retail funding outflow
requirements. Specifically, commenters requested information regarding
the stability of insured deposits, partially insured deposits, term
deposits, and deposits without a contractual term during the recent
financial crisis.
v. Final Rule
In considering the comments on retail funding outflows, the
agencies continue to believe that the outflow rates applicable to
stable deposits and other retail deposits, 3 percent and 10 percent,
respectively, are appropriate based on supervisory data and for the
reasons outlined in the proposed rule and, accordingly, have retained
those outflow rates in the final rule.\60\ The agencies used
substantial supervisory data, including data reflecting the recent
financial crisis, to inform the outflow rates. This data indicated that
depositors withdrawing funds usually withdraw the entire amount, and
not just the amount that is not covered by FDIC insurance. As a result,
the agencies are retaining the treatment of partially insured retail
deposits.
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\60\ 78 FR 71835-71836.
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In response to comments received about other retail funding, the
agencies have reconsidered the 100 percent outflow rate in Sec.
_.32(a)(3) of the proposed rule. In the final rule, the agencies have
lowered the outflow rate to 20 percent for deposits placed at the
covered company by a third party on behalf of a retail customer or
counterparty that are not brokered deposits, where the retail customer
or counterparty owns the account and where the entire amount is covered
by deposit insurance. In addition, partially insured deposits placed at
the covered company by a third party on behalf of a retail customer or
counterparty that are not brokered deposits and where the retail
customer or counterparty owns the account receive a 40 percent outflow
rate under the final rule. The 20 percent and 40 percent outflow rates
are designed to be consistent with the final rule's treatment of
wholesale deposits, which the agencies believe have similar liquidity
risk as deposits placed on behalf of a retail customer or counterparty.
Finally, all other funding from a retail customer or counterparty that
is not a retail deposit, a brokered deposit provided by a retail
customer or counterparty, or a debt instrument issued by the covered
company that is owned by a retail customer or counterparty, which
includes items such as unsecured prepaid cards, receives a 40 percent
outflow rate. The agencies believe these changes better reflect the
liquidity risks of categories of unsecured retail funding that have
liquidity characteristics that more closely align with certain types of
third-party funding in Sec. _.32(g) of the proposed rule.
Additionally, the final rule clarifies that the outflow rates for
retail funding apply to all retail funding, regardless of whether that
funding is unsecured or secured. This reflects the nature of retail
[[Page 61482]]
funding, which is less likely to involve a secured transaction, and the
relatively low outflow rates already assigned to the funding.
The agencies decline to revise most of the definitions and key
terms employed in the retail funding section of the proposed rule. With
respect to the commenters' request to raise the limit on aggregate
funding that applies to small businesses, the annual receipts criteria
within the U.S. Small Business Administration's definition for small
business would include businesses that are large and sophisticated and
should not be treated similarly to retail customers or counterparties
in terms of liquidity risks. The agencies therefore continue to believe
that $1.5 million is the appropriate limit. The agencies considered
whether foreign deposit insurance systems should be given the same
treatment as FDIC deposit insurance in the final rule. The agencies
believe there would be operational difficulties in evaluating a foreign
deposit insurance system for the purposes of a U.S. regulatory
requirement. For the reasons discussed in the preamble to the proposed
rule, the agencies are recognizing only FDIC deposit insurance in
defining stable retail deposits.\61\
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\61\ 78 FR 71836.
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However, the agencies have concluded that certain trusts pose
liquidity risks substantially similar to those posed by individuals,
and the agencies are modifying the final rule to clarify that living or
testamentary trusts that have been established for the benefit of
natural persons, that do not have a corporate trustee, and that
terminate within 21 years and 10 months after the death of grantors or
beneficiaries of the trust living on the effective date of the trust or
within 25 years (in states that have a rule against perpetuities) can
be treated as retail customers or counterparties. The agencies believe
that these trusts are ``alter egos'' of the grantor and thus should be
treated the same as an individual for purposes of the LCR. If the
trustee is a corporate trustee that is an investment adviser, whether
or not required to register as an investment adviser under the
Investment Advisers Act of 1940 (15 U.S.C. 80b-1, et seq.), however,
the trust will be treated as a financial sector entity.
Apart from the changes to the final rule discussed above, the
agencies have finalized the rule as proposed with regard to retail
funding and believe that the changes incorporated appropriately capture
the key liquidity characteristics of the retail funding market.
b. Structured Transaction Outflow Amount
The proposed rule's structured transaction outflow amount, set
forth in Sec. _.32(b) of the proposed rule, would have captured
obligations and exposures associated with structured transactions
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. The proposed rule
assigned as an outflow rate for each structured transaction sponsored
by the covered company 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 proposed the 100 percent outflow rate
because such transactions, including potential obligations arising out
of commitments to an issuing entity, whether issued directly or
sponsored by covered companies, caused severe liquidity demands at
covered companies during times of stress as observed during the recent
financial crisis.
Comments regarding Sec. _.32(b) of the proposed rule focused on
specific structured transactions (such as bank customer securitization
credit facilities and those vehicles where a banking organization
securitizes its own assets) and requested clarification around which
types of transactions should be treated as a structured transaction
under Sec. _.32(b) and which transactions should be treated as
facilities under Sec. _.32(e)(1)(vi) of the proposed rule. A commenter
noted that the agencies did not draw a distinction between a structured
transaction vehicle that is consolidated on the covered company's
balance sheet and transactions that are sponsored, but not owned by the
covered company. The commenter argued that the proposed rule would
impact all private label MBS that are sponsored by a covered company by
assigning a 100 percent outflow rate to the obligations of the issuing
entity that mature in 30 calendar days or less. Moreover, the commenter
also requested clarification as to whether variable interest entity
(VIE) liabilities relating to SPEs that are to be included in the net
cash outflow of a covered company can be offset with cash flows from
the assets in the SPE even if they are not consolidated on the covered
bank's balance sheet.
Some commenters also indicated that those securitizations that meet
the definition of ``traditional securitization'' in the agencies'
regulatory capital rules, where the sponsor securitizes its own assets,
should be exempt from the outflow amount in Sec. _.32(b), so long as
the covered company does not extend credit or liquidity support. These
commenters relied on the fact that the issuing entity would have no
legal obligation to make a payment on a security as a result of a
shortfall of cash from underlying assets, irrespective of whether the
covered company is required to consolidate the issuing entity onto its
balance sheet to justify the exemption request.
Several commenters also expressed concern regarding the proposed
rule's assumption of a significant cash outflow on the first day of the
30 calendar-day period (without a corresponding inflow that would be
assumed to occur at a later date) and that the proposed rule did not
include a clear explanation for this assumption. Commenters requested
that the outflow be deemed to occur on the scheduled maturity date of
the debt. Several commenters also expressed concern that potential
double counting of outflow amounts could occur in that transactions
captured under Sec. _.32(e)(1)(vi) of the proposed rule could also be
subject to Sec. _.32(b) without further clarification.
The agencies continue to believe the 100 percent outflow rate
applicable to structured transactions sponsored by a covered company is
generally reflective of the liquidity risks of such transactions.
Structured transactions can be a source of unexpected funding
requirements during a liquidity crisis, as demonstrated by the
experience of various financial firms during the recent financial
crisis. This outflow rate is also generally consistent with the outflow
for commitments made to financial counterparties and SPEs that issue
commercial paper and other securities, as provided in Sec. _.32(e) of
the final rule and discussed below.
The agencies recognize that banking regulations may prohibit some
covered companies from providing certain forms of support to funds that
are sponsored by covered companies.\62\ However, the
[[Page 61483]]
100 percent outflow rate recognizes that covered companies may still
provide significant support to structured transactions that they
sponsor while complying with regulatory requirements that prohibit
certain forms of support.
---------------------------------------------------------------------------
\62\ See, e.g., OCC, Board, FDIC, and SEC, ``Prohibitions and
Restrictions on Proprietary Trading and Certain Interests in, and
Certain Relationships With, Hedge Funds and Private Equity Funds,''
79 FR 5536, 5790 (January 31, 2014); OCC, Board, and FDIC,
``Interagency Policy on Banks/Thrifts Providing Financial Support to
Funds Advised by the Banking Organization or its Affiliates,'' OCC
Bulletin 2004-2, Federal Reserve Supervisory Letter 04-1, FDIC FIL-
1-2004 (January 5, 2004).
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To address the commenters' concern regarding potential double
counting of outflow amounts, the final rule excludes from the outflows
in Sec. _.32(e)(1)(vii) through (viii) those commitments described in
the structured transaction outflow amount section. Although the
structured transaction outflow amount and the commitment outflow amount
sections (Sec. _.32(b) and Sec. _.32(e), respectively) are similar in
that both apply outflow rates to commitments made to an SPE, the
structured transaction outflow amount also includes outflows beyond
contractual commitments because a sponsor may provide support despite
the absence of such a commitment.
The agencies are making a clarifying change in the final rule by
applying the structured transaction outflow amount provision only to
issuing entities that are not consolidated with the covered company. If
the issuing entity is consolidated with the covered company, then the
commitments from the covered company to that entity would be excluded
under Sec. _.32(m) as intragroup transactions. However, even though
the commitments would be excluded, any outflows and inflows of the
issuing entity would be included in the covered company's outflow and
inflows because they are consolidated.
The agencies did not define the term ``sponsor'' in the proposed
rule and are not defining it in the final rule because the agencies
believe that the term is generally understood within the marketplace.
Furthermore, the agencies intend Sec. _.32(b) to apply to all covered
companies that would have explicit or implicit obligations to support a
structured transaction of an issuing entity that is not consolidated by
the covered company during a period of liquidity stress. Generally, the
agencies consider covered companies to be sponsors when they have
significant control or influence over the structuring, organization, or
operation of a structured transaction.
The agencies agree with commenters' concern that the maturity
assumptions in the proposed rule would cause structured transaction
payments to fall on the first day of the 30 calendar-day period and
that this treatment would not be appropriate. The changes to the peak
day approach described above in section II.C.1 of this Supplementary
Information section would result in structured transaction payments not
being assumed to occur on the first day of a 30 calendar-day window
because they are not included in the calculation of the add-on.
Instead, these commitments would be assumed to occur on the
transaction's scheduled maturity date. Finally, the agencies believe
that the definitions and key terms employed in this section of the
proposed rule accurately capture the key characteristics related to
structured transactions sponsored by a covered company and decline to
provide a different treatment for the funding of VIE liabilities that
are part of a structured securitization, structured securitizations
involving SPEs, structured securitization credit facilities to finance
the receivables owned by a corporate entity, or where the sponsor
securitizes its own assets. Likewise, private label MBS that meet the
definition of a structured transaction will be subject to this
provision because of the liquidity risks incumbent in such
transactions. Accordingly, the agencies are adopting as final this
provision of the rule as proposed with the clarifying change regarding
consolidated issuing entities.
c. Net Derivative Outflow Amount
The proposed rule would have defined a covered company's net
derivative cash outflow amount as the sum of the payments and
collateral that a covered company would make or deliver to each
counterparty under derivative transactions, less the sum of payments
and collateral due from each counterparty, if subject to a valid
qualifying master netting agreement.\63\ This calculation would have
incorporated the amounts due to and from counterparties under the
applicable transactions within 30 calendar days of a calculation date.
Netting would have been permissible at the highest level permitted by a
covered company's contracts with a counterparty and could not include
offsetting 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 were not subject to a qualifying master
netting agreement, then the derivative cash outflows 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
and subject to the proposed rule's cap on total inflows. Under the
proposed rule, the net derivative cash outflow amount would have been
calculated in accordance with existing valuation methodologies and
expected contractual derivatives cash flows. In the event that the net
derivative cash outflow for a particular counterparty was less than
zero, such amount would have been required to be included in a covered
company's net derivative cash inflow amount for that counterparty.
---------------------------------------------------------------------------
\63\ Under the proposal, a ``qualifying master netting
agreement'' was defined 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. This is the same definition as
under the agencies' regulatory capital rules. See 12 CFR part 3
(OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC).
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A covered company's net derivative cash outflow amount would not
have included amounts arising in connection with forward sales of
mortgage loans or any derivatives that are mortgage commitments subject
to Sec. _.32(d) of the proposed rule. However, net derivative cash
outflows would have included outflows related to derivatives that hedge
interest rate risk associated with mortgage loans and commitments.
Many commenters were concerned that the treatment of derivative
transactions created an asymmetric treatment for certain offsetting
derivative transactions (such as foreign exchange swaps) because
covered companies would be required to compute the cash flows on a
gross basis with a cash outflow and a cash inflow subject to the 75
percent inflow cap as described above, even if in practice the
settlement occurred on a net basis. Accordingly, these commenters
proposed that foreign exchange transactions that are part of the same
swap should be treated as a single transaction on a net basis.
For the reasons discussed in the proposal, the agencies continue to
believe the 100 percent outflow rate applicable to net derivative
outflows is reflective of the liquidity risks of these transactions and
therefore are retaining this outflow rate in the final rule. The
agencies are, however, making a significant change to how this outflow
rate is applied to foreign currency exchange derivative transactions to
address concerns raised by commenters.
Specifically, foreign currency exchange derivative transactions
that meet certain criteria can be netted under
[[Page 61484]]
the provisions of Sec. _.32(c)(2) of the final rule. Cash flows
arising from foreign currency exchange derivative transactions that
involve a full exchange of contractual cash principal amounts in
different currencies between a covered company and a counterparty
within the same business day may be reflected in the net derivative
cash outflow amount for that counterparty as a net amount, regardless
of whether those transactions are covered by a qualifying master
netting agreement. Thus, the inflow leg of a foreign currency exchange
derivative transaction in effect is not subject to the 75 percent
inflow cap as long as it settles on the same date as the corresponding
outflow payment of that derivative transaction.\64\
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\64\ This treatment is consistent with the Frequently Asked
Questions on Basel III's January 2013 Liquidity Coverage Ratio
framework (April 2014), available at http://www.bis.org/publ/bcbs284.htm.
---------------------------------------------------------------------------
d. Mortgage Commitment
The proposed rule would have required a covered company to apply an
outflow rate of 10 percent for all commitments for mortgages primarily
secured by a first or subsequent lien on a one-to-four family property
that can be drawn upon within 30 calendar days of a calculation date.
One commenter was concerned about the treatment of VIE liabilities
(and particularly non-consolidated VIEs). Specifically, this commenter
requested that MBS VIE liabilities be excluded from the outflow
calculation or if included, that these outflow amounts be netted
against the estimated cash inflows from linked assets in the
securitization trust, even if those assets are not on the company's
balance sheet. Additionally, the commenter requested that mortgage
commitment outflows be netted against sales from projected to-be-
announced inflows. Further, the commenter requested clarification
regarding cash outflows for commercial and multifamily loans and
whether outflows for partially funded loans would be limited to the
amount of the loan that is scheduled to be funded during the 30
calendar-day period or the entire unfunded amount of the loan.
The agencies are adopting the mortgage commitment outflow rates of
the proposed rule, with the following clarifications that address
concerns raised by commenters. For the reasons discussed in the
proposal, the agencies continue to believe that the 10 percent outflow
rate applicable to mortgage commitments reflects the liquidity risks of
these transactions and have adopted this outflow rate in the final
rule. In response to the comment regarding the netting of mortgage
commitment amounts against certain transactions, such as VIE
liabilities, the forward sale of projected to-be-announced mortgage
inflows, and GSE standby facilities, the agencies are clarifying that
such inflows may not be netted against the overall mortgage commitment
amount. The agencies believe that in a crisis, such inflows may not
fully materialize, and thus do not believe that such inflows should be
allowed under the final rule or netted against the mortgage commitment
outflow amount.
Also, the agencies are confirming that the outflow amount for
mortgage commitments is based upon the amount the covered company has
contractually committed for its own originations of retail mortgages
that can be drawn upon 30 calendar days or less from the calculation
date and not the entire unfunded amount of commitments that cannot be
drawn within 30 calendar days.
e. Commitments Outflow Amount
The commitment category of outflows under the proposed rule would
have included the undrawn portion of committed credit and liquidity
facilities provided by a covered company to its customers and
counterparties that could have been drawn down within 30 calendar days
of the calculation date. The proposed rule would have defined a
liquidity facility 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 also
would have included 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
would have excluded general working capital facilities, such as
revolving credit facilities for general corporate or working capital
purposes. Facilities that have aspects of both credit and liquidity
facilities would have been deemed to be liquidity facilities for the
purposes of the proposed rule. An SPE would have been defined as 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 SPE.
The proposed rule would have defined a credit facility as a legally
binding agreement to extend funds upon request 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 have included 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. Under the proposed rule, a liquidity or
credit facility would have been considered committed when the terms
governing the facility prohibited 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--had been met. The undrawn amount for a committed credit
or liquidity facility would have been the entire undrawn amount of the
facility that could have been drawn upon within 30 calendar days of the
calculation date under the governing agreement, less the fair value of
level 1 liquid assets or 85 percent of the fair value of level 2A
liquid assets, if any, that secured the facility. In the case of a
liquidity facility, the undrawn amount would not have included the
portion of the facility that supports customer obligations that mature
more than 30 calendar days after the calculation date. A covered
company's proportionate ownership share of a syndicated credit facility
would have been included in the appropriate category of wholesale
credit commitments.
Section _--.32(e) of the proposed rule would have assigned various
outflow amounts to commitments that are based on the counterparty type
and facility type. First, in contrast to the outflow rates applied to
other commitments, those commitments between affiliated depository
institutions that are subject to the proposed rule would have received
an outflow rate of zero percent because the agencies expect that such
institutions would hold sufficient liquidity to meet their obligations
and would not need to rely on committed facilities. In all other cases,
the outflow rates assigned to committed facilities were meant to
reflect the characteristics of each class of customers or
counterparties under a stress scenario, as well as the reputational and
legal risks that covered companies face if they were to try to
restructure a commitment during a crisis to avoid drawdowns by
customers.
An outflow rate of 5 percent was proposed for retail facilities
because
[[Page 61485]]
individuals and small businesses would likely have a lesser need for
committed credit and liquidity facilities in a stress scenario when
compared to institutional or wholesale customers (that is, the
correlation between draws on such facilities and the stress scenario of
the LCR is considered to be lower). An outflow rate of 10 percent was
proposed for credit facilities and 30 percent for liquidity facilities
to entities that are not financial sector entities based on their
typically longer-term funding structures and lower correlation of
drawing down the commitment during times of stress. The proposed rule
would have assigned 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 have been
assigned a 40 percent outflow rate for credit facilities and 100
percent for liquidity facilities. The agencies proposed a 100 percent
outflow rate for a covered company's credit and liquidity facility
commitments to SPEs given SPEs' sensitivity to emergency cash and
backstop needs in a short-term stress environment, such as those
experienced during the recent financial crisis.
The agencies also proposed that the amount of level 1 or level 2A
liquid assets securing the undrawn portion of a commitment would have
reduced the outflow associated with the commitment if certain
conditions were met. The amount of level 1 or level 2A liquid assets
securing a committed credit or liquidity facility would have been the
fair value (as determined under GAAP) of all level 1 liquid assets and
85 percent of the fair value (as determined under GAAP) of level 2A
liquid assets posted or required to be posted upon funding of the
commitment as collateral to secure the facility, provided that: (1) The
pledged assets had met the criteria for HQLA as set forth in Sec.
_--.20 of the proposed rule during the applicable 30 calendar-day
period; and (2) the covered company had not included the assets in its
HQLA amount as calculated under subpart C of the proposed rule during
the applicable 30 calendar-day period.
The comments on Sec. _--.32(e) were generally focused on: (i)
SPEs; (ii) dual use facilities; and (iii) other concerns such as
calibration of the outflow rates. At a high level, commenters asserted
that the treatment for SPEs was overly harsh, that the approach for
financing vehicles that employed both credit and liquidity facilities
should conform to the Basel III Revised Liquidity Framework, and that a
host of specific entities, such as central counterparties (CCPs) and
financial market utilities, deserved unique treatments.
i. Special Purpose Entities Comments
Overall, commenters asserted that the agencies had defined SPEs too
broadly for purposes of Sec. _--.32(e) of the proposed rule, and
argued that a 100 percent outflow rate was too high, recommending
instead a ``look-through'' approach depending on the type of
counterparty that sponsors or owns the SPE; for example, whether the
counterparty is an operating company that develops or manages real
estate, a securitization facility that functions as a financing
vehicle, a CCP, a Tender Option Bond (TOB) issuer, a fund subject to
the Investment Company Act of 1940 (40 Act Fund), or a commercial paper
facility. Commenters argued that funding provided through an SPE should
receive the outflow specified in Sec. _--.32(e) for the ``underlying''
counterparty rather than the 100 percent outflow rate applied to SPEs.
A few commenters also requested that the agencies distinguish between
those SPEs intended to be captured by Sec. _--.32(e)(vi) of the
proposed rule that were a source of liquidity stress in the last
financial crisis and those SPEs that a borrower uses to finance,
through a securitization credit facility, the receivables owned by a
corporate entity (a so-called ``bank customer securitization credit
facility''). These commenters proposed the agencies look through to the
sponsor or owner of the SPE and set the outflow rates for the undrawn
amounts based on the sponsor at: 50 percent for depository
institutions, depository institution holding companies, or foreign
banks; 40 percent for regulated financial companies, investment
companies, non-regulated funds, pension funds, investment advisers, or
identified companies; and 10 percent for other wholesale customers.
Commenters proposed specific criteria to define bank customer
securitization credit facilities, which provided guidelines related to
the sponsor, financing, customers, underlying exposures, and other
particular aspects of this type of SPE. These commenters also stated
that failure to implement their suggestion and retention of the
proposed rule's treatment of SPEs would reduce the provision of credit
in the U.S. economy by restricting access to securitized lines of
credit, a major source of funding.
Other commenters requested that the look-through approach be
applied to the undrawn amount of credit commitments of any bank
customer securitization credit facility irrespective of whether it is
funded by the bank or through an asset-backed commercial paper conduit
facility that is set up by the sponsoring borrower for the sole purpose
of purchasing and holding financial assets, because these facilities
function as a substitute or complement to traditional revolving credit
facilities. These commenters argued that such securitizations act as a
``credit enhancement'' by allowing the borrower to borrow against a
pool of bankruptcy remote assets. Further, these commenters argued that
such borrowing structures left lenders less exposed to counterparty
credit risk than a traditional revolving facility because the amount
drawn on such facilities in a stressed environment would be wholly
limited by a borrowing base derived from the underlying eligible
financial assets.
Commenters argued that certain SPEs, such as SPEs established to
hold specific real estate assets, have a similar risk profile to
conventional commercial real estate borrowers and therefore should
receive a lower outflow rate. Commenters argued that these SPE
structures are passive, with all decisions made by the operating
company parent, rather than the SPE itself. They further argued that
this structure enhances the ability to finance a real estate project
because the lender receives greater comfort that the primary asset will
be shielded from many events that might prevent the lender from
foreclosing on its loan and that the punitive treatment in the proposed
rule will hamper this type of financing. Some commenters requested that
SPEs that own and operate commercial and multi-family real estate be
assigned a much lower outflow rate or no outflow rate. Moreover,
commenters further argued that commitments to SPEs established to ring-
fence the liabilities of a real estate development project do not merit
a 100 percent outflow rate because in practice, the drawdowns (in
crises and in normal times) could only amount to a modest portion of
the overall unfunded commitment over a 30 calendar-day period due to
contractual milestones reflected in the loan documentation (e.g.,
obtaining permits, completing a certain percentage of the project,
selling or renting a certain percentage of units, or that a certain
stage of the real estate development project has been completed). These
commenters requested that the agencies limit the
[[Page 61486]]
undrawn amount of such facilities to the amount that could legally be
withdrawn during the next 30 calendar days.
Another commenter expressed concern over the outflow rate applied
to TOBs, stating that TOBs did not draw on liquidity facilities during
the recent crisis because they rely on the remarketing process for the
liquidity needed to satisfy TOB holders exercising the tender option.
The commenter argued that the outflow rate should be lower for TOBs
because such programs are significantly over-collateralized, and a
liquidation of underlying bonds would cover liquidity needed to satisfy
TOB investors, even in an environment when bond prices are falling. The
commenter requested that the outflow rate be set at a maximum of 30
percent. Another commenter expressed concern that the proposed rule
assigned unduly high outflow rates to mutual funds and their foreign
equivalents, which are subject to statutory limitations on borrowed
funds, and suggested that the outflow rate for non-financial sector
companies (10 percent and 30 percent for committed credit and liquidity
facilities, respectively) would be more appropriate for such funds.
ii. Dual Use Facilities Comments
Some commenters were concerned about key terms and definitions
referenced in Sec. _--.32(e) of the proposed rule. For example, one
commenter requested clarity regarding how to treat certain commercial
paper backup facilities arguing that it was unclear how the proposed
rule should be applied because most commercial paper backup facilities
(that is, liquidity facilities) can also serve other general corporate
purposes (akin to credit facilities). Commenters requested that
multipurpose commitment facilities (which have aspects of both
liquidity and credit facilities) should not automatically default to a
liquidity facility and argued for employing the treatment of the Basel
III Revised Liquidity Framework, which sets a portion of the undrawn
amount of a commitment as a committed credit facility. Another
commenter requested that the outflow rate for commitment outflows be
applied to the borrowing base (rather than the commitment amount) where
a covered company would not as a practical matter fund the full amount
of the commitment beyond the amount of collateral that is available in
the LCR's 30-day measurement period.
iii. Other Commitment Outflows Comments
Commenters also expressed concern that the treatment of commitment
outflows in the proposed rule could have adverse effects on the U.S.
economy by reducing the provision of credit to businesses. In
particular, commenters stated that the proposed rule's 10 percent
outflow rate for undrawn, committed credit facilities, regardless of
borrower rating, was far higher than necessary and would negatively
impact a covered company's LCR due to the underlying size of the
commitments. According to these commenters, this outflow rate could
have a ``far-reaching'' impact on a covered company's ability to lend
to small and medium enterprises. Accordingly, the commenters requested
a zero percent outflow assumption for commitments to highly rated
companies.
Some commenters requested that a number of other specific
commitment facilities receive a lower outflow rate than provided in
Sec. _--.32(e) of the proposed rule. For instance, one commenter noted
that 40 Act Funds and their foreign equivalents have aspects that limit
liquidity risks such as tenor, asset quality, diversification minimums
and repayment provisions. Accordingly, the commenter argued, such
commitments should be assigned a 10 percent outflow rate. One commenter
requested that the outflow rate assigned to commitments used for the
issuance of commercial paper be raised in light of the fact that
commercial paper was a significant liquidity strain during the most
recent crisis. The same commenter suggested that the outflow rate for
liquidity facilities used to support the issuance of certain types of
securities, such as auction rate securities, should be raised to 100
percent due to the drawdown rates of such facilities observed during
the crisis.
A few commenters requested that commitments provided to CCPs should
be treated in the same manner as commitments to regulated financial
companies due to the requirement that CCPs comply with the principles
for financial market infrastructures, which require CCPs to establish
and maintain sufficient liquidity resources.\65\ Two commenters
requested that committed facilities offered by covered companies to
CCPs be separately categorized with an outflow rate below the proposed
rate of 100 percent due to their low historical drawdown rates and the
Dodd-Frank Act's express clearing mandate, requiring that certain
transactions be cleared through a CCP.\66\ One commenter noted that the
Basel III leverage ratio provides a specific delineation of commitments
to CCPs and credit conversion factors and indicated that these reflect
the operational realities of these commitments and requested the
agencies to make a similar delineation in the LCR. This commenter also
proposed to define credit facility 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 and a qualified central
counterparty facility for general operational purposes such as managing
a clearing member unwind or disruption of services by a depository or
payment system. 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).''
---------------------------------------------------------------------------
\65\ See Committee on Payment and Settlement Systems and
Technical Committee of the International Organization of Securities
Commissions, Principles for financial market infrastructures (April
2012), available at http://www.bis.org/publ/cpss101a.pdf.
\66\ Pursuant to sections 723(a)(3) and 763(a) of the Dodd-Frank
Act, certain swaps must be cleared through a CCP. 7 U.S.C. 2(h), 15
U.S.C. 78c-3.
---------------------------------------------------------------------------
One commenter requested that the agencies conduct an empirical
analysis of historic drawdown rates to calibrate drawdown assumptions.
Another commenter requested that the agencies, at a minimum, clarify
that commitments to financial market utilities that have not been
designated by the Council as systemically important ``be treated no
worse than commitments to `regulated financial companies' for purposes
of LCR outflow assumptions.''
In addition, one commenter claimed that bonds backed by letters of
credit cannot be properly valued for purposes of the 30 calendar-day
period because the process of drawing upon such a letter of credit
usually requires notice of 30 days or more. The commenter requested
that only the value of the debt maturing within the 30-day window be
included in the outflow estimate.
v. Final Rule
The agencies are clarifying the definition of liquidity facility in
the final rule by eliminating the requirement that the liquidity
facility be made ``expressly'' for the purpose of refinancing debt. The
definition in the final rule is intended to include
[[Page 61487]]
commitments that are being used to refinance debt, regardless of
whether there is an express contractual clause. This change captures
the intent of the proposed rule by focusing on the function of the
commitment.
The agencies are clarifying the treatment of letters of credit
issued by a covered company. To the extent a letter of credit meets the
definition of credit facility or liquidity facility, it will be treated
as such. Thus, a covered company will have to review letters of credit
to determine whether they should be treated as commitments in the LCR.
The agencies are also clarifying the differences among the types of
commitments that are covered by Sec. _--.32(b), (d), and (e) of the
proposed rule, which are consistent with the final rule. Section
_--.32(b) relates to a covered company's commitments to structured
transactions that the covered company itself has sponsored. These
commitments may take the form of committed liquidity facilities, but
may also take the form of less formal support. In the final rule, Sec.
_--.32(b) commitments have been expressly carved out of Sec.
_--.32(e)(vii) and (viii). Section _--.32(d) relates only to a covered
company's commitments to originate retail mortgage loans. All other
outflow amounts related to committed credit and liquidity facilities
are subject to the provisions in Sec. _--.32(e) of the final rule.
In response to the aforementioned comments about commitment
outflows amounts, the agencies have adopted changes in the final rule
to the outflow amounts for commitments to SPEs (Sec. _--.32(e)(1)) and
the treatment for assessing the undrawn amount of a credit or liquidity
facility (Sec. _--.32(e)(2)).
The agencies agree with commenters that not all SPEs are exposed to
the highest degree of liquidity risk. To that end, the agencies are
clarifying that certain SPEs can be treated with an approach similar to
the treatment for the other referenced commitments in Sec.
_--.32(e)(1). Under the final rule, the agencies have limited the
application of the 100 percent outflow rate to committed credit and
liquidity facilities to SPEs that issue or have issued securities or
commercial paper to finance their purchases or operations. These SPEs
are highly susceptible to stressed market conditions during which they
may be unable to refinance their maturing securities and commercial
paper. As such, under the final rule:
For SPEs that do not issue securities or commercial paper:
[cir] The outflow amount for a committed credit facility extended
by the covered company to such SPE that is a consolidated subsidiary of
a wholesale customer or counterparty that is not a financial sector
entity is 10 percent of the undrawn amount;
[cir] The outflow amount for a committed liquidity facility
extended by the covered company to such SPE that is a consolidated
subsidiary of a wholesale customer or counterparty that is not a
financial sector entity is 30 percent of the undrawn amount;
[cir] The outflow amount for a committed credit facility extended
by the covered company to such SPE that is a consolidated subsidiary of
a financial sector entity is 40 percent of the undrawn amount; and
[cir] The outflow amount for a committed liquidity facility
extended by the covered company to an SPE that is a consolidated
subsidiary of a financial sector entity is 100 percent of the undrawn
amount.
The outflow amount for either a committed credit or
liquidity facility extended by the covered company to an SPE that
issues or has issued commercial paper or securities, other than equity
securities issued to a company of which the SPE is a consolidated
subsidiary, to finance its purchases or operations is 100 percent of
the undrawn amount.
The agencies agree with commenters that SPEs that are formed to
manage and invest in real estate should not all be treated with a 100
percent outflow rate, provided that such SPEs do not issue securities
or commercial paper. Instead, the agencies are employing the ``look
through'' approach as described above. For example, under the final
rule, funding provided to a non-financial sector entity for real estate
activities via a committed credit facility to an SPE would receive a 10
percent outflow rate, and funding provided to a financial sector entity
for real estate activities via a committed liquidity facility to an SPE
would receive a 100 percent outflow rate.
The agencies also agree that the assessment of the undrawn amount
for committed liquidity facilities should be narrowed to only include
commitments that support obligations that mature in the 30 calendar-day
period following the calculation date; however, pursuant to Sec.
_--.31, notice periods for draws on commitments are not recognized. The
agencies are thus clarifying that, if the underlying commitment's
contractual terms are so limiting, the amount supporting obligations
with maturities greater than 30 days would not be considered undrawn
because they would not be available to be drawn within the 30 calendar-
day period following the calculation date. In addition, if the
underlying commitment's contractual terms do not permit withdrawal but
for the occurrence of a contractual milestone that cannot occur within
30-calendar days, such amounts would not be included in the undrawn
amount of the facility. Thus, with respect to undrawn amounts for all
facilities, the agencies are clarifying in the final rule that the
undrawn amount would only include the portion of the facility that a
counterparty could contractually withdraw within the 30 calendar-day
period following the calculation date.
The agencies have not included Sec. _--.32(e)(2)(ii)(B) of the
proposed rule in the final rule. This provision that the undrawn amount
of a committed facility is less that portion of the facility that
supports obligations of a covered company's customer that do not mature
30 calendar days or less from such calculation date, and further
provided that if facilities have aspects of both credit and liquidity
facilities, the facility must be classified as a liquidity facility.
First, the principle in the first clause of the deleted language is
duplicative of the rule text set forth in Sec. _--.32(e)(2)(ii) of the
final rule and therefore not only unnecessary but potentially
confusing. Second, the second sentence of the deleted language has been
included in the final rule's definition of liquidity facility, rather
than in the section on outflows, where the agencies think it is more
appropriate and will be easier for readers to find. Accordingly, the
agencies have streamlined the text in the final rule.
The agencies are retaining the approach for those financing
vehicles that employ both credit and liquidity facilities and treating
those entities as liquidity facilities. The agencies believe it would
be problematic to assess which portion of the assets securing the
facility are meant to serve the liquidity facility and which portion of
the assets are meant to serve the credit facility. At the same time,
this treatment provides the agencies with a conservative approach for
assessing dual purpose facilities. The agencies are also clarifying
that facilities that may provide liquidity support to asset-backed
commercial paper by lending to, or purchasing assets from, any
structure, program, or conduit should be treated as a liquidity
facility and not be treated as a credit facility.
The agencies disagree with commenters' recommendation that 40 Act
Funds and their foreign equivalents be treated with an outflow rate
equivalent to unsecured retail funding because the nature of the
counterparty and the corresponding liquidity risks
[[Page 61488]]
are more akin to the liquidity risks of financial sector entities.
Thus, the agencies decline to apply a unique rate for this category of
commitments. The agencies also decline to create special exceptions for
commitments related to TOBs, mutual funds, and other commitments to
investment companies, because similar to other SPEs that issue, or have
issued, securities or commercial paper, such entities have liquidity
risks that are commensurate with a financial sector entity and their
draws on commitments likely will be highly correlated with stress in
the financial sector.
The agencies are not providing special treatment for CCPs or
certain financial market utilities. The agencies believe it is critical
for covered companies to maintain appropriate HQLA to support
commitments that may necessitate the provision of liquidity in a crisis
and believe that to be the case with respect to commitments to CCPs and
certain financial market utilities. Further, the agencies understand
that commitments to these entities generally require HQLA to be posted
and because the commitment outflow amount is reduced by the amount of
Level 1 and 2A HQLA required to support the commitment, the agencies
have determined that special treatment for CCPs or certain financial
market utilities is not necessary.
f. Collateral Outflow Amount
The proposed rule would have required 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 being required to post additional or higher quality collateral
as a result of a change in derivative collateral values or in
underlying derivative values, having to return excess collateral, or
accepting lower quality collateral as a substitute for already-posted
collateral, all of which could have a significant impact upon a covered
company's liquidity profile.
Various requirements of proposed Sec. _.32(f) were of concern to
certain commenters who generally believed that the provisions relating
to changes in financial condition, potential collateral valuation
changes, collateral substitution, and derivative collateral change
required clarification or did not accurately reflect liquidity risks
around the posting of collateral for derivative transactions. The
following describes the subcategories of collateral outflows discussed
in the preamble to the proposed rule.
i. Changes in Financial Condition
The proposed rule would have required a covered company to include
in its collateral outflow amount 100 percent of all additional amounts
that the covered company would have needed to post or fund as
additional collateral under a contract as a result of a change in its
own financial condition. A covered company would have calculated this
outflow amount by evaluating the terms of such contracts and
calculating any incremental additional collateral or higher quality
collateral that would have been required to be posted as a result of
triggering clauses tied to a change in the covered company's financial
condition. If multiple methods of meeting the requirement for
additional collateral were available (for example, providing more
collateral of the same type or replacing existing collateral with
higher quality collateral) the covered company was permitted to use the
lower calculated outflow amount in its calculation.
Some commenters requested additional clarification regarding the
requirements of Sec. _--.32(f)(1) of the proposed rule. One commenter
requested that the agencies clarify that they do not view the existence
of a material adverse change (MAC) clause in a contract as a provision
that would be expected to impact the calculation of collateral outflows
because these clauses by themselves do not necessarily trigger
additional collateral, but require subjective analysis to determine
whether they have been triggered. Another commenter noted that the
Basel III Revised Liquidity Framework provides for credit ratings
downgrades of up to three notches and requested clarity as to how to
calculate the collateral outflow amount given the absence of an
explicit downgrade threshold in the proposed rule. The same commenter
urged the agencies to employ a standard approach (as opposed to
allowing banking organizations to choose the lower outflow amount) in
cases where multiple methods are available.
The agencies are clarifying in the final rule that when calculating
the collateral outflow amount, a covered company should review all
contract clauses related to transactions that could contractually
require the posting or funding of collateral as a result of a change in
the covered company's financial condition, including downgrade
triggers, but not including general MAC clauses, which is consistent
with the intent of the proposed rule. The agencies also are clarifying
that covered companies should count all amounts of collateral in the
collateral outflow amount that could be posted in accordance with the
terms and conditions of the downgrade trigger clauses found in all
applicable legal agreements. Covered companies should not look solely
to credit ratings to determine collateral outflows from changes in
financial condition, but the agencies note that collateral requirements
based on credit rating changes constitute collateral requirements based
on changes in financial condition under the final rule. The final rule
continues to allow a covered company to choose the method for posting
collateral that results in the lowest outflow amount, as the agencies
believe a covered company will likely post collateral in the most
economically advantageous way that it can. The agencies are finalizing
the provision addressing changes in financial condition collateral
outflow as proposed.
ii. Derivative Collateral Potential Valuation Changes
The proposed rule would have applied a 20 percent outflow rate to
the fair value of any assets posted as collateral that were not level 1
liquid assets, in recognition that a covered company could be required
to post additional collateral as the market price of the posted
collateral fell. The agencies did not propose to apply outflow rates to
level 1 liquid assets that are posted as collateral, as these are not
expected to face substantial mark-to-market losses in times of stress.
Commenters requested that the agencies change and clarify certain
requirements in Sec. _.32(f)(2) of the proposed rule. For instance,
one commenter requested that the agencies revise Sec. _.32(f)(2) to
base outflow rates on a net calculation on a security-by-security basis
(for non-level 1 liquid assets) and only to include collateral posted
on a net basis, not the pre-netting gross amount. Commenters also
requested that, consistent with the Basel III Revised Liquidity
Framework, the agencies clarify that Sec. _.32(f)(2) only applies to
collateral securing derivative transactions and not to collateral
pledged for the secured funding transactions contemplated in Sec.
_.32(j) of the proposed rule. Another commenter requested that the
agencies impose a 20 percent outflow rate for collateral value changes
due to market stress.
The agencies have reviewed comments about potential valuation
changes in Sec. _.32(f)(2) of the proposed rule and are generally
finalizing this
[[Page 61489]]
section of the rule as proposed. However, the agencies are clarifying
in the final rule that, when determining the outflow amount for the
potential valuation change of collateral, only collateral securing
derivative transactions should be assessed, and not collateral
supporting other transactions, such as that securing secured funding
transactions under Sec. _.32(j) of the proposed rule. Also, consistent
with other derivative netting provisions employed in the proposal, the
agencies are clarifying that covered companies can apply the rate to
netted collateral, not the pre-netted gross amount, but only if the
collateral can be netted under the same qualifying master netting
agreement.
iii. Excess Collateral Outflow Amount
The proposed rule would have applied an outflow rate of 100 percent
to the fair value of collateral posted by counterparties that exceeds
the current collateral requirement in a governing contract. Under the
proposed rule, this category would have included unsegregated excess
collateral that a covered company may have been 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
eligible HQLA.
There were no substantive comments received by the agencies
regarding Sec. _.32(f)(3) of the proposed rule. For the same reasons
outlined in the proposed rule, the agencies are finalizing the excess
collateral outflow requirements substantially as proposed.
iv. Contractually-Required Collateral Outflow
The proposed rule would have imposed a 100 percent outflow rate
upon the fair value of collateral that a covered company was
contractually obligated to post, but had not yet posted. Where a
covered company has not yet posted such collateral, the agencies
believe that, in stressed market conditions, a covered company's
counterparties may demand all contractually required collateral.
There were no substantive comments about Sec. _.32(f)(4) of the
proposed rule. For the same reasons outlined in the proposed rule, the
agencies are finalizing the contractually-required collateral outflow
requirements substantially as proposed.
v. Collateral Substitution
The proposed rule's collateral substitution outflow amount would
have equaled the difference between the post-haircut fair value of
eligible HQLA collateral posted by a counterparty to a covered company
and the post-haircut fair value of lower quality eligible HQLA
collateral, or non-HQLA collateral, a counterparty could substitute
under an applicable contract. Thus, if a covered company had received
as collateral a level 1 liquid asset that counted towards its level 1
liquid asset amount, and the counterparty could have substituted it
with an eligible level 2A liquid asset collateral, the proposed rule
imposed an outflow rate of 15 percent, which resulted from applying the
standardized haircut value of the level 2A liquid assets. Similarly, if
a covered company had received as collateral a level 1 liquid asset
that counted towards its level 1 liquid asset amount and under an
agreement the collateral could have been substituted with assets that
are not HQLA, a covered company would have been required to include in
its outflow amount 100 percent of the collateral's market value. The
proposed rule provided outflow rates for all permutations of collateral
substitution.
One commenter stated that Sec. _.32(f)(5) of the proposed rule was
excessively conservative because it did not take into account that a
counterparty's right to substitute non-HQLA collateral is generally
subject to an increase in a market haircut designed to mitigate the
liquidity risk associated with the substitution. The commenter further
stated that such substitutions are infrequent, and the requirement
introduces an asymmetry by ignoring the reuse of the substituted
collateral which could be posted to another counterparty. Accordingly,
the commenter argued that collateral substitution outflows occur
infrequently and do not warrant inclusion in the proposed rule.
The agencies are finalizing this section of the rule substantially
as proposed. The agencies recognize that collateral related to
transactions is subject to market haircuts. However, the standardized
haircuts provided in the proposed rule permit the agencies to design a
generally consistent standard that addresses certain potential risks
that covered companies may face under a stressed environment. The
agencies are clarifying that Sec. _.32(f)(5) only applies to
collateral that a counterparty has posted to the covered company as of
the calculation date, and does not apply to collateral a covered
company has posted to a counterparty, nor to any collateral that the
covered company could repost to a counterparty after a collateral
substitution has taken place.
vi. Potential Derivative Valuation Change
The proposed rule would have required a covered company to use a
two-year look-back approach in calculating its market valuation change
outflow amounts for derivative positions. Under the proposed rule, the
derivative collateral outflow amount would have equaled 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.
One commenter indicated that the two-year look-back approach
ofSec. _.32(f)(6) of the proposed rule was not a forward-looking
estimate of potential collateral flows in a period of market stress,
and that historic collateral outflows may be more indicative of closing
out positions rather than liquidity strains. The same commenter
requested that the agencies provide an alternative forward-looking
approach that would replace the requirement of the proposed rule.
Another commenter expressed concern that Sec. _.32(f)(6) did not take
into account current conventions regarding margin requirements that
greatly reduce a covered company's exposure to derivative valuation
changes, thereby making the proposed rule an onerous data exercise
without an obvious benefit. Further, according to this commenter, there
would be operational challenges as banking organizations have not
previously retained this data.
[[Page 61490]]
While the agencies recognize the operational challenges raised by
commenters, the agencies are finalizing this section of the rule
largely as proposed because of the important liquidity risk it
addresses. When a covered company becomes subject to the LCR, it should
have relevant records related to derivatives to compute this amount. To
the extent that the covered company's data is not complete, it should
be able to closely estimate its potential derivative valuation change.
Once subject to the LCR, the agencies expect that a covered company
will collect data to make a precise calculation in the future. The
agencies recognize that the calculation is not forward-looking and may
not be entirely indicative of the covered company's derivative
portfolio at the time of the calculation date, but the historical
experience of the covered company with its derivatives portfolio should
be a reasonable proxy for potential derivative valuation changes.
Additionally, while the margin requirements in recent regulatory
proposals may provide certain protections in derivatives transactions,
this rule specifically addresses the risk of the potential future
liquidity stress from derivative valuation changes. One clarifying
change has been made to highlight that the look-back should only
include collateral that is exchanged based on the actual valuation
changes of derivative transactions (generally referred to as variation
margin), and not collateral exchanged based on the initiation or close
out of derivative transactions (generally referred to as initial
margin).
Table 2 below illustrates how a covered company should calculate
this collateral outflow amount. Note that Table 2 only presents a
single 30-day period within a prior two-year calculation window. A
covered company is required to repeat this calculation for each
calendar day within every two-year calculation window, and then
determine the maximum absolute value of the net cumulative collateral
change, which would be equal to the largest 30-consecutive calendar day
cumulative net mark-to-market collateral outflow or inflow realized
during the preceding 24 months resulting from derivative transactions
valuation changes.
Table 2--Potential Derivative Valuation Change Outflow Amount
----------------------------------------------------------------------------------------------------------------
Net mark-to- Cumulative net
Mark-to- Mark-to- market mark-to- Absolute value
market market collateral market of cumulative
collateral collateral change due to collateral net collateral
inflows due to outflows due derivative change due to change due to
derivative to derivative transaction derivative derivative
transaction transaction valuation transaction transaction
valuation valuation changes (A)- valuation valuation
changes changes (B) changes changes
A B C D E
----------------------------------------------------------------------------------------------------------------
Day 1........................... 72 78 -6 -6 6
Day 2........................... 78 0 78 72 72
Day 3........................... 35 85 -50 22 22
Day 4........................... 18 30 -12 10 10
Day 5........................... 77 59 18 28 28
Day 6........................... 9 53 -44 -16 16
Day 7........................... 53 24 29 13 13
Day 8........................... 81 92 -11 2 2
Day 9........................... 66 2 64 66 66
Day 10.......................... 56 58 -2 64 64
Day 11.......................... 7 32 -25 39 39
Day 12.......................... 62 10 52 91 91
Day 13.......................... 96 90 6 97 97
Day 14.......................... 54 83 -29 68 68
Day 15.......................... 73 45 28 96 96
Day 16.......................... 11 62 -51 45 45
Day 17.......................... 65 55 10 55 55
Day 18.......................... 87 55 32 87 87
Day 19.......................... 1 43 -42 45 45
Day 20.......................... 96 99 -3 42 42
Day 21.......................... 3 89 -86 -44 44
Day 22.......................... 95 49 46 2 2
Day 23.......................... 18 90 -72 -70 70
Day 24.......................... 48 54 -6 -76 76
Day 25.......................... 18 100 -82 -158 158
Day 26.......................... 86 74 12 -146 146
Day 27.......................... 51 65 -14 -160 160
Day 28.......................... 48 19 29 -131 131
Day 29.......................... 40 74 -34 -165 165
Day 30.......................... 52 32 20 -145 145
----------------------------------------------------------------------------------------------------------------
g. Brokered Deposit Outflow Amount for Retail Customers and
Counterparties
The proposed rule provided several outflow rates for retail
brokered deposits held by covered companies. The proposed rule defined
a brokered deposit 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 (FDI Act).\67\ The agencies'
proposed outflow rates for brokered deposits from retail customers or
counterparties was based on the type of account, whether
[[Page 61491]]
deposit insurance was in place, and the maturity date of the deposit
agreement. Outflow rates for retail brokered deposits were further
subdivided into reciprocal brokered deposits, brokered sweep deposits,
and all other brokered deposits. The agencies received several comments
arguing that: (i) The proposed outflow rates for each category of
brokered deposits were too high; (ii) the applicable definitions and
key terms lacked clarity and precision; and (iii) the proposed rule
would have a number of unintended consequences, including potentially
disrupting an important, stable funding source for many banking
organizations.
---------------------------------------------------------------------------
\67\ 12 U.S.C. 1831f(g).
---------------------------------------------------------------------------
The agencies are adopting many aspects of the proposed rule, with
revisions to certain elements in response to commenters and to better
reflect the liquidity risks of brokered funding, as described in this
section. The agencies continue to believe that brokered deposits have
the potential to exhibit greater volatility than funding from stable
retail deposits, even in cases where the deposits are fully or
partially insured, and thus believe that higher outflow rates, relative
to some other retail funding, are appropriate. Brokered deposits are
more easily moved from one institution to another, as customers search
for higher interest rates. Additionally, brokered deposits can be
subject to both regulatory limitations and limitations imposed by the
facilitating deposit broker when an institution's financial condition
deteriorates, and these limitations can become especially problematic
during periods of economic stress when a banking organization may be
unable to renew such deposits.
i. Retail Brokered Deposit Outflow Rates
Several commenters contended that the outflow rates for all
categories of retail brokered deposits were too high, that they were
inconsistent with the liquidity risks posed by these transactions, and
that they should be lowered. Commenters argued that the liquidity
characteristics of most brokered deposits warranted outflow rates
consistent with the unsecured retail outflow rates specified in Sec.
_.32(a) of the proposed rule (for example, 3 percent for fully insured
retail deposits and 10 percent for all other retail deposits).
As noted in the preamble to the proposed rule, 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 also are
concerned that statutory restrictions on certain brokered deposits make
this form of funding less stable than other deposit types under certain
stress scenarios. Specifically, a covered company that becomes less
than ``well capitalized'' is subject to restrictions on accepting
deposits through a deposit broker. Additionally, the agencies disagree
with commenters' views that brokered deposits are as low risk as other
unsecured retail deposits. During the recent crisis, the FDIC found
that: (i) Failed and failing banking organizations were more likely to
have brokered deposits than other banking organizations; (ii) replacing
core deposits with brokered deposit funding tended to raise a banking
organization's default probability, and (iii) banking organizations
relying on brokered deposits were more costly to resolve.\68\ Because
banking organizations that rely heavily on brokered deposits have been
shown to engage in relatively higher-risk lending than institutions
with more core deposits, banking organizations that rely heavily on
brokered deposits are more likely to experience significant losses
during stress conditions, which, in turn, may cause these banking
organizations' capital levels to fall and, in turn, restrict their
ability to replace brokered deposits that run off or mature.
---------------------------------------------------------------------------
\68\ See Federal Deposit Insurance Corporation, ``Study on Core
Deposits and Brokered Deposits,'' Submitted to Congress pursuant to
the Dodd-Frank Wall Street Reform and Consumer Protection Act (FDIC
Brokered Deposit Study), at pages 34-45 (2011), available at http://www.fdic.gov/regulations/reform/coredeposit-study.pdf.
---------------------------------------------------------------------------
The agencies continue to have the concerns noted above and are
finalizing the treatment of retail brokered deposits largely as
proposed. However, in response to commenters, the final rule modifies
the treatment of certain non-maturity brokered deposits in retail
transactional accounts to provide for a lower outflow rate, as
described below.
(a). Non-Maturity Brokered Deposits in Transactional Accounts
Under the proposed rule, brokered deposits that mature within 30
calendar days of a calculation date that are not reciprocal deposits or
brokered sweep deposits would have been subject to a 100 percent
outflow rate. Several commenters argued this outflow rate was
unrealistic and would disrupt a valuable source of funding. In
particular, commenters argued that certain non-maturity brokered
checking and transactional account deposits, such as affinity group
deposits, are as stable as traditional retail deposits and should not
be subject to the proposed rule's 100 percent outflow rate. According
to the commenters, in many instances these deposits involve direct
relationships between the banking organization and the retail customer
with little continued involvement of the deposit broker. Likewise,
commenters stressed that the LCR generally provides for lower treatment
of retail-related outflows, and argued that this 100 percent outflow
assumption is higher than the 40 percent outflow assumption for
wholesale brokered deposits.
To address these commenters' concerns about the outflow rate
applied to such deposits, the agencies are providing separate outflow
rates for non-maturity brokered deposits in transactional accounts.
Under the final rule, retail brokered deposits held in a transactional
account with no contractual maturity date receive a 20 percent outflow
rate if the entire amount is covered by deposit insurance and a 40
percent outflow rate if less than the entire amount is covered by
deposit insurance. This outflow rate covers brokered deposits that are
in traditional retail banking accounts and are used by the customers
for their transactional needs, and would include non-maturity affinity
group referral deposits and third-party marketer deposits where the
deposit is held in a transactional account with the bank. The agencies
believe these deposits have lower liquidity risk than other types of
brokered deposits, but nevertheless warrant higher outflow treatment
than the unsecured retail deposits in Sec. _.32(a) due to the presence
of third-party intermediation by the deposit broker, which may result
in higher outflows during periods of stress. The outflow rates under
the final rule are intended to be consistent with the outflow rates for
unaffiliated brokered sweep deposits, discussed below, and the
agencies' treatment of professionally managed deposits that do not
qualify as brokered deposits, discussed above under section II.C.3.a.
(b). Other Brokered Deposits
As noted above, under the proposed rule, all other brokered
deposits would have been defined to include those brokered deposits
that are not reciprocal brokered deposits or are not part of a brokered
sweep arrangement. These deposits were subject to an outflow rate of 10
percent for deposits maturing more than 30 calendar days from the
calculation date or 100 percent for deposits maturing within 30
calendar days of the calculation date. With respect to other brokered
deposits
[[Page 61492]]
maturing within 30 calendar days of the calculation date, commenters
argued that the 100 percent outflow rate for such deposits was
unnecessarily high due to the rollover rates banking organizations
observed for such deposits. In addition, one commenter argued that the
agencies' treatment of deposits entirely covered by deposit insurance
was inconsistent because a brokered sweep deposit that is not entirely
insured is subject to a 40 percent outflow rate while an entirely
insured brokered time deposit is subject to a 100 percent outflow rate
if it matures within the 30-day period. The commenter suggested that
all deposits that are fully insured (retail or wholesale) should
receive the same treatment for the purposes of the LCR. Several
commenters requested clarification regarding the treatment of retail
brokered deposits that allow for early withdrawal upon the payment of a
financial penalty, such as a certain amount of accrued interest.
As discussed in the proposal, the agencies believe the 100 percent
outflow rate is appropriate for other brokered deposits maturing within
the 30 calendar-day period because under stress, there is a greater
probability that counterparties will not renew and that covered
companies will not be able to renew brokered deposits due to associated
regulatory restrictions. Therefore, the agencies believe covered
companies should not rely on the renewal or rollover of such funding as
a source of liquidity during a stress period. Accordingly, other than
the changes for non-maturity brokered deposits in transactional
accounts discussed above, the agencies are adopting this provision of
the rule as proposed. The agencies are clarifying that, under the final
rule, all retail brokered deposits, regardless of contractual
provisions for withdrawal, are subject to the outflow rates provided in
the proposed rule, including the 10 percent outflow rate for brokered
deposits maturing more than 30 calendar-days after the calculation
date.
In addition, several commenters suggested that the 10 percent
outflow rate for other brokered deposits maturing outside the 30
calendar-day period was unnecessarily conservative, and urged the
agencies to recognize the contractual terms in retail brokered deposit
agreements that restrict early withdrawal. Several commenters requested
clarification regarding the treatment of retail brokered deposits that
allow for early withdrawal upon the payment of a financial penalty,
such as a certain amount of accrued interest. A commenter requested
that the agencies provide a rationale for diverging from the Basel III
Revised Liquidity Framework, which applies a zero percent outflow rate
to deposits that have a stated contractual maturity date longer than 30
days. Although many agreements for brokered deposits with contractual
maturity provide for limited contractual withdrawal rights, as with
non-brokered term retail deposits, the agencies believe that covered
companies may agree to waive such contractual maturity dates for retail
deposits. The agencies believe a brokered deposit should not obtain
more favorable treatment than a non-brokered deposit because the
relationship between the brokered deposit customer and the covered
company is not as strong as the relationship between a direct retail
customer and the covered company, as a brokered deposit interposes a
third party. Accordingly, the agencies are adopting this provision of
the rule as proposed.
(c). Brokered Sweep Deposits
Brokered sweep deposits involve securities firms or investment
companies that ``sweep'' or transfer idle customer funds into deposit
accounts at one or more depository institutions. Under the proposed
rule, such deposits would have been defined as those that are held at
the covered company by a customer or counterparty through a contractual
feature that automatically transfers funds to the covered company from
another regulated financial company at the close of each business day.
The definition of ``brokered sweep deposit'' under the proposed rule
would have covered all deposits under such arrangements, regardless of
whether the deposit qualified as a brokered deposit under the FDI Act.
The proposed rule would have assigned these deposits progressively
higher outflow rates depending on deposit insurance coverage and the
affiliation between the bank and 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 (affiliated
brokered sweep deposits), would have been assigned 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
(unaffiliated brokered sweep deposits), would have been assigned a 25
percent outflow rate. All brokered sweep deposits that are not entirely
covered by deposit insurance, regardless of the affiliation between the
bank and the broker, would have been assigned 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. The agencies received a number of comments on
the outflow rates for brokered sweep deposits. However, for the reasons
discussed below and in the proposal, other than changing the level of
affiliation required for the 10 percent affiliated brokered sweep
deposit outflow rate to apply, the agencies are adopting in the final
rule the proposed rule's treatment of brokered sweep deposits with
respect to outflow amounts.
Several commenters maintained that the outflow rates applied to
fully-insured brokered deposits (10 percent for reciprocal and
affiliated brokered sweep deposits, and 25 percent for non-affiliated
brokered sweep deposits) should be lowered to be more consistent with
the fully insured rate of 3 percent to unsecured stable retail
deposits. Similarly, commenters asserted that the outflow rates
applicable to partially insured brokered deposits (25 percent for
reciprocal brokered deposits and 40 percent for brokered sweep
deposits) were too high and should be lowered to be more closely
aligned with the corresponding outflow rate for less-stable unsecured
retail deposits (10 percent). The agencies believe that the outflow
rates for brokered sweep deposits as set forth in the proposed rule are
appropriate in light of the additional liquidity risk arising as a
result of deposit intermediation. In addition, in contrast to retail
deposit accounts which are typically composed of funds used by the
depositor for transactional purposes (for example, checking accounts),
brokered sweep accounts are composed of deposits that are used for the
purchase or sale of securities. During a period of significant market
volatility and distress, customers may be more likely to purchase or
sell securities and withdraw funds from such accounts. Moreover, the
agencies believe that customers would be more likely to withdraw funds
from their ancillary accounts, such as the brokered sweep accounts,
prior to depleting resources in accounts used for day-to-day
transactions. Accordingly, the
[[Page 61493]]
agencies are adopting in the final rule the relevant outflow rates as
proposed.
Several commenters requested that the agencies not distinguish
between affiliate and non-affiliate relationships in applying outflow
rates to brokered sweep deposits. In particular, commenters argued that
unaffiliated sweep arrangements operated by a program operator, where
the customer controls the selection of the banking organizations in
which deposits may be placed, have far lower outflow rates due to the
limited intermediation of the program operator. According to these
commenters, the program operator is required to place deposits in
accordance with levels set forth in the contractual agreements with the
banking organizations and broker-dealers, and in many cases, is
required to reduce overall volatility in the deposits to amounts below
the outflow rates in the proposed rule. Commenters requested a lower
outflow rate for unaffiliated brokered sweep deposits that are subject
to a contractual non-volatility requirement or a contractual
arrangement that obligates a deposit broker to maintain a minimum
amount with the depository institution. In addition, these commenters
requested that the agencies recognize the impact of a depository
institution's contracts with broker-dealers and treat outflows more
favorably if that depository institution would contractually receive
funds ahead of other institutions. One commenter requested that the
agencies require that affiliated brokered sweep deposits be subject to
agreements providing for substantial termination and withdrawal
penalties to minimize accelerated client-driven withdrawal. Finally,
one commenter stated that data from its own proprietary program shows
that fully insured, unaffiliated brokered sweep deposits and fully
insured, reciprocal brokered deposits are stickier than would be
implied by the outflow rates assigned in the proposed rule. The
commenter argued that customers could be deprived access to these
insured sweep deposit programs if banking organizations reduce or
eliminate their use of these deposits as a funding source because of
application of a higher outflow rate to them. The commenter further
stated that a substantial portion of these funds, which currently flow
to these banking organizations, would be diverted to money market
mutual funds or other investments outside the banking system were they
subject to a higher outflow rate.
The agencies believe that affiliated brokered sweep deposits are
more reflective of an overall relationship with the underlying retail
customer, while non-affiliated sweep deposits are more reflective of a
relationship associated with wholesale operational deposits. Affiliated
brokered sweep deposits generally exhibit a stability profile
associated with retail customers, because the affiliated sweep
providers generally have established relationships with the retail
customer that in many circumstances include multiple products with both
the covered company and the affiliated broker-dealer. Affiliated
brokered sweep deposit relationships are usually developed over time.
Additionally, the agencies believe that because such deposits are swept
by an affiliated company, the affiliated company would be incented to
minimize harm to any affiliated depository institution.
In contrast, depository institutions in unaffiliated brokered sweep
deposit programs have relationships only with a third-party
intermediary, rather than with retail customers. Balances in an
unaffiliated brokered sweep accounts are purchased and can fluctuate
significantly depending on the type of contractual relationship the
banking organization has with the unaffiliated broker. Additionally,
the introduction of the third-party intermediary adds volatility to the
deposit relationship in times of stress, as it is possible the third-
party intermediary will move entire balances away from the bank. With
respect to contractual requirements for the amount to be swept,
although such requirements may add additional stability during normal
market conditions, the agencies believe that during a period of
significant market distress and volatility, deposit brokers may be
unable to abide by such commitments as market transaction volumes rise.
One commenter requested clarification regarding the treatment of
the agreement between the bank and a deposit broker relating to minimum
balances over a period longer than 30 days, and whether such agreements
cause brokered sweep deposits to be treated as deposits maturing
greater than 30 days because of the aggregate balance requirement. The
agencies are clarifying that such provisions do not alter the
contractual maturity of the underlying deposit, which are typically
non-maturity or overnight deposits, and do not cause such deposits to
become deposits that mature more than 30 calendar days from a
calculation date. Accordingly, other than the change to the level of
affiliation required under the affiliated sweep deposit outflow rate,
discussed below, the agencies are adopting this provision of the final
rule as proposed.
(d). Reciprocal Brokered Deposits
The proposed rule would have applied a 10 percent outflow rate to
all reciprocal brokered deposits at a covered company that are entirely
covered by deposit insurance. Any reciprocal brokered deposits not
entirely covered by deposit insurance received an outflow rate of 25
percent. A reciprocal brokered deposit was 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
certain other brokered deposits because each institution within the
deposit placement network typically has an established relationship
with the retail customer or counterparty that is making the initial
over-the-insurance-limit deposit that necessitates distributing the
deposit through the network.
Several commenters contended that the outflow rate applied to
fully-insured reciprocal deposits (10 percent) should be lowered to be
more consistent with the fully insured rate of 3 percent to unsecured
stable retail deposits, and that the rate for partially insured
reciprocal deposits (25 percent) should be lowered to more closely
align with the outflow rate for less-stable unsecured retail deposits
(10 percent). The agencies continue to believe that reciprocal
deposits, like other brokered deposits, present elevated liquidity
risks. During periods of material financial distress or an
idiosyncratic event involving a particular institution, depositors or
program operators may terminate their relationships with a banking
organization, resulting in a significant loss of funding. Accordingly,
the agencies have adopted in the final rule the proposed definition and
outflow rates for reciprocal brokered deposits.
(e). Empirical Data
Several commenters requested that the agencies provide data or an
empirical analysis to support the proposed outflow rates for reciprocal
and other brokered deposits. Many commenters concurred with the FDIC
Brokered Deposit Study's conclusion that comprehensive, industry-wide
data for different types of brokered deposits
[[Page 61494]]
is not available. As one commenter noted, while banking organizations
are required to report their total brokered deposits on the
Consolidated Report of Condition and Income (Call Report), there is no
breakdown by type of deposit account, specific maturity of CDs, or
interest rates. Thus, the commenter stated that banking organizations
currently do not report the information necessary for a comprehensive
examination of the brokered deposit market and its component parts.
Some commenters submitted data to show that the proposed brokered
deposit outflow rates were too conservative.
The agencies believe a conservative approach to setting brokered
deposit outflow rates for the purposes of the LCR is appropriate in
light of limited available data, the findings of the FDIC Brokered
Deposit Study showing that increased reliance on brokered deposit rates
is correlated with higher overall risk, and the strong incentives
third-party brokers have to provide the highest possible returns for
their clients by seeking accounts paying the highest interest rates.
Moreover, the agencies believe the assumptions and provisions of Sec.
_--.32(g) are consistent with the available sources of information,
including the FDIC Brokered Deposit Study, guidelines provided in the
Basel III Revised Liquidity Framework, and supervisory information
reviewed by the agencies. Based on the information available to the
agencies, the agencies continue to believe that brokered deposits
represent a more volatile source of funding than typical retail
deposits, thus warranting the outflow rates that were proposed.
(f). Other Comments
One commenter suggested that the agencies allow covered companies
to use internal models to determine outflow rates instead of using the
proposed rule's standardized outflow rates. While the internal stress-
testing requirements of certain covered companies under the Board's
Regulation YY \69\ permit firms to use internally-developed models for
liquidity stress testing, the LCR is a standardized metric that
provides for comparability across all institutions subject to the rule.
Accordingly, the agencies are not adopting provisions in the final rule
that would allow covered companies to determine outflow rates using
their internal models as an alternative to the standardized outflow
rates outlined in the final rule.
---------------------------------------------------------------------------
\69\ See 12 CFR part 252.
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ii. Definitions and Key Terms
In connection with the treatment of brokered deposits, several
commenters requested that key definitions and terms in the proposed
rule be modified or updated to reflect a number of key characteristics.
Specifically, commenters requested that the agencies modify the
definitions of brokered deposit and consolidated subsidiary and
requested that the agencies clarify the meaning of fully insured
deposits, pass-through insurance, penalties for withdrawal, and a
number of other terms.
(a). Definition of Brokered Deposit
A commenter expressed concern that the proposed rule incorporated
the definition of brokered deposit from the FDI Act and the FDIC's
regulations, which the commenter stated were developed many years ago
for a different purpose and at a time when views of liquidity risks
were different. Another commenter requested clarification whether the
Board and the OCC would be interpreting the FDI Act's brokered deposit
definitions for purposes of the LCR and whether the FDIC's prior
interpretations remained binding. Two commenters stated that the FDI
Act's definition of brokered deposit and the FDIC's interpretations
would cover arrangements that would generally be considered retail
stable deposits such as deposits placed by employees of affiliates of a
bank. Finally, one commenter requested additional clarity regarding
what type of deposits (those from affinity groups, affiliates or third
parties) would count as other brokered deposits for purposes of Sec.
_--.32(g)(1) and Sec. _--.32(g)(2) of the proposed rule.
The definition of brokered deposit is adopted as proposed because
it continues to sufficiently capture the types of funding with
increased liquidity risk that the LCR is designed to capture, including
deposits provided by: (a) Persons engaged in the business of placing
deposits, or facilitating the placement of deposits, of third parties
with insured depository institutions or the business of placing
deposits with insured depository institutions for the purpose of
selling interests in those deposits to third parties; and (b) an agent
or trustee who establishes a deposit account to facilitate a business
arrangement with an insured depository institution to use the proceeds
of the account to fund a prearranged loan. As noted by a commenter,
this would include the placement or facilitation of the placement of
deposits by an employee of an affiliate of a bank. The agencies believe
that such intermediation by nonbank employees, like intermediation by
third-parties, could result in greater liquidity risks.
In response to the comment about what types of transactions would
be captured under Sec. _--.32(g)(1) and Sec. _--.32(g)(2) of the
proposed rule, the agencies are clarifying that these provisions
include all brokered deposits that are not reciprocal brokered
deposits, brokered sweep deposits, or, under the new provision included
in the final rule as discussed above, non-maturity brokered deposits
that are in transaction accounts, which would include transactional
accounts with no maturity date that are placed through certain
marketers, affinity groups, and Internet deposit broker entities.
Finally, the agencies are clarifying that the FDIC's longstanding
guidance and interpretations will remain in effect. The FDIC will
remain the Federal banking agency primarily responsible for matters of
interpretation relating to section 29(g) of the FDI Act, and will
continue to work closely with the Board and OCC to ensure consistent
application of the LCR to covered companies.
(b). Definition of ``Consolidated Subsidiary''
One commenter requested that the agencies change the definition of
``consolidated subsidiary'' for purposes of the affiliated brokered
sweep deposit outflow rate so that subsidiaries that are controlled
under the BHC Act or affiliates that are under common control under the
BHC Act are subject to the lower outflow rate rather than solely
subsidiaries and affiliates that are consolidated under GAAP. This
commenter argued that the BHC Act affiliate relationship is well
recognized in the U.S. bank regulatory scheme, notably Federal Reserve
Act sections 23A and 23B, as implemented by the Board's Regulation W,
and further noted that the commenter had structured its brokered sweep
deposit arrangement with its affiliate to comply with these regulatory
restrictions.
The agencies have concluded that it would be consistent with the
purposes of the LCR to extend the scope of affiliated brokered sweep
arrangements under the final rule to include relationships between
affiliates that are ``controlled'' under the BHC Act. Such affiliates
would be subject to all the requirements of the BHC Act, sections 23A
and 23B of the Federal Reserve Act, and the Board's Regulation W, and
thus such deposits are indistinguishable from those where the
subsidiary or affiliated is consolidated. Accordingly, the agencies
have modified the provision of
[[Page 61495]]
the rule relating to affiliated sweep arrangements such that any fully
insured brokered sweep deposits that are deposited in accordance with a
contract between the retail customer or counterparty and the bank, a
controlled subsidiary of the bank, or a company that is a controlled
subsidiary of the same top-tier company of which the bank is a
controlled subsidiary are subject to a 10 percent outflow rate, while
brokered sweep deposits not subject to such an agreement are subject to
a 25 percent outflow rate.
(c). ``Fully Covered by Insurance''
One commenter raised the concern that it would be difficult to
distinguish between fully insured and partially insured or uninsured
deposits because, in the case of brokered sweep deposits, the covered
company would not necessarily know the identity of the depositor and
because recordkeeping would be done by the deposit provider and would
be provided to the covered company only in the event of a bank failure.
Another commenter requested that the agencies assess the cost for
determining whether deposits are fully insured, particularly those
deposits that receive pass-through insurance, and requested that the
agencies clarify the level of certainty a covered company is required
to have prior have in determining whether a deposit is below the
deposit insurance threshold.
The agencies believe that a covered company should be able to
identify the applicable treatment for all of its deposits under the
proposed rule by obtaining the applicable information through the
deposit provider, irrespective of a bank failure. The agencies note
that banking organizations are expected to have adequate policies and
procedures in place for determining whether deposits are above the
applicable FDIC-insurance limits. Therefore, the agencies are adopting
this provision as proposed.
(d). Pass-Through Insurance
Commenters raised the issue of the proposed rule's treatment of
brokered deposits that are held in custody for a depositor by a conduit
financial entity, such as a trust corporation, where the depositor, but
not the custodial entity, is eligible for deposit insurance on a pass-
through basis. Commenters noted that the proposed rule only looks to
the identity of the custodial entity, but ignores the pass-through
insurance to which such deposit accounts are subject. These commenters
asserted that such brokered deposits should be treated as fully-insured
retail deposits under the LCR.
The agencies are clarifying that the final rule does not alter the
treatment of pass-through insurance for deposits, such that deposits
owned by a principal or principals and deposited into one or more
deposit accounts in the name of an agent, custodian or nominee, shall
be insured to the same extent as if deposited in the name of the
principal(s) if certain requirements are satisfied.\70\ Under FDIC
regulations, to qualify for pass-through insurance, the account records
of a covered company must disclose the agency relationship among the
parties. Second, the identities and interests of the actual owners must
be ascertainable either from the account records of the covered company
or records maintained by the agent or other party. Third, the agency or
custodial relationship must be genuine.\71\
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\70\ 12 CFR 330.7.
\71\ Id.
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With respect to brokered deposits held by a fiduciary or an agent
on behalf of a retail customer or counterparty, the agencies are
clarifying that under the final rule, such deposits would be subject,
as applicable, to the outflow rate of non-maturity brokered deposits in
a transactional account, reciprocal deposits, brokered sweep deposits,
or any other type of brokered deposits.
With respect to deposits that are held by a fiduciary, but do not
qualify as brokered deposits under certain exceptions to the FDIC's
brokered deposit regulations, the agencies have added Sec.
_--.32(a)(3) and Sec. _--.32(a)(4) to reflect that a trustee or
similar third party may deposit funds at a covered company as trustee
for the benefit of retail customers or counterparties. These provisions
complement the newly added provisions for non-maturity brokered
deposits in a transactional account. In those cases, where the criteria
of Sec. _--.32(a)(3) and Sec. _--.32(a)(4) are satisfied, a covered
company may look through to the retail customer or counterparty and
apply the 20 percent outflow rate to deposits that are fully covered by
deposit insurance and the 40 percent outflow rate where less than the
entire amount of the deposit is covered by deposit insurance.
(e). Penalties Versus Contractual Restrictions for Withdrawal
Similar to the Basel III Revised Liquidity Framework, commenters
requested that the agencies differentiate between brokered deposits
that are subject to withdrawal penalties (such as the loss of accrued
interest), and those brokered deposits where no contractual right
exists to withdraw the deposit or such rights are strictly limited.
As noted above, the agencies have clarified for purposes of the
final rule that deposits that can only be withdrawn in the event of
death or incompetence are assumed to mature on the applicable maturity
date, and deposits that can be withdrawn following notice or the
forfeiture of interest are subject to the rule's assumptions for non-
maturity transactions. The agencies decline to treat the assessment of
deposit penalties the same as contractual prohibitions to withdrawal,
but for the occurrence of a remote contingency, because the assessment
of the liquidity characteristics of such fees, and whether they deter
withdrawal, would be difficult to undertake and could have unintended
consequences for retail customers. Additionally, while typical
agreements for brokered deposits that mature in more than 30 calendar
days provide for more limited contractual withdrawal rights, the
agencies decline to provide more favorable treatment for these deposits
relative to similar retail deposits. Therefore, the agencies are
adopting this provision of the rule as proposed.
(f). Additional Brokered Deposit Categories
One commenter requested that the agencies establish categories for
additional types of brokered deposits, namely brokered checking
accounts, brokered savings accounts, and deposits referred by affinity
groups, affiliates, or third party marketers.
The agencies did not attempt to specifically identify every type of
retail brokered deposit in the proposed rule. As discussed above, the
agencies have included an additional category of outflows for non-
maturity brokered deposits in transactional accounts. The agencies
believe that all other types of brokered deposits are appropriately
captured in Sec. _--.32(g)(1) of the final rule.
iii. Deposit Market Consequences
Several commenters asserted that the proposed requirements of Sec.
_--.32(g) could adversely impact the brokered deposit markets, preclude
covered companies from obtaining key sources of funding, affect
investor perceptions about the risks of brokered deposits, and allocate
funds away from the banking system as a result of elevated brokered
deposit outflow rates, among other unintended consequences. One
commenter suggested that the proposed rule would harm retail investing
by broker-dealer clients, who would be
[[Page 61496]]
faced with elevated costs without any additional consumer protection
benefit, and requested that the final rule exempt depository
institution holding companies with substantial retail brokerage
activities. Another commenter suggested that the proposed treatment for
reciprocal deposits could impact community banks not subject to the LCR
by distorting the market standards and pricing for these types of
deposits. One commenter suggested that the proposal's treatment of
brokered sweep deposits would cause the cost of such products to
increase, leading investors to seek products outside of the banking
sector, such as money market mutual funds, at a greater cost to
financial stability. Another commenter suggested that applying the
existing definition of brokered deposit in FDIC regulations would have
unintended consequences, such as having employees who are primarily
compensated by commissions versus salary being considered deposit
brokers. One commenter stated that the FDI Act's treatment of brokered
deposits at well-capitalized institutions, which allows for those
institutions to accept brokered deposits without limit, warrants the
same outflow rate as applicable to stable retail deposits. The
commenter stated that the proposed rule appears to stigmatize brokered
deposits and requested that the FDIC clarify its liquidity guidance.
One commenter argued that the uniqueness of deposit insurance (for
example, the relatively high insurance coverage, pass-through
insurance, quick and orderly resolution of failed banks) should result
in lower outflow rates for insured brokered deposits. This commenter
stated that brokered deposits qualifying for full pass-through
insurance should be subject to the same outflow rate as fully insured
stable retail deposits. Finally, one commenter stated that the
distinction between affiliated and unaffiliated brokered sweep deposits
would create an unfair disadvantage for small broker-dealers and
commercial banks without affiliated broker-dealers, which will face
relatively higher pricing to place their swept deposits.
Despite the changes that the retail brokered deposit market will
likely need to undertake in response to the application of the LCR, the
agencies believe that the provisions and assumptions underlying Sec.
_--.32(g) of the proposed rule are consistent with the potential risks
posed by retail brokered deposits.\72\ As noted above, the agencies
continue to believe that brokered deposits have the potential to
exhibit volatility, are more easily moved from one institution to
another, and can be risky to rely upon as a source of liquidity on
account of regulatory limitations. In sum, the agencies believe that
the standard set forth in Sec. _--.32(g) will serve to strengthen the
overall financial system as well as the retail brokered deposit market.
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\72\ 78 FR 71840.
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h. Unsecured Wholesale Funding Outflow Amount
The proposed rule included three general categories of unsecured
wholesale funding: (i) Unsecured wholesale funding transactions; (ii)
operational deposits; and (iii) other unsecured wholesale funding which
would, among other things, encompass funding from a financial company.
The proposed rule defined each of these categories of funding
instruments as being unsecured under applicable law by a lien on
specifically designated assets. Under the proposed rule, unsecured
wholesale funding instruments typically would have included: Wholesale
deposits; \73\ federal funds purchased; unsecured advances from a
public sector entity, sovereign entity, or U.S. GSE; unsecured notes;
bonds, or other unsecured debt securities issued by a covered company
(unless sold exclusively in retail markets to retail customers or
counterparties), brokered deposits from non-retail customers, and any
other transactions where an on-balance sheet unsecured credit
obligation has been contracted.
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\73\ Certain small business deposits are included within
unsecured retail funding. See section II.C.3.a. supra.
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i. Non-Financial Wholesale Counterparties and Financial Sector Entities
The agencies proposed to assign three separate outflow rates to
non-operational unsecured wholesale funding, reflecting the stability
of these obligations based on deposit insurance and the nature of the
counterparty. Under the proposed rule, unsecured wholesale funding
provided by an entity that is not a financial sector entity generally
would have been subject to an outflow rate of 20 percent where the
entire amount is covered by deposit insurance. Deposits that are less
than fully covered by deposit insurance, or where the funding is a
brokered deposit from a non-retail customer, would have been assigned a
40 percent outflow rate. However, the proposed rule would have required
all unsecured wholesale funding provided by financial sector entities,
including funding provided by a consolidated subsidiary or affiliate of
the 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 agencies' concerns
regarding the interconnectedness of financial institutions.
Two commenters suggested that wholesale reciprocal brokered
deposits are as stable as retail reciprocal brokered deposits, and
should be subject to the same outflow rates. These commenters stated
that the impact of insurance coverage should be reflected in the case
of wholesale brokered deposits (including wholesale reciprocal
deposits) by assigning such deposits the same outflow rates that apply
to non-brokered deposits; that is, 20 percent if fully-insured and 40
percent if not fully-insured.
One commenter argued that the proposed rule defines the term
wholesale deposits broadly and improperly categorizes deposits placed
by pension funds on behalf of a retail counterparty as wholesale
deposits placed by a financial sector entity. The commenter argued that
under FDIC regulations, deposit accounts held by employee benefit plans
are insured on a pass-through basis to the benefit of plan
beneficiaries and in many plans, a beneficiary can direct the
investment of the funds, which merits retail treatment for such funds
rather than wholesale treatment.
In addition, several commenters disagreed with the agencies'
proposed outflow rate for unsecured wholesale funding provided by
financial sector entities. One commenter recognized the agencies'
concern regarding the interconnectivity of financial institutions, but
cautioned against potential increased costs for correspondent banking
and other services and for holding financial institution deposits for
banks required to comply with the LCR. A commenter argued that the
proposed rule's 100 percent outflow rate for wholesale deposits by
financial sector entities effectively eliminates any incentive for a
banking organization to take such deposits and that they would
therefore cease doing so. The commenter further argued that this would
severely disrupt the availability of correspondent deposit options for
depository institutions. Another commenter suggested the agencies
reconsider the 100 percent outflow rate that would apply to
correspondent banking deposits in excess of amounts required for
operational services, suggesting that the 40 percent outflow rate
applicable to non-financial unsecured wholesale
[[Page 61497]]
corporate deposits would be more appropriate. Another commenter
suggested treating correspondent banking relationships as operational
and argued that assigning a 25 percent outflow rate to such deposits
would help support the provision of correspondent banking services to
client banks, thereby ensuring the ability of client banks to continue
to service the cash management needs of organizations that drive the
real economy. The commenter asked that the agencies take an activity-
based approach to the classification of correspondent banking outflows,
such that outflows generated by correspondent transactions with
underlying commercial operations relating to banks and their customers
would be classified as operational because they behave in a similar
fashion to those of corporate operational relationship accounts. One
commenter requested that all corporate trust deposits receive a 25
percent outflow rate regardless of whether the deposit qualified as an
operational deposit.
Another commenter requested that the agencies re-examine the
treatment of funding provided by a subsidiary of a covered company and:
(i) Not treat as an outflow funding provided by a subsidiary of the
covered company; (ii) not treat as an inflow amounts owed to the
covered company by a subsidiary; and (iii) not treat as an outflow or
an inflow funding provided by one consolidated subsidiary of the
covered company to another consolidated subsidiary.
For the reasons discussed in the proposal, the agencies continue to
believe the proposed outflow rates assigned to unsecured wholesale
funding are appropriate. As evidenced in the recent financial crisis,
funding from wholesale counterparties, which are generally more
sophisticated than retail counterparties, presents far greater
liquidity risk to covered companies during a stress period. With
respect to wholesale brokered deposits (including wholesale reciprocal
brokered deposits), the agencies continue to believe that the 40
percent outflow rate for all such deposits (regardless of insurance) is
appropriate given the intermediation or matchmaking by the deposit
broker. The 100 percent outflow rate applicable to other unsecured
wholesale funding provided by financial sector entities mirrors the
treatment for unsecured wholesale cash inflows contractually payable to
the covered company from financial sector entities. The agencies note,
however, that Sec. _--.32(a)(3) and Sec. _--.32(a)(4) have been added
to the final rule to address the commenter's concern regarding pension
fund deposits where the beneficiary can direct the investment of the
funds. Such non-brokered deposits placed by a third party on behalf of
a retail customer or counterparty may be treated as retail funding, as
discussed above. In addition, as discussed above, to the extent such
deposits placed by a pension fund meet the definition of retail
brokered deposit, such deposits would be eligible for the retail
brokered deposit outflow rates under Sec. _--.32(g) of the final rule.
With respect to funding provided by an affiliate of a covered
company, to address commenters' concerns, the agencies are clarifying
in the final rule that the 100 percent outflow rate for unsecured
wholesale funding applies only to funding from a company that is a
consolidated subsidiary of the same top-tier company of which the
covered company is a consolidated subsidiary. This outflow rate does
not apply to funding from a consolidated subsidiary of the covered
company, which is entirely excluded from the LCR calculation in the
final rule under Sec. _--.32(m), as discussed below. The agencies also
have added paragraph (h)(2)(ii) to the final rule to clarify that debt
instruments issued by a covered company that mature within a 30
calendar-day period, whether owned by a wholesale or retail customer or
counterparty, will receive a 100 percent outflow rate.
The final rule is adopting the 100 percent outflow rate for
unsecured wholesale funding provided by financial sector entities as
proposed. The agencies continue to believe that the liquidity risk
profile of financial sector entities are significantly different from
that of traditional corporate entities. Based on the agencies'
supervisory experience, during a period of material financial distress,
financial sector entities tend to withdraw large amounts of funding
from the financial system to meet their obligations. The agencies
believe the outflow rates properly reflect the liquidity risk present
in the types of products offered to financial sector entities. The
agencies also are adopting in the final rule the 20 percent and 40
percent outflow rates for non-financial sector unsecured wholesale
funding, as proposed.
ii. Operational Services and Operational Deposit
The proposed rule would have recognized that some covered companies
provide services, such as those related to clearing, custody, and cash
management, that increase the likelihood that their customers will
maintain certain deposit balances with the covered company. These
services would have been defined in the proposed rule as operational
services and a deposit required for each of their provision was termed
an operational deposit. The proposed rule would have applied a 5
percent outflow rate to an operational deposit fully covered by deposit
insurance (other than an escrow deposit) and a 25 percent outflow rate
to an operational deposit not fully covered by deposit insurance.
The agencies received a number of comments regarding: (1) The
proposed rule's definition of operational deposit and operational
services; (2) the operational criteria required to be met for a covered
company to treat a particular deposit as an operational deposit; and
(3) the proposed rule's outflow rates for operational deposits. In
response to the comments received, the agencies have made certain
modifications to these requirements, as discussed below.
Although many commenters appreciated the agencies' recognition of
the provision of key services by many covered companies in the form of
lower outflow rates for operational deposits, two commenters suggested
that a model that segregates operational deposits from other deposits
is inconsistent with how covered companies and their customers
structure their banking operations. One commenter suggested that
application of this model could lead to unnecessary confusion and could
push excess depository balances into shadow banking. Another commenter
argued that the proposed rule's broad definition of operational deposit
could result in a lack of consistent application among covered
companies, as they would reflect their own clients and product mixes in
applying the definition. One commenter called for a simplified
definition that could be applied uniformly across the industry, stating
that it would be preferable to have a slightly higher outflow rate in
exchange for such simplicity.
For the reasons discussed in the proposal and below, the agencies
continue to believe that the underlying structure of the proposal's
approach to defining an operational deposit, which is consistent with
the Basel III Revised Liquidity Framework, is appropriate. As noted by
commenters, many customers place deposits with covered companies as a
result of their provision of key services, such as payroll processing
and cash management. Because such deposits are tied to the provision of
specific services to the customer, these deposits present less
liquidity risk during a stress period. The agencies
[[Page 61498]]
have made some changes to the definition of operational deposit, but
have retained the definition's structure as proposed because it
unambiguously aligns a particular operational deposit with an
operational service, thereby providing a standardized method for
identifying operational deposits. Accordingly, the agencies are
adopting in the final rule the structure for defining operational
deposit as proposed with the modifications discussed below.
(a). Definition of ``Operational Deposit''
The proposed rule would have defined an operational deposit as
unsecured wholesale funding that is required to be in place for a
covered company to provide operational services as an independent
third-party intermediary to the wholesale customer or counterparty
providing the unsecured wholesale funding.
Many commenters indicated that an operational deposit should be one
that is ``necessary'' rather than ``required'' for the banking
organization to provide in light of the operational services enumerated
in the proposed rule, which would better align with industry practice.
The commenters stated that using ``necessary'' would make clear that
such deposits are functionally necessary as opposed to contractually
required. Commenters also requested that the agencies recognize that
certain operational services may be provided by a covered company not
only as an independent third-party intermediary, but also as an agent
or administrator. Finally, several commenters requested that certain
collateralized deposits that otherwise meet the eligibility criteria
for treatment as an operational deposit, such as preferred public
sector deposits or corporate trust deposits, be subject to the outflow
rates applicable to operational deposits.
In response to commenters' concerns, the agencies have revised the
definition of operational deposit to state that the deposit is
``necessary'' for the provision of operational services rather than
``required.'' The term ``required'' implied that the deposit was a
contractual requirement as opposed to incidental to the provision of
the operational services, and may have inadvertently limited the
definition's application. The agencies also have added ``agent'' and
``administrator'' as capacities in which a covered company may provide
operational services that give rise to a need for an operational
deposit, as there are circumstances, such as the provision of custody
services, where a covered company acts as an agent or administrator,
rather than merely as an independent third-party intermediary. Finally,
the agencies have clarified in the final rule that secured funding
transactions that are collateralized deposits, as defined under the
final rule, are eligible for the operational deposit outflow rates if
the deposits otherwise meet the final rule's criteria. However, as
discussed in section II.C.3.j. below, such deposits would still be
considered secured funding transactions and could be subject to lower
outflow rates if the deposits are secured by level 1 liquid assets or
level 2A liquid assets.
(b). Definition of ``Operational Services''
The proposed rule would have included eleven categories of
operational services provided by covered companies that would
correspond to an operational deposit. Consistent with the Basel III
Revised Liquidity Framework, the operational services would have
included: (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.
Several commenters argued that the list of operational services
should be expanded to include trustee services, the administration of
investment assets, collateral management services, settlement of
foreign exchange transactions, and corporate trust services. Other
commenters requested that the agencies specifically include a number of
operational services that are specific to the business of custody
banks. One commenter requested that the final rule recognize that a
covered company may provide these services as a trustee. One commenter
suggested that the rule define operational services as those normal and
customary operational services performed by a covered company, and use
the rule's enumerated services as illustrative examples. Commenters
also recommended that operational deposits include all deposits
obtained under correspondent banking relationships. Another commenter
requested that the final rule better align the criteria for operational
services with the Basel III Revised Liquidity Framework to avoid
excluding a substantial amount of deposits that are truly operational
in nature.
After consideration, to address commenters' requests that services
relating to the business of custody banks be included, the agencies
have added a new subparagraph 2 to the definition of operational
services to include the administration of payments and cash flows
related to the safekeeping of investment assets, not including the
purchase or sale of assets. This is intended to encompass certain
collateral management payment processing provided by covered companies.
Such operational services solely involve the movement of money, and not
the transfer of collateral, and are limited to cash flows, and not the
investment, purchase, or sale of assets. Moreover, the agencies wish to
make clear that this prong of the operational services definition does
not encompass any activity that would constitute prime brokerage
services, as any deposit provided in connection with the provision of
prime brokerage services by a covered company could not be treated as
an operational deposit, as discussed in more detail below.
The agencies also have added ``capital distributions'' to the now
renumbered subparagraph 8 of the operational services definition. This
addition was necessary to clarify the intention of the agencies to
include such payments as an operational service along with recurring
contractual payments when performed as part of cash management,
clearing, or custody services.
The agencies believe the final rule appropriately addresses the
concerns of commenters while also treating as operational services
those services that are truly operational in nature. Defining
operational services as the customary operational services performed by
a covered company, as suggested by one commenter, would have been
overly broad and could have led to wide variations in the treatment of
operational services across covered companies. Moreover, it is not
necessary to add the entire suite of corporate trust services to the
list of enumerated defined operational services in order to include
those aspects of such business lines that have the inherent or
essential qualities of operational services. The existing twelve
categories of services, when performed as part of cash management,
clearing, or custody services, will adequately capture those corporate
trust services that should be captured by the operational service
definition. With respect to correspondent banking and foreign exchange
settlement activity, neither of
[[Page 61499]]
those services in isolation enhance the stability of the funding to
warrant a lower outflow rate; however, to the extent that operational
services are utilized by customers engaged in those activities,
associated deposits may be included as operational deposits. With
respect to the remaining operational services identified in the
proposed rule, the agencies have adopted the final rule as proposed.
(c). Operational Requirements for Recognition of Operational Deposits
In addition to stipulating that the deposit be required for the
provision of operational service by the covered company to the
customer, the proposed rule would have required that an operational
deposit meet eight qualifying criteria, each described below. The
agencies received a number of comments on these operational criteria,
and have made certain modifications to these criteria in their adoption
of the final rule.
(d). Deposit Held Pursuant to Agreement and Subject to Termination or
Switching Costs
Section _.4(b)(1) of the proposed rule would have required that an
operational deposit be held pursuant to a legally binding written
agreement, the termination of which was subject to a minimum 30
calendar-day notice period or significant termination costs to have
been borne by the customer providing the deposit if a majority of the
deposit balance was withdrawn from the operational deposit prior to the
end of a 30 calendar-day notice period.
Many commenters stated that operational deposits are typically held
in demand deposit accounts with no notice or termination restrictions.
Instead, the associated operational services are provided pursuant to a
written contract that contains the relevant termination and notice
provisions. Commenters requested that the final rule require that the
operational services, not the operational deposits, be subject to a
legally binding written agreement. In addition, several commenters
suggested that the agencies recognize, in addition to termination costs
such as fees or withdrawal penalties, switching costs that would be
borne by a customer transitioning operational services from one covered
company to another and could inhibit the transfer of operational
services to another provider.
In response to the comments, the agencies have revised Sec.
_.4(b)(1) of the final rule to require that the operational services,
rather than the operational deposit, be provided pursuant to a written
agreement. Additionally, the agencies have revised Sec. _.4(b)(1) to
reflect that, in addition to or in lieu of termination costs set forth
in the written agreement covering the operational services, the final
rule's criterion would be satisfied if a customer bears significant
switching costs to obtain operational services from another provider.
Switching costs include costs external to the contract for operational
services, such as the significant information technology,
administrative, and legal service costs that would be incurred in
connection with the transfer of operational services to a new service
provider. Switching costs, however, would not include the routine costs
of moving an account from one financial institution to another, such as
notifying counterparties of new account numbers or setting up recurring
transactions. Rather, the favorable treatment for operational deposits
under the final rule is premised on strong incentives for a customer to
keep its deposits with the covered company.
(e). Lack of Significant Volatility in Average Deposit Balance
Section _.4(b)(2) of the proposed rule would have required that an
operational deposit not have significant volatility in its average
balance. The agencies proposed this requirement with the intent to
exclude surges in balances in excess of levels that customers have
historically held to facilitate operational services.
Commenters found the proposed requirement in Sec. _--.4(b)(2)
confusing. One commenter questioned how the concept of ``average
balance'' could be reconciled with ``significant volatility,'' as
averaging would in practice subsume the variability. Several commenters
observed that an operational deposit account, by definition, would
experience volatility, as cash flows into and out of such an account
over the course of a 30 calendar-day period. Commenters expressed
concern that the ``significant volatility'' language could disqualify
deposits based on these normal variations in deposit balances.
Commenters suggested that the agencies' concerns regarding excess funds
would be better addressed through the provisions of Sec. _--.4(b)(6),
and that Sec. _--.4(b)(2) should be deleted.
To address these concerns, the agencies have eliminated significant
volatility as a standalone criterion for qualification as an
operational deposit in the final rule, but have incorporated
consideration of volatility into the methodology that a covered company
must adopt for identifying excess balances, as discussed below. Covered
companies are still expected to assess whether there are operational
reasons for any notable shifts in the average balances that occur over
time.
(f). Deposit Must Be Held in Operational Account
In Sec. _--.4(b)(3) of the proposed rule, the agencies proposed
that an operational deposit be held in an account designated as an
operational account. Two commenters expressed the view that this
provision was too restrictive because cash management practices allow
customers to transfer funds across their entire banking relationship
between sweep accounts, interest bearing accounts, investment accounts,
and zero balance accounts. These commenters argued that a customer's
funds need not be maintained in a transactional account specified as an
operational account so long as the funds are liquid and available for
operational use without penalty when needed.
After consideration of the comments, the agencies have retained the
requirement in the final rule. The agencies believe this requirement
allows covered companies to clearly identify the deposits that are
eligible for operational deposit's lower outflow rate, and to prevent
the intermingling of operational deposits with other deposits.
Accordingly, under the final rule, an operational deposit must be held
in an account designated as an operational account, which can be one or
more linked accounts. Such an account need not take a specific form,
but must be designated as an operational account for a specific
customer so that it can be considered in identifying excess balances
required under Sec. _--.4(b)(5) of the final rule and discussed
further below.
(g). Primary Purpose of Obtaining Operational Services
Section _--.4(b)(4) of the proposed rule would have required that
an operational deposit be held by a customer at a covered company for
the primary purpose of obtaining operational services from the covered
company. Commenters suggested that the best way to address the
relationship between the operational deposits and operational services
would be to disqualify deposit balances that are in excess of amounts
necessary to perform operational services; that is, through Sec.
_--.4(b)(6) of the proposed rule. Accordingly, these commenters
requested the deletion of this requirement from the final rule.
Alternatively, one commenter suggested that the agencies use the
language from paragraph 94 of the Basel III Revised
[[Page 61500]]
Liquidity Framework and allow a deposit to be treated only as an
operational deposit to the extent that the customer depends on the
covered company to perform the associated operational services.
After considering the comments, the agencies have adopted this
requirement of the proposed rule without change. Based on their
supervisory experience, the agencies understand that covered companies
already review various characteristics, such as customer type, business
line, product, and service, when classifying deposits as operational.
The agencies expect that covered companies would review these same
characteristics to categorize the primary purpose of the deposit in
order to satisfy this provision of the rule.
(h). Prohibition of Economic Incentives To Maintain Excess Funds
Section _.4(b)(5) of the proposed rule would have required that an
operational deposit account not be designed to incent customers to
maintain excess funds therein through increased revenue, reduction in
fees, or other economic incentives. Commenters remarked that a common
feature of most operational deposit accounts, the earnings credit rate
(ECR), would seem to violate this criterion and, therefore, disqualify
many deposits from being treated as operational.\74\ Commenters
suggested that the ECR increases the strength of the relationship
between a covered company and a customer, as it encourages the customer
to continue to obtain operational services from the covered company.
This, in turn, results in more stable operational deposit levels.
Several commenters requested that the agencies remove this proposed
criterion on the grounds that it essentially aims to limit excess
balances, and this is already addressed in the proposed rule's Sec.
_.4(b)(6).
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\74\ An ECR is a rate used by certain banking organizations in
noninterest bearing accounts to reduce the amount of fees a customer
would be required to pay for bank services. The ECR would be applied
to the entire balance of the account, and thus, a larger balance
would provide for a greater reduction in fees.
---------------------------------------------------------------------------
The agencies believe this criterion better ensures that a deposit
is truly necessary for an operational service, and is not the result of
an ancillary economic incentive. For that reason, the agencies are
retaining this criterion in the final rule. However, the agencies are
clarifying that some economic incentives, such as an ECR to offset
expenses related to operational services, are acceptable, so long as
they do not incent the maintenance of excess deposits. If an ECR or
other economic incentive causes a customer to maintain deposit balances
in excess of the amount necessary to serve the customer's operational
needs, then those excess balances would not qualify as operational
deposits.
(i). Exclusion of ``Excess'' Amounts
Section _.4(b)(6) of the proposed rule would have required that a
covered company demonstrate that an operational deposit is empirically
linked to an operational service and that the covered company has a
methodology for identifying any deposits in excess of the amount
necessary to provide the operational services, the amount of which
would be excluded from the operational deposit amount. Commenters
generally supported this criterion but requested clarification as to
whether covered companies would be allowed to calculate excess balances
on an aggregate basis rather than on a deposit-by-deposit or account-
by-account basis. Commenters argued that absent such clarification,
assessing operational deposits at an unnecessarily granular level would
be overly burdensome for covered companies and supervisors. One
commenter expressed concern that the proposed rule would have required
covered companies to develop models for determining the excess amount
and requested that the agencies provide clear criteria for determining
excess deposits. One commenter suggested, however, that allowing each
banking organization to have its own methodology could lead to
protracted negotiation with local supervisors and inconsistent
implementation. Commenters also expressed concerns regarding the
identification of excess deposits in connection with particular
operational services, such as cash management and corporate trust
services and argued that the agencies should exempt such deposits from
the excess operational deposit methodology.
The agencies believe it would be inappropriate to give excess
operational deposit amounts the same favorable treatment as deposits
that are truly necessary for operational purposes, as doing so could
lead to regulatory arbitrage or distort the amount of unsecured
wholesale cash outflows in the LCR calculation. Further, operational
deposits are afforded a lower outflow rate due to their perceived
stability arising from the nature of the relationship between a
customer and covered company and the operational services provided, as
well as factors, such as the switching costs associated with moving
such deposits, as discussed above. In contrast, excess deposits are not
necessary for the provision of operational services and therefore do
not exhibit these characteristics.
The agencies are of the view that there is no single methodology
for identifying excess deposits that will work for every covered
company, as there is a range of operational deposit products offered
and covered company data systems processing those products. Aggregation
may be undertaken on a customer basis, a service basis, or both, but in
all instances, a covered company's analysis of operational deposits
must be conducted at a sufficiently granular level to adequately assess
the risk of withdrawal in an idiosyncratic stress. The agencies expect
covered companies to be able to provide supporting documentation that
justifies the assumptions behind any aggregated calculations of excess
deposits and expect that the higher (that is, the further from the
individual account or customer) the level of aggregation, the more
conservative the assumptions related to excess deposit amounts will be.
A covered company's methodology must also take into account the
volatility of the average deposit balance to ensure the proper
identification of excess balances. Moreover, the agencies believe that
it is inappropriate to exempt deposits received in connection with
particular operational services from the requirement to identify excess
balances because all excess balances may exhibit greater volatility
than those that are necessary for the provision of operational services
by a covered company. Accordingly, the agencies are adopting this
provision of the rule as proposed, with a modification to explicitly
require a covered company to take into account the volatility of the
average operational deposit balance when designing its methodology for
identifying excess deposit amounts.
(j). Exclusion of Deposits Relating to Prime Brokerage Services
Section _.4(b)(7) of the proposed rule would have excluded deposits
provided in connection with the covered company's provision of prime
brokerage services from the operational deposit outflow rates.\75\ The
agencies defined prime brokerage services as the provision of
operational services to an investment company, non-regulated fund, or
investment adviser. The agencies defined prime brokerage in this manner
to cover the primary recipients of prime brokerage services.
---------------------------------------------------------------------------
\75\ Basel III Revised Liquidity Framework at ] 99.
---------------------------------------------------------------------------
Many commenters disagreed with the agencies' approach in the
proposed rule,
[[Page 61501]]
stating that defining prime brokerage services in terms of customer
type resulted in an operational deposit exclusion that was too broad,
and several argued that it would likely exclude a broad range of
operational deposits from custody banks, which provide safekeeping and
asset administration services to investment companies that are wholly
unrelated to prime brokerage services, as well as clearly operational
services such as employee compensation payroll services for a mutual
fund complex. Several commenters suggested that rather than focus on
the type of client, the final rule should focus on the specific prime
brokerage services to be excluded from the definition of operational
services. One commenter argued that this proposed alternative treatment
would be beneficial in that, consistent with the Basel III Revised
Liquidity Framework, it would not exclude stable deposits related to
operational servicing relationships with mutual funds and their foreign
equivalents. Commenters noted that while many prime brokerage services
overlap with core operational services such as cash management,
clearing, or custody, prime brokerage services differ from those
services in that a prime broker generally facilitates the clearing,
settling, and carrying of client trades that are executed by an
executing broker. A second distinguishing feature of prime brokerage
services identified by these commenters is the provision of financing
(for example, margin lending) by the prime broker to facilitate the
investment strategies of the client. According to commenters, these
financing agreements require the client to authorize the prime broker
to rehypothecate client assets pledged to secure margin lending, as
contrasted with investment company assets held by a custodian for safe-
keeping, which by law must be segregated.\76\
---------------------------------------------------------------------------
\76\ 15 U.S.C. 80a-17(f).
---------------------------------------------------------------------------
With respect to the exclusion of non-regulated funds, one commenter
requested that the rule be revised to instead apply a higher outflow
rate to the types of non-regulated funds that are likely to withdraw
deposits in a period of stress. The commenter further suggested that
closed-end funds that do not issue redeemable securities be excluded
from the definition of non-regulated funds, as well as a consolidated
subsidiary of a non-regulated fund.\77\ Another commenter argued that
investment companies, such as U.S. mutual funds and their foreign
equivalents, should not be included in this category because they do
not use prime brokerage services in their ordinary business operations.
---------------------------------------------------------------------------
\77\ With respect to commenters' requests regarding non-
regulated funds, the agencies have addressed these comments in
section II.B.2.b.iv above.
---------------------------------------------------------------------------
The agencies have concluded that the proposed rule's approach of
defining prime brokerage services by counterparty could have been
overly broad in application, potentially excluding many types of truly
operational services from the proposed rule's preferential treatment of
operational deposits. Therefore, in response to concerns raised by
commenters, the agencies have defined prime brokerage services in the
final rule using the key aspects of the prime brokerage relationship.
In addition to the execution, clearing and settling of transactions,
the agencies believe it is the financing services and the retention of
rehypothecation rights by the prime broker that distinguish prime
brokerage from other operational services. This financing and
rehypothecation aspect of prime brokerage services merits exclusion
from operational services, as highly-levered customers and the reuse of
assets can expose covered companies to significant liquidity risk.
Under the final rule, prime brokerage services are those services
offered by a covered company whereby the covered company executes,
clears, settles, and finances transactions entered into by a customer
with the covered company or a third-party entity on behalf of the
customer (such as an executing broker). The covered company must also
have a right to use or rehypothecate assets provided to the covered
company by the customer, including in connection with the extension of
margin lending or other financing to the customer. The final rule
clarifies that prime brokerage services would include operational
services provided to a non-regulated fund. The final rule explicitly
states that prime brokerage services include those provided to non-
regulated funds because of the higher liquidity risks posed by the
provision of these services to hedge and private equity funds. The
agencies believe these changes capture the intent of the proposed rule,
in that deposits that are less stable do not qualify as operational
deposits under the final rule. Accordingly, all deposits of a non-
regulated fund will not be eligible for treatment as an operational
deposit, regardless of the provision of operational services by the
covered company.
(k). Exclusion of Certain Correspondent Banking Activities
Section _.4(b)(8) of the proposed rule would have excluded from the
definition of operational deposits a subset of correspondent banking
arrangements pursuant to which a covered company (as correspondent)
holds deposits owned by another depository institution (as respondent)
and the respondent temporarily places excess funds in an overnight
deposit with the covered company. The agencies specifically excluded
these deposits from treatment as an operational deposit under the
proposed rule because, although they may meet some of the requirements
applicable to operational deposits, they historically have exhibited
instability during stressed liquidity events. In doing so, the agencies
did not intend to exclude all banking arrangements with correspondents,
only those specifically described in Sec. _.4(b)(8) of the proposed
rule.
Several commenters argued that the agencies' proposed exclusion is
broader than that in the Basel III Revised Liquidity Framework and
requested that the agencies clarify that the exclusion for deposits
provided in connection with correspondent banking services is limited
to the settlement of foreign currency transactions. In addition,
several commenters argued that this exclusion would exclude all
deposits under correspondent banking relationships from application of
the operational deposit outflow rate.
The agencies continue to believe that excess funds from a
depository institution placed in an overnight deposit account are not
stable, and have retained the exclusion of them from operational
deposits. However, the agencies have modified the final rule to remove
the phrase ``correspondent banking'' from the proposed provision in
Sec. _.4(b)(8) to address commenters' concerns that the exclusion
applies to all correspondent banking arrangements.
The proposed rule would have allowed correspondent banking deposits
that meet all operational requirements to be included as operational
deposits; however, deposits arising from correspondent banking
relationships that were not operational in nature would not have been
categorized as operational. The proposal would not have excluded from
operational deposits those correspondent banking arrangements under
which a correspondent bank held deposits owned by respondent banks and
provided payment and other services in order to settle foreign currency
transactions. The final rule provides for the same treatment.
[[Page 61502]]
(l). Operational Deposit Outflow Rates
As noted above, the proposed rule would have applied a 5 percent
outflow rate to operational deposits fully covered by deposit insurance
(other than escrow deposits) and a 25 percent outflow rate to
operational deposits not fully covered by deposit insurance and all
escrow deposits. One commenter argued that operational deposits are
unlikely to run off during a 30 calendar-day period because customers
likely would not terminate the attendant operational services, which
are provided via legal contracts with notice and termination
provisions, and thus requested that the agencies adopt lower outflow
rates for such deposits. The commenter further argued that certain
operational services, such as investment company custody services, are
mandated by law, and providers of operational services generally have a
diverse customer base. Other commenters argued that operational
deposits should be subject to lower outflow rates on the basis of
evidence indicating that such deposit amounts tend to increase during
times of stress.
A commenter provided data to justify lowering the 25 percent
outflow rate for operational deposits where less than the entire amount
of the deposit is covered by deposit insurance, requesting that the
treatment of operational deposits be consistent with the Basel III
Revised Liquidity Framework. Commenters also argued for the inclusion
of both fully insured accounts and the insured portions of accounts
that are over the FDIC insurance limits in the 5 percent outflow
category of operational deposits. Throughout the final rule, the
agencies are drawing a distinction between fully insured deposits on
the one hand and less than fully insured deposits on the other,
because, as discussed above, based on the agencies' supervisory
experience, the entire balance of partially insured deposits behave
more like uninsured deposits, with customers withdrawing the entire
deposit amount, including amounts below the deposit insurance limit.
Thus, the agencies have adopted this provision of the rule as proposed.
The agencies recognize the stable nature of operational deposits,
which is reflected in the proposed and final rule's 5 percent outflow
rate for fully insured operational deposits. However, the agencies
continue to believe that deposits that are not fully covered by
insurance will experience higher outflow rates in a macroeconomic
stress scenario as covered companies' counterparties will likely find
themselves subject to the same stress, thereby reducing their
operational deposit balances as their business slows. While operational
deposits are more stable than non-operational funding, the agencies
believe that in the event of idiosyncratic stress, counterparties
likely would reduce the amount of their operational deposits.
Accordingly, all other unsecured operational deposits are assigned a 25
percent outflow rate in the final rule, as in the proposed rule.
One commenter criticized the agencies' decision not to assign fully
insured escrow deposits a 5 percent outflow rate that other fully
insured operational deposits would have received, arguing that deposits
in mortgage escrow accounts are no more likely to be withdrawn in a
period of financial stress than any other operational deposits at the
same bank from the same depositor.
The agencies believe that, although escrow deposits are
operational, it is their nature that there will be outflows based on
the occurrence of a specified event, regardless of the amount of
deposit insurance coverage. Thus, during a period of overall
macroeconomic distress, the amount of operational escrow deposits would
shrink as business slowed, regardless of deposit insurance. Further,
the agencies believe that given the general volatility of escrow
deposits, affording them a 3 or 10 percent outflow rate would not
properly reflect the lack of funding stability in these deposits. The
25 percent outflow rate appropriately reflects the outflow risk of
escrow deposits, and has therefore been adopted in the final rule as
proposed.
iii. Other Unsecured Wholesale Funding
The proposed rule would have assigned an outflow rate of 100
percent to all other unsecured wholesale funding. This category was
designed to capture all other funding not given a specific outflow rate
elsewhere in the proposed rule, including funding provided to a
financial sector entity as described above. The agencies have adopted
this category in the final rule as proposed.
i. Debt Security Outflow Amount
The agencies proposed 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 period
and 5 percent for all debt securities that are structured debt
securities that mature outside of a 30 calendar-day period. This
outflow amount was proposed in addition to any debt security-related
outflow amounts maturing within a 30 calendar-day period that must have
been included in net cash outflows. Based on historical experience,
including the recent financial crisis during which institutions went to
significant lengths to ensure the liquidity of their debt securities,
the agencies proposed what they considered to be relatively low outflow
rates for a covered company's own debt securities. The proposed rule
differentiated between structured and non-structured debt on the basis
of data from stressed institutions indicating the likelihood that
structured debt requires more liquidity support. 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.
A few commenters suggested that these proposed outflow rates were
too high, arguing that the actual volume of any repurchases made by a
banking organization may be lower than the proposed outflow rates
because investors may not be willing to have the banking organization
repurchase the debt securities during a stress scenario at a price
which would result in the investor recognizing a significant loss. A
commenter suggested that covered companies be allowed to set their own
outflow rates, reflecting the fact that different covered companies
might take different approaches to addressing franchise or reputational
risk. This commenter argued that, in any event, while outflow rates of
3 and 5 percent seem low, once one takes into account the amount of
securities that a covered company may have outstanding, a materially
significant outflow amount is possible, which the commenter found
unreasonable. Two other commenters requested clarification regarding
how the debt security outflow amount would work in practice. A
commenter argued that the scope of debt securities subject to this
section should be modified to apply an outflow rate only to the senior
unsecured debt of the covered company in which it is the primary market
maker. The commenter also argued that to the extent that a covered
company's offering documents disclose that it is not obligated to
provide liquidity for such securities, the securities should not be
subject to a predetermined outflow rate.
Another commenter argued that the proposed rule's provision of cash
outflow rates for primary market makers would likely discourage covered
companies from supporting their own or other covered companies' debt
securities and asked that the agencies clarify the definition and the
intent of
[[Page 61503]]
this provision. After considering the comments received on this section
of the proposed rule, the agencies are finalizing Sec. _.32(i) as
proposed with one minor change. Recognizing that a limited number of
covered companies are primary market makers for their own debt
securities, the agencies have clarified that the debt security buyback
outflow will be triggered when either a covered company or its
consolidated subsidiary is the primary market maker for debt securities
issued by the covered company.
The agencies are adopting the outflow rates as proposed for several
reasons. First, one purpose of the LCR is to implement a standardized
quantitative liquidity stress measure and this, in turn, counsels
toward not allowing covered companies discretion in determining outflow
rates. Second, these outflow rates are not intended to measure the cost
to a covered company of addressing franchise or reputational risk
through participation in the market. Rather, as the primary market
maker for a security, the market expects that the covered company or
its consolidated subsidiary will continue to purchase the securities,
especially if they issued the securities. Thus, the 3 percent and 5
percent rates are reasonable. Third, with regard to investors not being
willing to repurchase securities at a given price, the price will be
the then-market price, which reflects the outflow the market maker will
have if it is required to purchase securities from a counterparty that
it cannot then re-sell. That reduced price is reflected in the outflow
rate. Historical experience in past bear markets and the recent
financial crisis shows that market makers will continue to make markets
in most debt issuances, particularly when such market makers or their
consolidated subsidiaries are the issuers of a particular security.
The agencies further believe that these outflow rates are
appropriate to address the potential future support a covered company
will provide with regard to its primary market making role for its own
debt, and would not directly discourage any such support. In addition,
the outflow rates only apply to debt securities issued by a covered
company or its consolidated subsidiary. It would not apply to a covered
company's efforts to provide secondary market liquidity to the
securities of other banking organizations.
Moreover, a covered company would not be required to calculate this
outflow amount unless it or its consolidated subsidiary is the primary
market maker for its own debt securities. While the final rule does not
define the term market maker, the agencies generally expect that if a
covered company or its consolidated subsidiary routinely stands ready
to purchase and sell its debt securities and is willing and available
to quote, purchase and sell, or otherwise to enter into long and short
positions in its debt securities, in commercially reasonable amounts
and throughout market cycles on a basis appropriate for the liquidity,
maturity, and depth of the market for such debt securities, that it is
a market maker for those debt securities. The market will know who the
primary market makers are for a particular security, and a covered
company should know if it is the primary market maker for a particular
security.
j. Secured Funding Transactions and Asset Exchange Outflow Amounts
i. Definitions and Outflow Rates
The proposed rule would have defined a secured funding transaction
as a transaction giving 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. As defined,
secured funding transactions would have included repurchase
transactions, FHLB advances, secured deposits, 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.
Under the proposed rule, secured funding transactions maturing
within 30 calendar days of the calculation date would have given rise
to cash outflows during the stress period. This outflow risk, together
with the potential for additional outflows in the form of collateral
calls to support a given level of secured funding transactions, was
reflected in the proposed secured funding transaction outflow rates.
The agencies believed that rather than applying an outflow rate based
on the nature of the funding provider, the proposed rule should
generally apply an outflow rate based on the quality and liquidity of
the collateral securing the funding. For secured funding transactions,
the quality of the assets securing the transaction is a significant
factor in determining the likelihood that a covered company will be
able to roll over the transaction at maturity with a range of market
participants and maintain the associated funding over time. In the
proposed rule, secured funding outflow rates would have progressively
increased depending upon whether the secured funding transaction was
secured by level 1 liquid assets, level 2A liquid assets, level 2B
liquid assets, or by assets that were not HQLA. These outflow rates
were proposed as zero percent, 15 percent, 50 percent and 100 percent,
respectively. Additionally, the proposed rule would have applied a 25
percent outflow rate to secured funding transactions with sovereigns,
multilateral development banks, or U.S. GSEs that are assigned a risk
weight of 20 percent under the agencies' risk-based capital rules, to
the extent such transactions were secured by assets other than level 1
or level 2A liquid assets. Under the proposed rule, loans of collateral
to facilitate customer short positions were secured funding
transactions, subject to outflow rates generally as described above for
other types of secured funding transactions.
Secured funding transactions in the form of customer short
positions give rise to liquidity risk because the customer may abruptly
close its positions, removing funding from the covered company.
Further, customers may remove their entire relationship with the
covered company, causing the firm to lose the funding associated with
the short position. In the particular case where customer short
positions were covered by other customers' collateral that does not
consist of HQLA, the proposed rule would have applied an outflow rate
of 50 percent, rather than the generally applicable 100 percent outflow
rate for other secured funding transactions secured by assets that are
not HQLA. The 50 percent outflow rate reflected the agencies'
recognition of there being some interrelatedness between such customer
short positions and other customer long positions within the covered
company, and that customers in aggregate may not be able to close all
short positions without also significantly reducing leverage. In the
case of customers moving their relationships, closing short positions
would also be associated with moving long positions for which the
covered company may have been providing funding in the form of margin
loans. The 50 percent outflow rate for these customer short positions
was designed to recognize potential symmetry with the inflows generated
from margin loans secured by assets that are not HQLA, to which the
proposed rule applied an inflow rate of 50 percent, and that are
described in section II.C.4.f. of this Supplementary Information
section.
The agencies proposed to treat borrowings from Federal Reserve
Banks the same as other secured funding
[[Page 61504]]
transactions because these borrowings are not automatically rolled
over, and a Federal Reserve Bank may choose not to renew the borrowing.
Therefore, the agencies believed an outflow rate based on the quality
and liquidity of the collateral posted was most appropriate for such
transactions. The agencies noted in the proposed rule that should the
Federal Reserve Banks offer alternative facilities with different terms
than the current primary credit facility, or modify the terms of the
primary credit facility, outflow rates for the LCR may be modified.
In addition to secured funding transactions, which relate solely to
a secured cash obligation, an asset exchange would have been defined
under the proposed rule as a transaction that requires the
counterparties to exchange non-cash assets. Asset exchanges can give
rise to a change in a covered company's liquidity, such as where the
covered company is obligated to provide higher-quality assets in return
for less liquid, lower-quality assets. The proposal would have
reflected this risk through the proposed asset exchange outflow rates,
which would have been based on the HQLA levels of the assets exchanged
and would have progressively increased as the assets to be relinquished
by a covered company increased in quality relative to those to be
received from the asset exchange counterparty. Sec. _.32(j)(2) of the
proposed rule set forth the outflow rates for various asset exchanges.
In general, commenters' concerns with the outflow rates for secured
funding transactions pertained to perceptions of the relative liquidity
of various asset classes and whether particular types of assets should
have been classified as HQLA in the proposed rule, as described in
section II.B above. For example, one commenter argued that a
transaction secured by government MMFs should receive the same outflow
rate as a transaction that is secured by level 1 liquid assets and,
similarly, a transaction secured by other types of MMFs should have the
same outflow rate as a transaction secured by level 2A liquid assets
because MMFs have high credit quality and are liquid. Some commenters
noted that, under the proposed rule, level 2B liquid assets that are
common equity securities were limited to shares in the S&P 500 index,
common shares recognized by local regulatory authorities in other
jurisdictions, and, potentially, shares in other indices. These
commenters requested that the agencies consider a narrow expansion of
this asset category for the purposes of secured funding outflow rates
(and secured lending inflow rates). These commenters also argued that
all major indices in G-20 jurisdictions should qualify as level 2B
liquid assets for the purposes of secured funding transaction cash
flows.
Other commenters recommended applying an outflow rate that would
ensure that secured funding transactions secured by assets that are not
HQLA would not have an outflow rate that was greater than the outflow
rate applied to an unsecured funding transaction with the same
counterparty in order to avoid inconsistency. One commenter requested
that the agencies limit the definition of secured funding transaction
to only include repurchase agreements.
With respect to the definition of a secured funding transaction,
the agencies continue to believe that the principle liquidity
characteristics of an asset which were considered when determining the
inclusion of an asset as HQLA also are applicable to the determination
of the outflow rates for any transactions that are secured by those
assets and that the definition of such transactions should include more
than repurchase agreements. Accordingly, the agencies are adopting the
definition of secured funding transaction largely as proposed, with a
clarification that the definition of secured funding transaction only
includes transactions that are subject to a legally binding agreement
as of the calculation date. In addition and as described above under
section II.C.3.a, the agencies have opted to treat secured retail
transactions under Sec. _.32(a) of the final rule. Accordingly, the
secured funding transaction and asset exchange outflow rates under
Sec. _.32(j) of the final rule would apply only to transactions with a
wholesale counterparty.
Consistent with the proposed rule, the final rule's outflow rates
for secured funding transactions that mature within 30 calendar days of
the calculation date are based upon the HQLA categorization of the
assets securing the transaction and are generally as proposed (see
Table 3a). Consistent with this treatment and as discussed in section
II.B above, MMFs do not meet the definition of HQLA under the final
rule and a secured funding transaction that is secured by an MMF
generally will receive the 100 percent outflow rate associated with
collateral that is not HQLA. Further, the agencies believe it would be
inappropriate to establish an exception to this principle, whereby, for
example, secured funding transactions secured by non-U.S. equity
securities that are not level 2B liquid assets would be subject to the
outflow rate applicable to level 2B liquid asset collateral. As
discussed above in section II.B.2.f, the agencies believe that assets
that are not HQLA may not remain liquid during a stress scenario.
Accordingly, any secured funding transaction maturing in less than 30
calendar days that is secured by assets that are not HQLA may not roll
over or could be subject to substantial haircuts. Thus, secured funding
transactions that are secured by assets that are not HQLA under the
final rule receive the outflow rate appropriate for this type of
collateral and the relevant counterparty.
Although a covered company may have the option of reallocating the
composition of the collateral that is securing a portfolio of
transactions at a future date, the outflow rates for a secured funding
transaction or asset exchange is based on the collateral securing the
transaction as of the calculation date.
The agencies agree with certain commenters that, as a general
matter, the outflow rate for a secured funding transaction should not
be greater than that applicable to an equivalent wholesale unsecured
funding transaction (that is not an operational deposit) from the same
counterparty. Under Sec. _.32(j)(2) of the final rule, in instances
where the outflow rate applicable to a secured funding transaction
(conducted with a counterparty that is not a retail customer or
counterparty) would exceed that of an equivalent wholesale unsecured
funding transaction (that is not an operational deposit) with the same
counterparty, the covered company may apply the lower outflow rate to
the transaction.\78\ The reduced outflow rate would not, however, be
applicable if the secured funding transaction was secured by collateral
that was received by the covered company under a secured lending
transaction or asset exchange. Additionally, the reduced outflow would
still be considered a secured funding transaction outflow amount under
Sec. _.32(j) of the final rule for the purposes of reporting and
determining the applicable maturity date (see Table 3a). Furthermore
and as discussed below, for collateralized deposits as defined in the
final rule, the outflow rate applicable to part or all of the
[[Page 61505]]
secured funding transaction amount may potentially be the outflow rate
applicable to a wholesale operational deposit from the same
counterparty, for the portion of the deposit that meets the remaining
criteria for classification as an operational deposit.
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\78\ The agencies note that, for counterparties that are
financial sector entities, the applicable non-operational deposit
unsecured wholesale funding outflow rate would be 100 percent under
Sec. _.32(h)(5) of the final rule. Thus, for such counterparties,
the secured funding transaction outflow rates would be equivalent or
higher depending on the collateral securing the transaction.
---------------------------------------------------------------------------
Under the final rule, the treatment of asset exchange outflows is
adopted generally as proposed (see Table 3b). However, the agencies are
clarifying that in the case where a covered company will not have the
required collateral to deliver to the counterparty upon the maturity of
an asset exchange, the covered company should assume it will be
required to make a cash purchase of the necessary security prior to the
maturity of the asset exchange. Accordingly, and consistent with the
Basel III Revised Liquidity Framework, the covered company should
include in its outflow amount an outflow for the purchase of the
security. As reflected in Sec. _.32(j)(3)(x)-(xiii) of the final rule
and in Table 3b, below, under these provisions, the outflow rate would
be the fair value of the asset that the covered company would be
required to purchase in the open market minus the value of the
collateral that the covered company would receive on the settlement of
the asset exchange, which is determined by the rule's haircuts for HQLA
and non-HQLA.
The agencies are clarifying that assets collateralizing secured
funding transactions as of a calculation date are encumbered and
therefore cannot be considered as eligible HQLA at the calculation
date. However, because outflow rates are applied to the cash
obligations of a covered company under secured funding transactions
subject to a legally binding agreement as of a calculation date, these
outflow rates do not depend on whether the collateral securing the
transactions at the calculation date was or was not eligible HQLA prior
to the calculation date.
The agencies recognize that certain assets that are collateralizing
a secured funding transaction (or a derivative liability or other
obligation) as of a calculation date, and certain assets that have been
delivered to a counterparty in an asset exchange, may be rehypothecated
collateral that was made available to the covered company from a
secured lending, asset exchange, or other transaction. As described in
section II.C.2 above, the maturity date of any such secured lending
transaction or asset exchange determined under Sec. _.31 of the final
rule cannot be earlier than the maturity date of the secured funding
transaction or asset exchange for which the collateral has been reused.
Furthermore, the agencies recognize that the remaining term of secured
lending transactions, asset exchanges or other transactions that are
secured by rehypothecated assets may extend beyond 30 calendar days
from a calculation date, meaning that the covered company will have a
continuing obligation to return collateral at a future date. The inflow
rates that are to be applied to secured lending transactions and asset
exchanges where received collateral has been reused to secure other
transactions are described in section II.C.4 below.
In addition to comments broadly relating to definitions and outflow
rates for secured funding transactions, commenters raised specific
concerns regarding the treatment of collateralized municipal and other
deposits as secured funding transactions, the outflow rates associated
with certain prime brokerage transactions, and the treatment of FHLB
secured funding.
ii. Collateralized Deposits
Under the proposed rule, all secured deposits would have been
treated as secured funding transactions. Some commenters objected to
the proposed rule's inclusion of collateralized public sector deposits
as secured funding transactions on the grounds that such deposits are
relationship-based, were more stable during the recent financial
crisis, and are typically secured by a more stable portfolio of
collateral than the collateral that secures secured funding
transactions such as repurchase agreements. Commenters argued that
during the recent financial crisis, state and local governments that
placed deposits secured by municipal securities with banking
organizations did not withdraw such funds due to concern over the
quality of the collateral underlying their deposits. These commenters
further argued that it is often the case that the collateral used to
secure a government's deposits can be that government's own bonds.
As discussed in section II.B.5 of this Supplementary Information
section, commenters argued that collateralized public sector deposits,
which are required by law to be collateralized with high-quality
assets, should not be treated like short-term, secured funding
transactions, because collateralized public sector deposits are not the
type of transactions susceptible to the risk of manipulation that
commenters believed was the focus of the proposed rule. Commenters
further argued that this classification would lead to unnecessary
distortions that could increase the cost of these deposits for bank
customers.
Commenters also contended that during a period of financial market
distress, it is not plausible that a state or local government could
withdraw a lower amount of unsecured deposits than secured public
sector deposits, as contemplated by the outflow rates assigned to the
applicable unsecured wholesale funding and secured funding
categories.\79\ Many commenters also argued that applying a higher
outflow rate to collateralized municipal deposits versus unsecured
municipal deposits could discourage banking organizations from
accepting collateralized public sector deposits. Thus, several
commenters requested that if collateralized public sector deposits are
categorized as secured funding transactions in the final rule, the
agencies should assign a lower outflow rate to these deposits. These
commenters suggested that the agencies provide the same treatment for
collateralized deposits as they do for unsecured deposits and take into
consideration the historical behavior of the depositor to determine the
appropriate outflow rate. Other commenters pointed out that the
unsecured deposits of municipalities would have been subject to outflow
rates in the range of 20 percent to 40 percent under the proposed rule,
in contrast to the more stringent outflow rates applicable to secured
funding transactions backed by lower quality collateral.\80\
Additionally, some commenters stated that the secured funding
transaction outflow rates that would have applied to collateralized
public sector deposits under the proposed rule would have diverged from
the Basel III Revised Liquidity Framework. These commenters argued that
the Basel standard assigned a 25 percent outflow rate for secured
funding transactions with public sector entities that have a risk-
weight of 20 percent under the Basel capital standards. Likewise, one
commenter recommended assigning collateralized public sector deposits
an outflow rate of no more than 15 percent because, according to the
commenter, bank Call Report data suggests that, even during the recent
financial crisis, the peak secured municipal deposit outflow rates
generally did not exceed approximately 15 percent. Another commenter
also recommended that the agencies adopt a
[[Page 61506]]
30 percent maximum outflow rate assumption for deposits collateralized
by municipal securities. Finally, other commenters requested
clarification as to whether collateralized public sector deposits that
otherwise meet the criteria for operational deposits would be eligible
for the operational deposit outflow rates.
---------------------------------------------------------------------------
\79\ Under the proposed rule, secured funding transactions that
are secured by collateral that is not HQLA, would have received a
100 percent outflow rate while unsecured non-operational wholesale
funding that is not fully covered by deposit insurance would have
received an outflow rate of 40 percent.
\80\ However, other commenters also argued that the outflow rate
for unsecured deposits of 40 percent under the proposed rule was
unduly punitive.
---------------------------------------------------------------------------
Further, because municipal securities would not have been included
as HQLA under the proposed rule, commenters were concerned that in
certain cases a banking organization could be required to hold HQLA
equal to the deposits that a public entity had placed with the banking
organization in addition to the collateral specified to be held against
the deposit as a matter of state law in order to meet the outflow rates
that the proposed rule would have assumed. A commenter proposed that
the outflow rate for a collateralized deposit should only be applied to
the deposit amount less the value of collateral posted by the covered
company. A few commenters inquired as to whether preferred deposits
secured by FHLB letters of credit would be assigned the same 15 percent
outflow rate as secured funding transactions secured with U.S. GSE
obligations or if those that satisfy the operational deposit criteria
would receive an outflow rate no higher than 25 percent.\81\
---------------------------------------------------------------------------
\81\ As discussed above under section II.B.2.f.iv, FHLB letters
of credit would not qualify as HQLA under the final rule.
---------------------------------------------------------------------------
Many commenters requested the exclusion of collateralized public
sector deposits from the secured transaction unwind mechanism used to
determine adjusted liquid assets amounts as addressed in section
II.B.5.d above.
In addition to comments relating to public sector deposits, the
agencies received a number of comments relating to corporate trust
deposits. Commenters argued that funds in corporate trust accounts are
very stable due to the specialized nature of the banking relationship
and constraints imposed by governing documents. Moreover, due to the
specialized nature of indentured trustee and agency engagements
associated with corporate trust deposits, withdrawal and disbursements
of funds may be strictly limited. However, certain corporate trust
deposits would have met the definition of secured funding transactions
under the proposed rule. Consistent with other comments received
relating to secured funding transactions in general, commenters were
concerned that the outflow rate applicable to a collateralized
corporate trust deposit may be higher than that applied to an unsecured
deposit from the same depositor. Other commenters requested
clarification as to whether collateralized corporate trust deposits
that otherwise met the criteria for operational deposits would be
eligible for the operational deposit outflow rate. One commenter
requested that collateralized corporate trust deposits be excluded from
the LCR requirements entirely. A few commenters requested that
collateralized corporate trust deposits be excluded from the unwind
mechanism used to determine the adjusted excess HQLA amount as
addressed in section II.B.5.d above.
The agencies recognize the particular characteristics of
collateralized public sector and certain collateralized corporate trust
deposits. The agencies acknowledge that a covered company's
collateralized public sector deposits may, in part, be related to
longer-term relationships with its counterparties, established through
a public bidding process that is specific to the counterparties'
requirements. The agencies also recognize that certain corporate trust
deposits are required by federal law to be collateralized.\82\ Such
deposits are governed by complex governing documents, such as trust
indentures, that may limit the customer's discretion to withdraw, pay,
or disburse funds. The agencies further acknowledge that there may be
relationship characteristics that influence the availability, volume,
and potential stability of collateralized public sector and corporate
trust deposits placed at covered companies. However, given the
collateral requirements and potential collateral flows associated with
such deposits, whether required by law or otherwise, the agencies
continue to believe that the liquidity risk of collateralized public
sector deposits, collateralized corporate trust deposits, and all other
secured deposits is appropriately addressed through their treatment as
secured funding transactions where the deposits meet the definition of
such transactions. Under the final rule, the outflow rate assigned to
all secured deposits, including collateralized public sector and
corporate trust deposits, with a maturity as determined under Sec.
_.31 of the final rule of 30 calendar days or less will be principally
based on the quality of the collateral used to secure the deposits. The
outflow rate applicable to all secured deposits meeting the definition
of a secured funding transaction that are secured by level 1 liquid
assets will be zero percent, while the outflow rate for deposits
secured by level 2A liquid assets will be 15 percent. As described
above for secured funding transactions in general, the agencies are
amending the final rule so that the outflow rate applicable to a
secured deposit is not greater than the equivalent outflow rate for an
unsecured deposit from the same counterparty.
---------------------------------------------------------------------------
\82\ 12 CFR 9.10 (national banks) and 12 CFR 150.300-150.320
(Federal savings associations).
---------------------------------------------------------------------------
The agencies believe this amendment addresses a number of the
concerns expressed by commenters with respect to collateralized
deposits. For example, while public sector deposits secured by level 2A
liquid assets would be assigned a 15 percent outflow rate, similar
deposits secured by FHLB letters of credit (which are not HQLA under
the final rule) may receive the 40 percent outflow rate applicable to
unsecured deposits from a wholesale counterparty that is not a
financial sector entity (versus a 100 percent outflow rate). The
agencies believe the application of outflow rates in this manner is
appropriate and that a further reduced outflow rate specific to public
sector deposits would not be appropriate. Additionally, because the
secured funding transaction outflow rates are derived from the quality
and liquidity profile of the collateral securing the deposit in a
manner which is consistent with the liquidity value of that collateral
if it were held unencumbered by the covered company, the agencies do
not believe that it is appropriate to net the amount of the deposit by
the collateral posted by the covered company.
Furthermore, specifically and solely in the case of a secured
funding transaction that meets the definition of a collateralized
deposit under the final rule, a covered company may assess whether such
a collateralized deposit meets the criteria for an operational deposit
under Sec. _.4 of the final rule.\83\ If such collateralized deposits
meet the criteria for an operational deposit, the covered company may
determine the amount of the collateralized deposit that would receive
the 25 percent outflow rate applicable to an unsecured operational
deposit that is not fully covered by deposit insurance (see Table 3a).
Any portion of the collateralized deposit that is not an operational
deposit under the covered company's excess operational deposit amount
methodology will receive the outflow rate applicable to a wholesale
unsecured non-operational deposit from the same counterparty. With
respect to the requests by commenters to apply the 25 percent outflow
rate to all collateralized
[[Page 61507]]
public sector deposits that are secured by level 2B liquid assets or
non-HQLA, the agencies believe that deposits not meeting the criteria
for operational deposits would be less stable during a period of market
stress due to the lack of an operational relationship tying the funds
to the service provided by the covered company. Accordingly, the
agencies have not made secured funding transactions with public sector
entities eligible for the 25 percent outflow rate applicable to secured
funding transactions with sovereign entities, multilateral development
banks, and U.S. GSEs subject to a 20 percent risk-weight under the
agencies' risk-based capital rules.
---------------------------------------------------------------------------
\83\ All other secured deposits would not be eligible for the
operational deposit outflow rates under the final rule.
---------------------------------------------------------------------------
iii. Prime Brokerage Secured Funding Transactions Outflows
The agencies received several comments regarding the outflow
treatment of secured funding transactions in the context of prime
brokerage activities. As described above, in general under the proposed
rule secured funding transactions, including certain loans of
collateral to cover customer short positions, that are secured by
assets that are not HQLA would have required an outflow rate of 100
percent. However, certain secured funding transactions that are
customer short positions of collateral that do not consist of HQLA and
are covered by another customer's collateral would have received a 50
percent outflow rate. As explained above, the 50 percent outflow rate
reflected the agencies' recognition of some interrelatedness between
such customer short positions and other customer long positions within
the covered company, and the fact that customers in aggregate may not
be able to close all short positions without also significantly de-
leveraging, or in the case of moving their relationship, also moving
the long positions for which the covered company may have been
providing funding in the form of margin loans. Commenters argued that
this section of the proposed rule did not address a covered company's
internal process for deciding how to source collateral to cover short
positions, such as the process for choosing between utilizing inventory
securities, external borrowings, or using other customers' collateral.
Commenters argued that when customer short positions are covered by
inventory securities, these securities are frequently held as hedges to
other customer positions. These commenters indicated that the source of
the collateral covering the customer short position is irrelevant, and
recommended applying a 50 percent outflow rate to all customer shorts
that are covered by any collateral that is not HQLA, irrespective of
the source, and also to customer short positions that are covered by
other methods, such as hedges to customer swaps and securities
specifically obtained by a prime broker to cover the customer short
positions. These commenters argued that this treatment would better
capture risk management practices that rely on symmetrical treatment of
customer long and short positions. These commenters also argued that
applying this approach to closing customer short positions would
reflect customers' offsetting reduction in leverage irrespective of the
source of collateral and would capture the risks related to internal
coverage of short positions. One commenter suggested that the funding
risk created by internalization, where collateral is provided by and
utilized for various secured transactions within the covered company
without being externally sourced, is more accurately assessed by
measuring customer and CUSIP concentrations, rather than looking at the
asset class or the type of long-short pair because more concentrated
ownership impacts the risk of internalization providing stable funding.
Consistent with the Basel III Revised Liquidity Framework, the
final rule prescribes the outflow amount for each secured funding
transaction individually, while taking into account the potential
dependency of certain secured transactions upon the source of the
collateral securing the transaction. Cash obligations of a covered
company to a counterparty that are generated through loans of
collateral to cover a customer short position pose liquidity risks that
are similar to other secured funding transactions as described above.
For this reason, the agencies believe that funding from a customer
short position should be treated as a secured funding transaction, and
that the outflow associated with this funding should, in general, be
consistent with all other forms of secured funding transactions. In the
case where a covered company has received funding from, for example,
the cash proceeds of a customer's short sale of an asset that is not
HQLA, the closing out of the short position by the customer at its
discretion may lead to the covered company being required to relinquish
cash in return for the receipt of the borrowed asset. In general, the
outflow rate applicable to an individual secured funding transaction
secured by assets that are not HQLA is 100 percent under the final
rule. The agencies believe that it would be inappropriate to apply an
outflow rate of 50 percent to all customer short positions covered by
assets that are not HQLA, irrespective of the source of the collateral.
While the standardized framework of the final rule is not designed to
reflect the individual collateral allocation or risk management
practices of covered companies, the agencies expect that covered
companies will have in place liquidity risk management practices
commensurate with the complexity of their prime brokerage business
activities, including collateral tracking, collateral concentration
monitoring, and potential exposure resulting from the exercise of
customer options to withdraw funding.
The outflow rate applicable to customer short positions that are
covered by other customers' collateral that does not consist of HQLA is
specifically intended to parallel the inflow rate applicable to secured
lending transactions that are margin loans secured by assets that are
not HQLA under Sec. _.33(f)(1)(vii) of the final rule.\84\ This 50
percent outflow rate reflects the agencies' recognition of some
correlation between such customer short positions and other customer
long positions within a covered company, and the fact that customers in
aggregate may not be able to close all short positions without also
significantly de-leveraging, or in the case of moving their
relationship, also moving the long positions for which the covered
company may have been providing funding in the form of margin loans. In
contrast, if a customer short position is covered by the covered
company's long positions of assets that are not HQLA, the outflow rate
assigned to the customer short position would be that applicable to
other secured funding transactions under the final rule.
---------------------------------------------------------------------------
\84\ Margin loans that are secured by assets that are not HQLA
are assigned an inflow rate of 50 percent under the final rule.
---------------------------------------------------------------------------
Furthermore, the agencies recognize that prime brokerage activities
may entail significant rehypothecation of assets to secure certain
secured funding transactions. The agencies emphasize the treatment for
determining the maturity of such transactions under Sec. _.31 of the
final rule and the inflows rates applicable to secured lending
transactions and assets exchanges under Sec. _.33(f) of the final
rule.
iv. Federal Home Loan Bank Secured Funding Transactions
Under the proposed rule, secured funding transactions with
sovereign entities, multilateral development banks, and U.S. GSEs that
are assigned a 20 percent risk weight under the agencies' risk-based
capital rules and
[[Page 61508]]
that are not secured by level 1 or level 2A liquid assets would have
received a 25 percent outflow rate. Several commenters requested
clarification as to whether this 25 percent proposed outflow rate would
have applied to all secured FHLB advances or only those secured by
level 2B liquid assets. Some commenters stated that if the agencies
intended to apply the 25 percent outflow rate only to advances secured
by level 2B liquid assets, it would significantly increase the cost of
FHLB advances to member institutions because such advances are
typically secured by mortgages or mortgage-related securities that are
not HQLA. Commenters recommended reducing the outflow rate applicable
to FHLB advances to 3 percent, the outflow rate for stable retail
deposits. Other commenters requested confirmation that FHLB advances
are subject to a maximum outflow rate of 25 percent and posited that
involuntary outflow rates for FHLB advances have approached zero
historically. The agencies were also asked to clarify whether FHLB
guarantees, including letters of credit that secure public sector
deposits, would be subject to the same outflow rate as FHLB advances.
The agencies are aware of the important contribution made by the
FHLB system in providing funding to banking organizations and of the
general collateral used to support FHLB borrowings. The agencies are
clarifying that, under the final rule, the preferential 25 percent
outflow rate applicable to secured funding transactions with certain
sovereigns, multilateral development banks and U.S. GSEs applies to
secured funding transactions that are secured by either level 2B liquid
assets or assets that are not HQLA and that mature within 30 calendar
days of a calculation date. FHLB advances that mature more than 30
calendar days from a calculation date are excluded from net cash
outflows. Given the broad range of collateral accepted by FHLBs and the
possibility of collateral quality deterioration or increased collateral
haircuts, the agencies do not believe that a lower outflow rate for
FHLB advances, such as the 3 percent outflow rate proposed by a
commenter, would be appropriate. The agencies recognize that FHLB
advances may be secured by diverse pools of collateral, and that this
collateral may potentially include HQLA. Under Sec. _.22(b)(1)(ii) of
the final rule, HQLA that is pledged to a central bank or U.S. GSE to
secure borrowing capacity but is not securing existing borrowings may
be treated as unencumbered for the purposes of identifying eligible
HQLA. The agencies acknowledge that in cases where advances and undrawn
FHLB capacity are secured by a pool of collateral, covered companies
may wish to exercise the flexibility of designating which collateral
pledged to a FHLB is securing currently outstanding borrowings and also
designating which subset of such collateral is securing those advances
maturing within 30 calendar days of a calculation date. The agencies
believe allowing covered companies this flexibility is appropriate, but
emphasize that no asset may be double counted as eligible HQLA and as
securing a borrowing as of a calculation date.
Tables 3a and 3b summarize the secured funding transaction and
asset exchange outflow rates under the final rule.
Table 3a--Secured Funding Transaction Outflow Rates
------------------------------------------------------------------------
Categories for maturing secured funding Secured funding outflow
transactions rate
------------------------------------------------------------------------
Secured by level 1 liquid assets............. 0%.
Secured by level 2A liquid assets............ 15%.
Transactions with sovereigns, multilateral 25%.
development banks and U.S. GSEs subject to a
20% risk weight not secured by level 1 or
level 2A liquid assets.
Secured by level 2B liquid assets............ 50%.
Customer short positions covered by other 50%.
customers' collateral that is not HQLA.
Secured by assets that are not HQLA, except 100%.
as above.
If the outflow rate listed above is greater Apply to the secured
than that for a wholesale unsecured funding transaction
transaction (that is not an operational amount the wholesale
deposit) with the same wholesale unsecured non-
counterparty. operational outflow rate
for that counterparty.
For collateralized deposits where the secured Apply to each portion of
funding transaction outflow rate listed the secured funding
above is greater than that for a wholesale transaction amount the
unsecured transaction with the same wholesale unsecured
wholesale counterparty. outflow rate applicable
to that portion, for
that counterparty,
including amounts that
may be operational
deposits or excess
operational deposit
amounts.
------------------------------------------------------------------------
Table 3b--Asset Exchange Outflow Rates
------------------------------------------------------------------------
Covered company must deliver Covered company will Asset exchange
at maturity receive at maturity outflow rate
------------------------------------------------------------------------
Where a covered company has the asset that it will be required to
deliver at the maturity of an asset exchange or where the asset has
been reused in a transaction that will mature no later than the
maturity date of the asset exchange such that the asset required to be
delivered will be available at the maturity date, and where the:
------------------------------------------------------------------------
Level 1 liquid assets......... Level 1 liquid assets. 0%
Level 1 liquid assets......... Level 2A liquid assets 15%
Level 1 liquid assets......... Level 2B liquid assets 50%
Level 1 liquid assets......... Assets that are not 100%
HQLA.
Level 2A liquid assets........ Level 2A liquid assets 0%
Level 2A liquid assets........ Level 2B liquid assets 35%
Level 2A liquid assets........ Assets that are not 85%
HQLA.
Level 2B liquid assets........ Level 2B liquid assets 0%
Level 2B liquid assets........ Assets that are not 50%
HQLA.
------------------------------------------------------------------------
[[Page 61509]]
Where a covered company does not have the asset that it will be required
to deliver at the maturity of an asset exchange and where the asset has
not been reused in a transaction that will mature no later than the
maturity date of the asset exchange, and where the:
------------------------------------------------------------------------
Level 1, 2A, 2B liquid assets, Level 1 liquid assets. 0%
or assets that are not HQLA. Level 2A liquid assets 15%
Level 2B liquid assets 50%
Assets that are not 100%
HQLA.
------------------------------------------------------------------------
k. Foreign Central Bank Borrowings Outflow Amount
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 have assigned an outflow rate equal to
the outflow rate that such jurisdiction has established for central
bank borrowings under a minimum liquidity standard. The proposed rule
would have provided further that if such an outflow rate has not been
established in a foreign jurisdiction, the outflow rate for such
borrowings would be treated as secured funding pursuant to Sec.
_.32(j) of the proposed rule.
The agencies received no comments on this section and have adopted
proposed Sec. _.32(k) without change in the final rule.
l. Other Contractual Outflow Amounts
The proposed rule would have applied a 100 percent outflow rate to
amounts payable within 30 calendar days of a calculation date under
applicable contracts that are not otherwise specified in the proposed
rule. Some commenters argued that the 100 percent outflow rate would
have applied to some contractual expenses payable within 30 calendar
days of a calculation date, such as operating costs and salaries that
are operational expenses and should be excluded from outflows. One
commenter also argued that the proposed rule's treatment of such
expenses was not consistent with the examples of ``other outflows''
illustrated in Paragraph 141 of the Basel III Revised Liquidity
Framework, which includes outflows to cover unsecured collateral
borrowings, uncovered short positions, dividends or contractual
interest payments and specifically excludes from this category
operating costs. The commenter requested that the final rule be
consistent with the Basel III Revised Liquidity Framework. Further, one
commenter argued that including contractual expenses that are
operational in nature would result in such expenses being included as
outflows, yet the inflows from non-financial revenues would be
excluded. Therefore, this commenter argued, the final rule should
exclude operational costs from outflows and exclude from inflows non-
financial revenues that are not enumerated in Sec. _.33(b)-(f) of the
proposed rule and excluded under Sec. _.33(g) of the proposed rule
(other cash inflows). One commenter requested clarification that there
was no outflow rate associated with trade finance instruments and
letters of credit with performance requirements under the proposed
rule. Another commenter asked for clarification of the treatment of
contingent trade finance obligations under the final rule. Another
commenter asked for guidance on the treatment of projected cash
outflows for certain contingency funding obligations such as variable
rate demand notes, stable value funds, and other similarly structured
products, noting that while the proposed rule did not provide outflow
rates for these categories, the Basel III Liquidity Framework provided
for national discretion when determining rates for such products.
The agencies are clarifying that the final rule excludes from
outflows operational costs, because the agencies believe that assets
specifically designated to cover costs, such as wages, rents, or
facility maintenance, generally would not be available to cover
liquidity needs that arise during stressed market conditions.
The final rule does not provide a specific outflow rate for trade
finance obligations that are subject to the movement of goods or the
provision of services. This would include documentary trade letters of
credit; documentary and clean collection; import and export bills; and
guarantees directly related to trade finance obligations, such as
shipping guarantees. Instead, a covered company should calculate
outflow amounts for lending commitments, such as direct import or
export financing for non-financial firms, in accordance with Sec.
_.32(e) of the final rule.
Under the final rule, variable rate demand note amounts payable
within 30 calendar days of a calculation date will be treated as a
committed liquidity facility to a financial sector entity and will
receive a 100 percent outflow rate pursuant to Sec. _.32(e)(1)(vii) of
the final rule. The agencies believe that this treatment is appropriate
because such payments would likely be made by a covered company to
support amounts coming due within 30 calendar days of a calculation
date. With respect to an implicit agreement to guarantee a covered
company's sponsored product, covered companies may be prohibited from
doing so under Sec. _.13 of the BHC Act, and such support has long
been discouraged by the agencies.\85\ If, however, a covered company's
guarantee is in the form of a guaranteed investment contract (GIC) or a
synthetic GIC (commonly referred to as a wrapper), then it will be
treated as a commitment to a financial sector entity or SPE as
appropriate under Sec. _.32(e)(1)(vii) or (viii) of the final rule.
---------------------------------------------------------------------------
\85\ See, e.g., OCC, Board, FDIC, and SEC, ``Prohibitions and
Restrictions on Proprietary Trading and Certain Interests in, and
Certain Relationships With, Hedge Funds and Private Equity Funds,''
79 FR 5536, 5790 (January 31, 2014); ``Interagency Policy on Banks/
Thrifts Providing Financial Support to Funds Advised by the Banking
Organization or its Affiliates,'' OCC Bulletin 2004-2, Federal
Reserve Supervisory Letter 04-1, FDIC FIL-1-2004 (January 5, 2004).
---------------------------------------------------------------------------
m. Excluded Amounts for Intragroup Transactions
The proposed rule would have excluded from a covered company's
outflows and inflows all transactions between the covered company and a
consolidated subsidiary or between consolidated subsidiaries of a
covered company. Such transactions were excluded on the grounds that
they would not result in a net liquidity change for a covered company
on a consolidated basis.
One commenter expressed concern that section 32(h) of the proposed
rule was contrary to the symmetrical treatment of funding provided by
and to
[[Page 61510]]
covered companies and its subsidiaries and between its subsidiaries in
section 32(m)(1), which would have entirely excluded outflows arising
from transactions between the covered company and its consolidated
subsidiary. Consistent with the proposed rule's section 32(m), the
final rule excludes from a covered company's outflows and inflows all
transactions between the covered company and a consolidated subsidiary
or between consolidated subsidiaries of a covered company. As discussed
above under II.C.3.h, to address commenters concerns, the agencies have
clarified that the 100 percent affiliate outflow rate under Sec.
_.32(h)(2) of the final rule applies solely to funding from a
consolidated subsidiary of the same top-tier company of which the
covered company is a consolidated subsidiary, but that is not a
consolidated subsidiary of the covered company, due to the lack of the
consolidation of the inflows and outflows with the covered company
under applicable accounting standards. Accordingly, the agencies have
removed the language from proposed Sec. _.32(h)(2) that would have
applied the outflow rate to funding from a consolidated subsidiary of
the covered company.
4. Inflow Amounts
Under the proposed rule, a covered company's total cash inflow
amount would be the lesser of: (1) the sum of the cash inflow amounts
as described in Sec. _.33 of the proposed rule; and (2) 75 percent of
the expected cash outflows as calculated under Sec. _.32 of the
proposed rule. Similar to the total cash outflow amount, the total cash
inflow amount would have been calculated by multiplying the outstanding
balances of contractual receivables and other cash inflows as of a
calculation date by the inflow rates described in Sec. _.33 of the
proposed rule. In addition, the proposed rule would have excluded
certain inflows from the cash inflow amounts, as described immediately
below. The agencies have adopted this structure for calculating total
cash inflows in the final rule, with certain updates to the proposed
inflow rates to address comments received.
a. Items Not Included as Inflows
Under the proposed rule, the agencies identified six categories of
items that would have been explicitly excluded from cash inflows. These
exclusions were meant to ensure that the denominator of the proposed
LCR 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 have consisted of any inflows derived from
amounts that a covered company holds in operational deposits at other
regulated financial companies. Because these deposits are made for
operational purposes, the agencies reasoned that it would be unlikely
that a covered company would be able to withdraw these funds in a
crisis to meet other liquidity needs, and therefore excluded them. The
final rule adopts this provision as proposed. The agencies expect
covered companies to understand what deposits they have placed at other
financial companies that are operational in nature and to use the same
methodology to assess the operational nature of its deposits at other
financial companies as it uses to assess the operational nature of
their deposit liabilities from other financial companies.
A commenter requested clarification as to whether cash held at
agent banks for other than operational purposes can count towards a
covered company's HQLA or inflow amount. The agencies are clarifying
that, depending on the manner in which the cash is held, it may qualify
as an unsecured payment contractually payable to the covered company by
a financial sector entity under Sec. _.33(d)(1) of the final rule, in
which case it would be subject to a 100 percent inflow rate. As
discussed in section II.B.2.c above such placements do not meet the
criteria for inclusion as HQLA.
The second category would have excluded 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.
Two commenters recommended that the agencies distinguish forward
sales of mortgage loans under GSE standby programs from other warehouse
facilities, reasoning that the nature of the commitments provided under
those programs and the creditworthiness of the GSEs should permit each
covered company to include 100 percent of its notional balances under
GSE standby programs as an inflow. Commenters argued that, unlike a
warehouse facility, which involves the counterparty risk of a non-
government-sponsored enterprise and the potential that loans will not
close or will have incomplete loan documents, GSE standby programs
include only closed and funded loans with the liquidity option provided
directly by FNMA and FHLMC. According to the commenters, the loans are
always eligible to be delivered to FNMA and FHLMC regardless of credit
deterioration. Another commenter remarked on the asymmetry of the
proposed rule's treatment of commitments, noting that if a covered
company must include loan commitments in its outflows, then it should
be allowed to include forward commitments to sell loans to GSEs in its
inflows.
A commenter argued that the proposed rule would discourage covered
companies from investing in the housing industry or GSE-backed
securities because these would be subject to a 15 percent haircut when
counted as HQLA and any expected inflow from mortgage commitments
within the next 30 days would be excluded from the net outflow
calculation. This commenter noted that it is unclear what impact this
treatment would have on the mortgage markets.
The agencies recognize that covered companies may receive inflows
as a result of the sale of mortgages or derivatives that are mortgage
commitments within 30 days after the calculation date. However, the
agencies believe that there are some potential liquidity risks from
mortgage operations that should be captured in the LCR. During the
recent financial crisis, it was evident that many institutions were
unable to rapidly reduce mortgage lending pipelines even as market
demand for mortgages slowed. Because of these liquidity risks, the
final rule requires an outflow rate for mortgage commitments of 10
percent, with an exclusion of inflows. On balance, the agencies believe
the 10 percent outflow rate for commitments coupled with no recognition
of inflows is appropriate due to the risks evidenced in the recent
financial crisis. The agencies are therefore finalizing this aspect of
the rule as proposed.
The third excluded category would have comprised 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 due to restrictive covenants or
termination clauses. Furthermore, reliance by covered companies on
inflows from credit facilities with other financial entities would
materially increase the interconnectedness within the system. Thus, the
material financial distress 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, the proposed
rule would not have counted a covered company's credit and liquidity
facilities as inflows.
[[Page 61511]]
Some commenters recommended that at least 50 percent of the unused
portions of a covered company's committed borrowing capacity at a FHLB
be treated as an inflow under the final rule. Commenters requested that
the agencies allow a banking organization to increase its inflow
amounts and thus decrease the denominator of its LCR by an amount equal
to at least 50 percent of the unused borrowing commitments from an
FHLB. The agencies have considered the role that FHLB borrowings played
in the recent crisis and have decided not to recognize collateralized
lines of credit in favor of promoting on-balance sheet liquidity.
A commenter requested that the agencies revisit the assumptions
about asymmetric outflows and inflows under credit and liquidity
facilities. The commenter proposed that a covered nonbank company be
permitted to include amounts from committed credit and liquidity
facilities extended to covered companies as inflows at the same rates
at which it would be required to assume outflows if it extended the
same facilities to the same counterparties, but only if the facilities
do not contain material adverse change clauses, financial covenants, or
other terms that could allow a counterparty to cancel the facility if
the covered company experienced stress. According to the commenter, the
balance sheet and funding profile of covered nonbank companies are
substantially different from other covered companies.
The agencies continue to emphasize the importance of on-balance
sheet liquidity and not the capacity to draw upon a facility, which, as
stated above, may or may not materialize in a liquidity stress scenario
even where the facilities do not contain material adverse change
clauses or financial covenants. During a period of material financial
distress, companies may not be in a position to extend funds under the
facilities. Therefore, the agencies are adopting this provision in the
final rule as proposed.
The fourth excluded category of inflows would have consisted of
amounts included in a covered company's HQLA amount under Sec. _.21 of
the proposed rule and any amount payable to the covered company with
respect to those assets. The agencies reasoned that because HQLA is
already included in the numerator at fair market value, including such
amounts as inflows would result in double counting. Consistent with the
Basel III Revised Liquidity Framework, this exclusion also would have
included all HQLA that mature within 30 calendar days of a calculation
date. The agencies received no comments on this provision of the
proposed rule and have adopted it in the final rule without change.
The fifth excluded category of inflows would have comprised 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 that 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 was
defined as any exposure that is past due by more than 90 calendar days
or on nonaccrual status. This provision recognized the potential that a
covered company will not receive the full inflow amounts due from a
nonperforming customer. The agencies received no comments on this
provision of the proposed rule and have retained it in the final rule
as proposed.
The sixth excluded category of inflows would have comprised items
that have no contractual maturity date or items that mature more than
30 calendar days after a calculation date. The agencies are concerned
that in a time of liquidity stress a covered company's counterparties
will not pay amounts that are not contractually required in order to
maintain their own liquidity or balance sheet. Items that mature more
than 30 calendar days after a calculation date generally fall outside
of the scope of the net cash outflow denominator.
The agencies received several comments relating to the treatment of
the term of margin loans and, more generally, the maturity treatment of
secured transactions that may be interrelated. The treatment of these
secured transactions is described in section II.C.4.f, below.
Another commenter stated that loans that are offered on an open
maturity basis and contractually due on demand, such as trade
receivables, should be included as inflows rather than excluded as
items that do not have a contractual maturity date under proposed Sec.
_.33(a)(6).
Section _.31 of the final rule describes how a covered company must
determine the maturity date of a transaction for the purposes of the
rule. The agencies have revised this provision to provide a maturity
date for certain non-maturity transactions that would have otherwise
been excluded as inflows under the final rule. Thus, as discussed
below, certain unsecured wholesale cash inflows (including non-maturity
deposits at other financial sector entities) and secured lending
transactions, are treated as maturing on the first calendar day after
the calculation date. The agencies recognize these specific inflows as
day-one inflows to reflect symmetry in the outflow assumptions. Any
other non-maturity inflow would be excluded under this provision.
b. Net Derivatives Cash Inflow Amount
In Sec. _.33(b) of the proposed rule, the agencies proposed that 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 to its derivative transactions, less, for each
counterparty, 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 have incorporated
the amounts due from and to counterparties under applicable
transactions within 30 calendar days of a calculation date. Netting
would have been permissible at the highest level permitted by a covered
company's contracts with a counterparty and could not include off-
setting inflows where a covered company has included as eligible HQLA
any assets that the counterparty has posted to support those inflows.
If the derivatives transactions are not subject to a qualifying master
netting agreement, then the derivative cash inflows for that
counterparty would have been included in the net derivative cash inflow
amount and the derivative cash outflows for that counterparty would
have been included in the net derivative cash outflow amount, without
any netting. Under the proposed rule, the net derivative cash inflow
amount would have been calculated in accordance with existing valuation
methodologies and expected contractual derivative cash flows. In the
event that the net derivative cash inflow for a particular counterparty
was less than zero, such amount would have been required to be included
in a covered company's net derivative cash outflow amount for that
counterparty.
As with the net derivative cash outflow amount, pursuant to Sec.
_.33(a)(2), the net derivative cash inflow amount would not have
included amounts arising in connection with forward sales of mortgage
loans and derivatives that are mortgage commitments. The net derivative
cash inflow amount would have included derivatives that hedge interest
rate risk associated with a mortgage pipeline.
The agencies received no comments unique to this provision of the
proposed
[[Page 61512]]
rule. All related comments focused on the net derivatives cash outflow
amount provision. This provision was intended to complement the net
derivatives cash outflow amount provision, and the provision that would
apply at any given time would depend on whether the covered company had
a net ``due to'' or ``due from'' position with the counterparty. In the
final rule, the agencies have made changes to Sec. _.33(b) that are
consistent with the changes described above in section II.C.3.c that
the agencies made to Sec. _.32(c). In both cases, the agencies have
permitted the netting of foreign currency exchange derivative
transactions that result in the full exchange of cash principal
payments in different currencies within the same business day. As with
all net cash inflows, any resulting net derivatives cash inflow amount
would be subject to the overall 75 percent cap on total net inflows.
c. Retail Cash Inflow Amount
The proposed rule would have allowed a covered company to count as
an inflow 50 percent of all contractual payments it expects to receive
within 30 calendar days from retail customers and counterparties. This
inflow rate reflected the agencies' expectation that covered companies
will need to maintain a portion of their retail lending activity even
during periods of liquidity stress. The agencies received no comments
on this provision of the proposed rule and have retained it in the
final rule as proposed.
d. Unsecured Wholesale Cash Inflow Amount
The agencies believed that for purposes of the proposed rule, all
wholesale inflows (for example, principal and interest receipts) from
financial sector entities (and consolidated subsidiaries thereof) and
from central banks generally would have been available to meet a
covered company's liquidity needs. Therefore, the agencies proposed to
assign such inflows a rate of 100 percent.
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 entities. Indeed, one
purpose of the proposed rule was to ensure that covered companies would
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 some activity
to a limited extent, covered companies would likely continue to renew
at least a portion of maturing credit and extend some new loans due to
reputational and business considerations. Therefore, the agencies
proposed to apply an inflow rate of 50 percent for inflows due from
wholesale customers or counterparties that are not financial sector
entities, or consolidated subsidiaries thereof. With respect to
revolving credit facilities, already drawn amounts would not have been
included in a covered company's inflow amount, and undrawn amounts
would be treated as outflows under Sec. _.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.
A commenter requested that the final rule provide a 100 percent
inflow treatment for inflows due from trade financing activities with a
residual maturity of 30 calendar days or less as of the calculation
date, rather than the overall 50 percent outflow for non-financial
sector entities. Trade finance receivables coming due from non-
financial corporate entities that are contractually due within 30 days
receive the same treatment as other loans coming due from non-financial
counterparties and that is a 50 percent inflow. This recognizes that
the covered company will likely have new lending and loan renewals for
at least a portion of loans coming due within the next 30 days. The
agencies continue to believe that these inflow rates accurately reflect
the effect of material liquidity stress upon an institution, as
described above, and are thus adopting this provision of the final rule
as proposed.
One commenter requested clarification regarding the proposed rule's
treatment of fee income. The commenter argued that unless fee income is
included under wholesale payments, there appeared to be no provision or
discussion of the possibility that fee income will greatly decline
during market stress. The agencies consider fee income to be a
contractual payment and its inflow rate would depend on whether the
counterparty owing the fee is a retail customer or counterparty (in
which case the inflow rate would be 50 percent under Sec. _.33(c)), a
financial sector entity or central bank (in which case the inflow rate
would be 100 percent under Sec. _.33(d)(1)), or a non-financial sector
wholesale customer or counterparty (in which case the inflow rate would
be 50 percent under Sec. _.33(d)(2)).
e. Securities Cash Inflow Amount
The proposed rule would have provided that inflows from securities
owned by a covered company that were not included in a covered
company's HQLA amount and that would mature within 30 calendar days of
the calculation date would have received a 100 percent inflow rate.
Such amounts would have included all contractual dividend, interest,
and principal payments due and expected to be paid to a covered company
within 30 calendar days of a calculation date, regardless of their
liquidity. The agencies received no comments on this provision of the
proposed rule and have retained it in the final rule.
f. Secured Lending and Asset Exchange Cash Inflow Amounts
i. Definitions and Inflow Rates
The proposed rule provided that a covered company would be able to
recognize cash inflows from secured lending transactions that matured
within 30 calendar days of a calculation date. The proposed rule would
have defined a secured lending transaction as any lending transaction
that gave rise to a cash obligation of a counterparty to a covered
company that was 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 gave the covered company, as a holder of the
lien, priority over the assets in the case of bankruptcy, insolvency,
liquidation, or resolution. Secured lending transactions would have
included reverse repurchase transactions, margin loans, and securities
borrowing transactions.
The proposed rule would have assigned inflow rates to all
contractual payments due to the covered company under secured lending
transactions based on the quality of the assets securing the
transaction. These inflow rates generally would have complemented the
outflow rates on secured funding transactions under Sec. _.32(j)(1) of
the proposed rule. Consistent with the Basel III Revised Liquidity
Framework, the inflow amount from secured lending transactions or the
outflow amount from secured funding transactions would have been
calculated on the basis of each transaction individually. However, the
symmetry between the proposed inflow and outflow rates recognized the
benefits of a matched book approach to managing secured transactions,
where applicable. The proposed rule also would have assigned a 50
percent inflow rate to the contractual payments
[[Page 61513]]
due from customers that had borrowed on margin, where such margin loans
were collateralized by assets that were not HQLA.
While the provisions relating to secured lending transactions
governed the cash obligations of counterparties, the proposed rule
would have defined asset exchanges as the transfer of non-cash assets.
A covered company's liquidity position may improve in instances where a
counterparty is contractually obligated to deliver higher quality
assets to the covered company in return for less liquid, lower-quality
assets. The proposed rule would have reflected this through the
proposed asset exchange inflow rates, which were based on a comparison
of the quality of the asset to be delivered by a covered company with
the quality of the asset to be received from a counterparty. Asset
exchange inflow rates progressively increased on a spectrum that ranged
from a zero percent inflow rate where a covered company would be
receiving assets that are the same HQLA level as the assets that it
would be required to deliver through a 100 percent inflow rate where a
covered company would be receiving assets that are of significantly
higher quality than the assets that it would be required to deliver.
Many commenters noted that a contradiction existed between the
definition of a secured lending transaction under the proposed rule,
which would have been limited to transactions that were secured by
assets included in the covered company's HQLA amount, and the proposed
secured lending transaction cash inflow amounts which would have
recognized inflows for secured lending transactions that are secured by
assets that are not HQLA. Commenters therefore requested that the final
rule clarify that the 100 percent inflow rate would be applied to
transactions secured by assets that are not eligible HQLA. In addition,
other commenters objected to the fact that the proposed rule applied
inflow rates for secured lending transactions secured by level 1, level
2A, and level 2B liquid assets only when the assets were eligible HQLA.
These commenters argued that the difference in phrasing could lead to
uncertainty about the treatment of transactions secured by liquid
assets that are not included in a company's eligible HQLA because the
operational requirements are not satisfied. Moreover, the commenters
argued that the perceived matched book parity of the proposed rule
would not apply to a large number of transactions that actually have
matched maturities.
As described in section II.B.3 of this Supplementary Information
section, the agencies recognized the need to clarify the distinction
between the criteria for assets identified as HQLA in Sec. _.20 of the
final rule and the requirements for eligible HQLA set forth in
Sec. _.22 of the final rule. The agencies recognize that secured
lending transactions may be secured by assets that are not eligible
HQLA and agree with commenters that the definition of secured lending
transaction was too narrow and that it should be revised to remove the
requirement that the collateral securing a secured lending transaction
must be eligible HQLA. Therefore, under the final rule, secured lending
transactions include the cash obligations of counterparties to the
covered company that are secured by assets that are HQLA regardless of
whether the HQLA is eligible HQLA and also include the cash obligations
of counterparties that are secured by assets that are not HQLA.
Accordingly, the agencies have amended the requirements for the secured
lending transaction inflow amounts under Sec. _.33(f) of the final rule
to remove the references to the requirement that the assets securing a
secured lending transaction be eligible HQLA.
The agencies continue to believe that the inflow rate for a secured
lending transaction that has a maturity date (as determined under Sec.
_.31 of the final rule) within 30 calendar days should be based on the
type of collateral that is used to secure that transaction. Generally,
the agencies assume that upon the maturity of a secured lending
transaction, the covered company may be obligated to return the
collateral to the counterparty and receive cash from the counterparty
in fulfilment of the counterparty's cash obligation. Therefore, for the
purpose of recognizing a cash inflow, it is crucial that the collateral
securing a secured lending transaction be identified as being available
for return to the counterparty at the maturity of the transaction.
Under the final rule, the secured lending transaction inflow rates
are designed to complement the outflow rates for secured funding
transactions (that are not secured funding transactions conducted with
sovereigns, multilateral development banks, or U.S. GSEs and are not
customer short positions facilitated by other customers' collateral)
secured by the same quality of collateral and, for collateral that is
held by the covered company as eligible HQLA,\86\ the haircuts for the
various categories of HQLA.
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\86\ The agencies reiterate that a covered company cannot treat
an asset as eligible HQLA that it received with rehypothecation
rights if the owner has the contractual right to withdraw the asset
without an obligation to pay more than de minimis remuneration at
any time during the prospective 30 calendar-day period per
Sec. _.22(b)(5) of the final rule.
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In the case of a secured lending transaction that matures within 30
calendar days of a calculation date that is secured by an asset that is
not held by the covered company as eligible HQLA, but where the
collateral has not been rehypothecated such that the asset is still
held by the covered company and is available for immediate return to
the counterparty, the agencies have adopted a 100 percent inflow rate
(except for margin loans secured by assets that are not HQLA, which
will receive a 50 percent inflow rate). Unlike secured lending
transactions where collateral is held as eligible HQLA and is therefore
included in the calculation of the HQLA amount at the calculation date,
the agencies determined that the inflow for transactions where
collateral is not held as eligible HQLA but is available for immediate
return to the counterparty should receive a 100 percent inflow
reflecting the settlement of the counterparty's cash obligation at the
maturity date.
Section II.C.4.ii below discusses instances where the collateral
securing the secured lending transaction has been rehypothecated in
another transaction as of a calculation date. The inflow rates applied
to maturing secured lending transactions are shown in Table 4a.
With respect to asset exchange inflows, the agencies did not
receive significant comments on the proposed rule's treatment of asset
exchanges and are adopting them in the final rule largely as proposed
(Table 4b.). However, the agencies are clarifying for purposes of the
final rule that where a covered company has rehypothecated an asset
received from a counterparty in an asset exchange transaction, a zero
percent inflow rate would be applied to the transaction under the final
rule, reflecting the agencies' concern that the covered company would
be required to purchase the asset on the open market to settle the
asset exchange, as described for assets exchange outflows in section
II.C.3.j above.
ii. The Reuse of Collateral and Certain Prime Brokerage Transactions
The proposed rule would have applied a 50 percent inflow rate to
inflows from collateralized margin loans that are secured by assets
that are not HQLA and that are not reused by the covered company to
cover any of its short positions. Several commenters
[[Page 61514]]
requested that the agencies expand this inflow rate to also apply to
collateralized margin loans that are secured by collateral that is
eligible HQLA or otherwise held at the covered company and not reused
in any other transaction.\87\ These commenters also suggested this
proposed 50 percent inflow rate should be applied regardless of the
maturity of the loan because, although such margin loans may have a
contractual maturity date that is more than 30 calendar days from a
calculation date, the contractual agreements would require the customer
to repay the loan in the event the customer's portfolio composition
materially changes. Commenters argued that the agencies had not taken
into account that a significant portion of prime brokerage business
consists of short-term secured financing, such as margin loans and
loans of securities to effect customer short positions. Commenters also
expressed concern that the terms of certain contracts, such as term
margin agreements, require customers to maintain market neutral
portfolios with increasing margin requirements and reduced leverage or
financing based on the level of asymmetry between customer long and
short positions. In particular, commenters requested that the agencies
recognize collateralized term margin loans not secured by HQLA as
generating inflows regardless of maturity because financings under term
margin loans are designed to be treated as overnight transactions that
are due on demand if the customer does not satisfy the loan terms.
---------------------------------------------------------------------------
\87\ As discussed above, the agencies have adopted a 100 percent
inflow rate for all secured lending transactions that are secured by
assets that are not eligible HQLA, have not been rehypothecated by
the bank, and are available for the immediate return to the
counterparty at any time.
---------------------------------------------------------------------------
More generally, commenters asked that the agencies revise the
proposed rule such that it more fully capture the matched secured
lending and secured funding transactions that occur in prime brokerage
and matched book activity. As addressed in section II.C.1. b of this
Supplementary Information section, commenters also requested that
certain related inflow amounts be excluded from the aggregate cap on
inflows in calculating the net cash inflow amount. Commenters asked the
agencies to reevaluate the treatment of matched transactions based on
whether the collateral is rehypothecated or remains in inventory and
based on the term of the secured funding transaction to determine the
covered company's net cash outflow over a 30 calendar-day period.
The agencies recognize that prime brokerage, matched book, and
other activities conducted at covered companies make significant use of
the rehypothecation of collateral that may have been provided for use
by the covered company through secured lending transactions and asset
exchanges (together with derivative assets, other secured counterparty
obligations, or other transactions). Beyond the reuse of specific
collateral, the agencies also recognize the potential interrelationship
of certain transactions within prime brokerage activities, both at an
individual customer level (for example, through market neutrality
requirements) and in the aggregate portfolio of customers. Consistent
with the Basel III Revised Liquidity Framework, the agencies do not
believe that a 100 percent inflow rate for all margin loans secured by
assets that are not HQLA and that mature within 30 calendar days of a
calculation date is appropriate. The 50 percent inflow rate on these
margin loans recognizes that not all margin loans may pay down during a
stress period and covered companies may have to continue to fund a
proportion of margin loans over time. In requiring the 50 percent
inflow rate on such margin loans, the agencies note the symmetry with
the secured funding transaction outflow rate required for customer
short positions that are covered by other customers' collateral that is
not HQLA. The agencies believe this symmetrical treatment balances the
general treatment of individual secured funding and secured lending
transactions under the rule with certain relationships that may
potentially apply within prime brokerage activities, including
contractual market neutrality clauses applicable to certain customers
and certain aggregate customer behaviors. The agencies are further
clarifying that margin loans secured by HQLA are required to apply the
inflow rates applicable to any other type of secured lending
transaction secured by the same collateral, including inflow rates
applicable to collateral that is eligible HQLA. As discussed in section
II.C.1.b above, although the final rule permits the use of specified
netting in the determination of certain transaction amounts, no
individual inflow categories are exempt from the aggregate cap of
inflows at 75 percent of gross outflows in the net cash inflow amount
calculation.
The agencies believe that, consistent with other foundational
elements of the final rule, secured lending transactions that have a
maturity date as determined under the final rule of greater than 30
calendar days from a calculation date should be excluded from the LCR
calculation. Similarly, the agencies believe this principle should be
maintained in respect to margin loans with remaining contractual terms
of greater than 30 calendar days from a calculation date because a
covered company may not rely on inflows that are not required, by
relevant contractual terms, to occur within the 30 calendar-day period
of the LCR calculation. With respect to margin loans that are secured
by HQLA, the agencies believe that the inflow rates applied to secured
lending transactions, which are complementary to the outflow rates for
secured funding transactions that are secured by HQLA, are appropriate
given the cash obligation of the counterparty. Moreover, where margin
loans are secured by assets that the covered company includes as
eligible HQLA, the inflow rates applied to the secured lending
transactions would be complementary to the haircut assumptions for the
various categories of HQLA and also are appropriate given the cash
obligation of the counterparty and the covered company's obligation to
return the value of the HQLA.
The agencies are aware that collateral may be rehypothecated to
secure a secured funding transaction or other transaction or obligation
(or delivered in an asset exchange) that matures either within 30
calendar days of a calculation date, or that matures more than 30
calendar days after a calculation date. In either case, different
inflow rates are applied under the final rule to the secured lending
transaction (or asset exchange) that provides the collateral in order
to address the interdependency with the secured funding transaction (or
asset exchange) for which the collateral was reused.
If the transaction or obligation for which the collateral has been
reused has a maturity date (as determined under Sec. _.31 of the final
rule) within 30 calendar days of a calculation date, the covered
company may anticipate receiving, or regaining access to, the
collateral within the 30-day period. Assuming that the maturities are
matched or that the maturity of the secured lending transaction is
later than that of the secured funding transaction, the covered company
may therefore anticipate having the collateral available at the
maturity of the secured lending transaction (or asset exchange) from
which the collateral was originally obtained. Accordingly, under the
final rule, if collateral obtained from a secured lending transaction
(or received from a prior asset exchange) that
[[Page 61515]]
matures within 30 calendar days of a calculation date is reused in a
secured funding transaction (or delivered in a second asset exchange)
that matures within 30 calendar days of a calculation date, the covered
company may recognize an inflow from the secured lending transaction
(or prior asset exchange) as occurring at the maturity date.\88\ As
required under Sec. _.31 of the final rule, the maturity of this
secured lending transaction (or prior asset exchange) must be no
earlier than the secured funding transaction (or second asset
exchange). This treatment will generally apply a symmetric treatment
for outflows and inflows occurring within a 30 calendar-day period.
---------------------------------------------------------------------------
\88\ The amount of the inflow would be determined by whether the
collateral that the covered company received in the secured lending
transaction or prior asset exchange was HQLA or non-HQLA as
summarized in Tables 4a and 4b.
---------------------------------------------------------------------------
Consistent with the Basel III Revised Liquidity Framework, the
final rule will not recognize inflows from secured lending transactions
(or asset exchanges) that mature within 30 calendar days from a
calculation date where the collateral received is reused in a secured
funding transaction (or asset exchange) that matures more than 30
calendar days from the calculation date, or where the collateral is
otherwise reused in a transaction or to cover any obligation that could
extend beyond 30 calendar days from a calculation date. This is because
a covered company should assume that such secured lending transaction
(or asset exchange) may need to be rolled over and will not give rise
to a cash (or net collateral) inflow, reflecting its need to continue
to cover the secured funding transaction (or asset exchange or other
transaction or obligation). For example, a covered company would not
recognize an inflow from a margin loan that matures within 30 calendar
days of a calculation date if the loan was secured by collateral that
had been reused in a term repurchase transaction that matured more than
30 calendar days from a calculation date.
Tables 4a and 4b summarize the inflow rates for secured lending
transactions and asset exchanges.
Table 4a--Secured Lending Transaction Inflow Rates
------------------------------------------------------------------------
Secured lending
inflow rate
Categories for secured lending transactions maturing applied to
within 30 calendar days of the calculation date contractual
amounts due from
the counterparty
------------------------------------------------------------------------
Where the asset securing the secured lending transaction is included in
the covered company's eligible HQLA as of the calculation date, and the
transaction is:
------------------------------------------------------------------------
Secured by level 1 liquid assets.................... 0%
Secured by level 2A liquid assets................... 15%
Secured by level 2B liquid assets................... 50%
------------------------------------------------------------------------
Where the asset securing the secured lending transaction is not included
in the covered company's eligible HQLA as of the calculation date but
is still held by the covered company and is available for immediate
return to the counterparty, and the transaction is:
------------------------------------------------------------------------
Secured by level 1, level 2A or level 2B liquid 100%
assets.............................................
A collateralized margin loan secured by assets that 50%
are not HQLA.......................................
Not a collateralized margin loan and is secured by 100%
assets that are not HQLA...........................
------------------------------------------------------------------------
Where the asset securing the secured lending transaction has been
rehypothecated and used to secure, or has been delivered into, any
transaction or obligation which:
------------------------------------------------------------------------
Will not mature or expire within 30 calendar days or 0%
may extend beyond 30 calendar days of the
calculation date...................................
------------------------------------------------------------------------
Where the asset securing the secured lending transaction has been
rehypothecated and used to secure any secured funding transaction or
obligation, or delivered in an asset exchange, that will mature within
30 calendar days of the calculation date,* and the secured lending
transaction is:
------------------------------------------------------------------------
Secured by level 1 liquid assets.................... 0%
Secured by level 2A liquid assets................... 15%
Secured by level 2B liquid assets................... 50%
A collateralized margin loan secured by assets that 50%
are not HQLA.......................................
Not a collateralized margin loan and is secured by 100%
assets that are not HQLA...........................
------------------------------------------------------------------------
* Under Sec. --.31(a)(3) of the final rule, the maturity date of the
secured lending transaction cannot be earlier than the maturity date
of the secured funding transaction or asset exchange.
Table 4b--Asset Exchange Inflow Rates
------------------------------------------------------------------------
Covered company
Covered company will receive at must post at Asset exchange
maturity maturity inflow rate
------------------------------------------------------------------------
Where the asset originally received in the asset exchange has not been
rehypothecated to secure any transaction or obligation, or delivered in
an asset exchange, that will mature or expire more than 30 calendar
days from a calculation date or may extend beyond 30 calendar days of a
calculation date: **
------------------------------------------------------------------------
Level 1 liquid assets............ Level 1 liquid 0%
assets.
Level 1 liquid assets............ Level 2A liquid 15%
assets.
Level 1 liquid assets............ Level 2B liquid 50%
assets.
Level 1 liquid assets............ Assets that are not 100%
HQLA.
[[Page 61516]]
Level 2A liquid assets........... Level 1 or level 2A 0%
liquid assets.
Level 2A liquid assets........... Level 2B liquid 35%
assets.
Level 2A liquid assets........... Assets that are not 85%
HQLA.
Level 2B liquid assets........... Level 1 or level 2A 0%
or level 2B liquid
assets.
Level 2B liquid assets........... Assets that are not 50%
HQLA.
------------------------------------------------------------------------
Where the asset originally received in the asset 0%
exchange has been rehypothecated to secure any
transaction or obligation, or delivered in an asset
exchange, which will mature or expire more than 30
calendar days from the calculation date or may extend
beyond 30 calendar days of the calculation date:
------------------------------------------------------------------------
** Under Sec. --.31(a)(3) of the final rule, the maturity date of the
asset exchange cannot be earlier than the maturity date of the
transaction or obligation for which the collateral was reused.
g. Segregated Account Inflow Amount
Several commenters noted that unlike the Basel III Revised
Liquidity Framework, the proposed rule did not recognize inflows from
the release of assets held in segregated accounts in accordance with
regulatory requirements for the protection of customer trading assets,
such as Rule 15c3-3.\89\ A few commenters argued that Rule 15c3-3 is,
in effect, a liquidity rule that ensures that broker-dealers have
sufficient liquid assets to meet their obligations to customers.
Another commenter argued that by failing to address these assets in the
proposed rule, the agencies had failed to consider the SEC's functional
regulation of broker-dealers. Commenters noted that because these
inflows are not specifically addressed in the proposed rule, the assets
would be treated as encumbered and would not be eligible to offset
deposits subject to the outflow rate applicable to affiliated sweep
deposits. A commenter argued that because of the regulatory regime that
governs these segregated assets, there is no market risk to the banking
organization. One commenter requested that the release of balances held
in segregated accounts be subject to a 100 percent inflow rate.
---------------------------------------------------------------------------
\89\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------
The agencies recognize that segregated accounts required for the
protection of customer trading assets are designed to meet potential
outflows to customers under certain circumstances. The agencies also
recognize, however, that such segregated amounts held as of an LCR
calculation date will be amounts calculated by the covered company at
or prior to the calculation date and generally on a net basis across
existing customer free cash, loans, and short positions. The agencies
acknowledge that these segregated amounts will necessarily be
recalculated within a 30 calendar-day period, which could potentially
lead to a reduction in the amount that is required to be segregated,
and a corresponding release of a portion of the amount held as of a
calculation date. Accordingly, the agencies have included a provision
in the final rule that permits a covered company to recognize certain
inflows from broker-dealer segregated account releases based on the
change in fair value of the customer segregated account balances
between the calculation date and 30 calendar days following the
calculation date.
The agencies do not believe that 100 percent of the value of
segregated accounts held as of a calculation date would be an
appropriate inflow amount because this inflow amount may not, in fact,
be realized by the covered company. As a general matter, the final rule
requires outflow amounts and inflow amounts to be calculated by using
only the balances and transaction amounts at a calculation date, and
not based on anticipated future balances or obligation amounts.
However, consistent with the Basel III Revised Liquidity Framework, the
agencies have determined that the appropriate inflow amount for the
release of broker-dealer segregated account assets is dependent on the
anticipated amount of broker-dealer segregated account assets that may
need to be held by the covered company 30 calendar days from a
calculation date. The anticipated amount of broker-dealer segregated
account assets that may need to be held 30 calendar days from a
calculation date should be based on the impact of those outflow and
inflow amounts described under the final rule that are specifically
relevant to the calculation of the segregated amount under applicable
law. The covered company must therefore calculate the anticipated
required balance of the broker-dealer segregated account assets as of
30 calendar days from a calculation date, assuming that customer cash
and collateral positions have changed consistent with the outflow and
inflow calculations required under Sec. _.32 and Sec. _.33 of the
final rule as applied to any transaction affecting the calculation of
the segregated balance. If the calculated future balance of the
segregated account assets is less than the balance at the calculation
date, then the broker-dealer segregated account inflow amount is the
value of assets that would be released from the segregated accounts.
In addition and as discussed above, the agencies have added a
provision to the maturity date calculation requirements of Sec.
_.31(a)(5) of the final rule to clarify that broker-dealer segregated
account inflow under Sec. _.33(g) will not be deemed to occur until
the date of the next scheduled calculation of the amount as required
under applicable legal requirements for the protection of customer
assets with respect to each broker-dealer segregated account, in
accordance with the covered company's normal frequency of recalculating
such requirements. If, for example, a broker-dealer performs this
calculation on a daily basis, the inflow may occur on the day following
a calculation date. If a broker-dealer typically performs the
calculation on a weekly basis, the inflow would be deemed to occur the
day of the next regularly scheduled calculation.
h. Other Cash Inflow Amounts
Under the proposed rule, the covered company's inflow amount, as of
the calculation date, would have included zero percent of other cash
inflow amounts not described elsewhere in the proposed rule. The
agencies continue to believe that limiting inflow amounts in the final
rule to those categories specified, which reflect certain stressed
assumptions, is important to the calculation of the total cash inflow
amount and the LCR as a whole. The agencies received no comments on
this provision of the proposed rule and have retained it in the final
rule as proposed.
[[Page 61517]]
i. Excluded Amount for Intragroup Transactions
Under the proposed rule, inflow amounts would not have included
amounts arising out of transactions between a covered company and its
consolidated subsidiary or amounts arising out of transactions between
a consolidated subsidiary of a covered company and another consolidated
subsidiary of that covered company. The agencies received no comments
on this provision of the proposed rule and have retained it in the
final rule.
III. Liquidity Coverage Ratio Shortfall
Although the Basel III Revised Liquidity Framework provides that a
banking organization is required to maintain an amount of HQLA
sufficient 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 Revised Liquidity Framework therefore provides
that any supervisory decisions in response to a reduction of a banking
organization's LCR should take into consideration the objectives of the
Basel III Revised Liquidity Framework. This provision of the Basel III
Revised Liquidity Framework 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 proposed rule included a supervisory framework for addressing a
shortfall with respect to the rule's LCR that is consistent with the
intent of having HQLA available for use during stressed conditions, as
described in the Basel III Revised Liquidity Framework. This
supervisory framework included notice and response procedures that
would have required a covered company to notify its appropriate Federal
banking agency of any LCR shortfall on any business day, and would have
provided the appropriate Federal banking agency with flexibility in its
supervisory response. In addition, if a covered company's LCR fell
below the minimum requirement for three consecutive business days or if
its supervisor determined that the covered company is otherwise
materially noncompliant with the proposed rule, the proposed rule would
have required the covered company to provide to its supervisor a plan
for remediation of the liquidity shortfall.
Some commenters stated that the requirement in the proposed rule to
report non-compliance to the appropriate Federal banking agency appears
to contradict the BCBS premise that the stock of HQLA should be
available for use during periods of stress. Other commenters requested
that the agencies take into consideration that when an institution's
LCR falls below 100 percent, it is not necessarily indicative of any
real liquidity concerns. Commenters expressed concern that disclosure
requirements under securities laws or stock exchange listing rules
could require an institution to immediately and publicly report an LCR
below 100 percent or the adoption of a remediation plan, which would
make the HQLA de facto unusable during times of stress and could
exacerbate any burgeoning liquidity stress being experienced.
Similarly, commenters expressed concern that media reports of an
institution's LCR falling below100 percent would not necessarily
reflect the underlying reasons and complexities in the case of a
temporary LCR shortfall and may create liquidity instability.
Accordingly, such commenters recommended that any public disclosure at
the bank holding company level be carefully tailored. Alternatively,
one commenter requested that any supervisory procedures be triggered
only when a covered company's LCR has fallen by at least 5 percent for
a period of at least 3 business days. In order to accommodate normal
fluctuations in a firm's day-to-day liquidity position, the commenter
encouraged the agencies to consider providing more flexibility in the
final rule. One commenter requested that the agencies clarify whether,
in addition to monitoring a covered company's compliance with the LCR,
the agencies would be taking other indicators of financial health into
account. Another commenter noted that daily notification requirements
to a covered company's appropriate Federal banking agency for non-
compliance with the LCR would detract from the company's critical
operating duties. Several commenters requested that the agencies
reconsider the negative connotation of falling below the target ratio
and the requirement to provide a written remediation plan, which they
stated would cause the LCR to become a bright line requirement to be
met each day instead of serving as a cushion for stressful times. One
commenter requested that the agencies consider making greater use of
the countercyclical potential of liquidity regulation by permitting
liquidity requirements to be adjusted upward during periods where
markets are overheated, similar to the countercyclical capital
requirements under the Basel III capital framework.
In the proposed rule, consistent with the Basel III Revised
Liquidity Framework, the agencies affirmed the principle that a covered
company's HQLA amount is expected to be available for use to address
liquidity needs in a time of stress. The agencies believe that the
proposed LCR shortfall framework would provide them with the
appropriate amount of supervisory flexibility to respond to LCR
shortfalls. Depending on the circumstances, an LCR shortfall would not
have necessarily resulted in supervisory action, but, at a minimum,
would have resulted in heightened supervisory monitoring. The
notification procedures that were to be followed whenever a covered
company dropped below the required LCR were intended to enable
supervisors to monitor and respond appropriately to the unique
circumstances that are giving rise to a covered company's LCR
shortfall. This supervisory monitoring and response would be hindered
if such notification were only to occur when a covered company dropped
a specified percentage below the LCR requirement. Such notification may
give rise to a supervisory or enforcement action, depending on
operational issues at a covered company, whether the violation is a
part of a pattern or practice, whether the liquidity shortfall was
temporary or caused by an unusual event, and the extent of the
shortfall or noncompliance. The agencies believe the proposed LCR
shortfall framework provides appropriate supervisory flexibility and
are adopting it in the final rule substantially as proposed.
The agencies recognize that there will be a period of time during
which covered companies will be calculating their LCR on the last day
of each calendar month, rather than on each business day. Accordingly,
the final rule requires that during that period, if a covered company's
LCR is below the required minimum when it is calculated on the last day
of each calendar month, or if its supervisor has determined that the
covered company is otherwise materially noncompliant, the covered
company must promptly consult with the appropriate Federal banking
agency to determine whether the covered company must provide a written
remediation plan.
A covered company dropping below the LCR requirement will
necessitate allocating resources to address the LCR shortfall. However,
the agencies believe this allocation of resources is appropriate to
promote the overall
[[Page 61518]]
safety and soundness of the covered company. As with all supervisory
monitoring, the agencies will monitor a covered company's compliance
with the final rule in conjunction with the agencies' overall
supervisory framework. If necessary, the agencies will adjust the
supervisory response to address any deterioration in the financial
condition of a covered company.
With regard to counter cyclicality, by requiring that ample liquid
assets be held during favorable conditions such that a covered company
can use them in times of stress, the LCR effectively works as a
countercyclical requirement. The agencies are not adding additional
countercyclical elements to the final rule.
As noted elsewhere in this Supplementary Information section, the
proposed rule did not include disclosure requirements for the LCR and
the agencies anticipate that they will seek comment on reporting
requirements through a future notice, which will be tailored to
disclose the appropriate level of information. The agencies are
clarifying that, other than any public disclosure requirements that may
be proposed in a separate notice, reports to the agencies of any
decline in a covered company's LCR below 100 percent, and any related
supervisory actions would be considered and treated as confidential
supervisory information.
IV. Transition and Timing
The proposed rule included a transition period for the LCR that
would have required covered companies to maintain a minimum LCR as
follows: 80 percent beginning on January 1, 2015, 90 percent beginning
on January 1, 2016, and 100 percent beginning on January 1, 2017, and
thereafter. The proposed transition period accounted for the potential
implications of the proposed rule on financial markets, credit
extension, and economic growth and sought to balance these concerns
with the proposed LCR's important role in promoting a more robust and
resilient banking sector.
Commenters expressed concern with: (i) The proposed transition
period with regard to the operational requirements necessary to meet
the proposed rule, (ii) the fact that the transition period differs
from the timetable published in the Basel III Revised Liquidity
Framework, and (iii) the HQLA shortfall amount that the financial
system faces. One commenter expressed concern that the proposal was
premature because the BCBS is currently reviewing ways to reduce the
complexity and opaqueness of the Basel III capital framework.
Several commenters stated that compliance with the proposed
transition timeline would require comprehensive information technology
improvements and governance processes over a short period of time. One
commenter noted that covered companies will need to make operational
changes to comply with the new requirement and that some covered
companies will need to adjust their asset composition significantly.
One commenter argued that certain covered companies have not
historically been subject to formal regulatory reporting requirements
at the holding company level and that the agencies should consider this
in determining whether to impose accelerated implementation on these
companies. The commenter further stated that the implementation
challenges posed by the proposal would be particularly acute for these
covered companies and requested that the final rule provide an extended
transition period for those companies that have not traditionally been
subject to the regulatory reporting regimes that are applicable to bank
holding companies. Similarly, two commenters noted that U.S. banking
organizations that have not been identified as G-SIBs by the Financial
Stability Board have not been previously required to report their
liquidity positions on a daily basis under the Board's FR 2052a
reporting form, and thus these banking organizations have not had time
to upgrade data and systems to be in a position to comply with the
proposed rule and its daily reporting requirements. Additionally,
according to commenters, accelerated implementation would compress the
full cost and burden of compliance into an extremely brief period for
these organizations.
A few commenters requested that the agencies consider that the
implementation of the proposed LCR requirements would happen
contemporaneously with the implementation of other resource-intensive
regulatory requirements, all of which would require changes to the
infrastructure of banking organizations. Several commenters requested
that the implementation date of the rule be delayed, with some
specifically requesting delay by 12 months to begin no earlier than
January 1, 2016, one commenter requesting a delay by 24 months to begin
no earlier than January 1, 2017, and another commenter requesting a
phase-in period of three years.
Several commenters requested that the proposed transition time
frame follow the Basel III Revised Liquidity Framework. One commenter
stated that this approach would minimize the likelihood of an adverse
impact on the financial markets. One commenter stated that an
accelerated implementation timeline would make it impossible for there
to be a level playing field for LCR comparison across all
internationally active banking organizations until 2019 when the Basel
III Revised Liquidity Framework becomes fully implemented in other
jurisdictions, and that asymmetrical treatment between the United
States and Europe will advantage foreign lenders and borrowers, as well
as their economies.
A few commenters expressed concern that the proposed transition
timeline was in part predicated on a level of shortfall in HQLA
estimated by the agencies. One commenter argued that the empirical
evidence justifying the agencies' aggregate HQLA amount shortfall
conclusion on which the implementation timing was based is very limited
and requested that the agencies revisit the conclusion regarding the
amount of shortfall. The commenter expressed concern that the shortfall
assumption may be based on the less stringent approach of the Basel III
Revised Liquidity Framework. The commenter also expressed concern that
the estimate of the LCR shortfall does not take into account any
shortfall that may be present in foreign banking organizations that
will be required to form an intermediate holding company under the
Board's Regulation YY,\90\ and thus the estimate of the shortfall is
likely significantly underestimated.\91\ A commenter stated that its
analysis indicated that a number of institutions would find it
difficult to reach a LCR of 80 percent by 2015. Several commenters
requested that a quantitative impact study be conducted before the
agencies implement an accelerated implementation schedule. Several
commenters requested that the agencies clarify the interaction between
the daily calculation requirement under the proposed rule, and the
current liquidity reporting that certain firms are undertaking under
the Board's FR 2052a and Liquidity Monitoring Report (FR 2052b)
reporting forms. In particular, the commenters expressed concern that
the agencies would be requiring multiple daily calculations and reports
with respect to the same data.
---------------------------------------------------------------------------
\90\ See 12 CFR 252.153.
\91\ As noted above, the agencies have not applied the
requirements of the rule to foreign banking organizations or
intermediate holding companies that are not otherwise covered
companies.
---------------------------------------------------------------------------
[[Page 61519]]
With respect to commenters' concerns regarding the proposed rule's
deviation from the Basel III Revised Liquidity Framework phase-in, the
agencies believe the accelerated phase-in properly reflects the
significant progress covered companies have made since the financial
crisis in enhancing their overall liquidity positions. The agencies
continue to believe that the minimum level of the LCR that would be
applicable in each calendar year specified in the proposed transition
periods is appropriate to ensure that the financial stability benefits
presented by the standard are appropriately realized. Accordingly, as
with the proposed rule, the final rule requires covered companies to
maintain a LCR as follows: 80 percent beginning on January 1, 2015, 90
percent beginning on January 1, 2016, and 100 percent beginning on
January 1, 2017, and thereafter. These transition periods are intended
to facilitate compliance with a new minimum liquidity requirement and
the agencies expect that covered companies with LCRs at or near 100
percent generally would not reduce their liquidity coverage during the
transition period. The agencies emphasize that the final rule's LCR 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 institution-specific liquidity needs
that could arise in a period of stress.
In determining the proposed transition time frame, the agencies
were aware that covered companies may face a range of implementation
issues in coming into compliance with the proposed rule. The agencies
asked in the proposal whether the proposed transition periods were
appropriate for all covered companies in respect to the proposed LCR.
Recognizing commenters' concerns regarding the operational difficulty
for organizations that were not already subject to daily liquidity
reporting requirements, and the systems changes necessary to calculate
the LCR accurately on a daily basis, the agencies believe it is
appropriate to differentiate the transition periods for calculation of
the liquidity coverage ratio based on the size, complexity, and
potential systemic impact of covered companies. The final rule
therefore requires covered depository institution holding companies
with $700 billion or more in total consolidated assets or $10 trillion
or more in assets under custody, and any depository institution that is
a consolidated subsidiary of such depository institution holding
companies that has total consolidated assets equal to $10 billion or
more, to conform to transition periods that are different from those
for other covered companies. The agencies expect these largest, most
complex firms to have the most sophisticated liquidity risk monitoring
procedures, commensurate with their size and complexity,\92\ and these
firms are currently submitting daily liquidity reports. Under the final
rule, these covered companies are required to calculate the LCR on the
last business day of each calendar month from January 1, 2015, to June
30, 2015, and on each business day from July 1, 2015, onwards. All
other covered companies must calculate the LCR on the last business day
of each calendar month beginning January 1, 2015, and on each business
day from July 1, 2016, onwards. The transition provisions of the final
rule are also set forth in Table 5 below.
---------------------------------------------------------------------------
\92\ For example, the Board's Regulation YY requires large
domestic bank holding companies to develop internal liquidity risk-
management and stress testing practices that are tailored to the
risk profile and business model of the particular institution. See
12 CFR 252.33-35. The firm-specific liquidity requirements set forth
in the Board's Regulation YY are intended to complement the
standardized approach of the U.S. liquidity coverage ratio
framework, which provides for comparability across firms within the
United States.
---------------------------------------------------------------------------
In developing these transition periods, the agencies analyzed data
received from several institutions under a quantitative impact study as
well as supervisory data from each of the institutions that would be
subject to the final rule. Based on the review of this data, the
agencies believe that the transition periods set forth in the rule are
appropriately tailored to the size, complexity, and potential systemic
impact of covered companies. The agencies do not currently believe that
additional data is necessary for the adjustment of the transition
periods, but will monitor the implementation of the final rule by
covered companies during the transition periods.
Although the agencies have not proposed the regulatory or public
reporting requirements for the final rule, the agencies anticipate that
they will seek comment on reporting requirements through a future
notice.
Table 5--Transition Period for the Liquidity Coverage Ratio
----------------------------------------------------------------------------------------------------------------
Transition period Liquidity coverage ratio
----------------------------------------------------------------------------------------------------------------
Calendar year 2015........................... .80
Calendar year 2016........................... .90
Calendar year 2017 and thereafter............ 1.00
----------------------------------------------------------------------------------------------------------------
Calculation Frequency
----------------------------------------------------------------------------------------------------------------
Covered depository institution holding
companies with $700 billion or more in total
consolidated assets or $10 trillion or more
in assets under custody, and any depository
institution that is a consolidated
subsidiary of such depository institution
holding companies that has total
consolidated assets equal to $10 billion or
more:
Last business day of the calendar month.. Beginning January 1, 2015.
Each business day........................ Beginning July 1, 2015 and thereafter.
All other covered companies:
Last business day of the calendar month.. Beginning January 1, 2015.
Each business day........................ Beginning July 1, 2016 and thereafter.
----------------------------------------------------------------------------------------------------------------
V. Modified Liquidity Coverage Ratio
Section 165 of the Dodd-Frank Act authorizes the Board to tailor
the application of its enhanced prudential standards, including
differentiating among covered companies on an individual basis or by
category of institution.\93\ When differentiating among companies for
purposes of applying the Board's standards established under section
165, the Board may consider the companies' size,
[[Page 61520]]
capital structure, riskiness, complexity, financial activities, and any
other risk-related factor the Board deems appropriate.\94\
---------------------------------------------------------------------------
\93\ See 12 U.S.C. 5365(a) and (b).
\94\ See 12 U.S.C. 5365(a)(2).
---------------------------------------------------------------------------
The Basel III Revised Liquidity Framework was developed for
internationally active banking organizations, taking into account the
complexity of their funding sources and structure. Although 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 than covered companies. On a
relative basis, the modified LCR holding companies tend to have simpler
balance sheets, better enabling management and supervisors to take
corrective actions more quickly in a stressed scenario than is the case
with a covered company.
Accordingly, the Board proposed to tailor the proposed rule's
application of the liquidity coverage ratio requirement to modified LCR
holding companies pursuant to its authority under section 165 of the
Dodd-Frank Act. Although 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 smaller 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 shorter period
of time, the Board proposed a modified LCR incorporating a shorter (21
calendar-day) stress scenario for modified LCR holding companies.
The proposed modified LCR would have been a simpler, less stringent
form of the proposed rule's liquidity coverage ratio (for the purposes
of this section V., unmodified LCR) and would have imposed outflow
rates based on a 21 calendar-day rather than a 30 calendar-day stress
scenario. As a result, outflow rates for the proposed modified LCR
generally would have been 70 percent of the unmodified LCR's outflow
rates. In addition, modified LCR holding companies would not have been
required to calculate a maximum cumulative peak net outflow day for
total net cash outflows as required for covered companies subject to
the unmodified LCR.\95\ The requirements of the modified LCR standard
would have otherwise been the same as the unmodified LCR as described
in the proposal, 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.
---------------------------------------------------------------------------
\95\ See supra section II.C.
---------------------------------------------------------------------------
A. Threshold for Application of the Modified Liquidity Coverage Ratio
Requirement
One commenter expressed support for the modified LCR, stating that
modified LCR holding companies have substantially less complex funding
and risk profiles than covered companies. The commenter stated that
operating under the modified LCR will allow such a holding company to
remain competitive without compromising its commitment to liquidity
risk management or drastically limiting the amount of maturity
transformation it undertakes on behalf of its customers. A commenter
further expressed support for the Board's use of cumulative net cash
outflows over the stress period in the modified LCR compared to the net
cumulative peak calculation in the unmodified LCR requirement's
proposed rule.
As discussed above in section I.D., several commenters requested
that the agencies apply the modified LCR to all banking organizations
with limited international operations regardless of asset size. The
commenters argued that the risk and funding profile of banking
organizations with balance sheets of $250 billion or more in total
consolidated assets and limited international operations is more
consistent with that of modified LCR holding companies than with
internationally active G-SIBs, for which the commenters say the LCR was
originally intended. A commenter stated that deposit pricing may be
adversely affected by the threshold for application of the modified LCR
requirement and expressed concerns regarding an unlevel playing field
across banking organizations. Another commenter stated that the
proposed rule's tiered approach to assessing liquidity risks among U.S.
banking organizations raises the potential unintended consequence that
certain risks the agencies wish to ensure are backed by adequate
liquidity will migrate to those institutions that are not required to
hold as much liquidity. One commenter requested that the Federal
Reserve articulate the justification for applying the LCR to the
selected institutions, particularly in light of other supervisory
efforts to monitor and strengthen liquidity management.
As discussed in section I of this Supplementary Information
section, the agencies believe that the unmodified LCR is appropriate
for the size, complexity, risk profile, and interconnectedness of
covered companies. Consistent with the enhanced prudential standards
requirements in Regulation YY, the Board continues to believe that bank
holding companies and savings and loan holding companies with total
consolidated assets of at least $50 billion dollars that are not
covered companies should be subject to the modified LCR. Further, the
Board believes that tailoring the requirements of the quantitative
minimum standard for organizations that are not covered companies under
the rule is consistent with the Dodd-Frank Act and that it is
appropriate for modified LCR holding companies with less complex
funding structures to be required to hold lower amounts of HQLA under
the rule.
B. 21 Calendar-Day Stress Period
Several commenters noted that the 21 calendar-day stress period is
operationally challenging because banking organizations typically
manage and operate on a month-end or 30-day cycle. Thus, commenters
suggested that the modified LCR be based on a calendar month stress
period, rather than the 21 calendar-day stress period in the proposal,
and argued that the 21 calendar-day basis of the modified LCR would
have made it difficult to fully embed the calculation into internal
processes including liquidity stress testing and balance sheet
forecasts. One commenter argued that the benefits of a 21 calendar-day
measurement period would typically be small because most holding
companies that would be subject to the modified LCR do not generally
rely on short-term funding; however, the same commenter requested the
70% outflow rate for non-maturity cash outflows be retained. Commenters
argued that the 21 calendar-day forward-looking stress period required
under the modified LCR would consistently omit key recurring payment
activity that occurs on the calendar-month cycle and would force the
banks to manage cash flows in an abnormal manner. Commenters also
[[Page 61521]]
argued that the 21 calendar-day measurement period would make the
modified LCR holding companies' LCR extremely volatile. One commenter
requested that the agencies give such firms the option to utilize a 30
calendar-day measurement period, whereas others requested that the
modified LCR be based on 30 calendar-day time frame and outflow rates
be set at 70 percent of the outflow rate in the unmodified liquidity
coverage ratio. One commenter stated that many of the calibrations in
the rule, such as the treatment of operational deposits, municipal
deposits, and level 2A securities, overstate the liquidity risk of the
institutions covered by the modified LCR. The commenter requested that
the agencies consider a lower LCR compliance threshold, such as 50
percent, to better align with the more stable funding profile of
modified LCR holding companies.
Commenters suggested that the modified LCR be based on a monthly
cycle so that 31-day, 30-day, and 28-day months are all treated as a
cycle for the modified LCR. Two commenters stated that the 21 calendar-
day measurement period would create additional measurement and
reporting burdens and inconsistencies, because it deviates from other
similar liquidity standards proposed by the BCBS and by the Dodd-Frank
Act.
The Board agrees with commenters that there is merit in using a
stress period that is consistent with periods over which liquidity risk
is monitored by modified LCR holding companies as part of their
internal practices. Thus, consistent with the risk management practices
required under the Board's Regulation YY, the Board is applying a
stress period of 30 days to the calculation of the modified LCR. To
tailor the minimum quantitative standard for modified LCR holding
companies while generally maintaining the amount of HQLA required for
these firms under the proposal, the Board is amending the modified LCR
denominator such that the net cash outflows shall be the net cash
outflows calculated under the unmodified liquidity coverage ratio
requirements over a 30 calendar-day stress period (excluding step 2 of
the peak day approach described in section II.C.1 of this Supplementary
Information section) multiplied by a factor of 0.7.
C. Calculation Requirements and Comments on Modified LCR Reporting
The proposed rule would have applied the modified LCR to depository
institution holding companies domiciled in the United States that have
total consolidated assets of $50 billion or more based on the average
of the total asset amount reported on the institution's four most
recent FR Y-9Cs. One commenter requested that the agencies clarify when
companies subject to the modified LCR are required to start meeting the
requirement: The day on which the company files the fourth FR Y-9C
showing that it is subject to the rule, the day of the quarter
following the filing of that report, or another date.
One commenter requested that the agencies clarify the mechanics for
calculating the modified LCR and reporting to the regulators.
Specifically, the commenter asked whether the modified LCR requires a
daily calculation. One commenter recommended that regional banking
organizations be required to calculate the LCR monthly and to report
the information on a delayed basis, for example on the 20th day of the
calendar month following the calculation date. The Board recognizes
that the calculation requirements under the modified LCR present
certain operational challenges to modified LCR holding companies. The
Board is delaying the earliest date upon which a modified LCR holding
company must comply with this rule to January 1, 2016. In addition, the
Board is adopting in the final rule a monthly calculation requirement,
rather than the daily calculation requirement in the proposed rule.
This monthly calculation requirement reflects the difference in size,
complexity, and funding profile of the institutions subject to the
modified LCR. Modified LCR holding companies will be subject to the
transition periods set forth in Table 6 below. If a modified LCR
holding company's LCR is below the required minimum when it is
calculated on the last day of each calendar month, or if its supervisor
has determined that the covered company is otherwise materially
noncompliant, the covered company must promptly consult with the Board
to determine whether the covered company must provide a written
remediation plan.
As discussed in section I of this Supplementary Information
section, the agencies anticipate proposing reporting requirements in a
future notice. This future notice would contain the reporting
requirements for institutions subject to the Board's modified LCR,
including any applicable reporting date requirements.
The Board is clarifying that a modified LCR holding company is
required to comply with the modified LCR on the first day of the
quarter following the date at which the average total consolidated
assets of the holding company equal or exceed $50 billion.
Table 6--Transition Period for the Modified Liquidity Coverage Ratio
------------------------------------------------------------------------
------------------------------------------------------------------------
Transition period Liquidity coverage
ratio
------------------------------------------------------------------------
Calendar year 2016 .90
Calendar year 2017 and thereafter 1.00
------------------------------------------------------------------------
Calculation Frequency
------------------------------------------------------------------------
All modified LCR holding Last business day Beginning January
companies. of the calendar 1, 2016 and
month. thereafter.
------------------------------------------------------------------------
VI. Plain Language
Section 722 of the Gramm-Leach Bliley Act \96\ requires the
agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies sought to present the
proposed rule in a simple and straightforward manner and did not
receive any comments on the use of plain language.
---------------------------------------------------------------------------
\96\ Pub L. 106-102, 113 Stat. 1338, 1471, 12 U.S.C. 4809.
---------------------------------------------------------------------------
VII. Regulatory Flexibility Act
Section 4 of the Regulatory Flexibility Act \97\ (RFA), requires an
agency to prepare a final regulatory flexibility analysis (FRFA) when
an agency promulgates a final rule unless,
[[Page 61522]]
pursuant to section 5(b) of the RFA, the agency certifies that the
final rule will not, if promulgated, have a significant economic impact
on a substantial number of small entities \98\ (defined for purposes of
the RFA to include banking entities with total assets less than or
equal to $550 million and trust companies with total assets less than
or equal to $38.5 million (small banking entities)).\99\ Pursuant to
section 5(b) of the RFA, the OCC and the FDIC are certifying that the
final rule will not have a significant economic impact on a substantial
number of small entities.
---------------------------------------------------------------------------
\97\ 5 U.S.C. 604.
\98\ 5 U.S.C. 605(b).
\99\ See 79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------
OCC
As discussed previously in this Supplementary Information section,
the final rule generally will apply to national banks and Federal
savings associations with: (i) Total consolidated assets equal to $250
billion or more; (ii) consolidated total on-balance sheet foreign
exposure equal to $10 billion or more; or (iii) total consolidated
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, 2013, the OCC supervises 1,231
small entities. The only OCC-supervised institutions subject to the
final rule have $10 billion or more in total consolidated assets.
Accordingly, no OCC-supervised small banking entities meet the criteria
to be a covered institution under the final rule. Therefore, the final
rule will not have a significant economic impact on a substantial
number of small OCC-supervised banking entities.
Pursuant to section 5(b) of the RFA, the OCC certifies that the
final rule will not have a significant economic impact on a substantial
number of small national banks and small Federal savings associations.
Board
The Board is providing a final regulatory flexibility analysis with
respect to this final rule. As discussed above, this final rule would
implement a quantitative liquidity requirement consistent with the
liquidity coverage ratio established by the BCBS. The Board received no
public comments related to the initial Regulatory Flexibility Act
analysis in the proposed rule from the Chief Council for Advocacy of
the Small Business Administration or from the general public.
As discussed previously in this Supplementary Information section,
the final rule generally would apply to Board-regulated institutions
with (i) total consolidated assets equal to $250 billion or more; (ii)
total consolidated on-balance sheet foreign exposure equal to $10
billion or more; or (iii) total consolidated assets equal to $10
billion or more if that Board-regulated institution is a depository
institution subsidiary of a company subject to the proposed rule. The
modified version of the liquidity coverage ratio would apply to top-
tier bank holding companies and savings and loan holding companies
domiciled in the United States that have total consolidated assets of
$50 billion or more. The modified version of the liquidity coverage
ratio would not apply to: (i) A grandfathered unitary savings and loan
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 has 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. The final rule
focuses on these financial institutions because of their complexity,
funding profiles, and potential risk to the financial system.
As of June 30, 2014, there were approximately 657 small state
member banks, 3,716 small bank holding companies, and 254 small savings
and loan holding companies. No small top-tier bank holding company,
top-tier savings and loan holding company, or state member bank would
be subject to the rule, so there would be no additional projected
compliance requirements imposed on small bank holding companies,
savings and loan holding companies, or state member banks.
The Board believes that the final rule will not have a significant
impact on small banking organizations supervised by the Board and
therefore believes that there are no significant alternatives to the
rule that would reduce the economic impact on small banking
organizations supervised by the Board.
FDIC
As described previously in this Supplementary Information section,
the final rule generally will 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),
and their consolidated subsidiary depository institutions with $10
billion or more in in total consolidated assets. One FDIC-supervised
institution will satisfy the foregoing criteria as of the effective
date of the final rule, and it is not a small entity. As of December
31, 2013, based on a $550 million threshold, the FDIC supervises 3,353
small state nonmember banks, and 51 small state savings associations.
The only FDIC-supervised institutions subject to the final rule have
$10 billion or more in total consolidated assets. 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.
Pursuant to section 5(b) of the RFA, the FDIC certifies that the
final rule will 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 OCC and FDIC submitted this collection to OMB at the proposed
rule stage. The information collection requirements contained in this
joint final rule 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
final rule under the authority delegated to the Board by OMB. The
agencies received no comments regarding the collection at the proposed
rule stage.
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
[[Page 61523]]
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.
All 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.
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: Annual and event generated.
Affected Public:
FDIC: Insured state non-member 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, and any subsidiary thereof.
Abstract:
The final rule implements a quantitative liquidity requirement
consistent with the LCR standard established by the BCBS and contains
requirements subject to the PRA. The reporting and recordkeeping
requirements are found in Sec. Sec. _.22 and _.40. Compliance with the
information collections will be mandatory. Responses to the information
collections will be kept confidential to the extent permitted by law,
and there would be no mandatory retention period for the proposed
collections of information.
Section _.22 will require that, with respect to each asset eligible
for inclusion in a covered company's HQLA amount, the covered company
must implement policies that require eligible HQLA to be under the
control of the management function in the covered company responsible
for managing liquidity risk. The management function must evidence its
control over the HQLA by segregating the HQLA from other assets, with
the sole intent to use the HQLA as a source of liquidity, or
demonstrating the ability to monetize the assets and making the
proceeds available to the liquidity management function without
conflicting with a business or risk management strategy of the covered
company. In addition, Sec. _.22 will require that a covered company
must have a documented methodology that results in a consistent
treatment for determining that the covered company's eligible HQLA meet
the requirements of Sec. _.22.
Section _.40 will require that a covered company must notify its
appropriate Federal banking agency on any day when its liquidity
coverage ratio is calculated to be less than the minimum requirement in
Sec. _.10. If a covered company's liquidity coverage ratio is below
the minimum requirement in Sec. _--.10 for three consecutive days, or
if its appropriate Federal banking agency has determined that the
institution is otherwise materially noncompliant, the covered company
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 appropriate Federal banking agency.
The liquidity plan must include, as applicable, (1) an assessment
of the covered company's liquidity position; (2) the actions the
covered company has taken and will take to achieve full compliance,
including a plan for adjusting the covered company'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 time frame for achieving
full compliance; and (4) a commitment to provide a progress report to
its appropriate Federal banking agency at least weekly until full
compliance is achieved.
Estimated Paperwork Burden
Estimated Burden per Response:
Reporting Burden
Sec. _.40(a)--0.25 hours.
Sec. _.40(b)--0.25 hours.
Sec. _.40(b)(4)--0.25 hours.
Recordkeeping Burden
Sec. _.22(a)(2) and (5)--20 hours.
Sec. _.40(b)--100 hours.
FDIC
Estimated Number of Respondents: 2.
Total Estimated Annual Burden: 249 hours.
OCC
Estimated Number of Respondents: 20 national banks and Federal
savings associations.
Total Estimated Annual Burden: 2,485 hours.
Board
Estimated Number of Respondents: 42 for Sec. _.22; 3 for Sec.
_.40.
Total Estimated Annual Burden: 1,153 hours.
IX. OCC Unfunded Mandates Reform Act of 1995 Determination
The OCC has analyzed the final rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). For
purposes of this analysis, the OCC considered whether the final rule
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 OCC has determined that this final rule is likely to result in
the expenditure by the private sector of $100 million or more (adjusted
annually for inflation) in any one year. When the final rule is
published in the Federal Register, the OCC's UMRA written statement
will be available at: http://www.regulations.gov, Docket ID OCC-2013-
0016.
Text of Common Rule
(All Agencies)
PART [_--]--LIQUIDITY RISK MEASUREMENT STANDARDS
Subpart A General Provisions
Sec.
_.1 Purpose and applicability.
_.2 Reservation of authority.
_.3 Definitions.
_.4 Certain operational requirements.
Subpart B Liquidity Coverage Ratio
_.10 Liquidity coverage ratio.
Subpart C High-Quality Liquid Assets
_.20 High-quality liquid asset criteria.
[[Page 61524]]
_.21 High-quality liquid asset amount.
_.22 Requirements for eligible high-quality liquid assets.
Subpart D Total Net Cash Outflow
_.30 Total net cash outflow amount.
_.31 Determining maturity.
_.32 Outflow amounts.
_.33 Inflow amounts.
Subpart E Liquidity Coverage Shortfall
_.40 Liquidity coverage shortfall: Supervisory framework.
Subpart F Transitions
_.50 Transitions.
Subpart A--General Provisions
Sec. _.1 Purpose and applicability.
(a) Purpose. This part establishes a minimum liquidity standard for
certain [BANK]s on a consolidated basis, 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 total consolidated assets equal to $250 billion or more,
as reported on the most recent year-end [REGULATORY REPORT];
(ii) It has total consolidated 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 the 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 (ii) of
this section and has total consolidated 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) Subject to the transition periods set forth in subpart F of
this part:
(i) A [BANK] that is subject to the minimum liquidity standard and
other requirements of this part under paragraph (b)(1) of this section
on September 30, 2014, must comply with the requirements of this part
beginning on January 1, 2015;
(ii) A [BANK] that becomes subject to the minimum liquidity
standard and other requirements of this part under paragraphs (b)(1)(i)
through (iii) of this section after September 30, 2014, must comply
with the requirements of this part beginning on April 1 of the year in
which the [BANK] becomes subject to the minimum liquidity standard and
other requirements of this part, except:
(A) From April 1 to December 31 of the year in which the [BANK]
becomes subject to the minimum liquidity standard and other
requirements of this part, the [BANK] must calculate and maintain a
liquidity coverage ratio monthly, on each calculation date that is the
last business day of the applicable calendar month; and
(B) Beginning January 1 of the year after the first year in which
the [BANK] becomes subject to the minimum liquidity standard and other
requirements of this part under paragraph (b)(1) of this section, and
thereafter, the [BANK] must calculate and maintain a liquidity coverage
ratio on each calculation date; and
(iii) A [BANK] that becomes subject to the minimum liquidity
standard and other requirements of this part under paragraph (b)(1)(iv)
of this section after September 30, 2014, must comply with the
requirements of this part subject to a transition period specified by
the [AGENCY].
(3) 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).
(4) 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.
(5) In making a determination under paragraphs (b)(1)(iv) or (4) 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.
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 in which, as of the calculation
date, the counterparties have previously exchanged non-cash assets, and
have each agreed to return such assets to each other 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] that is not an asset of the
[[Page 61525]]
[BANK], regardless of a [BANK]'s hypothecation rights with respect to
the security.
Collateralized deposit means:
(1) A deposit of a public sector entity held at the [BANK] that is
secured under applicable law by a lien on assets owned by the [BANK]
and that gives the depositor, as holder of the lien, priority over the
assets in the event the [BANK] enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or similar proceeding; or
(2) A deposit of a fiduciary account held at the [BANK] for which
the [BANK] is a fiduciary and sets aside assets owned by the [BANK] as
security under 12 CFR 9.10 (national bank) or 12 CFR 150.300 through
150.320 (Federal savings associations) and that gives the depositor
priority over the assets in the event the [BANK] enters into
receivership, bankruptcy, insolvency, liquidation, resolution, or
similar proceeding.
Committed means, with respect to a credit facility or liquidity
facility, that under the terms of the legally binding written 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 the
balance sheet of a [BANK] or other company under GAAP.
Controlled subsidiary means, with respect to a company or a [BANK],
a consolidated subsidiary or a company that otherwise meets the
definition of ``subsidiary'' in section 2(d) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(d)).
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 of
Governors of the Federal Reserve System.
Covered nonbank company means a designated company that the Board
of Governors of the Federal Reserve System has required by rule or
order to comply with the requirements of 12 CFR part 249.
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. A credit facility does not include a legally
binding written agreement to extend funds at a future date to a
counterparty that is made for the purpose of refinancing the debt of
the counterparty when it is unable to obtain a primary or anticipated
source of funding. See liquidity facility.
Customer short position means a legally binding written agreement
pursuant to which the customer must deliver to the [BANK] a non-cash
asset that the customer has already sold.
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, forward 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)).
Designated 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 of Governors of
the Federal Reserve System and for which such determination is still in
effect.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
Eligible HQLA means a high-quality liquid asset that meets the
requirements set forth in Sec. _.22.
Fair value means fair value as determined under GAAP.
Financial sector entity means an investment adviser, investment
company, pension fund, non-regulated fund, regulated financial company,
or identified company.
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 is a level 1
liquid asset, level 2A liquid asset, or level 2B liquid asset, in
accordance with the criteria set forth in Sec. _--.20.
HQLA amount means the HQLA amount as calculated under Sec. _.21.
[[Page 61526]]
Identified company means any company that the [AGENCY] has
determined should be treated for the purposes of this part the same 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 person or 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 persons or companies.
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 written agreement to
extend funds at a future date to a counterparty that is made 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 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. If a facility has
characteristics of both credit and liquidity facilities, the facility
must be classified as a liquidity facility. 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 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), 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 or a
collateralized deposit that is necessary for the [BANK] to provide
operational services as an independent third-party intermediary, agent,
or administrator to the wholesale customer or counterparty providing
the unsecured wholesale funding or collateralized deposit. 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) Administration of payments and cash flows related to the
safekeeping of investment assets, not including the purchase or sale of
assets;
(3) Payroll administration and control over the disbursement of
funds;
(4) Transmission, reconciliation, and confirmation of payment
orders;
(5) Daylight overdraft;
(6) Determination of intra-day and final settlement positions;
(7) Settlement of securities transactions;
(8) Transfer of capital distributions and recurring contractual
payments;
(9) Customer subscriptions and redemptions;
(10) Scheduled distribution of customer funds;
(11) Escrow, funds transfer, stock transfer, and agency services,
including payment and settlement services, payment of fees, taxes, and
other expenses; and
(12) 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 U.S. sovereign entity level.
Publicly traded means, with respect to an equity security, that the
equity 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 legally binding
written 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, bankruptcy, insolvency, liquidation, resolution,
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, bankruptcy, insolvency,
liquidation, resolution, 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; and
(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
[[Page 61527]]
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 depository institution holding company or designated company;
(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 12 CFR part 249;
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\1\ http://www.ffiec.gov/nicpubweb/nicweb/NicHome.aspx.
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(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 financial
market utility).
(8) A regulated financial company 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 multilateral development banks.
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; or
(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 Federal Reserve
Bank.
Retail customer or counterparty means a customer or counterparty
that is:
(1) An individual;
(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; or
(3) A living or testamentary trust that:
(i) Is solely for the benefit of natural persons;
(ii) Does not have a corporate trustee; and
(iii) Terminates within 21 years and 10 months after the death of
grantors or beneficiaries of the trust living on the effective date of
the trust or within 25 years, if applicable under state law.
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 is
subject to a legally binding agreement as of the calculation date and
gives rise to a cash obligation of the [BANK] to a counterparty that is
secured under applicable law by a lien on assets owned by the [BANK],
which gives the counterparty, as holder of the lien, priority over the
assets in the event the [BANK] enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or similar proceeding. Secured
funding transactions include repurchase transactions, loans of
collateral to the [BANK]'s customers to effect short positions, other
secured loans, and borrowings from a Federal Reserve Bank.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement of the calculation date and
gives rise to a cash obligation of a counterparty to the [BANK] that is
secured under applicable law by a lien on assets owned by the
counterparty, which gives the [BANK], as holder of the lien, priority
over the assets in the event the counterparty enters into receivership,
bankruptcy,
[[Page 61528]]
insolvency, liquidation, resolution, or similar proceeding, including
reverse repurchase transactions and securities borrowing transactions.
Securities Exchange Act means the Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.).
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 has 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.
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 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, bankruptcy, insolvency, liquidation,
resolution, 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 related operational services must be performed pursuant to
a legally binding written agreement, and:
(i) The termination of the agreement must be subject to a minimum
30 calendar-day notice period; or
(ii) As a result of termination of the agreement or transfer of
services to a third-party provider, the customer providing the deposit
would incur significant contractual termination costs or switching
costs (switching costs include significant technology, administrative,
and legal service costs incurred in connection with the transfer of the
operational services to a third-party provider);
(2) The deposit must be held in an account designated as an
operational account;
(3) The customer must hold the deposit at the [BANK] for the
primary purpose of obtaining the operational services provided by the
[BANK];
(4) 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;
(5) The [BANK] must demonstrate that the deposit is empirically
linked to the operational services and that it has a methodology that
takes into account the volatility of the average balance for
identifying any excess amount, which must be excluded from the
operational deposit amount;
(6) The deposit must not be provided in connection with the
[BANK]'s provision of prime brokerage services, which, for the purposes
of this part, are a package of services offered by the [BANK] whereby
the [BANK], among other services, executes, clears, settles, and
finances transactions entered into by the customer or a third-party
entity on behalf of the customer (such as an executing broker), and
where the [BANK] has a right to use or rehypothecate assets provided by
the customer, including in connection with the extension of margin and
other similar financing of the customer, subject to applicable law, and
includes operational services provided to a non-regulated fund; and
(7) The deposits must not be for arrangements in 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 prior written approval from the [AGENCY].
(b) Calculation of the liquidity coverage ratio. A [BANK]'s
liquidity coverage ratio equals:
[[Page 61529]]
(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
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 U.S. 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, European Community, or a multilateral
development bank, that is:
(i) Assigned a zero percent risk weight under subpart D of [AGENCY
CAPITAL REGULATION] as of the calculation date;
(ii) Liquid and readily-marketable;
(iii) Issued or guaranteed 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
(iv) Not an obligation of a financial sector entity and not an
obligation of a consolidated subsidiary of a financial sector entity;
or
(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 zero 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 this part.
(b) Level 2A liquid assets. An asset is a level 2A liquid asset if
the asset is liquid and readily-marketable 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; or
(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 or guaranteed by an entity whose obligations have a
proven record as a reliable source of liquidity in repurchase or sales
markets during stressed market conditions, as 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 financial sector entity, and not an
obligation of a consolidated subsidiary of a financial sector entity.
(c) Level 2B liquid assets. An asset is a level 2B liquid asset if
the asset is liquid and readily-marketable and is one of the following
types of assets:
(1) A corporate debt security that is:
(i) Investment grade under 12 CFR part 1 as of the calculation
date;
(ii) Issued or guaranteed by an entity whose obligations have a
proven record as a reliable source of liquidity in repurchase or sales
markets during stressed market conditions, as demonstrated by:
(A) The market price of the 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
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 financial sector entity and not an
obligation of a consolidated subsidiary of a financial sector entity;
or
(2) A publicly traded common equity share that is:
(i) Included in:
(A) The Russell 1000 Index; or
(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;
(ii) Issued in:
(A) U.S. dollars; or
(B) 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, as
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 financial sector entity and not issued by a
consolidated subsidiary of a financial sector entity;
(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 in which the publicly traded common equity
share is held, as calculated by the [BANK] 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
[[Page 61530]]
(3) The level 2B liquid asset amount; minus
(4) The greater of:
(i) The unadjusted excess HQLA amount; and
(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 of all
level 1 liquid assets held by the [BANK] as of the calculation date
that are eligible HQLA, less the amount of the reserve balance
requirement under section 204.5 of Regulation D (12 CFR 204.5).
(2) Level 2A liquid asset amount. The level 2A liquid asset amount
equals 85 percent of the fair value of all level 2A liquid assets held
by the [BANK] as of the calculation date that are eligible HQLA.
(3) Level 2B liquid asset amount. The level 2B liquid asset amount
equals 50 percent of the fair value of all level 2B liquid assets held
by the [BANK] as of the calculation date that are eligible HQLA.
(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; and
(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; and
(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 of all level 1 liquid assets that would be
eligible HQLA and would be held by the [BANK] upon the unwind of any
secured funding transaction (other than a collateralized deposit),
secured lending transaction, asset exchange, or collateralized
derivatives transaction that matures within 30 calendar days of the
calculation date where the [BANK] will provide an asset that is
eligible HQLA and the counterparty will provide an asset that will be
eligible HQLA; less the amount of the reserve balance requirement under
section 204.5 of Regulation D (12 CFR 204.5).
(2) Adjusted level 2A liquid asset amount. A [BANK]'s adjusted
level 2A liquid asset amount equals 85 percent of the fair value of all
level 2A liquid assets that would be eligible HQLA and would be held by
the [BANK] upon the unwind of any secured funding transaction (other
than a collateralized deposit), secured lending transaction, asset
exchange, or collateralized derivatives transaction that matures within
30 calendar days of the calculation date where the [BANK] will provide
an asset that is eligible HQLA and the counterparty will provide an
asset that will be eligible HQLA.
(3) Adjusted level 2B liquid asset amount. A [BANK]'s adjusted
level 2B liquid asset amount equals 50 percent of the fair value of all
level 2B liquid assets that would be eligible HQLA and would be held by
the [BANK] upon the unwind of any secured funding transaction (other
than a collateralized deposit), secured lending transaction, asset
exchange, or collateralized derivatives transaction that matures within
30 calendar days of the calculation date where the [BANK] will provide
an asset that is eligible HQLA and the counterparty will provide an
asset that will be eligible 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; and
(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; and
(2) 0.
Sec. _.22 Requirements for eligible high-quality liquid assets.
(a) Operational requirements for eligible HQLA. With respect to
each asset that is eligible for inclusion in a [BANK]'s HQLA amount, a
[BANK] must meet all of the following operational requirements:
(1) The [BANK] must demonstrate 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 monetizing a sample of HQLA that reasonably
reflects the composition of the [BANK]'s eligible HQLA, including with
respect to asset type, maturity, and counterparty characteristics;
(2) The [BANK] must implement policies that require eligible HQLA
to be under the control of the management function in the [BANK] that
is charged with managing liquidity risk, and this management function
must evidence its control over the HQLA by either:
(i) Segregating the HQLA from other assets, with the sole intent to
use the HQLA 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 or risk management strategy of the [BANK];
(3) The fair value of the eligible HQLA must be reduced by the
outflow amount that would result from the termination of any specific
transaction hedging eligible HQLA;
(4) The [BANK] must implement and maintain policies and procedures
that determine the composition of its eligible HQLA on each calculation
date, by:
(i) Identifying its eligible HQLA by legal entity, geographical
location, currency, account, or other relevant identifying factors as
of the calculation date;
(ii) Determining that eligible HQLA meet the criteria set forth in
this section; and
(iii) Ensuring the appropriate diversification of the eligible HQLA
by asset type, counterparty, issuer, currency, borrowing capacity, or
other factors associated with the liquidity risk of the assets; and
(5) The [BANK] must have a documented methodology that results in a
consistent treatment for determining that the [BANK]'s eligible HQLA
meet the requirements set forth in this section.
(b) Generally applicable criteria for eligible HQLA. A [BANK]'s
eligible HQLA must meet all of the following criteria:
(1) The assets are unencumbered in accordance with the following
criteria:
[[Page 61531]]
(i) The assets are free of legal, regulatory, contractual, or other
restrictions on the ability of the [BANK] to monetize the assets; and
(ii) The assets are not pledged, explicitly or implicitly, to
secure or to provide credit enhancement to any transaction, but the
assets may be considered unencumbered if the assets are pledged to a
central bank or a U.S. government-sponsored enterprise where:
(A) Potential credit secured by the assets is not currently
extended to the [BANK] or its consolidated subsidiaries; and
(B) The pledged assets are not required to support access to the
payment services of a central bank;
(2) The asset is not:
(i) A client pool security held in a segregated account; or
(ii) An asset received from a secured funding transaction involving
client pool securities that were held in a segregated account;
(3) For eligible 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 eligible
HQLA of the U.S. consolidated subsidiary 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); and
(ii) If the U.S. consolidated subsidiary is not subject to a
minimum liquidity standard under this part, the [BANK] may include the
eligible HQLA of the U.S. consolidated subsidiary 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);
(4) For HQLA held by a consolidated subsidiary of the [BANK] that
is organized under the laws of a foreign jurisdiction, the [BANK] may
include the eligible HQLA of the consolidated subsidiary organized
under the laws of a foreign jurisdiction 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 as eligible HQLA any assets, or
HQLA resulting from transactions involving an asset that the [BANK]
received with rehypothecation rights, if the counterparty that provided
the asset or the beneficial owner of the asset has a contractual right
to withdraw the assets without an obligation to pay more than de
minimis remuneration at any time during the 30 calendar days following
the calculation date; and
(6) The [BANK] has not designated the assets to cover operational
costs.
(c) Maintenance of U.S. eligible HQLA. A [BANK] is generally
expected to maintain as eligible HQLA an amount and type of eligible
HQLA in the United States that is sufficient to meet its total net cash
outflow amount in the United States under subpart D of this part.
Subpart D--Total Net Cash Outflow
Sec. _.30 Total net cash outflow amount.
(a) Calculation of total net cash outflow amount. As of the
calculation date, a [BANK]'s total net cash outflow amount equals:
(1) The sum of the outflow amounts calculated under Sec. _.32(a)
through (l); minus
(2) The lesser of:
(i) The sum of the inflow amounts calculated under Sec. _.33(b)
through (g); and
(ii) 75 percent of the amount calculated under paragraph (a)(1) of
this section; plus
(3) The maturity mismatch add-on as calculated under paragraph (b)
of this section.
(b) Calculation of maturity mismatch add-on. (1) For purposes of
this section:
(i) The net cumulative maturity outflow amount for any of the 30
calendar days following the calculation date is equal to the sum of the
outflow amounts for instruments or transactions identified in Sec.
_.32(g), (h)(1), (h)(2), (h)(5), (j), (k), and (l) that have a maturity
date prior to or on that calendar day minus the sum of the inflow
amounts for instruments or transactions identified in Sec. _.33(c),
(d), (e), and (f) that have a maturity date prior to or on that
calendar day.
(ii) The net day 30 cumulative maturity outflow amount is equal to,
as of the 30th day following the calculation date, the sum of the
outflow amounts for instruments or transactions identified in Sec.
_.32(g), (h)(1), (h)(2), (h)(5), (j), (k), and (l) that have a maturity
date 30 calendar days or less from the calculation date minus the sum
of the inflow amounts for instruments or transactions identified in
Sec. _.33(c), (d), (e), and (f) that have a maturity date 30 calendar
days or less from the calculation date.
(2) As of the calculation date, a [BANK]'s maturity mismatch add-on
is equal to:
(i) The greater of:
(A) 0; and
(B) The largest net cumulative maturity outflow amount as
calculated under paragraph (b)(1)(i) of this section for any of the 30
calendar days following the calculation date; minus
(ii) The greater of:
(A) 0; and
(B) The net day 30 cumulative maturity outflow amount as calculated
under paragraph (b)(1)(ii) of this section.
(3) Other than the transactions identified in Sec. _.32(h)(2),
(h)(5), or (j) or Sec. _.33(d) or (f), the maturity of which is
determined under Sec. _.31(a), transactions that have no maturity date
are not included in the calculation of the maturity mismatch add-on.
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
[[Page 61532]]
exercise the option at the earliest possible date;
(ii) If an investor or funds provider has an option that would
extend the maturity, the [BANK] must assume that the investor or funds
provider will not exercise the option to extend the maturity;
(iii) If the [BANK] has an option that would reduce the maturity of
an obligation, the [BANK] must assume that the [BANK] will exercise the
option at the earliest possible date, except if either of the following
criteria are satisfied, in which case the maturity of the obligation
for purposes of this part will be the original maturity date at
issuance:
(A) The original maturity of the obligation is greater than one
year and the option does not go into effect for a period of 180 days
following the issuance of the instrument; or
(B) The counterparty is a sovereign entity, a U.S. government-
sponsored enterprise, or a public sector entity.
(iv) If the [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
(v) 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 the borrower has an option that would reduce the maturity,
the [BANK] must assume that the borrower will not exercise the option
to reduce the maturity;
(iii) If the [BANK] has an option that would reduce the maturity of
an instrument or transaction, the [BANK] must assume the [BANK] will
not exercise the option to reduce the maturity;
(iv) If the [BANK] has an option that would extend the maturity of
an instrument or transaction, the [BANK] must assume the [BANK] will
exercise the option to extend the maturity to the latest possible date;
and
(v) 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.
(3) With respect to a transaction subject to Sec. _.33(f)(1)(iii)
through (vii) (secured lending transactions) or Sec. _.33(f)(2)(ii)
through (x) (asset exchanges), to the extent the transaction is secured
by collateral that has been pledged in connection with either a secured
funding transaction or asset exchange that has a remaining maturity of
30 calendar days or less as of the calculation date, the maturity date
is the later of the maturity date determined under paragraph (a)(2) of
this section for the secured lending transaction or asset exchange or
the maturity date determined under paragraph (a)(1) of this section for
the secured funding transaction or asset exchange for which the
collateral has been pledged.
(4) With respect to a transaction that has no maturity date, is not
an operational deposit, and is subject to the provisions of Sec.
_.32(h)(2), (h)(5), (j), or (k) or Sec. _.33(d) or (f), the maturity
date is the first calendar day after the calculation date. Any other
transaction that has no maturity date and is subject to the provisions
of Sec. _.32 must be considered to mature within 30 calendar days of
the calculation date.
(5) With respect to a transaction subject to the provisions of
Sec. _.33(g), on the date of the next scheduled calculation of the
amount required under applicable legal requirements for the protection
of customer assets with respect to each broker-dealer segregated
account, in accordance with the [BANK]'s normal frequency of
recalculating such requirements.
(b) [Reserved]
Sec. _.32 Outflow amounts.
(a) Retail funding outflow amount. A [BANK]'s retail funding
outflow amount as of the calculation date includes (regardless of
maturity or collateralization):
(1) 3 percent of all stable retail deposits held at the [BANK];
(2) 10 percent of all other retail deposits held at the [BANK];
(3) 20 percent of all deposits placed at the [BANK] by a third
party on behalf of a retail customer or counterparty that are not
brokered deposits, where the retail customer or counterparty owns the
account and the entire amount is covered by deposit insurance;
(4) 40 percent of all deposits placed at the [BANK] by a third
party on behalf of a retail customer or counterparty that are not
brokered deposits, where the retail customer or counterparty owns the
account and where less than the entire amount is covered by deposit
insurance; and
(5) 40 percent of all funding from a retail customer or
counterparty that is not:
(i) A retail deposit;
(ii) A brokered deposit provided by a retail customer or
counterparty; or
(iii) A debt instrument issued by the [BANK] that is owned by a
retail customer or counterparty (see paragraph (h)(2)(ii) of this
section).
(b) Structured transaction outflow amount. If the [BANK] is a
sponsor of a structured transaction where the issuing entity is not
consolidated on the [BANK]'s balance sheet under GAAP, the structured
transaction outflow amount for each such 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 amount for each counterparty. The net
derivative cash outflow amount does not include forward sales of
mortgage loans and any derivatives that are mortgage commitments
subject to paragraph (d) of this section. The net derivative cash
outflow amount for a counterparty is the sum of:
(1) The amount, if greater than zero, of contractual 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 other than transactions described in paragraph (c)(2) of
this section, less the contractual payments and collateral that the
[BANK] will receive from the counterparty 30 calendar days or less from
the calculation date under derivative transactions other than
transactions described in paragraph (c)(2) of this section, provided
that the derivative transactions are subject to a qualifying master
netting agreement; and
(2) The amount, if greater than zero, of contractual principal
payments that the [BANK] will make to the
[[Page 61533]]
counterparty 30 calendar days or less from the calculation date under
foreign currency exchange derivative transactions that result in the
full exchange of contractual cash principal payments in different
currencies within the same business day, less the contractual principal
payments that the [BANK] will receive from the counterparty 30 calendar
days or less from the calculation date under foreign currency exchange
derivative transactions that result in the full exchange of contractual
cash principal payments in different currencies within the same
business day.
(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) Zero 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) 10 percent of the undrawn amount of all committed credit
facilities extended by the [BANK] to a wholesale customer or
counterparty that is not a financial sector entity or a consolidated
subsidiary thereof, including a special purpose entity (other than
those described in paragraph (e)(1)(viii) of this section) that is a
consolidated subsidiary of such wholesale customer or counterparty;
(iv) 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 financial sector entity or a consolidated
subsidiary thereof, including a special purpose entity (other than
those described in paragraph (e)(1)(viii) of this section) that is a
consolidated subsidiary of such wholesale customer or counterparty;
(v) 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, but
excluding commitments described in paragraph (e)(1)(i) of this section;
(vi) 40 percent of the undrawn amount of all committed credit
facilities extended by the [BANK] to a financial sector entity or a
consolidated subsidiary thereof, including a special purpose entity
(other than those described in paragraph (e)(1)(viii) of this section)
that is a consolidated subsidiary of a financial sector entity, but
excluding other commitments described in paragraph (e)(1)(i) or (v) of
this section;
(vii) 100 percent of the undrawn amount of all committed liquidity
facilities extended by the [BANK] to a financial sector entity or a
consolidated subsidiary thereof, including a special purpose entity
(other than those described in paragraph (e)(1)(viii) of this section)
that is a consolidated subsidiary of a financial sector entity, but
excluding other commitments described in paragraph (e)(1)(i) or (v) of
this section and liquidity facilities included in paragraph (b)(2) of
this section;
(viii) 100 percent of the undrawn amount of all committed credit
and liquidity facilities extended to a special purpose entity that
issues or has issued commercial paper or securities (other than equity
securities issued to a company of which the special purpose entity is a
consolidated subsidiary) to finance its purchases or operations, and
excluding liquidity facilities included in paragraph (b)(2) of this
section; and
(ix) 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 of a
committed credit facility or committed liquidity facility is the entire
unused 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 the amount of level 2A
liquid assets securing the 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 of level 1 liquid assets and 85
percent of the fair value of level 2A liquid assets that are required
to be pledged as collateral by the counterparty to secure the facility,
provided that:
(i) The assets pledged upon a draw on the facility would be
eligible HQLA; and
(ii) The [BANK] has not included the assets as eligible HQLA under
subpart C of this part as of the calculation date.
(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
pledge or to fund under the terms of any transaction as a result of a
change in the [BANK]'s financial condition;
(2) Derivative collateral potential valuation changes. 20 percent
of the fair value of any collateral securing a derivative transaction
pledged to a counterparty by the [BANK] that is not a level 1 liquid
asset;
(3) Potential derivative valuation changes. The absolute value of
the largest 30-consecutive calendar day cumulative net mark-to-market
collateral outflow or inflow realized during the preceding 24 months
resulting from derivative transaction valuation changes;
(4) Excess collateral. 100 percent of the fair value of collateral
that:
(i) The [BANK] could be required by contract to return to a
counterparty because the collateral pledged 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 such that it
cannot be rehypothecated; and
(iii) Is not already excluded as eligible HQLA by the [BANK] under
Sec. _.22(b)(5);
(5) Contractually required collateral. 100 percent of the fair
value of collateral that the [BANK] is contractually required to pledge
to a counterparty and, as of such calculation date, the [BANK] has not
yet pledged;
(6) Collateral substitution. (i) Zero percent of the fair value of
collateral pledged to the [BANK] by a counterparty where the collateral
qualifies as level 1 liquid assets and eligible HQLA and where, under
the contract governing the transaction, the counterparty may replace
the pledged collateral with other assets that qualify as level 1 liquid
assets, without the consent of the [BANK];
(ii) 15 percent of the fair value of collateral pledged to the
[BANK] by a counterparty, where the collateral qualifies as level 1
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged 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 pledged to the
[BANK] by a counterparty where the collateral qualifies as level 1
liquid assets and eligible HQLA and where under, the contract governing
the transaction, the counterparty may replace the pledged
[[Page 61534]]
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 pledged to the
[BANK] by a counterparty where the collateral qualifies as level 1
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged collateral
with assets that do not qualify as HQLA, without the consent of the
[BANK];
(v) Zero percent of the fair value of collateral pledged to the
[BANK] by a counterparty where the collateral qualifies as level 2A
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged 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 pledged to the
[BANK] by a counterparty where the collateral qualifies as level 2A
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged 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 pledged to the
[BANK] by a counterparty where the collateral qualifies as level 2A
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged collateral
with assets that do not qualify as HQLA, without the consent of the
[BANK];
(viii) Zero percent of the fair value of collateral pledged to the
[BANK] by a counterparty where the collateral qualifies as level 2B
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged collateral
with other assets that qualify as HQLA, without the consent of the
[BANK]; and
(ix) 50 percent of the fair value of collateral pledged to the
[BANK] by a counterparty where the collateral qualifies as level 2B
liquid assets and eligible HQLA and where, under the contract governing
the transaction, the counterparty may replace the pledged collateral
with assets that do not qualify as HQLA, without the consent of the
[BANK].
(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)(5) through (9) 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)(5) through (9) of this section and which mature later than 30
calendar days from the calculation date;
(3) 20 percent of all brokered deposits at the [BANK] provided by a
retail customer or counterparty that are not described in paragraphs
(g)(5) through (9) of this section and which are held in a
transactional account with no contractual maturity date, where the
entire amount is covered by deposit insurance;
(4) 40 percent of all brokered deposits at the [BANK] provided by a
retail customer or counterparty that are not described in paragraphs
(g)(5) through (9) of this section and which are held in a
transactional account with no contractual maturity date, where less
than the entire amount is covered by deposit insurance;
(5) 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;
(6) 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;
(7) 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 controlled subsidiary
of the [BANK], or a company that is a controlled subsidiary of the same
top-tier company of which the [BANK] is a controlled subsidiary; and
(ii) Where the entire amount of the deposits is covered by deposit
insurance;
(8) 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 controlled
subsidiary of the [BANK], or a company that is a controlled subsidiary
of the same top-tier company of which the [BANK] is a controlled
subsidiary; and
(ii) Where the entire amount of the deposits is covered by deposit
insurance; and
(9) 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, for all transactions that
mature within 30 calendar days or less of the calculation date, as of
the calculation date includes:
(1) For unsecured wholesale funding that is not an operational
deposit and is not provided by a financial sector entity or
consolidated subsidiary of a financial sector entity:
(i) 20 percent of all such funding, where the entire amount is
covered by deposit insurance and the funding is not a brokered deposit;
(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:
(i) Funding provided by a company that is a consolidated subsidiary
of the same top-tier company of which the [BANK] is a consolidated
subsidiary; and
(ii) Debt instruments issued by the [BANK], including such
instruments owned by retail customers or counterparties;
(3) 5 percent of all operational deposits, other than operational
deposits that are held in 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 buyback outflow amount. A [BANK]'s debt security
buyback 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] or a consolidated subsidiary of 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
[[Page 61535]]
[BANK]'s secured funding outflow amount, for all transactions that
mature within 30 calendar days or less of the calculation date, as of
the calculation date includes:
(i) Zero 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 entities, 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) If an outflow rate specified in paragraph (j)(1) of this
section for a secured funding transaction is greater than the outflow
rate that the [BANK] is required to apply under paragraph (h) of this
section to an unsecured wholesale funding transaction that is not an
operational deposit with the same counterparty, the [BANK] may apply to
the secured funding transaction the outflow rate that applies to an
unsecured wholesale funding transaction that is not an operational
deposit with that counterparty, except in the case of:
(i) Secured funding transactions that are secured by collateral
that was received by the [BANK] under a secured lending transaction or
asset exchange, in which case the [BANK] must apply the outflow rate
specified in paragraph (j)(1) of this section for the secured funding
transaction; and
(ii) Collateralized deposits that are operational deposits, in
which case the [BANK] may apply to the operational deposit amount, as
calculated in accordance with Sec. _.4(b), the operational deposit
outflow rate specified in paragraph (h)(3) or (4) of this section, as
applicable, if such outflow rate is lower than the outflow rate
specified in paragraph (j)(1) of this section.
(3) A [BANK]'s asset exchange outflow amount, for all transactions
that mature within 30 calendar days or less of the calculation date, as
of the calculation date includes:
(i) Zero percent of the fair value of the level 1 liquid assets the
[BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive level 1 liquid assets from the asset exchange
counterparty;
(ii) 15 percent of the fair value of the level 1 liquid assets the
[BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive level 2A liquid assets from the asset exchange
counterparty;
(iii) 50 percent of the fair value of the level 1 liquid assets the
[BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive level 2B liquid assets from the asset exchange
counterparty;
(iv) 100 percent of the fair value of the level 1 liquid assets the
[BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive assets that are not HQLA from the asset
exchange counterparty;
(v) Zero percent of the fair value of the level 2A liquid assets
that [BANK] must post to a counterparty pursuant to asset exchanges,
not described in paragraphs (j)(3)(x) through (xiii) of this section,
where [BANK] will receive level 1 or level 2A liquid assets from the
asset exchange counterparty;
(vi) 35 percent of the fair value of the level 2A liquid assets the
[BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive level 2B liquid assets from the asset exchange
counterparty;
(vii) 85 percent of the fair value of the level 2A liquid assets
the [BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive assets that are not HQLA from the asset
exchange counterparty;
(viii) Zero percent of the fair value of the level 2B liquid assets
the [BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive HQLA from the asset exchange counterparty; and
(ix) 50 percent of the fair value of the level 2B liquid assets the
[BANK] must post to a counterparty pursuant to asset exchanges, not
described in paragraphs (j)(3)(x) through (xiii) of this section, where
the [BANK] will receive assets that are not HQLA from the asset
exchange counterparty;
(x) Zero percent of the fair value of the level 1 liquid assets the
[BANK] will receive from a counterparty pursuant to an asset exchange
where the [BANK] has rehypothecated the assets posted by the asset
exchange counterparty, and, as of the calculation date, the assets will
not be returned to the [BANK] within 30 calendar days;
(xi) 15 percent of the fair value of the level 2A liquid assets the
[BANK] will receive from a counterparty pursuant to an asset exchange
where the [BANK] has rehypothecated the assets posted by the asset
exchange counterparty, and, as of the calculation date, the assets will
not be returned to the [BANK] within 30 calendar days;
(xii) 50 percent of the fair value of the level 2B liquid assets
the [BANK] will receive from a counterparty pursuant to an asset
exchange where the [BANK] has rehypothecated the assets posted by the
asset exchange counterparty, and, as of the calculation date, the
assets will not be returned to the [BANK] within 30 calendar days; and
(xiii) 100 percent of the fair value of the non-HQLA the [BANK]
will receive from a counterparty pursuant to an asset exchange where
the [BANK] has rehypothecated the assets posted by the asset exchange
counterparty, and, as of the calculation date, the assets will not be
returned to the [BANK] within 30 calendar days.
(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 in accordance with
paragraph (j) of this section.
(l) Other contractual outflow amount. A [BANK]'s other contractual
outflow amount is 100 percent of funding or amounts, with the exception
of
[[Page 61536]]
operating expenses of the [BANK] (such as rents, salaries, utilities,
and other similar payments), 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 that is eligible HQLA and any amounts
payable to the [BANK] with respect to that asset;
(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] with respect to any transaction
that has no contractual maturity date or that matures after 30 calendar
days of the calculation date (as determined by Sec. _.31).
(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 amount for each counterparty. The net derivative
cash inflow amount does not include amounts excluded from inflows under
paragraph (a)(2) of this section. The net derivative cash inflow amount
for a counterparty is the sum of:
(1) The amount, if greater than zero, of contractual payments and
collateral that the [BANK] will receive from the counterparty 30
calendar days or less from the calculation date under derivative
transactions other than transactions described in paragraph (b)(2) of
this section, less the contractual 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 other than
transactions described in paragraph (b)(2) of this section, provided
that the derivative transactions are subject to a qualifying master
netting agreement; and
(2) The amount, if greater than zero, of contractual principal
payments that the [BANK] will receive from the counterparty 30 calendar
days or less from the calculation date under foreign currency exchange
derivative transactions that result in the full exchange of contractual
cash principal payments in different currencies within the same
business day, less the contractual principal payments that the [BANK]
will make to the counterparty 30 calendar days or less from the
calculation date under foreign currency exchange derivative
transactions that result in the full exchange of contractual cash
principal payments in different currencies within the same business
day.
(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:
(1) 100 percent of all payments contractually payable to the [BANK]
from financial sector entities, or from a consolidated subsidiary
thereof, or central banks; and
(2) 50 percent of all payments contractually payable to the [BANK]
from wholesale customers or counterparties that are not financial
sector entities or consolidated subsidiaries thereof, provided that,
with respect to revolving credit facilities, the amount of the existing
loan is not included in the unsecured wholesale cash inflow amount 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 eligible 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) Zero percent of all contractual payments due to the [BANK]
pursuant to secured lending transactions, including margin loans
extended to customers, to the extent that the payments are secured by
collateral that has been rehypothecated in a transaction and, as of the
calculation date, will not be returned to the [BANK] within 30 calendar
days;
(ii) 100 percent of all contractual payments due to the [BANK]
pursuant to secured lending transactions not described in paragraph
(f)(1)(vii) of this section, to the extent that the payments are
secured by assets that are not eligible HQLA, but are still held by the
[BANK] and are available for immediate return to the counterparty at
any time;
(iii) Zero percent of all contractual payments due to the [BANK]
pursuant to secured lending transactions not described in paragraphs
(f)(1)(i) or (ii) of this section, to the extent that the payments are
secured by level 1 liquid assets;
(iv) 15 percent of all contractual payments due to the [BANK]
pursuant to secured lending transactions not described in paragraphs
(f)(1)(i) or (ii) of this section, to the extent that the payments are
secured by level 2A liquid assets;
(v) 50 percent of all contractual payments due to the [BANK]
pursuant to secured lending transactions not described in paragraphs
(f)(1)(i) or (ii) of this section, to the extent that the payments are
secured by level 2B liquid assets;
(vi) 100 percent of all contractual payments due to the [BANK]
pursuant to secured lending transactions not described in paragraphs
(f)(1)(i), (ii), or (vii) of this section, to the extent that the
payments are secured by assets that are not HQLA; and
(vii) 50 percent of all contractual payments due to the [BANK]
pursuant to collateralized margin loans extended to customers, not
described in paragraph (f)(1)(i) of this section, provided that the
loans are secured by assets that are not HQLA.
(2) A [BANK]'s asset exchange inflow amount as of the calculation
date includes:
(i) Zero percent of the fair value of assets the [BANK] will
receive from a counterparty pursuant to asset exchanges, to the extent
that the asset received by the [BANK] from the counterparty has been
rehypothecated in a transaction and, as of the calculation date, will
not be returned to the [BANK] within 30 calendar days;
(ii) Zero percent of the fair value of level 1 liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where
[[Page 61537]]
the [BANK] must post level 1 liquid assets to the asset exchange
counterparty;
(iii) 15 percent of the fair value of level 1 liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post level 2A liquid assets to the asset exchange counterparty;
(iv) 50 percent of the fair value of level 1 liquid assets the
[BANK] will receive from counterparty pursuant to asset exchanges, not
described in paragraph (f)(2)(i) of this section, where the [BANK] must
post level 2B liquid assets to the asset exchange counterparty;
(v) 100 percent of the fair value of level 1 liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post assets that are not HQLA to the asset exchange counterparty;
(vi) Zero percent of the fair value of level 2A liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post level 1 or level 2A liquid assets to the asset exchange
counterparty;
(vii) 35 percent of the fair value of level 2A liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post level 2B liquid assets to the asset exchange counterparty;
(viii) 85 percent of the fair value of level 2A liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post assets that are not HQLA to the asset exchange counterparty;
(ix) Zero percent of the fair value of level 2B liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post assets that are HQLA to the asset exchange counterparty; and
(x) 50 percent of the fair value of level 2B liquid assets the
[BANK] will receive from a counterparty pursuant to asset exchanges,
not described in paragraph (f)(2)(i) of this section, where the [BANK]
must post assets that are not HQLA to the asset exchange counterparty.
(g) Broker-dealer segregated account inflow amount. A [BANK]'s
broker-dealer segregated account inflow amount is the fair value of all
assets released from broker-dealer segregated accounts maintained in
accordance with statutory or regulatory requirements for the protection
of customer trading assets, provided that the calculation of the
broker-dealer segregated account inflow amount, for any transaction
affecting the calculation of the segregated balance (as required by
applicable law), shall be consistent with the following:
(1) In calculating the broker-dealer segregated account inflow
amount, the [BANK] must calculate the fair value of the required
balance of the customer reserve account as of 30 calendar days from the
calculation date by assuming that customer cash and collateral
positions have changed consistent with the outflow and inflow
calculations required under Sec. Sec. _.32 and _.33.
(2) If the fair value of the required balance of the customer
reserve account as of 30 calendar days from the calculation date, as
calculated consistent with the outflow and inflow calculations required
under Sec. Sec. _.32 and _.33, is less than the fair value of the
required balance as of the calculation date, the difference is the
segregated account inflow amount.
(3) If the fair value of the required balance of the customer
reserve account as of 30 calendar days from the calculation date, as
calculated consistent with the outflow and inflow calculations required
under Sec. Sec. _.32 and _.33, is more than the fair value of the
required balance as of the calculation date, the segregated account
inflow amount is zero.
(h) Other cash inflow amounts. A [BANK]'s inflow amount as of the
calculation date includes zero percent of other cash inflow amounts not
included in paragraphs (b) through (g) of this section.
(i) 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. (1) For the period during which a [BANK] must
calculate a liquidity coverage ratio on the last business day of each
applicable calendar month under subpart F of this part, if the [BANK]'s
liquidity coverage ratio is below the minimum requirement in Sec. _.10
for any calculation date that is the last business day of the
applicable calendar month, or if the [AGENCY] has determined that the
[BANK] is otherwise materially noncompliant with the requirements of
this part, the [BANK] must promptly consult with the [AGENCY] to
determine whether the [BANK] must provide to the [AGENCY] a plan for
achieving compliance with the minimum liquidity requirement in Sec.
_.10 and all other requirements of this part.
(2) For the period during which a [BANK] must calculate a liquidity
coverage ratio each business day under subpart F of this part, 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.
(3) The plan must include, as applicable:
(i) An assessment of the [BANK]'s liquidity position;
(ii) The actions the [BANK] has taken and will take to achieve full
compliance with this part, including:
(A) A plan for adjusting the [BANK]'s risk profile, risk
management, and funding sources in order to achieve full compliance
with this part; and
(B) A plan for remediating any operational or management issues
that contributed to noncompliance with this part;
(iii) An estimated time frame for achieving full compliance with
this part; and
(iv) 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 standard and other
requirements of this part.
[[Page 61538]]
Subpart F--Transitions
Sec. _--.50 Transitions.
(a) Covered depository institution holding companies with $700
billion or more in total consolidated assets or $10 trillion or more in
assets under custody. For any depository institution holding company
that has total consolidated assets equal to $700 billion or more, as
reported on the company's most recent Consolidated Financial Statements
for Holding Companies (FR Y-9C), or $10 trillion or more in assets
under custody, as reported on the company's most recent Banking
Organization Systemic Risk Report (FR Y-15), and any depository
institution that is a consolidated subsidiary of such depository
institution holding company that has total consolidated assets equal to
$10 billion or more, as reported on the most recent year-end
Consolidated Report of Condition and Income:
(1) Beginning January 1, 2015, through June 30, 2015, the [BANK]
must calculate and maintain a liquidity coverage ratio monthly, on each
calculation date that is the last business day of the applicable
calendar month, in accordance with this part, that is equal to or
greater than 0.80.
(2) Beginning July 1, 2015 through December 31, 2015, the [BANK]
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.
(3) Beginning January 1, 2016, through December 31, 2016, the
[BANK] 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.
(4) On January 1, 2017, and thereafter, the [BANK] must calculate
and maintain a liquidity coverage ratio on each calculation date that
is equal to or greater than 1.0.
(b) Other [BANK]s. For any [BANK] subject to a minimum liquidity
standard under this part not described in paragraph (a) of this
section:
(1) Beginning January 1, 2015, through December 31, 2015, the
[BANK] must calculate and maintain a liquidity coverage ratio monthly,
on each calculation date that is the last business day of the
applicable calendar month, in accordance with this part, that is equal
to or greater than 0.80.
(2) Beginning January 1, 2016, through June 30, 2016, the [BANK]
must calculate and maintain a liquidity coverage ratio monthly, on each
calculation date that is the last business day of the applicable
calendar month, in accordance with this part, that is equal to or
greater than 0.90.
(3) Beginning July 1, 2016, through December 31, 2016, the [BANK]
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.
(4) On January 1, 2017, and thereafter, the [BANK] must calculate
and maintain a liquidity coverage ratio on each calculation date that
is equal to or greater than 1.0.
[End of Common Rule Text]
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.
12 CFR Part 329
Administrative practice and procedure; Banks, banking; Federal
Deposit Insurance Corporation, FDIC; Liquidity; Reporting and
recordkeeping requirements.
Adoption of Common Rule
The adoption of the 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 adds 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 and further amends part 50 as follows:
PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
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 ``[REGULATORY REPORT]'' and adding ``Consolidated Reports
of Condition and Income'' in its place, wherever it appears; and
0
g. 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. Revising paragraph (b)(1)(iii);
0
b. Removing the word ``or'' at the end of paragraph (b)(3)(i);
0
c. Removing the period at the end of paragraph (b)(3)(ii) and adding
``; or'' in its place; and
0
d. Adding paragraph (b)(3)(iii).
The addition and revision read as follows:
Sec. 50.1 Purpose and applicability.
* * * * *
(b) * * *
(1) * * *
(iii) It is a depository institution that has total consolidated
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
consolidated assets equal to $250 billion or more, as reported on the
most recent year-end Consolidated Financial Statements for Holding
Companies reporting form (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 total consolidated assets
equal to $250 billion or more, as reported on the most recent year-end
Consolidated Report of Condition and Income; or
(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
[[Page 61539]]
another country plus redistributed guaranteed amounts to the country of
the 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
* * * * *
(3) * * *
(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 adds
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 and further amends part 249 as follows:
PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)
0
4. The authority citation for part 249 is added to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1),
1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.
0
5. Revise the heading for part 249 as set forth above.
0
6. Part 249 is amended by:
0
a. Removing ``[AGENCY]'' and adding ``Board'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``Regulation Q
(12 CFR part 217)'' in its place wherever it appears.
0
c. Removing ``[BANK]'' and adding ``Board-regulated institution'' in
its place wherever it appears.
0
d. Removing ``[BANK]s'' and adding ``Board-regulated institutions'' in
its place wherever it appears.
0
e. Removing ``[BANK]'s'' and adding ``Board-regulated institution's''
in its place wherever it appears.
0
f. Removing``[12 CFR 3.404 (OCC), 12 CFR 263.202 (Board), and 12 CFR
324.5 (FDIC)]'' and adding ``12 CFR 263.202'' in its place wherever it
appears.
0
7. Amend Sec. 249.1 by:
0
a. Revising paragraph (b)(1)(i);
0
b. Removing the word ``or'' at the end of paragraph (b)(1)(iii);
0
c. Redesignating paragraph (b)(1)(iv) as paragraph (b)(1)(vi);
0
d. Adding new paragraphs (b)(1)(iv) and (v);
0
e. Revising paragraphs (b)(2)(iii) and (5); and
0
f. Adding new paragraph (c).
The additions and revisions read as follows:
Sec. 249.1 Purpose and applicability.
* * * * *
(b) * * *
(1) * * *
(i) It has total consolidated assets equal to $250 billion or more,
as reported on the most recent year-end (as applicable):
(A) Consolidated Financial Statements for Holding Companies
reporting form (FR Y-9C), or, if the Board-regulated institution 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; or
(B) Consolidated Report of Condition and Income (Call Report);
* * * * *
(iv) It is a covered nonbank company;
(v) It is a covered depository institution holding company that
meets the criteria in Sec. 249.60(a) but does not meet the criteria in
paragraphs (b)(1)(i) or (ii) of this section, and is subject to
complying with the requirements of this part in accordance with subpart
G of this part; or
* * * * *
(2) * * *
(iii) A Board-regulated institution that becomes subject to the
minimum liquidity standard and other requirements of this part under
paragraph (b)(1)(vi) of this section after September 30, 2014, must
comply with the requirements of this part subject to a transition
period specified by the Board.
* * * * *
(5) In making a determination under paragraphs (b)(1)(vi) or (4) 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 263.202.
(c) Covered nonbank companies. The Board will establish a minimum
liquidity standard for a designated company under this part by rule or
order. In establishing such standard, the Board will consider the
factors set forth in sections 165(a)(2) and (b)(3) of the Dodd-Frank
Act and may tailor the application of the requirements of this part to
the designated company based on the nature, scope, size, scale,
concentration, interconnectedness, mix of the activities of the
designated company or any other risk-related factor that the Board
determines is appropriate.
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. In Sec. 249.22, revise paragraph (b)(3) to read as follows:
Sec. 249.22 Requirements for eligible high-quality liquid assets.
* * * * *
(b) * * *
(3) For eligible HQLA held in a legal entity that is a U.S.
consolidated subsidiary of a Board-regulated institution:
(i) If the U.S. consolidated subsidiary is subject to a minimum
liquidity standard under this part, 12 CFR part 50, or 12 CFR part 329,
the Board-regulated institution may include the eligible HQLA of the
U.S. consolidated subsidiary 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, 12 CFR part 50, or 12 CFR
part 329; plus
(B) Any additional amount of assets, including proceeds from the
monetization of assets, that would be available for transfer to the
top-tier Board-regulated institution 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, or 12 CFR part 50, or 12
CFR part 329, the Board-regulated institution may include the eligible
HQLA of the U.S. consolidated subsidiary 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
[[Page 61540]]
after the calculation date, as calculated by the Board-regulated
institution for the Board-regulated institution'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 Board-regulated institution 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
* * * * *
0
10. In Sec. 249.40, revise paragraph (b)(1) to read as follows:
Sec. 249.40 Liquidity coverage shortfall: Supervisory framework.
* * * * *
(b) Liquidity plan. (1) For the period during which a Board-
regulated institution must calculate a liquidity coverage ratio on the
last business day of each applicable calendar month under subparts F or
G of this part, if the Board-regulated institution's liquidity coverage
ratio is below the minimum requirement in Sec. 249.10 for any
calculation date that is the last business day of the applicable
calendar month, or if the Board has determined that the Board-regulated
institution is otherwise materially noncompliant with the requirements
of this part, the Board-regulated institution must promptly consult
with the Board to determine whether the Board-regulated institution
must provide to the Board a plan for achieving compliance with the
minimum liquidity requirement in Sec. 249.10 and all other
requirements of this part.
* * * * *
0
11. Add subpart G to read as follows:
Subpart G--Liquidity Coverage Ratio for Certain Bank Holding
Companies
Sec.
249.60 Applicability.
249.61 Liquidity coverage ratio.
249.62 High-quality liquid asset amount.
249.63 Total net cash outflow.
Sec. 249.60 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 E of this part apply to
covered depository institution holding companies that are subject to
this subpart.
(c) Applicability. Subject to the transition periods set forth in
Sec. 249.61:
(1) A Board-regulated institution that meets the threshold for
applicability of this subpart under paragraph (a) of this section on
September 30, 2014, must comply with the requirements of this subpart
beginning on January 1, 2015; and
(2) A Board-regulated institution that first meets the threshold
for applicability of this subpart under paragraph (a) of this section
after September 30, 2014, must comply with the requirements of this
subpart beginning on the first day of the first quarter after which it
meets the threshold set forth in paragraph (a).
Sec. 249.61 Liquidity coverage ratio.
(a) Calculation of liquidity coverage ratio. A Board-regulated
institution subject to this subpart must calculate and maintain a
liquidity coverage ratio in accordance with Sec. 249.10 and this
subpart, provided however, that such Board-regulated institution shall
only be required to maintain a liquidity coverage ratio that is equal
to or greater than 1.0 on last business day of the applicable calendar
month. A Board-regulated institution subject to this subpart must
calculate its liquidity coverage ratio as of the same time on each
calculation day (elected calculation time). The Board-regulated
institution must select this time by written notice to the Board prior
to the effective date of this rule. The Board-regulated institution may
not thereafter change its elected calculation time without prior
written approval from the Board.
(b) Transitions. For any Board-regulated institution subject to a
minimum liquidity standard under this subpart:
(1) Beginning January 1, 2016, through December 31, 2016, the
Board-regulated institution must calculate and maintain a liquidity
coverage ratio monthly, on each calculation date, in accordance with
this subpart, that is equal to or greater than 0.90.
(2) Beginning January 1, 2017 and thereafter, the Board-regulated
institution must calculate and maintain a liquidity coverage ratio
monthly, on each calculation date, in accordance with this subpart,
that is equal to or greater than 1.0.
Sec. 249.62 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.
Sec. 249.63 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 as of the
calculation date, the total net cash outflow amount of a covered
depository institution subject to this subpart equals 70 percent of:
(1) The sum of the outflow amounts calculated under Sec. 249.32(a)
through (l); less:
(2) The lesser of:
(i) The sum of the inflow amounts under Sec. 249.33(b) through
(g); and
(ii) 75 percent of the amount in paragraph (a)(1) of this section
as calculated for that calendar day.
(b) [Reserved]
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
0
12. The authority citation for part 329 is added to read as follows:
Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1,
5412.
0
13. Part 329 is added as set forth at the end of the common preamble.
0
14. Part 329 is amended by:
0
a. Removing ``[AGENCY]'' and adding ``FDIC'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
324'' in its place wherever it appears.
0
c. Removing ``A [BANK]'' and adding ``An FDIC-supervised institution''
in its place wherever it appears.
0
d. Removing ``a [BANK]'' and add ``an FDIC-supervised institution'' in
its place wherever it appears.
0
e. Removing ``[BANK]'' and adding ``FDIC-supervised institution'' in
its place wherever it appears.
0
f. Removing ``[BANK]s'' and adding ``FDIC-supervised institutions'' in
its place wherever it appears.
[[Page 61541]]
0
g. Removing ``[BANK]'s'' and adding ``FDIC-supervised institution's''
in its place wherever it appears.
0
h. Removing ``[REGULATORY REPORT]'' and adding ``Consolidated Report of
Condition and Income'' in its place wherever it appears.
0
i. Removing ``[12 CFR 3.404 (OCC), 12 CFR 263.202 (Board), and 12 CFR
324.5 (FDIC)]'' and adding ``12 CFR 324.5'' in its place wherever it
appears.
0
15. 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 total consolidated
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 Consolidated Financial Statements for Holding Companies
reporting form (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 total consolidated 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 total consolidated 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
the 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
16. 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.
* * * * *
Dated: September 3, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 3rd day of September 2014.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2014-22520 Filed 10-9-14; 8:45 am]
BILLING CODE P