[Federal Register Volume 80, Number 102 (Thursday, May 28, 2015)]
[Proposed Rules]
[Pages 30383-30389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12850]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 80, No. 102 / Thursday, May 28, 2015 /
Proposed Rules
[[Page 30383]]
FEDERAL RESERVE SYSTEM
12 CFR Part 249
[Docket No. R-1514; Regulation WW]
RIN 7100 AE-32
Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities
as High-Quality Liquid Assets
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking with request for public comment.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
invites public comment on a proposed rule (proposed rule) that would
amend the Board's liquidity coverage ratio requirement (LCR) to include
certain U.S. municipal securities as high-quality liquid assets (HQLA).
This proposed rule includes as level 2B liquid assets under the LCR
general obligation securities of a public sector entity that meet the
same criteria as corporate debt securities that are included as level
2B liquid assets, subject to limits that are intended to address the
unique structure of the U.S. municipal securities market. This proposed
rule would apply to all Board-regulated institutions that are subject
to the LCR, which include: (1) Bank holding companies, certain savings
and loan holding companies, and state member banks that, in each case,
have $250 billion or more in total consolidated assets or $10 billion
or more in on-balance sheet foreign exposure; (2) state member banks
with $10 billion or more in total consolidated assets that are
consolidated subsidiaries of bank holding companies described in (1);
and (3) nonbank financial companies designated by the Financial
Stability Oversight Council for Board supervision to which the Board
has applied the LCR by rule or order. This proposed rule would also
permit bank holding companies and certain savings and loan holding
companies, in each case with $50 billion or more in total consolidated
assets that are subject to the Board's modified liquidity coverage
ratio to rely on the proposed expanded definition of HQLA.
DATES: Comments on this notice of proposed rulemaking must be received
by July 24, 2015.
ADDRESSES: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. R-1514, by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert de V. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, 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 3515, 1801 K Street NW. (between 18th and 19th Street NW.),
Washington, DC 20006 between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Constance Horsley, Assistant Director,
(202) 452-5239, Adam S. Trost, Senior Supervisory Financial Analyst,
(202) 452-3814, or J. Kevin Littler, Senior Supervisory Financial
Analyst, (202) 475-6677, Risk Policy, Division of Banking Supervision
and Regulation; Dafina Stewart, Counsel, (202) 452-3876, or Adam J.
Cohen, Senior Attorney, (202) 912-4658, Legal Division, Board of
Governors of the Federal Reserve System, 20th and C Streets,
Washington, DC 20551. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Criteria for Inclusion of U.S. Municipal Securities as
Eligible HQLA
A. Criteria for Inclusion as Level 2B Liquid Assets
1. U.S. General Obligation Municipal Securities
2. Investment Grade U.S. General Obligation Municipal Securities
3. Proven Record as a Reliable Source of Liquidity
4. Not an Obligation of a Financial Sector Entity or Its
Consolidated Subsidiaries
B. Limitations on a Company's Inclusion of U.S. General
Obligation Municipal Securities as Eligible HQLA
1. Limitation on the Inclusion of U.S. General Obligation
Municipal Securities With the Same CUSIP Number as Eligible HQLA
2. Limitation on the Inclusion of the U.S. General Obligation
Municipal Securities of a Single Issuer as Eligible HQLA
3. Limitation on the Amount of U.S. General Obligation Municipal
Securities That Can Be Included in the HQLA Amount
III. Plain Language
IV. Regulatory Flexibility Act
V. Paperwork Reduction Act
I. Background
On September 3, 2014, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, and the Federal
Deposit Insurance Corporation (collectively, the agencies) adopted a
final rule that implemented a quantitative liquidity requirement \1\
(LCR) consistent with the liquidity coverage ratio standard established
by the Basel Committee on Banking Supervision (Basel III Liquidity
Framework).\2\ The LCR is designed to promote the short-term resilience
of the liquidity risk profile of large and internationally active
banking organizations, and to further improve the measurement and
management of liquidity risk, thereby improving the banking sector's
ability to absorb shocks arising during periods of significant stress.
The LCR requires a company subject to the rule to maintain an
[[Page 30384]]
amount of high-quality liquid assets (HQLA) (the numerator of the
ratio) \3\ that is no less than 100 percent of its total net cash
outflows over a prospective 30 calendar-day period of significant
stress (the denominator of the ratio). Community banking organizations
are not subject to the LCR.\4\
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\1\ 79 FR 61440 (October 10, 2014).
\2\ Basel Committee on Banking Supervision, ``Basel III: The
Liquidity Coverage Ratio and liquidity risk monitoring tools''
(January 2013), available at http://www.bis.org/publ/bcbs238.htm.
\3\ A company's HQLA amount is calculated according to section
249.21 of the LCR.
\4\ The LCR applies to large and internationally active banking
organizations, generally: (1) Bank holding companies, certain
savings and loan holding companies, and depository institutions
that, in each case, have $250 billion or more in total assets or $10
billion or more in on-balance sheet foreign exposure; (2) depository
institutions with $10 billion or more in total consolidated assets
that are consolidated subsidiaries of bank holding companies and
savings and loan holding companies described in (1); and (3) nonbank
financial companies designated by the Financial Stability Oversight
Council for Board supervision to which the Board has applied the LCR
by rule or order. In addition, the Board adopted a modified minimum
liquidity coverage ratio requirement for bank holding companies and
certain savings and loan holding companies that, in each case, have
$50 billion or more in total consolidated assets but that do not
meet the threshold for large and internationally active firms
(together with the entities described in (1), (2), (3) above,
covered companies).
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Under the LCR, only a limited number of asset classes that have
historically been used as a source of liquidity in the United States
during periods of significant stress and have a demonstrable record of
liquidity are included as HQLA. In identifying the types of assets that
qualify as HQLA under the Basel III Liquidity Framework the Basel
Committee on Banking Supervision considered several factors, including
the asset's risk profile and characteristics of the market for the
asset (e.g., active sale or repurchase markets at all times,
significant diversity in market participants, and high trading volume).
The agencies considered similar factors in developing the LCR. In
addition, the agencies developed certain other criteria, such as
operational requirements, that assets must meet for inclusion as
eligible HQLA.
The LCR divides HQLA into three categories of assets: Level 1,
level 2A, and level 2B liquid assets. Specifically, level 1 liquid
assets are limited to balances held at a Federal Reserve Bank and
foreign central bank withdrawable reserves, all securities issued or
unconditionally guaranteed as to timely payment of principal and
interest by the U.S. Government, and certain highly liquid, high credit
quality sovereign, international organization and multilateral
development bank debt securities. Level 1 liquid assets, which are the
highest quality and most liquid assets, may be included in a covered
company's HQLA amount without 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. Level 2A liquid assets include
certain obligations issued or guaranteed by a U.S. government-sponsored
enterprise (GSE) and certain obligations issued or guaranteed by a
sovereign entity or a multilateral development bank that are not
eligible to be treated as level 1 liquid assets. The LCR subjects level
2A liquid assets to a 15 percent haircut and limits the aggregate of
level 2A and level 2B liquid assets to no more than 40 percent of the
total HQLA amount. Level 2B liquid assets, which are liquid assets that
generally exhibit more volatility than level 2A liquid assets, are
subject to a 50 percent haircut and may not exceed 15 percent of the
total HQLA amount. Under the LCR, level 2B liquid assets include
certain corporate debt securities and certain common equity shares of
publicly traded companies. Level 2 liquid assets, including all level
2B liquid assets, must be liquid and readily marketable as defined in
the LCR to be included as HQLA.\5\ Other classes of assets, such as
debt securities issued or guaranteed by a U.S. public sector entity
(U.S. municipal securities), are not treated as HQLA. The LCR final
rule defines a public sector entity to include any state, local
authority, or other governmental subdivision below the U.S. sovereign
entity level.\6\
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\5\ The liquid and readily marketable standard is defined in
section 249.3 of the LCR final rule and is discussed in section
II.B.2 of the Supplementary Information section. 79 FR 61440, 61451
(October 10, 2014).
\6\ 12 CFR 249.3.
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The agencies received a substantial number of comments in
connection with the LCR rulemaking \7\ from U.S. and foreign firms,
public officials (including state and local governments and members of
the U.S. Congress), public interest groups, private individuals, and
other interested parties requesting that U.S. municipal securities be
treated as HQLA. Commenters asserted that U.S. municipal securities
exhibit liquidity characteristics consistent with those considered by
the agencies in identifying assets as HQLA and presented data to
demonstrate the liquidity of U.S. municipal securities. In particular,
some commenters indicated that certain U.S. municipal securities trade
more often and in greater volumes than some corporate debt securities
that qualify as HQLA under the LCR. In addition, commenters argued that
the exclusion of U.S. municipal securities from HQLA could lead to
higher funding costs for U.S. municipalities, which could affect local
economies and infrastructure.
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\7\ 78 FR 71818 (November 29, 2013).
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In the SUPPLEMENTARY INFORMATION section to the LCR final rule, the
agencies expressed concern that covered companies would be limited in
their ability to rapidly monetize U.S. municipal securities during a
period of significant stress. For example, the funding of many U.S.
municipal securities in the repurchase market is limited, which lessens
the opportunity for companies to convert the securities to cash quickly
during a period of significant stress. Accordingly, the LCR final rule
did not include U.S. municipal securities as HQLA.
However, the Board indicated a willingness to continue to study the
question of whether at least some U.S. municipal securities should be
permitted under some circumstances to be included as HQLA. The Board
now proposes to allow Board-regulated institutions to include as level
2B liquid assets under the LCR U.S. general obligation municipal
securities that exhibit characteristics that are comparable to other
asset classes included as level 2B liquid assets. The proposal contains
a variety of criteria and limitations designed to ensure that U.S.
general obligation municipal securities included as HQLA are liquid and
appropriately valued for purposes of the LCR.
This proposed rule would apply to all Board-regulated institutions
that are subject to the LCR, which include: (1) Bank holding companies,
certain savings and loan holding companies, and state member banks
that, in each case, have $250 billion or more in total consolidated
assets or $10 billion or more in on-balance sheet foreign exposure; (2)
state member banks with $10 billion or more in total consolidated
assets that are consolidated subsidiaries of bank holding companies
subject to the LCR described in (1); and (3) nonbank financial
companies designated by the Financial Stability Oversight Council for
Board supervision to which the Board has applied the LCR by rule or
order. This proposed rule would also allow bank holding companies and
certain savings and loan holding companies, in each case with $50
billion or more in total consolidated assets, that are subject to the
Board's modified minimum liquidity coverage ratio to take advantage of
the proposed expanded definition of HQLA.
[[Page 30385]]
II. Proposed Criteria for Inclusion of U.S. Municipal Securities as
Eligible HQLA
As described in more detail below, this proposed rule would include
limited amounts of U.S. general obligation municipal securities as
level 2B liquid assets under the LCR if the securities meet certain
criteria. The Board invites comment on all aspects of the proposal
including whether these criteria and limitations are appropriate,
reasonable, and achieve their intended purposes.
The Board proposes to include U.S. general obligation municipal
securities as level 2B liquid assets, rather than as level 2A liquid
assets. Municipal securities are less liquid than assets that are
included as level 2A liquid assets. For example, the daily trading
volume of securities issued or guaranteed by U.S. GSEs far exceeds that
of U.S. municipal securities.
As a threshold matter, to qualify as HQLA under the proposal, U.S.
general obligation municipal securities must be liquid and readily
marketable and meet other criteria consistent with the criteria for
corporate debt securities that are included as level 2B liquid assets.
These criteria help to ensure comparable treatment between U.S. general
obligation municipal securities and corporate debt securities included
as HQLA.\8\ In addition, to help ensure sufficient liquidity of the
U.S. general obligation municipal securities that are included in the
total HQLA amount, this proposed rule would impose certain limits on
the amount of U.S. general obligation municipal securities that a
Board-regulated institution may include as eligible HQLA.\9\ This
proposed rule would not limit the amount of U.S. municipal securities a
Board-regulated institution could hold for other purposes.
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\8\ See 12 CFR 249.20(c)(1).
\9\ The LCR final rule defines eligible HQLA as those high-
quality liquid assets that meet the requirements set forth in
section 249.22.
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A. Criteria for Inclusion as Level 2B Liquid Assets
1. U.S. General Obligation Municipal Securities
Under this proposed rule, U.S. municipal securities would qualify
as HQLA only if they are general obligations of the issuing entity.
General obligations of U.S. public sector entities, which include bonds
or similar obligations that are backed by the full faith and credit of
the public sector entities, are assigned a 20 percent risk weight under
the Board's risk-based capital rules.\10\ This provision, which is
consistent with the Basel III Liquidity Framework, is designed to limit
the liquidity and credit risk associated with U.S. municipal securities
included in the HQLA amount.
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\10\ See 12 CFR part 217.
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Revenue obligations, which include bonds or similar obligations
that are obligations of U.S. public sector entities, but which the
public sector entities have committed to repay with revenues from a
specific project rather than from general tax funds, are assigned a 50
percent risk weight under the Board's risk-based capital rules.\11\
Revenue obligations are assigned a higher risk weight than general
obligations because repayment of revenue obligations is dependent on
revenue from an underlying project without an obligation from a public
sector entity to repay these obligations from other revenue
sources.\12\ The Board has proposed to exclude revenue obligations
because, during a period of significant stress, revenue derived from a
particular project, such as a stadium, may fall dramatically as
domestic consumption declines and the associated revenue bond may
experience significant price declines and become less liquid.
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\11\ Id.
\12\ 78 FR 62018, 62086 (October 11, 2013).
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2. Investment Grade U.S. General Obligation Municipal Securities
Consistent with the requirements for corporate debt securities
included as level 2B liquid assets, this proposed rule would require
that U.S. general obligation municipal securities be ``investment
grade'' under 12 CFR part 1 as of the calculation date.\13\ This
criterion requires an issuer of a U.S. general obligation municipal
security to have adequate capacity to meet its financial commitments
under the security for the projected life of the security, which is met
by showing a low risk of default and an expectation of the timely
repayment of principal and interest.
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\13\ 12 CFR 1.2(d). In accordance with section 939A of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, this
regulation does not rely on credit ratings as a standard of credit-
worthiness. Rather, the regulation relies on an assessment by the
bank of the capacity of the issuer to meet its financial
commitments.
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3. Proven Record as a Reliable Source of Liquidity
Consistent with the requirements for corporate debt securities
included as level 2B liquid assets under the LCR, this proposed rule
would require that U.S. general obligation municipal securities
included as level 2B liquid assets be issued by an entity whose
obligations have a proven record as a reliable source of liquidity in
repurchase or sales markets during a period of significant stress. A
Board-regulated institution would be required to demonstrate this
record of liquidity reliability and lower volatility during periods of
significant stress by showing that the market price of the U.S. general
obligation municipal 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. This percentage decline in
value and percentage increase in haircut is the same as those
applicable to corporate debt securities included as level 2B liquid
assets under the LCR.\14\ This limitation is meant to exclude volatile
U.S. municipal securities because their volatility indicates these
assets may not hold their value during a period of significant stress,
thereby over-estimating the amount of HQLA actually available to the
banking entity.
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\14\ Under the LCR, equity securities included as level 2B
liquid assets have a similar criteria. However, the covered company
would be required to demonstrate that the market price of the
security 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 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 increased by no more than 40
percentage points, during a 30 calendar-day period of significant
stress.
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As discussed in the Supplementary Information section to the LCR
final rule, a Board-regulated institution may demonstrate a historical
record that meets this criterion through reference to historical market
prices and available funding haircuts of the U.S. general obligation
municipal security during periods of significant stress, such as the
2007-2009 financial crisis.\15\ Board-regulated institutions should
also look to other periods of systemic and idiosyncratic stress to see
if the asset under consideration has proven to be a reliable source of
liquidity. As noted above, HQLA include only those assets that have
demonstrated an ability to maintain relatively stable prices such that
they can be rapidly sold by a Board-regulated institution to meet its
[[Page 30386]]
obligations during a period of significant stress.
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\15\ 79 FR 61440, 61459 (October 10, 2014).
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4. Not an Obligation of a Financial Sector Entity or Its Consolidated
Subsidiaries
Under this proposed rule, U.S. general obligation municipal
securities would qualify as HQLA only if they are not obligations of a
financial sector entity and not obligations of a consolidated
subsidiary of a financial sector entity. For purposes of this
provision, the Board considers a security that is issued or guaranteed
by a financial sector entity to be an obligation of the financial
sector entity. The LCR defines a financial sector entity to include a
regulated financial company, investment company, non-regulated fund,
pension fund, investment adviser, or a company that the Board has
determined should be treated the same as the foregoing for the purposes
of the LCR. Thus, if a bond insurer insures the general obligation
municipal securities of a U.S. public sector entity (such insurance is
commonly referred to as a ``wrap''), the securities would not be
eligible for inclusion in HQLA. The Board has proposed to include this
criterion in order to exclude U.S. general obligation municipal
securities that are valued, in part, based on guarantees provided by
financial sector entities, because these financial sector entity
guarantees could exhibit similar risks and correlation with Board-
regulated institutions (wrong-way risk) during a liquidity stress
period, thus overestimating the amount of HQLA that would be available
to the banking entity during a liquidity stress period. This criterion
is consistent with the Basel III Liquidity Framework and with the
requirements imposed on corporate debt securities and publicly traded
common equity shares that are included as level 2B liquid assets under
the LCR.
1. How should the Board supplement or amend the proposed criteria
for including U.S. general obligation municipal securities as HQLA?
2. Is it appropriate to exclude U.S. general obligation municipal
securities that are guaranteed (or ``wrapped'') by bond insurers or
other financial sector entities from HQLA because of wrong-way risk?
Why or why not? How else could the Board address concerns regarding the
wrong-way risk associated with such securities?
B. Limitations on a Company's Inclusion of U.S. General Obligation
Municipal Securities as Eligible HQLA
This proposed rule would limit the amount of U.S. general
obligation municipal securities a Board-regulated institution could
include as eligible HQLA based on the total amount outstanding of U.S.
general obligation municipal securities with the same CUSIP number, on
the average daily trading volume of general obligation municipal
securities issued by a particular U.S. municipal issuer, and on a
percentage of the institution's total HQLA amount. These limitations
are intended to address the unique structure of the U.S. municipal
securities market and designed to help ensure sufficient liquidity of
the U.S. general obligation municipal securities included in the HQLA
amount under the LCR.
1. Limitation on the Inclusion of U.S. General Obligation Municipal
Securities With the Same CUSIP Number as Eligible HQLA
Individual issuances of U.S. municipal securities (those with the
same CUSIP number) by a single public sector entity are frequently far
smaller and more numerous than issuances of debt securities by a single
corporate issuer and exhibit a diverse array of maturity dates and
interest rates. This is in part due to legal and other restrictions on
the size of individual issuances by public sector entities and because
U.S. municipal securities are frequently marketed to retail or smaller
institutional investors. For example, a very large issuer of U.S.
municipal securities (such as a state or large city) may have several
hundred individual issuances outstanding. In contrast, a single
corporate issuer may have a comparable dollar amount of securities
outstanding but with only 20 to 30 individual issuances outstanding.
Investors in U.S. municipal securities sometimes purchase a large
percentage, including more than 50 percent of the outstanding amount,
of the individual issuance.
The Board is concerned that a Board-regulated institution would not
be able to monetize a concentration in the holding of a particular
issuance of U.S. general obligation municipal securities during a
period of significant stress without a material impact on the
securities' price. This proposed rule therefore would permit a Board-
regulated institution to count U.S. general obligation municipal
securities as eligible HQLA only to the extent the fair value of the
institutions' securities with the same CUSIP number do not exceed a
maximum of 25 percent of the total amount of outstanding securities
with the same CUSIP number. Under the proposal, this threshold for
inclusion as eligible HQLA would be calculated prior to application of
the 50 percent haircut applicable to level 2B liquid assets that is set
forth in Sec. 249.21(a)(3) of the LCR final rule. This requirement is
designed to ensure that a Board-regulated institution does not include
in its HQLA amount a concentration of an individual issuance of U.S.
general obligation municipal securities.
2. Limitation on the Inclusion of the U.S. General Obligation Municipal
Securities of a Single Issuer as Eligible HQLA
The Board is proposing a limit on the amount of securities issued
by a single U.S. public sector entity that a Board-regulated
institution may include as eligible HQLA, based on the trading volume
that the secondary market for the entity's general obligation municipal
securities could be expected to withstand before prices materially
decline. For each U.S. public sector entity, this proposed rule would
limit the aggregate fair value of the general obligation securities
that a Board-regulated institution could include as eligible HQLA to
two times the average daily trading volume, as measured over the
previous four quarters, of all general obligation municipal securities
issued by that public sector entity.
The LCR was designed to include as eligible HQLA assets that remain
relatively liquid and have multiple buyers and sellers during periods
of significant stress, as a covered company may be expected to sell
HQLA to meet its cash outflows during such periods. To remain
consistent with the design of the LCR, the proposal seeks to include
U.S. general obligation municipal securities as eligible HQLA to the
extent that they would exhibit liquidity without dramatic loss in value
during periods of significant stress. The U.S. municipal securities
market includes a large diversity of issuers, size of issuances, and
volumes of secondary market trading. The Board analyzed data on the
historical trading volume of municipal securities in order to determine
the general level of increased sales of municipal securities that could
be absorbed by the market during periods of significant stress before
prices would materially decline. The proposal would limit the aggregate
fair value of the U.S. general obligation municipal securities of a
public sector entity that may be included as eligible HQLA to two times
the average daily trading volume of all U.S. general obligation
municipal securities issued by that public sector entity because, based
on the Board's analysis, a holding of two times the average daily
trading volume could likely be absorbed by the market within a 30
calendar-day period
[[Page 30387]]
of significant stress without materially disrupting the functioning of
the market.
Rather than proposing an average daily trading volume limitation on
a per-security basis, the Board is proposing a limitation based on the
average daily trading volume of all U.S. general obligation municipal
securities issued by the public sector entity. Due to the smaller size
of many U.S. municipal securities issuances, applying this limit on a
per-security basis may unnecessarily restrict a covered company's
ability to invest in a particular security that meets the Board-
regulated institution's investment criteria and liquidity needs.
However, as discussed above, the Board has proposed a separate
limitation on the amount of an individual issuance that may be included
as eligible HQLA to address the concern that a high concentration of an
individual U.S. general obligation municipal security could be included
as eligible HQLA.
3. Limitation on the Amount of U.S. General Obligation Municipal
Securities That Can Be Included in the HQLA Amount
The Board is proposing to limit the amount of U.S. general
obligation municipal securities that are included in a Board-regulated
institution's HQLA amount to no more than five percent of its total
HQLA amount. This limit is in addition to the 40 percent limit on the
aggregate amount of level 2A and level 2B liquid assets and the 15
percent limit on level 2B liquid assets that can be included in the
HQLA amount. It also complements the other two limits on U.S. general
obligation municipal securities described above, which relate solely to
a particular issuance and individual issuers. Although the Board has
concluded that certain U.S. general obligation municipal securities are
sufficiently liquid to be included as eligible HQLA, the Board proposes
to limit the aggregate amount of all U.S. general obligation municipal
securities that may be included in the HQLA amount to ensure
appropriate diversification of asset classes within a Board-regulated
institution's HQLA amount. Consistent with the LCR's limits on level 2A
and level 2B liquid assets, this proposed five percent limit applies
both on an unadjusted basis and after adjusting the composition of the
HQLA amount upon the unwind of certain secured funding transactions,
secured lending transactions, asset exchanges and collateralized
derivatives transactions.\16\
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\16\ See 12 CFR 249.21(g).
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The proposed five percent limit would be applied to the calculation
of the HQLA amount by amending the definitions of the unadjusted excess
HQLA amount and the adjusted excess HQLA amount.\17\ Under this
proposed rule, the unadjusted excess HQLA amount would equal the sum of
the level 2 cap excess amount, the level 2B cap excess amount and the
public sector entity security cap excess amount. The method of
calculating the public sector entity security cap excess amount is set
forth in Sec. 249.21(f) of this proposed rule. Under this provision,
the public sector entity security cap excess amount would be calculated
as the greater of: (1) The public sector entity security liquid asset
amount minus the level 2 cap excess amount minus level 2B cap excess
amount minus 0.0526 (or 5/95, which is the ratio of the maximum
allowable public sector entity security liquid assets to the level 1
liquid assets and other level 2 liquid assets) times the sum of (i) the
level 1 liquid asset amount, (ii) the level 2A liquid asset amount, and
(iii) the level 2B liquid asset amount minus the public sector entity
security liquid asset amount; or (2) zero.
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\17\ See 12 CFR 249.21(c) and (f).
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Under this proposed rule, the adjusted excess HQLA amount would
equal the sum of the adjusted level 2 cap excess amount, the adjusted
level 2B cap excess amount, and the adjusted public sector entity cap
excess amount. The method of calculating the adjusted public sector
entity security cap excess amount is set forth in Sec. 249.21(k) of
this proposed rule. Under this provision, the adjusted public sector
entity security cap excess amount would be calculated as the greater
of: (1) The adjusted public sector entity security liquid asset amount
minus the adjusted level 2 cap excess amount minus the adjusted level
2B cap excess amount minus 0.0526 (or 5/95, which is the ratio of the
maximum allowable adjusted public sector entity security liquid assets
to the adjusted level 1 liquid assets and other adjusted level 2 liquid
assets) times the sum of (i) the adjusted level 1 liquid asset amount,
(ii) the adjusted level 2A liquid asset amount, and (iii) the adjusted
level 2B liquid asset amount minus the adjusted public sector entity
security liquid asset amount; or (2) zero.
3. What additional or alternative limitations should the Board
consider relating to the inclusion of individual and aggregate
issuances of U.S. public sector entities as eligible HQLA and in a
Board-regulated institution's HQLA amount? How else could the Board
address concerns regarding concentrations and minimizing market price
movements associated with sales of HQLA?
III. Plain Language
Section 722 of the Gramm-Leach Bliley Act (Pub L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Board to use plain
language in all proposed and final rules published after January 1,
2000. The Board invites your comments on how to make this proposal
easier to understand. For example:
Has the Board organized the material to suit your needs?
If not, how could this material be better organized?
Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly
stated?
Does the proposed rule contain language or jargon that is
not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed rule easier to
understand? If so, what changes to the format would make the proposed
rule easier to understand?
What else could the Board do to make the regulation easier
to understand?
IV. Regulatory Flexibility Act
The Regulatory Flexibility Act \18\ (RFA), requires an agency to
either provide an initial regulatory flexibility analysis with a
proposed rule for which a general notice of proposed rulemaking is
required or to certify that the proposed rule will not have a
significant economic impact on a substantial number of small entities
(defined for purposes of the RFA to include banks with assets less than
or equal to $550 million). In accordance with section 3(a) of the RFA,
the Board is publishing an initial regulatory flexibility analysis with
respect to this proposed rule. Based on its analysis and for the
reasons stated below, the Board believes that this proposed rule will
not have a significant economic impact on a substantial number of small
entities. Nevertheless, the Board is publishing an initial regulatory
flexibility analysis. A final regulatory flexibility analysis will be
conducted after commenters received during the public comment period
have been considered.
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\18\ 5 U.S.C. 601 et seq.
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As discussed above, this proposed rule would amend the liquidity
coverage ratio rule to include certain high-quality general obligation
U.S. municipal securities as high-quality
[[Page 30388]]
liquid assets for the purposes of the LCR.
Under regulations issued by the Small Business Administration, a
``small entity'' includes a depository institution, bank holding
company, or savings and loan holding company with total assets of $550
million or less (a small banking organization). As of December 31,
2014, there were approximately 664 small state member banks, 3,832
small bank holding companies, and 275 small savings and loan holding
companies.
This proposed rule does not apply to ``small entities'' and would
apply only to Board-regulated institutions subject to the LCR, which
include: (1) Bank holding companies, certain savings and loan holding
companies, and state member banks that, in each case, have $250 billion
or more in total consolidated assets or $10 billion or more in on-
balance sheet foreign exposure; (2) state member banks with $10 billion
or more in total consolidated assets that are consolidated subsidiaries
of bank holding companies subject to the LCR; and (3) nonbank financial
companies designated by the Financial Stability Oversight Council for
Board supervision to which the Board has applied the LCR by rule or
order. This proposed rule also would apply to bank holding companies
and certain savings and loan holding companies with $50 billion or more
in total consolidated assets, which are subject to the modified minimum
liquidity coverage ratio. Companies that are subject to this proposed
rule therefore substantially exceed the $550 million asset threshold at
which a banking entity is considered a ``small entity'' under SBA
regulations.
As noted above, because this proposed rule is not likely to apply
to any company with assets of $550 million or less, if adopted in final
form, it is not expected to apply to any small entity for purposes of
the RFA. The Board is aware of no other Federal rules that duplicate,
overlap, or conflict with this proposed rule. In light of the
foregoing, the Board does not believe that this proposed rule, if
adopted in final form, would have a significant economic impact on a
substantial number of small entities supervised and therefore believes
that there are no significant alternatives to this proposed rule that
would reduce the economic impact on small banking organizations
supervised by the Board.
The Board welcomes comment on all aspects of its analysis. A final
regulatory flexibility analysis will be conducted after consideration
of comments received during the public comment period.
V. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or
sponsor, and a 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 Board reviewed this proposed rule
and determined that it would not introduce any new collection of
information pursuant to the PRA.
List of Subjects in 12 CFR Part 249
Administrative practice and procedure; Banks, banking; Federal
Reserve System; Holding companies; Liquidity; Reporting and
recordkeeping requirements.
Authority and Issuance
For the reasons stated in the Supplementary Information section,
the Board proposes to amend part 249 of chapter II of title 12 of the
Code of Federal Regulations as follows:
PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)
0
1. The authority citation for part 249 continues 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
2. Amend Sec. 249.20, by redesignating paragraph (c)(2) as paragraph
(c)(3) and adding new paragraph (c)(2) to read as follows:
Sec. 249.20 High-quality liquid asset criteria.
* * * * *
(c) * * *
(2) A general obligation security issued by, or guaranteed as to
the timely payment of principal and interest by, a public sector entity
where the security is:
(i) Investment grade under 12 CFR part 1 as of the calculation
date;
(ii) Issued or guaranteed by a public sector 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 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
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.
* * * * *
0
3. Amend Sec. 249.21, by:
0
a. Adding paragraph (b)(4);
0
b. Removing the period at the end of paragraph (c)(2) and adding in its
place a semicolon and the word ``plus'';
0
c. Adding paragraph (c)(3);
0
d. Redesignating paragraphs (f) through (i) and as paragraphs (g)
through (j) respectively and adding new paragraph (f);
0
e. Adding paragraph (g)(4);
0
f. Removing the period at the end of paragraph (h)(2) and adding in its
place a semicolon and the word ``plus'';
0
g. Adding paragraphs (h)(3); and (k);
The additions read as follows:
Sec. 249.21 High-quality liquid asset amount.
* * * * *
(b) * * *
(4) Public sector entity security liquid asset amount. The public
sector entity security liquid asset amount equals 50 percent of the
fair value of all general obligation securities issued by, or
guaranteed as to the timely payment of principal and interest by, a
public sector entity that are eligible HQLA.
(c) * * *
(3) The public sector entity security cap excess amount.
* * * * *
(f) Calculation of the public sector entity security cap excess
amount. As of the calculation date, the public security entity security
cap excess amount equals the greater of:
(1) The public sector entity security liquid asset amount minus the
level 2 cap excess amount minus level 2B cap excess amount minus 0.0526
times the sum of:
(i) The level 1 liquid asset amount;
(ii) The level 2A liquid asset amount; and
(iii) The level 2B liquid asset amount minus the public sector
entity security liquid asset amount; or
(2) 0.
(g) * * *
(4) Adjusted public sector entity security liquid asset amount. A
[BANK]'s adjusted public sector entity security liquid asset amount
equals 50 percent of the fair value of all general obligation
securities issued by, or guaranteed as to the timely payment of
principal and interest by, a public sector entity that would be
eligible HQLA and would be held by the [BANK] upon the unwind of any
secured funding
[[Page 30389]]
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.
(h) * * *
(3) The adjusted public sector entity security cap excess amount.
* * * * *
(k) Calculation of the adjusted public sector entity security cap
excess amount. As of the calculation date, the adjusted public sector
entity security cap excess amount equals the greater of:
(1) The adjusted public sector entity security liquid asset amount
minus the adjusted level 2 cap excess amount minus the adjusted level
2B cap excess amount minus 0.0526 times the sum of:
(i) The adjusted level 1 liquid asset amount;
(ii) The adjusted level 2A liquid asset amount: and
(iii) The adjusted level 2B liquid asset amount minus the adjusted
public sector entity security liquid asset amount; or
(2) 0.
0
4. Amend Sec. 249.22, by redesignating paragraph (c) as paragraph (d)
and adding new paragraph (c) to read as follows:
Sec. 249.22 Requirements for eligible high-quality liquid assets.
* * * * *
(c) Securities of public sector entities as eligible HQLA. A Board-
regulated institution may include as eligible HQLA a general obligation
security issued by, or guaranteed as to the timely payment of principal
and interest by, a public sector entity if each of the following is
satisfied:
(1) The fair value of a single issuance of securities that are
included as eligible HQLA by the Board-regulated institution is no
greater than 25 percent of the total amount of outstanding securities
with the same CUSIP number at the calculation date; and
(2) The fair value of the aggregate amount of securities of a
single public sector entity issuer that are included as eligible HQLA
by the Board-regulated institution is no greater than two times the
average daily trading volume during the previous four quarters of all
general obligation securities issued by that public sector entity.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, May 18, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-12850 Filed 5-27-15; 8:45 am]
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