[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Rules and Regulations]
[Pages 8266-8315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00431]



[[Page 8265]]

Vol. 82

Tuesday,

No. 14

January 24, 2017

Part II





 Federal Reserve System





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 12 CFR Part 252





Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding 
Company Requirements for Systemically Important U.S. Bank Holding 
Companies and Intermediate Holding Companies of Systemically Important 
Foreign Banking Organizations; Final Rule

  Federal Register / Vol. 82 , No. 14 / Tuesday, January 24, 2017 / 
Rules and Regulations  

[[Page 8266]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Docket No. R-1523]
RIN 7100-AE37


Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding 
Company Requirements for Systemically Important U.S. Bank Holding 
Companies and Intermediate Holding Companies of Systemically Important 
Foreign Banking Organizations

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is adopting a final rule to require a U.S. top-tier 
bank holding company identified under the Board's rules as a global 
systemically important bank holding company (covered BHC) to maintain 
outstanding a minimum amount of loss-absorbing instruments, including a 
minimum amount of unsecured long-term debt. In addition, the final rule 
prescribes certain additional buffers, the breach of which would result 
in limitations on the capital distributions and discretionary bonus 
payments of a covered BHC. The final rule applies similar requirements 
to the top-tier U.S. intermediate holding company of a global 
systemically important foreign banking organization with $50 billion or 
more in U.S. non-branch assets (covered IHC). The final rule also 
imposes restrictions on other liabilities that a covered BHC or covered 
IHC may have outstanding in order to improve their resolvability and 
resiliency; these restrictions are referred to in the final rule as 
``clean holding company requirements.''

DATES: The final rule is effective on March 27, 2017.

FOR FURTHER INFORMATION CONTACT: Sean Campbell, Associate Director, 202 
452-3760, Thomas Boemio, Senior Project Manager, (202) 452-2982, or 
Anna Harrington, Senior Supervisory Financial Analyst, (202) 452-6406, 
Division of Supervision and Regulation; or Laurie Schaffer, Associate 
General Counsel, (202) 452-2272, Benjamin McDonough, Special Counsel, 
(202) 452-2036, Jay Schwarz, Senior Counsel, (202) 452-2970, Will 
Giles, Senior Counsel, (202) 452-3351, Greg Frischmann, Counsel, (202) 
452-2803, or Mark Buresh, Senior Attorney, (202) 452-5270, Legal 
Division, Board of Governors of the Federal Reserve System, 20th and C 
Streets NW., Washington, DC 20551. For the hearing impaired only, 
Telecommunications Device for the Deaf (TDD) users may contact (202) 
263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Notice of Proposed Rulemaking and General Summary of Comments
    C. Overview of the Final Rule
    D. Consultation With the Federal Deposit Insurance Corporation, 
the Financial Stability Oversight Council, and Foreign Authorities
II. External TLAC and LTD Requirements for U.S. GSIBs
    A. Scope of Application
    B. Calibration of the External TLAC and LTD Requirements
    C. Core Features of Eligible External TLAC
    D. External TLAC Buffer
    E. Core Features of Eligible External LTD
    F. Costs and Benefits
III. TLAC and LTD Requirements for U.S. Intermediate Holding 
Companies of Global Systemically Important Foreign Banking 
Organizations
    A. Eligible External and Internal Issuance of TLAC and LTD by 
Covered IHCs
    B. Scope of Application
    C. Resolution and Non-Resolution IHCs
    D. Calibration of the TLAC and LTD Requirements
    E. Core Features of Eligible TLAC
    F. TLAC Buffer for Covered IHCs
    G. Core Features of Eligible Internal and External LTD for 
Covered IHCs
IV. Clean Holding Company Requirements
    A. Third-Party Short-Term Debt Instruments
    B. Qualified Financial Contracts With Third Parties
    C. Guarantees That Are Subject to Cross-Defaults
    D. Upstream Guarantees and Offset Rights
    E. Cap on Certain Liabilities
    F. Disclosure Requirements
    V. Regulatory Capital Deduction for Investments in the Unsecured 
Debt of Covered BHCs
VI. Transition Periods
VII. Consideration of Domestic Internal TLAC Requirements and Public 
Reporting Requirements for Eligible Internal TLAC and LTD
VIII. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Invitation for Comments on Use of Plain Language

I. Introduction

A. Background

    In October 2015, the Board invited public comment on a notice of 
proposed rulemaking (proposal) to require the largest domestic and 
foreign banks operating in the United States to maintain a minimum 
amount of total loss-absorbing capacity (TLAC), consisting of a minimum 
amount of long-term debt (LTD) and tier 1 capital.\1\ In addition, the 
proposed rule prescribed certain buffers, the breach of which would 
result in limitations on the capital distributions and discretionary 
bonus payments of the firm. The proposal also included a separate 
requirement that these companies maintain a minimum amount of LTD. The 
TLAC and LTD requirements in the proposal had two overall objectives: 
Improving the resiliency of these companies and improving their 
resolvability in the event of their failure or material financial 
distress. Both objectives help to reduce risks to financial stability, 
as provided in section 165 of the Dodd-Frank Act.\2\
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    \1\ See 80 FR 74926 (November 30, 2015).
    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111- 203, 124 Stat. 1376. (2010); 12 U.S.C. 5365.
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    Improving the resiliency of banking organizations, and in 
particular large banking organizations, has long been a goal of the 
Board. The Board has had a long-standing practice of requiring large 
bank holding companies to maintain minimum amounts of regulatory 
capital in order to absorb losses.\3\ Banking organizations subject to 
the Board's regulatory capital rules (Regulation Q) must maintain a 
minimum amount of regulatory capital and maintain a capital buffer 
above the minimum capital requirements in order to avoid restrictions 
on capital distributions and discretionary bonus payments.\4\ The 
largest and most complex banking organizations are subject to 
additional capital buffers because of their greater systemic risk.\5\
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    \3\ See 12 CFR part 225, Appendix A (superseded as of January 1, 
2015, by 12 CFR part 217).
    \4\ 12 CFR 217.11(a). The capital conservation buffer is 
composed entirely of common equity tier 1 capital.
    \5\ These are the countercyclical capital buffer and the buffer 
in the Board's risk-based capital surcharge for global systemically 
important bank holding companies.
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    The minimum capital requirements in Regulation Q take the form of 
minimum ratios of different forms of regulatory capital to risk-based 
and total-leverage-based measures of assets.\6\ The risk-based ratios 
are the common equity tier 1 ratio (common equity tier 1 capital to 
risk-weighted assets), the tier 1 risk-based capital ratio (tier 1 
capital to risk-weighted assets), and the total risk-based capital 
ratio (tier 1 capital plus tier 2 capital to risk-weighted assets).\7\ 
Regulation Q also includes a leverage ratio that relates a company's 
tier 1 capital to its total assets.\8\
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    \6\ See 12 CFR 217.10.
    \7\ See 12 CFR 217.10(a)(1) through (3).
    \8\ See 12 CFR 217.10(a)(4). In addition, certain 
internationally active banking organizations are subject to a 
supplementary leverage ratio, which incorporates certain off-balance 
sheet exposures into the measure of total assets. 12 CFR 
217.10(a)(5).

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[[Page 8267]]

    The TLAC and LTD requirements in the final rule build on, and serve 
as a complement to, the regulatory capital requirements in Regulation 
Q. While regulatory capital requirements are intended to ensure that a 
banking organization has sufficient capital to remain a going concern, 
the objective of the TLAC and LTD requirements in the final rule is to 
reduce the financial stability impact of a failure by requiring 
companies to have sufficient loss-absorbing capacity on both a going 
concern and a gone-concern basis.
    A company's gone-concern loss-absorbing capacity is different from 
the company's going-concern capacity in a few fundamental respects. 
Although regulatory capital theoretically can absorb losses after a 
firm has entered resolution, the firm's regulatory capital, and 
especially its equity capital, is likely to be significantly or 
completely depleted in the lead up to a bankruptcy or resolution. Thus, 
if the ultimate goal is to have a failed firm re-emerge from resolution 
with sufficient capital to successfully operate as a going concern, 
there will need to be a new source of capital for the firm. In this 
regard, debt instruments, which count in regulatory capital in limited 
amounts and are subject to restrictions on their terms, are capable of 
absorbing losses in resolution. This is because the debt holders' claim 
on a company's assets may be reduced in a resolution or bankruptcy 
proceeding. This would increase the size of a company's assets relative 
to the size of its liabilities and thereby increase the company's 
equity. Certain debt instruments are better able to absorb losses in a 
resolution proceeding and only these eligible debt instruments count 
toward the TLAC and LTD requirement in the final rule.
    As in the proposal, the TLAC and LTD requirements in the final rule 
focus on the largest and most systemic U.S. banking organizations and 
the U.S. operations of the largest and most systemic foreign banking 
organizations, because, as shown in the recent financial crisis, the 
failure or material financial distress of these companies has the 
greatest potential to disrupt U.S. financial stability.
    The TLAC requirements in the final rule are based on many of the 
same measures as those that are in Regulation Q. For example, the TLAC 
requirements include both risk-based and leverage-based measures and 
include buffer requirements on top of the minimum TLAC requirements 
that function in a manner similar to the capital conversation buffer in 
Regulation Q. The risk-based measures of TLAC help to ensure that the 
amount of TLAC held by a company would be commensurate with its overall 
risks, while the leverage-based measures of TLAC act as a backstop to 
the risk-based measures. Companies that do not meet a TLAC buffer face 
limitations on capital distributions and discretionary bonus payments 
(in a manner similar to the restrictions in Regulation Q).
    Improving resolvability was also an important goal of the proposal, 
and remains an important goal of the final rule. Efforts to ensure the 
orderly resolution of firms subject to the rule enhances financial 
stability. To further this objective, the largest domestic and foreign 
banks operating in the United States will be required to maintain a 
minimum amount of outstanding LTD instruments. This LTD also will count 
toward the TLAC requirements in the final rule. In the event that a 
company had significant losses such that it was experiencing 
significant financial distress or had depleted its equity capital, the 
LTD that the company had outstanding could be used to replenish the 
company's equity. This could occur in a resolution proceeding, or, in 
the case of the U.S. operations of certain foreign banks, by order of 
the Board.\9\ Like the minimum TLAC requirements and for the same 
reasons as noted above, the minimum LTD requirements include both risk-
based and leverage-based measures.
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    \9\ See, e.g., 80 FR 74928-30 (November 30, 2015).
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    If a company subject to the final rule experiences losses, the 
losses would be passed on first to shareholders of the parent company 
and, if the losses exceed the parent company's equity, to the holders 
of the parent company's debt. In this way, the TLAC and LTD 
requirements would increase market discipline for banking organizations 
subject to the requirements by making them bear the costs of issuing a 
minimum amount of LTD instruments that are capable of absorbing losses 
in a manner that would enhance the resiliency and resolvability of the 
organization.
    Foreign jurisdictions have been pursuing similar approaches to the 
approach adopted by the Board in the final rule since the 2007-2009 
financial crisis.\10\ In November 2015, the Financial Stability Board 
(FSB) finalized an internationally negotiated minimum standard for the 
total loss-absorbing capacity of global systemically important banks 
(GSIBs) (the FSB standard).\11\
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    \10\ These efforts have been coordinated through the Basel 
Committee on Banking Supervision (BCBS) and the Financial Stability 
Board (FSB), at the direction of the Heads of State of the Group of 
Twenty (G20 Leaders). Representatives of the United States have 
taken an active role in these efforts.
    \11\ Principles on Loss-absorbing and Recapitalisation Capacity 
of G-SIBs in Resolution, Total Loss-absorbing Capacity (TLAC) Term 
Sheet, November 9, 2015 (hereinafter ``FSB Standard''), available at 
http://www.fsb.org/wp-content/uploads/TLAC-Principles-and-Term-Sheet-for-publication-final.pdf.
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    The final rule also is generally consistent with the FSB standard, 
although the final rule adopts a minimum LTD requirement, unlike the 
FSB standard.\12\ Several commenters noted that the proposed rule 
deviated from the FSB standard in various respects. These comments are 
addressed in greater detail below in the description of the 
requirements of the final rule, including those aspects of the final 
rule that were modified in response to issues raised by commenters. As 
described further below, the final rule requires full compliance by 
January 1, 2019.
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    \12\ Under the FSB standard, GSIBs would be subject to a minimum 
TLAC requirement equal to 16 percent of the banking organization's 
risk weighted assets (risk-weighted assets) as of January 1, 2019 
and 18 percent as of January 1, 2022 plus any applicable regulatory 
capital (Basel III) buffers, which must be met in addition to the 
TLAC risk-weighted assets minimum. Minimum TLAC must also be at 
least 6 percent of the Basel III leverage ratio denominator as of 
January 1, 2019, and at least 6.75 percent as of January 1, 2022. 
The FSB standard also contains an expectation that a GSIB would meet 
at least one-third of its TLAC requirement with eligible LTD rather 
than equity.
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    The Board is issuing the final rule under section 165 of the Dodd-
Frank Act. Section 165 authorizes the Board to impose enhanced 
prudential standards on bank holding companies with total consolidated 
assets of $50 billion or more ``[i]n order to prevent or mitigate risks 
to the financial stability of the United States that could arise from 
the material financial distress or failure, or ongoing activities, of 
large, interconnected financial institutions.'' \13\ These enhanced 
prudential standards must increase in stringency based on the systemic 
footprint and risk characteristics of individual covered firms.\14\ In 
addition, section 165 authorizes the Board to establish such other 
prudential standards as the Board of Governors, on its own or pursuant 
to a recommendation made by the Council, determines are 
appropriate.\15\
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    \13\ 12 U.S.C. 5365(a)(1).
    \14\ 12 U.S.C. 5365(a)(1)(B), (b)(3).
    \15\ 12 U.S.C. 5365(b)(1)(B)(iv).
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    In implementing other portions of the Dodd-Frank Act, the Board has 
taken important steps to protect U.S. financial stability by making 
major financial companies more resolvable--that is, to take measures so 
that a failed firm could be dealt with in an orderly manner, without 
the destructive effects on other

[[Page 8268]]

important financial firms that were caused by the failures and near-
failures of major financial firms in 2008. These steps include 
heightened regulatory capital and capital planning requirements for 
large, systemically important banks holding companies and resolution 
planning requirements.\16\ In addition, Title II of the Dodd-Frank Act 
established a new statutory resolution framework for major financial 
companies as an alternative to bankruptcy.\17\ The enhanced prudential 
standards in the final rule are intended to prevent or mitigate risks 
to the financial stability of the United States that could arise from 
the material financial distress, failure, or ongoing activities of a 
covered BHC or covered IHC. In particular, the final rule would improve 
the resolvability of a covered BHC under either the U.S. Bankruptcy 
Code or Title II of the Dodd-Frank Act and improve their resiliency.
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    \16\ See, e.g., 12 CFR part 217, subpart H; 12 CFR 225.8; and 12 
CFR part 243.
    \17\ See 12 U.S.C. 5381-5394.
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    Similarly, the final rule would improve the resiliency of covered 
IHCs and their subsidiaries, and thereby increase the likelihood that a 
failed foreign bank with significant U.S. operations could be 
successfully resolved without the failure of the U.S. subsidiaries or, 
failing that, that the U.S. operations could be separately resolved in 
an orderly manner.
    In addition to the authority identified above, section 165 of the 
Dodd-Frank Act authorizes the Board to establish ``enhanced public 
disclosures'' and ``short-term debt limits.'' \18\ The final rule 
includes disclosure requirements and limits on the ability of covered 
BHCs and covered IHCs to issue short-term debt.
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    \18\ 12 U.S.C. 5365(b)(1)(B)(ii) and (iii).
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    Finally, as noted, the Board has tailored the final rule to apply 
to companies that, if resolved in a disorderly manner, would likely 
pose the greatest risk to the financial stability of the United 
States.\19\
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    \19\ 12 U.S.C. 5365(a)(1)(B).
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B. Notice of Proposed Rulemaking and General Summary of Comments

    As noted, the proposal contained requirements regarding LTD and 
TLAC for large, interconnected U.S. bank holding companies and the U.S. 
operations of large, interconnected foreign banking organizations.\20\ 
The proposal included four interrelated requirements for these 
organizations.
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    \20\ 80 FR 74926 (November 30, 2015).
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    First, the top-tier parent holding companies of U.S. GSIBs (covered 
BHCs) would be required to maintain outstanding minimum levels of total 
loss-absorbing capacity (external TLAC) and long-term unsecured debt 
(external LTD). In addition, the proposal included a related buffer on 
top of the risk-weighted asset component of external TLAC, the breach 
of which would result in limitations on a covered BHC's capital 
distributions and discretionary bonus payments. The proposal defined 
external LTD as unsecured debt that is issued directly by a covered 
BHC, is ``plain vanilla'' (that is, the debt instrument has no features 
that would interfere with a smooth resolution proceeding),\21\ and is 
governed by U.S. law. External TLAC, under the proposal, was defined as 
the sum of the tier 1 regulatory capital issued directly by the covered 
BHC (excluding minority interests) and the external LTD of the covered 
BHC.
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    \21\ ``Plain vanilla'' is described in detail in section II.E.3 
and generally excludes exotic features that could impact the loss 
absorbing capacity of the LTD and thereby diminish the prospects for 
an orderly resolution of a covered BHC, such as structured notes and 
most instruments that contain derivative-linked features.
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    Second, under the proposal, the top-tier U.S. intermediate holding 
companies of foreign GSIBs (covered IHCs) would have been required to 
maintain outstanding minimum levels of total loss-absorbing capacity 
(internal TLAC) and long-term unsecured debt instruments (internal LTD) 
issued to their foreign parent company. In addition, the proposal 
included a related buffer on top of the risk-weighted asset component 
of internal TLAC, the breach of which would result in limitations on a 
covered IHC's capital distributions and discretionary bonus payments. 
The proposal defined internal TLAC and LTD for covered IHCs similarly 
to external TLAC and LTD for covered BHCs, with a few key differences 
for internal LTD. These included the requirements that internal LTD had 
to be issued to a parent foreign entity that controls the covered IHC, 
be contractually subordinated to all third-party liabilities of the 
covered IHC, and contain a contractual conversion trigger pursuant to 
which the Board could require the covered IHC to cancel the eligible 
internal LTD or convert or exchange it into common equity tier 1 
capital under certain circumstances. In addition, the minimum amount of 
internal TLAC required under the proposal varied based on whether the 
covered IHC was expected to adopt either an SPOE or MPOE resolution 
strategy, though both types of firms were required to issue the same 
amounts of internal LTD.
    Third, the operations of the covered BHCs and covered IHCs would 
have been subject to ``clean holding company'' limitations to further 
improve their resolvability and the resiliency of their operating 
subsidiaries. In particular, the proposal would have prohibited covered 
BHCs from issuing short-term debt instruments to third parties 
(including deposits); entering into ``qualified financial contracts'' 
(QFCs) with third parties; having liabilities that are subject to 
``upstream guarantees'' from the covered BHC's subsidiaries or that are 
subject to contractual offset rights for its subsidiaries' creditors; 
or issuing guarantees of its subsidiaries' liabilities, if the 
guarantee provided that the covered BHC's insolvency or entry into 
resolution was an event of default on the part of the subsidiary. The 
proposal applied a similar prohibition to covered IHCs. Additionally, 
the proposal capped the value of a covered BHC's liabilities (other 
than those related to external TLAC and external LTD) that can be pari 
passu with or junior to its external LTD at 5 percent of the value of 
its external TLAC. This cap on liabilities was not relevant to covered 
IHCs under the proposal because the proposal required that a covered 
IHC's eligible internal LTD be contractually subordinated to all of the 
covered IHC's third-party liabilities.
    Fourth and finally, banking organizations subject to the Board's 
capital requirements would have been required to make certain 
deductions from capital for holding of unsecured debt issued by covered 
BHCs to limit the potential for financial sector contagion in the event 
of the failure of a covered BHC.
    The Board received approximately 50 comments on the proposed rule 
from banking organizations, trade associations, public interest 
advocacy groups, members of Congress, and private individuals. Board 
staff also met with some commenters at their request to discuss their 
comments on the proposal and summaries of these meetings may be found 
on the Board's public Web site.
    Commenters generally supported the proposal, including the proposed 
minimum TLAC and LTD requirements. Certain commenters, however, argued 
that the calibration of the proposed TLAC and LTD requirements under 
the proposal was too high for both covered BHCs and covered IHCs. A 
number of these commenters encouraged the Board to reduce or eliminate 
certain proposed requirements. In particular, a number of commenters 
urged the Board to eliminate the separate LTD requirement

[[Page 8269]]

and allow covered BHCs and covered IHCs the option to meet the proposed 
TLAC requirements with equity or debt.
    Commenters also expressed concerns about the eligibility 
requirements for LTD. These commenters urged the Board to permit a 
broader set of instruments to qualify as eligible long-term debt, 
including debt with various types of acceleration clauses, debt issued 
under foreign law, principal-protected structured notes, and trust 
preferred securities (``TruPS''). In the alternative, to mitigate the 
impact of the requirements, commenters urged the Board to grandfather 
as eligible LTD existing outstanding long-term debt, which often 
contains features that would cause disqualification as eligible LTD 
under the proposal. The Board also received comment requesting that the 
leverage component of external TLAC be reduced and include a buffer 
similar to that placed on the risk-weighted asset component.
    Foreign bank commenters raised a number of concerns related to the 
proposed internal TLAC and LTD requirements. These commenters expressed 
general concerns about national treatment and competitive equality.\22\ 
In particular, some commenters argued that, given their relative size, 
covered IHCs should not be subject to TLAC and LTD requirements under 
the proposed rule considering that similarly-sized U.S. institutions 
would not be subject to these requirements. Commenters also urged the 
Board to permit covered IHCs to issue debt externally on the same terms 
as covered BHCs. Commenters expressed particular concerns about 
additional costs resulting from certain features of internal LTD that 
the proposal would not require for external LTD. According to the 
commenters, these features would make internal LTD relatively more 
costly than external LTD. In particular, foreign bank commenters 
requested the removal of the acceleration clause prohibition, the 
contractual subordination requirement, and the contractual conversion 
trigger requirement. Commenters argued that these requirements for 
internal LTD could cause eligible LTD to be characterized as equity, 
rather than debt, for U.S. income tax purposes.
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    \22\ The Board is required to give due regard to the principle 
of national treatment and equality of competitive opportunity in 
developing enhanced prudential standards under the Dodd-Frank Act. 
12 U.S.C. 5365(b)(2).
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    While commenters generally supported the proposed clean holding 
company requirements, certain commenters urged the Board to modify the 
proposal to allow certain types of guarantees that are subject to 
cross-default rights. Commenters also requested that the Board include 
a market-making exception from the proposed capital deduction and 
provide additional time for companies to come into compliance with the 
requirements of the final rule. Comments on the proposal and the 
changes in the final rule are described in more detail throughout the 
remainder of this SUPPLEMENTARY INFORMATION.

C. Overview of the Final Rule

    The Board is adopting this final rule to improve the resiliency and 
resolvability of GSIBs and thereby reduce threats to financial 
stability. The Board has made a number of changes to the proposal in 
response to concerns raised by commenters, as further described below.
    The final rule is intended to improve the resolvability of the most 
systemically important banking firms--global systemically important 
banking organizations (GSIBs) without extraordinary government support 
or taxpayer assistance by establishing ``total loss-absorbing 
capacity'' standards for the GSIBs and requiring them to issue a 
minimum amount of LTD.\23\ The final rule requires the top-tier holding 
companies of U.S. GSIBs to maintain outstanding minimum levels of TLAC 
and eligible LTD. In addition, the final rule establishes a buffer on 
top of both the risk-weighted asset and leverage components of the 
external TLAC requirements, the breach of which would result in 
limitations on a covered BHC's capital distributions and discretionary 
bonus payments.
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    \23\ Separately, the Board is continuing to work with the OCC 
and FDIC to mitigate the resolvability risks related to potential 
disorderly unwinds of financial contracts.
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    The final rule requires the top-tier U.S. intermediate holding 
companies of foreign GSIBs to maintain outstanding minimum levels of 
total loss-absorbing capacity and long-term unsecured debt. In 
addition, the final rule establishes a buffer on top of the risk-
weighted asset component of the internal TLAC requirements, the breach 
of which would result in limitations on a covered IHC's capital 
distributions and discretionary bonus payments.
    The final rule applies ``clean holding company'' limitations to the 
operations of the top-tier holding companies of U.S. GSIBs and the top-
tier U.S. intermediate holding companies of foreign GSIBs to further 
improve their resolvability and the resiliency of their operating 
subsidiaries. The Board has decided to defer adoption of capital 
deduction requirements for Board-regulation institutions that hold 
unsecured LTD. The Board will work with the other federal banking 
agencies to adopt the deduction requirements on a coordinated basis as 
further described below.
    After analyzing the expected impact of the final rule with the 
modifications adopted to address concerns of commenters, the Board has 
determined to establish an effective date of January 1, 2019, for the 
rule. While this provides a shorter transition period than originally 
proposed, the changes adopted by the Board, including grandfathering 
outstanding LTD and other changes discussed below, mitigate the actions 
firms must take to comply with the final rule.
1. External Total Loss-Absorbing Capacity and Long-Term Debt 
Requirements for Covered U.S. Bank Holding Companies
    Under the final rule, a ``covered BHC'' is defined to mean a U.S. 
GSIB identified under the Board's rule establishing risk-based capital 
surcharges for global systemically important bank holding companies 
(GSIB surcharge rule).\24\ A covered BHC will be required to maintain 
outstanding minimum levels of eligible TLAC and eligible external LTD 
beginning on January 1, 2019. Consistent with the proposal, a covered 
BHC's eligible external TLAC is defined to be the sum of the tier 1 
regulatory capital issued directly by the covered BHC and the amount of 
the covered BHC's eligible external LTD that is due to be paid after 
one year or more.\25\
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    \24\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
    \25\ The proposal was based on the ``remaining maturity'' of the 
debt, while the final rule is based on the unpaid principal amount 
``due to be paid'' for reasons discussed below.
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    Also consistent with the proposal, eligible external LTD is defined 
under the final rule as debt that is issued directly by the covered 
BHC, is unsecured, is ``plain vanilla,'' and is governed by U.S. law. 
Only 50 percent of the amount of eligible external LTD that is due to 
be paid between one and two years can be used for purposes of the 
external LTD requirement (though such debt would count in full for 
purposes of the external TLAC requirement). The amount of eligible 
external LTD due to be paid in less than one year will not count toward 
the external TLAC requirement or the external LTD requirement.
    In response to comments and to mitigate the impact of the 
requirements, the final rule differs from the proposal

[[Page 8270]]

by providing a grandfather for certain outstanding LTD of covered BHCs 
issued prior to December 31, 2016, to count towards the external LTD 
and external TLAC requirements in the final rule. The final rule also 
includes a provision that would allow the Board, after notice and an 
opportunity to respond, to order a global systemically important BHC to 
exclude from its outstanding eligible long-term debt amount any debt 
securities with features that would significantly impair the ability of 
such debt securities to take losses.
    Under the external TLAC requirement of the final rule, a covered 
BHC is required to maintain outstanding eligible external total loss-
absorbing capacity (``eligible external TLAC'') in an amount not less 
than the greater of 18 percent of the covered BHC's total risk-weighted 
assets and 7.5 percent of the covered BHC's total leverage 
exposure.\26\ In addition, external TLAC buffers that are similar to 
the capital buffers in the Board's Regulation Q \27\ will apply in 
addition to the risk-weighted asset component and leverage component of 
the external TLAC requirement. These requirements generally are the 
same as under the proposal, except the leverage component of the 
external TLAC requirement has been reduced from 9.5 percent under the 
proposal to 7.5 percent in the final rule, and the Board has adopted a 
2 percent buffer on top of the leverage component of the external TLAC 
requirement to better align with the risk-weighted asset component and 
the Board's regulatory capital rules.
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    \26\ Total leverage exposure is defined in 12 CFR 
217.10(c)(4)(ii).
    \27\ 12 CFR part 217.
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    Under the external LTD requirement of the final rule, a covered BHC 
is required to maintain outstanding eligible external long-term debt 
instruments (eligible external LTD) in an amount not less than the 
greater of 6 percent plus the surcharge applicable under the GSIB 
surcharge rule (expressed as a percentage) of total risk-weighted 
assets and 4.5 percent of total leverage exposure. These requirements 
are the same as under the proposal. The external LTD requirement is 
calibrated by reference to a ``capital refill'' framework that helps to 
ensure that the covered BHC could be effectively recapitalized to the 
individual capital levels expected of each covered BHC to be 
sufficiently capitalized in the event that all or most of its capital 
were depleted. Because the capital requirements that apply to covered 
BHCs depend, in part, on idiosyncratic measures of a covered BHC's 
risks and, in part, on standardized measures of risk that are common 
across all bank holding companies, the LTD requirements that apply to a 
particular covered BHC will vary. To the extent that these capital 
requirements are updated over time, the Board would also expect to 
consider updating the associated external LTD requirement in an effort 
to preserve the general alignment between the Board's capital rules and 
the external LTD requirements.
2. Total Loss-Absorbing Capacity and Long-Term Debt Requirements for 
Covered U.S. Intermediate Holding Companies
    The term ``covered IHC'' is defined in the final rule to include 
any U.S. IHC that (a) is required to be formed under the Board's 
enhanced prudential standards rule, and (b) is controlled by a foreign 
banking organization that has been designated as a GSIB or would be 
designated as a GSIB under the Board's capital rules.\28\ Under the 
final rule, a ``covered IHC'' is required to maintain outstanding 
minimum levels of eligible total loss-absorbing capacity and eligible 
long-term debt beginning on January 1, 2019. A covered IHC's eligible 
TLAC generally is defined to be the sum of (a) the tier 1 regulatory 
capital issued from the covered IHC to a foreign parent entity that 
controls the covered IHC and (b) the covered IHC's eligible LTD, as 
defined below.
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    \28\ The Board's enhanced prudential standards rule generally 
requires any foreign banking organization with total consolidated 
non-branch U.S. assets of $50 billion or more to form a single U.S. 
intermediate holding company over its U.S. subsidiaries. 12 CFR 
252.153; 79 FR 17329 (May 27, 2014).
---------------------------------------------------------------------------

    Under the final rule, the amount of eligible total loss-absorbing 
capacity (``eligible TLAC'') and long-term debt that a covered IHC is 
required to maintain outstanding, as well as whether the eligible long-
term debt component may be issued externally, depends on whether the 
covered IHC (or any of its subsidiaries) is expected to enter 
resolution (resolution covered IHC) in a multiple-point-of-entry (MPOE) 
resolution strategy, or to continue to operate outside of resolution 
proceedings (non-resolution covered IHC) while a foreign parent entity 
is resolved under a single-point-of-entry (SPOE) resolution 
strategy.\29\ A key modification to the proposal is that, under the 
final rule, a resolution covered IHC that adopts an MPOE resolution 
strategy would have the option to issue capital and LTD externally to 
third parties in a fashion similar to covered BHCs (and consistent with 
their resolution strategy) as described below. Non-resolution covered 
IHCs continue to be required under the final rule to issue LTD 
internally.
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    \29\ In developing the TLAC and LTD requirements in the proposal 
and final rule, the Board considered the two scenarios under which 
large financial firms are likely to be resolved following failure. 
In one scenario, an SPOE resolution, only the top-tier holding 
company would enter a resolution proceeding. An SPOE resolution thus 
would avoid the need for separate proceedings for separate legal 
entities run by separate authorities across multiple jurisdictions 
and the associated destabilizing complexity. The losses that caused 
the banking organization to fail would be passed up from the 
subsidiaries that incurred the losses using one of several potential 
mechanisms and would then be imposed on the equity holders and 
unsecured creditors of the holding company, which would have the 
effect of recapitalizing the subsidiaries of the banking 
organization. An SPOE resolution could avoid losses to the third-
party creditors of the subsidiaries and could thereby allow the 
subsidiaries to continue normal operations, without entering 
resolution or taking actions (such as asset fire sales) that could 
pose a risk to the financial stability of the United States. The 
expectation that the holding company's equity holders and unsecured 
creditors would absorb the banking organization's losses in the 
event of its failure would also help to maintain the confidence of 
the operating subsidiaries' creditors and counterparties, reducing 
their incentive to engage in potentially destabilizing funding runs. 
Most of the U.S. GSIBs, as well as most foreign GSIBs, are 
developing plans that facilitate an SPOE approach, including in 
their most recent resolution plans.
    The other likely resolution scenario is an MPOE resolution. An 
MPOE resolution involves separate resolutions of different legal 
entities within a financial firm and could potentially be executed 
by multiple resolution authorities across multiple jurisdictions. 
The final rule would improve the prospects for a successful MPOE 
resolution of a GSIB by requiring U.S. GSIBs and the intermediate 
holding company of a foreign GSIBs to maintain substantially more 
loss-absorbing capacity. The final rule also includes certain 
features that would facilitate the resolution of a foreign GSIB 
under an MPOE resolution. Moreover, an MPOE resolution strategy 
involving the resolution of a covered IHC may often effectively be 
an SPOE resolution strategy of their U.S. operations.
---------------------------------------------------------------------------

    In particular, under the final rule, the capital and long-term debt 
of a non-resolution covered IHC will be required to be issued either to 
a foreign company that controls the covered IHC (a ``foreign parent'') 
or to a directly or indirectly wholly-owned foreign subsidiary of the 
top-tier foreign parent (internal TLAC and LTD) consistent with the 
SPOE resolution strategy. The proposal, by contrast, required a foreign 
parent to hold internal TLAC and LTD issued by covered IHCs. In 
response to comments, the final rule was changed from the proposal to 
allow any directly or indirectly wholly owned subsidiary of the top-
tier foreign parent to hold eligible internal TLAC and LTD issued by 
covered IHCs. This change is consistent with the overall objectives of 
the proposal that a non-resolution

[[Page 8271]]

covered IHC upstream any losses outside of the United States to a 
parent foreign banking organization. By contrast, under the final rule, 
a resolution covered IHC will have the option to issue its LTD 
internally to its foreign affiliates or externally to third-party 
investors consistent with an MPOE resolution strategy.
    Under the final rule, beginning on January 1, 2019, non-resolution 
covered IHCs are required to maintain eligible internal TLAC in an 
amount not less than the greater of: (a) 16 percent of the covered 
IHC's total risk-weighted assets; (b) 6 percent of the covered IHC's 
total leverage exposure (for covered IHCs that are subject to the 
supplementary leverage ratio); \30\ and (c) 8 percent of the covered 
IHC's average total consolidated assets, as computed for purposes of 
the U.S. tier 1 leverage ratio.\31\ For all covered IHCs, a buffer that 
is similar to the capital conservation buffer in the Board's Regulation 
Q will apply in addition to the risk-weighted assets component of the 
TLAC requirement. These requirements for non-resolution covered IHCs 
are the same as under the proposal. In addition, under the final rule 
and as explained above, a non-resolution covered IHC is required to 
issue internal LTD to a foreign parent that controls the IHC as under 
the proposal, or to a directly or indirectly wholly owned foreign 
subsidiary of the top-tier foreign parent.
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    \30\ Under the IHC rule, U.S. intermediate holding companies 
with total consolidated assets of $250 billion or more or on-balance 
sheet foreign exposure equal to $10 billion or more are required to 
meet a minimum supplementary leverage ratio of 3 percent. 12 CFR 
252.153(e)(2); 79 FR 17329 (March 27, 2014).
    \31\ The final rule imposes the same leverage capital 
requirements on U.S. intermediate holding companies as it does on 
U.S. bank holding companies. 12 CFR 252.153(e)(2); 79 FR 17329 
(March 27, 2014). These leverage capital requirements include the 
generally applicable leverage ratio and the supplementary leverage 
ratio for U.S. intermediate holding companies that meet the scope of 
application for that ratio.
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    Under the final rule, beginning on January 1, 2019, resolution 
covered IHCs are required to maintain outstanding eligible TLAC in an 
amount not less than the greater of (a) 18 percent of the covered IHC's 
total risk-weighted assets; (b) 6.75 percent of the covered IHC's total 
leverage exposure (if applicable); and (c) 9 percent of the covered 
IHC's average total consolidated assets, as computed for purposes of 
the U.S. tier 1 leverage ratio. As noted above, for all covered IHCs, a 
TLAC buffer that is similar to the capital conservation buffer in the 
Board's Regulation Q applies in addition to the risk-weighted assets 
component of the TLAC requirement. These requirements are generally the 
same as under the proposal.
    In response to comments, the minimum eligible LTD requirements have 
been adjusted downward to reflect the same balance-sheet depletion 
assumption afforded to the calibration of the eligible external LTD 
requirements of U.S. bank holding companies. Accordingly, all covered 
IHCs (whether or not a resolution entity) will be required under the 
final rule to maintain outstanding eligible LTD in an amount not less 
than the greater of (a) 6 percent of total risk-weighted assets; (b) 
2.5 percent of the total leverage exposure (if applicable); and (c) 3.5 
percent of average total consolidated assets, as computed for purposes 
of the U.S. tier 1 leverage ratio. As discussed in more detail below, 
the final rule also includes a provision that would allow the Board, 
after notice and an opportunity to respond, to order a covered IHC to 
exclude from its outstanding long-term debt amount any debt securities 
with features that would significantly impair the ability of such debt 
securities to take losses.
    A covered IHC's eligible LTD generally is subject to the same 
requirements as the requirements that apply to eligible external LTD 
for U.S. GSIBs: The eligible LTD must be issued directly from the 
covered IHC, be unsecured, have only ``plain vanilla'' features, and be 
governed by U.S. law. The amount of eligible LTD that is due to be paid 
between one and two years is subject to a 50 percent haircut for 
purposes of the LTD requirement, and eligible LTD amounts due to be 
paid in less than one year will not count toward the LTD requirement.
    In addition, the final rule has been modified to allow eligible LTD 
issued by covered IHCs, whether external or internal LTD, to have the 
same acceleration clauses that are permitted for eligible external LTD 
issued by covered BHCs. Moreover, under the final rule, covered IHCs 
will have the option to adopt contractual subordination or structural 
subordination for their eligible long-term debt; under the proposal 
covered IHCs were required to contractually subordinate their long-term 
debt. These modifications will allow covered IHCs to issue eligible 
long-term debt, whether internal or external, on similar terms as 
covered BHCs under the final rule and therefore reduce burden on 
covered IHCs and help ensure national treatment and competitive 
equality. In response to comments and to mitigate the impact of the 
requirements, the final rule differs from the proposal by providing a 
grandfather for certain outstanding eligible external LTD of resolution 
covered IHCs issued prior to December 31, 2016.
    However, one key feature will continue to distinguish eligible 
internal LTD from eligible external LTD for covered IHC's (both for 
non-resolution covered IHCs and for resolution covered IHCs that 
exercise their option to issue their LTD internally). Eligible internal 
LTD must include a contractual trigger pursuant to which the Board 
could require the covered IHC to convert or exchange the LTD into 
common equity tier 1 capital without the covered IHC's entry into a 
resolution proceeding in certain circumstances. These circumstances are 
(a) the Board determines that the covered IHC is ``in default or in 
danger of default''; and (b) any of the following situations apply (i) 
the top-tier foreign banking organization or any subsidiary outside the 
United States is placed into resolution proceedings, (ii) the home 
country supervisory authority consents to the conversion, or does not 
object to the conversion following 24 hours' notice, or (iii) the Board 
makes a written recommendation to the Secretary of the Treasury that 
the Federal Deposit Insurance Corporation (FDIC) should be appointed as 
receiver of the covered IHC.
    In response to comments, the final rule includes certain changes to 
the requirement that the Board must be able to cause a covered IHC to 
convert its LTD to equity. Under the proposed rule, the contractual 
conversion trigger would have allowed the Board to cancel or convert 
the covered IHC's LTD. The final rule includes only the requirement 
that LTD be convertible into equity and does not include the 
requirement that LTD be subject to cancellation. Thus, under the final 
rule, a covered IHC must include a contractual conversion provision in 
its LTD that would allow the Board to order the conversion of the long-
term debt into equity. In addition, the final rule has been modified to 
allow the Board to convert all or part of a covered IHC's LTD into 
equity. The intended purpose of these changes, along with allowing 
certain acceleration clauses and structural subordination, is to 
provide flexibility consistent with the purposes of the rule and to 
respond to concerns raised by commenters regarding the contractual 
conversion trigger as further discussed below. The Board believes that 
these changes respond to comments on the proposed rule and serve to 
mitigate the costs of the conversion feature on covered IHCs.

[[Page 8272]]

3. Clean Holding Company Requirements
    The final rule prohibits or limits covered BHCs and covered IHCs 
from directly entering into certain financial arrangements that could 
impede an entity's orderly resolution. These prohibitions and 
limitations will enhance resiliency by reducing complexity and reliance 
on short-term funding and are intended to support the orderly 
resolution of a covered BHC and covered IHC.
    Under the final rule, a covered BHC and covered IHC are prohibited 
from issuing short-term debt instruments to third parties (including 
deposits); entering into ``qualified financial contracts'' (QFCs) with 
third parties; having liabilities that are guaranteed by the covered 
BHC's subsidiaries or subject to contractual offset rights for its 
subsidiaries' creditors; or issuing certain guarantees of its 
subsidiaries' liabilities if the liability provides default rights 
based on the resolution of the covered BHC or covered IHC. This last 
prohibition has been revised from the proposal to exempt guarantees of 
liabilities that are subject to any future rule of the Board or another 
Federal banking agency restricting default rights.
    Additionally, the final rule caps the amount of a covered BHC's 
third-party liabilities (other than those related to eligible external 
TLAC and eligible external LTD) that can be pari passu with or junior 
to its eligible external LTD at 5 percent of the value of its eligible 
external TLAC. The final rule includes a similar cap for covered IHCs 
that choose structural subordination of their long-term debt though 
with certain differences for non-resolution covered IHCs and resolution 
covered IHCs described further below. In each case, under the final 
rule, both covered BHCs and covered IHCs have the option under the 
final rule to contractually subordinate their eligible long-term debt 
to other third-party liabilities without the need for the 5 percent 
cap. Finally, the final rule requires covered BHCs and covered IHCs 
that issue long-term debt externally to make certain public 
disclosures.
4. Capital Deduction
    The final rule does not adopt the requirement in the proposal that 
state member banks, bank holding companies, and savings and loan 
holding companies and IHCs formed to comply with the Board's enhanced 
prudential standards for foreign banking organizations deduct 
investments in the unsecured debt of covered BHCs that exceed certain 
thresholds from regulatory capital. The Board intends to address these 
elements of the proposal jointly with the Office of the Comptroller of 
the Currency (OCC) and FDIC at a later time, in order to apply these 
requirements consistently to all entities subject to the regulatory 
capital requirements of the federal banking agencies.

E. Consultation With the FDIC, the Council, and Foreign Authorities

    In developing this final rule, the Board consulted with the FDIC, 
the Financial Stability Oversight Council (Council), and other U.S. 
financial regulatory agencies. The final rule reflects input that the 
Board received during this consultation process. Furthermore, the Board 
has consulted with foreign financial regulatory authorities regarding 
this final rule and the establishment of other standards that would 
maximize the prospects for the cooperative and orderly cross-border 
resolution of failed GSIBs.

II. External TLAC and LTD Requirements for U.S. GSIBs

A. Scope of Application (Section 252.60 of the Final Rule)

    The final rule, like the proposal, applies to all ``covered BHCs.'' 
The term ``covered BHC'' is defined in the final rule in the same 
manner as the proposal to include any U.S. top-tier bank holding 
company identified as a global systemically important BHC under the 
Board's GSIB surcharge rule.\32\ Under the GSIB surcharge rule, a U.S. 
top-tier bank holding company subject to the advanced approaches rule 
must determine whether it is a global systemically important BHC by 
applying a multifactor methodology established under the Board's 
regulatory capital rules.\33\ This methodology evaluates a banking 
organization's systemic importance on the basis of its attributes in 
five broad categories: Size, interconnectedness, cross-jurisdictional 
activity, substitutability, and complexity. Accordingly, the 
methodology provides a tool for identifying as global systemically 
important BHCs those banking organizations that pose elevated risks. 
The final rule's focus on global systemically important BHCs is in 
keeping with the Dodd-Frank Act's mandate that more stringent 
prudential standards be applied to the most systemically important bank 
holding companies.\34\
---------------------------------------------------------------------------

    \32\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
    \33\ 12 CFR part 217, subpart H.
    \34\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Under the methodology in the GSIB surcharge rule, eight U.S. bank 
holding companies are currently identified as GSIBs. Those eight top-
tier bank holding companies will therefore be covered BHCs subject to 
this final rule.\35\ In addition, because the GSIB surcharge 
methodology is dynamic, other banking organizations could become 
subject to the final rule in the future. As under the proposal, a 
covered BHC will become subject to the requirements of the final rule 
on the later of January 1, 2019, or three years after the date on which 
the firm becomes a covered BHC.
---------------------------------------------------------------------------

    \35\ The eight firms currently identified as U.S. GSIBs are Bank 
of America Corporation, The Bank of New York Mellon Corporation, 
Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase & Co., 
Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
---------------------------------------------------------------------------

    The Board did not receive any comments on the proposed methodology 
for identifying those U.S. BHCs subject to the rule. Accordingly, the 
Board is adopting this methodology in the final rule without 
modification.

B. Calibration of the External TLAC and LTD Requirements (Sections 
252.62 and 252.63 of the Final Rule)

    Under the proposal, a covered BHC would have been required to 
maintain outstanding eligible external TLAC in an amount not less than 
the greater of 18 percent of its total risk-weighted assets and 9.5 
percent of its total leverage exposure under the supplementary leverage 
ratio rule.\36\ Under the final rule's external TLAC requirement, a 
covered BHC is required to maintain outstanding eligible external TLAC 
in an amount not less than the greater of 18 percent of the covered 
BHC's total risk-weighted assets \37\ and

[[Page 8273]]

7.5 percent of the covered BHC's total leverage exposure.
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    \36\ See 12 CFR 217.10(c)(4)(ii). Under the proposal, the risk-
weighted assets component of the external TLAC requirement would 
have been phased in as follows: It would be equal to 16 percent of 
the covered BHC's risk-weighted assets beginning on January 1, 2019, 
and would be equal to 18 percent of the covered BHC's risk-weighted 
assets beginning on January 1, 2022.
    \37\ A covered BHC would calculate risk-weighted assets for 
purposes of the external TLAC requirement using the same methodology 
it uses to calculate risk-weighted assets under the Board's 
regulatory capital rules. See 12 CFR part 217, subparts D and E. The 
Board's regulatory capital rules require an advanced approaches 
banking organization (generally, a banking organization with $250 
billion or more in total consolidated assets or $10 billion or more 
in total on-balance sheet foreign exposure) that has successfully 
completed its parallel run to calculate each of its risk-based 
capital ratios using the standardized approach and the advanced 
approaches, and directs the banking organization to use the lower of 
each ratio as its governing ratio. See 12 CFR 217.10.
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    As described below, the reduction of the leverage component of the 
external TLAC requirement is intended to account for revisions to the 
proposal. As revised, the final rule includes a buffer over the minimum 
external TLAC leverage exposure requirement that is being added in the 
final rule for parallelism with the buffer over the risk-weighted asset 
measure of external TLAC and with the Board's Regulation Q. As a 
result, two separate external TLAC buffers apply in addition to both 
the risk-weighted assets component and leverage component of the 
external TLAC requirement under the final rule.
    Under the final rule's external LTD requirement, as under the 
proposal, a covered BHC is required to maintain outstanding eligible 
external LTD in an amount not less than the greater of 6 percent plus 
the surcharge applicable under the GSIB surcharge rule (expressed as a 
percentage) of total risk-weighted assets and 4.5 percent of total 
leverage exposure. Covered BHCs are prohibited from redeeming or 
repurchasing eligible external LTD prior to its stated maturity date 
without obtaining prior approval from the Board where the redemption or 
repurchase would cause the covered BHC's eligible external LTD to fall 
below its external LTD requirement. A summary table of the final rule's 
calibrations for eligible external TLAC and LTD appears below.

           Table 1--Eligible External TLAC and LTD Calibrations Under the Final Rule for Covered BHCs
----------------------------------------------------------------------------------------------------------------
                                            Risk-weighted assets                       Leverage
----------------------------------------------------------------------------------------------------------------
Covered BHCs:
    External TLAC......................  18 percent plus buffer....  7.5 percent plus buffer.
    External LTD.......................  6 percent plus GSIB         4.5 percent.
                                          surcharge.
----------------------------------------------------------------------------------------------------------------

    In developing the final rule, the Board considered comments on the 
calibration of the proposed external TLAC and LTD requirements. A 
number of commenters supported the external TLAC and LTD requirements 
in the proposed rule, and some commenters suggested that the 
requirements were appropriately calibrated to support U.S. financial 
stability. A few commenters, however, suggested that higher minimum 
TLAC requirements would provide additional financial stability 
benefits. Certain commenters argued that the external TLAC requirement 
should be calibrated using a more severe set of loss assumptions than 
the historical loss experience of major financial institutions during 
past financial crises, or set at a significantly higher percentage of a 
covered BHC's risk-weighted assets. For example, one commenter argued 
that the requirements should be well above a requirement informed by 
the most recent financial crisis and recommended a minimum TLAC 
requirement of 30 percent of risk-weighted assets.
    A few commenters argued that the calibration of the external TLAC 
and external LTD requirements in the proposed rule was higher than 
necessary to support a successful resolution, did not take into account 
other regulatory efforts to address financial stability, and would 
impede economic growth and access to capital. These commenters 
generally supported adjusting the calibration of the external TLAC and 
LTD requirements by lowering the minimum external TLAC and LTD 
percentages levels. For example, certain commenters suggested reducing 
the risk-weighted asset component of the TLAC requirement from 18 
percent to 14 percent and reducing the supplementary leverage ratio 
component of the TLAC requirement from 9.5 percent to 6.75, 7.5 or 8 
percent. Similarly, one commenter suggested reducing the leverage 
component of LTD from 4.5 percent to 2.5 percent.
    In addition, some commenters urged the Board to eliminate or 
significantly reduce the component of the external TLAC and external 
LTD requirement calculated as a percentage of the covered BHC's total 
leverage exposure in light of the lack of risk sensitivity of this 
measure. The commenters that objected to the calibrations as too high 
argued that superequivalent external TLAC and LTD requirements of the 
proposal relative to the FSB standard would put U.S. firms at a 
competitive disadvantage. Other commenters, however, expressed the view 
that superequivalence relative to the FSB requirements would enhance 
the competitive position of U.S. institutions and U.S. financial 
stability.
    Certain commenters urged that the separate long-term debt 
requirement in the proposed rule be eliminated and that covered BHCs 
should be permitted to meet TLAC requirements with either equity or 
debt. These commenters argued that equity capital is the best way to 
ensure that firms are well capitalized and can absorb losses and that 
equity can act as a going-concern or gone-concern form of capital. 
These commenters further argued that if a separate LTD requirement were 
retained in the final rule, the final rule should include a one-year 
cure period for any breaches of the LTD requirement. Other commenters, 
however, including a member of Congress, expressed support for a 
separate long-term debt requirement to strengthen the resilience of 
covered firms and support recapitalization in a resolution, which would 
likely only occur after equity capital is depleted.
    With regard to the calibration in the final rule, the Board 
balanced the need to help ensure the orderly resolution of a GSIB 
without imposing unduly high costs on the economy, against the need to 
ensure that firms can manage their overall liability structure in a 
cost effective manner that fits with their overall mix of business 
lines and funding needs. The final rule retains the overall calibration 
of the external TLAC and external LTD requirements set forth in the 
proposal but with certain modifications, discussed below, including a 
buffer for the leverage component of the external TLAC requirement.
    As suggested by some commenters, the Board considered whether to 
structure the final rule solely around a minimum TLAC requirement--that 
is, as a single minimum requirement that could be satisfied by any 
mixture of capital and eligible LTD--without a specific minimum LTD 
requirement. In the absence of an LTD requirement, a TLAC requirement 
would permit each covered firm to reduce its expected systemic impact 
by striking its own balance between reducing its probability of default 
(by issuing additional going-concern equity capital above regulatory 
capital minimum requirements) or by reducing the harm it would cause if 
it were to fail (by issuing additional gone-concern LTD above 
regulatory capital minimum requirements).\38\
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    \38\ See ``Calibrating the GSIB Surcharge'' at 3 (July 20, 
2015), available at www.federalreserve.gov/aboutthefed/boardmeetings/gsib-methodology-paper-20150720.pdf.

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[[Page 8274]]

    The Board has determined that it is appropriate for the final rule 
to include both a minimum LTD requirement and a minimum TLAC 
requirement. Unlike existing equity, LTD can be ``bailed-in'' to create 
additional equity capital subsequent to a firm's failure. Imposing an 
LTD requirement would help to ensure that a covered firm would have a 
known and observable quantity of loss-absorbing capacity in excess of 
its going-concern equity capital. Unlike common equity, that loss-
absorbing capacity would not be at substantial risk of volatility or 
depletion before the covered BHC fails or enters a resolution 
proceeding. Thus, the LTD requirements of the final rule would enhance 
the prospects for the successful resolution of a failed GSIB and 
thereby better address the too-big-to-fail problem, as compared with an 
approach that relied solely on a minimum TLAC requirement.
    The availability of long-term debt that can serve as a fresh source 
of capital is vital to ensure a successful recapitalization of a 
failing firm experiencing stress without relying on government or 
taxpayer support to provide additional equity capital. The calibration 
of the TLAC and LTD requirements in the final rule takes into account 
the various statutory and regulatory requirements applicable to covered 
BHCs and other financial institutions, including those designed to 
enhance the stability of the United States financial system and support 
a successful resolution. In addition, the empirical analysis underlying 
the final rule's calibration described below suggests it would be 
sufficient to support the viability of a covered BHC during a period of 
severe economic stress.
    The final rule also retains the proposed leverage-related TLAC and 
LTD requirements. Capital requirements based on simple measures of 
equity to total assets and capital requirements based on risk are 
complementary tools. Risk-based capital requirements reflect the 
different risk characteristics of different assets, while leverage 
capital requirements act as a backstop and act as a counterweight to 
potential arbitrage of risk-based capital requirements. For these 
reasons, the required TLAC and LTD requirements in the final rule 
include both risk-weighted and leverage-related components to ensure a 
robust set of requirements that are not overly dependent on a single 
risk measurement framework.
    The calibration of the external TLAC requirement in the final rule 
is based in part on an analysis of the historical loss experience of 
major financial institutions during financial crises. First, a targeted 
analysis of losses of U.S. financial firms during the 2007-2009 
financial crisis was performed. The analysis considered the loss 
experiences of the 19 bank holding companies that participated in the 
Supervisory Capital Assessment Program (SCAP).\39\ This analysis 
combined the losses actually sustained by those firms during the 2007-
2008 period with their 2009 SCAP loss projections \40\ and the 
government recapitalization support that they received. This provided 
an estimate of the level of losses that would have been sustained in 
the absence of extraordinary government intervention in the financial 
system, which likely prevented substantial losses that each firm would 
otherwise have incurred as a result of the material financial distress 
or failure of major counterparties. The purpose of a TLAC requirement 
is to ensure that GSIBs have sufficient loss-absorbing capacity to 
absorb significant losses and then be recapitalized to the level 
necessary for them to face the market on a going-concern basis without 
public-sector support. Therefore, the sum of losses and public-sector 
recapitalization provides a good measure for the approximate level of 
TLAC necessary to achieve this purpose.
---------------------------------------------------------------------------

    \39\ See Press Release, ``Federal Reserve, OCC, and FDIC release 
results of the Supervisory Capital Assessment Program'' (May 7, 
2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm.
    \40\ See ``The Supervisory Capital Assessment Program: Overview 
of Results'' (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf. 
One commenter indicated that it conducted a similar internal 
analysis and determined that the calibration for external TLAC under 
the proposed rule is well-sized and would be more than sufficient to 
restore firms to solvency based on last financial crisis.
---------------------------------------------------------------------------

    The analysis found that the bank holding company with the most 
severe loss experience incurred estimated losses and recapitalization 
needs of roughly 19 percent of risk-weighted assets. The risk-weighted 
assets component of the external TLAC requirement is consistent with 
this high-water mark from the global financial crisis. This historical 
analysis confirms the appropriateness of the calibration under the 
final rule.
    Additionally, a separate quantitative study of the experiences of 
13 U.S. and foreign GSIBs and other major financial firms that incurred 
substantial losses during the 2007-2009 financial crisis and the 
Japanese financial crisis of the 1990s was conducted. With respect to 
each firm, the study considered both the peak losses incurred by the 
firm (measured in terms of total comprehensive income) over the loss 
period and public-sector capital support, incorporating both direct 
capital injections and asset relief transactions.
    The study examined losses and recapitalization needs in terms of 
both risk-weighted assets and total assets, which is relevant to the 
total leverage exposure component of the external TLAC requirement. The 
calibration of the external TLAC requirement in the final rule is 
consistent with the findings of this historical survey. The risk-
weighted assets component of the final rule exceeds a substantial 
majority of the loss-and-recapitalization experiences surveyed, while 
the total leverage exposure requirement is slightly higher than the 
most severe experience surveyed. These are appropriate results in light 
of the Dodd-Frank Act's focus on the mitigation of risks that could 
arise from the material financial distress or failure of the largest, 
most systemic financial institutions, and further supports the 
calibration of the final rule.\41\
---------------------------------------------------------------------------

    \41\ See 12 U.S.C. 5365.
---------------------------------------------------------------------------

    The calibration of the external LTD requirement in the final rule 
was also informed by an analysis of the extreme loss tail of the 
distribution of income for large U.S. bank holding companies over the 
past several decades. This analysis closely resembled the analysis that 
informed the calibration of the minimum risk-based capital requirements 
in the revised capital framework, but it involved looking further into 
the loss tail of the income distribution.
    Like the proposal, the final rule's external LTD requirement was 
calibrated primarily on the basis of a ``capital refill'' framework. 
According to the capital refill framework, the objective of the 
external LTD requirement is to ensure that each covered BHC has a 
minimum amount of eligible external LTD such that, if the covered BHC's 
going-concern capital is depleted and the covered BHC fails and enters 
resolution, the eligible external LTD will be sufficient to absorb 
losses and fully recapitalize the covered BHC by replenishing its 
going-concern capital. The amount of eligible external LTD required by 
the final rule is the amount estimated to be necessary for a covered 
BHC that has depleted all of its equity capital to return to a 
sufficient level of going concern capital level without any government 
assistance or outside investment. Thus, even if a covered BHC were 
unable to identify outside sources of funding, the company would be 
capitalized at a level sufficient

[[Page 8275]]

to support all of the operations that had been in place before 
resolution proceedings were initiated. This enhanced level of 
resiliency is appropriate because of the size, interconnectedness, and 
complexity of covered BHCs. Fulfilling this objective is vital to the 
use of eligible external LTD to facilitate the orderly resolution of a 
covered BHC, because an orderly SPOE resolution requires that a firm 
exiting from resolution have sufficient going-concern capital to 
maintain market confidence in its solvency so that other market 
participants will do business with it.
    The external LTD requirement was calibrated in accordance with this 
framework. Under the Board's regulatory capital requirements, a covered 
BHC must maintain a minimum ratio of common equity tier 1 capital to 
risk-weighted assets of 4.5 percent. In addition, a covered BHC is 
subject to a capital conservation buffer of 2.5 percent of risk-
weighted assets plus a firm-specific surcharge determined under the 
GSIB surcharge rule (expressed as a percentage) of risk-weighted 
assets.\42\ Thus, a covered BHC with a GSIB surcharge of 2 percent 
would be subject to a combined common equity tier 1 capital minimum 
plus buffers of 9 percent.
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    \42\ See 12 CFR 217.10(a)(1); 217.11. Under the Board's capital 
rules, the capital conservation buffer can be increased by an 
additional 2.5 percent of risk-weighted assets through the 
activation of a countercyclical capital buffer. The external LTD 
requirement does not incorporate any countercyclical capital buffer 
because it is likely that no such buffer would be active under the 
economic circumstances most likely to be associated with the failure 
and resolution of a covered BHC.
---------------------------------------------------------------------------

    Since the calibration of the external LTD requirement is based on 
the capital refill framework, and the capital refill framework depends 
on the precise structure and calibration of bank capital requirements, 
the Board expects to consider updating the external LTD requirement in 
the event that the Board updates bank capital requirements in a way 
that materially changes their precise structure or calibration.
    Under the final rule, a covered BHC is subject to an external LTD 
requirement equal to 7 percent of risk-weighted assets, plus the 
applicable GSIB surcharge, minus a 1 percentage point allowance for 
balance-sheet depletion. This results in a requirement of 6 percent 
plus the applicable GSIB surcharge (expressed as a percentage) of risk-
weighted assets. Without the 1 percentage point allowance for balance-
sheet depletion, the risk-weighted assets component of a covered BHC's 
external LTD requirement would require it to maintain outstanding an 
amount of eligible external LTD equal to the full amount of its minimum 
common equity tier 1 capital ratio plus buffer. The 1 percentage point 
allowance for balance-sheet depletion is appropriate under the capital 
refill theory because the losses that the covered BHC incurs leading to 
its failure will deplete its risk-weighted assets as well as its 
capital. Accordingly, the pre-failure losses would result in a smaller 
balance sheet for the covered BHC at the point of failure, meaning that 
a smaller dollar amount of capital would be required to restore the 
covered BHC's pre-stress capital level. Although the specific amount of 
eligible external LTD necessary to restore a covered BHC's pre-stress 
capital level in light of the diminished size of its post-failure 
balance sheet will vary in light of the firm-specific GSIB surcharges 
applicable to the covered BHCs, the Board is applying a uniform 1 
percentage point allowance for balance-sheet depletion so as to avoid 
undue regulatory complexity.
    The application of the capital refill framework to the leverage 
component of the external LTD requirement is analogous. The 
supplementary leverage ratio requires that bank holding companies 
maintain a ratio of tier 1 capital to total leverage exposure of at 
least 3 percent.\43\ The enhanced supplementary leverage standards 
applicable to global systemically important BHCs add to a covered BHC's 
supplementary leverage ratio minimum a buffer of 2 percent of its total 
leverage exposure for a total tier 1 capital to total leverage exposure 
requirement plus buffer of 5 percent.\44\ Under the final rule, a 
covered BHC is subject to an external LTD requirement equal to 4.5 
percent of its total leverage exposure. This requirement, which 
incorporates a balance-sheet depletion allowance of 0.5 percent, is 
appropriate to ensure that a covered BHC that has depleted its tier 1 
capital and failed would be able to refill its capital to meet the 
minimum leverage ratio requirement and buffer through the exchange or 
conversion of its eligible external LTD into equity.
---------------------------------------------------------------------------

    \43\ 12 CFR 217.10(a)(5).
    \44\ The supplementary leverage ratio requirement and buffer 
become effective January 1, 2018. See 12 CFR 217.1(f)(1)(iii)(B).
---------------------------------------------------------------------------

    The proposed rule would have prohibited a covered BHC from 
redeeming or repurchasing any outstanding eligible external LTD without 
the prior approval of the Board, if after the redemption the covered 
BHC would not meet its external LTD requirement or its external TLAC 
requirement. One commenter generally supported the proposed prior 
approval requirement, and, in particular, its limited application to 
cases where a BHC would fail to meet its external LTD requirement or 
its external TLAC requirement following redemption or repurchase.
    The final rule adopts as proposed the prior approval requirement 
for redemptions and repurchases of a covered BHC's outstanding eligible 
external LTD. Allowing a covered BHC to redeem or repurchase its 
eligible external LTD without prior Board approval, where such 
redemption or repurchase would not result in the covered BHC failing to 
comply with the external TLAC and LTD requirements of the final rule, 
gives the covered BHC flexibility to manage its outstanding debt levels 
without interfering with the underlying purpose of the rule. In 
addition and as discussed below, the final rule includes a provision 
that would allow the Board, after notice and an opportunity to respond, 
to order a global systemically important BHC to exclude from its 
outstanding eligible long-term debt amount any debt securities with 
features that would significantly impair the ability of such debt 
securities to take losses.\45\
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    \45\ Section 263.83 of the Board's rules of procedures describes 
the notice and response procedures that apply if the Board 
determines that a company's capital levels are not adequate. See 12 
CFR 263.83. The Board would follow the same procedures under the 
final rule to determine that a covered BHC must exclude from its 
eligible LTD amount securities with features that would 
significantly impair the ability of such debt securities to take 
losses. For example, the Board would provide notice to a company of 
its intention to require the company to exclude certain securities 
from its eligible LTD amount and up to 14 days to respond before the 
Board would issue a final notice requiring that company exclude the 
securities from its eligible LTD amount, unless the Board determines 
that a shorter period is necessary.
---------------------------------------------------------------------------

    In addition, the final rule does not include a grace period during 
which a covered BHC that breaches its external LTD requirement could 
take voluntary actions to come into compliance with such requirement 
without being subject to any other regulatory consequences, such as an 
enforcement action, as suggested by certain commenters. The Board 
expects covered BHCs subject to the final rule to comply with 
applicable minimum external LTD requirements at all times. The key 
purpose of the eligible external LTD requirement is to have debt 
available to absorb losses; a one-year cure period would defeat this 
purpose by providing a period of time during which covered BHCs would 
not be required to meet the minimum requirements of the final rule.

[[Page 8276]]

C. Core Features of Eligible External TLAC (Section 252.63(b) of the 
Final Rule)

    The core features of eligible external TLAC under the final rule 
are the same as under the proposal. Under the final rule, a covered 
BHC's eligible external TLAC would be defined to be the sum of (a) the 
tier 1 regulatory capital (common equity tier 1 capital and additional 
tier 1 capital) issued directly by the covered BHC (excluding any tier 
1 minority interests), and (b) the covered BHC's eligible external LTD, 
as defined below.\46\ Tier 2 capital that meets the definition of 
eligible external LTD would continue to count toward the external LTD 
and TLAC requirements.
---------------------------------------------------------------------------

    \46\ Although eligible external LTD due to be paid between one 
and two years would be subject to a 50 percent haircut for purposes 
of the external LTD requirement, such eligible external LTD would 
continue to count at full value for purposes of the external TLAC 
requirement in the same manner as under the proposal. As discussed 
below, eligible external LTD due to be paid in less than one year 
would not count toward either the external TLAC requirement or the 
external LTD requirement.
---------------------------------------------------------------------------

    Certain commenters urged the Board to harmonize the proposed TLAC 
requirement with the Basel III Capital framework by not disqualifying 
minority interests in consolidated subsidiaries from counting as TLAC. 
These commenters argued that the qualifying criteria imposed on 
minority interests in consolidated subsidiaries in the U.S. capital 
rules and Basel capital framework significantly haircut the amount of 
minority interest in a consolidated subsidiary that may be included in 
a parent organization's regulatory capital, thus mitigating any concern 
that the subsidiary's loss absorbing capacity would be unavailable to 
absorb losses anywhere in an banking organization.
    Like the proposal, the final rule does not permit minority 
interests in consolidated subsidiaries to count as TLAC. The 
requirement that regulatory capital be issued out of the covered BHC 
itself (rather than by a subsidiary) is intended to ensure that the 
total required amount of loss-absorbing capacity would be available to 
absorb losses incurred anywhere in the banking organization (through 
downstreaming of resources from the BHC to the subsidiary that has 
incurred the losses, if necessary).

D. External TLAC Buffers (Section 252.63(c) of the Final Rule)

    The proposal would have imposed a buffer over the external TLAC 
requirement measured as a percentage of risk-weighted assets, but did 
not include a buffer over the external TLAC requirement measured as a 
percentage of total leverage exposure. The final rule retains the 
proposed buffer for the risk-weighted assets component of the external 
TLAC requirement and adds a buffer for the leverage component of the 
external TLAC requirement to address concerns raised by commenters 
regarding burden of the proposal's total leverage exposure requirement 
and for better parallelism with the regulatory capital framework in 
Regulation Q.
    The Board received several comments on the proposed external TLAC 
buffer. The Board received comment arguing that the buffer should be 
broadened to apply to the leverage component of the external TLAC 
requirement, as well as the external LTD requirement, so that similar 
limitations on capital distributions and discretionary bonus payments 
would apply to each of the minimum requirements under the rule. A 
commenter also urged the Board to align the leverage component of the 
external TLAC requirement with the enhanced supplementary leverage 
ratio standard in Regulation Q by reducing the leverage component of 
the external TLAC requirement by 2 percent and adding a 2 percent 
buffer over this component. Commenters noted that, where the leverage 
component of the external TLAC requirement was binding, a buffer over 
this component of the external TLAC requirement would impose 
progressively more stringent limits on a firm's ability to make capital 
distribution and discretionary bonus payments as its capital was 
depleted, in parallel with the proposed buffer over the risk-weighted 
assets component of the external TLAC requirement. Another commenter 
suggested that breaches of the TLAC buffer should bar any capital 
distributions and discretionary bonus payments until the firm has 
refilled its TLAC buffer, rather than only resulting in the incremental 
limits to the firm's ability to make such payments. A commenter further 
urged the Board to study how the proposed TLAC buffer would interact 
with any incentive-based compensation rules issued by the Board and 
whether the rules were duplicative.
    In response to comments received on the proposal, the final rule 
reduces the minimum amount of the leverage component of the external 
TLAC requirement and adds, in an equal amount, a TLAC buffer to the 
leverage component of the external TLAC requirement. Specifically, 
under the final rule, the leverage component of the external TLAC 
requirement has been reduced to 7.5 percent from 9.5 percent and a 2 
percent buffer has been added over the leverage component of the 
external TLAC requirement. These changes should address the major 
concern raised by commenters to create a buffer for the leverage 
component of external TLAC to better parallel the buffer for the risk-
weighted asset component of external TLAC and the Board's regulatory 
capital rules.
    The purpose of the external TLAC buffers is to reduce the risk of 
insolvency by limiting the ability of a covered bank holding company to 
make capital distributions and discretionary bonus payments as its 
capital levels decline in the same manner as capital buffers in the 
Board's regulatory capital framework limits capital distributions and 
discretionary bonus payments. The buffer over the leverage component of 
the external TLAC requirement is designed to operate in a similar 
manner to the buffer in the enhanced supplementary leverage ratio 
standards, which functions similarly to the capital conservation buffer 
by limiting the ability of a company to make capital distributions and 
discretionary bonus payments as its capital levels decline.
    Since the TLAC buffers are intended to be analogous to the capital 
buffers in Regulation Q, the final rule does not prohibit all 
discretionary bonus payments and dividends for breach of the applicable 
buffer, as suggested by one commenter, or include separate buffers on 
top of the long-term debt requirements. The Board notes that a covered 
BHC subject to this final rule may also be subject to future rules 
related to incentive compensation and that covered BHCs must comply 
with all applicable regulatory requirements.\47\
---------------------------------------------------------------------------

    \47\ See 12 U.S.C. 956; 81 FR 37670 (June 10, 2016).
---------------------------------------------------------------------------

    A covered BHC's external TLAC buffer for the risk-weighted asset 
component (TLAC risk-weighted assets buffer) is equal to the sum of 2.5 
percent plus the GSIB surcharge applicable to the covered BHC under 
method 1 of the GSIB surcharge rule \48\ plus any applicable 
countercyclical capital buffer. The external TLAC risk-weighted assets 
buffer must be filled solely with common equity tier 1 capital, and a 
covered BHC's breach of its external TLAC risk-weighted assets buffer 
would subject it to limits on capital distributions and discretionary 
bonus payments in accordance with Table 1 to section 252.63 of the 
final rule. Thus, the external TLAC risk-weighted asset buffer is 
analogous to the capital conservation buffer applicable under the 
Board's Regulation Q, except that it applies in addition to the 
external TLAC requirement rather than in addition to

[[Page 8277]]

minimum risk-based capital requirements under Regulation Q and 
incorporates only the applicable GSIB surcharge amount required under 
method 1 of the GSIB surcharge rule (rather than the greater of the 
applicable GSIB surcharge under method 1 and method 2).\49\
---------------------------------------------------------------------------

    \48\ 80 FR 49082 (Aug. 14, 2015); 12 CFR part 217, subpart H.
    \49\ See 12 CFR 217, subpart H.
---------------------------------------------------------------------------

    A covered BHC's external TLAC buffer for the total leverage 
exposure component of the external TLAC requirement (TLAC leverage 
buffer) is equal to 2 percent of total leverage exposure, the same as 
the buffer set by the enhanced supplementary leverage ratio standards. 
The TLAC leverage buffer must be filled solely with tier 1 capital, and 
a covered BHC's breach of its TLAC leverage buffer also subjects it to 
similar limits on capital distributions and discretionary bonus 
payments, as described in Table 2 to section 252.63 of the final rule. 
Accordingly, the TLAC leverage buffer is analogous to the buffer 
established under the enhanced supplementary leverage ratio standards 
except that it would apply in addition to the external TLAC 
requirement.\50\
---------------------------------------------------------------------------

    \50\ See 79 FR 24528 (May 1, 2014); 80 FR 49082 (August 14, 
2015).
---------------------------------------------------------------------------

    Finally, since under the final rule a covered BHC is subject to 
both the TLAC risk-weighted assets and TLAC leverage buffers, any 
limitations on distributions and discretionary bonus payments would be 
based on the more restrictive of the buffers. As an example, if a 
covered BHC had an amount of TLAC in excess of the TLAC risk-weighted 
asset requirement and in excess of the TLAC risk-weighted assets buffer 
but had an amount of TLAC in excess of the TLAC leverage requirement 
but less than the TLAC leverage buffer, the covered BHC's distributions 
and discretionary bonus payments would be limited by the level of its 
TLAC leverage buffer.

Table 2--Calculation of Maximum External TLAC Risk-Weighted Asset Payout
                                 Amount
------------------------------------------------------------------------
                                             Maximum external TLAC risk-
                                              weighted payout ratio  (as
  External TLAC risk-weighted buffer level    a percentage  of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the external TLAC risk-         No payout ratio limitation
 weighted buffer.                             applies.
Less than or equal to the external TLAC      60 percent.
 risk-weighted buffer, and greater than 75
 percent of the external TLAC risk-weighted
 buffer.
Less than or equal to 75 percent of the      40 percent.
 external TLAC risk-weighted buffer, and
 greater than 50 percent of the external
 TLAC risk-weighted buffer.
Less than or equal to 50 percent of the      20 percent.
 external TLAC risk-weighted buffer, and
 greater than 25 percent of the external
 TLAC risk-weighted buffer.
Less than or equal to 25 percent of the      0 percent.
 external TLAC risk-weighted buffer.
------------------------------------------------------------------------


  Table 3--Calculation of Maximum External TLAC Leverage Payout Amount
------------------------------------------------------------------------
                                                Maximum external TLAC
                                              leverage payout ratio  (as
    External TLAC leverage buffer level        a percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than 2.0 percent...................  No payout ratio limitation
                                              applies.
Less than or equal to 2.0 percent, and       60 percent.
 greater than 1.5 percent.
Less than or equal to 1.5 percent, and       40 percent.
 greater than 1.0 percent.
Less than or equal to 1.0 percent, and       20 percent.
 greater than 0.5 percent.
Less than or equal to 0.5 percent..........  0 percent.
------------------------------------------------------------------------

    A covered BHC's external TLAC risk-weighted asset buffer level will 
be equal to its common equity tier 1 capital ratio minus that portion 
(if any) of its common equity tier 1 capital ratio (expressed as a 
percentage) that could be used to meet the risk-weighted assets 
component of the external TLAC requirement. To calculate its external 
TLAC risk-weighted assets buffer level, a covered BHC will subtract 
from its common equity tier 1 capital ratio the greater of 0 percent 
and the following figure: The risk-weighted assets component of the 
covered BHC's external TLAC requirement minus the ratio of its 
additional tier 1 capital (excluding tier 1 minority interest) to its 
risk-weighted assets and minus the ratio of its outstanding eligible 
external LTD to its risk-weighted assets.
    For example, suppose that a covered BHC called ``BHC A'' has a 
common equity tier 1 capital ratio of 10 percent, an additional tier 1 
capital ratio of 2 percent, an outstanding eligible external LTD amount 
equal to 8 percent of its risk-weighted assets, and no tier 1 minority 
interest. Suppose further that BHC A is subject to an external risk-
weighted asset TLAC requirement of 18 percent and an external risk-
weighted assets TLAC buffer of 5 percent of risk-weighted assets. BHC A 
would meet its external risk-weighted asset TLAC requirement because 
the sum of its common equity tier 1 capital ratio, its additional tier 
1 capital ratio, and the ratio of its eligible external LTD to risk-
weighted assets would be equal to 20, which is greater than 18. 
Moreover, BHC A would have an external TLAC risk-weighted assets buffer 
level equal to 10 - (18 - 2 - 8) = 2 percent. Because 2 percent is less 
than 50 percent and more than 25 percent of the applicable 5 percent 
external TLAC buffer, BHC A would be subject to a maximum external TLAC 
risk-weighted payout ratio of 20 percent of eligible retained income.
    The covered BHC's external TLAC leverage buffer level would be 
equal to its supplementary leverage ratio minus that portion (if any) 
of its supplementary leverage ratio (expressed as a percentage) that is 
used to meet the leverage component of the external TLAC requirement. 
To calculate its external TLAC leverage buffer level, a

[[Page 8278]]

covered BHC would subtract from its supplementary leverage ratio the 
greater of 0 percent and the following figure: 7.5 percent (the 
leverage component of the covered BHC's external TLAC requirement) 
minus the ratio of its outstanding eligible external LTD amount to its 
total leverage exposure.
    For example, suppose that a covered BHC called ``BHC B'' has a 
ratio of common equity tier 1 capital to total leverage exposure of 5 
percent, a ratio of additional tier 1 capital to total leverage 
exposure of 1 percent, a ratio of outstanding eligible external LTD 
amount to total leverage exposure of 3 percent, and no tier 1 minority 
interest. BHC B will be subject to an external TLAC leverage 
requirement of 7.5 percent and a TLAC leverage buffer of 2 percent. BHC 
B would meet its external TLAC leverage requirement because the ratio 
of its common equity tier 1 capital and additional tier 1 capital plus 
outstanding eligible external LTD amount to total leverage exposure 
would be equal to 9 percent. Moreover, BHC B would have a TLAC leverage 
buffer level equal to 5 - (7.5 - 1 - 3) = 1.5 percent. Because 1.5 
percent is less than or equal to 1.5 percent and greater than 1.0 
percent, BHC B would be subject to a 40 percent maximum external TLAC 
leverage payout ratio for making distributions or discretionary bonus 
payments.
    Finally, it is important to note that if the two examples provided 
above described a single BHC's TLAC risk-weighted assets buffer level 
and TLAC leverage buffer level then the BHC would be bound by the TLAC 
risk-weighted assets buffer because it would be more restrictive.
    In order to comply with the external TLAC requirement and satisfy 
the TLAC risk-weighted assets buffer and TLAC leverage buffer, a 
covered BHC would need to have an outstanding TLAC amount sufficient to 
satisfy both the risk-weighted assets component and the total leverage 
exposure component of the TLAC requirement, as well as additional 
capital sufficient to satisfy both buffers. A covered BHC generally may 
use the same regulatory capital to satisfy its external TLAC 
requirement and the minimum ratios under Regulation Q. Therefore, a 
covered BHC that satisfies the minimum requirements and buffers under 
Regulation Q, and complies with the external LTD requirement, generally 
will satisfy the external TLAC requirement and the TLAC risk-weighted 
assets buffer and TLAC leverage buffer.
    The rationale for the external TLAC buffers is similar to the 
rationale for the capital conservation buffer established by the 
Board's Regulation Q. During the 2007-2009 financial crisis, some 
banking organizations continued to pay dividends and substantial 
discretionary bonuses even as their financial condition weakened. These 
capital distributions weakened the financial system and exacerbated the 
crisis. The external TLAC buffers are intended to encourage covered 
BHCs to practice sound capital conservation and thus to enhance the 
resilience of covered BHCs and of the financial system as a whole. The 
external TLAC buffers pursue this goal by providing covered BHCs with 
incentives to hold sufficient capital to reduce the risk that their 
eligible external TLAC would fall below the minimum external TLAC 
requirement during a period of financial stress.

E. Core Features of Eligible External LTD (section 252.61 of the final 
rule)

    Under the final rule, a covered BHC's eligible external LTD is 
defined to be debt that is paid in and issued directly by the covered 
BHC, is unsecured, has a maturity of greater than one year from the 
date of issuance, has ``plain vanilla'' features, and is governed by 
U.S. law. While the core features of eligible external LTD are 
generally the same under the final rule as under the proposal, eligible 
external LTD under the final rule also includes certain debt 
instruments issued prior to December 31, 2016 that do not meet all the 
same requirements of eligible external LTD as described further below. 
Principal due to be paid on eligible external LTD in one year or more 
and less than two years is subject to a 50 percent haircut for purposes 
of the external LTD requirement, and principal due to be paid on 
eligible external LTD in less than one year would not count toward the 
external LTD requirement.
    Commenters expressed general concerns about the criteria that long-
term debt would be required to meet in order to count towards a firm's 
external long-term debt requirement. Some commenters suggested that the 
definition of eligible external LTD should be expanded to include a 
broader set of debt securities that may be available to absorb losses 
and recapitalize the covered BHC in a Title II resolution or 
bankruptcy. Several commenters suggested that the definition of 
eligible external LTD should include all capital structure liabilities, 
which would include all debt instruments available to absorb losses 
that have a reasonably determinable claim in bankruptcy, including 
instruments with standard acceleration clauses, instruments issued 
under foreign law, and principal-protected structured notes. Certain 
commenters, for example, urged the Board to permit all instruments that 
satisfy the Board's tier 2 regulatory capital requirements to qualify 
as eligible LTD, including preferred stock.\51\ Commenters also noted 
that the criteria proposed for eligible external LTD would disqualify a 
significant amount of the existing, outstanding long-term debt issued 
by covered BHCs.
---------------------------------------------------------------------------

    \51\ Commenters requested that preferred stock be allowed as 
eligible external LTD and eligible internal LTD. The Board is 
declining to allow preferred stock for either form of LTD for the 
same reasons as described below.
---------------------------------------------------------------------------

    Several commenters suggested that the existing, outstanding long-
term debt issued by covered BHCs should qualify as eligible external 
LTD, even if such debt does not meet all of the requirements for 
eligible external LTD. Some of these commenters noted that other 
actions covered BHCs would need to take to conform outstanding debt to 
the requirements for eligible external LTD in lieu of grandfathering--
such as tendering and replacing outstanding debt, exchanging 
outstanding debt, or acquiring bondholder consent to amend the terms of 
outstanding debt--would impose significant costs on covered BHCs, costs 
that would be significantly reduced if the Board permitted such debt to 
qualify as eligible external LTD for even a short transitional period 
after the effective date of the final rule. Many of these commenters 
proposed that all external debt issued by covered BHCs before the 
effective date of the final rule should be permanently grandfathered to 
qualify as eligible external LTD. Other commenters proposed permitting 
outstanding long-term debt to qualify as eligible external LTD if such 
debt would be ineligible only due to one of the following features: The 
inclusion of otherwise impermissible acceleration clauses, such debt 
being subject to foreign law, or debt that was ineligible due to 
inclusion of a market-based redemption feature (e.g., a security with a 
survivor put provision). Certain commenters noted that nearly all 
outstanding long-term debt issued by covered BHCs includes standard 
market acceleration clauses that would be impermissible under the 
proposal absent an explicit grandfathering provision in the final rule 
and that a significant fraction of currently outstanding long-term debt 
issued by covered IHCs has been issued under foreign law.
    As discussed below, the general purpose of the proposed limitations 
on eligible long-term debt was to ensure the adequacy of the 
instruments to absorb losses in a resolution of the covered

[[Page 8279]]

BHC. As a consequence, the final rule largely retains the eligibility 
criteria for eligible external LTD set forth in the proposal, with 
important modifications to address concerns raised by commenters. The 
modifications provided in the final rule to the eligibility criteria 
for eligible external LTD should mitigate the impact on covered BHCs 
and preserve the marketability of such debt, without adversely 
impacting its loss-absorbing capacity in resolution.
    In response to concerns raised by comments, and to mitigate the 
impact of the requirements, the final rule includes as eligible 
external LTD those long-term debt instruments that are issued by a 
covered BHC prior to December 31, 2016 even if these instruments 
contain otherwise impermissible acceleration clauses or are subject to 
foreign law as described below. This grandfathering provision would 
largely eliminate the costs of modifying the terms of existing, 
outstanding debt or issuing new debt to meet the minimum requirements 
as cited by commenters. Over time, debt that is grandfathered will 
mature and be replaced by long-term debt that meets the eligibility 
criteria of the final rule. As noted above, the final rule also 
contains a provision that would allow the Board, after notice and an 
opportunity to respond, to exclude from a covered BHC's outstanding 
long-term debt, the amount of any debt securities with features that 
would impair the ability of the debt to absorb losses.
1. Issuance by the Covered BHC and Prohibition on Own Holdings
    Consistent with the proposal, eligible external LTD would be 
required to be paid in and issued directly by the covered BHC itself--
that is, by the banking organization's top-tier holding company. Thus, 
debt instruments issued by a subsidiary would not qualify as eligible 
external LTD, even if they would qualify as regulatory capital.
    Two commenters requested that the final rule make explicit whether 
TruPS would be classified as eligible external LTD in the final rule. 
In a typical TruPS structure, a trust holds assets consisting solely of 
junior subordinated notes issued by the bank holding company to the 
trust, and the trust issues the TruPS to investors. Therefore, TruPS, 
as typically structured, would not meet the requirement in the final 
rule that the debt be issued externally by the covered BHC. In 
addition, TruPS do not meet the criteria that such debt be ``plain 
vanilla,'' given the somewhat complex structure used to issue TruPS to 
the market, and the fact that TruPS are hybrid equity-debt instruments.
    One commenter, who argued that TruPS should count as LTD, noted 
that its existing TruPS had impermissible acceleration clauses, another 
feature that would disqualify the securities from counting as eligible 
external LTD. In addition, information provided by commenters and the 
Board's review of available information regarding outstanding TruPS 
issued by U.S. covered BHCs suggests that the effect of not counting 
TruPS as eligible long-term debt would have a relatively minor impact 
on covered BHCs.
    The requirement that eligible external LTD be issued by the covered 
BHC itself serves two purposes. First, as with the requirement that 
regulatory capital be issued directly by the covered BHC in order to 
count as eligible external TLAC, this requirement allows eligible 
external LTD to be used to absorb losses incurred anywhere in the 
banking organization. By contrast, loss-absorbing debt issued by a 
subsidiary would lack this flexibility and would generally be available 
only to absorb losses incurred by that particular subsidiary.
    Second, issuance directly from a covered BHC would enable the use 
of the eligible external LTD in an SPOE resolution of the covered BHC. 
Under the SPOE approach, only the covered BHC itself would enter 
resolution. The covered BHC's eligible external LTD would be used to 
absorb losses incurred throughout the banking organization, enabling 
the recapitalization of operating subsidiaries that had incurred losses 
and enabling those subsidiaries to continue operating on a going-
concern basis. For this approach to be implemented successfully, the 
eligible external LTD must be issued directly by the covered BHC. Debt 
issued by a subsidiary generally cannot be used to absorb losses, even 
at the issuing subsidiary itself, unless that subsidiary enters a 
resolution proceeding. Therefore, permitting debt issued by a 
subsidiary to qualify as eligible external LTD would be contrary to the 
SPOE approach and potentially would create risks to the orderly 
resolution of a covered BHC.
2. Unsecured
    Eligible external LTD is required to be unsecured, not guaranteed 
by the covered BHC or a subsidiary of the covered BHC, and not subject 
to any other arrangement that legally or economically enhances the 
seniority of the instrument (such as a credit enhancement provided by 
an affiliate). As no commenters raised issues regarding the requirement 
that eligible LTD must be unsecured, the final rule retains this 
requirement with no changes from the proposal.
    The primary rationale for this restriction is to ensure that 
eligible external LTD can serve its intended purpose of absorbing 
losses incurred by the banking organization in resolution. To the 
extent that a creditor is secured, it can avoid suffering losses by 
seizing the collateral that secures the debt. This would thwart the 
purpose of eligible external LTD by leaving losses with the covered BHC 
(which would lose the collateral) rather than imposing them on the 
eligible external LTD creditor (which could take the collateral).
    A secondary purpose of the restriction is to prevent eligible 
external LTD from contributing to the asset fire sales that can occur 
when a financial institution fails and its secured creditors seize and 
liquidate collateral. Asset fire sales can drive down the value of the 
assets being sold, which can undermine financial stability by 
transmitting financial stress from the failed firm to other entities 
that hold similar assets.
    Finally, the requirement that eligible external LTD be unsecured 
ensures that losses can be imposed on that debt in resolution in 
accordance with the standard creditor hierarchy in bankruptcy, under 
which secured creditors are paid ahead of unsecured creditors.
3. ``Plain Vanilla''
    As under the proposal, eligible external LTD instruments are 
required to be ``plain-vanilla'' instruments under the final rule. 
Exotic features could create complexity and thereby diminish the 
prospects for an orderly resolution of a covered BHC. These limitations 
would help to ensure that a covered BHC's eligible external LTD 
represents loss-absorbing capacity with a definite value that can be 
quickly determined in resolution. In a resolution proceeding, claims 
represented by such ``plain-vanilla'' debt instruments are more easily 
ascertainable and relatively certain compared to more complex and 
volatile instruments. Permitting these features could engender 
uncertainty as to the level of the covered BHC's loss-absorbing 
capacity and could increase the complexity of the resolution 
proceeding, both of which could undermine market participants' 
confidence in an SPOE resolution and potentially result in a disorderly 
resolution. This could occur, for instance, if creditors and 
counterparties of the covered BHC's subsidiaries decided to reduce 
their exposures to the subsidiaries of the failed covered BHC by 
severing business relationships and

[[Page 8280]]

refusing to provide additional funding to such subsidiaries.
    Under the final rule, eligible external LTD instruments are 
prohibited from (1) being structured notes; (2) having a credit-
sensitive feature; (3) including a contractual provision for conversion 
into or exchange for equity in the covered BHC; or (4) including a 
provision that gives the holder a contractual right to accelerate 
payment (including automatic acceleration), other than a right that is 
exercisable on a one or more dates specified in the instrument, in the 
event of the insolvency of the covered BHC, or the covered BHC's 
failure to make a payment on the instrument when due that continues for 
30 days or more.\52\
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    \52\ As under the proposal, this restriction would be subject to 
an exception that would permit eligible external LTD instruments to 
give the holder a future put right as of a date certain, subject to 
the provisions discussed below regarding when the debt is due to be 
paid.
---------------------------------------------------------------------------

    In response to comments requesting that the Board permit all tier 2 
capital to count as eligible LTD, the Board has determined not to 
include as eligible LTD any instrument that qualifies as tier 2 
capital. Certain of these instruments (e.g., certain forms of preferred 
stock and convertible debt) would not meet the requirement to be 
``plain vanilla'' or other aspects of the requirements of eligible LTD 
(e.g., the prohibition on convertibility features described below). An 
instrument that qualifies as tier 2 capital will only qualify as 
eligible LTD under the final rule if it meets the applicable 
qualification requirements.
a. Structured Notes
    The final rule retains the prohibition on counting structured 
notes, including principal-protected structured notes, as eligible 
external LTD. Structured notes contain features that could make their 
valuation uncertain, volatile, or unduly complex. In addition, they are 
often liabilities of retail customers (as opposed to investor 
liabilities). To promote resiliency and market discipline, it is 
important that covered BHCs have a minimum amount of loss-absorbing 
capacity whose value is easily ascertainable at any given time. 
Moreover, in an orderly resolution of a covered BHC, debt instruments 
that will be subjected to losses must be able to be valued accurately 
and with minimal risk of dispute. The requirement that eligible 
external LTD not contain the features associated with structured notes 
advances these goals.
    For purposes of the final rule, a ``structured note'' is defined a 
debt instrument that (a) has a principal amount, redemption amount, or 
stated maturity that is subject to reduction based on the performance 
of any asset,\53\ entity, index, or embedded derivative or similar 
embedded feature; (b) has an embedded derivative or similar embedded 
feature that is linked to one or more equity securities, commodities, 
assets, or entities; (c) does not have a minimum principal amount that 
becomes due and payable upon acceleration or early termination; or (d) 
is not classified as debt under U.S. generally accepted accounting 
principles. The definition of a structured note does not include a non-
dollar-denominated instrument or an instrument whose interest payments 
are based on an interest rate index (for example, a floating-rate note 
linked to the federal funds rate or to LIBOR) that satisfies the 
proposed requirements in all other respects.\54\
---------------------------------------------------------------------------

    \53\ Assets would include loans, debt securities, and other 
financial instruments.
    \54\ One commenter recommended that the final rule clarify that 
instruments denominated in a currency other that U.S. dollars would 
not constitute ``structured notes'' and therefore may qualify as 
eligible external LTD. The same commenter noted that the final rule 
should clarify that an instrument whose interest payments are linked 
to an interest rate index would not be a structured note merely due 
to inclusion of this feature. The preamble to the proposed rule 
addressed these points and changes to provide further clarity are 
reflected in the final rule.
---------------------------------------------------------------------------

    Several commenters proposed modifying the ``plain vanilla'' 
requirement for eligible external LTD to include a broader array of 
long-term debt securities issued by covered BHCs. In particular, 
certain commenters suggested that the final rule expand the definition 
of eligible external LTD to include structured notes that are 
principal-protected at par, as these notes by their terms require the 
issuer to pay 100 percent of the stated principal amount of the 
structured note upon early termination or acceleration and at maturity. 
As a result, these commenters argued that principal-protected 
structured notes do not present the same type of valuation issues as 
other structured notes whose value may be more volatile or uncertain 
since the minimum amount of any claim in a bankruptcy or Title II 
proceeding for a principal-protected structured note will always be the 
stated principal amount of the structured note.
    Structured notes with principal protection often combine a zero-
coupon bond, which pays no interest until the bond matures, with an 
option or other derivative product, whose payoff is linked to an 
underlying asset, index, or benchmark.\55\ The derivative feature 
violates the intent of the clean holding company requirements 
(described below), which prohibits derivatives entered into by the 
covered bank holding company with third parties. Moreover, investors in 
structured notes tend to pay less attention to issuer credit risk than 
investors in other long-term debt, because structured note investors 
use structured notes to gain exposure unrelated to the covered BHC. As 
a result, these investors are less likely to contribute to the market 
discipline objective of the minimum LTD requirements.
---------------------------------------------------------------------------

    \55\ https://www.sec.gov/investor/alerts/structurednotes.htm.
---------------------------------------------------------------------------

    For these same reasons, the final rule does not grandfather 
existing outstanding structured notes as eligible external TLAC. These 
products may not serve in a loss absorbing capacity consistent with the 
intended purposes of the final rule's long-term debt requirement. 
Moreover, based on figures provided by commenters and the Board's 
review of available information, the impact of not counting principal-
protected structured notes as eligible external LTD is likely to be 
limited, especially in light of the grandfathering provided in the 
final rule for other outstanding long-term debt instruments.
b. Contractual Provision for Conversion Into or Exchange for Equity
    Consistent with the proposal, the final rule retains the 
requirement that eligible external LTD be prohibited from including 
contractual provisions for conversion into or exchange for equity. Some 
commenters supported the requirement that the eligible external LTD not 
exclude debt that is convertible or exchangeable into equity of the 
covered BHC, arguing that such a conversion feature would reduce the 
financial stability benefits of the debt and increase risks to 
investors. By contrast, other commenters pointed out that tier 2 
capital includes debt that may convert into tier 1 capital, but under 
the proposed rule would not count towards a firm's LTD or TLAC 
requirements even though such securities would be ``loss-absorbing'' 
either on an as-converted basis, or as outstanding debt. Consequently, 
these commenters contended that such securities should count as 
eligible external LTD (or, at a minimum, count towards a covered BHC's 
TLAC requirement). These commenters also stated that, while covered 
BHCs currently do not have long-term debt with such convertibility 
features outstanding, covered BHCs may wish to issue debt securities 
with such convertibility features in the future, particularly in times 
of stress when issuing other forms of capital could be difficult.

[[Page 8281]]

    The fundamental objective of the external LTD requirement is to 
ensure that covered BHCs will have a minimum amount of loss-absorbing 
capacity available to absorb losses upon the covered BHC's entry into 
resolution. Debt instruments that could convert into equity prior to 
resolution may not serve this goal, since by doing so they would reduce 
the amount of debt that will be available to absorb losses in 
resolution. In addition, debt with features to allow conversion into 
equity are often complex and thus may not be characterized as ``plain 
vanilla.'' Convertible debt instruments may be viewed as debt 
instruments with an embedded stock call option. The embedded stock call 
option introduces a derivative-linked feature to the debt instrument 
that is inconsistent with the purpose of the clean holding company 
requirements (described below) and introduces uncertainty and 
complexity into the value of such securities. For these reasons, under 
the final rule, eligible external LTD may not include contractual 
provisions allowing for the conversion into or exchange for equity 
prior to the covered BHC's resolution. Moreover, in light of the fact 
that commenters indicate that existing outstanding debt generally does 
not contain such convertibility features, the impact of such a 
prohibition is likely to be immaterial.
c. Credit-Sensitive Features and Acceleration Clauses
    Under the proposal, eligible external LTD was prohibited from 
having a credit-sensitive feature or giving the holder of the 
instrument a contractual right to the acceleration of payment of 
principal or interest at any time prior to the instrument's stated 
maturity (an acceleration clause), other than upon the occurrence of 
either an insolvency event or a payment default event, except that 
eligible external LTD instruments would be permitted to give the holder 
a put right as of a future date certain, subject to the remaining 
maturity provisions discussed below.
    Several commenters expressed concerns with the proposed limitations 
on acceleration clauses. These commenters contended that the Board's 
final rule should permit more classes of acceleration clauses. In 
particular, these commenters argued that a covered BHC is unlikely to 
breach any traditional covenants that result in acceleration unless it 
were on the brink of insolvency. Traditional covenants range from 
covenants that are impossible to breach inadvertently, such as those 
not to enter a merger transaction or sell all or substantially all of 
their assets unless the successor assumes the debt securities subject 
to the covenant or to pledge the stock of material subsidiaries, to 
those that are administrative in nature and easy to comply with or cure 
breaches of, such as maintaining paying agents in certain locations. 
Commenters also argued that some classes of acceleration clauses that 
would be barred by the proposal would be unlikely to frustrate the 
purposes of the rule, and should therefore be permitted, including, for 
example, clauses permitting acceleration upon the event of non-payment 
of principal or interest (subject to a period during which the covered 
BHC could ``cure'' the failure to pay), restrictions on mergers or 
asset transfers, limits on the sale of principal subsidiaries, and 
other procedural covenants intended to facilitate payments on, and 
registration and transfer of, the debt securities. Moreover, commenters 
argued that these traditional covenants and related acceleration rights 
are important to investors and have traditionally been demanded and 
given in the markets for investment-grade senior long-term debt 
securities issued by covered BHCs.
    Commenters contended that nearly all currently outstanding long-
term debt of covered BHCs includes standard acceleration clauses, which 
would not qualify as eligible external LTD under the proposed rule, and 
that it would be impossible or very expensive to conform or redeem. For 
these reasons, commenters argued that the impact of this requirement 
was significant. The commenters asserted that, to the extent such debt 
is not grandfathered, covered BHCs would have a projected shortfall, as 
of January 1, 2019, of almost three times the estimated shortfall 
projected in the proposal. A number of commenters suggested that 
grandfathering outstanding debt would be helpful to mitigate the impact 
of the requirements.
    A few commenters expressed the view that the final rule should 
prohibit all acceleration clauses in eligible external LTD, including 
the insolvency or payment default acceleration clauses permitted under 
the proposal. These commenters argued that because acceleration clauses 
related to payment default or insolvency are highly unlikely to protect 
creditors from losses upon insolvency of a covered BHC, their inclusion 
could be deceptive for investors.
    Under the final rule, eligible external LTD is prohibited from 
having a credit-sensitive feature or an acceleration clause--a 
contractual right to the acceleration of payment of principal or 
interest at any time prior to the instrument's stated maturity, other 
than upon the occurrence of either an insolvency event or a payment 
default event that continues for 30 days or more--except that eligible 
external LTD instruments would be permitted to give the holder a put 
right as of a future date certain, subject to the provisions discussed 
below related to when the debt is due to be paid.\56\
---------------------------------------------------------------------------

    \56\ This final rule's prohibition is similar to but moderately 
less stringent than the analogous restriction on tier 2 regulatory 
capital. The main difference between eligible external LTD and tier 
2 capital in this regard is that tier 2 capital is also prohibited 
from containing payment default event acceleration clauses. See 12 
CFR 217.20(d)(1)(vi).
---------------------------------------------------------------------------

    The final rule does not broaden the list of acceleration clauses 
that are permissible for long-term debt (and limits the permissibility 
of payment default acceleration clauses to those that include a cure 
period as described below). This restriction on acceleration clauses 
serves the same purpose as several of the other restrictions discussed 
above: To ensure that the required amount of loss-absorbing capacity 
will indeed be available to absorb losses in resolution if the covered 
BHC fails. Early acceleration clauses, including cross-acceleration 
clauses, could undermine an orderly resolution by forcing a covered BHC 
to make payment on the full value of the debt prior to the entry of the 
covered IHC into resolution, potentially depleting the covered BHC's 
eligible external LTD immediately prior to resolution. This concern 
does not apply to acceleration clauses that are triggered by an 
insolvency event, however, because the insolvency that triggers the 
clause would generally occur concurrently with the covered BHC's entry 
into a resolution proceeding.
    Senior debt instruments issued by covered BHCs commonly also 
include payment default event clauses. These clauses provide the holder 
with a contractual right to accelerate payment upon the occurrence of a 
``payment default event''--that is, a failure by the covered BHC to 
make a required payment when due. Payment default event clauses, which 
are not permitted in tier 2 regulatory capital, raise more concerns 
than insolvency event clauses because a payment default event may occur 
(triggering acceleration) before the institution has entered a 
resolution proceeding and a stay has been imposed. Such a pre-
resolution payment default event could cause a decline in the covered 
BHC's loss-absorbing capacity.
    Nonetheless, the final rule permits eligible external LTD to be 
subject to payment default event acceleration

[[Page 8282]]

rights for two reasons. First, default or acceleration rights upon a 
borrower's default on its direct payment obligations are a standard 
feature of senior debt instruments, such that a prohibition on such 
rights could be unduly disruptive to the potential market for eligible 
external LTD. Second, the payment default of a covered BHC on an 
eligible external LTD instrument would likely be a credit event of such 
significance that whatever diminished capacity led to the payment 
default event would also be a sufficient trigger for an insolvency 
event acceleration clause, in which case a prohibition on payment 
default event acceleration clauses would have little or no practical 
effect.
    In addition, the final rule revises this aspect of the proposal to 
provide that an acceleration clause relating to a failure to pay 
principal or interest must include a ``cure period'' of at least 30 
days. During this cure period, the covered BHC could make payment on 
the eligible external LTD before such debt could be accelerated and if 
the covered BHC satisfies its obligations on the eligible external LTD 
within the cure period, the instrument could not be accelerated. The 
purpose of this modification is to ensure that an accidental or 
temporary failure to pay principal or interest does not trigger 
immediate acceleration. Moreover, this cure period for interest 
payments is found in many existing debt instruments and is consistent 
with current market practice.
    As discussed, the final rule's definition of ``eligible debt 
security'' has been modified to allow debt instruments issued prior to 
December 31, 2016 that contain otherwise impermissible acceleration 
clauses to count as eligible long-term debt. This change significantly 
mitigates the impact of the requirements, because, based on information 
provided by commenters, nearly all existing outstanding long-term debt 
issued by covered BHCs contains acceleration clauses that would 
otherwise be prohibited under the final rule.
    Certain commenters argued that the inclusion of acceleration causes 
could be misleading to investors that hold long-term debt. The 
disclosure requirements (described below) require a covered BHC to 
publicly disclose a description of the financial consequences to 
unsecured debtholders of the covered IHC entering into a resolution 
proceeding. Accordingly, the disclosure requirements should address the 
concerns raised by commenters regarding transparency.
    Commenters also noted that the proposal does not impose limits on 
the rights of holders of internal LTD to file suit in the event of non-
payment or that such holders would have to waive those rights. However, 
because of the limitations on acceleration provisions, commenters 
requested that the Board clarify that the rule does not also limit such 
rights. The final rule does not require the holder of an eligible debt 
security to waive the holder's rights to file suit to enforce their 
ordinary creditor remedies. However, if a covenant involves a 
redemption or repurchase by the covered BHC (e.g., upon sale of a 
principal subsidiary), any such covenant would be subject to the 
restrictions on repurchase described elsewhere in this SUPPLEMENTARY 
INFORMATION, including prior approval from the Board where the 
redemption or repurchase would cause the covered BHC's eligible 
external LTD to fall below its external LTD requirement.
4. Minimum Remaining Maturity and Amortization (Section 252.62(b) of 
the Final Rule)
    Under the proposal, eligible external LTD with a remaining maturity 
of between one and two years would be subject to a 50 percent haircut 
for purposes of the external LTD requirement, and eligible external LTD 
with a remaining maturity of less than one year would not count toward 
the external LTD requirement.
    Some commenters recommended that debt with a remaining maturity of 
at least one year, but less than two years, should not be subject to a 
haircut for purposes of the external LTD requirement. These commenters 
argued that this haircut incorrectly assumes that a covered BHC could 
be cut off from capital markets for a period of up to two years. One 
commenter noted, for example, that this proposed haircut would depart 
from the FSB standard, and would thus contribute to unequal treatment 
of covered BHCs subject to the U.S. requirements and foreign GSIBs 
subject to rules of foreign jurisdictions that adhere to the FSB 
standard. Another commenter, however, expressed the view that the 
proposed haircut is appropriately conservative, and would help to 
ensure that loss-absorbing resources will likely always exceed a 
covered BHC's total loss-absorbing capacity needs. One commenter urged 
the Board to require that LTD have a maturity of considerably longer 
than one year.
    In addition, some commenters suggested that the Board should take 
into consideration maturity date concentrations in the issuances of 
covered BHCs. One commenter suggested that the Board should establish a 
mandatory minimum maturity to which all eligible external LTD would 
have to comply at issuance. Other commenters, however, urged the Board 
not to mandate a particular issuance schedule for external LTD of 
covered BHCs.
    The final rule adopts the proposed amortization haircut 
requirements applicable to eligible external LTD. However, the final 
rule modifies the terminology from the remaining maturity of the unpaid 
principal amount to the amount due to be paid. The purpose of this 
intended change is to clarify that it is the amount of debt due to be 
paid that counts as eligible LTD under the final rule.\57\ Under the 
final rule, the amount of eligible external LTD that is due to be paid 
between one and two years would be subject to a 50 percent haircut for 
purposes of the external LTD requirement, and the amount of eligible 
external LTD that is due to be paid in less than one year would not 
count toward the external LTD requirement. The amount of eligible 
external LTD that is due to be paid in more than two years would count 
at 100 percent of the unpaid principal amount.
---------------------------------------------------------------------------

    \57\ The final rule makes clear that when principal payments are 
due, rather than the remaining maturity, governs the amount of LTD 
that counts toward the minimum requirements under the final rule. A 
covered BHC may only count the unpaid principal amount that is due 
to be paid as eligible external LTD. For amortizing debt, when the 
covered BHC pays back principal, that amount would not count toward 
the minimum LTD requirements in the final rule.
---------------------------------------------------------------------------

    The purpose of these restrictions is to limit the debt that would 
fill the external LTD requirement to debt that will be reliably 
available to absorb losses in the event that the covered BHC fails and 
enters resolution. Debt that is due to be paid in less than one year 
does not adequately serve this purpose because of the relatively high 
likelihood that the debt will mature during the period between the time 
when the covered BHC begins to experience extreme stress and the time 
when it enters a resolution proceeding. If the debt matures during that 
period, then it is likely that the creditors would be unwilling to 
maintain their exposure to the covered BHC and will therefore refuse to 
roll over the debt or extend new credit, and the distressed covered BHC 
will likely be unable to replace the debt with new long-term debt that 
would be available to absorb losses in resolution. This run-off dynamic 
could result in a case where the covered BHC enters resolution with 
materially less loss-absorbing capacity than would be required to 
recapitalize its subsidiaries, potentially resulting in a disorderly

[[Page 8283]]

resolution. To protect against this outcome, eligible external LTD 
would cease to count toward the external LTD requirement upon being due 
to be paid in less than on year, so that the full required amount of 
loss-absorbing capacity would be available in resolution even if the 
resolution period were preceded by a year-long stress period.\58\
---------------------------------------------------------------------------

    \58\ This requirement also accords with market convention, which 
generally defines ``long-term debt'' as debt with maturity in excess 
of one year.
---------------------------------------------------------------------------

    For the same reasons, eligible external LTD that is due to be paid 
in less than two years but greater than or equal to one year is subject 
to a 50 percent haircut under the final rule for purposes of the 
external LTD requirement, meaning that only 50 percent of the value of 
its principal amount would count toward the external LTD 
requirement.\59\ This amortization provision is intended to protect a 
covered BHC's loss-absorbing capacity against a run-off period in 
excess of one year (as might occur during a financial crisis or other 
protracted stress period) in two ways. First, it requires covered BHCs 
that rely on eligible external LTD that is vulnerable to such a run-off 
period (because it due to be paid in less than two years) to maintain 
additional loss-absorbing capacity. Second, it incentivizes covered 
BHCs to reduce or eliminate their reliance on loss-absorbing capacity 
that is due to be paid less than two years, since by doing so they 
avoid being required to issue additional eligible external LTD in order 
to account for the haircut. A covered BHC could reduce its reliance on 
eligible external LTD that is due to be paid in less than two years by 
staggering its issuance, by issuing eligible external LTD that is due 
to be paid after a longer period, or by redeeming and replacing 
eligible external LTD once the amount due to be paid falls below two 
years.
---------------------------------------------------------------------------

    \59\ As discussed above, the proposed amortization would apply 
only to eligible external LTD, not to eligible external TLAC. Thus, 
an eligible external LTD instrument that counts for only half value 
toward the external LTD requirement because of the 50 percent 
amortization provision would continue to count for full value toward 
the external TLAC requirement, although debt with a remaining 
maturity of less than one year would not count toward either 
requirement.
---------------------------------------------------------------------------

    The final rule also provides similar treatment for eligible 
external LTD that could become subject to a ``put'' right--that is, a 
right of the holder to require the issuer to redeem the debt on 
demand--prior to reaching its stated maturity. As under the proposal, 
such an instrument would be treated as if it were due to be paid on the 
day on which it first became subject to the put right, since on that 
day the creditor would be capable of demanding payment and thereby 
subtracting the value of the instrument from the covered BHC's loss-
absorbing capacity.\60\
---------------------------------------------------------------------------

    \60\ The date on which principal is due to be paid would be 
calculated from the date the put right would first be exercisable 
regardless of whether the put right would only be exercisable on 
that date if another event occurred (e.g., a credit rating 
downgrade).
---------------------------------------------------------------------------

    One commenter also recommended that the Board permit or grandfather 
long-term debt with a ``survivor put'' feature--that is, a provision 
that says that, on the death of the holder, the named holder's 
representative may require the issuer to repay the security within a 
designated period after the primary holder's death--to count as 
eligible external LTD. Under the final rule, the date on which debt is 
due to be paid of an outstanding eligible debt security is the date 
that the holder first has a contractual right to request or require 
payment of principal, provided that, with respect to a right that is 
exercisable on one or more dates that are specified in the instrument 
only on the occurrence of an event, the date will be calculated as if 
the event has occurred. Therefore, under the final rule, debt with a 
survivor put right would be treated as having matured on the first day 
it became subject to a put right, which would be the day of issuance. 
Because eligible external LTD must have a maturity of greater than one 
year, debt with a survivor put would therefore not qualify as eligible 
external LTD. For similar reasons, the final rule does not grandfather 
as eligible LTD outstanding long-term debt with such survivor put 
features.
5. Governing Law
    Eligible long-term debt instruments should consist only of 
liabilities that can be effectively used to absorb losses during the 
resolution of a covered BHC under the U.S. Bankruptcy Code or Title II 
without giving rise to material risk of successful legal challenge. To 
this end, the proposal would have required eligible external LTD to be 
governed by the laws of the United States or any State, which would 
include the U.S. Bankruptcy Code and Title II.
    Several commenters argued that long-term debt subject to foreign 
law should not be excluded from the definition of eligible external 
LTD. These commenters contended that a significant fraction (over 10 
percent) of existing, outstanding long-term debt securities would be 
ineligible due to the restriction on foreign governing law. These 
commenters expressed the view that there is no material risk that any 
actions taken in a U.S. bankruptcy or Title II proceeding to impose 
losses on long-term debt securities governed by foreign law would be 
subject to a successful legal challenge or not upheld by a court in 
foreign jurisdictions. These commenters pointed out that the United 
Kingdom, Japan and Australia, which commenters said account for 98 
percent of the foreign-law governed LTD outstanding as of September 30, 
2015, all have statutes that provide a judicial mechanism for 
recognizing and giving effect to actions taken in a U.S. bankruptcy or 
Title II proceeding. Certain commenters recommended that any material 
risk of a successful legal challenge could be eliminated by including 
clauses in eligible long-term debt securities that result in investors 
consenting to any actions taken in U.S. bankruptcy or Title II 
proceedings in the event of a covered BHC's failure as suggested by the 
FSB standard which provides that eligible external TLAC may be made 
subject to the laws of a foreign jurisdiction if the application of the 
home country's resolution tools is made ``enforceable on the basis of 
binding statutory provisions or legally enforceable contractual 
provisions for recognition of resolution actions.'' \61\
---------------------------------------------------------------------------

    \61\ FSB Standard at 17.
---------------------------------------------------------------------------

    The final rule retains the requirement that long-term debt subject 
to foreign law does not qualify as eligible external LTD. Long-term 
debt that is subject to foreign law would potentially be subject to 
legal challenge in a foreign jurisdiction, which could jeopardize the 
orderly resolution of a covered BHC. Foreign courts might not defer to 
actions of U.S. courts or U.S. resolution authorities requiring the 
debt be converted into equity, for example, where the conversion 
negatively impacts foreign bondholders or foreign shareholders. While 
the presence of recognition regimes abroad does improve the likelihood 
that these actions would be enforced, it does not guarantee it.
    However, to mitigate the impact of this requirement, the final 
rule's definition of ``eligible debt security'' has been modified to 
allow debt instruments issued prior to December 31, 2016 that are 
governed by foreign law to count as eligible long-term debt. Thus, 
long-term debt that is governed by foreign law and issued before 
December 31, 2016, may count toward the minimum LTD and TLAC 
requirements in the final rule.
6. Contractual Subordination
    The final rule, like the proposal, does not include a requirement 
that eligible LTD instruments be contractually

[[Page 8284]]

subordinated. Covered BHCs would have the option of contractual 
subordination or structural subordination.
    A number of commenters expressed support for the approach taken in 
the proposal to not require contractual subordination of eligible 
external LTD. Some commenters expressed concern that if the final rule 
required eligible external LTD to be either contractually or 
structurally subordinated to other liabilities of a covered BHC, long-
term debt that failed to meet this criteria would not be available to 
absorb losses in the event of a resolution of a covered BHC. These 
commenters expressed the view that structural subordination would 
sufficiently ensure that eligible external LTD would absorb losses 
ahead of the liabilities of subsidiaries in an SPOE resolution. These 
commenters further argued that giving covered BHC's flexibility to 
comply with the external LTD requirement by either contractual or 
structural subordination allows for efficient compliance and adaptation 
to investor risk preferences, and limits the need to re-issue LTD that 
would otherwise be outstanding and available to absorb losses. By 
contrast, other comments expressed the view that the failure to include 
a contractual subordination provision might improve marketability but 
could be deceptive to investors. One commenter recommended that the 
Board should prohibit such debt from being called ``senior debt,'' 
which commenter argued was a title that could further mislead 
unsophisticated investors.
    After reviewing the comments, the Board again considered whether to 
require eligible external LTD instruments to be contractually 
subordinated to the claims of general creditors of a covered BHC. A 
contractual subordination requirement could improve the market 
discipline imposed on a covered BHC by increasing the clarity of 
treatment for eligible external LTD holders relative to other creditors 
as suggested by certain commenters.
    There continue to be several reasons to not require eligible LTD be 
contractually subordinated to the claims of third-party creditor. 
First, as discussed above, the structural subordination of a covered 
BHC's creditors to the creditors and counterparties of the covered 
BHC's subsidiaries already generally ensures that the covered BHC's 
creditors would absorb losses ahead of the creditors of the covered 
BHC's subsidiaries in an SPOE resolution of the covered BHC.\62\ 
Second, the final rule includes clean holding company requirements that 
limit the amount of non-TLAC instruments that could be pari passu with 
or junior to eligible external LTD, which will further address any 
concerns with covered BHCs' unsecured creditor hierarchies. In order to 
provide additional flexibility, the final rule provides that a covered 
BHC that chooses to issue all of its external LTD with a contractual 
subordination provision would not be subject to such a cap as described 
further below.
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    \62\ As discussed above, in an insolvency proceeding, direct 
third-party claims on a parent holding company's subsidiaries would 
be superior to the parent holding company's equity claims on the 
subsidiaries.
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    By limiting the criteria for eligible external LTD to those 
necessary to achieve the objectives of the final rule, the final rule 
seeks to retain the broadest possible market for eligible external LTD 
instruments. Allowing covered BHCs to retain the flexibility to satisfy 
the external LTD requirement with either senior or subordinated debt 
instruments should allow covered BHCs to comply with the requirement 
efficiently, to adapt to debt investors' risk preferences, and to avoid 
re-issuances of outstanding long-term senior debt instruments that 
would otherwise meet the criteria for eligible external LTD.
7. Explicit Bail-In Mechanisms
    Several commenters recommended that the final rule include an 
express mechanism by which a covered BHC's eligible external LTD would 
be ``bailed in'' in the event of the covered BHC's bankruptcy or 
resolution. These commenters argued that additional detail would 
facilitate the orderly resolution of a covered BHC and reduce investor 
uncertainty. For example, such commenters sought clarification that the 
``bail in'' of eligible external LTD would wipe out existing equity 
holders of a covered BHC in a resolution scenario. Other commenters 
encouraged the Board to mandate that a covered BHC's eligible external 
LTD could not be bailed in prior to the failure of the firm. One 
commenter suggested that a covered BHC emerging from bankruptcy or 
resolution should be required to be significantly simpler.
    Under the final rule, eligible external LTD would be ``bailed in'' 
to absorb losses of the covered BHC only in bankruptcy or resolution 
proceedings of the firm. In contrast to the debt conversion mechanism 
that applies to the internal LTD of covered IHCs, as discussed below, 
the final rule does not require that a covered BHC's eligible external 
LTD include a specific conversion mechanism that could be triggered 
outside of bankruptcy or resolution. The requirements in the final rule 
are written under the assumptions that a covered BHC would recapitalize 
its subsidiaries in the event of distress so that the subsidiaries 
could remain operational outside of a bankruptcy or resolution 
proceedings and that losses the covered BHC sustained by such 
recapitalization could be imposed on holders of TLAC through a 
bankruptcy or resolution proceeding. However, the final rule does not 
prescribe any specific requirements for how a covered BHC would enter 
into bankruptcy or resolution, as any resolution would be dependent on 
the specific facts and circumstances of a covered BHC at the time of 
failure, and would be within the purview of the bankruptcy court (in a 
proceeding under the U.S. Bankruptcy Code) or the FDIC (in a Title II 
resolution).
8. Other Comments
    Certain commenters argued that a covered BHC's eligible external 
LTD should be a required component of its executive compensation 
program. These commenters argued that requiring executives of a covered 
BHC to be compensated with such debt would help align the incentives of 
a covered BHC's management with the incentives of other holders of 
eligible external LTD.
    The final rule does not include a requirement that a covered BHC 
compensate management with eligible external LTD. The intended purpose 
of this final rule is to improve the resolvability of covered BHCs by 
requiring them to issue long-term debt. Achieving this policy objective 
does not, as a general matter, require certain parties to hold the 
long-term debt of covered BHCs. Moreover, other rules may apply to the 
incentive compensation practices of covered BHCs.\63\
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    \63\ Recently, the Board jointly issued with the OCC, the FDIC, 
the National Credit Union Administration, the Securities and 
Exchange Commission, and the Federal Housing Finance Agency, joint 
proposed rules that would implement the incentive compensation 
requirements of the Dodd-Frank Act. See 12 U.S.C. 956; 81 FR 37670 
(June 10, 2016).
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F. Costs and Benefits

    An analysis of the potential costs and benefits of the external 
TLAC and external LTD requirements was conducted at the time of the 
release of the proposal. To evaluate the costs attributable to the 
proposed requirements, this analysis estimated (a)

[[Page 8285]]

the extent by which each covered BHCs' required capital and currently 
outstanding long-term debt fell short of the proposed requirements, (b) 
the increase in each U.S. GSIB's ongoing cost of funding that would 
result from meeting the proposed requirements, (c) the expected 
increase in the interest rates that the U.S. GSIBs would charge to 
borrowers to make up for their higher funding costs, and (d) any 
decline in the gross domestic product (GDP) of the United States that 
would result from these increased lending rates.
    The following components relevant to the benefits of the proposed 
requirements were evaluated: (a) The probability of a financial crisis 
occurring in a given year, (b) the cumulative economic cost that a 
financial crisis would impose if it were to occur, and (c) the extent 
to which the proposed requirements would decrease the likelihood and 
cost of a financial crisis.
    The analysis concluded that the estimated benefits would outweigh 
the estimated costs and that the proposed external TLAC and LTD 
requirements would yield a substantial net benefit for the U.S. 
economy. In evaluating the costs and benefits of the final rule it is 
important to consider the state of covered BHC's at the time of the 
proposal. Importantly, while covered BHC's have closed some of the 
shortfall in their TLAC requirements since the time of the proposal, 
this activity does not reduce the costs of complying with the 
requirements. In particular, information reviewed by the Board suggests 
that covered BHC's aggregate TLAC shortfall has fallen from roughly 
$120 billion at the time of the proposal to roughly $70 billion as of 
the third quarter of 2016.\64\ This reduction in shortfall, however, 
does not reduce the overall cost of the requirements but rather 
demonstrates that covered BHCs have already begun to bear the cost of 
the requirements of the final rule. Moreover, since the requirements of 
the final rule have been finalized largely as proposed, the overall 
estimated costs and benefits of the requirements as described in the 
final rule have not materially changed from the proposal. Several 
features of the final rule that differ from the proposal have impacted 
overall costs and we discuss these below.
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    \64\ The TLAC proposal reported a total shortfall of $120BN as 
of year-end 2014 that was based on different data and assumptions 
than the estimates presented above.
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    A few commenters suggested that the Board underestimated the cost 
of the rule in the proposal because the proposal's analysis assumed 
that covered firms' existing long-term debt is eligible under the rule 
even though much of the existing long-term debt would not have met the 
eligibility requirements under the proposal. Existing debt containing 
impermissible acceleration clauses was identified by certain commenters 
to be present in nearly all of the covered BHC's outstanding 
traditional long-term debt as of September 30, 2015. Similarly, 
commenters argued that a significant portion (over 10 percent) of the 
covered BHC's outstanding LTD would be ineligible under the proposal 
because it had been issued under foreign law. Commenters estimated that 
absent any grandfathering of this debt to satisfy the LTD requirements, 
the resulting shortfall would be in the range of $500 to $700 billion 
rather than the Board's estimated shortfall of $120 billion under the 
proposal. The Board believes that these comments on impact have been 
addressed and the costs of the final rule mitigated in large part by 
the fact that, as described above, eligible LTD in the final rule 
includes debt issued prior to December 31, 2016, that contains 
impermissible acceleration clauses or that is governed by foreign law. 
As a result the estimated shortfall of $120 billion that was reported 
in the original proposal is appropriate for considering the economic 
costs of the final rule.
1. Shortfall Analysis
    An analysis of information collected and reviewed by the Board 
suggested that the total TLAC shortfall of U.S. GSIBs at the time of 
the proposal was roughly $120 billion.\65\ This estimate includes debt 
with impermissible acceleration clauses and debt that is issued under 
foreign law but that is included in eligible LTD due to grandfathering 
of these features under the final rule. In addition, U.S. GSIBs have 
taken steps to reduce their overall shortfall since the release of the 
proposal. Information received and reviewed by the Board suggests that 
the aggregate TLAC shortfall has declined to roughly $70 billion as of 
the third quarter of 2016. This reduction in the shortfall indicates 
that the TLAC requirements are manageable as firms have made 
considerable progress in reducing their shortfalls in the relatively 
short period of time since the proposal. However, this also indicates 
that firms have already begun bearing the costs of the final rule by 
beginning to alter their capital structures after the proposal. The 
Board estimates that $120 billion is the relevant amount for purposes 
of considering the cost of the final rule because this is the shortfall 
that existed at the time of the proposal before covered entities had an 
opportunity to adjust their capital structure in response to the 
proposal.
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    \65\ See 80 FR 74926 at 74938.
---------------------------------------------------------------------------

2. Cost-of-Funding Analysis
    The analysis also considered the effect that filling the $120 
billion shortfall through the issuance of additional eligible external 
LTD would have on the covered BHCs' cost of funding. This analysis 
relied on additional information about the amounts and costs of funding 
of the debt that the covered BHCs and their subsidiaries have 
outstanding. For the same reasons that were discussed above, the 
estimated cost of filling the $120 billion shortfall that was described 
in the proposal is appropriate for estimating the costs of the final 
rule: It captures the cost that covered entities will bear to fill the 
shortfall that existed at the time the proposal was released and before 
covered entities made any changes to their capital structure in 
response to the proposal's requirements.
    One reason that would cause the proposal's cost estimate to be 
inaccurate would be if the cost of long term debt relative to short 
term debt changed markedly between the time of the proposal and the 
final rule. Such a change would indicate that the current costs of 
filling the shortfall at the time of the release of the final rule 
would be significantly different from the costs that prevailed at the 
time of the proposal. One simple measure of the cost of long term 
versus short term financing is the spread between five-year and three-
month U.S. Treasury debt. At the time of the proposal, this yield 
spread was roughly 1.45 percent and as of November 2016 this spread is 
roughly 1.1 percent. Accordingly, the cost of exchanging short term 
debt for long term debt has declined somewhat, which suggests that the 
estimates provided in the proposal represent a somewhat conservative 
estimate of filling the estimated shortfall. Accordingly, the estimated 
cost of filling the shortfall has not been decreased to reflect the 
modest narrowing in funding spreads.
    Several additional assumptions were made to estimate the cost of 
filling the $120 billion shortfall. First, it was assumed that covered 
BHCs would fill their shortfalls by replacing existing, ineligible debt 
with eligible external LTD during the period prior to the effective 
date of the proposed requirements, rather than by expanding their 
balance sheets by issuing the new debt while maintaining existing

[[Page 8286]]

liabilities outstanding. Second, it was assumed that covered BHCs would 
minimize the cost associated with meeting the proposed external TLAC 
and LTD requirements by first replacing with eligible external LTD 
their ``near-eligible debt''--that is, their outstanding debt that 
comes closest to meeting all requirements for eligible external LTD 
(and that therefore entails a cost of funding almost as high as that 
associated with eligible external LTD)--and by proceeding in this cost-
minimizing fashion until the proposed requirements were met. Thus, the 
marginal cost of each additional dollar of eligible external LTD was 
assumed to be the surplus of the funding cost associated with eligible 
external LTD over the funding cost of the covered BHC's highest-cost 
remaining ineligible debt. Finally, if total near-eligible liabilities 
were insufficient to fill the shortfall, it was assumed that the 
covered BHC proceeded to replace more senior, short-term liabilities, 
such as deposits, with eligible external LTD.
    Roughly $65 billion of the aggregate $120 billion shortfall could 
be filled through the issuance of eligible external LTD in the place of 
existing near-eligible debt, most of which would be the form of long-
term bonds issued by the covered BHCs' bank subsidiaries.\66\ Based on 
market data, it was estimated that the spread between this near-
eligible debt and eligible external LTD is between 20 and 30 basis 
points. Some commenters provided independent estimates of the cost of 
replacing this near-eligible debt with eligible debt. In particular, a 
group of commenters estimated that the cost of subordinating near-
eligible debt would range from 25 to 100 basis points.\67\ The 
remaining $55 billion shortfall could then be filled through the 
issuance of eligible external LTD in the place of existing deposits or 
other lower-cost liabilities. It was estimated that the spread between 
these liabilities and eligible external LTD would be approximately 
equal to the spread between the risk-free interest rate and the 
eligible external LTD rate, which is estimated to be between 100 and 
150 basis points. One commenter provided independent estimates of the 
cost of lengthening the duration of a bank's funding profile, but these 
estimates compared the costs of three to five year debt versus debt 
with a ten year maturity, rather than the relative costs of short term, 
deposit-like funding with longer-term debt.
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    \66\ For purposes of this analysis, structured notes were not 
treated as near-eligible debt. Structured notes could be viewed as 
near-eligible debt, but in many cases structured notes serve 
different purposes than debt that was treated as near-eligible (such 
as ``plain-vanilla'' bonds issued by covered BHCs' bank 
subsidiaries). As a result, the analysis assumed that covered BHCs 
would not replace their outstanding structured notes with eligible 
external LTD. On the assumption that covered BHCs would indeed 
replace their outstanding structured notes with eligible external 
LTD, covered BHCs would be able to meet roughly $100 billion of the 
aggregate $120 billion shortfall by replacing near-eligible debt 
with eligible external LTD, which would result in a lower estimated 
cost impact from the proposed requirements.
    \67\ This particular estimate was provided by foreign bank 
commenters that were required under the proposal to contractually 
subordinate their debt. They indicated these costs reflected arm's 
length market terms for these transactions and, accordingly, the 
Board has considered these costs in evaluating the total cost of 
subordinating the debt.
---------------------------------------------------------------------------

    The funding cost estimates at the low ends of the ranges described 
above--20 basis points for replacing near-eligible debt and 100 basis 
points for replacing lower-cost liabilities such as deposits--result in 
an aggregate increased cost of funding for the covered BHCs of $680 
million per year.
    A more conservative estimate can be produced using figures at the 
high ends of these ranges and then further adjusting them upward to 
reflect a potential supply effect of 30 basis points.\68\ Using the 
resulting, higher figures--130 basis points for replacing near-eligible 
debt and 200 basis points for replacing lower-cost liabilities--
resulted in an estimated aggregate increased cost of funding for the 
covered BHCs of approximately $2.0 billion per year. The Board notes 
that this amount is roughly $500 million larger than the estimate that 
was provided in the proposal since the high estimate of the cost of 
replacing near-eligible debt with eligible debt has been taken from the 
higher estimate provided by one group of commenters which was 100 basis 
points rather than the 30 basis points that was cited in the proposal.
---------------------------------------------------------------------------

    \68\ This accounts for an increase in the interest rate on 
eligible external LTD caused by the increase in the supply of 
eligible external LTD as a result of the external LTD requirement. 
The aggregate shortfall in eligible LTD amounts to approximately 20 
percent of the covered BHCs' current eligible LTD, implying that the 
covered BHCs in the aggregate would need to increase their 
outstanding eligible external LTD by 3 to 4 percent each year 
through 2022, when the proposed requirements would be fully phased 
in. On the basis of both internal analysis and an international 
survey of market participants in which Board staff participated, it 
is estimated that this increase in supply would increase spreads of 
covered BHCs' eligible external LTD by approximately 30 basis 
points.
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    Thus, the aggregate increased cost of funding attributable to the 
proposed external TLAC and LTD requirement are estimated to be in the 
range of $680 million to $2.0 billion annually.
3. Increased Lending Rate Analysis
    The Board conducted an analysis of increased lending rates using 
the updated values described previously that was similar to the 
analysis conducted under the proposal. To arrive at a conservative 
estimate of the effect of the final rule's external TLAC and LTD 
requirements on lending rates, it was next assumed that the U.S. GSIBs 
would maintain their current return-on-equity levels by passing all of 
their increased funding costs on to borrowers, holding constant their 
level of lending activity. The increased lending rates that the U.S. 
GSIBs would charge to borrowers were calculated by dividing both the 
low-end and the high-end estimated cost-of-funding increases by the 
U.S. GSIBs' aggregate outstanding loans of roughly $3.2 trillion. Under 
this analysis, covered BHCs would employ an increased lending rate of 
1.3 to 6.3 basis points as a result of the external TLAC and LTD 
requirements of the final rule. The total dollar value of this increase 
in funding rates is between $4.2 and $20.2 billion per year in 
increased lending costs across the entire U.S. economy.
4. Macroeconomic Costs Analysis
    The Board also conducted the analysis of macroeconomic costs 
similar to that conducted for the proposal using the updated values 
described previously. In prior assessments of the economic impact of 
regulations on banking organizations, increases in lending rates have 
been assumed to produce a drag on GDP growth. However, the very modest 
lending rate increases estimated above--from 1.3 to 6.3 basis points--
do not rise to the level of increase that could be expected to 
meaningfully affect GDP. Thus, from the standpoint of the economy as a 
whole and consistent with the analysis in the proposal, it appears that 
the costs associated with the external TLAC and LTD requirements would 
be minimal.
5. Macroeconomic Benefits Analysis
    To estimate the benefits of the final rule's requirements, the 
analysis built on the framework considered in a recent study titled 
``An assessment of the long-term economic impact of stronger capital 
and liquidity requirements'' (LEI report).\69\ The LEI report estimated 
that, prior to the regulatory reforms undertaken since 2009, the 
probability of a financial crisis occurring in a given

[[Page 8287]]

year was between 3.5 percent and 5.2 percent and the cumulative cost 
was between 20 percent and 100 percent of annual economic output. Even 
assuming that the lower ends of these ranges are accurate, these 
estimates reflect the well-understood fact that financial crises impose 
very substantial costs on the real economy. And the disorderly failures 
of major financial institutions play a major role in causing and 
deepening financial crises, as Congress recognized in enacting section 
165 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \69\ Basel Committee on Banking Supervision, ``An assessment of 
the long-term economic impact of stronger capital and liquidity 
requirements'' (August 2010), available at http://www.bis.org/publ/bcbs173.pdf.
---------------------------------------------------------------------------

    This final rule will materially reduce the risk that the failure of 
a covered BHC would pose to the financial stability of the United 
States by enhancing the prospects for the orderly resolution of such a 
firm. Moreover, by ensuring that the losses caused by the failure of 
such a firm are borne by private-sector investors and creditors (the 
holders of a covered BHC's eligible external TLAC), the final rule will 
materially reduce the probability that a covered BHC would fail in the 
first place by giving the firm's shareholders and creditors stronger 
incentives to discipline its excessive risk-taking. Both of these 
reductions will promote financial stability and materially reduce the 
probability that a financial crisis would occur in any given year. The 
final rule will therefore advance a key objective of the Dodd-Frank Act 
and help protect the American economy from the substantial potential 
losses associated with a higher probability of financial crises.

III. TLAC and LTD Requirements for U.S. Intermediate Holding Companies 
of Global Systemically Important Foreign Banking Organizations

A. Eligible External and Internal Issuance of TLAC and LTD by covered 
IHCs

    One of the key elements of the proposed rule was that it would have 
required a covered IHC, regardless of its resolution strategy, to issue 
internal TLAC and LTD--i.e., to issue TLAC and LTD, directly or 
indirectly, to its foreign parent. A U.S. covered BHC, by contrast, 
would have been required to issue its TLAC and LTD externally to third-
party investors. A number of commenters, particularly foreign banks 
with MPOE resolution strategies, urged the Board, consistent with the 
FSB standard, to permit a covered IHC the flexibility to satisfy its 
TLAC and LTD requirements with instruments issued either to 
unaffiliated third parties or to foreign parents. These commenters 
argued that requiring covered IHCs that intend to serve as a point of 
entry for resolution to maintain internal TLAC issued solely to a 
parent entity is inconsistent with an MPOE resolution strategy and, in 
fact, makes it impossible to pursue an MPOE resolution strategy by 
creating dependencies between the U.S. operations and the larger 
foreign banking organization. One commenter urged the Board to allow 
any covered IHC, regardless of its resolution strategy, to issue LTD 
externally to third-party investors in the same manner as U.S. GSIBs. 
This commenter suggested that an IHC with an SPOE resolution strategy 
should be permitted to issue LTD externally, provided that a cap is 
established to ensure that less than a majority of the covered IHC's 
LTD is issued to third parties. The purpose of the cap would be to 
ensure that, in the event that the long-term debt is converted to 
equity, the foreign parent would remain the controlling owner, thereby 
preserving alignment of interests between the covered IHC and its 
parent. Certain commenters also noted that the requirement to issue 
internally under the proposal limited the funding options available to 
covered IHCs.
    In response to these comments, the proposed rule has been modified 
to allow a resolution covered IHC, which expects to enter into 
resolution in the U.S. based on its FBO parent's MPOE resolution 
strategy, to have the option to issue its capital and debt internally 
to the FBO parent or to a foreign wholly owned subsidiary of the FBO 
parent,\70\ or externally to third-party investors. The purpose of this 
change is to ensure that covered IHCs can issue TLAC and LTD in a 
manner that best fits their adopted resolution strategy. For the same 
reason, the final rule, like the proposed rule, requires non-resolution 
covered IHCs that are not expected to enter resolution proceedings in 
the U.S. (because their foreign parent has adopted an SPOE resolution 
strategy) to issue debt internally to the FBO parent or to a wholly 
owned subsidiary of the FBO parent. Requiring internal issuance by 
these covered IHCs is consistent with their resolution strategy to 
upstream losses to their home country FBO parent or a wholly owned 
subsidiary of the FBO parent.
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    \70\ While the proposed rule required the internal debt to be 
issued, directly or indirectly, to the parent FBO, the final rule 
also allows covered IHCs the option to issue internal debt to other 
foreign affiliates that are wholly owned by the parent FBO, as 
described below.
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B. Scope of Application (Sections 252.153 and 252.160 of the Final 
Rule)

    The proposed rule would have applied to ``covered IHCs,'' defined 
to include any U.S. intermediate holding company that is (a) required 
to be formed under the Board's enhanced prudential standards rule (IHC 
rule) and (b) controlled by a foreign GSIB.
    The proposed rule would have established three methods by which the 
top-tier foreign banking organization that controls a covered IHC would 
be deemed a foreign GSIB. First, the proposed rule would have required 
foreign banking organizations that already provide the information used 
for the BCBS assessment methodology to use such information to 
determine whether they have the characteristics of a GSIB under that 
methodology. Accordingly, the proposed rule would have required a 
foreign banking organization that controls a U.S. intermediate holding 
company to notify the Board each year whether its home country 
regulatory authority has adopted standards consistent with the BCBS 
assessment methodology; whether the organization, for any reason, 
prepares or reports the information required for the BCBS assessment 
methodology; and whether, after using such information, the 
organization has determined that it is a GSIB under the BCBS assessment 
methodology.\71\ Any foreign banking organization that determined it is 
a GSIB under the BCBS assessment methodology would have been a foreign 
GSIB under the proposed rule.
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    \71\ As discussed in the supplementary information section to 
the proposed rule, these notice and determination requirements would 
have applied to the ``top-tier foreign banking organization,'' which 
would have been defined as, with respect to a foreign bank, the top-
tier entity that controls the foreign bank (if any) unless the Board 
specifies a subsidiary of such entity as the ``top-tier foreign 
banking organization.'' Thus, the definition would have included the 
top-tier entity that controls a foreign bank, which would be the 
foreign bank if no entity controls the foreign bank, or the entity 
specified by the Board that is a subsidiary of the top-tier entity.
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    Second, a foreign banking organization would have been deemed a 
foreign GSIB under the proposed rule if the Board determined that the 
organization either was a GSIB under the BCBS assessment methodology, 
or would be a GSIB under the Board's capital rules if the foreign 
banking organization were a domestic, top-tier bank holding company.
    Third, a foreign banking organization would have been deemed a 
foreign GSIB under the proposed rule if the Board determined that the 
organization's intermediate holding company, formed pursuant to the IHC 
rule, would be a GSIB under the Board's capital rules if the 
intermediate holding company were a top-tier bank holding company.

[[Page 8288]]

    Several commenters expressed concern with the proposal's method of 
identifying whether a covered IHC is controlled by a foreign GSIB. In 
particular, commenters argued that the TLAC requirements should apply 
only to covered IHCs of foreign banking organizations that have been 
identified as GSIBs by the FSB. These commenters argued that the 
additional requirement for covered IHCs to conduct their own assessment 
using both the Board's methodology and the global methodology and 
report to the Federal Reserve is overly complex and burdensome, 
especially where the covered IHC and its top-tier FBO are not close to 
the GSIB threshold. One commenter requested that the Board confirm it 
will determine which FBOs are subject to the final rule's requirements 
by relying exclusively on the method 1 GSIB surcharge calculation and 
not the method 2 GSIB surcharge calculation.
    The final rule adopts the same methodology as the proposal for 
determining whether a covered IHC is controlled by a foreign GSIB. The 
methodology in the GSIB surcharge rule identifies the most systemically 
important U.S. banking organizations. As discussed above with respect 
to covered BHCs, this methodology evaluates a banking organization's 
systemic importance on the basis of its size, interconnectedness, 
cross-jurisdictional activity, substitutability, and complexity. The 
firms that score the highest on these attributes are classified as 
GSIBs. While the GSIB surcharge rule itself applies only to U.S. BHCs, 
its methodology is equally well-suited to evaluating the systemic 
importance of foreign banking organizations. The method 1 methodology 
in the GSIB surcharge rule for identifying GSIBs is consistent with the 
methodology developed by the BCBS to identify GSIBs. Moreover, foreign 
jurisdictions collect information from banking organizations in 
connection with that framework that parallels the information collected 
by the Board for purposes of the Board's GSIB surcharge rule.
    Given that the global methodology and the method 1 methodology in 
the GSIB surcharge rule to identify GSIBs are virtually identical, the 
two methodologies should lead to the same outcomes, and the 
requirements in the final rule to identify whether a foreign banking 
organization is a GSIB should entail minimal additional burden for 
foreign banking organizations.
    The Board received a number of comments arguing that covered IHCs 
should not be subject to the requirements of the final rule. Commenters 
contended that the U.S. operations of covered IHCs are not significant 
enough to justify applying the proposed rule to them and that the Board 
did not explain its basis for subjecting covered IHCs to the proposal. 
In particular, certain commenters argued that the proposed internal 
TLAC and LTD requirements have no relationship to the systemic risk to 
the U.S. financial system posed by covered IHCs and discriminated 
against covered IHCs compared to covered BHCs with similar systemic 
significance based solely on ownership of the covered IHC by a global 
systemically important FBO. These commenters generally recommended that 
covered IHCs should be treated more like non-GSIB, similarly sized, 
domestic bank holding companies, which are not subject to TLAC or LTD 
requirements under the final rule. These commenters argued that the 
proposed rules conflicted with the statutory requirements to give due 
regard to the principle of national treatment and equality of 
competitive opportunity and take into account the extent to which the 
financial company is subject on a consolidated basis to home country 
standards that are comparable to those applied to financial 
institutions in the United States.\72\
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    \72\ 12 U.S.C. 5635(b)(2).
---------------------------------------------------------------------------

    The Dodd-Frank Act requires the Board to give due regard to 
national treatment and equality of competitive opportunity. This 
generally means that the Board must, in establishing standards 
applicable to foreign banking organizations operating in the United 
States, consider the standards applicable to similarly situated U.S. 
banking organizations and explain any differences in treatment between 
the two. The purpose of this requirement is to encourage competition in 
the U.S. banking market so that neither U.S. banking organizations nor 
the U.S. operations of foreign banking organizations are unfairly 
disadvantaged. The requirement does not mean, however, that the same 
standards must always apply to U.S. banking organizations and foreign 
banking organizations of a similar size and complexity.
    For example, in the context of resolution, covered IHCs are not 
similarly situated to U.S. banking organizations of a similar size and 
complexity. Unlike U.S. banking organizations, covered IHCs are 
connected to foreign GSIBs, which affects the potential impact of their 
resolution, the contexts under which they will be resolved, and how 
their resolution will be conducted. Foreign GSIBs, whose failure would 
impact the financial stability of the global financial system, also 
pose risks to the financial stability of the United States. Therefore, 
covered IHCs are more similarly situated to the U.S. GSIBs, and the 
final rule treats the two groups similarly, with appropriate 
adjustments to reflect their differences.
    The Board's enhanced prudential standards rules identify foreign 
banking organizations with a substantial U.S. presence and require each 
of them to form a single U.S. intermediate holding company over their 
respective U.S. subsidiaries.\73\ Thus, whether a foreign banking 
organization is required to form a U.S. intermediate holding company is 
an indicator of whether its U.S. presence is substantial. As with the 
application of the requirements in the final rule to covered BHCs, 
which are the largest, most systemically important U.S. banking 
organizations, the final rule's focus on IHCs held by foreign GSIBs is 
in keeping with the Dodd-Frank Act's mandate that more stringent 
prudential standards be applied to the most systemically important bank 
holding companies.\74\ Furthermore, as discussed in more detail below, 
the use of the methodology in the GSIB surcharge rule to identify both 
foreign and U.S. GSIBs (and to identify both covered BHCs and covered 
IHCs) promotes a level playing field between U.S. and foreign banking 
organizations. Thus, the final rule applies to the U.S. operations of 
those foreign banking organizations that would be considered GSIBs 
under the Board's GSIB surcharge rule and that have substantial 
operations in the United States.
---------------------------------------------------------------------------

    \73\ The IHC rule generally requires any foreign banking 
organization with total consolidated non-branch U.S. assets of $50 
billion or more to form a single U.S. intermediate holding company 
over its U.S. subsidiaries. 12 CFR 252.153; 79 FR 17329 (May 27, 
2014).
    \74\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Additionally, while some covered IHCs may be subject to comparable 
TLAC standards in their home jurisdiction, the final rule is tailored 
to the potential risks presented by the U.S. operations of foreign 
GSIBs to the U.S. financial system. In this regard, the final rule 
mandates that a covered IHC have sufficient loss absorbing capacity 
present in the United States to support a successful recapitalization 
or resolution of the covered IHC.

C. Resolution and Non-Resolution IHCs (Section 12 CFR 252.164 of the 
Final Rule)

    Under the final rule, as explained above, whether or not a covered 
IHC has the option to issue debt externally to

[[Page 8289]]

third-party investors depends on whether the covered IHC (or any of its 
subsidiaries) is expected to enter resolution if a foreign parent 
entity fails (an MPOE strategy), rather than continuing to operate 
outside of resolution proceedings while a foreign parent entity is 
resolved (an SPOE strategy). In addition, under the final rule like 
under the proposal, the amount of eligible total loss-absorbing 
capacity that a covered IHC would be required to maintain outstanding 
would depend on whether the covered IHC (or any of its subsidiaries) is 
expected to enter resolution if a foreign parent entity fails, rather 
than the covered IHC continuing to operate outside of resolution 
proceedings.
    Under the proposal, the home country resolution authority for the 
parent foreign banking organization of the covered IHC would have been 
required to provide a certification to the Board indicating that the 
authority's planned resolution strategy for the foreign banking 
organization did not involve the covered IHC or any subsidiary of the 
covered IHC entering a resolution proceeding in the United States for 
the covered IHC to have been considered a ``non-resolution entity.'' A 
few commenters objected to the requirement in the proposal that this 
determination require the home country resolution authority to provide 
such a certification to the Board. These commenters generally argued 
that this requirement created an unnecessary administrative burden that 
home country resolution authorities may not be able to satisfy--for 
example, due to internal policies or requirements that would not permit 
them to make an official certification. These commenters also pointed 
out that the Board already has enough information to make such a 
determination. In particular, these commenters noted the Board reviews 
FBO resolution plans that specify whether their resolution strategy is 
SPOE or MPOE, and participates in Crisis Management Groups for all 
covered IHCs of FBOs.
    To address these concerns, the final rule modifies the proposal to 
require the top-tier foreign banking organization with U.S. non-branch 
assets equal to or greater than $50 billion, rather than the home 
country resolution authority, to certify to the Board whether the 
planned resolution strategy of the top-tier foreign banking 
organization involves the covered IHC or its subsidiaries entering 
resolution, receivership, insolvency, or similar proceedings in the 
United States. The certification must be provided by the top-tier 
foreign banking organization to the Board on the later of June 30, 2017 
or one year prior to the date on which the covered IHC is required to 
comply with the covered IHC TLAC and LTD requirements of the final 
rule.\75\ In addition, the top-tier foreign banking organization with 
U.S. non-branch assets equal to or greater than $50 billion must 
provide an updated certification to the Board upon a change in 
resolution strategy.
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    \75\ Under the final rule, a covered IHC is required to comply 
with the rule's requirements by the later of three years after the 
date on which the U.S. non-branch assets of the foreign banking 
organization that controls the covered IHC equal or exceed $50 
billion, and the date on which the foreign banking organization that 
controls the covered IHC first became a GSIB.
---------------------------------------------------------------------------

    A covered IHC is a ``resolution covered IHC'' under the final rule 
if the certification provided indicates that the top-tier foreign 
banking organization's planned resolution strategy involves the covered 
IHC or its subsidiaries entering into resolution, receivership, 
insolvency or similar proceeding. A covered IHC is a ``non-resolution 
covered IHC'' under the final rule if the certification provided to the 
Board indicates that the top-tier foreign banking organization's 
planned resolution strategy does not involve the covered IHC or its 
subsidiaries entering into resolution, receivership, insolvency, or 
similar proceedings in the United States.
    In addition, under the final rule, the Board may determine in its 
discretion that an entity that is certified to be a non-resolution 
covered IHC is a resolution covered IHC, or that an entity that is 
certified to be a resolution covered IHC is a non-resolution covered 
IHC.
    In reviewing certifications provided with respect to covered IHCs, 
the Board would expect to review all the information available to it 
regarding a firm's resolution strategy, including information provided 
to it by the firm. The Board would also expect to consult with the 
firm's home country resolution authority in connection with this 
review. In addition, the Board may consider a number of factors 
suggested by commenters including but not limited to whether a foreign 
banking organization conducts substantial U.S. activities outside of 
the IHC chain; whether the group's capital and liability structure is 
set up in a way to allow for losses to be upstreamed to the top-tier 
parent; whether the top-tier parent or foreign affiliates provide 
substantial financial or other forms of support to the U.S. operations 
(e.g., guarantees, contingent claims and other exposures between group 
entities); whether the covered IHC is operationally independent (e.g., 
costs are undertaken by the IHC itself and whether the IHC is able to 
fund itself on a stand-alone basis); whether the covered IHC depends on 
the top-tier parent or foreign affiliates for the provision of critical 
shared services or access to infrastructure; whether the covered IHC is 
dependent on the risk management or risk-mitigating hedging services 
provided by the top-tier parent or foreign affiliates; and the location 
where financial activity that is conducted in the United States is 
booked.
    A covered IHC would have one year or a longer period determined by 
the Board to comply with the requirements of the final rule if it 
changes its resolution strategy or if the Board determines that the 
firm certified to the wrong strategy. For example, if the Board 
determines that a firm that had certified it is a non-resolution 
covered IHC, which is subject to a lower TLAC requirement under the 
final rule, is a resolution covered IHC for purposes of the final rule, 
the IHC would have up to one year from the date on which the Board 
notifies the covered IHC in writing of such determination to raise 
additional capital or long-term debt to comply with the requirements of 
the final rule. Similarly, a firm that certified it was a resolution 
covered IHC that is determined to be a non-resolution covered IHC would 
have one year to comply with the requirements of the final rule. Since 
under the final rule a resolution covered IHC has the option to issue 
TLAC and LTD externally to third-parties, the one-year period would 
provide the covered IHC with time to make any necessary adjustments to 
the composition of its TLAC and LTD, for example by issuing internal 
LTD to its foreign parent.
    As noted, under the final rule, the Board may extend the one-year 
period discussed above. In acting on any requests for extensions of 
this time period, the Board would consider whether the covered IHC had 
made a good faith effort to comply with the requirements of the final 
rule.

D. Calibration of the TLAC and LTD Requirements (Sections 252.162 and 
252.165 of the Final Rule)

    The proposed rule would have imposed different minimum internal 
loss-absorbing capacity (eligible internal TLAC) requirements for 
covered IHCs expected to enter into resolution proceedings if their 
foreign parent entity fails (resolution covered IHCs), and covered IHCs 
not expected to enter resolution proceedings under the same 
circumstances (non-resolution covered IHCs). The proposed rule would 
have treated all covered IHCs as resolution

[[Page 8290]]

entities unless the home country resolution authority for the foreign 
GSIB that controls the covered IHC certified to the Board that the 
authority's resolution plan for the foreign GSIB adopted an SPOE 
approach.\76\
---------------------------------------------------------------------------

    \76\ As described above, the final rule has modified this aspect 
of the proposal.
---------------------------------------------------------------------------

    Under the proposed rule, covered IHCs that were resolution entities 
would have been required to maintain a minimum amount of outstanding 
eligible internal TLAC no less than the greatest of (a) 18 percent of 
the covered IHC's total risk-weighted assets; \77\ (b) 6.75 percent of 
the covered IHC's total leverage exposure (if applicable); and (c) 9 
percent of the covered IHC's average total consolidated assets, as 
computed for purposes of the U.S. tier 1 leverage ratio. Covered IHCs 
that were non-resolution entities would have been required to maintain 
a minimum amount of outstanding eligible internal TLAC no less than the 
greater of (a) 16 percent of the covered IHC's total risk-weighted 
assets; \78\ (b) 6 percent of the covered IHC's total leverage exposure 
(if applicable); and (c) 8 percent of the covered IHC's average total 
consolidated assets, as computed for purposes of the U.S. tier 1 
leverage ratio.\79\ The proposed rule also would have applied an 
internal TLAC buffer to all covered IHCs in addition to the applicable 
risk-weighted assets component of the internal TLAC requirement.
---------------------------------------------------------------------------

    \77\ Under the proposed rule, the risk-weighted assets component 
of the internal TLAC requirement for covered IHCs of MPOE firms 
would have been phased in as follows: It would be equal to 16 
percent of the covered IHC's risk-weighted assets beginning on 
January 1, 2019, and would be equal to 18 percent of the covered 
IHC's risk-weighted assets beginning on January 1, 2022.
    \78\ Under the proposed rule, the risk-weighted assets component 
of the internal TLAC requirement would have been phased in as 
follows: It would be equal to 14 percent of the covered IHC's risk-
weighted assets beginning on January 1, 2019, and would be equal to 
16 percent of the covered IHC's risk-weighted assets beginning on 
January 1, 2022.
    \79\ The final rule imposes the same leverage capital 
requirements on U.S. intermediate holding companies as it does on 
U.S. bank holding companies. 12 CFR 252.153(e)(2). These leverage 
capital requirements include the generally applicable leverage ratio 
and the supplementary leverage ratio for U.S. intermediate holding 
companies that meet the scope of application for that ratio.
---------------------------------------------------------------------------

    Under the proposed internal LTD requirement, a covered IHC would 
have been required to maintain outstanding eligible internal long-term 
debt instruments in an amount not less than the greatest of (a) 7 
percent of total risk-weighted assets; (b) 3 percent of the total 
leverage exposure (if applicable); and (c) 4 percent of average total 
consolidated assets, as computed for purposes of the U.S. tier 1 
leverage ratio. A covered IHC would have been prohibited from redeeming 
eligible internal LTD prior to the stated maturity date without 
obtaining prior approval from the Board if after such redemption the 
covered IHC's eligible internal LTD would fall below its internal LTD 
requirement.
    Some commenters argued that, based on the size of their U.S. 
operations, covered IHCs should be treated like domestic U.S. bank 
holding companies that are not subject to the requirements of the final 
rule. These commenters questioned whether TLAC and LTD requirements for 
covered IHCs are even necessary, particularly where ownership by a 
major foreign bank parent would add a source of strength for covered 
IHCs and where other prudential standards, including robust capital, 
liquidity, stress testing, and risk management requirements, already 
address the risk to U.S. financial stability posed by covered IHCs. A 
few commenters suggested that the Board reserve the power to alter TLAC 
and LTD requirements for institutions on a case-by-case basis based on 
the relative importance of the U.S. operations of a foreign banking 
organization to U.S. financial stability.
    Commenters expressed a number of concerns with the proposal's 
calibration of internal TLAC and LTD for covered IHCs. In general, 
commenters requested a reduction in the calibration of internal TLAC 
and LTD for both resolution covered IHCs and non-resolution covered 
IHCs. Commenters contended that the levels of internal TLAC and LTD 
under the proposal were far higher than necessary to promote 
resolvability and resiliency of covered IHCs. Several commenters 
expressed concern that prepositioning too much capital and LTD at a 
covered IHC would prevent a foreign banking group from putting 
resources to better use, either by providing more services to the 
market or using the capital to assist the covered IHC's foreign 
affiliates in times of stress.
    Other commenters suggested that the requirements could potentially 
discourage cooperation between U.S. and foreign banking regulators, and 
perhaps encourage foreign banking regulators to impose more stringent 
requirements for foreign affiliates of U.S. banking organizations in 
retaliation for the proposed rule. Commenters concerned about the 
reaction of foreign regulators to the proposed rule suggested that the 
Board set the minimum TLAC requirements applicable to covered IHCs in 
consultation with foreign regulators. Several commenters also suggested 
that the requirements were so high that they would negatively impact 
credit markets and thereby decrease economic activity. Commenters 
argued that the calibration for non-resolution covered IHCs, in 
particular, was too high and that the Board should follow the approach 
described in the FSB standard and establish internal TLAC calibration 
levels for non-resolution covered IHCs based only on the need to ensure 
home-host country cooperation. These commenters urged that the internal 
TLAC requirements applicable to non-resolution covered IHCs should be 
reduced from the proposed level of approximately 90 percent of the TLAC 
requirements applicable to resolution covered IHCs, the top end of the 
range set by the FSB standard, to not more than 75 percent of such 
requirements applicable to resolution covered IHCs, representing the 
low end of the range recommended by the FSB standard, in order to 
appropriately incentivize SPOE resolution strategy.\80\ These 
commenters contended that the proposal's higher calibration would not 
provide enough flexibility to allocate a foreign parent's loss-
absorbing capacity wherever necessary within the firm in the case of 
failure, and that the potential ring-fencing of excessive amounts of 
capital would reduce, and not enhance, the resilience of the firm. 
These commenters also argued that non-resolution covered IHCs do not 
pose the same risks to U.S. financial stability because these firms 
would receive support from their foreign parents in times of stress.
---------------------------------------------------------------------------

    \80\ FSB standard at 19.
---------------------------------------------------------------------------

    A number of commenters argued that covered IHCs that are subject to 
the SLR requirement should not be subject to the additional prong of 
the covered IHC TLAC and LTD requirements in the proposal that required 
covered IHCs to maintain TLAC and LTD levels greater than or equal to a 
percentage of average total consolidated assets, as there is no 
corresponding requirement imposed on covered BHCs. These commenters 
urged the Board to remove the average total consolidated assets-based 
leverage ratio test for covered IHCs subject to the supplemental 
leverage ratio component of TLAC and LTD.
    In addition, commenters urged the Board to allow a portion of 
internal TLAC to be satisfied through collateralized guarantees, as 
contemplated in the FSB standard. These commenters suggested that such 
guarantees would address concerns motivating the proposed internal TLAC 
requirements in a manner less likely to lead to going-concern ring 
fencing and ``misallocation risk'' (i.e., trapping

[[Page 8291]]

resources that may not be needed in a covered IHC through pre-
positioning). To reduce misallocation risk, a few commenters argued 
that the Board should permit a covered IHC to satisfy minimum TLAC and 
LTD requirements with capital contribution agreements which would 
obligate a foreign GSIB parent to contribute an amount of assets up to 
the minimum amount required in order to recapitalize the covered IHC 
upon the occurrence of certain events. These commenters also 
recommended that the Board permit covered IHCs to satisfy a portion of 
their internal TLAC requirements with other forms of parent support 
that have similar characteristics to such guarantees and satisfy the 
Board's policy objectives, such as keepwell agreements and 
uncollateralized guarantees.
    A number of commenters argued that the Board should eliminate 
separate long-term debt requirements for covered IHCs. According to the 
commenters, separate long-term debt requirements are not necessary to 
ensure that covered IHCs have enough loss-absorbing capacity to be 
recapitalized. These commenters asserted that equity can absorb losses 
equally well both inside and outside of a bankruptcy or Title II 
proceeding, and can function as both going-concern and gone-concern 
capital. As a result, these commenters argued that covered IHCs should 
be able to satisfy their minimum TLAC requirements by freely 
substituting equity for LTD. A few commenters suggested that, 
consistent with the FSB standard, LTD for non-resolution IHCs be 
established as a supervisory expectation, rather than a formal minimum 
requirement, and that internal LTD be required to comprise no more than 
33 percent of internal TLAC. Other commenters, however, noted that 
requiring covered IHCs to maintain a minimum amount of LTD represents a 
departure from the FSB standards, which do not require that any portion 
of internal TLAC consist of long-term debt instruments.
    A number of commenters also pointed out that the Board did not 
apply the ``balance sheet'' depletion approach to calibrate the 
proposed internal LTD and TLAC requirements that the Board used for 
determining the calibration levels for the external LTD and TLAC 
requirements. These commenters urged the Board, consistent with the 
principle of national treatment, to include this adjustment to the 
calibration of LTD and TLAC requirements for covered IHCs.
    As noted, covered IHCs are more similarly situated to covered BHCs 
than to U.S. banking organizations of a similar size, and the LTD and 
TLAC requirements should therefore apply to covered IHCs. Thus, the 
rationale for the internal LTD and TLAC requirements in the final rule 
is generally parallel to the rationale for the TLAC and LTD 
requirements for covered BHCs, as discussed above. Resolution covered 
IHCs would be subject to a TLAC requirement with a risk-weighted assets 
component identical to the risk-weighted assets component of the TLAC 
requirement applicable to covered BHCs. They would be subject to a 
supplementary leverage ratio component (if applicable) that is lower 
than the supplementary leverage ratio component of the proposed TLAC 
requirement applicable to covered BHCs, in recognition of the fact that 
covered IHCs are not U.S. GSIBs and so would not be subject to the 
enhanced supplementary leverage ratio that applies to U.S. GSIBs. 
Finally, covered IHCs are also subject to TLAC and LTD requirements 
that are based on the U.S. tier 1 leverage ratio.\81\
---------------------------------------------------------------------------

    \81\ Generally, a bank holding company is subject to a 4 percent 
on-balance sheet leverage ratio requirement and a 3 percent 
supplementary leverage ratio requirement (if the supplementary 
leverage ratio applies to the bank holding company). The final 
rule's calibration of the on-balance sheet leverage ratio component 
of the proposed internal TLAC requirement, 8 percent, is twice the 4 
percent requirement to be conceptually consistent with the proposed 
calibration of the supplementary leverage ratio requirement, 6 
percent, which is twice the 3 percent requirement.
---------------------------------------------------------------------------

    The calibrations for TLAC and LTD under the final rule applicable 
to covered IHCs are reflected below:

                            Table 4--Covered IHC TLAC and LTD Final Rule Calibrations
----------------------------------------------------------------------------------------------------------------
                                                                                                     Leverage:
                                                                RWA             Leverage: SLR      Total assets
                                                                                                        (%)
----------------------------------------------------------------------------------------------------------------
Non-Resolution Covered IHC.......  Covered IHC TLAC...  16 percent plus      6 percent (if                     8
                                   Covered IHC LTD....   buffer.              applicable).                   3.5
                                                        6 percent..........  2.5 percent (if
                                                                              applicable)..
Resolution Covered IHC...........  Covered IHC TLAC...  18 percent plus      6.75 percent (if                  9
                                   Covered IHC LTD....   buffer.              applicable).                   3.5
                                                        6..................  2.5 percent (if
                                                                              applicable).
----------------------------------------------------------------------------------------------------------------

    Other than the adjustment to the LTD calibration to reflect balance 
sheet depletion, the final rule does not reduce or eliminate the TLAC 
and LTD requirements in the manner suggested by commenters. However, 
the final rule does reflect a number of changes intended to address 
concerns raised by commenters and mitigate the burden of the final rule 
on covered IHCs. In particular, resolution covered IHCs are permitted 
under the final rule to issue external debt in the same manner as 
covered BHCs. Resolution covered IHCs are therefore subject to similar 
calibrations as covered BHCs under the final rule, because these IHCs 
are analogous to covered BHCs, which are themselves resolution 
entities.
    The final rule provides that non-resolution covered IHCs are 
subject to slightly lower TLAC requirements than resolution covered 
IHCs. However, the final rule does not further reduce the requirement 
relative to the proposal as requested by commenters. The final rule's 
calibration of TLAC for non-resolution covered IHCs is the same as 
under the proposal and within (though toward the higher end) of the 
recommended range in the FSB standard.
    The Board considered comments requesting that the final rule lower 
the calibration for non-resolution covered IHCs. Most foreign GSIBs are 
expected to be resolved by their home jurisdiction resolution 
authorities through an SPOE resolution and are therefore expected to be 
non-resolution entities under the proposal. Were such an SPOE 
resolution to succeed, the covered IHC would avoid entering resolution 
and would continue as a going concern, with its eligible internal TLAC 
and eligible internal LTD used to transmit the covered IHC's going-
concern losses to the parent foreign GSIB, to the extent necessary. 
However, the final rule recognizes the need to plan for the contingency 
in which the covered IHC enters a U.S. resolution proceeding. The 
proposed calibration for such a covered IHC was based on the 
desirability of providing support for the preferred SPOE resolution of 
the foreign GSIB. This approach is most effective when a

[[Page 8292]]

foreign GSIB parent has internal loss-absorbing capacity that can be 
freely allocated to whichever subsidiaries have incurred the greatest 
losses (including non-U.S. subsidiaries). The value of this flexibility 
must, however, be balanced against the need to maintain sufficient 
loss-absorbing capacity in the United States so that a covered IHC can 
be maintained as a going concern or subjected to an orderly resolution 
in the United States if the foreign GSIB is not successfully resolved 
in an SPOE resolution or is otherwise unable to provide support to a 
non-resolution covered IHC.
    For these reasons, the final rule retains the proposed calibrations 
in order to maximize the likelihood that a non-resolution or resolution 
covered IHC could be resolved in an orderly manner in the United 
States. For similar reasons, collateralized guarantees and other forms 
of contingent support do not count toward the minimum TLAC requirements 
under the final rule as requested by commenters. These forms of 
contingent support would not be pre-positioned in the United States and 
available for use during a period of stress without additional actions 
by the foreign GSIB parent.
    To ensure that the LTD requirements are sufficient to replace a 
covered IHC's capital in a manner consistent with the Board's existing 
capital requirements, the LTD requirements are based on each of the 
three regulatory capital measures applicable to covered IHCs. The final 
rule does not eliminate, as requested by certain commenters, the total 
consolidated asset measure for covered IHCs that are subject to the 
total leverage exposure component because covered IHC's are generally 
subject to U.S. tier 1 leverage ratio capital requirement and basing 
the LTD requirements on this capital measure is consistent with the 
underlying capital refill framework that motivates the 
requirements.\82\
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    \82\ Covered BHCs are not subject to a TLAC or LTD requirement 
that references total average consolidated assets as is the case for 
covered IHC's. This is because the U.S. tier 1 leverage ratio 
requirement applicable to covered IHCs is 4 percent, which is lower 
than the 5 percent enhanced supplementary leverage ratio 
requirement. Accordingly, adding a total consolidated assets TLAC or 
LTD requirement in the case of covered BHCs would be superfluous 
since the enhanced supplementary leverage ratio based requirement 
would always be larger than the U.S. tier 1 leverage ratio 
requirement. This is because both the U.S. tier 1 leverage ratio 
requirement of 4 percent is lower than the enhanced supplementary 
leverage ratio requirement of 5 percent, and the total consolidated 
assets amount is always less than the total leverage exposure 
amount. This reasoning does not apply in the case of covered IHCs. 
Covered IHCs are not subject to the enhanced supplementary leverage 
ratio of 5 percent but are subject to the supplementary leverage 
ratio of 3 percent. Accordingly, there can be cases in which the 
U.S. tier 1 leverage ratio based requirement would be larger than 
the supplementary leverage ratio-based requirement. Since covered 
IHCs are subject to both the U.S. tier 1 leverage ratio and the 
supplementary leverage ratio and since the U.S. tier 1 based 
requirement is not redundant, the final rule requires that the TLAC 
and LTD requirements reference both the U.S. tier 1 and 
supplementary leverage ratio capital measures.
---------------------------------------------------------------------------

    The proposal has been modified to reduce the minimum LTD 
requirement applicable to covered IHCs to reflect the same balance 
sheet depletion approach that was used to calibrate the requirements in 
the final rule applicable to the covered bank holding companies. Thus, 
under the final rule, the risk-weighted asset component of the LTD 
requirements has been reduced from 7 percent under the proposal to 6 
percent (4.5 percent plus a 2.5 percent capital conservation buffer 
with a 1 percentage point allowance for balance sheet depletion); the 
SLR component from 3 percent to 2.5 percent; and the total assets 
component from 4 percent to 3.5 percent.
    With respect to the comment that the Board should reserve the power 
to adjust TLAC and LTD requirements for institutions on an case-by-case 
basis based on the relative importance of the U.S. operations of a 
foreign banking organization to U.S. financial stability, the final 
rule, like the proposal, establishes a minimum baseline requirement 
applicable to all covered IHCs, The possibility of adjusting these 
requirements on a case-by-case basis is something the Board may 
consider in the future based on the risk of the particular institution 
in question as the Board gains more experience with the application of 
the requirements.
    The final rule adds a new provision for covered IHCs to describe 
the treatment of long-term debt subject to a put right--that is, a 
right of the holder to require the issuer to redeem the debt on 
demand--that is the same as the applicable provision for covered BHCs 
under the final rule. In particular, such an instrument would be 
treated as if it were due to be paid on the day on which it first 
became subject to the put right, since on that day the creditor would 
be capable of demanding payment and thereby subtracting the value of 
the instrument from the covered BHC's loss-absorbing capacity. Also 
like the provision applicable to covered BHCs, the Board may order a 
covered IHC, after notice and an opportunity to respond, to exclude 
from its outstanding eligible long-term debt amount any debt securities 
with features that would significantly impair the ability of such debt 
securities to take losses.
    The Board has consulted with, and expects to continue to consult 
with, foreign financial regulatory authorities regarding the 
requirements of the final rule. In addition, as noted above, the Board 
intends to update required TLAC and LTD calibration requirements in 
light of any future changes to the framework of applicable capital 
requirements.

E. Core Features of Eligible TLAC (Section 252.165 of the Final Rule)

    Under the proposal, a covered IHC's eligible internal TLAC was 
defined to be the sum of the tier 1 regulatory capital (common equity 
tier 1 capital and additional tier 1 capital) issued from the covered 
IHC to a foreign entity that directly or indirectly controls the 
covered IHC (``foreign parent entity'') and the covered IHC's eligible 
LTD.\83\ Only those tier 2 capital instruments that meet the definition 
of eligible LTD would have counted toward the TLAC requirement 
applicable to covered IHCs.
---------------------------------------------------------------------------

    \83\ Although eligible internal LTD with a remaining maturity 
between one and two years would have been subject to a 50 percent 
haircut for purposes of the LTD requirement, such eligible LTD would 
have counted at full value for purposes of the internal TLAC 
requirement. As discussed below, eligible internal LTD with a 
remaining maturity of less than one year would not have counted 
toward either the internal TLAC requirement or the internal LTD 
requirement. These requirements are the same under the final rule as 
under the proposal other than the fact that the final rule considers 
the date debt is due to be paid rather than the remaining maturity 
of the debt for reasons described above.
---------------------------------------------------------------------------

    Requiring that regulatory capital be issued directly by a covered 
IHC, rather than by a subsidiary of the IHC, in order to count as 
eligible internal TLAC means that a covered IHC would have loss-
absorbing capacity available to absorb losses incurred by any 
subsidiary of the IHC. In contrast, regulatory capital that is issued 
by one subsidiary of a covered IHC would not necessarily be available 
to absorb losses incurred by another subsidiary.
    Under the proposal, regulatory capital and long-term debt were also 
required to be issued to a foreign parent entity of the covered IHC. As 
noted, a number of commenters urged the Board to permit covered IHCs, 
particularly resolution covered IHCs, to issue capital and long-term 
debt externally under the final rule. In addition, a few commenters 
argued that covered IHCs should be permitted to issue capital or long-
term debt to any foreign affiliate (i.e., any foreign entity within the 
foreign GSIB majority owned by the same top-tier foreign parent) rather 
than just a foreign parent as under the proposal. These

[[Page 8293]]

commenters pointed out that internal TLAC and LTD issued to foreign 
affiliates would transfer losses outside the U.S. just as well as if 
the internal TLAC or LTD was issued to a foreign parent. Moreover, 
these commenters argued that broadening TLAC and LTD eligibility to 
include instruments held by any non-U.S. affiliate of the covered IHC 
would provide covered IHCs with greater flexibility to satisfy their 
TLAC and LTD requirements in a manner consistent with global operations 
and funding structures.
    In response to comments, the final rule makes two changes to the 
proposed internal TLAC requirements. First, resolution covered IHCs 
have the option to issue capital and long-term debt externally to 
third-parties under the final rule or to issue it internally to a 
foreign parent or foreign wholly owned subsidiary of the foreign parent 
consistent with their resolution strategy.
    Second, covered IHCs may issue internal TLAC and LTD to any foreign 
affiliate of the covered IHC that is wholly owned, directly or 
indirectly, by the top-tier parent foreign banking organization, in 
addition to foreign parent entities of the covered IHC. This 
modification to the proposal provides additional flexibility to foreign 
banking organizations without compromising the principle that losses 
incurred by a covered IHC with an SPOE strategy should be upstreamed to 
a foreign parent or another foreign affiliate rather than being 
transferred to other U.S. entities. It will also prevent the conversion 
of eligible LTD into equity from effecting a change in control over the 
covered IHC in the case of a non-resolution entity IHC that is required 
to issue internal LTD. A change in control of a covered IHC could 
create additional and undesirable regulatory and management complexity 
during a failure scenario, and could severely disrupt an SPOE 
resolution strategy.

F. TLAC Buffer for Covered IHCs

    The proposed rule would have required covered IHCs to maintain a 
buffer of common equity tier 1 capital in addition to the risk-weighted 
assets component of the minimum internal TLAC requirement. This buffer 
would have been similar to the buffer in the proposed rule that would 
have applied to covered BHCs, except that the internal TLAC buffer 
would not have included a GSIB surcharge component because covered IHCs 
are not subject to the Board's GSIB surcharge rule. A covered IHC's 
internal TLAC buffer would thus be equal to the sum of 2.5 percent plus 
any applicable countercyclical capital buffer. Under the proposed rule, 
a covered IHC that breached its buffer would be subject to the limits 
on capital distributions and discretionary bonus payments.
    Commenters questioned whether the internal TLAC buffer was 
necessary for covered IHCs. These commenters argued that the buffer 
imposed additional burden with no corresponding benefits and encouraged 
the Board to eliminate the buffer, particularly for covered IHCs that 
issued TLAC only to their affiliates. Certain commenters recommended 
that a breach of the buffer should be addressed by the Board as part of 
the supervisory process rather than through self-executing restrictions 
on an IHC's capital distributions and discretionary bonus payments. One 
commenter argued that the 50 percent haircut on long-term debt operates 
as a de facto buffer, making the internal TLAC buffer duplicative and 
unnecessary. This commenter also argued that the TLAC buffer would 
unnecessarily strain liquidity at the covered IHCs.
    The covered IHC TLAC buffer serves the same purpose as the TLAC 
buffer applicable to covered BHCs: It limits capital distributions and 
discretionary bonus payments as a firm approaches its minimum TLAC 
requirements, thereby helping to preserve capital. Consistent with this 
principle and the proposal, the final rule includes a buffer that for 
covered IHCs that must be satisfied with common equity tier 1 capital.
    Also, consistent with the proposal, a covered IHC's breach of its 
TLAC buffer would result in limits on capital distributions and 
discretionary bonus payments in accordance with Table 5. As discussed 
above with respect to the external TLAC risk-weighted assets buffer, a 
covered IHC that meets the applicable capital requirements, the 
existing capital conservation buffer, and the covered IHC LTD 
requirements generally would not need to increase its common equity 
tier 1 capital to meet its covered IHC TLAC requirement and its TLAC 
buffer.
    The Board is not adding a buffer over the leverage component of the 
covered IHC TLAC requirement as described previously for covered BHCs. 
The buffers in the final rule are designed to be consistent with the 
buffers in Regulation Q, which only includes a buffer over a leverage 
requirement for the covered BHCs.

     Table 5--Calculation of Maximum Covered IHC TLAC Payout Amount
------------------------------------------------------------------------
                                               Maximum covered IHC TLAC
                                                  payout ratio (as a
       Covered IHC TLAC buffer level            percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the Covered IHC TLAC buffer...  No payout ratio limitation
                                              applies.
Less than or equal to the Covered IHC TLAC   60 percent.
 buffer, and greater than 75 percent of the
 Covered IHC TLAC buffer.
Less than or equal to 75 percent of the      40 percent.
 Covered IHC TLAC buffer, and greater than
 50 percent of the Covered IHC TLAC buffer.
Less than or equal to 50 percent of the      20 percent.
 Covered IHC TLAC buffer, and greater 25
 percent of the Covered IHC TLAC buffer.
Less than or equal to 25 percent of the      0 percent.
 Covered IHC TLAC buffer.
------------------------------------------------------------------------

G. Core Features of Eligible Internal and External LTD for Covered IHCs 
(Section 252.161 of the Final Rule)

    Under the proposal, a covered IHC's eligible internal LTD would 
have been defined as debt that is paid in and issued directly from the 
covered IHC, is unsecured, has a maturity of greater than one year from 
the date of issuance, is ``plain vanilla,'' and is governed by U.S. 
law.\84\ These are generally the same requirements as applied under the 
proposal to eligible external LTD issued by covered BHCs.
---------------------------------------------------------------------------

    \84\ The proposal required that eligible internal LTD be 
governed by U.S. law in order to clarify that the conversion and 
exchange provisions of these instruments, which would be held by 
foreign companies, are enforceable under U.S. law.
---------------------------------------------------------------------------

    A few additional requirements applied to eligible internal LTD 
under the proposal. Eligible internal LTD would be required to be 
issued, directly or indirectly, to a foreign parent entity

[[Page 8294]]

of the covered IHC, to be contractually subordinated to all third-party 
liabilities of the covered IHC, and to include a contractual trigger 
pursuant to which the Board could require the covered IHC to cancel the 
eligible internal LTD or convert or exchange it into tier 1 common 
equity on a going-concern basis under certain specified conditions. 
Eligible internal LTD was also prohibited from having any acceleration 
clauses.
    In general, commenters argued that the Board should conform the 
eligibility requirements of internal LTD for covered IHCs with those of 
external LTD for covered BHCs because the additional features were 
costly, unnecessary, and thereby placed covered IHCs at a significant 
competitive disadvantage relative to covered BHCs. In particular, 
commenters recommended that the Board eliminate the contractual 
subordination and contractual trigger requirements and to permit 
eligible internal LTD to contain the same acceleration events as 
permitted by long-term debt issued by covered BHCs. Commenters argued 
that covered IHCs transact with foreign parents on an arm's length 
basis, and that these features would require covered IHCs to pay a 
significant premiums for these features. Commenters also argued that 
these features of eligible internal LTD under the proposal would 
significantly increase the risk that the debt would be characterized as 
equity for U.S. income tax purposes and therefore significantly 
increase costs for covered IHCs. Each of these features, relevant 
comments, and changes to the final rule to address these concerns are 
discussed in more detail below.
1. Issuance to a Foreign Parent Entity that Controls the Covered IHC
    Under the proposal, eligible internal LTD was required to be paid 
in and issued, directly or indirectly, to a foreign parent entity that 
controls the covered IHC. As discussed above, a number of commenters 
urged the Board to allow external issuance for resolution covered IHCs 
consistent with their resolution strategy. In response to these 
comments, the final rule permits resolution covered IHCs to issue 
eligible long-term debt externally to third-party investors as 
discussed above. The final rule defines a new term ``eligible external 
debt security'' with generally the same terms as eligible debt 
securities issued by covered BHCs.\85\ As it would for eligible 
external LTD issued by covered BHCs, the final rule would also permit 
an eligible external debt instrument issued prior to December 31, 2016 
by a resolution covered IHC that contains otherwise impermissible 
acceleration clauses and is issued under foreign law to qualify as an 
eligible external debt security.
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    \85\ In particular, eligible external debt security is defined 
as a debt instrument that is paid in, and issued by the covered IHC 
to and remains held by a company that does not directly or 
indirectly control the covered IHC and is not a wholly owned 
subsidiary; is not secured, not guaranteed by the covered IHC or a 
subsidiary of the covered IHC, and is not subject to any other 
arrangement that legally or economically enhances the seniority of 
the instrument; has a maturity of greater than or equal to 365 days 
(one year) from date of issuance; is governed by the laws of the 
United States or any State thereof; does not provide the holder of 
the instrument a contractual right to accelerate payment of 
principal or interest on the instrument, except for a right that is 
exercisable on one or more dates that are specified in the 
instrument or in the event of a receivership, insolvency, 
liquidation or similar proceeding of the covered IHC or a failure of 
the covered IHC to pay principal or interest on the instrument when 
due and payable that continues for 30 days or more; and does not 
include structured notes.
---------------------------------------------------------------------------

    Resolution covered IHCs also have the option to issue debt 
internally to a foreign parent or foreign wholly owned subsidiary of a 
global systemically important foreign banking organization that 
directly or indirectly controls the covered IHC. Non-resolution covered 
IHCs are required under the final rule to issue debt internally to a 
foreign parent or foreign wholly owned subsidiary of a global 
systemically important foreign banking organization that directly or 
indirectly controls the covered IHC, for the reasons described above. 
The definition of ``eligible internal debt'' security is the same for 
both types of covered IHCs. The requirements for an ``eligible internal 
debt security'' are generally the same as the terms for an ``eligible 
external debt security'' for a resolution covered IHC and ``eligible 
debt security'' for a covered BHC with a few key differences described 
below.
    The proposal prohibited an eligible internal debt security from 
having any acceleration clauses. Under the final rule, both an eligible 
external debt security and an eligible internal debt security would be 
permitted to have the same types of acceleration clauses permitted for 
an eligible debt security of a covered BHC. However, unlike for 
eligible external debt securities, the final rule does not allow 
eligible internal debt of covered IHCs issued prior to December 31, 
2016, to have impermissible acceleration clauses or be issued under 
foreign law. The Board does not believe that covered IHCs have 
substantial amounts of internal long-term debt outstanding since the 
requirement to establish a covered IHC became effective on July 1, 
2016. Moreover, the Board believes that covered IHCs could modify the 
terms of existing outstanding internal debt issued to a foreign parent 
or another foreign affiliate with relative ease and low cost.
    Another difference from the proposal is that neither an eligible 
internal debt security nor an eligible external debt security would be 
required to be contractually subordinated under the final rule. Under 
the final rule, a covered IHC like a covered BHC would have the option 
of structural subordination, subject to a similar cap on unrelated 
liabilities applicable to covered BHCs described further below.
    However, eligible internal debt securities would continue to have 
two key distinctions from eligible external debt securities under the 
final rule. First, an ``eligible internal debt security'' must be 
issued to and remain held by a company that is incorporated and 
organized outside of the United States that directly or indirectly 
controls the covered IHC, or a foreign, wholly owned subsidiary of a 
global systemically important foreign banking organization that 
directly or indirectly controls the covered IHC. Second, the internal 
debt security must have a contractual provision that is approved by the 
Board that provides for immediate conversion or exchange of the 
instrument into common equity tier 1 capital of the covered IHC upon 
issuance by the Board of an internal debt conversion order.
    In response to comments by a number of foreign banks, the Board 
consulted with the U.S. Department of the Treasury on the possibility 
that internal LTD could be considered equity--rather than debt--for 
purposes of U.S. tax law, and therefore increase the cost of the debt 
relative to the external LTD required of covered BHCs.\86\ Four changes 
to the proposal should mitigate the concerns raised by commenters on 
the proposal.
---------------------------------------------------------------------------

    \86\ Commenters noted that, regardless of the characterization 
of internal LTD as equity under U.S. tax law, coupon payments on 
internal LTD are likely to be treated as debt in an FBO's home 
jurisdiction. The commenters argued that the overall result would 
therefore be the incurrence by FBOs of tax costs in respect of 
internal LTD substantially in excess of those that would arise from 
either conventional debt or conventional equity.
---------------------------------------------------------------------------

    First, the final rule removes the ability of the Board to require 
cancellation of the debt and only retains the ability of the Board to 
require its conversion or exchange. Second, eligible internal debt 
securities under the final rule are permitted to have the same 
acceleration clauses as eligible external LTD. Third, eligible internal 
debt securities are not required to be contractually

[[Page 8295]]

subordinated under the final rule. Fourth, the final rule allows the 
Board to require the partial conversion or exchange of less than all of 
the eligible internal debt securities of the IHC, whereas the proposal 
only contemplated 100 percent conversion. A more detailed explanation 
of these changes follows.
2. Acceleration Clauses
    The proposal would have prohibited an eligible internal debt 
security issued by a covered IHC from having any contractual provision 
giving the holder of the instrument a contractual right to accelerate 
payment of principal or interest on the instrument. Many commenters 
expressed concern with this aspect of the proposal as being stricter 
than the requirements for covered BHCs and argued that eligible LTD 
issued by covered IHCs should be permitted to contain the same 
acceleration events as permitted for eligible debt securities issued by 
covered BHCs (i.e., acceleration clauses for insolvency and payment 
default). These commenters explained that covered IHCs may not have 
more flexibility than covered BHCs to price internal debt because 
covered IHCs and their non-U.S. affiliates transact on market terms. 
These commenters also noted that prohibiting all acceleration clauses 
further increases the risk that eligible LTD would be characterized as 
equity rather than debt for U.S. federal income tax purposes, creating 
uncertainty about the tax deductibility of interest payments on 
eligible internal LTD and whether these payments are subject to 
withholding tax. These commenters argued that an instrument is more 
likely to be considered debt for U.S. tax purposes if its holder has 
adequate legal remedies, such as acceleration rights or the right to 
sue (e.g., for breaches of debt covenants).
    As explained above, the final rule permits both eligible external 
debt securities and eligible internal debt securities issued by covered 
IHCs to have the same acceleration clauses permitted under the final 
rule for covered BHCs. In particular, the eligible long-term debt 
issued by covered IHCs would not be permitted to provide the holder of 
the instrument a contractual right to accelerate payment of principal 
or interest on the instrument, except a right that is exercisable on 
one or more dates that are specified in the instrument or in the event 
of (A) a receivership, insolvency, liquidation, or similar proceeding 
of the covered IHC or (B) a failure of the covered IHC to pay principal 
or interest on the instrument when due and payable that continues for 
30 days or more. The rationale for these requirements is explained in 
more detail above in connection with the discussion of requirements for 
eligible long-term debt for covered BHCs.
    As for eligible external LTD issued by covered BHCs, the final rule 
would also permit an eligible external debt instrument issued prior to 
December 31, 2016 by a resolution covered IHC that contains otherwise 
impermissible acceleration clauses or is subject to foreign law to 
count for eligible external LTD. This allowance should mitigate 
compliance costs on resolution covered IHCs that have outstanding 
unsecured debt with acceleration clauses or subject to foreign law. The 
same treatment does not apply to internal LTD. The Board does not 
believe that covered IHCs have substantial amounts of internal long-
term debt outstanding since the requirement to establish a covered IHC 
became effective on July 1, 2016. Moreover, the Board believes that 
covered IHCs could modify the terms of existing outstanding internal 
debt issued to a foreign parent or another foreign affiliate with 
relative ease and low cost.
    Commenters also noted that the proposal does not impose limits on 
the rights of holders of internal LTD to file suit in the event of non-
payment or that such holders would have to waive those rights. However, 
because of the limitations on acceleration provisions, commenters 
requested that the Board clarify that the rule does not also limit such 
rights. The final rule does not require the holder of an eligible 
internal debt security, eligible external debt security, or eligible 
debt security to waive the holder's rights to file suit to enforce 
their ordinary creditor remedies. However, if a covenant involves a 
redemption or repurchase by the covered IHC of eligible LTD (e.g., upon 
sale of a principal subsidiary), any such covenant would be subject to 
the restrictions on redemption and repurchase described elsewhere in 
this SUPPLEMENTARY INFORMATION, including prior approval from the Board 
if after redemption or repurchase of eligible LTD, a covered IHC would 
not meet its LTD requirement.
3. Contractual Subordination
    Under the proposal, eligible internal LTD was required to be 
contractually subordinated to all third-party liabilities of the 
covered IHC, with the exception of liabilities that are related to 
eligible internal TLAC.\87\ A number of commenters objected to the 
requirement under the proposal that internal LTD was required to be 
contractually subordinated. These commenters encouraged the Board, 
consistent with the FSB standard and principles of national treatment 
and equality of competitive opportunity, to permit covered IHCs the 
flexibility afforded to covered BHCs to rely on either structural or 
contractual subordination. These commenters suggested that covered IHCs 
relying on structural subordination should be permitted a similar 5 
percent allowance for unrelated liabilities to that permitted for 
covered BHCs under the proposal.\88\ Commenters argued that these 
modifications would enable covered IHCs to avoid added costs associated 
with contractual subordination. One commenter, for example, provided an 
estimate of the cost of contractual subordination ranging from an 
additional 25 to 100 basis points with an average of 59 additional 
basis points. Commenters also indicated that the deep subordination 
requirements of the proposal would contribute to uncertainty over 
whether eligible long-term debt would be characterized as debt and not 
equity for purposes of U.S. federal and state tax laws.
---------------------------------------------------------------------------

    \87\ The exception for liabilities that are related to eligible 
internal TLAC applied to instruments that were eligible internal 
TLAC when issued and have ceased to be eligible solely because their 
remaining maturity is less than one year, because they have become 
subject to a put right, or because they could become subject to a 
put right within one year, as well as to payables (such as dividend- 
or interest-related payables) that are associated with such 
liabilities.
    \88\ While the Board did not propose to subject covered BHCs to 
this contractual subordination requirement, it did propose to impose 
a cap on the value of a covered BHC's non-eligible external LTD-
related liabilities that can be pari passu with or junior to its 
eligible long-term debt. This aspect of the final rule is discussed 
below.
---------------------------------------------------------------------------

    The Board has modified the proposal to permit covered IHCs the 
option to contractually or structurally subordinate their debt. For the 
same reasons discussed above with respect to covered BHCs, a covered 
IHC will have flexibility under the final rule to choose between 
contractual subordination and structural subordination. This 
modification also provides parity between covered BHCs and covered IHCs 
and thus should mitigate the costs of contractual subordination raised 
by comments under the proposal. If a covered IHC opts to contractually 
subordinate all of its eligible long-term debt, it will not be required 
to have a cap on unrelated liabilities.\89\ If a covered IHC has any 
eligible long-term debt that is structurally subordinated,

[[Page 8296]]

the long-term debt would be allowed to be senior unsecured debt and to 
be senior to a capped amount of liabilities of the covered IHC that do 
not count as eligible external LTD.\90\
---------------------------------------------------------------------------

    \89\ A covered BHC similarly would have the option under the 
final rule to contractually subordinate all of its eligible external 
LTD and not have a cap on unrelated liabilities as described below.
    \90\ The applicability of the cap to resolution covered IHCs and 
non-resolution covered IHCs is described in more detail below.
---------------------------------------------------------------------------

4. Contractual Conversion Trigger
    Under the proposal, eligible internal LTD was required to include a 
contractual trigger pursuant to which the Board could require the 
covered IHC to cancel the eligible internal LTD or convert or exchange 
it into tier 1 common equity on a going-concern basis (that is, without 
the covered IHC's entry into a resolution proceeding) under certain 
circumstances. These were if the Board determines that the covered IHC 
is ``in default or in danger of default'' and any of three additional 
circumstances applied.\91\ First, the top-tier foreign banking 
organization or any of its subsidiaries was placed into resolution 
proceedings. Second, the home country supervisory authority consented 
to the cancellation, exchange, or conversion, or did not object to the 
cancellation, exchange, or conversion following 48 hours' notice. Third 
and finally, the Board made a written recommendation to the Secretary 
of the Treasury that the FDIC should be appointed as receiver of the 
covered IHC under Title II of the Dodd-Frank Act.\92\
---------------------------------------------------------------------------

    \91\ The phrase ``in default or in danger of default'' would be 
defined consistently with the standard provided by section 203(c)(4) 
of Title II of the Dodd-Frank Act. See 12 U.S.C. 5383. Consistent 
with section 203's definition of the phrase, a covered IHC would be 
considered to be in default or in danger of default upon a 
determination by the Board that (A) a case has been, or likely will 
promptly be, commenced with respect to the covered IHC under the 
U.S. Bankruptcy Code; (B) the covered IHC has incurred, or is likely 
to incur, losses that will deplete all or substantially all of its 
capital, and there is no reasonable prospect for the company to 
avoid such depletion; (C) the assets of the covered IHC are, or are 
likely to be, less than its obligations to creditors and others; or 
(D) the covered IHC is, or is likely to be, unable to pay its 
obligations (other than those subject to a bona fide dispute) in the 
normal course of business.
    \92\ See 12 U.S.C. 5383.
---------------------------------------------------------------------------

    A number of commenters requested that the Board eliminate the 
contractual conversion trigger. These commenters argued that the 
conversion trigger was unnecessary to achieve the Board's objectives, 
would unfairly increase the funding costs of covered IHCs as compared 
to covered BHCs and could unfairly increase tax costs of covered IHCs 
as compared to covered BHCs. In particular, these commenters indicated 
that this feature posed a substantial risk of the LTD being 
characterized as equity, rather than debt, for U.S. tax purposes, 
further increasing the cost of compliance for covered IHCs, especially 
when combined with the contractual subordination requirement and 
prohibition on any acceleration clauses under the proposal.
    One commenter estimated the cost of the contractual conversion 
feature would range from a minimum of 20 additional basis points to a 
maximum of 85 basis points with an average increase in cost of 50 basis 
points. Another commenter estimated that a covered IHC's pre-tax cost 
would increase by a range of $10.5 million to $105 million as a result 
of the contractual conversion feature for a hypothetical covered IHC 
with risk-weighted assets of $100 billion. These commenters argued that 
the costs of this feature outweigh its benefits. In particular, certain 
commenters argued that a conversion trigger is not necessary to ensure 
an IHC can withstand losses, as the FBO parent would have every 
incentive to preserve the value of the IHC and recapitalize the IHC to 
avoid its entry into insolvency or resolution. Commenters also argued 
that the conversion trigger contravenes principles of national 
treatment and equality of competitive opportunity required under the 
Dodd-Frank Act.
    Commenters recommended that the Board, if it retained the 
contractual conversion trigger in any final rule, coordinate with the 
U.S. Treasury to ensure that the long-term debt would be treated as 
debt for U.S. federal income tax purposes. Commenters also suggested a 
number of modifications to the conversion trigger to increase the 
likelihood that the long-term debt would be treated as debt. In 
particular, commenters urged the Board to remove the ability to cancel 
the long-term debt, since cancellation is not necessary to ensure that 
a covered IHC can be recapitalized outside of insolvency (i.e., 
conversion alone can achieve that end). These commenters argued that 
the provision providing for the cancellation of the debt instrument 
would be inconsistent with the principle that debt must retain its 
priority over equity, because the cancellation of internal LTD would 
result in the subordination of LTD to existing equity. These commenters 
also indicated that this same concern arose from the requirement that 
internal LTD convert into equity while any existing equity remains 
outstanding. As a result, these commenters urged the Board to clarify 
in the preamble of the final rule that covered IHCs could adopt ``self-
help'' measures to preserve the priority of internal LTD when it 
converts into equity (e.g., all classes of a covered IHC's going 
concern equity may contain a transfer provision that allows the equity 
to be transferred for no consideration to the covered IHC, which is 
able to cancel the equity, prior to conversion of LTD into equity).
    Commenters also indicated that allowing internal LTD to have 
provisions (e.g., acceleration clauses and covenants) on the same terms 
as external LTD would make it more likely that the internal LTD would 
be characterized as debt and not equity. Further, commenters argued 
that not requiring internal LTD to be contractually subordinated, 
rather allowing it to be structurally subordinated, would further help 
the characterization of internal LTD as debt and not equity.
    As an initial matter, the final rule gives resolution covered IHCs 
the option to issue debt externally to third-party investors under the 
final rule on the same terms as covered BHCs. The external debt issued 
by resolution covered IHCs is not required to contain a contractual 
conversion trigger.
    After considering all of the information provided by commenters, 
the Board has determined that the benefits of a conversion trigger 
requirement for internal debt outweigh its potential costs. A 
conversion trigger will allow covered IHCs that are in default or 
danger of default to be recapitalized through the conversion of 
eligible internal LTD to equity upon the occurrence of the trigger 
conditions in light of the losses that the covered IHC has incurred. 
Under certain circumstances, entry of a covered IHC into a resolution 
proceeding could pose a risk to the financial stability of the United 
States. Recapitalizing such a covered IHC outside of a resolution 
proceeding, and thereby reducing systemic risk, would advance the Dodd-
Frank Act's goal of ``mitigat[ing] risks to the financial stability of 
the United States that could arise from the material financial 
distress'' of the covered IHC without the need for government or 
taxpayer support.\93\
---------------------------------------------------------------------------

    \93\ 12 U.S.C. 5365(a)(1).
---------------------------------------------------------------------------

    The final rule contains certain targeted changes suggested by 
commenters that are consistent with the policy objectives of the final 
rule that internal LTD be characterized as debt and not equity and that 
are intended to mitigate associated potential costs with respect to the 
proposed conversion feature raised by commenters.
    First, the Board has modified the requirement that the internal 
eligible long-term debt instrument allow the Board to require either 
the cancellation or conversion of the debt under the proposal. Under 
the final rule, the Board

[[Page 8297]]

would only have the ability to require the conversion of the debt into 
equity. This change does not prejudice the Board's policy objective of 
transferring the losses suffered by the covered IHC to the holder of 
the eligible internal LTD through the conversion of eligible internal 
LTD into equity.
    Second, under the proposal, the Board would have had to require 
conversion of all eligible internal debt. Under the final rule, the 
Board would have the ability to require the conversion of some or all 
of the eligible internal debt. This change gives the Board the 
flexibility to respond to losses or stress at a covered IHC in a more 
targeted manner.
    Third, as noted, the final rule allows all eligible LTD to have 
acceleration clauses on the same terms as eligible external LTD.
    Fourth, also as noted, the final rule allows internal LTD to be 
structurally subordinated in a similar manner as eligible external LTD. 
The combination of these changes represent a number of adjustments that 
commenters indicated would ameliorate the characterization of internal 
LTD as equity under U.S. tax law. In addition, nothing in this final 
rule restricts the ability of a covered IHC to build terms that are 
consistent with applicable law into its equity or debt instruments 
(e.g., terms that provide that existing equity would be transferred to 
the covered IHC and canceled upon transfer if the long-term debt 
converts to equity or debt covenants on the same terms permissible for 
covered BHCs described above).
    Under the proposal, the Board was required to consider an objection 
by the home country supervisor to the conversion, exchange or 
cancellation of eligible internal debt securities if the Board received 
the objection no later than 48 hours after the Board requested such 
consent or non-objection from the home country supervisor. A few 
commenters argued that this period was too short for the home country 
regulator of a covered IHC's parent FBO to play a meaningful role in 
the decision to recapitalize or resolve a covered IHC, particularly 
during a period of market stress.
    After giving additional consideration to this issue and consulting 
with certain foreign regulatory authorities, the Board has determined 
to reduce the 48-hour-period in the proposal to 24 hours in the final 
rule. As exhibited during the last financial crisis, a firm can 
collapse precipitously meaning that time may be of the essence. The 
Board expects to be in close coordination with regulators in other 
jurisdictions if a firm with a covered IHC begins to exhibit losses or 
stress, meaning the 24-hour period should be a sufficient amount of 
time for the home country regulator to object to the conversion of the 
covered IHC's LTD into equity. These early communications between the 
Board and the home country regulators should address the concerns 
raised by commenters about ensuring that a home country regulator has 
enough time and notice to be able to play a meaningful role in a 
decision regarding the covered IHC.
    For all these reasons, the final rule requires internal debt, 
whether issued by resolution covered IHCs or non-resolution covered 
IHCs, to contain a contractual conversion feature. As under the 
proposal, the terms of the contractual conversion provision in the debt 
instrument would have to be approved by the Board.
    The conversion trigger in the final rule represents a compromise 
between the interests of home and host regulators. From the perspective 
of a host regulator, it is desirable to have the power to impose losses 
on eligible internal LTD quickly and easily upon a determination that 
the hosted subsidiary is in danger of default, in order to remove those 
losses from the host jurisdiction's financial system and thereby 
promote financial stability in the host jurisdiction. The conversion 
trigger advances this interest by giving the Board the power to do so 
upon a determination that the covered IHC is in danger of default where 
the home jurisdiction supervisory authority either consents or fails to 
object within 24 hours or where the home jurisdiction resolution 
authority has placed the parent foreign banking organization into 
resolution proceedings.
    At the same time, from the perspective of a home regulator, it is 
desirable that host regulators not impose losses on the top-tier parent 
entity, except where doing so is appropriate to prevent the failure of 
the hosted subsidiary, since doing so drains loss-absorbing capacity 
from the top-tier parent entity that may be needed to support other 
subsidiaries in the home jurisdiction or in another host jurisdiction. 
The conversion trigger requirement advances this interest by giving the 
home jurisdiction supervisory authority the right to object to the 
triggering decision within 24 hours, except where the home jurisdiction 
resolution authority has placed the parent foreign banking entity into 
resolution proceedings. The United States is home to numerous U.S. 
GSIBs and also hosts substantial operations of numerous foreign GSIBs, 
thereby making both considerations relevant to the Board's role as both 
a home and host country supervisor.
5. Haircuts
    Under the proposal, eligible internal LTD with a remaining maturity 
of between one and two years was subject to a 50 percent haircut for 
purposes of the internal LTD requirement, and eligible internal LTD 
with a remaining maturity of less than one year would not count toward 
the internal LTD requirement.
    A number of commenters recommended that the Board eliminate the 50 
percent haircut applicable to eligible debt securities with a remaining 
maturity between one and two years, to make the proposed requirements 
more consistent with the FSB standard. These commenters argued that the 
haircut is less appropriate in the context of internal LTD for covered 
IHCs because there would be no refinancing risk--i.e., risk that the 
covered IHC will lose market risk and be unable to replace the internal 
LTD as it approaches maturity since it can simply replace internal LTD 
with a new issuance of internal LTD to a foreign affiliate. These 
commenters argued that foreign parents and foreign affiliates can be 
expected to continue to roll over debt or extend credit to a covered 
IHC in a period of stress so that the covered IHC could continue to 
meet any applicable LTD requirements. One commenter also recommended 
that the Board reduce the haircut for internal debt with a remaining 
maturity of less than one year from 100 percent to 50 percent.
    The Board is not modifying the proposed rule in response to these 
comments. The Board has modified the proposal to change ``remaining 
maturity'' of the principal amount to the amount ``due to be paid.'' 
Like for covered BHCs, this clarification is intended to make clear 
that only the remaining principal amount due to be paid counts as 
eligible LTD. Under the final rule, eligible external LTD or internal 
LTD issued by covered IHCs that is due to be paid between one and two 
years is subject to a 50 percent haircut for purposes of the internal 
LTD requirement, and eligible LTD that is due to be paid in less than 
one year would not count toward the internal LTD requirement. These 
requirements are the same as those applicable to covered BHCs.
    The purpose of these requirements is to ensure the ability of LTD 
instruments to absorb losses. The rationale for the haircut is to 
incentivize a firm to have enough debt of sufficient maturity to avoid 
issuing debt in unfavorable market circumstances or in the event

[[Page 8298]]

that the covered IHC is experiencing financial difficulties. With 
respect to internal LTD in particular, based on the information 
provided by commenters it appears covered IHCs should be able to easily 
roll over their one-year or two-year debt to avoid haircuts if that is 
the manner in which they choose to fund themselves. Moreover, the 
argument that foreign parents will always be incentivized to rollover 
or refinance the debt of covered IHCs, even when a third party would 
not do so, is inconsistent with other comments provided by foreign 
GSIBs indicated that covered IHCs generally transact with their FBO 
parents on an arm's-length terms.
    The final rule applies the same treatment as the proposal to an 
internal debt instrument that could become subject to a put right in 
the future. Under the final rule, such instruments would be treated as 
due to be paid on the first day on which the put right could be 
exercised. The rationale for this approach is the same as the rationale 
for the identical provisions that apply to eligible external LTD issued 
by covered BHCs, as discussed above. No comments were received on this 
aspect of the proposal.

IV. Clean Holding Company Requirements (Sections 252.64 and 252.166 of 
the Final Rule)

    The proposed rule would have prohibited covered BHCs and covered 
IHCs (together, covered holding companies) from engaging in certain 
transactions that could impede the orderly resolution of a covered 
holding company or increase the risk that financial market contagion 
would result from the resolution of a covered holding company. 
Specifically, the proposal would have prohibited covered holding 
companies from having the following categories of outstanding 
liabilities: Third-party debt instruments with an original maturity of 
less than one year, including deposits (short-term debt); qualified 
financial contracts with a third party (third-party QFCs); guarantees 
of a subsidiary's liabilities if the covered holding company's 
insolvency or entry into a resolution proceeding (other than resolution 
under Title II of the FDI Act) would create default rights for a 
counterparty of the subsidiary (subsidiary guarantees with cross-
defaults rights); and liabilities that are guaranteed by a subsidiary 
of the covered holding company (upstream guarantees) or that are 
subject to rights that would allow a third party to offset its debt to 
a subsidiary upon the covered holding company's default on an 
obligation owed to the third party.
    Additionally, the proposal would have limited the total value of 
each covered BHC's non-TLAC-related third-party liabilities that are 
either pari passu with or subordinated to any eligible external TLAC to 
5 percent of the value of the covered BHC's eligible external TLAC (5 
percent cap). With respect to covered IHCs, the proposal would have 
prohibited covered IHCs from having any non-TLAC-related third-party 
liabilities that are pari passu with or subordinated to eligible 
internal LTD by requiring that eligible internal LTD be contractually 
subordinated to all third-party debt claims. Therefore, the proposed 
cap was not relevant to covered IHCs under the proposal.
    The Board received comments on the proposed prohibitions on short-
term debt, third-party QFCs, and subsidiary guarantees with cross-
defaults rights. The final rule generally adopts these requirements of 
the proposal with modifications to address comments received on the 
proposal.

A. Third-Party Short-Term Debt Instruments (Sections 252.64(a)(1) and 
252.166(a)(1) of the Final Rule)

    Like the proposal, the final rule prohibits covered holding 
companies from issuing debt instruments with an original maturity of 
less than one year to a third party. (Issuances to an affiliate of the 
covered holding company are permitted under the final rule.) Under the 
final rule, a liability has an original maturity of less than one year 
if it would provide the creditor with the option to receive repayment 
within one year of the creation of the liability, or if it would create 
such an option or an automatic obligation to pay upon the occurrence of 
an event that could occur within one year of the creation of the 
liability (other than an event related to the covered holding company's 
insolvency). The prohibition of the final rule would also cover short-
term and demand deposits at the covered holding company.\94\
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    \94\ For purposes of the final rule, deposits would include 
those that are captured in line item 11 of schedule PC of FR Y-9LP.
---------------------------------------------------------------------------

    One objective of SPOE resolution is to mitigate the risk of 
destabilizing funding runs. A funding run occurs when the short-term 
creditors of a financial company observe stress at that institution and 
seek to minimize their exposures to it by refusing to roll over the 
debts of the financial company. The resulting liquidity stress can 
hasten a company's failure, including by forcing the company to engage 
in asset fire sales to pay obligations due to short-term creditors. 
Because they reduce the value of similar assets held by other firms, 
asset fire sales can be a key channel for the propagation of stress 
throughout the financial system. The short-term creditors of a failing 
GSIB may also run on counterparties that are similar to a failing firm, 
thereby weakening those firms and forcing further fire sales. 
Similarly, certain depositors, who generally have the ability to demand 
their funds on short notice, present analogous funding issues.
    The final rule seeks to mitigate these risks in two complementary 
ways. First, although the operating subsidiaries of covered holding 
companies rely on short-term funding, in an SPOE resolution, the short-
term creditors of operating subsidiaries would not bear losses incurred 
by the subsidiaries because those losses would instead be transferred 
to the covered holding company and therefore borne by the external TLAC 
holders during the bankruptcy or resolution of the covered holding 
company. To the extent that market participants view SPOE resolution as 
workable, the subsidiaries' short-term creditors should have reduced 
incentives to run because their direct counterparty would not default 
in such a resolution. Second, the covered holding companies themselves 
would be prohibited from relying on short-term funding, reducing the 
run risk associated with the failure of such an entity. This goal is 
particularly important in light of the likely liquidity needs of a GSIB 
during SPOE resolution, because a short-term funding run on a covered 
holding company would drain liquidity that may be needed to support the 
group's operating subsidiaries.
    One commenter argued that the proposal was unnecessarily 
restrictive and could prevent covered BHCs from obtaining liquidity via 
temporary secured lending. The prohibition against short-term funding 
in the final rule applies to both secured and unsecured short-term 
borrowings. Although secured creditors are less likely to take losses 
in resolution than unsecured creditors, secured creditors may 
nonetheless be unwilling to maintain their exposure to a covered 
holding company that comes under stress. In particular, if the covered 
holding company were to enter into a resolution proceeding, the 
collateral used to secure the debt would be subject to a stay, 
preventing the creditor from liquidating it immediately. (Qualified 
financial contracts, which are not subject to a stay under the U.S. 
Bankruptcy Code but which present other potential difficulties for SPOE 
resolution, are discussed below.) The creditor would therefore face two 
risks: The risk that

[[Page 8299]]

the value of the collateral would decline before it could be liquidated 
and the liquidity risk attributable to the fact that the creditor would 
be stayed from liquidating the collateral for some time. Knowing this, 
secured short-term creditors may well decide to withdraw funding from a 
covered holding company that comes under stress.
    Additionally, many short-term lenders to GSIBs are themselves 
maturity-transforming financial firms that are vulnerable to runs (for 
instance, money market mutual funds). If such firms incur losses in 
stressful conditions, then they may be unable to meet their obligations 
to their own investors and counterparties, which would cause further 
losses throughout the financial system. Because SPOE resolution relies 
on imposing losses on the covered holding company's creditors while 
protecting the creditors and counterparties of its material operating 
subsidiaries, it is desirable that the holding company's creditors be 
limited to those entities that can be exposed to losses without 
materially affecting financial stability. The final rule would enhance 
the credibility of the SPOE approach by reducing these risks and 
simplifying the types of creditors and funding of a covered holding 
company in resolution.
    Finally, the prohibition of the final rule on short-term debt 
instruments would promote the resiliency of covered holding companies 
as well as their resolvability. As discussed above, reliance on short-
term funding creates the risk of a short-term funding run that could 
destabilize the covered holding company by draining its liquidity and 
forcing it to engage in capital-depleting asset fire sales. The 
increase in covered holding company resiliency yielded by the 
prohibition provides a secondary justification for the proposal.
    One commenter contended that the proposed prohibition on short-term 
debt might prohibit covered holding companies from obtaining secured 
liquidity from the FDIC and requested the final rule except from the 
prohibition secured liquidity provided by the FDIC during periods of 
market distress or to facilitate an SPOE resolution. The Board would 
not expect the prohibition under the final rule to interfere with the 
orderly resolution of covered holding companies under Title II or other 
forms of governmental liquidity support and therefore is adopting the 
prohibition as proposed.

B. Qualified Financial Contracts With Third Parties (Sections 
252.64(a)(3) and 252.166(a) of the Final Rule)

    Under the proposal, covered BHCs could have only entered into 
qualified financial contracts (QFCs) with their subsidiaries and 
covered IHCs could have only entered into QFCs with their affiliates. 
The proposal defined QFCs by reference to Title II of the Dodd-Frank 
Act, which defines QFCs to include securities contracts, commodities 
contracts, forward contracts, repurchase agreements, and swap 
agreements.\95\
---------------------------------------------------------------------------

    \95\ 12 U.S.C. 5390(c)(8)(D).
---------------------------------------------------------------------------

    One commenter expressed support for this aspect of the rule arguing 
that it is best for all holding company swap transactions to be 
executed with internal entities to minimize the impact of external 
market disruption and reduce complexity. Other commenters noted that 
the prohibition on third-party QFCs not only would bar a covered 
holding company from directly entering into a swap, repurchase 
agreement, or other QFC but also would prohibit the covered company 
from guaranteeing or otherwise providing a credit enhancement for such 
a contract between a subsidiary of the covered holding company and a 
third party. The proposed third-party QFC prohibition would have 
prohibited credit enhancements provided by covered holding companies 
because the definition of QFC in Title II of the Dodd-Frank Act, which 
the proposal incorporated by reference, includes credit enhancements of 
swap agreements, repurchase agreements, and the other financial 
contracts identified in the definition.
    Some commenters suggested that the Board permit covered BHCs to 
enter into QFCs with third parties if the QFCs were cleared through a 
central counterparty (CCP). This commenter argued that the risk-
minimizing requirements in place at CCPs (that is, requirements to post 
initial and variation margin and the maintenance of a guaranty or 
default fund) limit concerns over the termination of QFCs and related 
fire sales as well as any concern that the CCP counterparty would 
itself become insolvent and contribute to contagion risk.
    In response to these comments, the Board notes that, like 
counterparties to uncleared transactions, a CCP counterparty may 
respond to an institution's default by immediately liquidating the 
institution's collateral and seeking replacement trades with other 
dealers. Even less drastic actions, such as increasing collateral 
requirements, could have a significant impact on the liquidity of a 
failing clearing member. Therefore, cleared QFC activities have the 
potential to complicate the resolution of the covered holding company. 
Moreover, the potential imposition of losses on CCPs could itself cause 
contagion and fire sale risk. For these reasons, the final rule 
prohibits covered holding companies from entering into cleared QFCs 
with third parties.
    Certain commenters requested the final rule permit covered BHCs to 
enter QFCs for hedging purposes including to engage in risk-management 
of eligible long-term debt. These commenters pointed out that new 
margin requirements on swaps and security-based swaps limit the 
potential build-up of risk from third-party derivatives.
    In response, while QFCs entered into for hedging purposes are 
intended to reduce or mitigate risk of the underlying position being 
hedged, a material amount of third-party QFCs poses risk to resolution 
of covered holding companies regardless of the purpose for which they 
are entered. Moreover, the final rule does not restrict the covered 
holding company from entering into QFCs with its affiliates for hedging 
purposes nor does the final rule prohibit other affiliates from 
engaging in QFCs for hedging purposes and risk management.
    The failure of a large financial organization that is a party to a 
material amount of third-party QFCs could pose a substantial risk to 
the stability of the U.S. financial system. The restriction on third-
party QFCs would mitigate this threat to financial stability in two 
ways. First, covered holding companies' operating subsidiaries, which 
are parties to large quantities of QFCs, are expected to remain solvent 
under an SPOE resolution and not expected fail to meet any ordinary 
course payment or delivery obligations during a successful SPOE 
resolution. Therefore, assuming that the cross-default provisions of 
the QFCs engaged in by the operating subsidiaries of covered holding 
companies are appropriately structured, their QFC counterparties 
generally would have no contractual right to terminate or liquidate 
collateral on the basis of the covered holding company's entry into 
resolution proceedings.\96\

[[Page 8300]]

Second, the covered holding companies themselves would have no QFCs 
with external counterparties, and so their entry into resolution 
proceedings would not result in QFC terminations and related fire 
sales. The restriction on third-party QFCs would therefore materially 
diminish the fire sale risk and contagion effects associated with the 
failure of a covered holding company.
---------------------------------------------------------------------------

    \96\ See Restrictions on Qualified Financial Contracts of 
Systemically Important U.S. Banking Organizations and the U.S. 
Operations of Systemically Important Foreign Banking Organizations; 
Revisions to the Definition of Qualifying Master Netting Agreement 
and Related Definitions, 81 FR 29169 (May 11, 2016) (Board QFC Stay 
Proposal).
---------------------------------------------------------------------------

    For all these reasons, the final rule prohibits third-party QFC, 
provided that, as requested by commenters, the final rule clarifies 
that the prohibition on third-party QFCs does not include credit 
enhancements of QFCs. The clean holding company requirements of the 
final rule separately address the provision of credit support to QFCs 
(and other liabilities) by covered holding companies as described 
below.\97\
---------------------------------------------------------------------------

    \97\ The final rule adds a new definition of ``credit 
enhancement'' to mean enhancement means a qualified financial 
contract of the type set forth in section 210(c)(8)(D)(ii)(XII), 
(iii)(X), (iv)(V), (v)(VI), or (vi)(VI) of Title II of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 
5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or 
a credit enhancement that the FDIC determines by regulation is a 
qualified financial contract pursuant to section 210(c)(8)(D)(i) of 
Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
---------------------------------------------------------------------------

C. Guarantees That Are Subject to Cross-Defaults (Sections 252.64(a)(4) 
and 252.166(a)(3) of the Final Rule)

    The proposal would have prohibited a covered holding company from 
guaranteeing (including by providing credit support) any liability 
between a direct or indirect subsidiary of the covered holding company 
and an external counterparty if the covered holding company's 
insolvency or entry into resolution (other than resolution under Title 
II of the Dodd-Frank Act) would have directly or indirectly provided 
the subsidiary's counterparty with a default right.\98\
---------------------------------------------------------------------------

    \98\ The proposal defined the term ``default right'' broadly.
---------------------------------------------------------------------------

    The proposed prohibition was intended to complement other work that 
has been done or is underway to facilitate resolution through the stay 
of cross-defaults, including the International Swaps and Derivatives 
Association (ISDA) 2014 Resolution Stay Protocol.\99\ Commenters urged 
the Board to limit the scope of the prohibition on guarantees with 
cross defaults to those that are inconsistent with the Board's expected 
rule restricting default rights in QFCs or the ISDA Protocol. These 
commenters noted that the ISDA Protocol overrides cross-default rights 
in instruments subject to the ISDA Protocol with counterparties that 
have signed the ISDA Protocol if certain conditions are satisfied. 
These commenters argued that the prohibition in the proposed rule would 
be overbroad and unnecessary for any guarantees of instruments covered 
by the ISDA Protocol if the guaranteed subsidiary's counterparty had 
agreed to the ISDA Protocol. Some commenters argued that the exception 
to the guarantee prohibition should apply to all liabilities, even if 
the Board's expected stay rule only applied to QFCs. Some commenters 
also requested the Board delay imposing prohibitions on covered holding 
companies until regulations requiring stays of cross-default provisions 
in QFCs of banking organizations were finalized.
---------------------------------------------------------------------------

    \99\ This protocol was subsequently replaced by the ISDA 2015 
Universal Resolution Stay Protocol (ISDA Protocol). The ISDA 
Protocol and its annexes enable parties to amend the terms of their 
QFCs ``to contractually recognize the cross-border application of 
special resolution regimes applicable to certain financial companies 
until comprehensive statutory regimes are adopted and to support the 
resolution of certain financial companies under the United States 
Bankruptcy Code.'' Internal Swaps and Derivatives Association, ISDA 
2015 Universal Resolution Stay Protocol available at https://www2.isda.org/functional-areas/protocol-management/protocol/22.
---------------------------------------------------------------------------

    Commenters also argued that, even for instruments not subject to 
the same conditions as the ISDA Protocol, the prohibition in the 
proposal would be unnecessary in a resolution proceeding under Title II 
of the Dodd-Frank Act. Section 210(c)(16) of Title II gives the FDIC 
authority to override any cross-defaults if they are triggered by a 
covered BHC's insolvency or entry into resolution under Title II and 
certain conditions are satisfied.\100\
---------------------------------------------------------------------------

    \100\ These commenters noted that the prohibition may likewise 
become unnecessary in a U.S. bankruptcy proceed if certain bills 
pending in both Houses of Congress are passed that would amend the 
Bankruptcy Code to override such cross-defaults if certain 
conditions are satisfied.
---------------------------------------------------------------------------

    As noted, the proposed prohibition on subsidiary guarantees with 
cross-defaults rights was intended to complement other efforts to 
facilitate SPOE resolution through the stay of cross-defaults, 
including the ISDA Protocol. Since the TLAC proposal was issued, the 
Board and other banking agencies (OCC and FDIC) have proposed QFC stay 
rules, which require covered holding companies and their subsidiaries 
to restrict the default rights of their QFCs that are subject to the 
rule.\101\ The QFC stay proposal issued by the Board would permit, 
under limited circumstances, covered holding companies to provide 
guarantees of their subsidiaries' covered QFCs with default rights 
based, directly or indirectly, on the resolution of the covered holding 
company (or another affiliate). The comment period to the proposed QFC 
stay rule closed on August 5, 2016, and the Board is considering the 
comments thereto.
---------------------------------------------------------------------------

    \101\ Board QFC Stay Proposal; Mandatory Contractual Stay 
Requirements on Qualified Financial Contracts, 81 FR 55381 (Aug. 19, 
2016); Restrictions on Qualified Financial Contracts of Certain 
FDIC-Supervised Institutions; Revisions to the Definition of 
Qualifying Master Netting Agreement and Related Definitions, 81 FR 
74326 (Oct. 26, 2016).
---------------------------------------------------------------------------

    To ensure consistent treatment of financial contracts among the 
Board's regulations, the final rule prohibits subsidiary guarantees 
with cross-default rights, but exempts guarantees subject to a rule of 
the Board restricting such defaults rights or any similar rule of 
another U.S. federal banking agency.\102\ Although the Board has not 
adopted a rule regarding cross-default provisions of financial 
contracts (including those regarding the applicability of Title II of 
the Dodd-Frank Act), this final rule leaves open the possibility that 
in the future certain guarantees would be permitted to the extent they 
are authorized under a rule of the Board or another federal banking 
agency.\103\
---------------------------------------------------------------------------

    \102\ Liabilities would be considered ``subject to'' such a rule 
even if those liabilities were exempted from one or more of the 
requirements of the rule.
    \103\ Because QFCs subject to the final stay rule of the Board 
or other banking agencies are exempted from the prohibition, these 
QFCs would be required to conform to the stay rule on the time 
period specified therein.
---------------------------------------------------------------------------

    Commenters also requested the Board confirm that the prohibition 
would only apply prospectively. The text of the regulation has been 
amended to clarify that the prohibition applies only to new agreements.
    Finally, the scope of contracts subject to the exception will be 
co-extensive with the scope of contracts subject to the final stay 
rule, which the proposed stay rule specifically sought comment on, to 
align the Board's rulemakings with respect to these requirements. The 
prohibition under the final rule advances the key SPOE resolution goal 
of ensuring that a covered holding company's subsidiaries would 
continue to operate normally upon the covered holding company's entry 
into resolution. This goal would be jeopardized if the covered holding 
company's entry into resolution or insolvency operated as a default by 
the subsidiary and empowered the subsidiary's counterparties to take 
default-related actions, such as ceasing to perform under the contract 
or liquidating collateral. Were the counterparty to take such actions, 
the subsidiary could face liquidity, reputational, or other stress that 
could undermine its ability to continue operating normally, for 
instance by

[[Page 8301]]

prompting a short-term funding run on the subsidiary. As in the 
proposal, guarantees by covered holding companies of liabilities that 
are not subject to such cross-default rights are unaffected by the 
final rule.

D. Upstream Guarantees and Offset Rights (Sections 252.64(a)(2), (5) 
and 252.166(a)(2), (5) of the Final Rule)

    The proposed rule would have prohibited covered holding companies 
from having outstanding liabilities that are subject to a guarantee 
from any direct or indirect subsidiary of the holding company. SPOE 
resolution is premised on the assumption that holders of eligible 
external TLAC will bear all losses incurred by the issuing covered 
holding company on a consolidated basis while ensuring that its 
operating subsidiaries continue to operate normally. This arrangement 
could be undermined if a liability of the covered holding company is 
subject to an upstream guarantee, because the effect of such a 
guarantee is to expose the guaranteeing subsidiary (and, ultimately, 
its creditors) to the losses that would otherwise be imposed on the 
holding company's creditors. A prohibition on upstream guarantees would 
facilitate the SPOE resolution strategy by increasing the certainty 
that the covered holding company's eligible external TLAC holders will 
be exposed to loss ahead of the creditors of its subsidiaries.
    Upstream guarantees do not appear to be common among covered 
holding companies. Section 23A of the Federal Reserve Act already 
limits the ability of a U.S. insured depository institution to issue 
guarantees on behalf of its parent holding company.\104\ The principal 
effect of the prohibition would therefore be to prevent the future 
issuance of such guarantees by material non-bank subsidiaries. For 
these reasons, the final rule prohibits covered holding companies from 
having outstanding liabilities that are subject to a guarantee from any 
direct or indirect subsidiary.\105\
---------------------------------------------------------------------------

    \104\ Transactions subject to the quantitative limits of section 
23A of the Federal Reserve Act and Regulation W include guarantees 
issued by a bank on behalf of an affiliate. See 12 U.S.C. 
371c(b)(7); 12 CFR 223.3(h).
    \105\ In response to comments, the regulatory text of the 
prohibition has been modified slightly from the proposed to clarify 
the prohibition only applies prospectively.
---------------------------------------------------------------------------

    For analogous reasons, the final rule prohibits covered holding 
companies from issuing an instrument if the holder of the instrument 
has a contractual right to offset its liabilities, or the liabilities 
of an affiliate of the holder, to the covered holding company's 
subsidiaries against the covered holding company's liability under the 
instrument.\106\ The prohibition includes all such offset rights 
regardless of whether the right is provided in the instrument itself. 
Such offset rights are another device by which losses that are expected 
to flow to the covered holding company's external TLAC holders in an 
SPOE resolution could instead be imposed on operating subsidiaries and 
their creditors.
---------------------------------------------------------------------------

    \106\ The prohibition for covered IHCs also includes contractual 
rights to offset against the covered IHC because the covered IHC 
itself may not enter resolution or insolvency proceedings.
---------------------------------------------------------------------------

    One commenter requested confirmation that this prohibition does not 
affect the ability of a subsidiary of the covered BHC to provide an 
offset right to a counterparty where the covered BHC has guaranteed the 
subsidiary's underlying obligations. In response, the prohibition in 
the final rule does not extend to offset rights provided by a 
subsidiary to its counterparties. However, as noted by the commenter, 
the prohibition does prevent a covered holding company from 
guaranteeing an obligation of its subsidiary if the guarantee may be 
offset against obligations of a subsidiary of the covered holding 
company.

E. Cap on Certain Liabilities (Sections 252.64(b)-(c) and 252.166(b)-
(c) of the Final Rule)

    Cap on liabilities of Covered BHCs. As noted, the proposed rule 
would have limited the total value of certain other liabilities of 
covered BHCs to 5 percent of the value of the covered BHC's eligible 
external TLAC. The proposed cap would have applied to non-contingent, 
non-TLAC liabilities (that is, liabilities that were not eligible LTD) 
to third parties (i.e., persons that are not affiliates of the covered 
BHC) that would rank either pari passu with or junior to the covered 
BHC's eligible LTD in the priority scheme of either the U.S. Bankruptcy 
Code or Title II.\107\
---------------------------------------------------------------------------

    \107\ See 11 U.S.C. 507; 12 U.S.C. 5390(b).
---------------------------------------------------------------------------

    The final rule generally adopts these requirements as proposed. To 
provide additional flexibility to covered BHCs, and for consistency 
with the treatment of covered IHCs (described below), the final rule 
adds a new provision to make clear that in the event the covered bank 
holding company chooses to contractually subordinate all of its long-
term debt, there is no cap on the amount of its non-contingent 
liabilities.\108\
---------------------------------------------------------------------------

    \108\ As discussed above, covered BHCs have the option under the 
final rule to structurally subordinate or contractually subordinate 
their long-term debt.
---------------------------------------------------------------------------

    Commenters requested that certain liabilities that could be loss-
absorbing in an orderly resolution not count toward the 5 percent cap 
(i.e., not be ``unrelated liabilities'' under the proposal). Requests 
for exclusion included all equity, hybrid and long-term debt securities 
that can absorb losses without threatening financial stability. In 
particular, commenters urged that long term debt securities that 
contain any impermissible acceleration provisions, long-term debt 
securities governed by foreign law, long-term structured notes, and 
long term convertible debt securities and hybrid securities should not 
count as unrelated liabilities under the final rule. One commenter 
provided figures indicating that without these changes covered BHCs 
would have outstanding unrelated liabilities nearly 8 times over the 5 
percent cap on January 1, 2019. This commenter recommended the Board 
allow at least a one year cure period for inadvertent breaches of the 5 
percent cap.
    As noted, debt issued on or before December 31, 2016, with standard 
acceleration clauses or under foreign law counts as eligible LTD for 
purposes of the LTD requirements and TLAC requirements of the final 
rule. As such, this outstanding debt is not an ``unrelated liability'' 
subject to the 5 percent cap under the final rule. Other forms of debt 
that do not count as eligible LTD under the final rule would continue 
to be subject to the cap under the final rule including debt 
instruments with derivative-linked features (i.e., structured notes); 
external vendor and operating liabilities, such as for utilities, rent, 
fees for services, and obligations to employees; and liabilities 
arising other than through a contract (e.g., liabilities created by a 
court judgment).\109\ Covered BHCs will have until January 1, 2019, to 
conform these liabilities with the 5 percent cap.
---------------------------------------------------------------------------

    \109\ Commenters requested the Board clarify the scope of 
judgment liabilities that would be subject to the cap. In general, 
all administrative penalties and court judgments for which the 
covered BHC has completed any applicable appeals process would be 
included. The Board may address other questions regarding these 
kinds of liabilities based on the facts and circumstances of the 
liability.
---------------------------------------------------------------------------

    The liabilities subject to the cap fall into two groups: Those that 
could be subjected to losses alongside eligible external TLAC 
potentially without undermining SPOE resolution or financial stability, 
and those that potentially could not.
    The first group includes structured notes. The final rule defines 
structured notes so as to avoid capturing debt instruments merely 
because the debt instrument is non-dollar denominated

[[Page 8302]]

or pays interest based on the performance of a single index but to 
otherwise capture all debt instruments that have a principal amount, 
redemption amount, or stated maturity, that is subject to reduction 
based on the performance of any asset, entity, index, or embedded 
derivative or similar embedded feature.\110\ Such liabilities could be 
subjected to losses in resolution alongside eligible external TLAC, but 
the proposal would cap them in light of their greater complexity 
relative to the plain-vanilla debt that qualifies as external TLAC. In 
an orderly resolution of a covered BHC, debt instruments that will be 
subjected to losses should be able to be valued accurately and with 
minimal risk of dispute. Structured notes contain features that could 
make their valuation uncertain, volatile, or unduly complex. 
Additionally, structured notes are often customer products sold to 
purchasers who are primarily seeking exposure to a particular asset 
class and not seeking credit exposure to the covered BHC, and the need 
to impose losses on a financial institution's customers in resolution 
may create obstacles to orderly resolution. The cap on structured notes 
promotes the resolvability of covered BHCs by limiting their issuance 
of instruments that present these issues.\111\ The cap does not limit a 
covered BHC's ability to issue structured notes out of subsidiaries.
---------------------------------------------------------------------------

    \110\ In addition, the definition captures debt instruments that 
have more than one embedded derivative (or similar embedded feature) 
or are not treated as debt under generally accepted accounting 
principles.
    \111\ See also discussion of structured notes in section 
II.E.3.a.
---------------------------------------------------------------------------

    The second group includes, for example, vendor liabilities and 
obligations to employees. Successful resolution may require that the 
covered BHC continue to perform on certain of its unsecured liabilities 
in order to ensure that it is not cut off from vital services and 
resources. If these liabilities were pari passu with eligible external 
LTD, protecting these liabilities from loss would entail treating these 
liabilities differently from eligible external LTD of the same 
priority, which could present both operational and legal risk. The 
operational risk flows from the need to identify such liabilities 
quickly in the context of a complex resolution proceeding. The legal 
risk flows from the no-creditor-worse-off principle, according to which 
each creditor of a firm that enters resolution is entitled to recover 
at least as much as it would have if the firm had simply been 
liquidated under chapter 7 of the U.S. Bankruptcy Code.\112\ As 
creditors of a given priority receive special treatment (that is, as 
they are paid in full to ensure that the firm maintains access to vital 
external services and resources), the pool of resources available to 
other creditors of the same priority shrinks, making it more likely 
that those creditors will recover less than they would have in 
liquidation. Thus, imposing a cap on the total value of liabilities 
that are pari passu with or junior to eligible external TLAC but that 
might need to receive special treatment in resolution mitigates the no-
creditor-worse-off risk.
---------------------------------------------------------------------------

    \112\ See, e.g., 11 U.S.C. 1129(a)(7); 12 U.S.C. 5390(d)(2).
---------------------------------------------------------------------------

    As indicated in the preamble to the proposal to justify the 
calibration of the 5 percent cap, the Board collected data from U.S. 
GSIBs and determined that covered BHCs have outstanding certain third-
party operational liabilities that may rank pari passu with eligible 
LTD and that could not be eliminated without substantial cost and 
complexity. These liabilities include (among other things) tax 
payables, compensation payables, and accrued benefit plan obligations. 
For the eight current U.S. GSIBs, the value of these operating 
liabilities ranges from 1 percent to 4 percent of the sum of the 
covered BHC's equity and long-term debt, which provides a reasonable 
proxy for the amount of eligible external TLAC that a covered BHC would 
have had under the proposal.
    The 5 percent cap was calibrated to allow these existing 
operational liabilities to continue while limiting the growth of these 
and other liabilities at the covered BHC so that the problems discussed 
above may be avoided or mitigated. In particular, several covered BHCs 
may need to limit the value of structured notes that they have 
outstanding. This result would be consistent with the overall rationale 
for the clean holding company requirements in the final rule because, 
as noted, such structured notes are not liabilities for the performance 
of vital services (for example, vendor liabilities) and because their 
presence at the holding company could create undue complexity during 
resolution. For these reasons, the rationale for the calibration 
remains appropriate and the expanded scope of debt that counts as 
eligible LTD, discussed above, should address the comments regarding 
calibration.
    As in the proposal, the cap under the final rule does not apply to 
(1) eligible external TLAC; (2) instruments that were eligible external 
TLAC when issued and have ceased to be eligible (because their 
remaining maturity is less than one year) as long as the holder of the 
instrument does not have a currently exercisable put right; or (3) 
payables (such as dividend- or interest-related payables) that are 
associated with such liabilities. As described in the proposal, the cap 
on other third-party liabilities is intended to limit the amount of 
third party liabilities that should not be subjected to losses as part 
of an orderly resolution (e.g., vendor liabilities) relative to the 
amount of liabilities that both could be subjected to losses (e.g., 
LTD) and is pari passu with the liabilities that should not be 
subjected to losses. Imposing losses only on certain creditors within 
the same priority shrinks the pool of resources available to other 
creditors of the same priority and therefore makes it more likely that 
the distribution would conflict with the no-creditor-worse-off 
requirements of Title II of the Dodd-Frank Act and Chapter 11 of the 
U.S. Bankruptcy Code. The final rule also clarifies that if a covered 
BHC chooses to contractually subordinate all of its long-term debt, the 
cap on unrelated liabilities does not apply.
    Cap on Liabilities of Covered IHCs. The proposal would not have 
applied the 5 percent cap to covered IHC's because internal LTD would 
have been contractually subordinated to all third-party liabilities of 
the covered IHC. Therefore, treating internal LTD differently from 
vendor liabilities and other third-party liabilities that had the 
potential to be important to a holding company following resolution 
would not have violated the no-creditor-worse-off principle. However, 
as described above, the final rule provides covered IHCs with the 
option to choose structural subordination or contractual subordination 
of external and internal long-term debt issued by covered IHCs, as 
requested by many commenters. The commenters that requested structural 
subordination generally recognized that covered IHCs that are permitted 
to adopt structural subordination would need to be subject to a cap in 
a manner similar to covered BHCs.
    The final rule adopts different caps for non-resolution covered 
IHCs and resolution covered IHCs because resolution covered IHCs are 
able to issue eligible debt externally to third-parties under the final 
rule whereas non-resolution covered IHCs must issue eligible long-term 
debt internally to certain foreign affiliates. For non-resolution 
covered IHCs, the final rule provides that the aggregate amount of 
unrelated liabilities that a non-resolution covered IHC owes to persons 
that are not affiliates of the covered IHC

[[Page 8303]]

may not exceed 5 percent of the covered IHC's total loss-absorbing 
capacity amount. The cap for non-resolution covered IHCs thus functions 
as a cap on unrelated liabilities to non-affiliates like the cap for 
covered BHCs. Some non-resolution covered IHCs may have external debt 
outstanding that would not count as eligible LTD (since these firms 
must issue internal LTD), the amount of which could be well above the 5 
percent cap. Non-resolution covered IHCs have two years to conform any 
external debt issuance to the requirements of the final rule. 
Contractual subordination is also available as another possible 
alternative for non-resolution covered IHCs to conform to the final 
rule.
    The 5 percent cap for non-resolution covered IHCs does not include 
liabilities owed to foreign affiliates because the eligible long-term 
debt held by the parent FBO generally should convert to equity, either 
through actions of the parent or the Board. Therefore, in contrast to 
resolution covered IHCs (discussed below), concern about the short-term 
liabilities owed to the FBO parent or other affiliated parties is 
minimal.
    In the case of resolution covered IHCs, the final rule adopts a cap 
equal to 5 percent of the covered IHC's total loss-absorbing capacity 
on the aggregate amount of unrelated liabilities that a resolution 
covered IHC may owe to any person other than a subsidiary of the 
covered IHC. The cap for resolution covered IHCs applies to unrelated 
liabilities owed to parents and sister affiliates, as well as third 
parties, because these IHCs have the option to issue external LTD. 
Thus, these firms may owe significant amounts of short-term debt or 
other unrelated liabilities to the FBO parent or another affiliate that 
would remain outstanding when the IHC enters resolution, because such 
entities are not anticipated to support the IHC under the resolution 
plan of the parent FBO.\113\ The cap on unrelated liabilities owed to 
parents and sister affiliates limits the amount of these liabilities 
that would remain outstanding upon the conversion of long-term debt to 
equity. Moreover, resolution covered IHCs could choose to issue all 
eligible LTD, whether internal or external, as contractually 
subordinated debt to avoid the cap altogether.
---------------------------------------------------------------------------

    \113\ This inclusion of liabilities owed to parents of the 
resolution covered IHC also is on par with the cap on liabilities of 
covered BHCs, which would include liabilities held by shareholders 
of the covered BHC.
---------------------------------------------------------------------------

    As with covered BHCs, debt issued prior to December 31, 2016 with 
standard acceleration clauses or issued under foreign law counts as 
eligible LTD for purposes of the LTD requirements and TLAC requirements 
of the final rule. As such, this outstanding debt would not be included 
as an unrelated liability subject to the cap under the final rule.

F. Disclosure Requirements (Sections 252.65 and 252.167 of the Final 
Rule)

    The final rule, like the proposal, requires each covered BHC to 
publicly disclose a description of the financial consequences to 
unsecured debtholders of the covered BHC's entry into a resolution 
proceeding in which the covered BHC is the only entity that would enter 
resolution. In addition, the final rule adopts a new section requiring 
resolution covered IHCs that issue external debt to be subject to the 
same disclosure requirement applicable to covered BHCs.
    Consistent with the disclosure requirements imposed by the Board's 
capital rules, the covered BHC or covered IHC is permitted to make this 
disclosure on its Web site or in more than one public financial report 
or other public regulatory report, provided that the covered BHC or 
covered IHC publicly provides a summary table specifically indicating 
the location(s) of this disclosure.\114\ Because the disclosure 
requirement is primarily intended to inform holders of a covered BHC's 
or covered IHCs' eligible external LTD that they are subject to loss 
ahead of other creditors of the covered BHC or covered IHC or its 
subsidiaries, the proposal would also require the covered BHC or 
covered IHC to disclose the required information in the offering 
documents for all of its eligible external LTD.
---------------------------------------------------------------------------

    \114\ See 12 CFR 217.62(a), 12 CFR 217.172(c)(1).
---------------------------------------------------------------------------

    A few commenters argued that comprehensive and clear disclosure is 
essential to ensure that potential investors are fully informed of the 
risks of the long-term debt and aware of potential losses. These 
commenters contended that the risks of misleading investors without 
such meaningful disclosure could lead to investors grossly underpricing 
the risk of these new instruments. Certain commenters recommended that 
the Board prescribe text for a specific warning about the nature of the 
debt and only allow the debt to be sold to qualified, sophisticated 
investors. One commenter, for example, urged the Board to mandate 
comprehensive, plain English disclosures to accompany this new debt 
with a front page warning in large red lettering to make clear in one 
sentence ``If the bank fails, your full investment is subject to a 
complete loss.'' A few commenters also suggested that the contract 
should describe expressly how and when the regulators could or would 
convert the debt, including the possible future scenarios where this 
debt might become convertible in Title I bankruptcy. One commenter 
argued that unless the Board specifies the circumstances and mechanism 
by which this unsecured debt will absorb losses, the mere disclosure of 
an ``expectation'' that this debt will absorb losses will be 
insufficient to force holders of the debt to take this expectation 
seriously and price for risk accordingly. Another commenter recommended 
that the required disclosure should include a list of liabilities of 
both eligible and non-eligible TLAC, and its relative position in the 
creditor hierarchy.
    The Board has long supported meaningful public disclosure by 
banking organizations, with the objective of improving market 
discipline and encouraging sound risk-management practices.\115\ By 
helping holders of eligible external LTD and other unsecured debt 
issued by a covered BHC or covered IHC to understand that they will be 
allowed to suffer losses in a resolution and generally will absorb 
losses ahead of the creditors of the covered BHC or covered IHC's 
subsidiaries, the disclosure requirement of the final rule should 
encourage potential investors to carefully assess the covered BHC or 
covered IHC's risk profile when making investment decisions. This 
careful assessment should lead to an improvement in the market pricing 
of the unsecured debt of covered BHCs and covered IHCs, including 
eligible external LTD, providing supervisors and market participants 
with more accurate market signals about the financial condition and 
risk profile of the covered BHC or covered IHC. In response to 
comments, the final rule does not specify the exact circumstances under 
which eligible LTD will convert to equity--such a provision would be 
inconsistent with the intent and purpose of the final rule that such 
debt be available to absorb losses in a flexible manner. However, the 
final rule states that the Board may order that internal debt be 
converted into equity only if the Board determines that the covered IHC 
is in default or danger of default.
---------------------------------------------------------------------------

    \115\ See, e.g., 78 FR 62018, 62128-29 (October 11, 2013).

---------------------------------------------------------------------------

[[Page 8304]]

V. Regulatory Capital Deduction for Investments in the Unsecured Debt 
of Covered BHCs

    The final rule does not include the proposal's requirement for a 
Board-regulated institution to deduct from its regulatory capital the 
amount of any investment in, or exposure to, unsecured debt issued by a 
covered BHC, including unsecured debt instruments that do not qualify 
as eligible external LTD. A number of comments urged the Board to, 
among other things, increase or have separate thresholds for deductions 
of unsecured debt holdings, allow for deductions of the unsecured debt 
holdings to be applied to outstanding eligible external LTD instead of 
regulatory capital, and recognize an exemption for market-making 
activity in the debt instruments. Certain commenters recommended that 
the Board postpone the effective date of these requirements.
    The Board is considering these comments, as well as a recent 
standard related to the regulatory capital treatment of TLAC holdings 
that was issued by the BCBS.\116\ The Board intends to work with the 
OCC and FDIC towards a proposed interagency approach regarding the 
regulatory capital treatment of debt instruments issued by covered 
BHCs.
---------------------------------------------------------------------------

    \116\ Basel Committee on Banking Supervision, Standard TLAC 
Holdings Amendments to the Basel III standard on the definition of 
capital (October 2016), available at: https://www.bis.org/bcbs/publ/d387.pdf.
---------------------------------------------------------------------------

VI. Transition Periods

    Under the proposal, the Board generally would have required covered 
BHCs to achieve compliance with the rule as of January 1, 2019. 
However, the proposal would have phased in the risk-weighted assets 
component of the external TLAC requirement in two stages: 16 percent 
effective January 1, 2019 and 18 percent effective January 1, 2022.
    Similarly, under the proposal, the Board generally would have 
required covered IHCs to achieve compliance as of January 1, 2019. 
However, the proposal would have phased in the risk-weighted assets 
component of the internal TLAC requirement applicable to resolution 
covered IHCs in the same manner as for covered BHCs: 16 percent 
effective January 1, 2019 and 18 percent effective January 1, 2022.
    Certain commenters requested that the leverage component of TLAC be 
subject to a phase-in until January 1, 2022, like the risk-weighted 
asset component under the proposal and consistent with the FSB 
standard. Other commenters urged the Board to adopt a phase-in period 
for LTD in the final rule or delay other aspects of the proposal.
    Other than the certification regarding resolution strategy for FBO 
GSIBs that is due on June 30, 2017, the requirements of the final rule 
will become effective on January 1, 2019, which will give firms 
approximately two years from the date of the issuance of the final rule 
to comply. In this respect, the final rule eliminates the proposed 
January 1, 2022, phase-in for the risk-weighted asset component of the 
TLAC requirements. The Board has monitored the shortfalls of covered 
firms as described above and noted significant declines in the amount 
of additional capital and long-term debt necessary to meet the 
requirements of the final rule. Based on available information and 
given the relatively small estimated shortfalls, requiring full 
compliance by 2019 should have only a modest incremental impact. In 
particular, the phase-in period was provided in part to allow firms 
additional time to adjust their capital structures and issue additional 
long-term debt. Furthermore, the final rule will grandfather a 
significant portion of outstanding long-term debt that would not 
otherwise qualify as eligible internal or external LTD, which 
significantly reduces the additional time necessary for firms to come 
into full compliance with the rule.
    Consistent with the proposal, firms that become covered BHCs after 
the date on which the final rule is issued will be required to comply 
with it on the later of three years after becoming covered BHCs and the 
effective date applicable to firms that are covered BHCs as of the date 
on which the final rule is issued.
    Also consistent with the proposal, an intermediate holding company 
controlled by a foreign banking organization becomes subject to the 
requirements of the final rule on the later of January 1, 2019, and 
three years from the date on which the foreign banking organization 
becomes a foreign GSIB and the foreign banking organization is required 
to establish an intermediate holding company pursuant to section 
252.153 of Regulation YY.

VII. Consideration of Domestic Internal TLAC Requirements and Public 
Reporting Requirements for Eligible Internal TLAC and LTD

    In the proposed rule, the Board indicated that it intends to 
propose for public comment a requirement that covered BHCs and covered 
IHCs report publicly their amounts of TLAC and LTD on a regular basis. 
The Board also indicated its consideration of imposing domestic 
internal TLAC requirements between certain holding companies and their 
subsidiaries to ensure firms have in place adequate mechanisms for 
transferring severe losses up to their operating subsidiaries from the 
holding company. Such requirements would complement this final rule and 
enhance the prospects for a successful SPOE resolution of a covered BHC 
or of the parent foreign GSIB of a covered IHC. The Board received a 
number of comments on potential public reporting and eligible internal 
TLAC and LTD requirements. If the Board determines that it would be 
appropriate to propose public reporting requirements related to TLAC 
and LTD, or domestic internal TLAC requirements, the Board will invite 
public comment at that time.

VIII. Regulatory Analysis

A. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501 through 3521). The Board 
reviewed the final rule under the authority delegated to the Board by 
OMB. The disclosure requirements are found in Sec.  252.65 and Sec.  
252.167 and the reporting requirements are found in Sec.  252.153(b)(5) 
and 252.164. These information collection requirements would implement 
section 165 of the Dodd Frank Act, as described in the Abstract below. 
In accordance with the requirements of the PRA, the Board 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 OMB control number 
for this collection is 7100-0350.
    The final rule would revise the Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY) (Reg YY; OMB No. 7100-0350). In addition, as permitted 
by the PRA, the Board is extending for three years, with revision, the 
Reporting, Recordkeeping, and Disclosure Requirements Associated with 
Enhanced Prudential Standards (Regulation YY) (Reg YY; OMB No. 7100-
0350). The Board received no comments on the PRA.
    The Board has a continuing interest in the public's opinions of 
collections of information. At any time, commenters may submit comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden to the 
ADDRESSES section. All comments will become a matter of public record.

[[Page 8305]]

A copy of the comments may also be submitted to the OMB desk officer: 
By mail to U.S. Office of Management and Budget, 725 17th Street NW., 
#10235, Washington, DC 20503 or by facsimile to 202-395-5806, 
Attention, Federal Reserve Desk Officer.
Revision, With Extension, of the Following Information Collection
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY).
    Agency Form Number: Reg YY.
    OMB Control Number: 7100-0350.
    Frequency of Response: Annual, semiannual, quarterly, one-time, and 
on occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks, U.S. bank holding companies, 
savings and loan holding companies, nonbank financial companies, 
foreign banking organizations, U.S. intermediate holding companies, 
foreign saving and loan holding companies, and foreign nonbank 
financial companies supervised by the Board.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
implement enhanced prudential standards for bank holding companies with 
total consolidated assets of $50 billion or more, including global 
systemically important foreign banking organizations with $50 billion 
or more in U.S. non-branch assets. Section 165 of the Dodd-Frank Act 
also permits the Board to establish such other prudential standards for 
such banking organizations as the Board determines are appropriate.
Disclosure Requirements
    Section 252.65 of the final rule would require a U.S. global 
systemically important BHC to publicly disclose a description of the 
financial consequences to unsecured debtholders of the global 
systemically important BHC entering into a resolution proceeding in 
which the global systemically important BHC is the only entity that 
would be subject to the resolution proceeding. A global systemically 
important BHC must provide the disclosure required of this section: (1) 
In the offering documents for all of its eligible debt securities; and 
(2) either on the global systemically important BHC's Web site, or in 
more than one public financial report or other regulatory reports, 
provided that the global systemically important BHC publicly provides a 
summary table specifically indicating the location(s) of this 
disclosure. Section 252.167 of the final rule would impose these 
requirements on certain intermediate holding companies of non-U.S. 
global systemically important BHC that issue long term debt to third 
parties.
Reporting Requirements
    Section 252.153(b)(5) of the final rule would require each top-tier 
foreign banking organization that controls a U.S. intermediate holding 
company to submit to the Board by January 1 of each calendar year 
through the U.S. intermediate holding company: (1) Notice of whether 
the home country supervisor (or other appropriate home country 
regulatory authority) of the top-tier foreign banking organization of 
the U.S. intermediate holding company has adopted standards consistent 
with the BCBS assessment methodology for identifying global 
systemically important banking organizations; and (2) notice of whether 
the top-tier foreign banking organization prepares or reports the 
indicators used by the BCBS assessment methodology to identify a 
banking organization as a global systemically important banking 
organization and, if it does, whether the top-tier foreign banking 
organization has determined that it has the characteristics of a global 
systemically important banking organization under the BCBS assessment 
methodology.
    Section 252.164 of the final rule would require each top-tier 
global systemically important foreign banking organization with U.S. 
non-branch assets that equal or exceed $50 billion to submit to the 
Board a certification indicating whether the planned resolution 
strategy of the top-tier foreign banking organization involves the U.S. 
intermediate holding company or its subsidiaries entering resolution, 
receivership, insolvency, or similar proceedings in the United States. 
The rule requires the top-tier foreign banking organization to update 
this certification when its resolution strategy changes.
Estimated Paperwork Burden for Proposed Revisions
    Estimated Number of Respondents:
Disclosure Burden
    Section 252.65--8 respondents.
    Section 252.167--3 respondents.
Reporting Burden
    Section 252.153(b)(5)--15 respondents.
    Section 252.164--8 respondents.

Estimated Burden per Response:

Disclosure Burden
    Section 252.65--1 hour (annual), 5 hours (one-time burden).
    Section 252.167--1 hour (annual), 5 hours (one-time burden).
Reporting Burden
    Section 252.153(b)(5)--10 hours (annual).
    Section 252.164--10 hours.
    Total estimated one-time burden: 55 hours.
    Current estimated annual burden for Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY): 118,546 hours.
    Proposed revisions estimated annual burden: 241 hours.
    Total estimated annual burden: 118,842 hours.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that an agency prepare and make available an initial 
regulatory flexibility analysis in connection with a notice of proposed 
rulemaking.
    The Board solicited public comment on this rule in a notice of 
proposed rulemaking \117\ and has since considered the potential impact 
of this rule on small entities in accordance with section 604 of the 
RFA. Based on the Board's analysis, and for the reasons stated below, 
the Board believes the final rule will not have a significant economic 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \117\ 80 FR 74,926 (Nov. 30, 2015).
---------------------------------------------------------------------------

    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 assets of $550 million or less 
(small banking organizations).\118\ As of June 30, 2016, there were 
approximately 3,203 top-tier small bank holding companies. As the 
threshold for forming an intermediate holding company in the United 
States is $50 billion in total U.S. non-branch assets, there would be 
no small covered IHCs.
---------------------------------------------------------------------------

    \118\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

1. Statement of the Need for, and Objectives of the Final Rule
    As discussed in the SUPPLEMENTARY INFORMATION, the final rule is 
designed to improve the resolvability of covered BHCs and covered IHCs 
by requiring

[[Page 8306]]

such institutions maintain outstanding a minimum amount of loss-
absorbing instruments, including a minimum amount of unsecured long-
term debt, and imposing restrictions on the corporate practices and 
liabilities of such organizations. The Board is not finalizing at this 
time the provisions of the proposed rule that would have required small 
state member banks and certain SLHCs and BHCS to make deductions from 
regulatory capital for investments in eligible external long-term debt 
of covered BHCs. As such, the final rule will only apply to entities 
that are not small entities as further explained below.
2. Summary of the Significant Issues Raised by Public Comment on the 
Board's Initial Analysis, the Board's Assessment of Any Such Issues, 
and a Result of Such Comments
    The Board did not receive a comments to the initial regulatory 
flexibility analysis relating to the elements of the proposal that are 
being finalized at this time. The final rule does not impact small 
entities as described below.
3. Small Entities Affected by the Final Rule and Compliance 
Requirements
    The provisions of the final rule will apply to a top-tier bank 
holding company domiciled in the United States with $50 billion or more 
in total consolidated assets and has been identified as a GSIB, and to 
a U.S. intermediate holding company of a foreign GSIB. Bank holding 
companies and U.S. intermediate holding companies of foreign GSIBs that 
are subject to the proposed rule therefore substantially exceed the 
$550 million asset threshold at which a banking entity would qualify as 
a small banking organization.
4. Significant Alternatives to the Final Rule
    In light of the foregoing, the Board does not believe that this 
final rule will have a significant negative economic impact on any 
small entities and therefore believes that there are no significant 
alternatives to the final rule that would reduce the impact on small 
entities.

C. Invitation for Comments on Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act of 1999 requires the 
Federal banking agencies to use plain language in all proposed and 
final rules published after January 1, 2000. The Board received no 
comments on these matters and believes that the final rule is written 
plainly and clearly.

List of Subjects in 12 CFR Part 252

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

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, the Board 
amends part 252 of chapter II of title 12 of the Code of Federal 
Regulations as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
1. The authority citation for part 252 is revised to read as follows:

    Authority:  12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828, 
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367, 
5368, 5371.


0
2. In Sec.  252.2:
0
a. Redesignate paragraphs (t) through (z) as paragraphs (bb) through 
(hh), respectively;
0
b. Redesignate paragraphs (n) through (s) as paragraphs (u) through 
(z), respectively;
0
c. Redesignate paragraphs (i) through (m) as paragraphs (j) through 
(n), respectively;
0
d. Add new paragraphs (i) and (o) through (t), and add paragraph (aa).
    The additions read as follows:


Sec.  252.2  Definitions.

* * * * *
    (i) Credit enhancement means a qualified financial contract of the 
type set forth in section 210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), 
(v)(VI), or (vi)(VI) of Title II of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)(ii)(XII), 
(iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or a credit enhancement that 
the Federal Deposit Insurance Corporation determines by regulation is a 
qualified financial contract pursuant to section 210(c)(8)(D)(i) of 
Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
* * * * *
    (o) Global methodology means the assessment methodology and the 
higher loss absorbency requirement for global systemically important 
banks issued by the Basel Committee on Banking Supervision, as updated 
from time to time.
    (p) Global systemically important banking organization means a 
global systemically important bank, as such term is defined in the 
global methodology.
    (q) Global systemically important foreign banking organization 
means a top-tier foreign banking organization that is identified as a 
global systemically important foreign banking organization under Sec.  
252.153(b)(4).
    (r) Home country, with respect to a foreign banking organization, 
means the country in which the foreign banking organization is 
chartered or incorporated.
    (s) Home country resolution authority, with respect to a foreign 
banking organization, means the governmental entity or entities that 
under the laws of the foreign banking organization's home county has 
responsibility for the resolution of the top-tier foreign banking 
organization.
    (t) Home country supervisor, with respect to a foreign banking 
organization, means the governmental entity or entities that under the 
laws of the foreign banking organization's home county has 
responsibility for the supervision and regulation of the top-tier 
foreign banking organization.
* * * * *
    (aa) Top-tier foreign banking organization, with respect to a 
foreign bank, means the top-tier foreign banking organization or, 
alternatively, a subsidiary of the top-tier foreign banking 
organization designated by the Board.
* * * * *

0
3. Add subpart G to read as follows:

Subpart G--External Long-term Debt Requirement, External Total 
Loss-absorbing Capacity Requirement and Buffer, and Restrictions on 
Corporate Practices for U.S. Global Systemically Important Banking 
Organizations

Sec.
252.60 Applicability.
252.61 Definitions.
252.62 External long-term debt requirement.
252.63 External total loss-absorbing capacity requirement and 
buffer.
252.64 Restrictions on corporate practices of U.S. global 
systemically important banking organizations.
252.65 Disclosure requirements.


Sec.  252.60  Applicability.

    (a) General applicability. This subpart applies to any U.S. bank 
holding company that is identified as a global systemically important 
BHC.
    (b) Initial applicability. A global systemically important BHC 
shall be subject to the requirements of this subpart beginning on the 
later of:
    (1) January 1, 2019; or
    (2) 1095 days (three years) after the date on which the company 
becomes a global systemically important BHC.

[[Page 8307]]

Sec.  252.61  Definitions.

    For purposes of this subpart:
    Additional tier 1 capital has the same meaning as in 12 CFR 
217.20(c).
    Common equity tier 1 capital has the same meaning as in 12 CFR 
217.20(b).
    Common equity tier 1 capital ratio has the same meaning as in 12 
CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
    Common equity tier 1 minority interest has the same meaning as in 
12 CFR 217.2.
    Default right (1) Means any:
    (i) Right of a party, whether contractual or otherwise (including 
rights incorporated by reference to any other contract, agreement or 
document, and rights afforded by statute, civil code, regulation and 
common law), to liquidate, terminate, cancel, rescind, or accelerate 
the agreement or transactions thereunder, set off or net amounts owing 
in respect thereto (except rights related to same-day payment netting), 
exercise remedies in respect of collateral or other credit support or 
property related thereto (including the purchase and sale of property), 
demand payment or delivery thereunder or in respect thereof (other than 
a right or operation of a contractual provision arising solely from a 
change in the value of collateral or margin or a change in the amount 
of an economic exposure), suspend, delay or defer payment or 
performance thereunder, modify the obligations of a party thereunder or 
any similar rights; and
    (ii) Right or contractual provision that alters the amount of 
collateral or margin that must be provided with respect to an exposure 
thereunder, including by altering any initial amount, threshold amount, 
variation margin, minimum transfer amount, the margin value of 
collateral or any similar amount, that entitles a party to demand the 
return of any collateral or margin transferred by it to the other party 
or a custodian or that modifies a transferee's right to reuse 
collateral or margin (if such right previously existed), or any similar 
rights, in each case, other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure; and
    (2) Does not include any right under a contract that allows a party 
to terminate the contract on demand or at its option at a specified 
time, or from time to time, without the need to show cause.
    Discretionary bonus payment has the same meaning as under 12 CFR 
217.2.
    Distribution has the same meaning as under 12 CFR 217.2.
    Global systemically important BHC has the same meaning as in 12 CFR 
217.2.
    Eligible debt security means, with respect to a global systemically 
important BHC:
    (1) A debt instrument that:
    (i) Is paid in, and issued by the global systemically important 
BHC;
    (ii) Is not secured, not guaranteed by the global systemically 
important BHC or a subsidiary of the global systemically important BHC, 
and is not subject to any other arrangement that legally or 
economically enhances the seniority of the instrument;
    (iii) Has a maturity of greater than or equal to 365 days (one 
year) from the date of issuance;
    (iv) Is governed by the laws of the United States or any State 
thereof;
    (v) Does not provide the holder of the instrument a contractual 
right to accelerate payment of principal or interest on the instrument, 
except a right that is exercisable on one or more dates that are 
specified in the instrument or in the event of:
    (A) A receivership, insolvency, liquidation, or similar proceeding 
of the global systemically important BHC; or
    (B) A failure of the global systemically important BHC to pay 
principal or interest on the instrument when due and payable that 
continues for 30 days or more;
    (vi) Does not have a credit-sensitive feature, such as an interest 
rate that is reset periodically based in whole or in part on the global 
systemically important BHC's credit quality, but may have an interest 
rate that is adjusted periodically independent of the global 
systemically important BHC's credit quality, in relation to general 
market interest rates or similar adjustments;
    (vii) Is not a structured note; and
    (viii) Does not provide that the instrument may be converted into 
or exchanged for equity of the global systemically important BHC; and
    (2) A debt instrument issued prior to December 31, 2016 that:
    (i) Is paid in, and issued by the global systemically important 
BHC;
    (ii) Is not secured, not guaranteed by the global systemically 
important BHC or a subsidiary of the global systemically important BHC, 
and is not subject to any other arrangement that legally or 
economically enhances the seniority of the instrument;
    (iii) Has a maturity of greater than or equal to 365 days (one 
year) from the date of issuance;
    (iv) Does not have a credit-sensitive feature, such as an interest 
rate that is reset periodically based in whole or in part on the global 
systemically important BHC's credit quality, but may have an interest 
rate that is adjusted periodically independent of the global 
systemically important BHC's credit quality, in relation to general 
market interest rates or similar adjustments;
    (v) Is not a structured note; and
    (vi) Does not provide that the instrument may be converted into or 
exchanged for equity of the global systemically important BHC.
    External TLAC buffer means, with respect to a global systemically 
important BHC, the sum of 2.5 percent, any applicable countercyclical 
capital buffer under 12 CFR 217.11(b) (expressed as a percentage), and 
the global systemically important BHC's method 1 capital surcharge.
    GAAP means generally accepted accounting principles as used in the 
United States.
    GSIB surcharge has the same meaning as in 12 CFR 217.2.
    Method 1 capital surcharge means, with respect to a global 
systemically important BHC, the most recent method 1 capital surcharge 
(expressed as a percentage) the global systemically important BHC was 
required to calculate pursuant to subpart H of Regulation Q (12 CFR 
217.400 through 217.406).
    Outstanding eligible external long-term debt amount is defined in 
Sec.  252.62(b).
    Person has the same meaning as in 12 CFR 225.2.
    Qualified financial contract has the same meaning as in section 
210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
    Structured note means a debt instrument that:
    (1) Has a principal amount, redemption amount, or stated maturity 
that is subject to reduction based on the performance of any asset, 
entity, index, or embedded derivative or similar embedded feature;
    (2) Has an embedded derivative or similar embedded feature that is 
linked to one or more equity securities, commodities, assets, or 
entities;
    (3) Does not specify a minimum principal amount that becomes due 
upon acceleration or early termination; or
    (4) Is not classified as debt under GAAP, provided that an 
instrument is not a structured note solely because it is one or both of 
the following:
    (i) An instrument that is not denominated in U.S. dollars; or
    (ii) An instrument where interest payments are based on an interest 
rate index.
    Supplementary leverage ratio has the same meaning as in 12 CFR 
217.10(c)(4).

[[Page 8308]]

    Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
    Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
    Total leverage exposure has the same meaning as in 12 CFR 
217.10(c)(4)(ii).
    Total risk-weighted assets means the greater of total risk-weighted 
assets as calculated under 12 CFR part 217, subpart D (the standardized 
approach) or 12 CFR part 217, subpart E (the internal ratings-based and 
advanced measurement approaches).


Sec.  252.62  External long-term debt requirement.

    (a) External long-term debt requirement. Except as provided under 
paragraph (c) of this section, a global systemically important BHC must 
maintain an outstanding eligible external long-term debt amount that is 
no less than the amount equal to the greater of:
    (1) The global systemically important BHC's total risk-weighted 
assets multiplied by the sum of 6 percent plus the global systemically 
important BHC's GSIB surcharge (expressed as a percentage); and
    (2) 4.5 percent of the global systemically important BHC's total 
leverage exposure.
    (b) Outstanding eligible external long-term debt amount. (1) A 
global systemically important BHC's outstanding eligible external long-
term debt amount is the sum of:
    (i) One hundred (100) percent of the amount due to be paid of 
unpaid principal of the outstanding eligible debt securities issued by 
the global systemically important BHC in greater than or equal to 730 
days (two years);
    (ii) Fifty (50) percent of the amount due to be paid of unpaid 
principal of the outstanding eligible debt securities issued by the 
global systemically important BHC in greater than or equal to 365 days 
(one year) and less than 730 days (two years); and
    (iii) Zero (0) percent of the amount due to be paid of unpaid 
principal of the outstanding eligible debt securities issued by the 
global systemically important BHC in less than 365 days (one year).
    (2) For purposes of paragraph (b)(1) of this section, the date on 
which principal is due to be paid on an outstanding eligible debt 
security is calculated from the earlier of:
    (i) The date on which payment of principal is required under the 
terms governing the instrument, without respect to any right of the 
holder to accelerate payment of principal; and
    (ii) The date the holder of the instrument first has the 
contractual right to request or require payment of the amount of 
principal, provided that, with respect to a right that is exercisable 
on one or more dates that are specified in the instrument only on the 
occurrence of an event (other than an event of a receivership, 
insolvency, liquidation, or similar proceeding of the global 
systemically important BHC, or a failure of the global systemically 
important BHC to pay principal or interest on the instrument when due), 
the date for the outstanding eligible debt security under this 
paragraph (b)(2)(ii) will be calculated as if the event has occurred.
    (3) After notice and response proceedings consistent with 12 CFR 
part 263, subpart E, the Board may order a global systemically 
important BHC to exclude from its outstanding eligible long-term debt 
amount any debt security with one or more features that would 
significantly impair the ability of such debt security to take losses.
    (c) Redemption and repurchase. A global systemically important BHC 
may not redeem or repurchase any outstanding eligible debt security 
without the prior approval of the Board if, immediately after the 
redemption or repurchase, the global systemically important BHC would 
not meet its external long-term debt requirement under paragraph (a) of 
this section, or its external total loss-absorbing capacity requirement 
under Sec.  252.63(a).


Sec.  252.63  External total loss-absorbing capacity requirement and 
buffer.

    (a) External total loss-absorbing capacity requirement. A global 
systemically important BHC must maintain an outstanding external total 
loss-absorbing capacity amount that is no less than the amount equal to 
the greater of:
    (1) 18 percent of the global systemically important BHC's total 
risk-weighted assets; and
    (2) 7.5 percent of the global systemically important BHC's total 
leverage exposure.
    (b) Outstanding external total loss-absorbing capacity amount. A 
global systemically important BHC's outstanding external total loss-
absorbing capacity amount is the sum of:
    (1) The global systemically important BHC's common equity tier 1 
capital (excluding any common equity tier 1 minority interest);
    (2) The global systemically important BHC's additional tier 1 
capital (excluding any tier 1 minority interest); and
    (3) The global systemically important BHC's outstanding eligible 
external long-term debt amount plus 50 percent of the amount due to be 
paid of unpaid principal of outstanding eligible debt securities issued 
by the global systemically important BHC in, as calculated in Sec.  
252.62(b)(2), greater than or equal to 365 days (one year) but less 
than 730 days (two years).
    (c) External TLAC buffer--(1) Composition of the External TLAC 
risk-weighted buffer. The external TLAC risk-weighted buffer is 
composed solely of common equity tier 1 capital.
    (2) Definitions. For purposes of this paragraph, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
global systemically important BHC is the global systemically important 
BHC's net income for the four calendar quarters preceding the current 
calendar quarter, based on the global systemically important BHC's FR 
Y-9C, net of any distributions and associated tax effects not already 
reflected in net income. Net income, as reported in the FR Y-9C, 
reflects discretionary bonus payments and certain distributions that 
are expense items (and their associated tax effects).
    (ii) Maximum external TLAC risk-weighted payout ratio. The maximum 
external TLAC risk-weighted payout ratio is the percentage of eligible 
retained income that a global systemically important BHC can pay out in 
the form of distributions and discretionary bonus payments during the 
current calendar quarter. The maximum external TLAC risk-weighted 
payout ratio is based on the global systemically important BHC's 
external TLAC risk-weighted buffer level, calculated as of the last day 
of the previous calendar quarter, as set forth in Table 1 to Sec.  
252.63.
    (iii) Maximum external TLAC risk-weighted payout amount. A global 
systemically important BHC's maximum external TLAC risk-weighted payout 
amount for the current calendar quarter is equal to the global 
systemically important BHC's eligible retained income, multiplied by 
the applicable maximum external TLAC risk-weighted payout ratio, as set 
forth in Table 1 to Sec.  252.63.
    (iv) Maximum external TLAC leverage payout ratio. The maximum 
external TLAC leverage payout ratio is the percentage of eligible 
retained income that a global systemically important BHC can pay out in 
the form of distributions and discretionary bonus payments during the 
current calendar quarter. The maximum external TLAC leverage payout 
ratio is based on the global systemically important BHC's external TLAC 
leverage buffer level, calculated as of the last day of the

[[Page 8309]]

previous calendar quarter, as set forth in Table 2 to Sec.  252.63.
    (v) Maximum external TLAC leverage payout amount. A global 
systemically important BHC's maximum external TLAC leverage payout 
amount for the current calendar quarter is equal to the global 
systemically important BHC's eligible retained income, multiplied by 
the applicable maximum TLAC leverage payout ratio, as set forth in 
Table 2 to Sec.  252.63.
    (3) Calculation of the external TLAC risk-weighted buffer level. 
(i) A global systemically important BHC's external TLAC risk-weighted 
buffer level is equal to the global systemically important BHC's common 
equity tier 1 capital ratio (expressed as a percentage) minus the 
greater of zero and the following amount:
    (A) 18 percent; minus
    (B) The ratio (expressed as a percentage) of the global 
systemically important BHC's additional tier 1 capital (excluding any 
tier 1 minority interest) to its total risk-weighted assets; and minus
    (C) The ratio (expressed as a percentage) of the global 
systemically important BHC's outstanding eligible external long-term 
debt amount to total risk-weighted assets.
    (ii) Notwithstanding paragraph (c)(3)(i) of this section, if the 
ratio (expressed as a percentage) of a global systemically important 
BHC's external total loss-absorbing capacity amount as calculated under 
paragraph (b) of this section to its risk-weighted assets is less than 
or equal to 18 percent, the global systemically important BHC's 
external TLAC risk-weighted buffer level is zero.
    (4) Limits on distributions and discretionary bonus payments. (i) A 
global systemically important BHC shall not make distributions or 
discretionary bonus payments or create an obligation to make such 
distributions or payments during the current calendar quarter that, in 
the aggregate, exceed the maximum external TLAC risk-weighted payout 
amount or the maximum external TLAC leverage payout amount.
    (ii) A global systemically important BHC with an external TLAC 
risk-weighted buffer level that is greater than the external TLAC risk-
weighted buffer and an external TLAC leverage buffer that is greater 
than 2.0 percent, in accordance with paragraph (c)(5) of this section, 
is not subject to a maximum external TLAC risk-weighted payout amount 
or a maximum external TLAC leverage payout amount.
    (iii) Except as provided in paragraph (c)(4)(iv) of this section, a 
global systemically important BHC may not make distributions or 
discretionary bonus payments during the current calendar quarter if the 
global systemically important BHC's:
    (A) Eligible retained income is negative; and
    (B) External TLAC risk-weighted buffer level was less than the 
external TLAC risk-weighted buffer as of the end of the previous 
calendar quarter or external TLAC leverage buffer level was less than 
2.0 percent as of the end of the previous calendar quarter.
    (iv) Notwithstanding the limitations in paragraphs (c)(4)(i) 
through (iii) of this section, the Board may permit a global 
systemically important BHC to make a distribution or discretionary 
bonus payment upon a request of the global systemically important BHC, 
if the Board determines that the distribution or discretionary bonus 
payment would not be contrary to the purposes of this section, or to 
the safety and soundness of the global systemically important BHC. In 
making such a determination, the Board will consider the nature and 
extent of the request and the particular circumstances giving rise to 
the request.
    (v)(A) A global systemically important BHC is subject to the lowest 
of the maximum payout amounts as determined under 12 CFR 217.11(a)(2), 
the maximum external TLAC risk-weighted payout amount as determined 
under this paragraph, and the maximum external TLAC leverage payout 
amount as determined under this paragraph.
    (B) Additional limitations on distributions may apply to a global 
systemically important BHC under 12 CFR 225.4, 225.8, and 263.202.
    (5) External TLAC leverage buffer--(i) General. A global 
systemically important BHC is subject to the lower of the maximum 
external TLAC risk-weighted payout amount as determined under paragraph 
(c)(2)(iii) of this section and the maximum external TLAC leverage 
payout amount as determined under paragraph (c)(2)(v) of this section.
    (ii) Composition of the external TLAC leverage buffer. The external 
TLAC leverage buffer is composed solely of tier 1 capital.
    (iii) Calculation of the external TLAC leverage buffer level. (A) A 
global systemically important BHC's external TLAC leverage buffer level 
is equal to the global systemically important BHC's supplementary 
leverage ratio (expressed as a percentage) minus the greater of zero 
and the following amount:
    (1) 7.5 percent; minus
    (2) The ratio (expressed as a percentage) of the global 
systemically important BHC's outstanding eligible external long-term 
debt amount to total leverage exposure.
    (B) Notwithstanding paragraph (c)(5)(iii) of this section, if the 
ratio (expressed as a percentage) of a global systemically important 
BHC's external total loss-absorbing capacity amount as calculated under 
paragraph (b) of this section to its total leverage exposure is less 
than or equal to 7.5 percent, the global systemically important BHC's 
external TLAC leverage buffer level is zero.

  Table 1 to Sec.   252.63--Calculation of Maximum External TLAC Risk-
                         Weighted Payout Amount
------------------------------------------------------------------------
                                             Maximum External TLAC risk-
                                             weighted payout ratio (as a
  External TLAC risk-weighted buffer level      percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the external TLAC risk-         No payout ratio limitation
 weighted buffer.                             applies.
Less than or equal to the external TLAC      60 percent.
 risk-weighted buffer, and greater than 75
 percent of the external TLAC risk-weighted
 buffer.
Less than or equal to 75 percent of the      40 percent.
 external TLAC risk-weighted buffer, and
 greater than 50 percent of the external
 TLAC risk-weighted buffer.
Less than or equal to 50 percent of the      20 percent.
 external TLAC risk-weighted buffer, and
 greater 25 percent of the external TLAC
 risk-weighted buffer.
Less than or equal to 25 percent of the      0 percent.
 external TLAC risk-weighted buffer.
------------------------------------------------------------------------


[[Page 8310]]


 Table 2 to Sec.   252.63--Calculation of Maximum External TLAC Leverage
                              Payout Amount
------------------------------------------------------------------------
                                          Maximum External TLAC leverage
   External TLAC leverage buffer level     payout ratio (as a percentage
                                           of eligible retained income)
------------------------------------------------------------------------
Greater than 2.0 percent................  No payout ratio limitation
                                           applies.
Less than or equal to 2.0 percent, and    60 percent.
 greater than 1.5 percent.
Less than or equal to 1.5 percent, and    40 percent.
 greater than 1.0 percent.
Less than or equal to 1.0 percent, and    20 percent.
 greater than 0.5 percent.
Less than or equal to 0.5 percent.......  0 percent.
------------------------------------------------------------------------

Sec.  252.64  Restrictions on corporate practices of U.S. global 
systemically important banking organizations.

    (a) Prohibited corporate practices. A global systemically important 
BHC may not directly:
    (1) Issue any debt instrument with an original maturity of less 
than 365 days (one year), including short term deposits and demand 
deposits, to any person, unless the person is a subsidiary of the 
global systemically important BHC;
    (2) Issue any instrument, or enter into any related contract, with 
respect to which the holder of the instrument has a contractual right 
to offset debt owed by the holder or its affiliates to a subsidiary of 
the global systemically important BHC against the amount, or a portion 
of the amount, owed by the global systemically important BHC under the 
instrument;
    (3) Enter into a qualified financial contract that is not a credit 
enhancement with a person that is not a subsidiary of the global 
systemically important BHC;
    (4) Enter into an agreement in which the global systemically 
important BHC guarantees a liability of a subsidiary of the global 
systemically important BHC if such liability permits the exercise of a 
default right that is related, directly or indirectly, to the global 
systemically important BHC becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding other than a 
receivership proceeding under Title II of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless 
the liability is subject to requirements of the Board restricting such 
default rights or subject to any similar requirements of another U.S. 
federal banking agency; or
    (5) Enter into, or otherwise begin to benefit from, any agreement 
that provides for its liabilities to be guaranteed by any of its 
subsidiaries.
    (b) Limit on unrelated liabilities. (1) The aggregate amount, on an 
unconsolidated basis, of unrelated liabilities of a global systemically 
important BHC owed to persons that are not affiliates of the global 
systemically important BHC may not exceed 5 percent of the systemically 
important BHC's external total loss-absorbing capacity amount, as 
calculated under Sec.  252.63(b).
    (2) For purposes of paragraph (b)(1) of this section, an unrelated 
liability is any non-contingent liability of the global systemically 
important BHC owed to a person that is not an affiliate of the global 
systemically important BHC other than:
    (i) The instruments that are used to satisfy the global 
systemically important BHC's external total loss-absorbing capacity 
amount, as calculated under Sec.  252.63(b);
    (ii) Any dividend or other liability arising from the instruments 
that are used to satisfy the global systemically important BHC's 
external total loss-absorbing capacity amount, as calculated under 
Sec.  252.63(b);
    (iii) An eligible debt security that does not provide the holder of 
the instrument with a currently exercisable right to require immediate 
payment of the total or remaining principal amount; and
    (iv) A secured liability, to the extent that it is secured, or a 
liability that otherwise represents a claim that would be senior to 
eligible debt securities in Title II of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the 
Bankruptcy Code (11 U.S.C. 507).
    (c) A Covered BHC is not subject to paragraph (b) of this section 
if all of the eligible debt securities issued by the Covered BHC would 
represent the most subordinated debt claim in a receivership, 
insolvency, liquidation, or similar proceeding of the Covered BHC.


Sec.  252.65  Disclosure requirements.

    (a) A global systemically important BHC must publicly disclose a 
description of the financial consequences to unsecured debtholders of 
the global systemically important BHC entering into a resolution 
proceeding in which the global systemically important BHC is the only 
entity that would be subject to the resolution proceeding.
    (b) A global systemically important BHC must provide the disclosure 
required by paragraph (a) of this section:
    (1) In the offering documents for all of its eligible debt 
securities; and
    (2) Either:
    (i) On the global systemically important BHC's Web site; or
    (ii) In more than one public financial report or other public 
regulatory reports, provided that the global systemically important BHC 
publicly provides a summary table specifically indicating the 
location(s) of this disclosure.

0
4. Add Sec.  252.153(b)(4), (5), and (6) to read as follows:


Sec.  252.153  U.S. intermediate holding company requirement for 
foreign banking organizations with U.S. non-branch assets of $50 
billion or more.

* * * * *
    (b) * * *
    (4) For purposes of this part, a top-tier foreign banking 
organization with U.S. non-branch assets that equal or exceed $50 
billion is a global systemically important foreign banking organization 
if any of the following conditions are met:
    (i) The top-tier foreign banking organization determines, pursuant 
to paragraph (b)(6) of this section, that the top-tier foreign banking 
organization has the characteristics of a global systemically important 
banking organization under the global methodology; or
    (ii) The Board, using information available to the Board, 
determines:
    (A) That the top-tier foreign banking organization would be a 
global systemically important banking organization under the global 
methodology;
    (B) That the top-tier foreign banking organization, if it were 
subject to the Board's Regulation Q, would be identified as a global 
systemically important BHC under 12 CFR 217.402 of the Board's 
Regulation Q; or
    (C) That the U.S. intermediate holding company, if it were subject 
to 12 CFR 217.402 of the Board's Regulation Q, would be identified as a 
global systemically important BHC.
    (5) Each top-tier foreign banking organization that controls a U.S. 
intermediate holding company shall submit to the Board by January 1 of 
each calendar year through the U.S. intermediate holding company:

[[Page 8311]]

    (i) Notice of whether the home country supervisor (or other 
appropriate home country regulatory authority) of the top-tier foreign 
banking organization of the U.S. intermediate holding company has 
adopted standards consistent with the global methodology; and
    (ii) Notice of whether the top-tier foreign banking organization 
prepares or reports the indicators used by the global methodology to 
identify a banking organization as a global systemically important 
banking organization and, if it does, whether the top-tier foreign 
banking organization has determined that it has the characteristics of 
a global systemically important banking organization under the global 
methodology pursuant to paragraph (b)(6) of this section.
    (6) A top-tier foreign banking organization that controls a U.S. 
intermediate holding company and prepares or reports for any purpose 
the indicator amounts necessary to determine whether the top-tier 
foreign banking organization is a global systemically important banking 
organization under the global methodology must use the data to 
determine whether the top-tier foreign banking organization has the 
characteristics of a global systemically important banking organization 
under the global methodology.
* * * * *

0
5. Add subpart P to read as follows:

Subpart P--Covered IHC Long-Term Debt Requirement, Covered IHC 
Total Loss absorbing Capacity Requirement and Buffer, and 
Restrictions on Corporate Practices for Intermediate Holding 
Companies of Global Systemically Important Foreign Banking 
Organizations

Sec.
252.160 Applicability.
252.161 Definitions.
252.162 Covered IHC long-term debt requirement.
252.163 Internal debt conversion order.
252.164 Identification as a resolution Covered IHC or a non-
resolution Covered IHC
252.165 Covered IHC total loss-absorbing capacity requirement and 
buffer.
252.166 Restrictions on corporate practices of intermediate holding 
companies of global systemically important foreign banking 
organizations.
252.167 Disclosure requirements for resolution Covered IHCs.


Sec.  252.160  Applicability.

    (a) General applicability. This subpart applies to a U.S. 
intermediate holding company that is required to be established 
pursuant to Sec.  252.153 and is controlled by a global systemically 
important foreign banking organization (Covered IHC).
    (b) Initial applicability. A Covered IHC is subject to the 
requirements of Sec. Sec.  252.162, 252.163, 252.165, 252.166, and 
252.167 beginning on the later of:
    (1) January 1, 2019; and
    (2) 1095 days (three years) after the earlier of the date on which:
    (i) The U.S. non-branch assets of the global systemically important 
foreign banking organization that controls the Covered IHC equaled or 
exceeded $50 billion; and
    (ii) The foreign banking organization that controls the Covered IHC 
became a global systemically important foreign banking organization.
    (c) Applicability of Sec.  252.164. Section 252.164 applies to a 
global systemically important foreign banking organization with U.S. 
non-branch assets that equal or exceed $50 billion.


Sec.  252.161  Definitions.

    For purposes of this subpart:
    Additional tier 1 capital has the same meaning as in 12 CFR 
217.20(c).
    Average total consolidated assets means the denominator of the 
leverage ratio as described in 12 CFR 217.10(b)(4).
    Common equity tier 1 capital has the same meaning as in 12 CFR 
217.20(b).
    Common equity tier 1 capital ratio has the same meaning as in 12 
CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
    Common equity tier 1 minority interest has the same meaning as in 
12 CFR 217.2.
    Covered IHC is defined in Sec.  252.160.
    Covered IHC TLAC buffer means, with respect to a Covered IHC, the 
sum of 2.5 percent and any applicable countercyclical capital buffer 
under 12 CFR 217.11(b) (expressed as a percentage).
    Covered IHC Total loss-absorbing capacity amount is defined in 
Sec.  252.165(c).
    Default right (1) Means any:
    (i) Right of a party, whether contractual or otherwise (including 
rights incorporated by reference to any other contract, agreement or 
document, and rights afforded by statute, civil code, regulation and 
common law), to liquidate, terminate, cancel, rescind, or accelerate 
such agreement or transactions thereunder, set off or net amounts owing 
in respect thereto (except rights related to same-day payment netting), 
exercise remedies in respect of collateral or other credit support or 
property related thereto (including the purchase and sale of property), 
demand payment or delivery thereunder or in respect thereof (other than 
a right or operation of a contractual provision arising solely from a 
change in the value of collateral or margin or a change in the amount 
of an economic exposure), suspend, delay or defer payment or 
performance thereunder, modify the obligations of a party thereunder or 
any similar rights; and
    (ii) Right or contractual provision that alters the amount of 
collateral or margin that must be provided with respect to an exposure 
thereunder, including by altering any initial amount, threshold amount, 
variation margin, minimum transfer amount, the margin value of 
collateral or any similar amount, that entitles a party to demand the 
return of any collateral or margin transferred by it to the other party 
or a custodian or that modifies a transferee's right to reuse 
collateral or margin (if such right previously existed), or any similar 
rights, in each case, other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure; and
    (2) Does not include any right under a contract that allows a party 
to terminate the contract on demand or at its option at a specified 
time, or from time to time, without the need to show cause.
    Discretionary bonus payment has the same meaning as under 12 CFR 
217.2.
    Distribution has the same meaning as under 12 CFR 217.2.
    Eligible external debt security means:
    (1) A debt instrument that:
    (i) Is paid in, and issued by the Covered IHC to, and remains held 
by, a person that does not directly or indirectly control the Covered 
IHC and is not a wholly owned subsidiary;
    (ii) Is not secured, not guaranteed by the Covered IHC or a 
subsidiary of the Covered IHC, and is not subject to any other 
arrangement that legally or economically enhances the seniority of the 
instrument;
    (iii) Has a maturity of greater than or equal to 365 days (one 
year) from the date of issuance;
    (iv) Is governed by the laws of the United States or any State 
thereof;
    (v) Does not provide the holder of the instrument a contractual 
right to accelerate payment of principal or interest on the instrument, 
except a right that is exercisable on one or more dates that are 
specified in the instrument or in the event of:
    (A) A receivership, insolvency, liquidation, or similar proceeding 
of the Covered IHC; or
    (B) A failure of the Covered IHC to pay principal or interest on 
the

[[Page 8312]]

instrument when due and payable that continues for 30 days or more;
    (vi) Does not have a credit-sensitive feature, such as an interest 
rate that is reset periodically based in whole or in part on the 
Covered IHC's credit quality, but may have an interest rate that is 
adjusted periodically independent of the Covered IHC's credit quality, 
in relation to general market interest rates or similar adjustments;
    (vii) Is not a structured note; and
    (viii) Does not provide that the instrument may be converted into 
or exchanged for equity of the covered IHC; and
    (2) A debt instrument issued prior to December 31, 2016 that:
    (i) Is paid in, and issued by the Covered IHC to, and remains held 
by, a person that does not directly or indirectly control the Covered 
IHC and is not a wholly owned subsidiary;
    (ii) Is not secured, not guaranteed by the Covered IHC or a 
subsidiary of the Covered IHC, and not subject to any other arrangement 
that legally or economically enhances the seniority of the instrument;
    (iii) Has a maturity of greater than or equal to 365 days (one 
year) from the date of issuance;
    (iv) Does not have a credit-sensitive feature, such as an interest 
rate that is reset periodically based in whole or in part on the 
Covered IHC's credit quality, but may have an interest rate that is 
adjusted periodically independent of the Covered IHC's credit quality, 
in relation to general market interest rates or similar adjustments;
    (v) Is not a structured note; and
    (vi) Does not provide that the instrument may be converted into or 
exchanged for equity of the Covered IHC.
    Eligible Covered IHC debt security with respect to a non-resolution 
Covered IHC means eligible internal debt securities issued by the non-
resolution Covered IHC, and with respect to a resolution Covered IHC 
means eligible internal debt securities and eligible external debt 
securities issued by the resolution Covered IHC.
    Eligible internal debt security means a debt instrument that:
    (i) Is paid in, and issued by the Covered IHC;
    (ii) Is not secured, not guaranteed by the Covered IHC or a 
subsidiary of the Covered IHC, and is not subject to any other 
arrangement that legally or economically enhances the seniority of the 
instrument;
    (iii) Has a maturity of greater than or equal to 365 days (one 
year) from the date of issuance;
    (iv) Is governed by the laws of the United States or any State 
thereof;
    (v) Does not provide the holder of the instrument a contractual 
right to accelerate payment of principal or interest on the instrument, 
except a right that is exercisable on one or more dates that are 
specified in the instrument or in the event of:
    (A) A receivership, insolvency, liquidation, or similar proceeding 
of the Covered IHC; or
    (B) A failure of the Covered IHC to pay principal or interest on 
the instrument when due and payable that continues for 30 days or more;
    (vi) Is not a structured note;
    (vii) Is issued to and remains held by a company that is 
incorporated or organized outside of the United States, and directly or 
indirectly controls the Covered IHC or is a wholly owned subsidiary; 
and
    (viii) Has a contractual provision that is approved by the Board 
that provides for the immediate conversion or exchange of the 
instrument into common equity tier 1 of the Covered IHC upon issuance 
by the Board of an internal debt conversion order.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Internal debt conversion order means an order by the Board to 
immediately convert to, or exchange for, common equity tier 1 capital 
an amount of eligible internal debt securities of the Covered IHC 
specified by the Board in its discretion, as described in Sec.  
252.163.
    Non-resolution Covered IHC means a Covered IHC identified as or 
determined to be a non-resolution Covered IHC pursuant to Sec.  
252.164.
    Outstanding eligible Covered IHC long-term debt amount is defined 
in Sec.  252.162(b).
    Person has the same meaning as in 12 CFR 225.2.
    Qualified financial contract has the same meaning as in section 
210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
    Resolution Covered IHC means a Covered IHC identified as or 
determined to be a resolution Covered IHC pursuant to Sec.  252.164.
    Standardized total risk-weighted assets has the same meaning as in 
12 CFR 217.2.
    Structured note means a debt instrument that:
    (1) Has a principal amount, redemption amount, or stated maturity 
that is subject to reduction based on the performance of any asset, 
entity, index, or embedded derivative or similar embedded feature;
    (2) Has an embedded derivative or other similar embedded feature 
that is linked to one or more equity securities, commodities, assets, 
or entities;
    (3) Does not specify a minimum principal amount that becomes due 
and payable upon acceleration or early termination; or
    (4) Is not classified as debt under GAAP, provided that an 
instrument is not a structured note solely because it is one or both of 
the following:
    (i) A non-dollar-denominated instrument, or
    (ii) An instrument whose interest payments are based on an interest 
rate index.
    Supplementary leverage ratio has the same meaning as in 12 CFR 
217.10(c)(4).
    Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
    Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
    Total leverage exposure has the same meaning as in 12 CFR 
217.10(c)(4)(ii).
    Total risk-weighted assets, with respect to a Covered IHC, is equal 
to the Covered IHC's standardized total risk-weighted assets.
    U.S. non-branch assets has the same meaning as in 12 CFR 
252.152(b)(2).
    Wholly owned subsidiary means an entity, all of the outstanding 
ownership interests of which are owned directly or indirectly by a 
global systemically important foreign banking organization that 
directly or indirectly controls a Covered IHC, except that up to 0.5 
percent of the entity's outstanding ownership interests may be held by 
a third party if the ownership interest is acquired or retained by the 
third party for the purpose of establishing corporate separateness or 
addressing bankruptcy, insolvency, or similar concerns.


Sec.  252.162  Covered IHC long-term debt requirement.

    (a) Covered IHC long-term debt requirement. A Covered IHC must have 
an outstanding eligible Covered IHC long-term debt amount that is no 
less than the amount equal to the greatest of:
    (1) 6 percent of the Covered IHC's total risk-weighted assets;
    (2) If the Covered IHC is required to maintain a minimum 
supplementary leverage ratio, 2.5 percent of the Covered IHC's total 
leverage exposure; and
    (3) 3.5 percent of the Covered IHC's average total consolidated 
assets.
    (b) Outstanding eligible Covered IHC long-term debt amount. (1) A 
Covered IHC's outstanding eligible Covered IHC long-term debt amount is 
the sum of:
    (i) One hundred (100) percent of the amount of the outstanding 
eligible Covered IHC debt securities issued by the Covered IHC due to 
be paid in greater than or equal to 730 days (two years); and

[[Page 8313]]

    (ii) Fifty (50) percent of the amount of the outstanding eligible 
Covered IHC debt securities issued by the Covered IHC due to be paid in 
greater than or equal to 365 days (one year) and less than 730 days 
(two years); and
    (iii) Zero (0) percent of the amount of the outstanding eligible 
Covered IHC debt securities issued by the Covered IHC due to be paid in 
less than 365 days (one year).
    (2) For purposes of paragraph (b)(1) of this section, the date on 
which principal is due to be paid on an outstanding eligible Covered 
IHC debt security is calculated from the earlier of:
    (i) The date on which payment of principal is required under the 
terms governing the instrument, without respect to any right of the 
holder to accelerate payment of principal; and
    (ii) The date the holder of the instrument first has the 
contractual right to request or require payment of the amount of 
principal, provided that, with respect to a right that is exercisable 
on one or more dates that are specified in the instrument only on the 
occurrence of an event (other than an event of a receivership, 
insolvency, liquidation, or similar proceeding of the Covered IHC, or a 
failure of the Covered IHC to pay principal or interest on the 
instrument when due), the date for the outstanding eligible Covered IHC 
debt security under this paragraph (b)(2)(ii) will be calculated as if 
the event has occurred.
    (3) After notice and response proceedings consistent with 12 CFR 
part 263, subpart E, the Board may order a Covered IHC to exclude from 
its outstanding eligible Covered IHC long-term debt amount any debt 
security with one or more features that would significantly impair the 
ability of such debt security to take losses.
    (c) Redemption and repurchase. Without the prior approval of the 
Board, a Covered IHC may not redeem or repurchase any outstanding 
eligible Covered IHC debt security if, immediately after the redemption 
or repurchase, the Covered IHC would not have an outstanding eligible 
Covered IHC long-term debt amount that is sufficient to meet its 
Covered IHC long-term debt requirement under paragraph (a) of this 
section.


Sec.  252.163  Internal debt conversion order.

    (a) The Board may issue an internal debt conversion order if:
    (1) The Board has determined that the Covered IHC is in default or 
danger of default; and
    (2) Any of the following circumstances apply:
    (i) A foreign banking organization that directly or indirectly 
controls the Covered IHC or any subsidiary of the top-tier foreign 
banking organization has been placed into resolution proceedings 
(including the application of statutory resolution powers) in its home 
country;
    (ii) The home country supervisor of the top-tier foreign banking 
organization has consented or not promptly objected after notification 
by the Board to the conversion or exchange of the eligible internal 
debt securities of the Covered IHC; or
    (iii) The Board has made a written recommendation to the Secretary 
of the Treasury pursuant to 12 U.S.C. 5383(a) regarding the Covered 
IHC.
    (b) For purposes of paragraph (a) of this section, the Board will 
consider:
    (1) A Covered IHC in default or danger of default if
    (i) A case has been, or likely will promptly be, commenced with 
respect to the Covered IHC under the Bankruptcy Code (11 U.S.C. 101 et 
seq.);
    (ii) The Covered IHC has incurred, or is likely to incur, losses 
that will deplete all or substantially all of its capital, and there is 
no reasonable prospect for the Covered IHC to avoid such depletion;
    (iii) The assets of the Covered IHC are, or are likely to be, less 
than its obligations to creditors and others; or
    (iv) The Covered IHC is, or is likely to be, unable to pay its 
obligations (other than those subject to a bona fide dispute) in the 
normal course of business; and
    (2) An objection by the home country supervisor to the conversion 
or exchange of the eligible internal debt securities to be prompt if 
the Board receives the objection no later than 24 hours after the Board 
requests such consent or non-objection from the home country 
supervisor.


Sec.  252.164  Identification as a resolution Covered IHC or a non-
resolution Covered IHC.

    (a) Initial certification. The top-tier global systemically 
important foreign banking organization with U.S. non-branch assets that 
equal or exceed $50 billion must certify to the Board on the later of 
June 30, 2017, or one year prior to the date on which a Covered IHC 
becomes subject to the requirements of this subpart pursuant to Sec.  
252.160(b) whether the planned resolution strategy of the top-tier 
foreign banking organization involves the Covered IHC or the 
subsidiaries of the Covered IHC entering resolution, receivership, 
insolvency, or similar proceedings in the United States.
    (b) Certification update. The top-tier global systemically 
important foreign banking organization with U.S. non-branch assets that 
equal or exceed $50 billion must provide an updated certification to 
the Board upon a change in the resolution strategy described in the 
certification provided pursuant to paragraph (a) of this section.
    (c) Identification of a resolution Covered IHC. A Covered IHC is a 
resolution Covered IHC if the most recent certification provided 
pursuant to paragraphs (a) and (b) of this section indicates that the 
top-tier foreign banking organization's planned resolution strategy 
involves the Covered IHC or the subsidiaries of the Covered IHC 
entering resolution, receivership, insolvency, or similar proceedings 
in the United States.
    (d) Identification of a non-resolution Covered IHC. A Covered IHC 
is a non-resolution Covered IHC if the most recent certification 
provided pursuant to paragraphs (a) and (b) of this section indicates 
that the top-tier foreign banking organization's planned resolution 
strategy involves neither the Covered IHC nor the subsidiaries of the 
Covered IHC entering resolution, receivership, insolvency, or similar 
proceedings in the United States.
    (e) Board determination. The Board may determine in its discretion 
that a non-resolution Covered IHC identified pursuant to paragraph (d) 
of this section is a resolution Covered IHC, or that a resolution 
Covered IHC identified pursuant to paragraph (c) of this section is a 
non-resolution Covered IHC.
    (f) Transition. (1) A Covered IHC identified as a resolution 
Covered IHC pursuant to paragraph (b) of this section or determined by 
the Board to be a resolution Covered IHC pursuant to paragraph (e) of 
this section must comply with the requirements in this subpart 
applicable to a resolution Covered IHC within 365 days (one year) after 
such identification or determination, unless such time period is 
extended by the Board in its discretion.
    (2) A Covered IHC identified as a non-resolution Covered IHC 
pursuant to paragraph (b) of this section or determined by the Board to 
be a non-resolution Covered IHC pursuant to paragraph (e) of this 
section must comply with the requirements in this subpart applicable to 
a non-resolution Covered IHC 365 days (one year) after such 
identification or determination, unless such time period is extended by 
the Board in its discretion.


Sec.  252.165  Covered IHC total loss-absorbing capacity requirement 
and buffer.

    (a) Covered IHC total loss-absorbing capacity requirement for a 
resolution Covered IHC. A resolution Covered IHC must have an 
outstanding Covered IHC

[[Page 8314]]

total loss-absorbing capacity amount that is no less than the amount 
equal to the greatest of:
    (1) 18 percent of the resolution Covered IHC's total risk-weighted 
assets;
    (2) If the Board requires the resolution Covered IHC to maintain a 
minimum supplementary leverage ratio, 6.75 percent of the resolution 
Covered IHC's total leverage exposure; and
    (3) Nine (9) percent of the resolution Covered IHC's average total 
consolidated assets.
    (b) Covered IHC total loss-absorbing capacity requirement for a 
non-resolution Covered IHC. A non-resolution Covered IHC must have an 
outstanding Covered IHC total loss-absorbing capacity amount that is no 
less than the amount equal to the greatest of:
    (1) 16 percent of the non-resolution Covered IHC's total risk-
weighted assets;
    (2) If the Board requires the non-resolution Covered IHC to 
maintain a minimum supplementary leverage ratio, 6 percent of the non-
resolution Covered IHC's total leverage exposure; and
    (3) Eight (8) percent of the non-resolution Covered IHC's average 
total consolidated assets.
    (c) Covered IHC Total loss-absorbing capacity amount. (1) A non-
resolution Covered IHC's Covered IHC total loss-absorbing capacity 
amount is equal to the sum of:
    (i) The Covered IHC's common equity tier 1 capital (excluding any 
common equity tier 1 minority interest) held by a company that is 
incorporated or organized outside of the United States and that 
directly or indirectly controls the Covered IHC;
    (ii) The Covered IHC's additional tier 1 capital (excluding any 
tier 1 minority interest) held by a company that is incorporated or 
organized outside of the United States and that directly or indirectly 
controls the Covered IHC; and
    (iii) The Covered IHC's outstanding eligible Covered IHC long-term 
debt amount, plus 50 percent of the amount of unpaid principal of 
outstanding eligible Covered IHC debt securities issued by the Covered 
IHC due to be paid in greater than or equal to 365 days (one year) but 
less than 730 days (two years).
    (2) A resolution Covered IHC's Covered IHC total loss-absorbing 
capacity amount is equal to the sum of:
    (i) The Covered IHC's common equity tier 1 capital (excluding any 
common equity tier 1 minority interest);
    (ii) The Covered IHC's additional tier 1 capital (excluding any 
tier 1 minority interest); and
    (iii) The Covered IHC's outstanding eligible Covered IHC long-term 
debt amount, plus 50 percent of the amount of unpaid principal of 
outstanding eligible Covered IHC debt securities issued by the Covered 
IHC due to be paid in greater than or equal to 365 days (one year) but 
less than 730 days (two years).
    (d) Covered IHC TLAC buffer--(1) Composition of the Covered IHC 
TLAC buffer. The Covered IHC TLAC buffer is composed solely of common 
equity tier 1 capital.
    (2) Definitions. For purposes of this paragraph, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
Covered IHC is its net income for the four calendar quarters preceding 
the current calendar quarter, based on the Covered IHC's FR Y-9C, or 
other applicable regulatory report as determined by the Board, net of 
any distributions and associated tax effects not already reflected in 
net income. Net income, as reported in the FR Y-9C, reflects 
discretionary bonus payments and certain distributions that are expense 
items (and their associated tax effects).
    (ii) Maximum Covered IHC TLAC payout ratio. The maximum Covered IHC 
TLAC payout ratio is the percentage of eligible retained income that a 
Covered IHC can pay out in the form of distributions and discretionary 
bonus payments during the current calendar quarter. The maximum Covered 
IHC TLAC payout ratio is based on the Covered IHC's Covered IHC TLAC 
buffer level, calculated as of the last day of the previous calendar 
quarter, as set forth in Table 1 to Sec.  252.165.
    (iii) Maximum Covered IHC TLAC payout amount. A Covered IHC's 
maximum Covered IHC TLAC payout amount for the current calendar quarter 
is equal to the Covered IHC's eligible retained income, multiplied by 
the applicable maximum Covered IHC TLAC payout ratio, as set forth in 
Table 1 to Sec.  252.165.
    (3) Calculation of the Covered IHC TLAC buffer level. (i) A Covered 
IHC's Covered IHC TLAC buffer level is equal to the Covered IHC's 
common equity tier 1 capital ratio (expressed as a percentage) minus 
the greater of zero and the following amount:
    (A) 16 percent for a non-resolution Covered IHC, and 18 percent for 
a resolution Covered IHC; minus
    (B)(1) For a non-resolution Covered IHC, the ratio (expressed as a 
percentage) of the Covered IHC's additional tier 1 capital (excluding 
any tier 1 minority interest) held by a company that is incorporated or 
organized outside of the United States and that directly or indirectly 
controls the Covered IHC to the Covered IHC's total risk-weighted 
assets;
    (2) For a resolution Covered IHC, the ratio (expressed as a 
percentage of the Covered IHC's additional tier 1 capital (excluding 
any tier 1 minority interest) to the Covered IHC's total-risk weighted 
assets; and minus
    (C) The ratio (expressed as a percentage) of the Covered IHC's 
outstanding eligible Covered IHC long-term debt amount to total risk-
weighted assets.
    (ii)(A) Notwithstanding paragraph (d)(3)(i) of this section, with 
respect to a resolution Covered IHC, if the ratio (expressed as a 
percentage) of the resolution Covered IHC's Covered IHC total loss-
absorbing capacity amount, as calculated under Sec.  252.165(a), to the 
resolution Covered IHC's risk-weighted assets is less than or equal to, 
18 percent, the Covered IHC's Covered IHC TLAC buffer level is zero.
    (B) Notwithstanding paragraph (d)(3)(i) of this section, with 
respect to a non-resolution Covered IHC, if the ratio (expressed as a 
percentage) of the non-resolution Covered IHC's Covered IHC total loss-
absorbing capacity amount, as calculated under Sec.  252.165(b), to the 
Covered IHC's risk-weighted assets is less than or equal to 16 percent, 
the non-resolution Covered IHC's Covered IHC TLAC buffer level is zero.
    (4) Limits on distributions and discretionary bonus payments. (i) A 
Covered IHC shall not make distributions or discretionary bonus 
payments or create an obligation to make such distributions or payments 
during the current calendar quarter that, in the aggregate, exceed the 
maximum Covered IHC TLAC payout amount.
    (ii) A Covered IHC with a Covered IHC TLAC buffer level that is 
greater than the Covered IHC TLAC buffer is not subject to a maximum 
Covered IHC TLAC payout amount.
    (iii) Except as provided in paragraph (d)(4)(iv) of this section, a 
Covered IHC may not make distributions or discretionary bonus payments 
during the current calendar quarter if the Covered IHC's:
    (A) Eligible retained income is negative; and
    (B) Covered IHC TLAC buffer level was less than the Covered IHC 
TLAC buffer as of the end of the previous calendar quarter.
    (iv) Notwithstanding the limitations in paragraphs (d)(4)(i) 
through (iii) of this section, the Board may permit a Covered IHC to 
make a distribution or discretionary bonus payment upon a request of 
the Covered IHC, if the Board determines that the distribution or

[[Page 8315]]

discretionary bonus payment would not be contrary to the purposes of 
this section, or to the safety and soundness of the Covered IHC. In 
making such a determination, the Board will consider the nature and 
extent of the request and the particular circumstances giving rise to 
the request.

   Table 1 to Sec.   252.165--Calculation of Maximum Covered IHC TLAC
                              Payout Amount
------------------------------------------------------------------------
                                         Maximum Covered IHC TLAC payout
     Covered IHC TLAC buffer level          ratio (as a percentage of
                                            eligible retained income)
------------------------------------------------------------------------
Greater than the Covered IHC TLAC        No payout ratio limitation
 buffer.                                  applies.
Less than or equal to the Covered IHC    60 percent.
 TLAC buffer, and greater than 75
 percent of the Covered IHC TLAC buffer.
Less than or equal to 75 percent of the  40 percent.
 Covered IHC TLAC buffer, and greater
 than 50 percent of the Covered IHC
 TLAC buffer.
Less than or equal to 50 percent of the  20 percent.
 Covered IHC TLAC buffer, and greater
 25 percent of the Covered IHC TLAC
 buffer.
Less than or equal to 25 percent of the  0 percent.
 Covered IHC TLAC buffer.
------------------------------------------------------------------------

    (v)(A) A Covered IHC is subject to the lowest of the maximum payout 
amounts as determined under 12 CFR 217.11(a)(2) and the maximum Covered 
IHC TLAC payout amount as determined under this paragraph.
    (B) Additional limitations on distributions may apply to a Covered 
IHC under 12 CFR 225.4, 225.8, and 263.202.


Sec.  252.166  Restrictions on corporate practices of intermediate 
holding companies of global systemically important foreign banking 
organizations.

    (a) Prohibited corporate practices. A Covered IHC may not directly:
    (1) Issue any debt instrument with an original maturity of less 
than 365 days (one year), including short term deposits and demand 
deposits, to any person, unless the person is an affiliate of the 
Covered IHC;
    (2) Issue any instrument, or enter into any related contract, with 
respect to which the holder of the instrument has a contractual right 
to offset debt owed by the holder or its affiliates to the Covered IHC 
or a subsidiary of the Covered IHC against the amount, or a portion of 
the amount, owed by the Covered IHC under the instrument;
    (3) Enter into a qualified financial contract that is not a credit 
enhancement with a person that is not an affiliate of the Covered IHC;
    (4) Enter into an agreement in which the Covered IHC guarantees a 
liability of an affiliate of the Covered IHC if such liability permits 
the exercise of a default right that is related, directly or 
indirectly, to the Covered IHC becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding other than a 
receivership proceeding under Title II of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless 
the liability is subject to requirements of the Board restricting such 
default rights or subject to any similar requirements of another U.S. 
federal banking agency; or
    (5) Enter into, or otherwise benefit from, any agreement that 
provides for its liabilities to be guaranteed by any of its 
subsidiaries.
    (b) Limit on unrelated liabilities. (1) The aggregate amount, on an 
unconsolidated basis, of unrelated liabilities of a Covered IHC may not 
exceed 5 percent of the Covered IHC's Covered IHC total loss-absorbing 
capacity amount, as calculated under Sec.  252.165(c).
    (2) For purposes of paragraph (b)(1) of this section, an unrelated 
liability includes:
    (i) With respect to a non-resolution Covered IHC, any non-
contingent liability of the non-resolution Covered IHC owed to a person 
that is not an affiliate of the non-resolution Covered IHC other than 
those liabilities specified in paragraph (b)(3) of this section, and
    (ii) With respect to a resolution Covered IHC, any non-contingent 
liability of the resolution Covered IHC owed to a person that is not a 
subsidiary of the resolution Covered IHC other than those liabilities 
specified in paragraph (b)(3) of this section.
    (3)(i) The instruments that are used to satisfy the Covered IHC's 
Covered IHC total loss-absorbing capacity amount, as calculated under 
Sec.  252.165(a);
    (ii) Any dividend or other liability arising from the instruments 
that are used to satisfy the Covered IHC's Covered IHC total loss-
absorbing capacity amount, as calculated under Sec.  252.165(c)(2);
    (iii) An eligible Covered IHC debt security that does not provide 
the holder of the instrument with a currently exercisable right to 
require immediate payment of the total or remaining principal amount; 
and
    (iv) A secured liability, to the extent that it is secured, or a 
liability that otherwise represents a claim that would be senior to 
eligible Covered IHC debt securities in Title II of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the 
Bankruptcy Code (11 U.S.C. 507).
    (c) A Covered IHC is not subject to paragraph (b) of this section 
if all of the eligible Covered IHC debt securities issued by the 
Covered IHC would represent the most subordinated debt claim in a 
receivership, insolvency, liquidation, or similar proceeding of the 
Covered IHC.


Sec.  252.167  Disclosure requirements for resolution Covered IHCs.

    (a) A resolution Covered IHC that has any outstanding eligible 
external debt securities must publicly disclose a description of the 
financial consequences to unsecured debtholders of the resolution 
Covered IHC entering into a resolution proceeding in which the 
resolution Covered IHC is the only entity in the United States that 
would be subject to the resolution proceeding.
    (b) A resolution Covered IHC must provide the disclosure required 
by paragraph (a) of this section:
    (1) In the offering documents for all of its eligible external debt 
securities; and
    (2) Either:
    (i) On the resolution Covered IHC's Web site; or
    (ii) In more than one public financial report or other public 
regulatory reports, provided that the resolution Covered IHC publicly 
provides a summary table specifically indicating the location(s) of 
this disclosure.

    By order of the Board of Governors of the Federal Reserve 
System, January 6, 2017.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2017-00431 Filed 1-23-17; 8:45 am]
 BILLING CODE 6210-01-P