[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
[Rules and Regulations]
[Pages 9120-9221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26546]
[[Page 9119]]
Vol. 86
Thursday,
No. 27
February 11, 2021
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
Federal Reserve System
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Federal Deposit Insurance Corporation
12 CFR Parts 50, 249, and 329
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Net Stable Funding Ratio: Liquidity Risk Measurement Standards and
Disclosure Requirements; Final Rule
Federal Register / Vol. 86 , No. 27 / Thursday, February 11, 2021 /
Rules and Regulations
[[Page 9120]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 50
[Docket ID OCC-2014-0029]
RIN 1557-AD97
FEDERAL RESERVE SYSTEM
12 CFR Part 249
[Regulation WW; Docket No. R-1537]
RIN 7100-AE 51
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 329
RIN 3064-AE 44
Net Stable Funding Ratio: Liquidity Risk Measurement Standards
and Disclosure Requirements
AGENCY: Office of the Comptroller of the Currency, Department of the
Treasury; Board of Governors of the Federal Reserve System; and Federal
Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
adopting a final rule that implements a stable funding requirement,
known as the net stable funding ratio (NSFR), for certain large banking
organizations. The final rule establishes a quantitative metric, the
NSFR, to measure the stability of the funding profile of certain large
banking organizations and requires these banking organizations to
maintain minimum amounts of stable funding to support their assets,
commitments, and derivatives exposures over a one-year time horizon.
The NSFR is designed to reduce the likelihood that disruptions to a
banking organization's regular sources of funding will compromise its
liquidity position, promote effective liquidity risk management, and
support the ability of banking organizations to provide financial
intermediation to businesses and households across a range of market
conditions. The NSFR supports financial stability by requiring banking
organizations to fund their activities with stable sources of funding
on an ongoing basis, reducing the possibility that funding shocks would
substantially increase distress at individual banking organizations.
The final rule applies to certain large U.S. depository institution
holding companies, depository institutions, and U.S. intermediate
holding companies of foreign banking organizations, each with total
consolidated assets of $100 billion or more, together with certain
depository institution subsidiaries (together, covered companies).
Under the final rule, the NSFR requirement increases in stringency
based on risk-based measures of the top-tier covered company. U.S.
depository institution holding companies and U.S. intermediate holding
companies subject to the final rule are required to publicly disclose
their NSFR and certain components of their NSFR every second and fourth
calendar quarter for each of the two immediately preceding calendar
quarters. The final rule also amends certain definitions in the
agencies' liquidity coverage ratio rule that are also applicable to the
NSFR.
DATES: Effective Date: July 1, 2021.
FOR FURTHER INFORMATION CONTACT:
OCC: Christopher McBride, Director, James Weinberger, Technical
Expert, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649-
6360, Treasury & Market Risk Policy; Dave Toxie, Capital Markets Lead
Expert, (202) 649-6833; Patrick T. Tierney, Assistant Director, Henry
Barkhausen, Counsel, or Daniel Perez, Counsel, Chief Counsel's Office,
(202) 649-5490; for persons who are deaf or hard of hearing, TTY, (202)
649-5597; Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219.
Board: Juan Climent, Assistant Director, (202) 872-7526, Kathryn
Ballintine, Manager, (202) 452-2555, J. Kevin Littler, Lead Financial
Institution Policy Analyst, (202) 475-6677, Michael Ofori-Kuragu,
Senior Financial Institution Policy Analyst II, (202) 475-6623 or
Christopher Powell, Senior Financial Institution Policy Analyst II,
(202) 452-3442, Division of Supervision and Regulation; Benjamin W.
McDonough, Associate General Counsel, (202) 452-2036, Steve Bowne,
Senior Counsel, (202) 452-3900, Jason Shafer, Senior Counsel, (202)
728-5811, Laura Bain, Counsel, (202) 736-5546, or Jeffery Zhang,
Attorney, (202) 736-1968, Legal Division, Board of Governors of the
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
For the hearing impaired only, Telecommunication Device for the Deaf
(TDD), (202) 263-4869.
FDIC: Bobby R. Bean, Associate Director, [email protected]; Brian Cox,
Chief, Capital Markets Strategies Section, [email protected]; Eric
Schatten, Senior Policy Analyst, [email protected]; Andrew
Carayiannis, Senior Policy Analyst, [email protected]; Kyle
McCormick, Capital Markets Policy Analyst, [email protected]; Capital
Markets Branch, Division of Risk Management Supervision, (202) 898-
6888; Gregory S. Feder, Counsel, [email protected], Andrew B. Williams,
II, Counsel, and [email protected], or Suzanne J. Dawley, Counsel,
[email protected], Supervision, Legislation & Enforcement Branch, Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (800) 925-4618.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
III. Overview of the Proposed Rule and Proposed Scope of Application
A. The Proposed Stable Funding Requirement
B. Revised Scope of Application
IV. Summary of Comments and Overview of Significant Changes to the
Proposals
V. The Final Rule's Purpose, Design, Scope of Application, and
Minimum Requirements
A. Purpose of the Final Rule
B. Comments on the Need for the NSFR Requirement
C. The NSFR's Conceptual Framework, Design, and Calibration
1. Use of an Aggregate Balance Sheet Measure and Weightings
2. Use of a Simplified and Standardized Point-in-Time Metric
3. Use of a Time Horizon
4. Stress Perspectives and Using Elements From the LCR Rule
5. Analytical Basis of Factor Calibrations and Supervisory
Considerations
D. Adjusting Calibration for the U.S. Implementation of the NSFR
E. NSFR Scope and Minimum Requirement Under the Final Rule--Full
and Reduced NSFR
1. Proposed Minimum Requirement and the Tailoring Final Rule
2. Applicability of the Final Rule to U.S. Intermediate Holding
Companies and Use of the Risk-Based Indicators
3. NSFR Minimum Requirements Under the Final Rule: Applicability
and Calibration
4. Applicability to Depository Institution Subsidiaries
VI. Definitions
A. Revisions to Existing Definitions
1. Revised Definitions for Which the Agencies Received no
Comments
2. Revised Definitions for Which the Agencies Received Comments
3. Other Definitions and Requirements for Which the Agencies
Received Comments
4. Other Definitions and Requirements for Which the Agencies Did
Not Receive Comments
B. New Definitions
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1. New Definitions for Which the Agencies Received no Comments
2. New Definitions for Which the Agencies Received Comments
VII. NSFR Requirement Under the Final Rule
A. Rules of Construction
1. Balance-Sheet Values
2. Netting of Certain Transactions
3. Treatment of Securities Received in an Asset Exchange by a
Securities Lender
B. Determining Maturity
C. Available Stable Funding
1. Calculation of the ASF Amount
2. Characteristics for Assignment of ASF Factors
3. Categories of ASF Factors
D. Required Stable Funding
1. Calculation of the RSF Amount
2. Characteristics for Assignment of RSF Factors
3. Categories of RSF Factors for Unencumbered Assets and
Commitments
4. Treatment of Rehypothecated Off-Balance Sheet Assets
E. Derivative Transactions
1. Scope of Derivatives Transactions Subject to Sec. __.107 of
the Final Rule
2. Current Net Value Component
3. Initial Margin Received by a Covered Company
4. Customer Cleared Derivative Transactions
5. Initial Margin Component
6. Future Value Component
7. Comments on the Effect on Capital Markets and Commercial End
Users
8. Derivatives RSF Amount Calculation
9. Derivatives RSF Amount Numerical Example
F. NSFR Consolidation Limitations
G. Treatment of Certain Facilities
H. Interdependent Assets and Liabilities
VIII. Net Stable Funding Ratio Shortfall
IX. Disclosure Requirements
A. NSFR Public Disclosure Requirements
B. Quantitative Disclosure Requirements
1. Disclosure of ASF Components
2. Disclosure of RSF Components
C. Qualitative Disclosure Requirements
D. Frequency and Timing of Disclosure
X. Impact Assessment
A. Impact on Funding
B. Costs and Benefits of an RSF Factor for Level 1 HQLA, Both
Held Outright and as Collateral for Short-Term Lending Transactions
C. Response to Comments
XI. Effective Dates and Transitions
A. Effective Dates
B. Transitions
1. Initial Transitions for Banking Organizations That Become
Subject to NSFR Rule After the Effective Date
2. Transitions for Changes to an NSFR Requirement
3. Reservation of Authority To Extend Transitions
4. Cessation of Applicability
XII. Administrative Law Matters
A. Congressional Review Act
B. Plain Language
C. Regulatory Flexibility Act
D. Riegle Community Development and Regulatory Improvement Act
of 1994
E. Paperwork Reduction Act
F. OCC Unfunded Mandates Reform Act of 1995 Determination
I. Introduction
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
adopting in final form the agencies' 2016 proposal to implement a net
stable funding ratio (NSFR) requirement (the proposed rule), with
certain adjustments.\1\ The agencies also are finalizing two proposals
released subsequent to issuance of the proposed rule to revise the
criteria for determining the scope of application of the NSFR
requirement (tailoring proposals).\2\ The Board will issue a separate
proposal for notice and comment to amend its information collection
under its Complex Institution Liquidity Monitoring Report (FR 2052a) to
collect information and data related to the requirements of the final
rule.
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\1\ See ``Net Stable Funding Ratio: Liquidity Risk Measurement
Standards and Disclosure Requirements,'' 81 FR 35124 (June 1, 2016).
\2\ See Proposed Changes to Applicability Thresholds for
Regulatory Capital and Liquidity Requirements, 83 FR 66024 (December
21, 2018) (domestic tailoring proposal); Changes to Applicability
Thresholds for Regulatory Capital Requirements for Certain U.S.
Subsidiaries of Foreign Banking Organizations and Application of
Liquidity Requirements to Foreign Banking Organizations, Certain
U.S. Depository Institution Holding Companies, and Certain
Depository Institution Subsidiaries, 84 FR 24296 (May 24, 2019) (FBO
tailoring proposal). The agencies indicated that comments regarding
the NSFR proposed rule would be addressed in the context of a final
rule to adopt a NSFR requirement for large U.S. banking
organizations and foreign banking organizations.
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The final rule establishes a quantitative metric, the NSFR, to
measure the stability of the funding profile of large U.S. banking
organizations, U.S. intermediate holding companies of foreign banking
organizations, and their depository institution subsidiaries with $10
billion or more in total consolidated assets. The final rule also
requires these banking organizations to maintain minimum amounts of
stable funding to support their assets, commitments, and derivatives
exposures.\3\ By requiring banking organizations to maintain a stable
funding profile, the final rule reduces liquidity risk in the financial
sector and provides for a safer and more resilient financial system.
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\3\ See further discussion of balance sheet funding in section
V.C below.
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Sections II and III of this Supplementary Information section
provide background on the agencies' proposed rule and the tailoring
proposals (together, the proposals). Section IV provides an overview of
comments received on the proposals and significant changes to the
proposals under this final rule. Section V describes the final rule's
purpose, design, scope of application, and minimum requirements. The
discussion of the final rule in sections VI through IX describes
amendments to certain applicable definitions, the calculation of the
NSFR, requirements imposed on a banking organization that fails to meet
its minimum NSFR requirement, and the public disclosure requirements
for U.S. depository institution holding companies and U.S. intermediate
holding companies subject to the final rule. Sections X through XII
describe the agencies' impact assessment, the effective date and
transitions under the final rule, and certain administrative matters.
II. Background
The 2007-2009 financial crisis revealed significant weaknesses in
banking organizations' liquidity risk management and liquidity
positions, including how banking organizations managed their
liabilities to fund their assets in light of the risks inherent in
their on-balance sheet assets and off-balance sheet commitments.\4\ The
2007-2009 financial crisis also revealed an overreliance on short-term,
less-stable funding, and demonstrated the vulnerability of large and
internationally active banking organizations to funding shocks. For
example, weaknesses in funding management at many banking organizations
made them vulnerable to contractions in funding supply, and they had
difficulties renewing short-term funding that they had used to support
longer term or illiquid assets. As access to funding became limited and
asset prices fell, many banking organizations faced an increased
possibility of default and failure. To stabilize the global financial
markets, governments and central banks around the world provided
significant levels of support to these institutions in the form of
liquidity facilities and capital injections.
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\4\ See Senior Supervisors Group, Risk Management Lessons from
the Global Banking Crisis of 2008, (October 21, 2009), available at
https://www.newyorkfed.org/medialibrary/media/newsevents/news/banking/2009/SSG_report.pdf.
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In response to the 2007-2009 financial crisis, the Basel Committee
on Banking Supervision (BCBS) established two international liquidity
standards. In January 2013, the BCBS established a short-term liquidity
metric, the liquidity coverage ratio (LCR), to mitigate the risks
arising when banking organizations face significantly increased net
cash outflows in a period
[[Page 9122]]
of stress (Basel LCR standard).\5\ As a complement to the LCR, the BCBS
in October 2014 established the net stable funding ratio standard
(Basel NSFR standard) to mitigate the risks presented by banking
organizations supporting their assets with insufficiently stable
funding; the Basel NSFR standard requires banking organizations to
maintain a stable funding profile over a longer, one-year time
horizon.\6\ The agencies have been, and remain, actively involved in
the BCBS' international efforts, including the continued development
and monitoring of the BCBS's framework for liquidity.
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\5\ See ``Basel III: The Liquidity Coverage Ratio and liquidity
risk monitoring tools'' at https://www.bis.org/publ/bcbs238.htm.
\6\ See ``Basel III: the net stable funding ratio'' at https://www.bis.org/bcbs/publ/d295.htm. The BCBS relatedly published the net
stable funding ratio disclosure standards published by the BCBS in
June 2015. See ``Basel III: the net stable funding ratio'' (October
2014), available at http://www.bis.org/bcbs/publ/d295.pdf; ``Net
Stable Funding Ratio disclosure standards'' (June 2015), available
at http://www.bis.org/bcbs/publ/d324.pdf.
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Following the 2007-2009 financial crisis, the agencies implemented
several requirements designed to improve the largest and most complex
banking organizations' liquidity positions and liquidity risk
management practices. In 2014, the agencies adopted the LCR rule to
improve the banking sector's resiliency to a short-term liquidity
stress by requiring large U.S. banking organizations to hold a minimum
amount of unencumbered high-quality liquid assets (HQLA) that can be
readily converted into cash to meet projected net cash outflows over a
prospective 30 calendar-day stress period.\7\ In addition, pursuant to
section 165 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act \8\ (Dodd-Frank Act) and in consultation with the OCC
and FDIC, the Board adopted the enhanced prudential standards rule,
which established general risk management, liquidity risk management,
and stress testing requirements for certain bank holding companies and
foreign banking organizations.\9\ These reforms in the post-crisis
regulatory framework did not include a requirement that directly
addresses the relationship between a banking organization's funding
profile and its composition of assets and off-balance commitments.\10\
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\7\ 12 CFR part 50 (OCC); 12 CFR part 249 (Board); 12 CFR part
329 (FDIC). See also ``Liquidity Coverage Ratio: Liquidity Risk
Measurement Standards,'' 79 FR 61440 (October 10, 2014).
\8\ 12 U.S.C. 5365.
\9\ See 12 CFR part 252. See also ``Enhanced Prudential
Standards for Bank Holding Companies and Foreign Banking
Organizations,'' 79 FR 17240 (March 27, 2014). The Economic Growth,
Regulatory Relief, and Consumer Protection Act, which became law on
May 24, 2018, subsequently raised the asset thresholds for
applicability of enhanced prudential standards under section 165 of
the Dodd-Frank Act. See Public Law 115-174, 132 Stat. 1296 (2018).
The Board amended the scope of application of these requirements in
October 2019. See 84 FR 59032, (November 1, 2019).
\10\ During the same period, the Board implemented requirements
designed to enhance the capital positions and loss-absorbing
capabilities for global systemically important banking organizations
(GSIBs), which can also have the effect of improving the funding
profiles of these firms. The Board adopted a risk-based capital
surcharge for GSIBs in the United States that is calculated based on
a bank holding company's risk profile, including its reliance on
short-term wholesale funding (the GSIB capital surcharge rule). See
12 CFR 217 subpart H. The Board also adopted a total loss-absorbing
capacity (TLAC) requirement and a long-term debt requirement (LTD)
requirement (the TLAC/LTD rule) for U.S. GSIBs and the U.S.
operations of certain foreign GSIBs, which requires these firms and
operations to have sufficient amounts of equity and eligible long-
term debt to improve their ability to absorb significant losses and
withstand financial stress and to improve their resolvability in the
event of failure or material distress. See 12 CFR 252 subparts G and
P.
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III. Overview of the Proposed Rule and Proposed Scope of Application
A. The Proposed Stable Funding Requirement
In June 2016, the agencies invited comment on a proposal to
implement a net stable funding requirement for the U.S. banking
organizations that were subject to the LCR rule at that time.\11\ The
proposed rule was generally consistent with the Basel NSFR standard,
with adjustments to reflect the characteristics of U.S. banking
organizations, markets, and other U.S. specific considerations.\12\
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\11\ See ``Net Stable Funding Ratio: Liquidity Risk Measurement
Standards and Disclosure Requirements,'' 81 FR 35124 (June 1, 2016).
\12\ The BCBS developed the Basel NSFR standard as a longer-term
balance sheet funding metric to complement the Basel LCR standard's
short-term liquidity stress metric. In developing the Basel NSFR
standard, the agencies and their international counterparts in the
BCBS considered a number of possible funding metrics. For example,
the BCBS considered the traditional ``cash capital'' measure, which
compares the amount of a firm's long-term and stable sources of
funding to the amount of the firm's illiquid assets. The BCBS found
that this cash capital measure failed to account for material
funding risks, such as those related to off-balance sheet
commitments and certain on-balance sheet short-term funding and
lending mismatches. The Basel NSFR standard incorporates
consideration of these and other funding risks, as does this final
rule.
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The proposed rule would have required a banking organization to
maintain an amount of available stable funding (ASF) equal to or
greater than the banking organization's projected minimum funding
needs, or required stable funding (RSF), over a one-year time
horizon.\13\ A banking organization's NSFR would have been expressed as
the ratio of its ASF amount to its RSF amount, with a banking
organization required to maintain a minimum NSFR of 1.0.\14\
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\13\ For certain depository institution holding companies with
$50 billion or more, but less than $250 billion, in total
consolidated assets and less than $10 billion in on-balance sheet
foreign exposure, the Board separately proposed a modified NSFR
requirement.
\14\ Under the Board's proposed modified NSFR requirement, a
depository institution holding company subject to a modified NSFR
would have been required to maintain an NSFR of 1.0 but would have
calculated such ratio using a lower minimum RSF amount in the
denominator of the ratio, equivalent to 70 percent of the holding
company's RSF amount as calculated under the agencies' proposed
rule.
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Under the proposed rule, a banking organization's ASF amount would
have been calculated as the sum of the carrying values of the banking
organization's liabilities and regulatory capital, each multiplied by a
standardized weighting (ASF factor) ranging from zero to 100 percent to
reflect the relative stability of such liabilities and capital over a
one-year time horizon. Similarly, a banking organization's minimum RSF
amount would have been calculated as (1) the sum of the carrying values
of its assets, each multiplied by a standardized weighting (RSF factor)
ranging from zero to 100 percent to reflect the relative need for
funding over a one-year time horizon based on the liquidity
characteristics of the asset, plus (2) RSF amounts based on the banking
organization's committed facilities and derivative exposures. The
proposed rule also would have included public disclosure requirements
for depository institution holding companies subject to the proposed
rule.
B. Revised Scope of Application
The proposed rule would have applied to: (1) Bank holding
companies, savings and loan holding companies without significant
commercial or insurance operations, and depository institutions that,
in each case, have $250 billion or more in total consolidated assets or
$10 billion or more in on-balance sheet foreign exposure; and (2)
depository institutions with $10 billion or more in total consolidated
assets that are consolidated subsidiaries of such bank holding
companies and savings and loan holding companies. In addition, the
Board proposed a modified NSFR requirement that would have applied to
certain depository institution holding companies with total
consolidated assets of $50 billion or more.\15\
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\15\ Subsequent to the issuance of the proposed rule, certain
foreign banking organizations with substantial operations in the
United States were required to form or designate U.S. intermediate
holding companies. The scope of application under the proposed rule
would have included certain U.S. bank holding company subsidiaries
of foreign banking organizations.
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[[Page 9123]]
Subsequent to the proposed rule, the agencies published the
tailoring proposals to modify the application of the LCR rule and the
proposed rule consistent with considerations and factors set forth
under section 165 of the Dodd-Frank Act, as amended by the Economic
Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).\16\
As part of the tailoring proposals, the agencies proposed to establish
four risk-based categories for determining applicability of
requirements under the LCR rule and the proposed rule. The requirements
would have increased in stringency based on measures of size, cross-
jurisdictional activity, weighted short-term wholesale funding, nonbank
assets, and off-balance sheet exposures (risk-based indicators). In
addition, the tailoring proposals would have removed the Board's
proposed modified NSFR requirement for certain depository institution
holding companies.\17\
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\16\ Public Law 115-174, 132 Stat. 1296 (2018).
\17\ The tailoring proposals also would have removed the LCR
rule's modified LCR requirement that at the time applied to certain
depository institution holding companies with total consolidated
assets of $50 billion or more.
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In October 2019, the agencies adopted a final rule (tailoring final
rule) that amended the scope of application of the LCR rule so that it
applies to certain U.S. banking organizations and U.S. intermediate
holding companies of foreign banking organizations, each with $100
billion or more in total consolidated assets, together with certain of
their depository institution subsidiaries.\18\ The tailoring final rule
applies LCR requirements on the basis of the four risk-based categories
determined by the risk profile of the top-tier banking organization,
including a depository institution that is not a subsidiary of a
depository institution holding company.\19\ The effective date of the
revisions to the LCR rule's scope was December 31, 2019.\20\
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\18\ 84 FR 59230 (November 1, 2019). In a change from the
tailoring proposals, the tailoring final rule applied LCR
requirements to a U.S. intermediate holding company of a foreign
banking organization on the basis of risk-based indicators measured
for the U.S intermediate holding company and not the foreign banking
organization's combined U.S. operations.
\19\ A ``top-tier banking organization'' means the top-tier bank
holding company, U.S. intermediate holding company, savings and loan
holding company, or depository institution domiciled in the United
States.
\20\ The tailoring final rule noted that comments regarding the
NSFR proposal would be addressed in the context of any final rule to
adopt a NSFR requirement for large U.S. banking organizations and
U.S. intermediate holding companies. 84 FR at 59235.
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IV. Summary of Comments and Overview of Significant Changes to the
Proposals
The agencies received approximately 30 comments on the proposed
rule, as well as approximately 20 comments related to the NSFR rule in
response to the tailoring proposals. Commenters included U.S. and
foreign banking organizations, trade groups, public interest groups,
and other interested parties. Agency staff also met with some
commenters at their request to discuss their comments on the proposed
rule and the tailoring proposals.\21\ Although many commenters
supported the goal of improving funding stability, many commenters
expressed concern regarding the overall proposal and criticized
specific aspects of the proposed rule.
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\21\ Summaries of these meetings are available on the agencies'
public websites. See https://www.regulations.gov/docket?D=OCC-2014-0029 (OCC), https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R%2D1537&doc_ver=1 (Board), and https://www.fdic.gov/regulations/laws/federal/2016/2016-net_stable-funding-ratio-3064-ae44.html (FDIC).
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A number of commenters argued that the proposed rule was
unnecessary because it would target risks already addressed by existing
regulations, such as the LCR rule. Other commenters expressed concern
regarding the design and calibration of the proposed rule. These
commenters requested clarification on the conceptual underpinnings of
the NSFR, requested additional quantitative support for the proposed
ASF and RSF factors, and argued that the proposed rule did not satisfy
Administrative Procedure Act (APA) requirements because it provided
insufficient support for its design and calibration. Some commenters
criticized the proposed rule as not being appropriately tailored for
implementation in the United States and argued that the proposed rule
was more stringent than the Basel NSFR standard such that it could
disadvantage U.S. banking organizations relative to their foreign
competitors. Relatedly, certain commenters requested that the agencies
conform the final rule to the European Union's implementation of the
Basel NSFR standard (EU NSFR rule) in order to minimize potential
adverse effects on U.S. banking organizations.\22\
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\22\ The European Union (EU) implementation of the NSFR
requirement, effective 2021, includes targeted adjustments from the
Basel NSFR standard in order to reflect EU specificities generally
consistent with the EU implementation of the Basel LCR standard. The
EU's NSFR requirements also include targeted adjustments to support
sovereign bond markets. See Regulation (EU) 2019/876 of the European
Parliament and the Council, May 20, 2019, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32019R0876 (EU NSFR
rule).
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Some commenters expressed concern that the proposed rule could
result in increased costs to banking organizations and the financial
system that would exceed the proposed rule's benefits.\23\
Specifically, some commenters argued that the proposed rule could
increase funding and compliance costs, which could cause banking
organizations to withdraw from or reduce the scale of certain business
activities with low margins, including certain capital markets-related
activities. According to the commenters, this could have the effect of
tightening credit and increasing borrowing costs for households and
businesses in the United States. Commenters also argued that the
funding and compliance costs of the proposed rule could increase
financial stability risk by shifting certain financial intermediation
activities from the banking sector to less regulated ``shadow banking''
channels. Commenters also expressed concern that the proposed rule
could have pro-cyclical effects, for example, by incentivizing banking
organizations to restrict lending to improve their NSFRs during periods
of stress.
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\23\ The agencies received a number of comments that were not
specifically responsive to the proposed rule but more generally
requested that the agencies assess the combined costs of post-crisis
regulations on the availability of credit and the economy.
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Additionally, many commenters requested changes to specific
elements of the proposed rule. For example, commenters recommended the
agencies assign higher ASF factors for certain liabilities, such as
certain types of deposits, and lower RSF factors for certain categories
of assets and committed facilities. Some commenters recommended changes
to the proposed rule's treatment of derivatives, particularly the
treatment of variation margin and the treatment of potential valuation
changes in a derivatives portfolio. In addition, a number of commenters
requested that the agencies modify the proposed rule to assign zero
percent RSF and ASF factors to certain assets and liabilities
commenters viewed as interdependent such that the specific,
identifiable assets are funded by the specific, identifiable
liabilities of an equal or similar tenor and, therefore, present little
or minimal funding risk. Finally, some commenters requested that the
agencies delay implementation of the NSFR requirement to allow banking
organizations additional time to build internal reporting systems and
comply with disclosure requirements.
[[Page 9124]]
The agencies received a number of comments requesting the agencies
reconsider the proposed rule's scope of application. Specifically, many
commenters argued that the proposed thresholds for application were
arbitrary and insufficiently risk-sensitive and requested the agencies
further tailor the scope of the proposed rule. The agencies also
received a number of comments on the appropriateness of the revised
scope of application in the tailoring proposals.
As discussed throughout this Supplementary Information section, the
final rule retains the general design for the NSFR calculation and
calibrates minimum requirements to the risk profiles of banking
organizations in a manner consistent with the tailoring final rule.
However, the final rule includes a number of modifications, including:
The final rule assigns a zero percent RSF factor to
unencumbered level 1 liquid asset securities and certain short-term
secured lending transactions backed by level 1 liquid asset securities
(see section VII.D of this Supplementary Information section).
The final rule provides more favorable treatment for
certain affiliate sweep deposits and non-deposit retail funding (see
section VII.C of this Supplementary Information section).
The final rule permits cash variation margin to be
eligible to offset a covered company's current exposures under its
derivatives transactions even if it does not meet all of the criteria
in the agencies' supplementary leverage ratio rule (SLR rule).\24\ In
addition, variation margin received in the form of rehypothecatable
level 1 liquid asset securities also would be eligible to offset a
covered company's current exposures (see section VII.E of this
Supplementary Information section).
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\24\ 12 CFR 3.10(c)(4) (OCC); 12 CFR 217.10(c)(4) (Board); 12
CFR 324.10(c)(4) (FDIC). In addition, the final rule includes a new
provision to exclude assets received by a covered company as
variation margin under derivative transactions from the treatment of
rehypothecated assets that are off-balance sheet assets in
accordance with U.S. generally accepted accounting principles
(GAAP).
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The final rule reduces the amount of a covered company's
gross derivatives liabilities that will be assigned a 100 percent RSF
factor (see section VII.E of this Supplementary Information section).
V. The Final Rule's Purpose, Design, Scope of Application, and Minimum
Requirements
A. Purpose of the Final Rule
The NSFR is designed to address risks that are inherent in the
business of banking. Banking organizations perform maturity and
liquidity transformation,\25\ which is an important financial
intermediation process that contributes to efficient resource
allocation and credit creation. To conduct maturity and liquidity
transformation and meet the long-term credit needs of businesses and
households, banking organizations also must address the short-term
liquidity preferences of funds providers. These transformation
activities create a certain inherent level of risk to banking
organizations, the U.S. financial system, and the broader economy
caused by banking organizations' potential overreliance on unstable
funding sources relative to the composition of their balance sheets.
Such overreliance could potentially result in the failure of banking
organizations, disruptions to asset prices, and reduction in the
provision of credit to households and businesses.
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\25\ To conduct financial intermediation, banking organizations
obtain resources that are currently surplus to the needs of certain
parts of the economy (funds providers) and lend them to other parts
of the economy that currently need those resources (users of funds).
Funds providers generally prefer to supply their resources on a
short-term basis with easy access to their funds (liquid resources);
for example, household savings. Users of funds often need these
resources on a long-term basis and in ways that make such resources
difficult to convert to cash (illiquid resources); for example,
building factories or capital for business growth. Maturity and
liquidity transformation refers to the process of bridging the
competing needs of funds providers and users of funds.
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A banking organization may mitigate these risks by having funding
sources that are appropriately stable over time. Because short-term
funding generally tends to be less expensive than longer-term funding,
banking organizations have incentives to fund their longer-term or
less-liquid assets with less stable, shorter-term liabilities. While
this approach may benefit short-term earnings, it may lead to
imbalances between how a banking organization chooses to fund its
assets and the funding it may need to maintain the assets over time, as
well as increases in liquidity and funding risk arising from potential
customer and counterparty runs and a more interconnected financial
sector. In turn, this creates a funding risk for banking organizations,
the financial system, and the broader economy. The final rule requires
large banking organizations to avoid excessively funding long-term and
less-liquid assets with short-term or less-reliable funding and thus
reduces the likelihood that disruptions in a banking organization's
regular funding sources would compromise its funding stability and
liquidity position.
The final rule establishes a minimum NSFR requirement that is
applicable on a consolidated basis to certain top-tier banking
organizations with total consolidated assets of $100 billion or more,
together with certain depository institution subsidiaries (together,
covered companies). Consistent with the proposed rule, the final rule
requires a covered company to calculate an NSFR based on the ratio of
its ASF amount to its RSF amount and maintain an NSFR equal to or
greater than 1.0 on an ongoing basis.\26\ In addition, the final rule,
like the proposed rule, includes public disclosure requirements for
U.S. depository institution holding companies and U.S. intermediate
holding companies of foreign banking organizations that are subject to
the final rule.
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\26\ ASF factors are described in section VII.C, RSF factors are
described in section VII.D, and the derivatives RSF amount is
described in section VII.E of this Supplementary Information
section.
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B. Comments on the Need for the NSFR Requirement
Banking organizations have improved their liquidity risk management
practices and liquidity positions since the 2007-2009 financial crisis,
including by holding larger liquidity buffers, avoiding excessive
reliance on very short-term unstable wholesale funding sources, and
improving their internal controls and governance structures surrounding
liquidity risk management. The NSFR requirement aims to preserve these
improvements and help position covered companies to act as resilient
financial intermediaries through potential future periods of
instability. The agencies received a number of comments arguing that
the proposed rule is unnecessary because other elements of the
agencies' regulatory framework already sufficiently address liquidity
and funding risk at covered companies.\27\ Some commenters also argued
that the agencies should not apply an NSFR requirement because many
covered companies have improved their current funding profiles relative
to the period leading up to the 2007-2009 financial crisis. By
contrast, one commenter supported the proposed rule, asserting that it
would be an important complement to the LCR rule because it would
address funding stability and
[[Page 9125]]
maturity mismatch more broadly and over a longer time horizon.
---------------------------------------------------------------------------
\27\ Commenters provided examples, including the LCR rule; the
Board's enhanced prudential standards rule; the TLAC/LTD rule; the
GSIB capital surcharge rule (which includes a measure of weighted
short-term wholesale funding), SLR rule, and other capital
requirements; single counterparty credit limits; mandatory clearing
requirements and margin requirements for non-cleared swaps and non-
cleared security-based swaps; and Board and FDIC supervisory
guidance relating to liquidity in connection with resolution
planning.
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The final rule is intended to complement and reinforce other
elements of the agencies' regulatory framework that strengthen
financial sector resiliency by addressing risks that are not directly
addressed by the agencies' other regulatory measures. For example, the
NSFR rule provides an important complement to the LCR rule, which
addresses the risk of increased net cash outflows over a 30-calendar
day period of stress by requiring banking organizations to hold HQLA
that can be readily converted to cash. While addressing short-term
cash-flow related risks is a core component of a banking organization's
liquidity risk management, a banking organization could comply with the
LCR requirement and still fund its long-term or illiquid assets and
commitments with short-term liabilities not sufficiently stable to
preserve these assets over an extended period.\28\ The final rule
further complements the LCR rule by mitigating the risk of a banking
organization concentrating funding just outside the LCR's 30-day
window. The final rule also complements requirements related to firm-
specific measures of funding risk under the Board's enhanced prudential
standards rule by providing a standardized measure of the stability of
a banking organization's funding profile, which would promote greater
comparability of funding structures across banking organizations and
improve transparency and market discipline through public disclosure
requirements.\29\ With respect to the other rules and guidance
commenters cited as sufficiently addressing liquidity and funding risk,
these elements of the agencies' regulatory framework do not directly
address balance sheet funding risks for covered companies on a going-
concern basis. \30\
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\28\ Cash flow projections, liquidity stress testing, and
liquidity buffer requirements for certain covered holding companies
under the Board's enhanced prudential standards rule complement the
LCR rule by addressing cash flow risks with additional firm-specific
granularity and across additional time horizons, including a one-
year planning horizon. These requirements do not directly address
balance sheet funding risks.
\29\ See 12 CFR 252.35 and 12 CFR 252.157.
\30\ The final rule reflects that regulatory capital elements
and long-term debt required under the agencies' regulatory capital
rule, the Board's GSIB capital surcharge rule, and the TLAC/LTD rule
provide stable funding by virtue of the long-term or perpetual tenor
of such regulatory capital elements and long-term debt. The Board's
GSIB capital surcharge rule and the tailoring final rule include a
measure of historic funding composition, weighted short-term
wholesale funding, but this measure does not measure or directly
address funding risk. The weighted short-term wholesale funding
measure is based on a banking organization's average use of short-
term funding sources over the prior year but does not reflect a
banking organization's assets or the banking organization's use of
longer-term funding sources.
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Reliance on less-stable sources of funding may require a banking
organization to repay or replace its funding more often and make it
more exposed to sudden funding market disruptions. Potential loss of
funding can restrict a banking organization's ability to support its
assets and commitments over the long term, generating both safety and
soundness and financial stability risks. The final rule is designed to
mitigate such risks by directly increasing the funding resilience of
subject banking organizations. The final rule mitigates risks to U.S.
financial stability by improving the capacity of banking organizations
to continue to support their assets and lending activities across a
range of market conditions. A covered company that sufficiently aligns
the stability of its funding sources with its funding needs based on
the liquidity characteristics of its assets and commitments is better
positioned to avoid asset fire sales and continue to function as a
financial intermediary in the event of funding or asset market
disruptions. As a result, a covered company will be better positioned
to continue to operate and lend, which promotes more stable and
consistent levels of financial intermediation in the U.S. economy
across economic and market conditions.
As a standardized metric, the NSFR also promotes greater
comparability across covered companies and foreign banks subject to
substantially similar requirements in other jurisdictions and
facilitates supervisory assessments of vulnerability. Through public
disclosure requirements, the NSFR rule also promotes greater market
discipline through enhanced transparency.\31\ In these ways, a
standardized long-term funding measure, such as the NSFR, is intended
to work in tandem with internal models-based measures to provide a more
robust and complete framework to monitor and manage funding and
liquidity risks of covered companies.
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\31\ Public disclosure requirements are not required for non-
standardized measurements of liquidity risk required under the
Board's enhanced prudential standards rule.
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C. The NSFR's Conceptual Framework, Design, and Calibration
A number of commenters questioned the conceptual framework and
design of the proposed rule, as well as its overall analytical basis
and the calibrations of specific components. In particular, commenters
argued that the agencies did not provide sufficient justification or
data analysis to support the proposed calibration of the NSFR rule's
relevant factors. Some commenters questioned whether the calibrations
in the proposed rule reflected a one-year period of stress or whether
the calibration was intended to reflect different ``business-as-usual''
conditions.\32\ A number of commenters also argued that if the proposed
rule was not calibrated based on the same stress assumptions as the LCR
rule, the proposed rule should not incorporate elements and definitions
from the LCR rule. Some commenters also requested that the agencies
reconsider elements of the proposed rule that they believed to be more
conservative than the LCR rule. In addition, several commenters argued
that the proposed rule was focused on commercial banking and was
therefore not sensitive enough to the different business models of
covered companies, such as custody banks and banking organizations
significantly involved in capital markets. Another commenter stated
that the NSFR is a static measure and does not take into account
actions a firm may take in the future to address funding risk. As
addressed in sections VII.C and VII.D of this Supplementary Information
section, the agencies also received a number of comments on the
proposed values of ASF factors and RSF factors where the commenter's
concern was predicated on the design of the NSFR. For example,
commenters described the value of certain ASF factors as conservative
based on the assumption that the values represented cash-flow amounts
and commenters therefore made direct comparison to factors used in the
LCR rule. In light of these comments, the agencies are clarifying in
this Supplementary Information section the conceptual basis for the
NSFR design under the final rule.
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\32\ Certain commenters also expressed concerns about the
descriptions by the BCBS of the Basel NSFR standard between 2009 and
2014 and the opportunities to comment on certain elements of the
international standard. Commenters argued that the agencies should
remove elements of the proposed rule or re-open the comment period
because, in these commenters' view, the public was unable to comment
on the inclusion of certain elements in the Basel NSFR standard.
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1. Use of an Aggregate Balance Sheet Measure and Weightings
The NSFR's conceptual design builds on commonly used assessments of
balance sheet funding.\33\ The NSFR is a standardized measure of a
banking organization's funding relative to its assets and commitments.
Consistent with the Basel NSFR standard, the final
[[Page 9126]]
rule conceptually draws on supervisory and industry-developed funding
risk management measures, with modifications to account for material
funding risks and policy considerations.\34\ Supervisors and industry
stakeholders such as credit rating agencies and equity analysts
routinely assess the funding profiles of banking organizations through
comparisons of the compositions of the banking organization's assets
and liabilities.\35\ The NSFR's design as a ratio of weighted
liabilities and regulatory capital to weighted assets and commitments
is consistent with these approaches. Using a ratio measure is
appropriate for measuring and addressing funding risks because it
provides a holistic assessment of a banking organization's funding
profile based on the aggregate composition of the banking
organization's balance sheet and commitments rather than on individual
assets or liabilities.
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\33\ See supra note 12.
\34\ For example, the final rule takes into account policy
considerations such as externalities associated with an unstable
funding structure that can affect the safety and soundness of other
banking organizations and U.S. financial stability and an interest
in maintaining financial intermediation of covered companies across
economic and market conditions.
\35\ For example, supervisors and industry analysts compare
compositions of assets and liabilities though the use of a loans-to-
deposits ratio or by defining a measure of ``noncore'' funding
dependency.
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The final rule takes into account the differing risk
characteristics of a covered company's various assets, liabilities, and
certain off-balance sheet commitments and applies different weightings
(ASF and RSF factors) to reflect these risk characteristics. Under the
final rule, ASF and RSF factors are used to determine the numerator and
denominator of the NSFR and reflect, respectively, the stability of
funding, and the need for assets and commitments to be supported by
such funding over a range of market conditions, each as assessed under
the final rule. As described in sections VII.C and VII.D of this
Supplementary Information section, the final rule uses broad categories
of liabilities and assets to assess relative stability and funding
needs, respectively. These weightings make the NSFR assessment risk
sensitive by differentiating between types of assets and types of
liabilities.
While the NSFR is a simplified and standardized metric, meeting the
NSFR minimum requirement of 1.0 provides evidence that a covered
company has, in aggregate, a sufficient amount of stable liabilities
and regulatory capital to support over a one-year time horizon its
aggregate assets and commitments based on the liquidity characteristics
of such aggregate assets and commitments.\36\ Given the size,
complexity, scope of activities, and interconnectedness of covered
companies, a covered company with an NSFR of less than 1.0 may face an
increased likelihood of liquidity stress or of having to dispose of
illiquid assets, and may be less well positioned to maintain its level
of financial intermediation over various market conditions.
---------------------------------------------------------------------------
\36\ As described in section V.E.3 of this Supplementary
Information section, the final rule applies an adjustment factor to
the denominator of the ratio to reflect the risk profile of a
covered company.
---------------------------------------------------------------------------
Commenters expressed concerns that application of RSF factors to
specific assets has the effect of imposing a requirement on covered
companies to issue additional long-dated liabilities to fund such
assets. The final rule does not prescribe the method by which a covered
company must meet its minimum requirement. Under the final rule, the
NSFR requirement reflects the aggregate balance sheet of a covered
company, and the final rule does not apply separate minimum funding
requirements to individual assets, legal entities, or business lines
represented on the balance sheet. For example, a covered company that
has an NSFR of 1.0 and increases its holding of certain long-dated
assets is not required to issue additional long-dated liabilities under
the final rule but, rather, has discretion on how to continue to meet
its minimum requirement, including by changing its overall asset
composition.
2. Use of a Simplified and Standardized Point-in-Time Metric
Many commenters expressed concerns or suggestions that related to
the level of granularity in the NSFR's conceptual design or that the
NSFR was a point-in-time measure. For example, commenters suggested the
NSFR include additional RSF and ASF factors tailored to specific
products and activities.\37\ Commenters similarly expressed concerns
about the number of residual maturity categories used in the NSFR. A
number of commenters criticized the design of the NSFR as a static
metric arguing that the measurement of the funding risk of a covered
company's aggregate balance sheet should consider actions that banking
organizations may undertake in the future.
---------------------------------------------------------------------------
\37\ See sections VII.C, VII.D and VII.E of this Supplementary
Information section.
---------------------------------------------------------------------------
In response to these concerns, the agencies note that a broad
comparison of the stability of a covered company's funding relative to
the liquidity characteristics of its assets achieves the final rule's
funding risk-mitigation objectives. To limit the burden on covered
companies and to maximize the comparability of the metric between each
covered company and other international banking organizations, the NSFR
is designed as a simplified metric that uses a small number of
categories of assets, exposures, liabilities, counterparty types, and
residual maturity buckets to achieve its objective. While the balance
sheets of large banking organizations reflect a complex variety of
transactions and business activities, additional granularity could be
burdensome to covered companies relative to the goals of the NSFR
requirement. The NSFR was designed holistically and introducing
additional granularity could require recalibration of certain other
elements. For example, the incorporation of additional RSF factors may
require other RSF factors to be adjusted upward, as they currently
reflect an aggregate view of the level of stable funding required for
the entire set of assets or off-balance sheet commitments in a given
category. Additionally, to the extent possible, the metric utilizes the
carrying values of assets and liabilities on a covered company's
balance sheet under U.S. Generally Accepted Accounting Principles
(GAAP) and limits the need for additional valuations.
In response to comments that the NSFR is not sensitive to the
different business models of covered companies, the agencies note that
the NSFR is designed to allow comparison across covered companies and
other international firms, and to minimize differences in how liquidity
characteristics of liabilities and assets are evaluated by covered
companies. As a standardized metric, the final rule is constructed to
ensure a sufficient amount of stable funding across all covered
companies, regardless of their business models. The NSFR generally does
not differentiate by a banking organization's business model, its lines
of business, or the purpose for which individual assets or liabilities
are held on its balance sheet. For example, the NSFR treats securities
held on a covered company's balance sheet based on the securities'
credit risk and market characteristics regardless of whether such
securities are held as long-term investments, as hedging instruments,
or as market making inventory. While the composition of banking
organizations' balance sheets varies based on business models and the
services provided to customers, the NSFR is not focused on
[[Page 9127]]
any particular business model (for example, commercial banking), as
suggested by commenters.
Like most prudential requirements, the NSFR is a measure of a
covered company's condition at a point in time and by design does not
consider the broad variety of actions that management may take in the
future. As a general principle, the agencies do not speculate about
future transactions, contingencies, or potential managerial remediation
steps that the covered company may take.\38\
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\38\ As noted above, the point-in-time NSFR complements forward-
looking assessments of risk, such as a covered company's internal
liquidity stress testing practices.
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3. Use of a Time Horizon
Certain commenters questioned the NSFR's design in respect to its
time horizon. While the NSFR measures a banking organization's balance
sheet and commitments at a point in time, the assessment of adequate
funding considers the stability of, and the need for, funding with
reference to a general one-year time horizon and a range of market
conditions. The measurement incorporates contractual maturities but
generally does not reflect expectations about the year following the
calculation date.\39\ Rather, consistent with the Basel NSFR standard,
the NSFR calibrations seek to reflect resilient credit intermediation
to the real economy and general behaviors by banking organizations and
their counterparties.
---------------------------------------------------------------------------
\39\ As described below, calculation date means any date on
which a covered company calculates its NSFR. See section VI.A.1 of
this Supplementary Information section.
---------------------------------------------------------------------------
The use of a time horizon for the assessment of funding imbalances
is appropriate because the residual maturities of liabilities and
assets of a covered company at the calculation date are, among other
characteristics, indicative of the liabilities' stability and the
assets' need for funding, respectively. For example, liabilities that
are due to mature in the short term will generally provide less
stability to a banking organization's balance sheet than longer-term
liabilities. Similarly, certain short-dated assets maturing in less
than one year should require a smaller portion of funding to be
maintained over a one-year time horizon because banking organizations
may allow such assets to mature without replacing them. The choice of a
one-year time horizon is also consistent with traditional accounting
and supervisory measures of short-term and long-term financial
instruments and exposures.
4. Stress Perspectives and Using Elements From the LCR Rule
A number of commenters requested clarification on the extent to
which the NSFR calibrations incorporated stress assumptions. Consistent
with the complementary designs of the Basel LCR and NSFR standards, the
final rule is designed differently from, and to be complementary to,
the LCR rule. Unlike the LCR, which compares immediately available
sources of cash to potential stressed cash outflows over a 30-calendar
day period, the NSFR is not a cash-flow coverage metric, and ASF and
RSF amounts are not cash-flow amounts. While ASF factors take into
account the characteristics of liabilities that influence relative
funding stability across a range of market conditions, the values of
ASF factors do not represent liability outflow rates. Similarly, while
RSF factors take into account the liquidity characteristics of assets
that generally influence their need for funding over a one-year
horizon, the values of RSF factors do not reflect the monetization
value of assets. In response to comments that the values of factors
used in the LCR rule imply that ASF or RSF factors were incorrectly
calibrated, it is important to note that comparisons of the values of
ASF or RSF factors under the final rule to the values of outflow and
inflow rates used in the LCR rule are not indicative of the relative
conservatism of the requirements under both rules.\40\
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\40\ See sections VII.C and VII.D of this Supplementary
Information section.
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Further, the final rule is not designed to function as a one-year
liquidity stress test, and therefore its ASF and RSF factors are not
assigned based on, or intended to directly translate to, assumed cash
inflows and outflows over a one-year period of stress. Rather, the
final rule is intended to serve as a balance-sheet metric, and ASF and
RSF factors reflect, respectively, the relative stability of funding
and the need for funding based on the liquidity characteristics of
assets and commitments, each across a range of economic and financial
conditions.\41\ Funding and liquidity characteristics of liabilities
and assets under stress conditions are therefore relevant to, but not
determinative of, ASF and RSF factors. As a result, ASF and RSF factor
calibrations take into account potential effects of stress on the
stability of funding and liquidity characteristics of assets and
commitments, but are not calibrated to require a covered company to
retain a buffer against a stress period of one year, as discussed in
sections VII.C and VII.D of this Supplementary Information section.
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\41\ The LCR rule compares cash-generating resources (i.e., the
HQLA amount) to cash needs (total net cash outflows) in a 30-day
stress. The final rule compares sources of stable funding (ASF
amount) to the need for stable funding (RSF amount), each calibrated
over a 12-month horizon and across a range of market conditions.
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Although the NSFR generally is not calibrated to the stress
assumptions of the LCR rule, it nevertheless shares certain common
elements and definitions with the complementary LCR where such
consistency is helpful. The alignment of the final rule with the
structure and design of the LCR rule, where appropriate, aims to
improve efficiency and limit compliance costs to covered companies by
allowing them more efficiently to implement the two requirements. In
response to commenters' concerns that sharing definitions and elements
with the LCR rule inappropriately incorporates stress assumptions into
the NSFR requirement, the agencies note that many shared elements and
defined terms are independent of stress assumptions.\42\ Moreover, to
the extent that the final rule incorporates definitions of the LCR
rule, their usage in the final rule generally reflects assumptions that
are specific to the final rule.\43\ Finally, while the final rule is
not calibrated based on a one-year stress, some considerations of
conservatism are still relevant. For example, as discussed in section
VII.B of this Supplementary Information section, the final rule
generally applies the same assumptions for determining maturity as the
LCR rule because conservative assumptions regarding the maturity of
funding relative to the duration of asset holdings are appropriate for
assessing the risks presented by mismatches in balance sheet funding.
---------------------------------------------------------------------------
\42\ For example, the definitions of ``general obligation,''
``affiliate,'' and ``company'' do not incorporate an assumption of
stress.
\43\ For example, the final rule applies the same ASF factor to
certain forms of funding from a financial sector entity that mature
in six months or less, regardless of whether such funding is in the
form of a secured funding transaction or unsecured wholesale
funding, whereas the LCR rule generally treats these categories of
funding separately for purposes of determining applicable outflow
amounts. See 12 CFR 50.32(h) and (j) (OCC); 12 CFR 249.32(h) and (j)
(Board); 12 CFR 329.32(h) and (j) (FDIC).
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5. Analytical Basis of Factor Calibrations and Supervisory
Considerations
Several commenters argued that the agencies did not sufficiently
rely on empirical analysis to inform various portions of the proposed
rule. Other commenters argued that the agencies
[[Page 9128]]
did not sufficiently disclose the quantitative data and analyses on
which the agencies relied.
As explained in detail in sections VII.C and VII.D of this
Supplementary Information section, the liabilities within an ASF factor
category generally exhibit similar levels of funding stability and the
assets within an RSF factor category generally exhibit similar
liquidity characteristics. In addition, there is a sufficient number of
ASF factor and RSF factor categories in the final rule to differentiate
among the funding risks presented by the assets, commitments, and
liabilities covered by the NSFR. The ASF and RSF factors as calibrated
for these categories of liabilities and assets, and as applied under
the Basel NSFR standard to similar categorizations, are generally
appropriate for U.S. implementation.\44\ However, as discussed below,
the final rule departs from the Basel NSFR standard where doing so
would support important domestic policy objectives. The agencies
regularly review their regulatory framework, including liquidity
requirements, to ensure it is functioning as intended and will continue
to assess the NSFR's calibration under the final rule. A more specific
discussion of the agencies' analysis is provided in sections VII.C and
VII.D of this Supplementary Information section, which discuss the
comments received on the calibration of ASF and RSF factors.
---------------------------------------------------------------------------
\44\ Supervisory experience is informed in part through
confidential data obtained through the FR 2052a report.
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Consistent with the proposed rule and as noted above, certain ASF
and RSF factor assignments in the final rule take into account policy
considerations relating to the safety and soundness of covered
companies and U.S. financial stability.\45\ For example, the assignment
of a zero percent ASF factor to wholesale funding from financial sector
entities that matures within six months generally reflects supervisory
concerns related to the financial stability risks related to
overreliance on this source of funding by large interconnected banking
organizations. In calibrating the factors, the agencies also considered
behavioral and operational factors that can affect funding stability or
asset liquidity, such as reputational incentives that could cause a
covered company to maintain lending to certain counterparties.\46\
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\45\ See sections VII.C and VII.D of this Supplementary
Information section.
\46\ See section VII of this Supplementary Information section.
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In response to commenters' assertion that the agencies failed to
disclose quantitative data and analyses used to support the proposed
rule, the agencies note that they disclosed in the proposed rule
material that was available and reliable. In the instances in which the
agencies cited data in support of the proposed rule, the agencies
identified that data, acknowledged the shortcomings of the available
data, and invited input from the public. In developing the final rule,
the agencies have considered the comments received.
D. Adjusting Calibration for the U.S. Implementation of the NSFR
As noted above, the final rule is based on the general framework of
the Basel NSFR standard. Some commenters argued that the agencies
should not adopt the proposed rule, or should modify certain elements
of the proposed rule, because the Basel NSFR standard is an
internationally negotiated standard that was not properly tailored to
reflect U.S. financial, legal, and market conditions. By contrast, a
number of commenters argued that the final rule should be more
consistent with the Basel NSFR standard, particularly with respect to
elements that would be more stringent under the proposed rule than the
Basel NSFR standard.
In developing the proposed and final rules, the agencies considered
the Basel NSFR standard as well as financial, legal, market, and other
considerations specific to the United States. Basing the final rule on
the general framework of the Basel NSFR standard helps promote
competitive equity with respect to covered companies and other large,
internationally active banking organizations in other jurisdictions,
facilitate regulatory consistency across jurisdictions, and ensure a
minimum level of resiliency across the global financial system. Where
appropriate, the final rule differs from the Basel NSFR standard to
reflect specific characteristics of U.S. markets, practices of U.S.
banking organizations and domestic policy objectives.\47\
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\47\ Notable divergences in the final rule from the Basel NSFR
standard include the treatment of level 1 liquid asset securities,
certain short-term secured lending transactions backed by level 1
liquid assets, variation margin in derivatives transactions, and
non-deposit retail funding.
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E. NSFR Scope and Minimum Requirement Under the Final Rule--Full and
Reduced NSFR
1. Proposed Minimum Requirement and the Tailoring Final Rule
In the tailoring proposals, the agencies re-proposed the scope of
application of the NSFR proposed rule. The tailoring proposals would
have established four categories of requirements--Category I, II, III,
and IV--that would have been used to tailor the application of the NSFR
requirement based on the risk profile of a top-tier banking
organization as measured by the risk-based indicators.\48\ Covered
companies subject to Category I and II requirements would have been
subject to the full requirements of the proposed rule (full NSFR).
Under Category III or Category IV, however, covered companies would
have been subject to further tailored NSFR requirements based on the
top-tier banking organization's level of weighted short-term wholesale
funding. Specifically, a covered company that meets the criteria for
Category III with $75 billion or more in average weighted short-term
wholesale funding would have been subject to the full NSFR requirement.
By contrast, banking organizations in Category III with less than $75
billion in average weighted short-term wholesale funding, or in
Category IV with $50 billion or more in average weighted short-term
wholesale funding, would have been required to comply with a reduced
NSFR (reduced NSFR) requirement, calibrated at a level equivalent to
between 85 and 70 percent of the full NSFR requirement.\49\ Banking
organizations in Category IV with less than $50 billion in weighted
short-term wholesale funding would not have been subject to an NSFR
requirement. In addition, a depository institution subsidiary of a
covered company meeting the criteria of Category I, II, or III would
have been required to comply with the NSFR requirement to which its
parent covered company was subject if the depository institution
subsidiary's total consolidated assets were $10 billion or greater.
Depository institution subsidiaries with less than $10 billion in total
consolidated assets, as well as depository institution subsidiaries of
covered companies meeting the criteria of Category IV, would not have
been required to comply with an NSFR requirement.
---------------------------------------------------------------------------
\48\ See section III.B of this Supplementary Information
section. In the tailoring proposals, the proposed scope of
application for the NSFR was the same as that proposed for the LCR
rule.
\49\ As noted above, the tailoring proposals would have removed
the Board's modified LCR and modified NSFR requirement because the
reduced LCR and reduced NSFR would be better designed for assessing
liquidity and funding risks for banking organizations in Categories
III and IV.
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The tailoring final rule adopted these categories, with certain
changes, for purposes of the LCR rule and the agencies' capital rule.
Under the tailoring final rule, Category I requirements apply to U.S.
global systemically important banks (GSIBs)
[[Page 9129]]
and any of their depository institution subsidiaries with $10 billion
or more in consolidated assets. Category II requirements apply to top-
tier banking organizations,\50\ other than U.S. GSIBs, with $700
billion or more in consolidated assets or $75 billion or more in
average cross-jurisdictional activity, and to their depository
institution subsidiaries with $10 billion or more in consolidated
assets. Category III requirements apply to top-tier banking
organizations that have $250 billion or more in consolidated assets, or
that have $100 billion or more in consolidated assets and also have $75
billion or more in (1) average nonbank assets, (2) average weighted
short-term wholesale funding, or (3) average off-balance sheet
exposure, that are not subject to Category I or II requirements.
Category III requirements also apply to depository institution
subsidiaries of these top-tier banking organizations, each with $10
billion or more in consolidated assets. Category IV requirements apply
to top-tier depository institution holding companies or U.S.
intermediate holding companies that in each case have $100 billion or
more in consolidated assets and $50 billion or more in average weighted
short-term wholesale funding that are not subject to Category I, II or
III requirements.
---------------------------------------------------------------------------
\50\ See supra note 19.
---------------------------------------------------------------------------
Under the tailoring final rule, covered companies in Category I and
II, or in Category III with $75 billion or more in average weighted
short-term wholesale funding are subject to the full requirements of
the LCR rule. All other covered companies in Category III and covered
companies in Category IV with $50 billion or more in average weighted
short-term wholesale funding are subject to a reduced LCR requirement
calibrated at 85 percent and 70 percent, respectively. The calibration
approaches outlined in the tailoring proposals and tailoring final rule
were designed to better align the regulatory requirements of banking
organizations with their risk profiles, taking into account their size
and complexity, as well as their potential impact on systemic risk.
The final rule adopts the risk-based category approach used in the
tailoring final rule for purposes of applying the NSFR. The application
of the NSFR requirements to specific entities based on their tailoring
category is discussed further below.
2. Applicability of the Final Rule to U.S. Intermediate Holding
Companies and Use of the Risk-Based Indicators
The tailoring proposals would have applied liquidity requirements
to foreign banking organizations based on the risk profile of their
combined U.S. operations. Specifically, the proposed NSFR requirements
would have applied to a foreign banking organization based on the
combined risk profile of its U.S. intermediate holding company and any
U.S. branches or agencies, as measured by the risk-based
indicators.\51\
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\51\ The tailoring proposals also sought comment on whether
standardized liquidity requirements, such as the LCR and NSFR,
should apply to the U.S. branches and agencies of a foreign banking
organization to complement the internal liquidity stress testing
standards that currently apply to these entities. As described in
the tailoring final rule, the Board continues to consider whether to
develop and propose for implementation a standardized liquidity
requirement with respect to the U.S. branches and agencies of
foreign banking organizations. See 84 FR at 59257. Any such
requirement would be subject to notice and comment as part of a
separate rulemaking process.
---------------------------------------------------------------------------
Most commenters argued that the NSFR requirement should apply
directly to a U.S. intermediate holding company of a foreign banking
organization based on the U.S. intermediate holding company's risk
profile. Some commenters further asserted that no NSFR requirement
should be imposed on U.S. intermediate holding companies in view of the
application of the NSFR under home country standards to the top-tier
foreign parent. These commenters argued that the application of an NSFR
requirement to U.S. intermediate holding companies is inconsistent with
the principles of national treatment and equality of competitive
opportunity because mid-tier U.S. bank holding companies of a similar
size and risk profile would not be subject to an NSFR requirement but
rather would be reflected in the NSFR applied at the top-tier
consolidated U.S. parent. Other commenters argued that the liquidity
requirements that apply to foreign banking organizations' U.S.
operations, such as internal liquidity stress testing and liquidity
risk management standards, and total loss-absorbing capacity (TLAC)
instruments issued by U.S. intermediate holding companies make the
application of the NSFR rule unnecessary for such companies. In
addition, some commenters argued that U.S. intermediate holding
companies should not be subject to the NSFR rule until after the
agencies have conducted an impact analysis. By contrast, other
commenters supported the proposed application of an NSFR requirement to
a U.S. intermediate holding company based on the risk profile of the
combined U.S. operations of the foreign banking organization.
A U.S. intermediate holding company poses risks in the United
States similar to domestic banking organizations of a similar size and
risk profile, even if the parent foreign banking organization is
subject to an NSFR requirement in its home jurisdiction. The LCR rule,
the Board's enhanced prudential standards rule, and the final rule
apply to applicable U.S. banking organizations on a global consolidated
basis and incorporate certain liquidity risks posed by mid-tier holding
companies and their subsidiaries.\52\ For this reason, such
requirements do not apply directly to mid-tier holding companies on a
standalone basis. Consistent with the LCR rule and the Board's enhanced
prudential standards rule, the final rule applies to a U.S.
intermediate holding company of a foreign banking organization because
of the risks it presents to the U.S. financial system on a consolidated
basis. However, the final rule does not apply liquidity or funding
requirements to a subsidiary holding company of a U.S. intermediate
holding company of a foreign banking organization. Further, for the
reasons described in section V.A of this Supplementary Information
section, the NSFR requirement is a complement to the LCR rule and other
regulatory requirements for banking organizations that can present
material risks to the U.S. financial system. In light of these
concerns, the agencies are applying an NSFR requirement to U.S.
intermediate holding companies.
---------------------------------------------------------------------------
\52\ The consolidated risks posed by U.S. banking organizations
to the U.S. financial system also include risks derived from
foreign-based branches and subsidiaries.
---------------------------------------------------------------------------
In addition, consistent with the scope of application of the LCR
rule, the final rule applies the NSFR requirement to a U.S.
intermediate holding company based on the risk profile of the U.S.
intermediate holding company, rather than on the combined U.S.
operations of the foreign banking organization.\53\ Specifically, the
final rule applies a full NSFR or reduced NSFR requirement to a U.S.
intermediate holding company under the risk-based categories based on
measures of the U.S. intermediate holding company's risk-based
indicators. This approach helps to enhance the efficiency of NSFR
requirements relative to the proposal, because stable funding
requirements that apply to a U.S. intermediate holding company are
based on the U.S.
[[Page 9130]]
intermediate holding company's risk profile.
---------------------------------------------------------------------------
\53\ See supra note 18.
---------------------------------------------------------------------------
3. NSFR Minimum Requirements Under the Final Rule: Applicability and
Calibration
A number of commenters argued that the re-proposed scope of
applicability of the NSFR requirement was too stringent. Some
commenters argued that smaller regional banking organizations should
not be subject to the NSFR rule and that NSFR requirements for Category
IV banking organizations should be eliminated. By contrast, other
commenters argued that the tailoring proposals would tailor NSFR
requirements in a way that would weaken the safety and soundness of
large banking organizations and increase risks to U.S. financial
stability. Some commenters argued that full NSFR requirements should
apply to all covered companies until after the final rule has been
effective for a sufficiently long period of time for the agencies to
evaluate its efficacy. Other commenters advocated for further tailoring
of the NSFR requirements.
For the reasons discussed below, the final rule generally retains
the NSFR requirements described under the tailoring proposals. The
final rule adopts a reduced NSFR requirement calibrated to 85 percent
of the full NSFR requirement for Category III banking organizations
with less than $75 billion in weighted short-term wholesale funding,
and to 70 percent of the full NSFR requirement for Category IV banking
organizations with $50 billion or more in weighted short-term wholesale
funding.\54\ Consistent with the tailoring proposals, depository
institution subsidiaries with less than $10 billion in total
consolidated assets would not be subject to an NSFR requirement.
Moreover, no NSFR requirement applies at the subsidiary depository
institution-level under Category IV.
---------------------------------------------------------------------------
\54\ Under the final rule, a banking organization applies the
appropriate adjustment factor to its calculated RSF amount (required
stable funding adjustment percentage), by multiplying its RSF amount
by its required stable funding adjustment percentage. Banking
organizations subject to the full NSFR requirement apply a 100
percent required stable funding adjustment percentage. Banking
organizations subject to a reduced NSFR requirement apply an 85 or
70 percent required stable funding adjustment percentage.
---------------------------------------------------------------------------
a) NSFR Requirements Under Category I
Consistent with the scope of application of the LCR rule, the
tailoring proposals would have applied full NSFR requirements to
covered companies that meet the criteria for Category I. The agencies
did not receive comments on the application of the NSFR requirement
under Category I and are finalizing this aspect as proposed.
b) NSFR Requirements Under Category II
The tailoring proposals would have applied the full NSFR
requirement to covered companies that meet the criteria for Category
II. Some commenters argued that Category II should include a reduced
NSFR requirement to reflect the lower risk profile of Category II
banking organizations relative to those in Category I. Specifically,
these commenters argued certain banking organizations in Category II
present relatively lower stable funding risks than Category I banking
organizations due to such banking organizations' concentration in
custody activities and use of operational deposits.
Similar to U.S. GSIBs and their large depository institution
subsidiaries, banking organizations that meet the criteria for Category
II provide material levels of financial intermediation within the
United States or internationally, and the NSFR helps to ensure that
such banking organizations have appropriate funding to be in a position
to sustain the necessary intermediation activities over a range of
conditions. Additionally, the failure or distress of banking
organizations that meet the criteria for Category II could impose
significant costs on the U.S. financial system and economy. For
example, any very large or global banking organization, including one
that has a significant custody business, that is subject to asset fire
sales resulting from funding disruptions is likely to transmit distress
on a broader scale because of the greater volume of assets it may sell
and the number of its counterparties across multiple jurisdictions.
Similarly, a banking organization with significant international
activity is more exposed to the risk of ring-fencing of funding
resources by one or more jurisdictions. Ring-fencing may hamper the
movement of funding, regardless of the level of custody business. More
generally, the overall size of a banking organization's operations,
material transactions in foreign jurisdictions, and the use of overseas
funding sources add complexity to the management of the banking
organization's funding profile. For these reasons, the agencies are
adopting the proposal to apply the full NSFR requirement to Category II
banking organizations.
c) NSFR Requirements Under Category III
As described above, the tailoring proposals would have
differentiated NSFR requirements in Category III based on whether the
level of average weighted short-term wholesale funding of a banking
organization was at least $75 billion and sought comment on the
calibration of the reduced NSFR requirement.
Some commenters argued that Category III banking organizations with
less than $75 billion in average weighted short-term wholesale funding
should not be subject to a reduced NSFR requirement. By contrast, many
commenters expressed support for a reduced NSFR requirement under
Category III, and generally recommended that such requirement be
calibrated to 70 percent of the full NSFR requirement, consistent with
the calibration of the Board's previously proposed modified NSFR
requirement. In addition, several of these commenters argued that the
reduced NSFR requirement should apply only to holding companies.
To improve the calibration of a banking organization's minimum ASF
amount relative to its funding profile and its potential risk to U.S.
financial stability, the final rule differentiates between banking
organizations based on their category and their reliance on short-term
wholesale funding. As discussed in the tailoring final rule, ongoing
reliance on short-term, wholesale funding can make a banking
organization more vulnerable to safety and soundness and financial
stability risks. Accordingly, under the final rule, a banking
organization subject to Category III standards with average weighted
short-term wholesale funding of $75 billion or more is subject to the
full NSFR requirement.
A banking organization subject to Category III standards with
average weighted short-term wholesale funding of less than $75 billion
is subject to a reduced NSFR requirement calibrated at 85 percent of
the full NSFR requirement. An 85 percent calibration is appropriate for
these banking organizations because they are less likely to contribute
to a systemic event relative to similarly sized banking organizations
that have a greater reliance on short-term wholesale funding and
therefore, are more complex, and whose distress or failure is more
likely to have greater systemic impact.
As a general matter, the alignment of the reduced NSFR with the
Board's initially proposed modified NSFR
[[Page 9131]]
would not be appropriate because each of these requirements was
designed to address different risk profiles. The Board designed the
modified NSFR for smaller U.S. holding companies with less complex
business models and more limited potential impact on U.S. financial
stability compared to banking organizations that would be subject to
the reduced NSFR requirement.\55\
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\55\ The Board's initially proposed modified NSFR applied to
depository holding companies with between $50 billion and less than
$250 billion in total assets whereas the tailoring proposal would
have applied Category III requirements to banking organizations that
either have $250 billion or more in total assets or have $100
billion or more in total assets as well as heightened levels of off-
balance sheet exposure, nonbank assets, or weighted short-term
wholesale funding.
---------------------------------------------------------------------------
d) NSFR Requirements Under Category IV
Under the tailoring proposals, a Category IV banking organization
with average weighted short-term wholesale funding of $50 billion or
more would have been required to comply with a reduced NSFR requirement
of between 70 and 85 percent. However, the reduced NSFR requirement
under Category IV would not have applied to standalone depository
institutions or at the level of a subsidiary depository institution.
Some commenters argued that all banking organizations subject to
Category IV should be subject to an NSFR requirement and that the
requirement could be further modified or simplified for these
organizations, as appropriate. In contrast, other commenters argued for
the removal of any NSFR requirement for all banking organizations
subject to Category IV.
For a banking organization with total consolidated assets of at
least $100 billion and less than $250 billion, average weighted short-
term wholesale funding of $50 billion or more demonstrates a material
reliance on short-term, generally uninsured funding from more
sophisticated counterparties, which can make a banking organization
more vulnerable to large-scale funding runs, generating both safety and
soundness and financial stability risks. Accordingly, such a banking
organization is relatively more vulnerable to the funding stability
risks addressed by the reduced NSFR requirement relative to similarly
sized banking organizations that rely more heavily on stable funding
such as retail deposits and have traditional balance sheet structures.
The application of the NSFR requirement, albeit at a reduced level, is
therefore appropriate for these banking organizations given their lower
potential impact on systemic risk.
The final rule calibrates the minimum reduced NSFR requirement
under Category IV at a level equivalent to 70 percent of the minimum
level required under Category I and II. The difference between the 85
percent reduced NSFR calibration in Category III and the reduced 70
percent LCR calibration in Category IV reflects the differences in risk
profiles of banking organizations subject to each respective
requirement. The 70 percent calibration recognizes that these banking
organizations are less complex and smaller than other banking
organizations subject to more stringent requirements under the final
rule and would likely have more modest systemic impact than larger,
more complex banking organizations if they experienced funding
disruptions. Banking organizations that are not subject to Category I,
II or III requirements and that have average weighted short-term
wholesale funding of less than $50 billion are not subject to an NSFR
requirement under the final rule. Depository institution subsidiaries
of banking organizations subject to Category IV requirements are not
subject to an NSFR requirement.
4. Applicability to Depository Institution Subsidiaries
As described above, the tailoring proposals would have applied the
same NSFR requirement to top-tier banking organizations subject to
Category I, II, or III standards and to their subsidiary depository
institutions with $10 billion or more in total consolidated assets.
Although a number of commenters generally supported the application
of consistent requirements for U.S. depository institutions holding
companies and their depository institution subsidiaries, many
commenters requested that the agencies eliminate the application of the
NSFR requirement to depository institutions that are consolidated
subsidiaries of covered companies. These commenters stated that the
NSFR rule should recognize that the holding company structure in the
United States allows for banking organizations to manage liquidity
across the broader corporate group and provides firms with flexibility
regarding where liquidity is held within the corporate structure. These
commenters also argued that an NSFR requirement for a consolidated
depository institution is unnecessary in view of the supervisory
monitoring and prudential limits applicable to the depository
institution's funding structure, as well as the source of strength
requirements that obligate the parent to remediate any funding
deficiencies at a subsidiary depository institution. Alternatively,
these commenters suggested that the agencies should rely on their
supervisory authority to ensure stable funding for depository
institutions. The commenters also requested that, if the agencies apply
the NSFR requirement to depository institutions, an exemption should
apply to depository institutions that comprise 85 percent or more of
the assets of the consolidated organization. Commenters supporting such
an approach stated that the costs of separately applying an NSFR at the
subsidiary depository institution-level would outweigh any benefits.
The proposed treatment would have aligned with the agencies'
longstanding policy of applying similar standards to holding companies
and their depository institution subsidiaries. Large depository
institution subsidiaries play a significant role in a banking
organization's funding structure, and in the operation of the payments
system. Such entities should have sufficient amounts of stable funding
to meet their funding needs rather than be overly reliant on their
parents or affiliates. In addition, these large subsidiaries generally
have access to deposit insurance coverage and, as a result, application
of standardized funding requirements would help to reduce the potential
for losses to the FDIC's deposit insurance fund. Accordingly, the final
rule maintains the application of an NSFR requirement to covered
depository institution subsidiaries as proposed.
VI. Definitions
The proposed rule would have shared definitions with the LCR rule
and would have been codified in the same part of the Code of Federal
Regulations as the LCR rule for each of the agencies.\56\ The proposed
rule also would have revised certain of the existing definitions under
the LCR rule and adopted new definitions for purposes of both the LCR
and NSFR rules. The agencies received a number of comments regarding
the proposed definitions.
---------------------------------------------------------------------------
\56\ 12 CFR part 50 (OCC); 12 CFR part 249 (Board); 12 CFR part
329 (FDIC).
---------------------------------------------------------------------------
One commenter argued that certain of the LCR rule's definitions are
flawed and should not be used for purposes of the NSFR rule because
they are the result of an internationally negotiated standard that was
not properly calibrated to reflect U.S. market conditions or U.S.
banking organizations' practices. As discussed in section V.C of this
Supplementary Information section, to the extent that the final rule
incorporates definitions
[[Page 9132]]
also used in the LCR rule, their usage in the final rule generally
reflects assumptions specific to the final rule. The agencies also note
that these common definitions include defined terms that are not
included in the Basel LCR standard, but are specific to U.S. markets
and banking organizations. For example, the definitions for certain
types of brokered deposits and collateralized deposits are not included
in the Basel LCR standard or the Basel NSFR standard. In addition, the
final rule has tailored certain definitions, such as the definition of
``operational deposit,'' for the U.S. market. The use of common
definitions across the regulatory framework, as appropriate, helps to
minimize compliance costs, facilitate comparability across banking
organizations, and reduce regulatory burden. Comments regarding
specific defined terms are discussed below. For ease of convenience,
the following discussion refers to Sec. __.3 of the LCR rule, even
though the definitions found in Sec. __.3 will apply to both the LCR
rule and final rule.
A. Revisions to Existing Definitions
The proposed rule would have amended the following definitions that
were included in Sec. __.3 of the LCR rule: ``calculation date,''
``collateralized deposits,'' ``committed,'' ``covered nonbank
company,'' ``operational deposit,'' ``secured funding transaction,''
``secured lending transaction,'' and ``unsecured wholesale funding.''
1. Revised Definitions for Which the Agencies Received no Comments
The proposed rule would have amended the existing definition of
``calculation date,'' ``committed,'' and ``covered nonbank company'' in
Sec. __.3 of the LCR rule. The agencies received no comments on the
changes to these definitions and are adopting these revised definitions
as proposed.
Calculation date. The final rule amends to the definition of
``calculation date'' in Sec. __.3 of the LCR rule to include any date
on which a covered company calculates its NSFR for purposes of Sec.
__.100 of the final rule.
Committed. The definition of ``committed'' in Sec. __.3 of the LCR
rule provides the criteria under which a credit facility or liquidity
facility is considered committed for purposes of the LCR rule. To more
clearly reflect the intended meaning of ``committed,'' the final rule,
consistent with the proposed rule, amends the definition to state that
a credit or liquidity facility is committed if it is not
unconditionally cancelable under the terms of the facility. Consistent
with the agencies' risk-based capital rule, the final rule defines
``unconditionally cancelable'' to mean that a covered company may
refuse to extend credit under the facility at any time, including
without cause (to the extent permitted under applicable law).\57\ For
example, a credit or liquidity facility that permits a covered company
to refuse to extend credit only upon the occurrence of a specified
event (such as a material adverse change) would not be considered
unconditionally cancelable, and therefore the facility would be
considered ``committed'' under the final rule. Conversely, a credit or
liquidity facility that the covered company may cancel without cause
would be considered unconditionally cancelable because the covered
company may refuse to extend credit under the facility at any time, and
therefore the facility would not be considered ``committed.'' For
example, credit card lines that are cancelable without cause (to the
extent permitted under applicable law), as is generally the case, are
not considered committed under the amendment to the definition.
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\57\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC).
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Covered nonbank company. Consistent with the proposed rule, the
final rule revises the definition of ``covered nonbank company'' to
clarify that if the Board requires a company designated by the
Financial Stability Oversight Council (FSOC) for Board supervision to
comply with the LCR rule or the final rule, it will do so through a
rulemaking that is separate from the LCR rule and the final rule or by
issuing an order.
2. Revised Definitions for Which the Agencies Received Comments
The agencies received comments on the following proposed amendments
to existing definitions that are included in Sec. __.3 of the LCR
rule: ``collateralized deposit,'' ``operational deposit,'' ``secured
funding transaction,'' ``secured lending transaction,'' and ``unsecured
wholesale funding.''
Collateralized Deposit. The proposed rule would have amended the
definition of ``collateralized deposit'' to include those deposits of a
fiduciary account collateralized as required under state law, as
applicable to state member and nonmember banks and state savings
associations. In addition, the proposed rule would have amended the
definition to include those deposits of a fiduciary account held at a
covered company for which a depository institution affiliate of the
covered company is a fiduciary and that the covered company has opted
to collateralize pursuant to 12 CFR 9.10(c) (for national banks) or 12
CFR 150.310 (for federal savings associations).
The agencies received two comments regarding the definition of
``collateralized deposit.'' One commenter supported the proposed
amendment to include fiduciary deposits collateralized as required
under state law, as applicable to state member banks, state nonmember
banks, and state savings associations. The other commenter requested
that the agencies revise the definition to include secured sweep
repurchase arrangements, which the commenter described as arrangements
that allow a customer's balances to be temporarily ``swept'' out of a
deposit account and into a secured non-deposit funding arrangement with
the covered company. The commenter argued that secured sweep repurchase
arrangements are distinct from other secured funding transactions,
including wholesale funding offered by a broker-dealer, because they
are typically tied to operational accounts and involve an automated
sweep of corporate client funds into a secured sweep repurchase
account, thus posing, in the commenter's view, less liquidity risk. The
commenter argued that secured sweep repurchase arrangements are similar
to secured deposit funding because the arrangements are offered as part
of a broader business relationship between a covered company and a
customer and, therefore, should not be subject to the unwind provisions
in Sec. __.21 of the LCR rule.
The final rule adopts the amended definition of ``collateralized
deposit'' as proposed with an adjustment to expressly include deposits
of a fiduciary account collateralized pursuant to state law
requirements for which a covered company's depository institution
affiliate is a fiduciary. The agencies defined ``collateralized
deposit'' to identify a narrow set of secured funding transactions that
should not be subject to the unwind provision in the LCR rule for a
covered company when determining its HQLA amount.\58\ The agencies
excluded such deposits from the unwind provision based on their unique
characteristics, including, among other things, that such deposits
``are required to be collateralized under applicable law'' and that
``the banking relationship associated with collateralized deposit can
be different in nature from shorter-term repurchase and
[[Page 9133]]
reverse repurchase agreements.'' \59\ The revised definition includes
deposits of a fiduciary account collateralized pursuant to state law
requirements or at the covered company's discretion pursuant to 12 CFR
9.10(c) (for national banks) or 12 CFR 150.310 (for federal savings
associations) in order to provide consistent treatment to deposits that
are subject to collateralization requirements or have been
collateralized. Additionally, temporary secured sweep repurchase
arrangements, including those offered part of a broader business
relationship, that will mature in 30 calendar days or less of an LCR
calculation date may affect a covered company's excess HQLA amount
similar to other wholesale secured funding transactions conducted by a
broker-dealer and do not qualify for the treatment afforded to
collateralized deposits.
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\58\ See Sec. __.21 of the LCR rule. Certain secured funding
transactions other than collateralized deposits are used in
calculating adjusted liquid asset amounts for determining the
adjusted excess HQLA amount under the LCR rule.
\59\ 79 FR at 61473.
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Operational Deposit. The proposed rule would have amended the
definition of ``operational deposit'' to include both deposits received
by the covered company in connection with operational services provided
by the covered company and deposits placed by the covered company in
connection with operational services received by the covered company.
The proposed rule also would have amended this definition to clarify
that only deposits can qualify. Further, because operational deposits
are limited to accounts that facilitate short-term transactional cash
flows associated with operational services, operational deposits also
should only have short-term maturities, falling within the proposed
rule's less-than-six-month maturity category and generally within the
LCR rule's 30-calendar-day period. Further, because operational
deposits are limited to accounts that facilitate short-term
transactional cash flows associated with operational services,
operational deposits also should only have short-term maturities,
falling within the proposed rule's less-than-six-month maturity
category and generally within the LCR rule's 30-calendar-day period.
Notwithstanding the proposed revisions to this definition, the
treatment of operational deposits under Sec. Sec. __.32 and __.33 of
the LCR rule would have remained the same.
The agencies received a number of comments regarding the proposed
definition of ``operational deposit.'' Some commenters requested
removal of the limitation that operational deposits cannot be provided
by non-regulated funds. These commenters argued that a deposit placed
at a covered company by a non-regulated fund for the provision of
operational services would have similar liquidity risks as a deposit
placed by a regulated fund for the same operational purposes.\60\ One
commenter argued that the exclusion of deposits placed by a non-
regulated fund lacks a clear policy rationale and is unduly strict
towards the custody bank business model. The commenter also argued that
this exclusion is more stringent than the treatment of operational
deposits in the Basel LCR standard. The commenter expressed concern
that retaining this exclusion could undermine the current trend among
non-regulated funds of separating the safekeeping and administration of
their investment assets from their trading and financing activities. A
commenter also asserted this exclusion is unnecessary because the risk
associated with operational deposits from non-regulated funds is
addressed sufficiently by the exclusion of deposits provided in
connection with a covered company's provision of prime brokerage
services.
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\60\ See Sec. __.4(b)(6) of the LCR rule; 79 FR at 61501. This
section provides that operational deposits do not include deposits
that are provided in connection with the covered company's provision
of prime brokerage services, which include operational services
provided to a non-regulated fund. Section __.3 of the LCR rule
defines a ``non-regulated fund'' as any hedge fund or private equity
fund whose investment adviser is required to file SEC Form PF
(Reporting Form for Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors), other than
a small business investment company as defined in section 102 of the
Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.).
---------------------------------------------------------------------------
One commenter argued that the definition of ``operational deposit''
should not be limited to deposits. The commenter suggested instead that
the definition should be revised to include non-deposit unsecured
wholesale funding that matures within the LCR rule's 30-day time
horizon, in order to include arrangements that allow an operational
customer's balances to be temporarily swept out of a deposit account
into non-deposit products until such time as the funds are needed to
meet operational demands. The commenter argued that excluding such
arrangements from the definition of ``operational deposit'' could
underrepresent the amount of a covered company's funding that is
associated with the provision of operational services over the LCR
rule's 30-day time horizon.
Operational deposit are deposits necessary for the covered company
to provide operational services, as that term is defined in Sec. __.3
of the LCR rule, to the wholesale customer or counterparty providing
the deposit.\61\ Among other things, the definition requires compliance
with certain operational requirements of Sec. __.4 of the LCR rule in
order for a deposit to be recognized as an operational deposit
(operational requirements).
---------------------------------------------------------------------------
\61\ See 79 FR at 61498.
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The exclusion of deposits provided by non-regulated funds is
appropriate because, in general, non-regulated funds tend to be
sophisticated and are more likely than many other types of
counterparties to engage in higher-risk trading strategies involving
leverage, which may result in higher cash needs due to collateral calls
and less stable deposit balances during certain market conditions. In
comparison to non-financial wholesale counterparties or regulated
financial sector entities, it is also more likely that operational
activities at a non-regulated fund would be impacted by the performance
of the fund's investment or trading activity that relies upon prime
brokerage services, and thus it would be more difficult to separate its
deposit balances that are necessary to maintain operational activities
from its balances that support trading and investment activities that
rely on prime brokerage services (even if these services are provided
by different entities of a covered company). As a result, deposits from
non-regulated funds may present heightened funding risk relative to
deposits from other counterparties.
In addition, operational deposit balances swept out of a deposit
account and into non-deposit products will not be eligible to be
considered ``operational deposits''. The LCR rule provides that in
order to be recognized as an operational deposit, any excess amount not
linked to operational services must be excluded.\62\
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\62\ See Sec. __.4(b)(5) of the LCR rule.
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As the preamble to the LCR rule noted, operational deposits are
assigned a lower outflow rate under the LCR rule compared to other
short-term wholesale funding due to the perceived stability arising
from the relationship between a covered company and a depositor, the
necessity of the deposit for the provision of operational services, and
the switching costs associated with moving such deposits.\63\ In
contrast, excess funds, including funds that are swept into non-deposit
products until funds are needed to meet operational demands, are not
necessary for the provision of operational services and therefore do
not exhibit these
[[Page 9134]]
characteristics.\64\ Furthermore, the LCR rule excludes from
operational deposits those deposits held in an account that is designed
to incentivize customers to maintain excess funds in the account
through increased revenue, reduction in fees, or other economic
incentives.\65\ Because the sweep arrangements described by the
commenter are typically used to increase returns on deposits, the
continued exclusion of these sweep arrangements from the definition of
``operational deposit'' is consistent with this treatment.
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\63\ See 79 FR at 61497-502.
\64\ See 79 FR at 61500.
\65\ See Sec. __.4(b)(4) of the LCR rule.
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For these reasons, the final rule adopts the amended definition of
``operational deposits'' as proposed.
Secured Funding Transaction and Secured Lending Transaction. The
proposed rule would have revised the definitions of ``secured funding
transaction'' and ``secured lending transaction'' to clarify that (i)
the transactions must be secured by a lien on securities or loans,
rather than secured by a lien on other assets; (ii) the definitions
include only transactions with wholesale customers or counterparties,
and (iii) securities issued or owned by a covered company do not
constitute secured funding or lending transactions.\66\
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\66\ As noted in Sec. __.3 of the LCR rule and the proposed
rule, the definition of ``secured funding transaction'' also
includes repurchase agreements and securities lending transactions,
and the definition of ``secured lending transaction'' also includes
reverse repurchase agreements and securities borrowing transactions,
as these transactions result in the equivalent of a lien, securing
the cash leg of the transaction, that gives the asset borrower
priority over the asset in the event the covered company or the
counterparty, as applicable, enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or similar proceeding.
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One commenter recommended amending the definitions of ``secured
funding transaction'' and ``secured lending transaction'' by replacing
``securities'' with ``financial assets'' in order to broaden the forms
of collateral that may be used in transactions that meet the
definitions. Specifically, the commenter argued that short-term debt,
commercial paper, gold, and certain other assets should be permitted
forms of collateral because they effectively reduce the risk associated
with secured transactions. The same commenter also requested that the
definition of ``secured lending transaction'' be expanded to include
certain transactions with retail customers, and, in particular, open-
maturity loans to retail customers collateralized by customer
securities, such as a margin loan. The commenter asserted that a
securities-based loan to a retail counterparty has similar
characteristics to an open-maturity reverse repurchase agreement with a
wholesale counterparty, including that the transaction is fully secured
by the borrower's collateral, the lender has a legal right and
operational ability to close out the loan upon default by the
counterparty and sell the collateral to offset the lender's credit
exposure, and the maturity of the loan extends each day that a notice
of termination is not provided.
Under the LCR rule, the cash flows associated with secured funding
and secured lending transactions take into account the relative
liquidity of the cash and marketable collateral that will be exchanged
at the maturity of the transaction and recognize that collateral in the
form of HQLA securities tends to be the most liquid. By contrast,
collateral that is not generally traded in liquid markets, including
property, plant, and equipment, may provide limited liquidity value,
particularly relative to the LCR rule's time horizon. While collateral
that is not in the form of securities or loans may serve to mitigate
credit risk, in the agencies' experience, the cash flows on lending
secured by such collateral, including the likelihood of renewing the
lending at maturity, depend to a greater degree on the characteristics
of the counterparty rather than the collateral, thus making the
liquidity risk associated with such arrangements more akin to that of
unsecured lending. Accordingly, such lending transactions should not
necessarily receive a 100 percent inflow rate under the LCR rule;
rather, the inflow rate should depend on the characteristics of the
borrower, which more accurately reflect the likelihood that a covered
company will be able to realize inflows from or roll over some or all
of the loan during a period of significant stress. In contrast to their
contributions to total net cash outflows under the LCR rule, the
contributions of secured loan assets and secured funding liabilities to
the funding risk of a covered company's aggregate balance sheet
generally depend on their maturities and counterparty characteristics
and the final rule generally treats secured and unsecured wholesale
transactions similarly.
In addition, while there is no defined term ``securities'' in the
LCR rule, the agencies are clarifying that a funding transaction that
is not a security, is conducted with a wholesale customer or
counterparty, and is secured under applicable law by a lien on third-
party short-term debt or commercial paper provided by a covered company
would qualify as a secured funding transaction. Similarly, a lending
transaction that is not a security, is conducted with a wholesale
customer or counterparty, and is secured under applicable law by a lien
on third-party short-term debt or commercial paper provided by the
wholesale customer or counterparty would qualify as a secured lending
transaction. However, secured funding and lending transactions where
the collateral is in the form of gold or other commodities would not
meet the definition of a secured funding transaction or secured lending
transaction. These assets exhibit an increased volatility in market
value and there are logistical factors associated with holding and
liquidating these assets as compared to loans and securities.\67\
---------------------------------------------------------------------------
\67\ The LCR rule for similar reasons does not include gold
bullion as a level 1 liquid asset. See 79 FR at 61456.
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The final rule adopts the amended definitions of ``secured funding
transaction'' and ``secured lending transaction'' as proposed. Under
the final rule, the definitions of ``secured funding transaction'' and
``secured lending transaction'' include only transactions with
wholesale customers or counterparties. Secured lending transactions do
not include secured lending to a retail customer or counterparty, such
as a retail margin loan. For purposes of the LCR rule generally,
secured lending transactions categorize certain lending to a wholesale
customer or counterparty where the expectation is that the transaction
may mature in the near term with the covered company receiving cash
from the counterparty and being required to return collateral to the
counterparty.\68\ In contrast, the treatment of retail exposures
generally reflects the agencies' expectation that a covered company
will need to maintain a portion of retail lending even during stress,
regardless of collateralization.\69\ As noted above, RSF factors
assigned to unencumbered loans to retail and wholesale customers and
counterparties under the final rule reflect their maturity and
counterparty, rather than collateralization, and the RSF factors
assigned to secured retail lending are the same as for secured lending
to non-financial sector wholesale counterparties. As a result, the
final rule, like the proposed rule, categorizes secured lending to a
retail customer or counterparty separately from secured lending
transactions with wholesale customers or counterparties for
[[Page 9135]]
purposes of assigning RSF factors under the NSFR requirement.\70\
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\68\ See 79 FR at 61513.
\69\ See 79 FR at 61512.
\70\ See section VII.D of this Supplementary Information
section.
---------------------------------------------------------------------------
Finally, under the final rule securities issued or owned by a
covered company do not constitute secured funding or lending
transactions. For example, asset-backed securities issued by a special
purpose entity that a covered company consolidates on its balance sheet
are not secured funding transactions. Similarly, securities owned by a
covered company where contractual payments to the covered company are
collateralized are not secured lending transactions.
Unsecured wholesale funding. The proposed rule would have amended
the definition of ``unsecured wholesale funding'' to mean a liability
or general obligation of a covered company to a wholesale customer or
counterparty that is not a secured funding transaction. The agencies
received one comment regarding this proposed definition. The commenter
asserted that, although ``asset exchange'' is separately defined in the
LCR rule, an asset exchange could nonetheless fall under the definition
of ``unsecured wholesale funding'' because it could be viewed as a
liability or general obligation that is not a secured funding
transaction if entered into with a wholesale customer or counterparty.
The final rule adopts the amended definition of ``unsecured
wholesale funding'' as proposed with an adjustment to expressly exclude
asset exchanges. Under the final rule, secured funding with a wholesale
counterparty that does not meet the revised definition of ``secured
funding transaction'' generally meets the definition of ``unsecured
wholesale funding.'' However, consistent with the agencies' intent to
provide a special framework for asset exchanges, the definitions of
``unsecured wholesale funding'' and ``unsecured wholesale lending'' in
the final rule have been revised to exclude asset exchanges.\71\
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\71\ In addition to the unique treatment of asset exchanges in
Sec. __.102(c) of the final rule, asset exchanges are also subject
to special treatment pursuant to Sec. __.106(d). These treatments
are discussed further in section VII.D.4 of this Supplementary
Information section.
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3. Other Definitions and Requirements for Which the Agencies Received
Comments
Given that the definitions in the LCR rule would apply to the final
rule, the proposed rule also requested comment as to whether any other
existing definitions or terms should be amended. The agencies received
several comments requesting revisions and clarifications to other
definitions in the LCR rule that the agencies did not propose to amend.
Credit and liquidity facility. One commenter requested that the
agencies provide examples of a lending commitment that would qualify as
a ``credit facility'' or ``liquidity facility'' under the rules.
Section __.3 of the LCR rule defines ``credit facility'' to mean a
legally binding agreement to extend funds if requested at a future
date, including a general working capital facility such as a revolving
credit facility for general corporate or working capital purposes.\72\
Other examples of credit facilities may include a letter of credit,
home equity line of credit, or any other legally binding agreement to
extend funds if requested at a future date that is not included in the
definition of ``liquidity facility.''
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\72\ A credit facility does not include a legally binding
written agreement to extend funds at a future date to a counterparty
made for the purpose of refinancing the debt of the counterparty
when it is unable to obtain a primary or anticipated source of
funding, which is included in the definition of ``liquidity
facility.''
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Section __.3 of the LCR rule defines ``liquidity facility'' to mean
a legally binding written agreement to extend funds at a future date to
a counterparty that is made for the purpose of refinancing the debt of
the counterparty when it is unable to obtain a primary or anticipated
source of funding. The definition of ``liquidity facility'' further
clarifies that it includes an agreement to provide liquidity support to
asset-backed commercial paper by lending to, or purchasing assets from,
any structure, program, or conduit in the event that funds are required
to repay maturing asset-backed commercial paper.\73\ Other examples of
liquidity facilities include agreements related to non-asset backed
commercial paper programs, secured financing transactions, securities
investment vehicles, and conduits that, in each case, meet the
requirements of the liquidity facility definition in Sec. __.3 of the
LCR rule. The LCR rule requires a facility that has characteristics of
both credit and liquidity facilities to be classified as a liquidity
facility.
---------------------------------------------------------------------------
\73\ A liquidity facility excludes facilities that are
established solely for the purpose of general working capital, such
as revolving credit facilities for general corporate or working
capital purposes.
---------------------------------------------------------------------------
In addition, a commenter asked the agencies to clarify the
treatment of (1) commercial paper backstop facilities where the
customer has no commercial paper currently outstanding and (2)
facilities that are expected to be cancelled without funding, such as
an unfunded bridge lending facility in connection with a capital
markets issuance. A commercial paper backstop facility may meet the
definition of a liquidity facility because the purpose of the facility
is to provide liquidity support in the future, if needed, regardless of
whether the customer currently has any commercial paper outstanding or
not. The determination of whether such a facility is ``committed''
likewise would not be impacted by the fact that the customer has no
amount of commercial paper outstanding, but would depend on whether it
was ``unconditionally cancelable'' as described above.\74\ With respect
to an unfunded bridge lending facility in connection with a capital
markets issuance, the facility may be considered a credit facility if
its sole purpose is to provide working capital to the issuer prior to
the capital markets issuance. If, however, the unfunded bridge lending
facility's purpose at least partially includes providing funds in the
event that the issuer cannot otherwise refinance its outstanding
liabilities prior to the capital market issuance, then the facility
would likely meet the definition of a liquidity facility. Whether a
facility meets the definition of a credit or liquidity facility at a
calculation date is not influenced by expectations regarding its future
cancellation. In addition, the determination of whether such a facility
is ``committed'' at a calculation date depends on whether it was
``unconditionally cancelable,'' and would not be impacted by the
likelihood of its cancellation.
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\74\ The undrawn amount of the facility would be determined
under Sec. __.32(e)(2) of the LCR rule and Sec. __.106(a)(2) of
the final rule.
---------------------------------------------------------------------------
Retail customer or counterparty. Section __.3 of the LCR rule
defines ``retail customer or counterparty'' to include a living or
testamentary trust that: (i) Is solely for the benefit of natural
persons; (ii) does not have a corporate trustee; and (iii) terminates
within 21 years and 10 months after the death of grantors or
beneficiaries of the trust living on the effective date of the trust or
within 25 years, if applicable under state law. One commenter suggested
changing the definition of ``retail customer or counterparty'' to
account for certain trusts, such as common trust arrangements with
corporate trustees that the commenter viewed as akin to a natural
person. The commenter suggested that a natural person's direct or
indirect power to control a trust's investment is a better measure for
assessing whether a trust should be treated for purposes of the LCR and
NSFR rule as a retail customer or counterparty. The commenter suggested
that a natural person's direct
[[Page 9136]]
or indirect power to control a trust's investment is a better measure
for assessing whether a trust should be treated for purposes of the LCR
and NSFR rules as a retail customer or counterparty.
The agencies expect that, as a class, living and testamentary
trusts with corporate trustees are more likely to exhibit behavioral
traits and sophistication comparable to those of a wholesale rather
than retail customer or counterparty, even if a natural person has
indirect authority over the trustee or complementary power to direct
the trust's investment activity.\75\ For example, despite the authority
of a natural person to direct the trustee's investment, a corporate
trustee would be more likely to act for the trust in the manner of a
financial counterparty. The final rule does not include any change to
the definition of ``retail customer or counterparty.''
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\75\ Subsequent to the proposal, the agencies issued in October
2017 frequently asked questions related to the LCR rule, including
discussion of corporate trustees. See https://www.federalreserve.gov/supervisionreg/topics/liquidity-coverage-ratio-faqs.htm.
---------------------------------------------------------------------------
Liquid and readily-marketable. Under the LCR rule, certain assets
must be liquid and readily-marketable in order to be included as HQLA
by a covered company. This requirement is intended to ensure that
assets included as HQLA exhibit a level of liquidity that would allow a
covered company to convert them into cash during times of stress in
order to meet its obligations when other sources of liquidity may be
reduced or unavailable. Under the LCR rule, an asset is liquid and
readily-marketable if it is traded in an active secondary market with
more than two committed market makers, a large number of committed non-
market maker participants on both the buying and selling sides of
transactions, timely and observable market prices, and a high trading
volume.
The agencies received several comments and requests for
clarification on this definition. Several commenters suggested that the
liquid and readily-marketable criteria are unduly difficult to satisfy.
One commenter stated that banking organizations have had difficulty
collecting the data necessary to demonstrate that securities meet these
criteria, and that the cost of collecting data for certain securities
that are widely accepted as being liquid and readily-marketable
outweighs the benefits. Several commenters requested additional
clarification concerning what is required by each of the elements of
the liquid and readily-marketable standard. For example, commenters
requested clarification for how to determine that a market maker is
``committed,'' that there is a ``large'' number of market participants,
and that the trading volume for a security is ``high.'' Commenters
expressed concern that relatively new types of securities and
securities that are preferred by investors utilizing a ``buy and hold''
strategy, including securities of the highest credit quality that have
strong demand at primary issuance, may not meet the criteria.
Commenters also expressed concern that there appears to be no widely
accepted or straightforward method for assessing these criteria.
Commenters also provided alternative methods to establish that a
security is liquid and readily-marketable. Several commenters suggested
that certain asset classes should be presumed to be liquid and readily-
marketable without further analysis if they meet certain criteria. For
example, commenters suggested that certain securities should be
presumed to be liquid and readily-marketable, including (i) securities
backed by the full faith and credit of the United States, including
agency securities, (ii) debt issues of foreign sovereigns that meet
certain risk weight and other criteria, and (iii) U.S. equities
included in the Russell 1000 index. These commenters also suggested
that securities presumed to be liquid and readily-marketable could be
assessed annually or more frequently to ensure that they are liquid and
readily-marketable. Another commenter suggested that a security should
be deemed liquid and readily-marketable if a firm can demonstrate that
the 30-day trading volume for the security exceeds the firm's holdings
of that security, or that there has been a purchase in the market for
each offer to sell the security. One commenter suggested that
securities should be considered liquid and readily-marketable if other
securities issued by the same issuer or guaranteed by the same credit
protection provider have already been deemed liquid and readily-
marketable.
The LCR rule's definition of ``liquid and readily-marketable'' is
intended to complement other restrictions on the assets that can
potentially be included in HQLA. Within the universe of possible HQLA,
the criteria in the definition are not overly prescriptive given the
divergence of trading frequency and practices. Suggestions to more
narrowly define these criteria would be difficult to apply because of
the different market structures for different asset classes. In
response to commenters' requests for clarification, this Supplementary
Information section describes the agencies' general expectations
regarding how assets may satisfy the definition's criteria.
The agencies do not expect covered companies to conduct the liquid
and readily-marketable analysis on a daily basis. However, the agencies
expect that covered companies monitor the securities included as HQLA
and conduct the analysis periodically, especially following a change in
market conditions. Covered companies should be able to demonstrate that
they have an appropriate process to regularly review that each security
meets the liquid and readily-marketable requirements and that they do
in fact perform this analysis.
The LCR rule defines ``liquid and readily-marketable'' to mean that
a given security is traded in an active secondary market that satisfies
four conditions. The first condition is that the active secondary
market must have more than two committed market makers. The presence of
committed market makers is an important characteristic of liquid
securities markets, to ensure that trades within the market will be
fulfilled on an ongoing basis. A covered company generally may treat a
market maker as committed if the market maker has a history of trading
the security in a substantial volume, particularly during times of
stress. As with the other criteria necessary for a security to be
liquid and readily-marketable, once the covered company makes an
initial determination that a security has more than two committed
market makers, a periodic review is adequate to confirm the continued
presence of committed market makers. The second condition is that the
active secondary market must have a large number of non-market maker
participants acting as buyers and sellers of the security. The agencies
generally will consider a security to satisfy this requirement if the
majority of the trading volume for the security involves non-market
maker participants. It also may be possible to satisfy this requirement
for securities traded in secondary markets where most trades are
between market makers if there are a large number of non-market maker
participants. The third condition is that the active secondary market
must have timely and observable market prices. The agencies generally
expect that securities that trade regularly and at prices that are
quoted daily can be considered to meet this requirement. The fourth
condition is that the active secondary market must have a high trading
volume. The analysis should take into account the depth of the market
across a range of time periods.
[[Page 9137]]
Operational Requirements for HQLA. One commenter suggested that the
agencies eliminate the operational requirement that firms periodically
monetize a sample of their HQLA held as eligible HQLA through an
outright sale or pursuant to a repurchase (LCR monetization
requirement). The commenter argued that if a security already satisfies
the agencies' liquid and readily-marketable standard, then it is
unnecessary to also sell the security to demonstrate its liquidity to
determine that it is eligible HQLA. The commenter also suggested that
the agencies accept proof that a security has been used to secure a
loan from a Federal Home Loan Bank (FHLB) to satisfy the LCR
monetization requirement. The LCR rule has separate definitions for
``High-quality liquid assets'' and ``Eligible HQLA'' for distinct
purposes under the LCR rule. The agencies are retaining the LCR
monetization requirement in order to ensure a covered company's
continued access to funds providers and the effectiveness of its
processes for monetization. While satisfaction of the liquid and
readily-marketable criteria indicates that a covered company should be
able to monetize a security, actual monetization confirms the
security's marketability and confirms that the covered company
maintains adequate processes for monetizing the security.
3. Other Definitions and Requirements for Which the Agencies Did Not
Receive Comments
As noted above in section VI.A.3 of this Supplementary Information
section, the proposed rule also requested comment as to whether any
other existing definitions or terms in Sec. __.3 of the LCR rule
should be amended. Although the agencies did not receive specific
requests to change the definition of ``brokered deposit,'' several
commenters expressed concern that the FDIC's interpretation of
``brokered deposit'' is overly broad. The final rule amends certain of
the definitions related to brokered deposits in Sec. __.3 to improve
clarity and consistency with the FDIC's brokered deposit framework.\76\
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\76\ The FDIC separately published a proposal in February 2020
to modernize its brokered deposit regulations, which would establish
a new framework for analyzing whether deposits placed through
deposit placement arrangements qualify as brokered deposits (FDIC
brokered deposit proposal). Unsafe and Unsound Banking Practices:
Brokered Deposits Restrictions, 85 FR 7453 (February 10, 2020). In
addition, in 2019 the FDIC published a final rule amending its
brokered deposit regulations to conform with changes to section 29
of the Federal Deposit Insurance Act (FDI Act) made by section 202
of EGRRCPA related to reciprocal deposits. See Limited Exception for
a Capped Amount of Reciprocal Deposits From Treatment as Brokered
Deposits, 84 FR 1346, 1349 (February 4, 2019), technical amendment
at 84 FR 15095 (April 15, 2019).
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Section __.3 previously defined a brokered deposit to mean any
deposit held at the covered company that is obtained, directly or
indirectly, from or through the mediation or assistance of a deposit
broker as that term is defined in section 29 of the Federal Deposit
Insurance Act (12 U.S.C. 1831f(g)) (FDI Act) and includes a reciprocal
brokered deposit and a brokered sweep deposit. The final rule amends
this definition by adding a reference to the FDIC's regulations and
eliminating the reference to reciprocal brokered deposits and brokered
sweep deposits because not all reciprocal and sweep deposits are
brokered deposits under section 29 of FDI Act and the FDIC's
implementing regulations.\77\
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\77\ In 2019, the FDIC published a final rule implementing
section 202 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, 132 Stat. 1296-1368 (2018),
codified at 12 U.S.C. 1831f. 84 FR 1346 (February. 4, 2019). Section
202 amends section 29 of the FDI Act to except a capped amount of
reciprocal deposits from treatment as brokered deposits for certain
insured depository institutions. Additionally, a third party whose
primary purpose is not the placement of funds with depository
institutions is not a deposit broker, meaning deposits placed or
facilitated by such a person are not brokered deposits.
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For this reason, the final rule also renames ``brokered sweep
deposit'' to ``sweep deposit'' and ``reciprocal brokered deposit'' to
``brokered reciprocal deposit'' wherever these terms appear. These
clarifications are important in light of ongoing FDIC efforts to update
the classification of brokered deposits. Under the final rule, the term
``sweep deposit'' includes deposits that are brokered deposits as well
as deposits that are not brokered deposits. The term ``reciprocal
brokered deposits'' only includes deposits that are classified as
brokered deposits.
Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefore in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' The changes to these
definitions are only intended to clarify the scope of the definitions,
not substantively alter the definitions or changes the applicable
outflow or inflow amounts in the LCR rule. Because these changes are
technical in nature and merely improve the clarity of these definitions
in the LCR and NSFR rules, the agencies have determined that it is
unnecessary to provide notice or the opportunity to comment prior to
adopting these changes to these definitions related to brokered
deposits.
B. New Definitions
The proposed rule would have added several new definitions:
``carrying value,'' ``encumbered,'' ``NSFR regulatory capital
element,'' ``NSFR liability,'' and ``QMNA netting set,'' and
``unsecured wholesale lending.''
1. New Definitions for Which the Agencies Received no Comments
The agencies received no comments on the proposed definitions of
``carrying value,'' ``encumbered,'' ``NSFR regulatory capital
element,'' ``NSFR liability,'' and ``QMNA netting set,'' and the final
rule adopts these definitions as proposed.
The final rule defines ``carrying value'' to mean the value on a
covered company's balance sheet of an asset, NSFR regulatory capital
element, or NSFR liability, as determined in accordance with GAAP. The
final rule includes this definition because RSF and ASF factors
generally are applied to the carrying value of a covered company's
assets, NSFR regulatory capital elements, and NSFR liabilities. By
relying on values based on GAAP, the final rule aims to ensure
consistency in the application of the NSFR requirement across covered
companies and limit operational compliance costs because covered
companies already prepare financial reports in accordance with GAAP.
This definition is consistent with the definition used in the agencies'
regulatory capital rules.\78\
---------------------------------------------------------------------------
\78\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
(FDIC).
---------------------------------------------------------------------------
The final rule's definition of ``encumbered'' uses the criteria for
an ``unencumbered'' asset found in Sec. __.22(b) of the LCR rule. The
definition does not include any substantive changes to the concept of
encumbrance included in the LCR rule. The final rule uses this
definition in place of the criteria enumerated in Sec. __.22(b) of the
LCR rule. The addition of this definition is necessary to apply the
concept of encumbrance in Sec. Sec. __.106(c) and (d) of the final
rule, which are discussed in sections VII.D of this Supplementary
Information section.
Additionally, the final rule defines ``NSFR regulatory capital
element'' to mean any capital element included in a covered company's
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital, as those terms are defined
[[Page 9138]]
in the agencies' risk-based capital rule, prior to the application of
capital adjustments or deductions set forth in the agencies' risk-based
capital rule.\79\ This definition excludes any debt or equity
instrument that does not meet the criteria for additional tier 1 or
tier 2 capital instruments in Sec. __.22 of the agencies' risk-based
capital rule or that is being phased out of tier 1 or tier 2 capital
pursuant to subpart G of the agencies' risk-based capital rule.\80\ The
term ``NSFR regulatory capital element'' includes both equity and
liabilities under GAAP that meet the requirements of the definition.
This definition of ``NSFR regulatory capital element'' generally aligns
with the definition of regulatory capital in the agencies' risk-based
capital rule, but does not include capital deductions and
adjustments.\81\ As a result, the final rule requires assets that are
capital deductions (such as goodwill) to be included in the
determination of required stable funding, as discussed in section VII.D
of this Supplementary Information section.
---------------------------------------------------------------------------
\79\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR
part 324 (FDIC).
\80\ Tier 2 capital instruments that have a remaining maturity
of less than one year are not included in regulatory capital. See 12
CFR 3.20(d)(1)(iv) (OCC); 12 CFR 217.20(d)(1)(iv) (Board); 12 CFR
324.20(d)(1)(iv) (FDIC); see also 12 CFR 3.300 (OCC); 12 CFR 217.300
(Board); 12 CFR 324.300 (FDIC).
\81\ The definition of ``NSFR regulatory capital element''
includes allowances for loan and lease losses (ALLL) to the same
extent as under the risk-based capital rule. See 12 CFR 3.20(d)(3)
(OCC); 12 CFR 217.20(d)(3) (Board); 12 CFR 324.20(d)(3) (FDIC).
---------------------------------------------------------------------------
Further, the final rule defines ``NSFR liability'' to mean any
liability or equity reported on a covered company's balance sheet that
is not an ``NSFR regulatory capital element.'' The term ``NSFR
liability'' primarily refers to balance sheet liabilities but may
include equity because some equity may not qualify as an ``NSFR
regulatory capital element.'' The definitions of ``NSFR liability'' and
``NSFR regulatory capital element,'' taken together, should cover the
entirety of the liability and equity side of a covered company's
balance sheet.
Finally, the final rule defines ``QMNA netting set'' to refer to a
group of derivative transactions with a single counterparty that is
subject to a qualifying master netting agreement (QMNA),\82\ and is
netted under the QMNA.\83\ QMNA netting sets include, in addition to
non-cleared derivative transactions, a group of cleared derivative
transactions (that is, a group of derivative transactions that have
been entered into with, or accepted by, a central counterparty (CCP))
if the applicable governing rules for the group of cleared derivative
transactions meet the definition of a QMNA. The term ``QMNA netting
set'' is used in the calculation of a covered company's stable funding
requirement attributable to its derivative transactions, as discussed
in section VII.E of this Supplementary Information section.
---------------------------------------------------------------------------
\82\ Each QMNA netting set must meet each of the conditions
specified in the definition of ``qualifying master netting
agreement'' under Sec. __.3 of the LCR rule and the operational
requirements under Sec. __.4(a) of the LCR rule.
\83\ A QMNA may identify a single QMNA netting set (for which
the agreement creates a single net payment obligation and for which
collection and posting of margin applies on an aggregate net basis)
or it may establish multiple QMNA netting sets, each of which would
be separate from and exclusive of any other QMNA netting set or
derivative transaction covered by the QMNA.
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2. New Definitions for Which the Agencies Received Comments
Unsecured wholesale lending. The proposed rule would have added a
definition of ``unsecured wholesale lending'' to mean a liability or
general obligation of a wholesale customer or counterparty to the
covered company that is not a secured lending transaction. Similar to
the comment received regarding the revised definition of ``unsecured
wholesale funding,'' a commenter noted that an asset exchange could be
viewed as a liability or general obligation that is not a secured
lending transaction if entered into with a wholesale customer and
treated as unsecured wholesale lending under the LCR and NSFR rules.
For the reasons discussed above in respect to the definition of
``unsecured wholesale funding,'' the agencies are revising the
definition of ``unsecured wholesale lending'' to exclude asset
exchanges.\84\ The final rule otherwise adopts the definition of
``unsecured wholesale lending'' as proposed.
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\84\ Under the LCR rule, a covered company should continue to
look to Sec. __.33(f) for the appropriate methodology for
determining inflows with respect to asset exchanges.
---------------------------------------------------------------------------
VII. NSFR Requirement Under the Final Rule
A. Rules of Construction
The proposed rule would have included rules of construction in
Sec. __.102 relating to how items recorded on a covered company's
balance sheet would be reflected in the covered company's ASF and RSF
amounts.
1. Balance-Sheet Values
As noted above, a covered company generally would have determined
its ASF and RSF amounts based on the carrying values of its on-balance
sheet assets, NSFR regulatory capital elements, and NSFR liabilities as
determined under GAAP. For off-balance sheet assets, the proposed rule
would have included a rule of construction in Sec. __.102(a)
specifying that, unless otherwise provided, a transaction or exposure
that is not recorded on the balance sheet of a covered company would
not be assigned an ASF or RSF factor and, conversely, a transaction or
exposure that is recorded on the balance sheet of the covered company
would be assigned an ASF or RSF factor. While the proposed rule
generally would have relied on balance sheet carrying values, it would
have provided a separate treatment for derivative transactions and the
undrawn amount of commitments. The proposed rule also would have
included adjustments to account for certain rehypothecated off-balance
sheet assets.
The agencies received several comments regarding the treatment of
securitization exposures. Two commenters requested that all or certain
securitization exposures that are included on a covered company's
balance sheet pursuant to GAAP be excluded from a covered company's
NSFR.\85\ The commenters argued that the assets and liabilities of the
securitization vehicle are not owned or owed, respectively, by the
covered company or that the securitization vehicle normally has no
legal obligation to make payments when the cash flow from the assets
underlying the securitization is insufficient. As an alternative to
this exclusion, one of the commenters suggested that the assets
collateralizing the securitization should be assigned an RSF factor to
match the ASF factor assigned to the securities issued. This commenter
also argued that where the covered company provides a liquidity
facility to support an asset-backed commercial paper (ABCP) conduit,
the NSFR rule should treat the ABCP conduit as a third-party
securitization and assign a 5 percent RSF factor to the committed
liquidity facility.
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\85\ For example, commenters requested the exclusion of
securitizations that are ``traditional securitizations'' under the
agencies' regulatory capital rules and meet the operational
requirements of risk transfer under those rules, or certain asset-
backed commercial paper (ABCP) conduits.
---------------------------------------------------------------------------
During the 2007-2009 financial crisis, a number of banking
organizations provided funding support for securitization exposures,
even if the banking organization did not include the exposures on its
balance sheet. In response to these events, changes were made to GAAP
that now require firms to include certain securitization
[[Page 9139]]
exposures on their balance sheets.\86\ GAAP's requirements for
including securitization exposures on a firm's balance sheet are based,
in part, on whether the firm exercises control of those exposures. As
discussed in section V.C of this Supplementary Information section, the
NSFR is designed to assess the consolidated balance sheet of a covered
company and using GAAP both promotes consistency in the application of
the NSFR across covered companies and limits operational costs
associated with compliance. In addition, if a covered company meets the
requirements under GAAP for including securitization exposures on-
balance sheet, it may be exposed to funding obligations generated by
those exposures. Therefore, it is appropriate to require stable funding
for securitization exposures that are reflected on-balance sheet in
accordance with GAAP.
---------------------------------------------------------------------------
\86\ For example, GAAP may require consolidation where a covered
company retains a controlling financial interest in the
securitization structure.
---------------------------------------------------------------------------
In response to the request of one commenter that the rule not
assign RSF factors to assets of an on-balance sheet securitization that
meets (1) the definition of ``traditional securitization'' under the
agencies' regulatory capital rules and (2) the operational requirements
of risk transfer under those rules, the agencies note that the
operational requirements include the requirement that the exposures are
not reported on the firm's consolidated balance sheet under GAAP.\87\
As a result, the commenter's requested treatment would not result in
the exclusion of any on-balance sheet securitizations from a covered
company's NSFR. Regardless of the accounting treatment of particular
securitization transactions, all securitizations carry liquidity risks,
including unexpected funding needs. Covered companies may experience
reputational pressure to support securitization transactions that they
are associated with. The final rule accordingly does not include the
commenter's requested exclusion.
---------------------------------------------------------------------------
\87\ See 12 CFR 41(a)(1) (OCC); 12 CFR 217.41(a)(1) (Board); 12
CFR 324.41(a)(1) (FDIC).
---------------------------------------------------------------------------
2. Netting of Certain Transactions
The proposed rule would have included a rule of construction in
Sec. __.102(b) that describes the treatment of receivables and
payables that are associated with secured funding transactions, secured
lending transactions, and asset exchanges with the same counterparty
that the covered company has netted against each other. The agencies
did not receive any comments regarding these netting criteria and are
finalizing these netting criteria as proposed.
For purposes of determining the carrying value of these
transactions, GAAP permits a covered company, when the relevant
accounting criteria are met, to offset the gross value of receivables
due from a counterparty under secured lending transactions by the
amount of payments due to the same counterparty under secured funding
transactions (GAAP offset treatment). The final rule requires a covered
company to satisfy these GAAP accounting criteria and the criteria
applied in Sec. __.102(b) before it can treat the applicable
receivables and payables on a net basis for the purposes of the NSFR
requirement.
Section __.102(b) of the final rule applies the same netting
criteria specified in the agencies' SLR rule.\88\ These criteria
require, first, that the offsetting transactions have the same explicit
final settlement date under their governing agreements. Second, the
criteria require that the right to offset the amount owed to the
counterparty with the amount owed by the counterparty is legally
enforceable in the normal course of business and in the event of
receivership, insolvency, liquidation, or similar proceeding. Third,
the criteria require that under the governing agreements the
counterparties intended to settle net, settle simultaneously, or settle
according to a process that is the functional equivalent of net
settlement (that is, the cash flows of the transactions are equivalent,
in effect, to a single net amount on the settlement date), where the
transactions are settled through the same settlement system, the
settlement arrangements are supported by cash or intraday credit
facilities intended to ensure that settlement of the transactions will
occur by the end of the business day, and the settlement of the
underlying securities does not interfere with the net cash settlement.
---------------------------------------------------------------------------
\88\ 12 CFR 3.10(c)(4)(ii)(E)(1) through (3) (OCC); 12 CFR
217.10(c)(4)(ii)(E)(1) through (3) (Board); 12 CFR
324.10(c)(4)(ii)(E)(1) through (3) (FDIC).
---------------------------------------------------------------------------
3. Treatment of Securities Received in an Asset Exchange by a
Securities Lender
The proposed rule would have included a rule of construction in
Sec. __.102(c) specifying that when a covered company, acting as a
securities lender, receives a security in an asset exchange, includes
the value of the security on its balance sheet, and has not
rehypothecated the security received, the covered company is not
required to assign an RSF factor to the security it has received and is
not permitted to assign an ASF factor to any liability to return the
security.
The agencies received two comments relating to this section of the
proposed rule. One commenter asserted that Sec. __.102(c), together
with Sec. __.106(d),\89\ of the proposed rule would be inconsistent
with the Basel NSFR standard by assigning RSF factors to assets not
included on the balance sheet of a covered company under GAAP. In
response to the comment, the agencies note that Sec. __.102(c) of the
proposed rule, would not have applied to assets excluded from a covered
company's balance sheet under GAAP; it would have applied only to the
carrying value of assets received in an asset exchange that the covered
company includes on its balance sheet.
---------------------------------------------------------------------------
\89\ Section __.106(d) of the proposed rule would have addressed
certain assets received by a covered company in an asset exchange
and not included on the covered company's balance sheet, as well as
certain other off-balance sheet assets rehypothecated by a covered
company. Comments regarding that provision are discussed in section
VII.D.4 of this Supplementary Information section.
---------------------------------------------------------------------------
The other commenter argued that the proposed rule should apply a
different treatment for asset exchanges more generally because,
according to the commenter, the proposed rule did not sufficiently
recognize the funding value of assets received in an asset exchange. In
particular, this commenter argued that the rule should assign an ASF
factor to the value of the asset received in an asset exchange, based
on the type of asset and the remaining maturity of the asset exchange.
The commenter asserted that such treatment would also better align with
the LCR rule, which under certain circumstances allows a covered
company to include in its HQLA amount an asset received in an asset
exchange and may take into account both the assets received and
provided for purposes of assigning inflow or outflow rates. The
commenter further argued that the proposed rule's treatment of asset
exchanges would incentivize covered companies to rehypothecate assets
received in an asset exchange, which the commenter argued would
increase systemic risk.
The NSFR assesses the adequacy of a covered company's funding
stability based on the covered company's balance sheet at a point in
time. A covered company, acting as a securities lender, retains the
security on its balance sheet. Since the covered company is the owner
of the provided security, it is appropriate for the covered company to
retain stable funding for that security, even in cases where the
liquidity characteristics of the asset that the
[[Page 9140]]
covered company provides are less favorable relative to the asset it
receives in the asset exchange. Unlike the LCR, the NSFR is not a cash
flow coverage metric and, where the asset received has not been
rehypothecated, the availability of the received asset as a source of
liquidity is not considered in the design of the NSFR, even in cases
where the received asset is recorded on a covered company's balance
sheet.
The final rule adopts the proposed treatment for securities
received in an asset exchange by a covered company acting as a
securities lender. This provision is intended to neutralize differences
across accounting frameworks and maintain consistency across covered
companies, and is consistent with the treatment of security-for-
security transactions under the SLR rule.\90\ Because the final rule
does not require stable funding for the securities received, it does
not treat the covered company's obligation to return these securities
as stable funding and does not permit a covered company to assign an
ASF factor to this obligation. If, however, the covered company, acting
as the securities lender, sells or rehypothecates the securities
received, the final rule requires the covered company to assign the
appropriate RSF factor or factors under Sec. __.106 to the proceeds of
the sale or, in the case of a pledge or rehypothecation, to the
securities themselves if such securities remain on the covered
company's balance sheet.\91\ Similarly, the covered company must assign
a corresponding ASF factor to the NSFR liability associated with the
asset exchange, for example, with an obligation to return the security
received.
---------------------------------------------------------------------------
\90\ 12 CFR 3.10(c)(4)(ii)(A) (OCC); 12 CFR 217.10(c)(4)(ii)(A)
(Board); 12 CFR 324.10(c)(4)(ii)(A) (FDIC).
\91\ If the assets received by the securities lender have been
rehypothecated but remain on the covered company's balance sheet,
these collateral securities would have been assigned an RSF factor
under Sec. __.106(c) to reflect their encumbrance. For the
treatment of rehypothecated off-balance sheet assets, see section
VII.D.4 of this Supplementary Information section.
---------------------------------------------------------------------------
B. Determining Maturity
The proposed rule would have assigned ASF and RSF factors to a
covered company's NSFR liabilities and assets based in part on the
maturity of each NSFR liability or asset. Section __.101 of the
proposed rule would have incorporated the maturity assumptions in
Sec. Sec. __.31(a)(1) and (2) of the LCR rule to determine the
maturities of a covered company's NSFR liabilities and assets. For
example, the proposed rule would require a covered company to apply the
earliest possible maturity date to an NSFR liability (which would be
assigned an ASF factor) and the latest possible maturity date to an
asset (which would be assigned an RSF factor), taking into account any
notice periods or options that may modify the maturity date.
A commenter argued that the proposed rule's maturity assumptions
provide a less risk-sensitive approach than the Basel NSFR standard,
stating that the Basel NSFR standard does not require the assumption
that a liability matures according to its earliest possible maturity
date, but provides supervisors with discretion regarding assumptions
about the exercise of certain options based on reputational factors and
market expectations. Another commenter posited that the NSFR rule
should not assume that a covered company would exercise a ``clean-up''
call option with respect to a securitization at the earliest possible
date.\92\ Instead, the commenter argued that the NSFR rule should
require a covered company to identify the securitizations that are
likely to have a clean-up call option maturing over the next year and
to reasonably evaluate whether the covered company intends to exercise
that option.
---------------------------------------------------------------------------
\92\ The commenter's discussion referred to contractual
provisions whereby an originating banking organization or servicer
has the option to exercise a ``clean-up'' call by repurchasing the
remaining securitization exposures once the amount of the underlying
asset exposures or outstanding securitization exposures falls below
a specified amount.
---------------------------------------------------------------------------
The final rule incorporates the maturity assumptions of the LCR
rule as proposed. The final rule requires a covered company to identify
the maturity date of its NSFR liabilities and assets in a conservative
manner by applying the earliest possible maturity date to an NSFR
liability and the latest possible maturity date to an asset. The final
rule generally also requires a covered company to take a conservative
approach when determining maturity with respect to any notice periods
and with respect to any options, either explicit or embedded, that may
modify maturity dates. For example, a covered company is required to
treat an option to reduce the maturity of an NSFR liability or an
option to extend the maturity of an asset as if it will be exercised on
the earliest possible date.
The final rule treats an NSFR liability that has an ``open''
maturity (i.e., the NSFR liability has no maturity date under Sec.
__.101 and may be closed out on demand) as maturing on the day after
the calculation date. For example, an ``open'' repurchase transaction
or a demand deposit placed at a covered company is treated as maturing
on the day after the calculation date. To ensure consistent use of
terms in the final rule and LCR rule and to avoid ambiguity between
perpetual instruments and transactions (i.e., the instrument or
transaction has no contractual maturity date and may not be closed out
on demand) and open maturity instruments and transactions, the final
rule amends Sec. __.31 of the LCR rule to use the term ``open''
instead of using the phrase ``has no maturity date.'' This change has
no substantive impact on the LCR rule. The final rule treats a
perpetual NSFR liability (such as perpetual securities issued by a
covered company) as maturing one year or more after the calculation
date.
The final rule treats each principal amount due under a
transaction, such as separate principal payments due under an
amortizing loan, as a separate transaction for which the covered
company would be required to identify the date on which the payment is
contractually due and apply the appropriate ASF or RSF factor based on
that maturity date. This treatment ensures that a covered company's ASF
and RSF amounts reflect the timing of the contractual maturities of a
covered company's liabilities and assets, rather than treating the full
principal amount as though it were due on one date (such as the last
contractual principal payment date). For example, if funding provided
by a counterparty to a covered company requires two contractual
principal repayments, the first due less than six months from the
calculation date and the second due one year or more from the
calculation date, only the principal amount that is due one year or
more from the calculation date is assigned a 100 percent ASF factor,
which is the factor assigned to liabilities that have a maturity of one
year or more from the calculation date. The liability for the
contractual principal repayment due within six months represents a less
stable source of funding and is therefore assigned a lower ASF factor.
For deferred tax liabilities that have no maturity date, the
maturity date under the final rule is the first calendar day after the
date on which the deferred tax liability could be realized.
Because the maturity assumptions in Sec. __.101 of the final rule
apply only to NSFR liabilities and assets, the final rule does not
apply the LCR rule's maturity assumptions to a covered company's NSFR
regulatory capital elements. Unlike NSFR liabilities, which have
varying maturities, NSFR regulatory capital elements are longer-term by
definition, and as such, the proposed rule would have assigned a
[[Page 9141]]
100 percent ASF factor to all NSFR regulatory capital elements.
The final rule's incorporation of the above maturity assumptions
provides for consistent determination of maturities across covered
companies, which improves comparability and standardization of the
NSFR. In addition, these assumptions reflect an appropriate degree of
conservatism regarding the timing of when an asset or NSFR liability
will mature, which helps to support a covered company's funding
resiliency across a range of economic and financial conditions. This
approach is also consistent with a provision in the Basel NSFR standard
that one commenter argued would be more risk-sensitive. This standard
provides that for funding with options exercisable at the discretion of
a firm subject to a jurisdiction's NSFR requirement, national
supervisors should take into account reputational factors that may
pressure a firm not to exercise the option. Given the possibility and
variability of reputational considerations with respect to many forms
of funding, in addition to the considerations discussed above, the
final rule incorporates the LCR rule maturity assumptions as proposed.
With respect to the treatment of securitization clean-up call
options, these options are generally features of securitizations with
terms greater than one year and are generally exercisable near the end
of the term. Instead of providing for firm specific evaluations of the
likelihood of exercising a clean-up call option as commenters
suggested, the final rule employs standardized assumptions to all firms
to facilitate comparability across firms. The maturity assumptions of
the LCR rule and final rule, however, do not require all clean-up call
options to be exercised at the earliest possible date. Section
__.31(a)(1)(iii)(A) of the LCR rule, applicable to the NSFR through
Sec. __.101 of the final rule, provides that a covered company must
treat an option to reduce the maturity of an obligation as though it
will be exercised at the earliest possible date, except where the
original maturity of the obligation is greater than one year and the
option does not go into effect for a period of 180 days following the
issuance of the instrument. If that condition is met, then the maturity
of the obligation will be the original maturity date at issuance under
both the LCR rule and the final rule.
C. Available Stable Funding
1. Calculation of the ASF Amount
Section __.103 of the proposed rule would have established the
requirements for a covered company to calculate its ASF amount, which
would have equaled the sum of the carrying values of the covered
company's NSFR regulatory capital elements and NSFR liabilities, each
multiplied by an ASF factor assigned in Sec. __.104 or Sec.
__.107(c).\93\
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\93\ ASF factors would have been assigned to NSFR regulatory
capital elements and NSFR liabilities under Sec. __.104, except for
NSFR liabilities relating to derivatives. As discussed in section
VII.E of this Supplementary Information section, certain NSFR
liabilities relating to derivative transactions would not have been
considered stable funding for purposes of a covered company's NSFR
calculation and would have been assigned a zero percent ASF factor
under Sec. __.107(c) of the proposed rule.
---------------------------------------------------------------------------
In the proposed rule, ASF factors would have been assigned based on
the relative stability of each category of NSFR regulatory capital
element or NSFR liability relative to the NSFR's one-year time horizon.
In addition, Sec. __.108 of the proposed rule would have provided that
a covered company may include in its ASF amount the ASF of a
consolidated subsidiary only to the extent that the funding of the
subsidiary supports the RSF amount of the subsidiary or is readily
available to support RSF amounts of the covered company outside the
consolidated subsidiary.\94\ The agencies received no comments on the
calculation of the ASF amount and are adopting such calculation as
proposed.
---------------------------------------------------------------------------
\94\ See section VII.F of this Supplementary Information
section.
---------------------------------------------------------------------------
Comments regarding the proposed assignment of ASF factors and
specific contractual and funding-related features of a number of NSFR
regulatory capital elements and NSFR liabilities are described below.
2. Characteristics for Assignment of ASF Factors
For the purpose of assigning ASF factors, the proposed rule would
have categorized NSFR regulatory capital elements and NSFR liabilities
into five broad categories based on their tenor, the type of funding,
and the type of funding counterparty. The proposed rule would have
applied the same ASF factor in each category to reflect the relative
stability of a covered company's NSFR regulatory capital elements and
NSFR liabilities over a one-year time horizon. ASF factors would have
been scaled from zero to 100 percent, with a zero percent weighting
representing the lowest relative stability and a 100 percent weighting
representing the highest relative stability.
For operational simplicity, the proposed rule would have grouped
NSFR regulatory capital elements and NSFR liabilities into one of four
maturity categories: One year or more, less than one year, six months
or more but less than one year, and less than six months (ASF maturity
categories). One commenter expressed concern that the ASF maturity
categories are arbitrary and may lead a covered company to
unnecessarily adjust its funding profile to align with the ASF maturity
categories rather than its actual funding needs. This commenter
recommended that the ASF factor framework provide more granular
maturity categories (e.g., monthly residual maturity categories), which
would be more risk-sensitive.
The agencies did not receive general comments on the proposed
approach to differentiate ASF factors based on different funding types
and counterparties, although some comments were received on the
proposed categories of ASF and are discussed below. However, some
commenters suggested that, for purposes of measuring the stand-alone
NSFR of a covered company that is a depository institution subsidiary
of another covered company, ASF factors should be higher or subject to
a floor where the counterparty providing the funding is an affiliated
insured depository institution. For example, one commenter suggested
that the ASF factor for funding provided by an affiliated depository
institution should be no less than 95 percent, particularly where the
affiliated depository institution has an ASF amount in excess of its
RSF amount when measured on a stand-alone basis. These commenters
argued that a higher ASF factor would be appropriate because funding
provided by an affiliated depository institution is more stable than
funding from non-affiliated sources. These commenters also asserted
that special treatment for funding transactions between affiliated
insured depository institutions in the final rule would be consistent
with the treatment of affiliates in the U.S. bank regulatory framework,
such as the treatment of affiliates in sections 23A and 23B of the
Federal Reserve Act,\95\ the Board's Regulation W,\96\ and cross-
guarantee liability provisions in the FDI Act.\97\ Commenters also
suggested that special treatment could be limited to institutions that
would qualify for the
[[Page 9142]]
``sister bank exemption'' in section 223.41(b) of Regulation W.\98\
---------------------------------------------------------------------------
\95\ 12 U.S.C. 371c and 12 U.S.C. 371c-1.
\96\ 12 CFR part 223.
\97\ 12 U.S.C. 1815(e).
\98\ 12 CFR 223.41(b).
---------------------------------------------------------------------------
The final rule generally adopts the proposed rule's approach to
assigning ASF factors subject to certain modifications and
clarifications that are discussed below in this Supplementary
Information section. The final rule treats funding to be relatively
less stable if there is a greater likelihood that a covered company
would need to replace or repay it over a one-year time horizon. As in
the proposed rule, the final rule assigns an ASF factor to NSFR
regulatory capital elements and NSFR liabilities based on three
characteristics relating to the stability of the funding: (1) Funding
tenor, (2) funding type, and (3) counterparty type. As discussed below,
certain ASF factor assignments under the final rule reflect additional
policy considerations.
a) Funding Tenor
For purposes of assigning ASF factors, the final rule assigns a
higher ASF factor to funding that has a longer remaining maturity (or
tenor) than shorter-term funding because, funding that by its terms has
a longer tenor is more stable relative to a one-year horizon and should
be less susceptible to short-term rollover risk. Specifically, the
assignment of a higher ASF factor reflects the relatively decreased
likelihood that a firm in the near term would need to replace funding
that has a longer tenor, or if necessary, monetize assets at a loss to
repay the funding in comparison to funding of a shorter tenor. The need
to replace funding or monetize assets could adversely impact a firm's
liquidity position or generate negative externalities for other market
participants. Longer-term funding, therefore, generally would provide
greater stability across all market conditions. For operational
simplicity, and consistent with the proposed rule, the final rule
groups the tenor of NSFR regulatory capital elements and NSFR
liabilities into one of the four ASF maturity categories: One year or
more, less than one year, six months or more but less than one year,
and less than six months. These ASF maturity categories are consistent
with the design principles described in section V of this Supplementary
Information section and the Basel NSFR standard. They are also
generally consistent to other approaches used for reflecting the role
of residual maturities in other agencies' regulations and supervisory
approaches.\99\
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\99\ For example, the Board's GSIB capital surcharge rule
includes generally similar categories for the maturities of average
wholesale funding, including short-term wholesale funding, with
remaining maturities of one year or more and six months or more but
less than one year.
---------------------------------------------------------------------------
The purpose of the ASF maturity categories is to categorize NSFR
regulatory capital elements and NSFR liabilities in a simple manner
based on the relative stability of such funding. Although the
categories may result in some greater cliff effects between groups than
more granular categories (e.g., one-month maturity categories),
including more granular categories would increase complexity and result
in a metric that is more difficult to monitor and supervise.\100\ The
final rule generally treats funding with a remaining maturity of one
year or more as the most stable and short-term funding as less stable.
In this manner, the final rule incentivizes a covered company to
maintain a stable funding profile by utilizing funding, such as equity
and long-term debt, that matures beyond the NSFR's one-year time
horizon. The final rule generally treats funding that matures in six
months or more but less than one year as less stable than regulatory
capital and long-term debt because a covered company would need to
replace or repay such funding before the end of the NSFR's one-year
time horizon. Funding with a remaining maturity of less than six months
or an open maturity is generally treated as less stable because a
covered company may need to replace or repay it in the near term.
---------------------------------------------------------------------------
\100\ The agencies note that adoption of the final rule does not
preclude covered companies from using other metrics to manage
funding risks and conduct internal stress testing over various time
horizons that may include, among other things, more granular
maturity categories.
---------------------------------------------------------------------------
b) Funding Type
The final rule recognizes that certain types of funding, such as
certain types of deposits, tend to be more stable than other types of
funding, independent of their tenor. For example, as described below in
this Supplementary Information section, the final rule assigns a higher
ASF factor to stable retail deposits relative to other retail deposits,
due in large part to the presence of full deposit insurance coverage
and other stabilizing features, such as another established
relationship with the depository institution,\101\ that increase the
likelihood of a counterparty continuing the funding across a broad
range of market conditions. Similarly, the final rule assigns a higher
ASF factor to operational deposits provided to a covered company than
to certain other forms of short-term wholesale deposits, as discussed
below in this Supplementary Information section. In a manner consistent
with the proposed rule, the final rule takes into account the
characteristics of funding type on funding stability when assigning ASF
factors.
---------------------------------------------------------------------------
\101\ For example, another deposit account, a loan, bill payment
services, or any similar service or product provided to the
depositor.
---------------------------------------------------------------------------
c) Counterparty Type
The final rule assigns ASF factors by taking into account the type
of counterparty that provides the funding, using the same counterparty
type classifications as the LCR rule: (1) Retail customers or
counterparties, (2) wholesale customers or counterparties that are not
financial sector entities, and (3) financial sector entities.\102\
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\102\ Under Sec. __.3 of the LCR rule, the term ``retail
customer or counterparty'' includes individuals, certain small
businesses, and certain living or testamentary trusts. The term
``wholesale customer or counterparty'' refers to any customer or
counterparty that is not a retail customer or counterparty. The term
``financial sector entity'' refers to a regulated financial company,
identified company, investment advisor, investment company, pension
fund, or non-regulated fund, as such terms are defined in Sec. __.3
of the LCR rule. The final rule incorporates these definitions. For
purposes of determining ASF and RSF factors assigned to liabilities,
assets, and commitments where counterparty type is relevant, the
final rule treats an unconsolidated affiliate of a covered company
as a financial sector entity.
---------------------------------------------------------------------------
Consistent with the proposed rule, the final rule considers the
differences in funding provided by retail and wholesale customers or
counterparties when assigning ASF factors. Retail customers or
counterparties (including small businesses) typically maintain long-
term relationships with covered companies and their deposits may
consist of larger numbers of accounts with smaller balances relative to
wholesale depositors. Retail customers or counterparties are generally
less likely to move deposits over a one-year time horizon than
wholesale depositors. In contrast, wholesale depositors are more likely
to move deposits over a one-year time horizon for business or
investment reasons. Therefore, the final rule treats most types of
deposit funding provided by retail customers or counterparties as more
stable than deposit funding provided by wholesale customers or
counterparties.
In addition, wholesale customers and counterparties that are not
financial sector entities typically maintain balances with covered
companies to support their non-financial activities, such as production
and physical investment, which tend to be less correlated to short-term
financial market fluctuations than activities of financial sector
entities. Therefore, non-financial wholesale customers or
counterparties are more likely than financial sector
[[Page 9143]]
entities to continue to provide funding to a covered company over a
one-year horizon.
Further, differences in business models and liability structures
tend to make short-term funding provided by financial sector entities
less stable than similar funding provided by non-financial wholesale
customers or counterparties. Financial sector entities are typically
less reliable funding providers than non-financial wholesale customers
or counterparties due, in part, to their financial intermediation
activities. Financial sector entities tend to be more sensitive to
market fluctuations that could cause them to reduce their general level
of funding provided to a covered company. Furthermore, the increased
interconnectedness between financial sector entities means that there
is a higher correlation of risks across the financial sector that may
adversely impact the stability of short-term funding provided by a
financial sector entity. Therefore, the final rule treats most short-
term funding that is provided by financial sector entities as less
stable than similar types of funding provided by non-financial
wholesale customers or counterparties.
Further, as a general matter, an affiliation would not necessarily
improve the funding stability of the covered company. Banking
organizations that generally rely on funding from financial sector
affiliates may have similar balance sheet funding risks to those that
generally rely on funding of the same tenor from non-affiliates. An
affiliated depository institution that is providing funding to a
covered company may have a business model, liability structure,
sensitivity to market fluctuations, degree of financial sector
interconnectedness, or other characteristics that are similar to
unaffiliated financial sector entities. While funding relationships
with affiliates may provide a banking organization with additional
flexibility in the normal course of business, ongoing reliance on
contractually short-term funding from affiliates may present risks that
are similar to funding from non-affiliate sources, particularly during
stress. Therefore, the final rule's treatment of funding from
affiliated sources consistent with non-affiliate funding provides a
more appropriate measure of balance sheet funding risk.
The agencies also are not convinced that the ASF factors applicable
to funding provided by an affiliated insured depository institution
should be higher in cases where the affiliated funds provider has an
ASF amount in excess of its RSF amount when calculated on a standalone
basis. The comparison of ASF to RSF amounts is informative of the
overall funding position of a banking organization, taking into account
its entire balance sheet, lending commitments, and derivative
exposures. However, the balance sheet funding position of an affiliated
insured depository institution at a calculation date does not
necessarily imply that the institution is generally more likely to
continue to provide funds to a covered company than an unaffiliated
funding provider. The agencies note that the specific legal provisions
cited by commenters (e.g., sections 23A and 23B of the Federal Reserve
Act, the Board's Regulation W, and the FDI Act) address different
policy considerations than the NSFR and do not suggest that funding
from affiliates is more stable than funding received from non-
affiliates.
While comprehensive data on the funding of covered companies by
counterparty type is limited, the agencies' analysis of available data
confirmed the agencies' expectation of funding stability differences
across counterparty types.\103\ Prior to issuing the proposed rule, the
agencies reviewed information collected on the Consolidated Reports of
Condition and Income (Call Report), Report of Assets and Liabilities of
U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and the
Securities and Exchange Commission (SEC) Financial and Operational
Combined Uniform Single Report (FOCUS Report) over the period beginning
December 31, 2007, and ending December 31, 2008, in combination with
more recent FR 2052a report data, and supervisory information collected
in connection with the LCR rule. In addition, the agencies reviewed
supervisory information collected from depository institutions for
which the FDIC was appointed as receiver in 2008 and 2009. Although the
NSFR requirement is designed to measure the stability of a covered
company's funding profile across all market conditions and would not be
specifically based on a particular market stress environment, the
agencies considered a period of stress for purposes of evaluating the
relative effects of counterparty type on funding stability. Because a
covered company under normal conditions may adjust funding across
counterparty types for any number of reasons, focusing on periods of
stress allowed the agencies to evaluate general differences in
stability by counterparty type.
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\103\ Prior to the 2007-2009 financial crisis, covered companies
did not consistently report or disclose detailed liquidity
information. On November 17, 2015, the Board adopted the revised FR
2052a to collect quantitative information on selected assets,
liabilities, funding activities, and contingent liabilities from
certain large banking organizations.
---------------------------------------------------------------------------
The agencies' analysis of available public and supervisory
information shows that, during 2008, funding from financial sector
entities exhibited less stability than funding provided by non-
financial wholesale counterparties, which in turn exhibited less
stability than insured retail deposits. For example, Call Report data
on insured deposits, deposit data from the FFIEC 002, and broker-dealer
liability data reported on the FOCUS Report showed higher withdrawals
in wholesale funding than retail deposits over this period. The
agencies' analysis of supervisory data from a sample of large
depository institutions for which the FDIC was appointed as receiver in
2008 and 2009 also indicated that, during the periods leading up to
receivership, funding provided by wholesale counterparties was
significantly less stable, showing higher average total withdrawals,
than funding provided by retail customers and counterparties.
3. Categories of ASF Factors
Based on the tenor, funding type and counterparty type
characteristics described above, the agencies categorized NSFR
regulatory capital elements and NSFR liabilities into five broad
categories and assigned a single ASF factor in each category, as shown
in Table 1 below. The types of funding grouped together in each
category generally displays relatively similar stability as compared to
funding in a different category. The value of the ASF factor is
calibrated to reflect the relative distinctions between categories and
the general composition of balance sheet liabilities, and is generally
consistent with the Basel NSFR standard to promote comparability across
jurisdictions and the supervisory assessment of the aggregate funding
position of covered companies.
[[Page 9144]]
Table 1--Categories of NSFR Regulatory Capital Elements and Liabilities Based on Their Characteristics and
Resulting ASF Factors
----------------------------------------------------------------------------------------------------------------
NSFR regulatory capital ASF factor
Tenor Counter-party type Funding type and liabilities percent
----------------------------------------------------------------------------------------------------------------
One year or more............... All............... All............... NSFR regulatory capital 100
elements and long-term
NSFR liabilities.
Any tenor...................... Retail............ Fully insured..... Stable retail deposits 95
and.
certain affiliate sweep
deposits.
Not fully insured. Other non-brokered 90
retail deposits and
certain affiliate
sweep deposits.
Retail brokered... Fully insured..... Brokered reciprocal ..............
deposits.
One year or more............... .................. All............... Other brokered deposits
not held in a
transactional account.
Less than one year............. Wholesale......... Non-operational *. Unsecured funding 50
provided by, and
secured funding
transactions with, a
counterparty that is
not a financial sector
entity or central bank.
Six months but less than one Financial or Non-operational... Unsecured wholesale ..............
year. central bank. funding provided by,
and secured funding
transactions with, a
financial sector
entity or central bank.
All............... Securities........ Securities issued by a ..............
covered company.
Retail brokered... All............... Retail brokered ..............
deposits other than
brokered reciprocal
deposits, sweep
deposits, or
transactional deposits.
Any tenor...................... .................. .................. Transactional retail ..............
brokered deposits.
Not fully insured. Brokered reciprocal ..............
deposits.
Retail............ All............... Non-affiliate sweep
deposits.
Retail funding that is
not a deposit or
security.
Wholesale......... Operational....... Operational deposits... ..............
Less than six months........... Retail brokered... Any............... Certain short-term 0
retail brokered
deposits.
Financial or Non-operational... Short-term funding from ..............
central bank. a financial sector
entity or central bank.
All............... Securities........ Securities issued by a ..............
covered company.
Other............. Trade date payables.... ..............
Any tenor **................... All............... Derivative........ NSFR derivatives ..............
liability amount.
----------------------------------------------------------------------------------------------------------------
* That is, not an operational deposit.
** The derivative treatment nets derivative transactions with various maturities.
a) 100 Percent ASF Factor
Section __.104(a) of the proposed rule would have assigned a 100
percent ASF factor to NSFR regulatory capital elements, as defined in
Sec. __.3 of the proposed rule, and described in section VI.B of this
Supplementary Information section. The proposed rule also would have
assigned a 100 percent ASF factor to NSFR liabilities that have a
remaining maturity of one year or more from the calculation date, other
than funding typically provided by retail customers or counterparties.
This category would have included debt or equity securities issued by a
covered company that have a remaining maturity of one year or more.
In the proposed rule, the agencies requested comment on whether
long-term debt securities issued by a covered company where the company
is the primary market maker of such securities should be assigned an
ASF factor other than 100 percent (for example, between 95 and 99
percent) to recognize the risk that a covered company may buy back
these debt securities. One commenter supported the proposed assignment
of a 100 percent ASF factor to such securities on the basis that a
lower ASF is unnecessary because the NSFR is not a stress metric. The
agencies did not receive other comments regarding treatment of the NSFR
regulatory capital elements and NSFR liabilities that mature one year
or more from the calculation date not provided by retail customers or
counterparties.
The final rule assigns a 100 percent ASF factor to NSFR regulatory
capital elements and NSFR liabilities that mature one year or more from
the calculation date as proposed. NSFR regulatory capital elements and
non-retail long-term liabilities that do not mature during the NSFR's
one-year time horizon represent the most stable form of funding under
the final rule because they are not susceptible to rollover risk during
the NSFR's timeframe. Similarly, and as noted by the commenter, there
is reduced risk, absent stress conditions, that a covered company will
face pressure to buy back its long-term debt securities in significant
quantities during the NSFR's one-year time horizon as compared to other
liabilities on its balance sheet.
The agencies received comments requesting assignment of a 100
percent ASF factor to certain other NSFR liabilities, which are
discussed in more detail below.
b) 95 Percent ASF Factor
Section __.104(b) of the proposed rule would have assigned a 95
percent ASF factor to stable retail deposits held at a covered
company.\104\ The assignment of a 95 percent ASF factor would have
reflected that such deposits generally provide a highly stable source
of funding for covered companies.
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\104\ Section __.3 of the LCR rule defines a ``stable retail
deposit'' as a retail deposit that is entirely covered by deposit
insurance and either (1) is held by the depositor in a transactional
account or (2) the depositor that holds the account has another
established relationship with the covered company such as another
deposit account, a loan, bill payment services, or any similar
service or product provided to the depositor that the covered
company demonstrates, to the satisfaction of the appropriate Federal
banking agency, would make the withdrawal of the deposit highly
unlikely during a liquidity stress event.
---------------------------------------------------------------------------
Some commenters requested that the final rule assign a 95 or 100
percent ASF factor to certain retail deposits that do not meet the
definition of ``stable retail deposits,'' but are subject to
contractual restrictions that make it less likely the deposits would be
redeemed earlier than their contractual term. For example, some
commenters suggested that the NSFR rule assign a 100 percent ASF factor
to a retail deposit, such as a certificate of deposit, with a remaining
maturity greater than one year if the covered company or its
consolidated depository institution does not maintain a secondary
market for the deposit, or if the contract contained provisions
restricting redemption only to certain specified events, such as death
or
[[Page 9145]]
determination of mental incapacity of the depositor.
The final rule assigns a 95 percent ASF factor to deposits that
meet the definition of ``stable retail deposit'' as proposed. Relative
to liabilities in the 100 percent ASF category, stable retail deposits
either have no contractual restriction on withdrawal within a one-year
period or there is some likelihood that covered companies may permit
withdrawals despite contractual restrictions within the one-year
horizon. Although some evidence suggests that these deposits are highly
stable, they are not as stable as funding for which there is greater
certainty of maturity outside the NSFR one-year horizon. Therefore, an
ASF factor that is only slightly lower than that assigned to NSFR
regulatory capital elements and long-term NSFR liabilities is
appropriate because stable retail deposits are nearly as stable over
the NSFR's one-year time horizon as NSFR regulatory capital elements
and long-term NSFR liabilities under Sec. __.104(a) of the final rule.
The remaining maturity of stable retail deposits does not affect
the assignment of an ASF factor under the final rule because the
stability of retail deposits is more closely linked to counterparty and
funding type characteristics. As noted in the preamble to the proposed
rule, the combination of full deposit insurance coverage, the
depositor's relationship with the covered company, and the costs of
moving transactional or multiple accounts to another institution
substantially reduce the likelihood that retail depositors will
withdraw stable retail deposits in significant amounts over a one-year
time horizon.\105\ Maturity or other contractual provisions restricting
redemption are less relevant, for example, because a covered company
may permit withdrawal of a retail term deposit for business and
reputational reasons in the event of a depositor's early withdrawal
request despite the absence of a contractual requirement to permit such
a withdrawal within the NSFR's one-year time horizon. Generally, other
categories of funding that do not have the features of stable retail
deposits are not as stable and therefore assigned to a lower ASF factor
category in the final rule.
---------------------------------------------------------------------------
\105\ See section VII.C.2.b of this Supplementary Information
section.
---------------------------------------------------------------------------
Under the proposal, affiliated brokered sweep deposits deposited in
accordance with a contract with a retail customer or counterparty and
where the entire amount of the deposit is covered by deposit insurance
would have been assigned a 90 percent ASF factor.\106\ Commenters
requested that similar types of deposits be assigned a higher ASF
factor, claiming that these deposits have historically evidenced
stability across a range of market conditions.
---------------------------------------------------------------------------
\106\ Under Sec. __.3 of the LCR rule, a ``brokered sweep
deposit'' previously was defined to mean a deposit held at a covered
company by a customer or counterparty through a contractual feature
that automatically transfers to the covered company from another
regulated financial company at the close of each business day
amounts identified under the agreement governing the account from
which the amount is being transferred. As discussed in section
VI.A.4 of this Supplementary Information section, the final rule
amends Sec. __.3 to replace ``brokered sweep deposit'' with the
term ``sweep deposit'' because not all sweep deposits are brokered,
for example, if they meet the terms of the primary purpose exception
under section 29 of the FDI Act and the FDIC's brokered deposit
regulations.
---------------------------------------------------------------------------
In a change from the proposal, the final rule also assigns a 95
percent ASF factor to affiliate sweep deposits where the entire amount
of the sweep deposit is covered by deposit insurance and where a
covered company has demonstrated to the satisfaction of its appropriate
Federal banking agency that withdrawal of the deposit is highly
unlikely to occur during a liquidity stress event. A sweep deposit
arrangement places deposits at one or more banking organizations, with
each banking organization receiving the maximum amount that is covered
by deposit insurance, according to a priority ``waterfall.'' Within the
waterfall structure, affiliates tend to be the first to receive
deposits and the last from which deposits are withdrawn. Because of
this priority relationship with an affiliate, a covered company is more
likely to receive and maintain a steady stream of sweep deposits
provided by a retail customer or counterparty across a range of market
conditions. The priority relationship with an affiliate results in a
deposit relationship that is reflective of an overall relationship with
the underlying retail customer or counterparty where these deposits
generally exhibit a stability profile associated with deposits directly
from retail customers. This affiliate relationship combined with the
presence of full deposit insurance coverage reduces the likelihood that
retail depositors will withdraw these deposits in significant amounts
over a one-year time horizon. Given these stabilizing characteristics,
some affiliate sweep deposits from retail customers may provide similar
funding stability across a range of market conditions as stable retail
deposits, particularly if there are contractual features or costs that
substantially reduce the likelihood that an affiliate sweep deposit
will be withdrawn over a one-year time horizon. In light of this
possibility, the final rule assigns a 95 percent ASF factor to any
fully insured affiliate sweep deposit from a retail customer or
counterparty that the covered company demonstrates is highly unlikely
to be withdrawn during a liquidity stress event. For the same reasons
as the agencies described in connection with this final rule, the
agencies are considering making similar changes to the treatment of
affiliate sweep deposits in the LCR in a separate rulemaking.
c) 90 Percent ASF Factor
While stable retail deposits and certain fully-insured retail
affiliate sweep deposits, regardless of tenor, have the highest
stability characteristics for deposits under the final rule, other non-
brokered retail deposits and certain retail brokered deposits have a
combination of deposit insurance, counterparty relationship, and tenor
characteristics that provide relatively less stability than stable
retail deposits and are assigned a slightly lower ASF factor of 90
percent.
(i) Other Non-Brokered Retail Deposits
Section __.104(c) of the proposed rule would have assigned a 90
percent ASF factor to retail deposits that are neither stable retail
deposits nor retail brokered deposits. This category would have
included retail deposits that are not fully insured by the FDIC or are
insured under non-FDIC deposit insurance systems. The agencies did not
receive comments on this aspect of the proposed rule, and the final
rule assigns a 90 percent ASF factor to these other retail deposits as
proposed.
As discussed above in section VII.C.2 of this Supplementary
Information section, retail customers and counterparties tend to
provide deposits that are more stable than funding provided by other
types of counterparties. However, deposits provided by retail customers
and counterparties that are not fully covered by FDIC deposit insurance
are assigned a lower ASF factor than the ASF factor assigned to stable
retail deposits because of the elevated risk that depositors will
withdraw funds if they become concerned about the condition of the
bank, in part, because the depositor will have no guarantee that
uninsured funds will promptly be made available through established and
timely intervention and resolution protocols. In addition, deposits
that are neither held in a transactional account nor from a customer
that has another relationship with a covered company tend to be less
stable than stable retail deposits because
[[Page 9146]]
the depositor is less reliant on the services of the covered company.
Therefore, the assigned ASF factor reflects the somewhat greater
likelihood of withdrawal for those deposits that are not stable retail
deposits. Similar to stable retail deposits and for the same reasons,
the remaining maturity of these retail deposits does not affect the
assignment of an ASF factor under the final rule.
(ii) Affiliate Sweep Deposits, Fully Insured Brokered Reciprocal
Deposits, and Certain Longer-Term Retail Brokered Deposits
Section __.104(c) of the proposed rule would have assigned a 90
percent ASF factor to the following three categories of brokered
deposits \107\ provided by retail customers or counterparties: (1) A
reciprocal brokered deposit where the entire amount is covered by
deposit insurance,\108\ (2) an affiliated brokered sweep deposit where
the entire amount of the deposit is covered by deposit insurance,\109\
and (3) a brokered deposit that is not a reciprocal brokered deposit or
brokered sweep deposit, is not held in a transactional account, and has
a remaining maturity of one year or more.\110\ Other types of brokered
deposits would have been assigned lower ASF factors under the proposed
rule.\111\
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\107\ A ``brokered deposit'' previously was defined in Sec.
__.3 of the LCR rule as a deposit held at the covered company that
is obtained, directly or indirectly, from or through the mediation
or assistance of a deposit broker, as that term is defined in
section 29(g) of the FDI Act (12 U.S.C. 1831f(g)), and includes
reciprocal brokered deposits and brokered sweep deposits. In the
final rule, the agencies have amended the definition to mean a
deposit held at the covered company that is obtained, directly or
indirectly, from or through the mediation or assistance of a deposit
broker, as that term is defined in section 29(g) of the FDI Act (12
U.S.C. 1831f(g)) and the FDIC's regulations. See section VI.A.4 of
this Supplementary Information section.
The agencies note that the ASF factors assigned to retail
brokered deposits are based solely on the stable funding
characteristics of these deposits over a one-year time horizon. The
assignment of ASF factors is not intended to reflect other impacts
of these deposits on a covered company, such as their effect on a
company's probability of failure or loss given default, franchise
value, or asset growth rate or lending practices.
\108\ A ``reciprocal brokered deposit'' previously was defined
in Sec. __.3 of the LCR rule as a brokered deposit that the covered
company receives through a deposit placement network on a reciprocal
basis, such that: (1) For any deposit received, the covered company
(as agent for the depositors) places the same amount with other
depository institutions through the network and (2) each member of
the network sets the interest rate to be paid on the entire amount
of funds it places with other network members. The final rule
renames the term ``reciprocal brokered deposit'' to ``brokered
reciprocal deposit'' to avoid confusion and use terminology
consistent with other regulations. See 12 CFR 327.8(q).
\109\ See supra note 106. Typically, these transactions involve
securities firms or investment companies that transfer (``sweep'')
idle customer funds into deposit accounts at one or more banks. An
affiliate sweep deposit is deposited in accordance with a contract
between the retail customer or counterparty and the covered company,
a controlled subsidiary of the covered company, or a company that is
a controlled subsidiary of the same top-tier company of which the
covered company is a controlled subsidiary.
\110\ Under the final rule, the agencies removed from the
definition of ``brokered deposit'' references to deposits defined as
either a ``reciprocal brokered deposit'' or ``brokered sweep
deposit'' in Sec. __.3 of the LCR rule. This revision reflects
modifications made to these terms under the final rule, as discussed
in section VI.A.4 of this Supplementary Information section. See
supra note 107.
\111\ These other types of brokered deposits are discussed in
sections VII.C.3.d and VII.C.3.e of this Supplementary Information
section.
---------------------------------------------------------------------------
A commenter argued that brokered deposits are not inherently
unstable and should receive similar treatment as non-brokered retail
deposits. Several commenters suggested that retail brokered deposits
with a remaining maturity of one year or more be assigned a 100 percent
ASF factor. Commenters argued that assigning these long-term retail
brokered deposits an ASF factor of 100 percent would align with the
Basel standard and recognize the more significant role of this funding
source in the U.S. financial system relative to other jurisdictions.
The commenters further argued that covered companies can expect to rely
on these deposits for funding over the NSFR's one-year time horizon
given their maturity and because depositors are generally not permitted
to withdraw such deposits except under narrow circumstances and usually
not without a significant penalty. The commenters also argued that
depositors are less likely to accelerate the maturity of their brokered
deposits outside of a stress scenario. Commenters also expressed
concern that the FDIC's interpretation of ``brokered deposit'' is
overly broad and reflects policy concerns, such as rapid deposit
expansion and improper deposit management that are not relevant for
purposes of determining the appropriate treatment of such products for
regulatory liquidity and stable funding requirements.
Except in the cases described below where brokered deposits have
certain stabilizing features, the typical characteristics of brokered
deposits support assigning a lower ASF factor for retail brokered
deposits than the ASF factor assigned to stable or other retail
deposits. Specifically, deposits that are placed by a deposit broker
are typically at higher risk of being withdrawn over a one-year period
as compared to a retail deposit placed directly by a retail customer or
counterparty. As noted, the FDIC has issued a proposal revising its
brokered deposits framework \112\ and expects the finalization of this
proposal will address some concerns that the FDIC's existing
interpretations are overly broad.
---------------------------------------------------------------------------
\112\ 85 FR 7453.
---------------------------------------------------------------------------
Additionally, statutory restrictions on certain brokered deposits
can make this form of funding less stable than other deposit types
across a range of market environments. Specifically, a covered company
that becomes less than ``well capitalized'' \113\ is subject to
restrictions on renewing or rolling over funds obtained directly or
indirectly through a deposit broker.\114\
---------------------------------------------------------------------------
\113\ As defined in section 38 of the FDI Act, 12 U.S.C. 1831o.
\114\ See 12 U.S.C. 1831f.
---------------------------------------------------------------------------
For these reasons, the final rule generally assigns a lower ASF
factor to retail brokered deposits to reflect their reduced stability
in comparison to other forms of retail deposits. However, consistent
with the proposal, the final rule applies a 90 percent ASF factor to
the following retail brokered deposits that have certain stabilizing
characteristics: (1) A brokered reciprocal deposit provided by a retail
customer or counterparty, where the entire amount of the deposit is
covered by deposit insurance; and (2) a brokered deposit provided by a
retail customer or counterparty that is not a brokered reciprocal
deposit or sweep deposit, is not held in a transactional account, and
has a remaining maturity of one year or more. In a change from the
proposal, the final rule assigns a 90 percent ASF factor to any
affiliate sweep deposit that does not meet all of the requirements for
affiliate sweep deposits to be assigned a 95 percent ASF factor, which
includes affiliate sweep deposits that are not fully covered by deposit
insurance.\115\ Each of these types of deposits is discussed below.
---------------------------------------------------------------------------
\115\ Section __.104(d)(7) of the proposed rule would have
assigned a 50 percent ASF factor to a brokered affiliate sweep
deposit where less than the entire amount of the deposit is covered
by deposit insurance and without regard to whether a covered company
could demonstrate to the satisfaction of its appropriate Federal
banking agency that a withdrawal of such deposit is highly unlikely
to occur during a liquidity stress event.
---------------------------------------------------------------------------
Brokered reciprocal deposits. The reciprocal nature of a brokered
reciprocal deposit provided by a retail customer or counterparty means
that a deposit placement network contractually provides a covered
company with the same amount of deposits that it places with other
depository institutions. As a result, and because the deposit is fully
insured, the retail customers or counterparties providing the deposit
tend to be less
[[Page 9147]]
likely to withdraw it than other types of deposits that are assigned a
lower ASF factor.
Affiliate sweep deposits. As described above in section VII.C.3.b
of this Supplementary Information section, within the waterfall
structure of sweep deposit arrangements, affiliates tend to be the
first to receive deposits and the last from which deposits are
withdrawn. With this priority relationship with an affiliate, a covered
company is more likely to receive and maintain a steady stream of sweep
deposits across a range of market conditions. Based on the reliability
of this stream of sweep deposits the final rule treats sweep deposits
received from affiliates as more stable than sweep deposits received
from non-affiliates and more similar to other types of retail deposits.
The final rule takes into account that the priority relationship with
an affiliate results in a deposit relationship that is reflective of an
overall relationship with the underlying retail customer where these
deposits generally exhibit a stability profile associated with deposits
directly from retail customers or counterparties, even if the deposits
are not fully covered by deposit insurance.
Certain longer-term brokered deposits. For a brokered deposit
provided by a retail customer or counterparty that is not a brokered
reciprocal deposit or sweep deposit, which is not held in a
transactional account and that has a remaining maturity of one year or
more, the contractual term makes it a more stable source of funding
than other types of deposits that are assigned a lower ASF factor.
However, these brokered deposits are not assigned an ASF factor higher
than 90 percent, as requested by certain commenters, because a covered
company may be more likely to permit withdrawal of retail brokered
deposits in the event of an early withdrawal request by the depositor,
for reputational or franchise reasons, despite the absence of
contractual requirements to permit withdrawal within the NSFR's one-
year time horizon.
d) 50 Percent ASF Factor
The final rule assigns an ASF factor of 50 percent to most forms of
wholesale funding with residual maturities of less than one year,
certain retail brokered deposits that do not have the stabilizing
characteristics described above, and non-deposit retail funding. For
wholesale funding, the 50 percent ASF factor recognizes that funding
that contractually matures in less than one year is less stable than
longer term wholesale funding relative to the NSFR time horizon. The
likelihood that maturing wholesale funding will be renewed generally
depends on counterparty relationship characteristics, with financial
sector entities being less likely than non-financial sector entities to
renew their provision of funding. In addition, the final rule assigns
the 50 percent ASF factor to all wholesale operational deposits,
regardless of contractual maturity or counterparty, reflecting the
provision of operational services. The 50 percent ASF factor applied to
certain retail brokered deposits and to retail funding that is not a
deposit or security reflect the counterparty relationship
characteristics and the extent to which the retail funding has other
stabilizing characteristics.
Unsecured Wholesale Funding Provided by, and Secured Funding
Transactions With, a Counterparty That is Not a Financial Sector Entity
or Central Bank and With Remaining Maturity of Less Than One Year
Sections __.104(d)(1) and (2) of the proposed rule would have
assigned a 50 percent ASF factor to a secured funding transaction or
unsecured wholesale funding (including a wholesale deposit) that, in
each case, matures less than one year from the calculation date and is
provided by a wholesale customer or counterparty that is not a central
bank or a financial sector entity (or a consolidated subsidiary
thereof). The proposed rule would have assigned this ASF factor because
covered companies generally will need to roll over or replace funding
with these characteristics during the NSFR's one-year time horizon.
Several commenters also requested that the NSFR assign a higher ASF
factor to public sector entity deposits, including public deposits that
must be collateralized and collateralized corporate trust deposits.
These commenters argued that these public sector entity collateralized
deposits are more stable than most other wholesale deposits because,
among other things, the deposit relationship is connected to longer-
term relationships between a covered company and the public sector
entity, the relationship is often acquired through prescribed bidding
processes, and the deposits frequently are secured by HQLA. These
commenters also argued that assigning a higher ASF factor to
collateralized deposits would be consistent with the LCR rule, which
assigns a lower outflow rate to such deposits compared to other forms
of wholesale funding. The commenters recommended that the agencies
revise the ASF factor for such deposits to one minus the RSF factor
applicable to the underlying collateral. One commenter advocated
assigning a 95 percent ASF factor (or an alternative factor slightly
lower than 95 percent) to public sector entity deposits in excess of
FDIC deposit insurance limits if the deposit is privately insured or
fully collateralized by an FHLB letter of credit. The commenter argued
that such features would lower the likelihood of withdrawal for these
types of funds, including during times of stress.
Other commenters requested a higher ASF factor for FHLB advances
because, in their view, FHLB advances are stable, reliable and fully
secured, and the FHLBs have a proven track record of providing
liquidity. For example, one commenter recommended assigning an ASF
factor of 80 percent to FHLB advances with maturities of six months or
more but less than one year.
The treatment of wholesale deposits in the final rule includes
consideration of counterparty relationships. As compared to retail
customers or counterparties, wholesale customers or counterparties may
be motivated to a greater degree by return and risk of an investment,
tend to be more sophisticated and responsive to changing market
conditions, and often employ personnel who specialize in the financial
management of the counterparty. As a result, wholesale customers or
counterparties are more likely to withdraw their funding than a retail
customer or counterparty. Further, FDIC deposit insurance coverage does
not mitigate these motivations and sophistication characteristics to
increase the stability of funding provided by a wholesale customer or
counterparty sufficient to warrant an ASF factor higher than 50
percent.
The NSFR's application to a covered company's aggregate balance
sheet generally does not involve differentiation between secured and
unsecured liabilities and, by design, the NSFR treats the liquidity
characteristics of collateral differently from the LCR rule. Although
collateralization may reduce credit risk in the event of default,
funding stability is influenced more by tenor, funding type and
counterparty relationship characteristics. The fact that certain
deposits placed by public sector entities are required to be
collateralized for their contractual term does not mitigate the risk
that a public sector entity may not renew such funding upon maturity.
The final rule treats the collateralization of FHLB advances in the
same fashion. Additionally, ASF and RSF factor values are not intended
to be values of, respectively, cash outflow amounts as in the LCR rule
or market haircuts of assets
[[Page 9148]]
used as collateral. Accordingly, it would not be appropriate for the
type of collateral, nor the RSF factor assigned to such assets, to
determine the ASF factor assigned to a collateralized deposit, as
suggested by commenters.\116\
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\116\ Additionally, as discussed in section VII.D of this
Supplementary Information section, the final rule applies lower RSF
factors to HQLA on a covered company's balance sheet relative to
certain less liquid assets, including HQLA used for, or available
for, the collateralization of public sector entity deposits,
consistent with the treatment of encumbered assets described below.
---------------------------------------------------------------------------
The final rule also treats the maturity characteristics of FHLB
advances consistent with other wholesale funding. Although the FHLBs
served as a source of liquidity during the 2007-2009 financial crisis,
covered companies generally may need to renew maturing funding from
these entities across a range of market conditions. The FHLB system
also conduct maturity transformation in obtaining the system's funding
from investors. Similar to other wholesale counterparties, the FHLB
system responds to events and market conditions in different ways than
retail counterparties and could be sensitive to fluctuations in market
conditions, which make funding already obtained from FHLBs less stable
than retail deposits and other forms of funding that are assigned
higher ASF factors. As a result, distinguishing FHLB advances from
other types of wholesale funding would be at odds with the goal of the
NSFR, which is to provide a standardized measure to ensure appropriate
stable funding of covered companies relative to their assets and
commitments.
For the reasons discussed above, the final rule assigns an ASF
factor of 50 percent for a secured funding transaction or unsecured
wholesale funding (including a wholesale deposit) that, in each case,
matures less than one year from the calculation date and is provided by
a wholesale customer or counterparty that is not a central bank or a
financial sector entity (or a consolidated subsidiary thereof), as
proposed. Funding from FHLBs and public sector entity deposits that
have a residual maturity of less than one year from the calculation
date are included in this category.
Unsecured Wholesale Funding Provided by, and Secured Funding
Transactions With, a Financial Sector Entity or Central Bank With
Remaining Maturity of Six Months or More, but Less Than One Year
Sections __.104(d)(3) and (4) of the proposed rule would have
assigned a 50 percent ASF factor to a secured funding transaction or
unsecured wholesale funding that matures six months or more but less
than one year from the calculation date and is provided by a financial
sector entity or a consolidated subsidiary thereof, or a central
bank.\117\ The proposed rule would therefore have treated funding from
central banks consistently with funding from financial sector entities.
---------------------------------------------------------------------------
\117\ See supra note 102.
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The agencies did not receive comments on this aspect of the
proposed rule, and the final rule adopts this provision as proposed. In
assigning a 50 percent ASF factor, the final rule treats secured
funding transactions and unsecured funding that each have a remaining
maturity of six months or more but less than one year, and are
conducted with financial sector counterparties and central banks, the
same as similar types of funding from other wholesale customers and
counterparties.
Securities Issued by a Covered Company With Remaining Maturity of Six
Months or More, but Less Than One Year
Section __.104(d)(5) of the proposed rule would have assigned a 50
percent ASF factor to securities issued by a covered company that
mature in six months or more, but less than one year, from the
calculation date.
The agencies received no comments on this provision of the proposed
rule. Consistent with the proposed rule, the final rule assigns a 50
percent ASF factor to securities issued by a covered company that
mature in six months or more, but less than one year, from the
calculation date. This treatment is appropriate because funds providers
that are investors in securities issued by covered companies include,
among others, financial sector entities and the relationship of the
funds provider to a covered company generally will have characteristics
that make such funding less stable than other types of funding received
from retail customers or counterparties.\118\ Further, due to the
operation of secondary markets, a covered company may not be aware of
the nature of the current investor in a security issued by a covered
company and requiring a covered company to apply an ASF factor based on
counterparty type would be operationally complex.
---------------------------------------------------------------------------
\118\ Securities issued by a covered company that have a
remaining maturity of one year or more receive an ASF factor of 100
percent. See section VII.C.3.a of this Supplementary Information
section.
---------------------------------------------------------------------------
Operational Deposits
Section __.104(d)(6) of the proposed rule would have assigned a 50
percent ASF factor to operational deposit funding, including
operational deposits from financial sector entities. Operational
deposits would include both (i) unsecured wholesale funding in the form
of deposits and (ii) collateralized deposits that, in each case, are
necessary for the provision of operational services, such as clearing,
custody, or cash management services.\119\
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\119\ The agencies note that the methodology that a covered
company would have used to determine whether and to what extent a
deposit is operational for the purposes of the proposed rule must be
consistent with the methodology used for the purposes of the LCR
rule. See Sec. __.3 of the LCR rule for the full list of services
that qualify as operational services and Sec. __.4(b) of the LCR
rule for additional requirements for operational deposits.
Consistent with the proposed rule, the methodology for determining
an operational deposit under the final rule is the same as the
methodology used for the LCR rule.
---------------------------------------------------------------------------
Commenters requested that the final rule assign operational
deposits a higher ASF factor (e.g., one commenter recommended an ASF
factor of between 60 and 75 percent) because moving operational
deposits to a different institution is expensive, time consuming, and
risky. \120\ In support of this request, a commenter stated that
changing custody service providers can take between six and twelve
months and can significantly disrupt a company's essential payment,
clearing, and settlement functions. Another commenter argued that
depositors are unlikely to move their operational deposits from a
covered company because of other relationships the depositor has with
the covered company, particularly when the covered company is a
regional banking institution. By contrast, one commenter noted that
operational deposits can be withdrawn from a covered company by a
customer within the NSFR's one-year time horizon and therefore do not
warrant a higher ASF factor.
---------------------------------------------------------------------------
\120\ Comments about the definition of operational deposits are
discussed in section VI.A of this Supplementary Information section.
---------------------------------------------------------------------------
Commenters also asserted that the proposed rule's treatment of
operational deposits was inconsistent with the treatment of operational
deposits under the LCR rule, and argued that this type of funding is
more stable than suggested by the treatment in the LCR rule or the
proposed rule based on historical experience, evidenced in the
empirical data, and the results of internal stress testing. These
commenters contended that the proposed treatment of operational
deposits would compound the already punitive treatment of operational
deposits under the LCR rule. A commenter also argued that the proposed
treatment of operational
[[Page 9149]]
deposits could penalize the business of custody banks.
The final rule applies an ASF factor of 50 percent to operational
deposits as proposed. By definition, operational deposits are essential
for the ongoing provision of operational services by a covered company
to a wholesale depositor. The final rule therefore applies the ASF
factor for operational deposits based on the operational relationship
with the depositor rather than the contractual tenor of the funding or
the type of wholesale counterparty. The level of operational deposits
from a given funds provider may vary over time based on the customer's
needs and, consistent with other wholesale funding that matures within
one year that is assigned a 50 percent ASF factor, is not contractually
guaranteed for the NSFR's one-year horizon. Further a counterparty
could successfully restructure how it obtains various operational
services and could place some or all of its operational deposits with
another financial institution over a one-year time horizon. The 50
percent ASF factor also recognizes that the stability of short-term
operational and non-operational deposits from financial counterparties
are not identical because switching operational service providers may
be difficult and have associated costs that are not present with non-
operational deposits.
As discussed in section V.C of this Supplementary Information
section, ASF factors are not directly comparable to outflow rates
assigned in the LCR rule or other cash flow risk assessments, such as
internal liquidity stress testing. While there are some barriers to
withdrawing operational deposits, such as switching costs, operational
deposits are not as stable as those forms of funding that are assigned
a higher ASF factor in the final rule.
In response to commenters' concern that the proposed treatment of
operational deposits is especially impactful to the custody banks
business model, which place greater reliance on operational deposits
than other business models, the agencies note the NSFR rule is meant to
apply a single minimum standard to all covered companies regardless of
business model, in order to improve resiliency and comparability of
funding profiles for all covered companies. Accordingly, the NSFR
assigns ASF factors and RSF factors to categories of liabilities and
assets based on the characteristics of those liabilities and assets
rather than their prevalence in certain business models.
Other Retail Brokered Deposits
Section __.104(d)(7) of the proposed rule would have assigned a 50
percent ASF factor to most categories of brokered deposits provided by
retail customers or counterparties that do not include the additional
stabilizing features described under Sec. __.104(c) and summarized
above. Specifically, retail brokered deposits to which the proposed
rule would have assigned a 50 percent ASF factor included: (1) A
brokered deposit that is not a reciprocal brokered deposit or brokered
sweep deposit and that is held in a transactional account; (2) a
brokered deposit that is not a reciprocal brokered deposit or brokered
sweep deposit, is not held in a transactional account, and matures in
six months or more, but less than one year, from the calculation date;
(3) a reciprocal brokered deposit or brokered affiliate sweep deposit
where less than the entire amount of the deposit is covered by deposit
insurance; and (4) a brokered non-affiliate sweep deposit, regardless
of deposit insurance coverage.
Commenters argued that one or more of the above types of retail
brokered deposits should be assigned a higher ASF factor. Commenters
asserted the proposed rule's treatment of brokered deposits was too
conservative, arguing that brokered deposits have historically been
stable sources of funding, including during times of stress, and their
use has not been correlated with the growth of risky assets.
Commenters recommended that specific brokered deposits be assigned
a 90 percent ASF factor. For example, some commenters suggested that
non-affiliate sweep deposits with contractual agreements that provide a
depository institution with priority over other participants in a
brokered sweep deposit program waterfall receive the same 90 percent
ASF factor assigned to affiliated brokered sweep deposits. Another
commenter requested that the 90 percent ASF factor be applied to all
non-affiliate brokered retail sweep deposits that are fully insured and
with remaining terms of greater than one year. Similarly, one commenter
suggested that retail brokered deposits categorized as money market
deposit accounts that are subject to a commitment to leave the balances
on deposit with the bank for a pre-determined period of time and
subject to an early withdrawal penalty should be assigned a 90 percent
ASF factor. The commenter argued that the agreements, which require
that the funds not be withdrawn for a minimum period without incurring
a significant interest penalty, make the funds sufficiently stable to
warrant a higher ASF factor.
One commenter argued that many brokered deposits held in
transactional accounts behave substantially similarly to retail
deposits and should therefore receive an ASF factor that is higher than
the proposed 50 percent factor. In particular, this commenter noted
that, due to the types of deposits that may be considered ``brokered
deposits'' under the FDIC's brokered deposit guidance,\121\ many
transactional account products that act as a stable source of retail
funding could be classified as ``brokered'' due to a referral from a
third party. This, the commenter noted, would make them subject to a 50
percent ASF factor under the NSFR rule.\122\ Another commenter argued
that retail brokered deposits are more stable due to the large number
and variety of providers of such deposits. Accordingly, the commenter
asserted that a covered company could easily find a substitute
counterparty for a company that withdraws its brokered deposits from
the covered company.
---------------------------------------------------------------------------
\121\ See Federal Deposit Insurance Corporation, ``Frequently
Asked Questions on Identifying, Accepting and Reporting Brokered
Deposits,'' updated June 30, 2016, available at https://www.fdic.gov/news/news/financial/2016/fil16042b.pdf.
\122\ Id.
---------------------------------------------------------------------------
Finally, commenters requested that the agencies increase the ASF
factors applied to retail brokered deposits to align the ASF factors
with the outflow rates assigned in the LCR rule. For example, one
commenter argued that it would be inconsistent for brokered deposits
that receive a 25 percent outflow rate under the LCR rule to receive a
50 percent ASF factor under NSFR rule. The commenter argued that the
ASF factor and LCR outflow rate should be complements, and, if not, the
ASF factor should be more favorable because a covered company would
have a full year to make adjustments to its balance sheet to replace a
withdrawal of retail brokered deposits, whereas the LCR outflow rate is
assumed to occur over a 30 calendar-day stress period. The same
commenter argued that the perceived disparate treatment of these
brokered deposits between the NSFR rule and LCR rule could incentivize
covered companies to meet funding needs with shorter, rather than long-
term brokered deposits.
The retail brokered deposits to which a 50 percent ASF factor would
have been assigned are less stable sources of funding than the retail
brokered deposits that are assigned a 90 percent ASF factor, other
deposits that are assigned a 90 percent ASF factor, and
[[Page 9150]]
stable retail deposits, which are assigned a 95 percent ASF factor.
Although the considerations identified by commenters may cause certain
brokered deposits to have increased relative stability, these brokered
deposits do not have the same combination of stabilizing features that
warrant assignment of a higher ASF factor. Specifically, they lack a
combination of being fully covered by deposit insurance, being received
from an affiliate, or having a longer-term maturity.
In response to commenters' request to treat certain non-affiliate
sweep deposits in a similar manner to affiliate sweep deposits, the
agencies note that an affiliate sweep deposit relationship is
reflective of an overall relationship with the underlying retail
customer or counterparty and these deposits generally exhibit a
stability profile associated with deposits directly from retail
customers, which warrants assignment of a higher ASF factor. As a
result, the final rule assigns a 50 percent ASF factor to non-affiliate
sweep deposits and a higher ASF factor to affiliate sweep deposits, as
discussed above. The agencies will continue to review the treatment of
sweep deposits, including non-affiliate sweep deposits, under the LCR
and NSFR rules.\123\ In response to the comments regarding treatment
under the LCR rule, as discussed above in section V.C of this
Supplementary Information section, the agencies note that the ASF
factors are not intended to align with the outflow rates assigned in
the LCR rule in all cases due to the different purposes of the two
rules. With the exception of affiliate sweep deposits where less than
the entire amount of the deposit is covered by deposit insurance, which
the final rule assigns a 90 percent ASF factor,\124\ the agencies are
adopting the 50 percent ASF factor for these deposits as proposed for
the reasons discussed above.
---------------------------------------------------------------------------
\123\ As part of this effort, the agencies intend to revise the
regulatory reporting (e.g. Call Report) to obtain data that may help
evaluate funding stability of sweep deposits over time to determine
their appropriate treatment under liquidity regulations.
\124\ See section VII.C.3.c.ii. of this Supplementary
Information section.
---------------------------------------------------------------------------
Funding From a Retail Customer or Counterparty not in the Form of a
Deposit or Security
The proposed rule would have assigned a zero percent ASF factor to
retail funding that is not in the form of a deposit or security issued
by the covered company. In the proposed rule, the agencies noted that
non-deposit retail liabilities are not regular sources of funding or
commonly utilized funding arrangements for covered companies.\125\ The
proposed rule also, however, solicited comment as to whether the final
rule should assign an ASF factor greater than zero to any non-deposit
retail liabilities.\126\
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\125\ As noted above, a security issued by the covered company
that is held by a retail customer or counterparty would not take
into account counterparty type and therefore would not fall within
this category.
\126\ See 81 FR at 35140.
---------------------------------------------------------------------------
Some commenters expressed concern that the proposed treatment of
non-deposit retail liabilities was overly conservative and would
unfairly penalize business models that focus on securities trading,
such as retail-oriented securities brokerage firms that utilize retail
brokerage payables as a source of funding.\127\ For example, a
commenter expressed concern that an organization with a depository
institution and a broker-dealer subsidiary of equal size could face a
funding shortfall under the proposed rule because the funding of the
broker-dealer subsidiary would not be assigned sufficiently high ASF
factors and the stable funding of the depository institution may not be
treated under the NSFR rule as available to support the nonbank funding
needs of the consolidated entity's broker-dealer subsidiary.\128\ Some
commenters noted that retail brokerage payables have been historically
stable across both normal and stressed economic periods--for example,
one commenter asserted that its amount of retail brokerage payables
increased at the height of the 2007-2009 financial crisis, and from
2009 to 2016. Commenters further indicated that retail brokerage
payables have counterparty credit risks similar to uninsured deposits,
in part because they arise in a transactional context and as part of a
client's larger brokerage relationship. One commenter argued that
because the risk-based capital surcharge for GSIBs in the United States
(GSIB capital surcharge rule) excludes non-deposit retail customer
funding entirely from its Method 2 calculation methodology,\129\ this
implicitly suggests that other Board rules consider such funding to be
stable.
---------------------------------------------------------------------------
\127\ The term ``retail brokerage payables'' generally refers to
(1) cash awaiting investment in retail clients' brokerage accounts,
or ``free credit balances,'' and (2) cash balances in a securities
firm's bank account related to a retail client's pending securities
purchase and sale transactions and pending deposits to and
distributions from clients' brokerage accounts, or ``float.''
\128\ See also section VII.F of this Supplementary Information
section.
\129\ 12 CFR 217.405.
---------------------------------------------------------------------------
Some commenters suggested more favorable treatment for specific
types of non-deposit retail liabilities. Specifically, commenters
argued that some liabilities owed to retail counterparties in
connection with non-deposit products, such as prepaid cards, travelers
checks, and customer rewards programs, should be recognized as a stable
source of funding given historical experience of low volatility in
balances and redemptions over time. In addition, these commenters
argued that certain features may be offered in connection with certain
prepaid products that would increase their stability, such as pass-
through insurance provided by some prepaid card products and state law
requirements that money transmitters hold and invest funds equal to
outstanding prepaid liabilities in high grade, low-risk assets.
Several commenters argued that the agencies should apply an ASF
factor higher than zero percent to non-deposit retail liabilities to
align with the treatment of similar liabilities under the LCR
rule.\130\ Some commenters recommended assigning an ASF factor of 60
percent to non-deposit retail liabilities. Other commenters recommended
assigning a 50 percent ASF factor to non-deposit retail funding or
assigning a 50 percent ASF factor to the unsecured liabilities of a
broker-dealer subsidiary of a covered company that are owed to a retail
customer or counterparty.
---------------------------------------------------------------------------
\130\ Section __.32(a)(5) of the LCR rule assigns a 40 percent
outflow rate to non-deposit retail funding. As discussed in section
V of this Supplementary Information section, the treatment of
liabilities under the NSFR rule is not intended to align directly
with that of the LCR rule due to the different purposes of the two
requirements.
---------------------------------------------------------------------------
As a general matter, the final rule considers the relationship
characteristics of retail customers or counterparties at least as
favorably as wholesale counterparties that are not financial sector
entities, and takes into account whether funding is obtained in
connection with a transactional account or as part of another
relationship with the covered company. However, not all forms of retail
funding are equally stable. Although the GSIB capital surcharge rule
excludes certain forms of non-deposit retail funding from the Method 2
calculation methodology, exclusion of a funding source is not
dispositive of its stability because the GSIB score measures a banking
organization's systemic importance and does not measure the stability
of each type of funding. Accordingly, the final rule does not calibrate
ASF factors to non-deposit retail liabilities based on whether those
liabilities are included in the Method 2 calculation under the GSIB
capital surcharge rule.
[[Page 9151]]
As noted by commenters, many of the liabilities that would have
been included in the non-deposit retail funding category have
demonstrated a relative degree of stability during normal and adverse
economic periods, similar to types of funding that receive a 50 percent
ASF factor. As non-deposits, however, the types of retail funding
described above do not have the same stabilizing characteristics as the
categories of deposits assigned a 90 percent or 95 percent ASF factor
under the final rule. Although certain non-deposit retail funding may
have transactional and other counterparty relationship characteristics
similar to retail deposits and retail brokered deposits, they may also
reflect counterparty sophistication characteristics similar to certain
wholesale counterparties. For these reasons, the final rule assigns a
50 percent ASF factor to funding from a retail customer that is not a
deposit or a security, including retail brokerage payables.
All Other NSFR Liabilities With Remaining Maturity of Six Months or
More, but Less Than One Year
Section __.104(d)(8) of the proposed rule would have assigned a 50
percent ASF factor to all other NSFR liabilities that have a remaining
maturity of six months or more, but less than one year. As discussed in
section VII.C.2 of this Supplementary Information section, a covered
company would not need to roll over a liability of this maturity in the
shorter-term, but may need to roll it over before the end of the NSFR's
one-year time horizon.
The agencies received no comments on this provision of the proposed
rule. For the reasons discussed in the proposed rule, the final rule
assigns a 50 percent ASF factor to all other NSFR liabilities that have
a remaining maturity of six months or more, but less than one year as
proposed.
e) Zero Percent ASF Factor
The final rule assigns a zero percent ASF factor to NSFR
liabilities that demonstrate the least stable funding characteristics,
including trade date payables, certain short-term retail brokered
deposits, certain short-term funding from financial sector entities or
central banks, and any other NSFR liability that matures in less than
six months and is not described above. In the absence of a remaining
tenor of at least six months, funding on a covered company's balance
sheet of these types are considered unreliable sources of funding
relative to the need to support assets and commitments over the NSFR's
time horizon.
Trade Date Payables
Section __.104(e)(1) of the proposed rule would have assigned an
ASF factor of zero percent to trade date payables that result from
purchases by a covered company of financial instruments, foreign
currencies, and commodities that are required to settle within the
lesser of the market standard settlement period for the particular
transactions and five business days from the date of the sale. Trade
date payables are established when a covered company buys financial
instruments, foreign currencies, and commodities, but the transactions
have not yet settled. Trade date payables are recorded on the covered
company's balance sheet as a liability. These payables should result in
a payment from a covered company at the settlement date, which varies
depending on the specific market. Accordingly, trade date payables are
not a source of stable funding.
The agencies did not receive comments on this provision. As
proposed, the final rule assigns an ASF factor of zero percent to trade
date payables because trade date payables should result in a payment
from a covered company at the settlement date, meaning the liability
does not represent a stable source of funding.
Certain Short-Term Retail Brokered Deposits
Section __.104(e)(2) of the proposed rule would have assigned a
zero percent ASF factor to a brokered deposit provided by a retail
customer or counterparty that is not a reciprocal brokered deposit or
brokered sweep deposit, is not held in a transactional account, and
matures less than six months from the calculation date.
Commenters argued that non-maturity brokered deposits that are held
in a savings account are similar in stability to non-brokered retail
deposits held in a retail savings account, and therefore should be
assigned a higher ASF factor. The commenters argued that assignment of
a zero percent ASF factor would overstate the funding risks of brokered
savings accounts, which these commenters argued include stabilizing
deposit features such as the availability of full or partial FDIC
deposit insurance and that the account holder can use other services
provided by the banking organization.
Retail brokered deposits that are not brokered reciprocal deposits
or sweep deposits, are not held in transactional accounts, and mature
in less than six months tend to be less stable than other types of
brokered deposits because they do not have the stabilizing features of
brokered deposits that are assigned a higher ASF factor. Although non-
maturity brokered deposits held in savings accounts may be fully or not
fully insured and may provide similar access to services as a non-
brokered deposit in a retail savings account, deposit brokers can, in
some cases, decide whether to move this funding to a different banking
organization at low cost and with little notice to the covered company.
Additionally, even if the deposit is fully insured, because the funds
are held in non-transactional accounts they are less stable due to the
ease with which the deposits can be withdrawn. Finally, under the
maturity categories of the final rule, the term of these deposits would
fall into the shortest-term and thus represent the least stable form of
funding.
For these reasons, the final rule assigns a zero percent ASF factor
to a brokered deposit provided by a retail customer or counterparty
that is not a brokered reciprocal deposit or sweep deposit, is not held
in a transactional account, and matures less than six months from the
calculation date as proposed.
Securities Issued by a Covered Company With Remaining Maturity of Less
Than Six Months
Section __.104(e)(4) of the proposed rule would have assigned a
zero percent ASF factor to securities that are issued by a covered
company and that have a remaining maturity of less than six months. As
discussed above in section VII.C.2 of this Supplementary Information
section, the proposed rule generally would have treated as less stable
funding that has to be paid within the NSFR's one-year time horizon.
The agencies received no comments on this provision of the proposed
rule. The final rule assigns a zero percent ASF factor to securities
that are issued by a covered company and that have a remaining maturity
of less than six months because such funding does not represent a
source of stable funding over the NSFR's one-year time horizon.
Short-Term Funding From a Financial Sector Entity
Section __.104(e)(5) of the proposed rule would have applied a zero
percent ASF factor to funding (other than operational deposits) for
which the counterparty is a financial sector entity or a consolidated
subsidiary thereof and the transaction matures less than six
[[Page 9152]]
months from the calculation date.\131\ In general, financial sector
entities and their consolidated subsidiaries are more likely than other
types of counterparties to withdraw funding from a covered company,
regardless of whether the funding is secured or the type of collateral
securing the funding, as described in section VII.C.2 of this
Supplementary Information section.
---------------------------------------------------------------------------
\131\ See supra note 102.
---------------------------------------------------------------------------
Many commenters raised concerns that the proposed assignment of a
zero percent ASF factor to short-term funding from a financial sector
entity would impair an important funding source for covered companies
and could adversely affect the functioning of credit markets by
increasing borrowing and transaction costs for end-users. Specifically,
commenters objected that the proposed rule would assign a zero percent
ASF factor to secured funding transactions while also assigning a 10 to
15 percent RSF factor to secured lending transactions.\132\
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\132\ As discussed in section VII.D.3.a of this Supplementary
Information section, the agencies are decreasing the effect on the
market for short-term secured lending transactions by adopting a
zero percent RSF factor for certain secured lending transactions
that are secured by rehypothecatable level 1 liquid assets.
---------------------------------------------------------------------------
Commenters also raised domestic and international regulatory
concerns around the proposed framework for repurchase agreements.
Commenters stated that rulemakings such as the GSIB capital surcharge
rule and the SLR rule have increased the costs of transacting in
matched-book repurchase agreements by adding higher capital
requirements and that the NSFR would further exacerbate these costs.
Commenters also questioned the assumption underlying the ASF and RSF
factors for repurchase agreement and reverse repurchase agreement
transactions--namely, that a covered company would be more likely to
roll over short-term loans to financial sector entities than such
entities would be likely to roll over short-term funding to a covered
company. Since commenters primarily raised these concerns with regards
to the assignment of RSF factors to short-term secured funding
transactions, these issues are addressed more fully in section VII.D of
this Supplementary Information section.
Consistent with the proposed rule, the final rule assigns a zero
percent ASF factor to funding (other than operational deposits) for
which the counterparty is a financial sector entity or a consolidated
subsidiary thereof and the transaction matures less than six months
from the calculation date because financial sector counterparties are
more likely to withdraw short term funding within a one-year time
horizon, regardless of whether the transaction is secured or unsecured.
As discussed in section V of this Supplementary Information section,
one of the goals of the final rule is to ensure that covered companies
have sufficient levels of long-term stable funding and do not
excessively rely on short-term borrowings from financial sector
entities. Moreover, these types of short-term borrowings with financial
sector counterparties can carry elevated risks to the funding needs of
covered companies when combined with concentrations that can increase
systemic risk and interconnectedness.
The agencies do not anticipate that the treatment of these short-
term secured funding transactions will have a significant impact on the
markets identified by commenters, such as fixed income markets,
commercial mortgage-backed securities, lending markets, or money
markets, especially in light of the adjustments made in the treatment
of short-term secured lending transactions as discussed in VII.D.3 of
this Supplementary Information section. However, the agencies monitor
these market segments on an ongoing basis to evaluate the impact of
agency rulemakings on financial intermediation. At the same time, the
agencies will continue to examine collateral markets for any warning
signals, including the costs of short- and long-term funding,
participation rates, and collateral flows between covered companies and
financial sector entities.
Short-Term Funding From a Central Bank
Section __.104(e)(5) of the proposed rule also would have assigned
a zero percent ASF factor to short-term funding from central banks to
recognize the short-term nature of such funding from central banks,
consistent with the proposed rule's focus on stable funding from market
sources. For example, funding obtained from the discount window would
have been assigned a zero percent ASF factor, consistent with the terms
of discount window advances.
The agencies received no comments on this provision of the proposed
rule. The final rule assigns a zero percent ASF factor to short-term
funding from central banks as proposed.
All Other NSFR Liabilities With Remaining Maturity of Less Than Six
Months or an Open Maturity
Section __.104(e)(6) of the proposed rule would have assigned a
zero percent ASF factor to all other NSFR liabilities, including those
that mature less than six months from the calculation date and those
that have an open maturity. NSFR liabilities that do not fall into one
of the categories that are assigned an ASF factor generally would not
represent a regular or reliable source of funding and, therefore, the
proposed rule would not have treated any portion as stable funding.
Commenters requested that the NSFR rule assign a non-zero ASF
factor to the unused borrowing capacity with FHLBs because the FHLB
system is an important source of liquidity for U.S. banking
organizations. The commenters pointed to FHLB lending activity during
the 2007-2009 financial crisis, which demonstrated that FHLBs increased
their lending by 50 percent between 2007 and 2008. Commenters argued
that recognizing this source of funding was appropriate since the NSFR
requirement, unlike the LCR rule, is intended to be a structural metric
that reflects the stable funding required across all market conditions
over a longer one-year time horizon. One commenter suggested that the
agencies conduct a study on the potential impact of the final rule on
the FHLB system and its role in providing liquidity to banks.
As discussed in section V.C of this Supplementary Information
section, the NSFR is determined based on a covered company's balance
sheet at a point in time. In order for a funding source to be
considered relevant stable funding under the NSFR, a covered company
must have obtained the funding for its balance sheet at that point in
time. Establishing reliable sources of contingent funding in advance of
potential funding needs is an essential part of sound liquidity risk
management for banking organizations. For the purposes of assessing the
risks presented by a banking organization's balance sheet, however, the
NSFR does not treat undrawn lines of credit available to a covered
company as stable funding, regardless of whether they are
collateralized or whether they are provided by the FHLB system, the
Federal Reserve System, or any other third parties.
The final rule assigns a zero percent ASF factor to all other NSFR
liabilities, including those that mature less than six months from the
calculation date and those that have an open maturity.
D. Required Stable Funding
1. Calculation of the RSF Amount
Consistent with the proposed rule, under the final rule a covered
company's RSF amount reflects a covered company's funding requirement
based on the liquidity characteristics of
[[Page 9153]]
its assets, commitments, and derivative exposures. Under Sec. __.105
of the proposed rule, a covered company's RSF amount would have equaled
the sum of two components: (i) The carrying values of a covered
company's assets (other than assets included in the calculation of the
covered company's derivatives RSF amount) and the undrawn amounts of
its committed credit and liquidity facilities, each multiplied by an
RSF factor assigned under Sec. __.106 (discussed in section VII.D.3 of
this Supplementary Information section), and (ii) the covered company's
derivatives RSF amount, as calculated under Sec. __.107 (discussed in
section VII.E of this Supplementary Information section). The agencies
received no comments on the calculation of the RSF amount and are
adopting it as proposed.
2. Characteristics for Assignment of RSF Factors
The proposed rule would have grouped NSFR assets, derivative
exposures and commitments into broad categories and assigned RSF
factors to determine the overall amount of stable funding a covered
company must maintain. RSF factors would have been scaled from zero to
100 percent based on the tenor and other liquidity characteristics of
an asset, derivative exposure, or committed facility. The agencies did
not receive comments on this general approach to using the
characteristics of assets and commitments, and the final rule adopts
the characteristics for assigning RSF factors as proposed. As in the
proposed rule, the final rule categorizes assets, derivative exposures,
and committed facilities into categories and assigns RSF factors based
on the following liquidity characteristics: (1) Tenor; (2) encumbrance;
(3) type of counterparty; (4) credit quality, and (5) market
characteristics. As discussed below and in the relevant sections of
this Supplementary Information section, the final rule assigns RSF
factors using these characteristics as proposed with certain
modifications that simplify the framework to seven categories for the
assignment of RSF factors.
a) Tenor
In general, the final rule requires a covered company to maintain
more stable funding to support assets that have longer tenors because
of the greater time the asset will remain on the balance sheet and
before the covered company is contractually scheduled to realize
inflows at the maturity of the asset. In addition, if assets with a
longer tenor are not held to maturity, such assets may liquidate at a
discount because of the increased market and credit risks associated
with cash flows occurring further in the future. Assets with a shorter
tenor, in contrast, generally require a smaller amount of stable
funding under the final rule because a covered company would not need
to fund such assets after the maturity date unless the assets are
extended or rolled over and the covered company would therefore have
access to the inflows from these maturing assets sooner. The final rule
divides maturities for purposes of a covered company's RSF amount
calculation into the same four maturity categories consistent with the
ASF maturity categories: One year or more, less than one year, six
months or more but less than one year, and less than six months (RSF
maturity categories).
b) Encumbrance
As described in section VII.D.3.h of this Supplementary Information
section, whether an asset is encumbered and the extent of the
encumbrance dictates the amount of stable funding required to support
the particular asset. Similar to assets with longer contractual tenors,
assets that are encumbered at a calculation date may be required to be
held for the duration of the encumbrance and these assets often cannot
be monetized while encumbered. In general, the longer an asset is
encumbered, the more stable funding is required under the final rule.
c) Counterparty Type
A covered company may face pressure to renew some portion of its
assets at contractual maturity in order to maintain its franchise value
with customers and because a failure to roll over such assets could be
perceived by market participants as an indicator of financial distress
at the covered company. Typically, these pressures are influenced by
the type of counterparty to the maturing asset. For example, covered
companies often consider their lending relationships with a wholesale,
non-financial borrower to be important to maintain current business and
generate additional business in the future. By contrast, the agencies
expect these concerns are less likely to be a factor with respect to
financial sector counterparties because financial counterparties
typically have a wider range of alternate funding sources already in
place, face lower transaction costs associated with arranging alternate
funding, and have less expectation of stable lending relationships with
any single provider of credit. In light of these business and
reputational considerations, the final rule generally requires a
covered company to maintain more aggregate stable funding to support
certain lending to non-financial counterparties than for lending to
financial counterparties.\133\
---------------------------------------------------------------------------
\133\ See supra note 102.
---------------------------------------------------------------------------
d) Credit Quality
Credit quality is a factor in an asset's general funding
requirements because market participants tend to be more willing to
purchase assets with higher credit quality on a consistent basis and
the prices of these assets are generally less volatile across a range
of market and economic conditions. The demand for higher credit quality
assets, therefore, is more likely to persist, and such assets are more
likely to have resilient values, allowing a covered company to dispose
of them more easily across a range of market conditions. Assets of
lower credit quality, in contrast, are less likely to retain their
value over time across market conditions. The final rule, like the
proposed rule, generally requires greater aggregate stable funding with
respect to assets of lower credit quality, to reduce the risk that in
the event of having to dispose of such an asset prior to maturity a
covered company may have to monetize it at a discount.
e) Market Characteristics
Assets that are traded in transparent, standardized markets with
large numbers of participants and dedicated intermediaries tend to
exhibit a higher degree of reliable liquidity. The final rule,
therefore, generally requires less aggregate stable funding for
holdings of such assets relative to those traded in markets
characterized by information asymmetry and relatively few participants.
f) Comments Proposing Other Liquidity Characteristics
The agencies invited comment on whether other characteristics
should be considered for purposes of assigning RSF factors. Several
commenters suggested that RSF factors should be assigned based on
criteria related to existing regulations and other market and
operational factors.\134\ Another commenter argued that RSF factors
should more closely align with market haircuts used in secured funding
markets. One commenter recommended
[[Page 9154]]
the agencies assign RSF factors based on the intent for which a
security is held and apply a lower RSF factor to short-term securities
held for market-making purposes than for securities held for investment
purposes, arguing that the proposal would negatively impact market-
making activities. Other commenters argued that the assignment of RSF
factors should take into account eligibility of assets as collateral
for FHLB advances.\135\
---------------------------------------------------------------------------
\134\ For example, a commenter recommended incorporating the
impact of existing regulations on a given asset or the counterparty
to the asset, and an asset's external credit rating. The commenter
recommended other market and operational factors, including the
seniority, hedging, clearing characteristics of the asset and the
size of the market for the asset.
\135\ As discussed in section VII.C.3 of this Supplementary
Information section, some commenters also recommended assigning a
non-zero ASF factor to unused borrowing capacity from FHLBs.
---------------------------------------------------------------------------
As discussed in section V.B of this Supplementary Information
section, the final rule addresses funding stability risks not directly
addressed in other parts of the agencies' regulatory framework.
Although the agencies recognize that other regulations may require or
incentivize covered companies to hold, or refrain from holding, certain
assets, those regulations do not directly address the stability of a
banking organization's funding profile in relation to the composition
of its assets and commitments. Accordingly, it would not be appropriate
to assign RSF factors to assets based on their treatment in other
regulations or the impact of regulations on the counterparty to an
asset. The liquidity characteristics described above tend to be
generally reflected in market haircuts, but RSF factor values are not
directly representative of asset haircuts and closer alignment of RSF
factors with haircuts used in secured funding markets would be
inappropriate for calibrating aggregate funding requirements of covered
companies. As also discussed in section V.C, the final rule's
simplified and standardized measure of funding risk does not
differentiate between business activities or the intent for which a
covered company holds a given asset. Accordingly, the final rule takes
into account an asset's contractual residual maturity at a point in
time and does not speculate on a covered company's intended purpose and
timeframe for holding an asset in the future. Further, an asset's
eligibility as collateral for FHLB advances is not an appropriate
additional basis for determining RSF factors. The liquidity
characteristics described above, including credit quality, are likely
factors also considered by FHLBs when assessing collateral eligibility.
Generally, assets currently held by a covered company contribute to its
balance sheet funding risk regardless of the covered company's
operational ability to obtain FHLB advances in the future.\136\
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\136\ In respect to FHLB advances, many FHLB advances may have
long maturities that may be reflected in the assignment of ASF
factors described in section VII.C.3 of this Supplementary
Information section.
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3. Categories of RSF Factors for Unencumbered Assets and Commitments
Based on the tenor, encumbrance, counterparty type, credit quality,
and market characteristics described above, the final rule assigns RSF
factors to unencumbered assets and commitments in the categories shown
in Table 2. The treatment of encumbered assets is described below and
shown in Table 3. The assignment of RSF factors for derivative
exposures is described in section VII.E of this Supplementary
Information section.
Table 2--Categories of Unencumbered Assets and Commitments Based on Their Characteristsics and Resulting RSF
Factors
----------------------------------------------------------------------------------------------------------------
Credit quality or
Unencumbered and with tenor of: Counterparty types market NSFR assets or RSF factor
characteristics commitments percent
----------------------------------------------------------------------------------------------------------------
Perpetual...................... Central bank...... Other............. Currency and coin...... 0
Any tenor...................... Non-financial..... HQLA.............. Level 1 liquid assets ..............
held on balance sheet.
Less than six months........... All............... Other............. Cash items in the ..............
process of collection
and certain trade date
receivables.
Central bank...... HQLA.............. Reserve Bank balances ..............
and claims on foreign
central banks.
Financial......... Non-operational... Secured lending ..............
transactions secured
by rehypothecatable
level 1 liquid assets.
Committed...................... All............... Other............. Committed credit and 5
liquidity facilities.
Any tenor...................... Non-financial..... HQLA.............. Level 2A liquid assets 15
held on balance sheet.
Less than six months........... Financial......... Non-operational... Secured lending ..............
transactions secured
by assets other than
rehypothecatable level
1 liquid assets and
unsecured lending.
Any tenor...................... Non-financial..... HQLA.............. Level 2B liquid assets 50
held on balance sheet.
Six months or more, but less Financial......... Non-operational... Secured lending ..............
than one year. transactions and
unsecured wholesale
lending.
Any tenor...................... Financial......... Operational....... Operational deposit ..............
placements.
Less than one year............. Non-financial..... Non-operational... Secured lending ..............
transactions and
unsecured lending.
Retail............ Any............... Retail lending......... ..............
Any............... Any............... All other assets....... ..............
One year or more............... Retail............ Risk weight <=50 Retail mortgages....... 65
percent.
Retail and non- Risk weight <=20 Secured lending ..............
financial. percent. transactions,
unsecured wholesale
lending, and retail
lending.
Retail............ Risk weight >50 Retail mortgages....... 85
percent.
Retail and non- Risk weight >20 Secured lending ..............
financial. percent. transactions,
unsecured wholesale
lending, and retail
lending.
All............... Non-HQLA.......... Securities other than ..............
common equity shares
that are not HQLA.
Any tenor...................... .................. .................. Publicly traded common ..............
equity shares that are
not HQLA.
Derivative Commodities............ ..............
transactions are
traded on U.S. or
non-U.S.
exchanges.
One year or more............... Financial......... Any............... Secured lending 100
transactions and
unsecured lending to a
financial sector
entity.
Any tenor...................... All............... >90 days past due Nonperforming assets... ..............
or nonaccrual.
Any............... All other assets....... ..............
[[Page 9155]]
Any tenor *.................... All............... Derivative........ NSFR derivatives asset ..............
amount.
----------------------------------------------------------------------------------------------------------------
* The derivative treatment nets derivative transactions with various maturities.
a) Zero Percent RSF Factor
Certain assets held by banking organizations have unique
characteristics such that they do not contribute risk to a banking
organization's funding profile. Assets such as currency, coin, cash
items in the process of collection and short-term central bank reserves
on a covered company's balance sheet at the NSFR calculation date
generally can be used in the immediate term to meet obligations and
eliminate short-term liabilities. In the normal course of business,
trade date receivables also constitute assets of this type, even though
they are subject to certain operational frictions.
Certain other assets in this category, such as level 1 liquid asset
securities on a covered company's balance sheet and certain short-term
secured lending transactions backed by rehypothecatable level 1 liquid
assets conducted with financial sector entities make minimal
contribution to a covered company's aggregate funding risk and are
important to the efficient operation of key short-term funding markets.
These unique characteristics make it appropriate to assign an RSF
factor of zero percent, the lowest RSF factor assigned to assets.
(i) Asset Classes for Which the Agencies Received No Comments
The proposal would have applied a zero percent RSF factor to
currency, coin, cash items in the process of collection, Reserve Bank
balances and other central bank reserves with a maturity of less than
six months. The agencies received no comments on these asset classes
and are finalizing them as proposed.
Currency and Coin
Section __.106(a)(1)(i) of the final rule assigns a zero percent
RSF factor to currency and coin because these assets can be directly
used to meet financial obligations. Currency and coin include U.S. and
foreign currency and coin owned and held in all offices of a covered
company; currency and coin in transit to a Federal Reserve Bank or to
any other depository institution for which the covered company's
subsidiaries have not yet received credit; and currency and coin in
transit from a Federal Reserve Bank or from any other depository
institution for which the accounts of the subsidiaries of the covered
company have already been charged.\137\
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\137\ This description of currency and coin is consistent with
the treatment of currency and coin in Federal Reserve form FR Y-9C.
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Cash Items in the Process of Collection
Section __.106(a)(1)(ii) of the final rule assigns a zero percent
RSF factor to cash items in the process of collection because these
assets will not persist on a covered company's balance sheet, but
rather will be converted to assets that can be directly used to meet
financial obligations in the immediate term. These items would include:
(1) Checks or drafts in process of collection that are drawn on another
depository institution (or a Federal Reserve Bank) and that are payable
immediately upon presentation in the country where the covered
company's office that is clearing or collecting the check or draft is
located, including checks or drafts drawn on other institutions that
have already been forwarded for collection, but for which the covered
company has not yet been given credit (known as cash letters), and
checks or drafts on hand that will be presented for payment or
forwarded for collection on the following business day; (2) U.S.
government checks drawn on the Treasury of the United States or any
other U.S. government agency that are payable immediately upon
presentation and that are in process of collection; and (3) such other
items in process of collection that are payable immediately upon
presentation and that are customarily cleared or collected as cash
items by depository institutions in the country where the covered
company's office that is clearing or collecting the item is
located.\138\
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\138\ This description of cash items in the process of
collection is consistent with the treatment of cash items in process
of collection in Federal Reserve form FR Y-9C.
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Reserve Bank Balances and Other Claims on a Reserve Bank That Mature in
Less Than Six Months
Section __.106(a)(1)(iii) of the final rule assigns a zero percent
RSF factor to a Reserve Bank balance or to another claim on a Reserve
Bank that matures in less than six months from the calculation date.
The term ``Reserve Bank balances'' is defined in Sec. __.3 of the LCR
rule and includes required reserve balances and excess reserves, but
not other balances that a covered company maintains on behalf of
another institution.\139\ Reserve Bank balances can be directly used to
meet financial obligations through the Federal Reserve's payment
system. Although other claims on Reserve Banks that mature in less than
six months cannot be directly used to meet financial obligations, a
covered company faces little risk of harm to its franchise value if it
does not roll over the lending to a Reserve Bank at maturity. The
covered company, therefore, may realize cash flows associated with the
asset in the near term and not retain the asset on its balance sheet.
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\139\ For example, the term ``Reserve Bank balance'' does not
include balances maintained by a covered company on behalf of a
respondent for which it acts as a pass-through correspondent. See 12
CFR 204.5(a)(1)(ii). The definition also does not include balances
maintained on behalf of an excess balance account participant. See
12 CFR 204.10(d). The Board reduced reserve requirement ratios to
zero percent effective March 26, 2020. This action eliminated
reserve requirements for all depository institutions. See https://www.federalreserve.gov/monetarypolicy/reservereq.htm The Board could
revise required reserve requirements in the future.
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Claims on a Foreign Central Bank That Matures in Less Than Six Months
Section __.106(a)(1)(iv) of the final rule assigns a zero percent
RSF factor to claims on a foreign central bank that mature in less than
six months. Similar to claims on a Reserve Bank, claims on a foreign
central bank in this category may generally either be directly used to
meet financial obligations or will be available for such use in the
near term, and a covered company faces little risk of harm to its
franchise value if it does not roll over the lending.
(ii) Asset Classes for Which the Agencies Received Comments
The proposed rule would have applied a zero percent RSF factor to
trade date receivables that met certain criteria. The proposed rule
also would have assigned RSF factors higher than zero to (1) certain
level 1 liquid assets and (2) secured lending transactions with a
maturity of less than six months
[[Page 9156]]
conducted with financial sector entities (or their subsidiaries) and
secured by rehypothecatable level 1 liquid assets. The agencies
received a number of comments on the proposed treatment of these
assets.
Trade Date Receivables
Section __.106(a)(1)(v) of the proposed rule would have assigned a
zero percent RSF factor to a trade date receivable due to a covered
company that results from the sale of a financial instrument, foreign
currency, or commodity that (1) is contractually required to settle
within the lesser of the market standard settlement period for the
relevant type of transaction, without extension of the standard
settlement period, and five business days from the date of the sale;
and (2) has not failed to settle within the required settlement period.
By contrast, Sec. __.106(a)(8) of the proposed rule would have
assigned a 100 percent RSF factor to a trade date receivable that (1)
is contractually required to settle within the lesser of the market
standard settlement period and five business days, but (2) fails to
settle within this period.\140\ Several commenters expressed concerns
that the proposed treatment was overly conservative and would result in
assignment of a 100 percent RSF to trade date receivables that would
likely still settle. Some commenters requested a zero percent RSF
factor for trade date receivables that have failed to settle within the
standard settlement period or five days, but still are expected to
settle. These commenters noted that such treatment would align with the
treatment in the Basel NSFR standard. One commenter contended that
certain instruments have standard market settlement periods longer than
five days and requested a zero percent RSF factor for receivables that
settle within the greater of the standard market settlement period and
five days. Another commenter requested a zero percent RSF factor for
trade date receivables that failed to settle but are not more than five
days past the standard settlement date, arguing that a covered company
would expect the majority of its trade date receivables to have settled
by that date.
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\140\ In addition, consistent with the definition of
``derivative transaction'' under Sec. __.3 of the LCR rule, a trade
date receivable that has a contractual settlement or delivery lag
longer than the lesser of the market standard for the particular
instrument or five days would have been treated as a derivative
transaction under Sec. __.107 of this final rule.
---------------------------------------------------------------------------
The final rule expands the types of trade date receivables that are
assigned a zero percent RSF factor to include trade date receivables
due to a covered company that result from the sale of a financial
instrument, foreign currency, or commodity that is required to settle
no later than the market standard for the particular transaction, and
that has yet to settle but is not more than five business days past the
scheduled settlement date. This change from the proposal will more
accurately measure the amount of receivables that are expected to
settle and result in inflows in the near future because such trade date
receivables are still reasonably expected to settle imminently. As
discussed in section VII.D.3.g of this Supplementary Information, trade
date receivables that do not qualify for a zero percent RSF factor are
assigned a 100 percent RSF factor.
Unencumbered Level 1 Liquid Assets Held on Balance Sheet
Section __.106(a)(2)(i) of the proposed rule would have assigned a
5 percent RSF factor to unencumbered level 1 liquid assets that would
not have been assigned a zero percent RSF factor. The proposed rule
would have incorporated the definition of ``level 1 liquid assets'' set
forth in Sec. __.20(a) of the LCR rule but would not have taken into
consideration the operational requirements described in Sec. __.22 of
the LCR rule. As a result, the proposed rule would have assigned a 5
percent RSF factor to the following level 1 liquid assets: (1)
Securities issued or unconditionally guaranteed as to the timely
payment of principal and interest by the U.S. Department of the
Treasury; (2) liquid and readily-marketable securities,\141\ as defined
in Sec. __.3 of the LCR rule, issued or unconditionally guaranteed as
to the timely payment of principal and interest by any other U.S.
government agency (provided that its obligations are fully and
explicitly guaranteed by the full faith and credit of the U.S.
government); (3) certain liquid and readily-marketable securities that
are claims on, or claims guaranteed by, a sovereign entity, a central
bank, the Bank for International Settlements, the International
Monetary Fund, the European Central Bank and European Community, or a
multilateral development bank; and (4) certain liquid and readily-
marketable debt securities issued by sovereign entities.
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\141\ As discussed in section VI of this Supplementary
Information section, the final rule incorporates the LCR rule's
definition of ``liquid and readily-marketable,'' which means, with
respect to a security that the security is traded in an active
secondary market with: (1) More than two committed market makers;
(2) a large number of non-market maker participants on both the
buying and selling sides of transactions; (3) timely and observable
market prices; and (4) a high trading volume. See Sec. __.3 of the
LCR rule.
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Some commenters argued that the NSFR rule should assign a zero
percent RSF factor for all HQLA. These commenters argued that the
proposed non-zero RSF factors for these assets would unduly penalize
low-risk sources of funding, increase banking organizations' costs for
holding HQLA and engaging in securities financing transactions
involving HQLA, and undermine the ability of banking organizations to
act as market makers. Other commenters believed a zero percent RSF
factor would provide for a more level playing field by aligning with
other jurisdictions' implementation of the NSFR.
A number of commenters requested a zero percent RSF factor be
assigned to all level 1 liquid assets, which include certain government
securities that commenters argued have liquidity characteristics
similar to assets that would have been assigned a zero percent RSF
factor under the proposed rule.\142\ Many commenters argued that U.S.
Treasury securities, in particular, should be assigned a zero percent
RSF factor because they are among the most liquid and readily
marketable securities a covered company may hold and benefit from
flight to quality during times of stress.
---------------------------------------------------------------------------
\142\ These commenters also argued that the proposed treatment
would be more conservative than the treatment of level 1 liquid
assets under the LCR rule, which allows a banking organization to
include the full fair value of level 1 liquid assets in its HQLA
amount. The value of RSF factors are not representative of market
haircuts to asset values.
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As described above, assets that a covered company can directly use
to meet financial obligations or can reasonably expect to obtain the
cash inflows at the maturity of these assets in the near future are
assigned a zero percent RSF factor under the final rule. Such assets
generally do not present risks to a covered company or the financial
sector in the event of funding disruptions. Similarly, given their
liquidity characteristics, level 1 liquid asset securities present
minimal risks resulting from a covered company's funding of these
assets as assessed over a one-year time horizon. Across a broad range
of market conditions, a covered company generally may be less likely to
have to fund these securities for one year compared to other
securities. Although U.S. Treasury securities and other level 1 liquid
asset securities generally must be monetized before they can be used to
settle obligations and face modest transaction costs in doing so, these
assets, regardless of their
[[Page 9157]]
contractual maturity, serve as reliable sources of liquidity across
market conditions, based on their high credit quality and the favorable
characteristics of the markets for these assets. Further, level 1
liquid asset securities generally retain their value in the event of
market disruptions relative to most other assets. In addition, these
level 1 liquid asset securities serve a critically important role in
supporting the smooth functioning of the funding markets, and, as
further discussed in section X of this Supplementary Information
section, a non-zero RSF factor on level 1 liquid assets could
discourage intermediation in the U.S. Treasury market. For these
reasons, the final rule applies a zero percent RSF factor to
unencumbered level 1 liquid assets. Responses to comments requesting
the final rule assign a zero percent RSF factor to all other HQLA are
included below.
Secured Lending Transactions With a Financial Sector Entity or a
Subsidiary Thereof That Mature Within Six Months and Are Secured by
Rehypothecatable Level 1 Liquid Assets
Section __.106(a)(3) of the proposed rule would have assigned a 10
percent RSF factor to a secured lending transaction \143\ with a
financial sector entity or a consolidated subsidiary thereof that
matures within six months of the calculation date and is secured by
level 1 liquid assets that are rehypothecatable for the duration of the
transaction.\144\ The proposal explained that a relatively lower amount
of stable funding is needed to support all forms of short-term lending
to financial sector entities because the financial nature of the
counterparty presents relatively lower reputational risk to a covered
company if it chooses not to roll over the transaction when it matures.
As a general matter, the proposed rule would have treated secured
lending transactions and unsecured lending transactions with financial
sector counterparties the same. However, the proposed rule would have
assigned a lower RSF factor to such short-term lending transactions
that are secured by rehypothecatable level 1 assets, relative to most
other lending, because of a covered company's ability to monetize the
level 1 liquid asset for the duration of the transactions.
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\143\ See section VI of this Supplementary Information section
for a description of the definition of ``secured lending
transaction'' in Sec. __.3 of the LCR rule.
\144\ The proposal would have assigned a 15 percent RSF factor
to all other secured lending transactions to a financial sector
counterparty with a remaining maturity of less than six months.
---------------------------------------------------------------------------
A number of commenters requested that the agencies reduce or remove
the proposed RSF factors for all short-term secured lending
transactions to financial sector entities. These commenters argued that
the RSF factor should match the zero percent ASF factor assigned to
short-term secured funding transactions with financial sector entities,
noting that the proposed asymmetrical treatment would prevent a covered
company from using such short-term funding transactions wholly to fund
its short-term lending transactions. Commenters asserted that this
asymmetry would be overly punitive, impair a covered company's ability
to conduct prudent short-term liquidity risk management, not accurately
reflect collateral quality, and increase costs. Such increased costs,
commenters contended, would cause covered companies to reduce such
lending, resulting in a further contraction of the repo market,
increased market volatility for the securities typically used as
collateral, and have a negative impact on financial institutions that
rely on the short-term funding market. Commenters also argued that the
proposed RSF factors for short-term secured lending transactions to
financial sector entities are unnecessary and overly burdensome because
other regulatory measures sufficiently address the risks posed by these
transactions. Several commenters argued that the proposed RSF treatment
would reduce the competitiveness of covered companies relative to other
market participants. Other commenters requested that the agencies
reduce the RSF factors to align with other jurisdictions'
implementation of the NSFR.
The agencies also received comments requesting a zero percent RSF
factor be assigned to short-term secured lending transactions with
financial sector entities secured by rehypothecatable level 1 liquid
assets. One commenter argued that these transactions present few risks
of disorderly or destabilizing unwinds due to the quality of the
underlying collateral. Another commenter expressed concern that the
proposed 10 percent RSF factor would incentivize a covered company to
purchase on balance sheet level 1 liquid assets rather than borrow such
assets through secured lending transactions to obtain more favorable
RSF treatment, which would increase liquidity and interest rate risk as
a result of holding the assets on balance sheet.
Covered companies may use short-term secured funding and lending
transactions, such as repurchase agreements and reverse repurchase
agreements, for collateral management and funding purposes as well as
other business and risk management purposes. Short-term secured funding
and lending transactions, however, can give rise to certain funding
risks. For example, a covered company is exposed to risk of borrower
default and fluctuation in the price of the underlying collateral. At
the same time, a covered company may be incentivized to continue
funding a certain portion of its lending under these transactions even
as it loses access to its short term funding transactions. Although the
agencies recognize that other regulations reduce certain risks
associated with short-term secured lending transactions, the NSFR
requirement is designed to directly measure and ensure the stability of
covered companies' aggregate funding profile over a one-year horizon.
Consistent with the proposed rule, the final rule generally treats
secured lending transactions with financial sector counterparties the
same as unsecured lending to these counterparties based on their tenor
and counterparty characteristics, described below. However, the
agencies have revised the proposed rule by adding Sec.
__.106(a)(1)(vii) to the final rule, which assigns an RSF factor of
zero percent, rather than 10 percent, for short-term lending
transactions with a financial sector entity secured by rehypothecatable
level 1 liquid assets, as such short-term secured lending transactions
present minimal risk to the covered company. Moreover, as further
discussed in section X of this Supplementary Information section, a
non-zero RSF factor on secured lending transactions secured with
rehypothecateble level 1 liquid assets could also discourage
intermediation in certain short-term secured lending markets. The
calibration would also align the RSF factor for these loan receivables
with the RSF factor for level 1 liquid assets that are held on the
covered company's balance sheet.
b) 5 Percent RSF Factor
Committed Credit and Liquidity Facilities--RSF Factor and Undrawn
Amount
Section __.106(a)(2)(ii) of the proposed rule would have assigned a
5 percent RSF factor to the undrawn amount of committed credit and
liquidity facilities that a covered company provides to its customers
and counterparties.\145\ The proposed rule
[[Page 9158]]
clarified that the ``undrawn amount'' for purposes of the NSFR rule
would be the amount that could be drawn within one year of the
calculation date, but would not have included amounts that could only
be drawn contingent upon contractual milestones or events that cannot
reasonably be expected to occur within one year.
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\145\ The terms ``credit facility,'' ``liquidity facility,'' and
``committed'' are defined terms under Sec. __.3 of the LCR rule. As
discussed in section VI.A of this Supplementary Information section,
the final rule modifies the definition of ``committed.''
---------------------------------------------------------------------------
The agencies did not receive any comments on the proposed 5 percent
RSF factor assigned to the undrawn amount of committed credit and
liquidity facilities. However, several commenters requested the
agencies modify the proposed rule to permit a covered company to reduce
the undrawn commitments by the value of collateral that it receives to
secure its committed facility, particularly collateral in the form of
HQLA, for purposes of determining the applicable RSF amount. Commenters
noted that the LCR rule permits covered companies to net, for purposes
of calculating outflow amounts, level 1 and level 2A liquid assets that
secure a committed credit or liquidity facility against the undrawn
amount of the facility, and requested similar treatment under the NSFR
rule.
Consistent with the proposed rule, the final rule does not permit a
covered company to net collateral against undrawn amounts of
commitments.\146\ As described in section V.C of this Supplementary
Information section, unlike the LCR rule, which addresses the risk of
cash outflows and permits a covered company to net certain high-quality
collateral against the undrawn amount of a committed credit or
liquidity facility because such collateral may be used to meet its
short-term obligations,\147\ the NSFR measures the funding profile of a
covered company's balance sheet and any draw upon a committed facility
would become an asset (i.e., a loan) on a covered company's balance
sheet that generally would increase the covered company's stable
funding needs. Similarly, collateral obtained pursuant to a default of
a draw on a secured facility would add to a covered company's balance
sheet and require stable funding.
---------------------------------------------------------------------------
\146\ The NSFR requirement generally does not take into account
prospective inflows arising from the receipt of collateral. As
explained further below in section VII.E of this Supplementary
Information section, the NSFR requirement's treatment of derivative
transactions permits the receipt of certain eligible collateral to
be netted against the derivatives asset amount. Recognition in the
NSFR requirement of the funding value of collateral for derivatives
transactions is appropriate notwithstanding the rule's general
prohibition against netting collateral because of the special role
of derivatives margin and because the rule sets forth a number of
restrictions and contractual netting criteria for certain collateral
to be netted against the derivatives asset amount.
\147\ See Sec. __.32(e)(3) of the LCR rule.
---------------------------------------------------------------------------
One commenter requested clarification of the term ``undrawn
amount'' and the treatment of funded commitments that result in
contractually offsetting collateral inflows. The commenter also asked
what level of support would be required to demonstrate an amount is
excludable from the undrawn amount because it is contingent upon events
not reasonably expected to occur within the NSFR's time horizon. The
agencies are clarifying that the undrawn amount is the maximum amount
that could be drawn under the agreement within the NSFR requirement's
one-year time horizon under all reasonably possible circumstances.\148\
The undrawn amount does not include amounts that are contingent on the
occurrence of a contractual milestone or other events that cannot
reasonably be expected to be reached or occur within the one-year time
horizon. For example, if a construction company can draw a certain
amount from a credit facility only upon meeting a construction
milestone that cannot reasonably be expected to be reached within one
year, such as entering the final stage of a multi-year project that has
just begun, then the undrawn amount would not include the amount that
would become available only upon entering the final stage of the
project.
---------------------------------------------------------------------------
\148\ For example, if the governing agreement provides that (1)
the counterparty must liquidate collateral securing the facility
before drawing on the facility and (2) the covered company must
provide the amount available under the facility less the proceeds of
the collateral sale, the undrawn amount would be the full value of
the amount available under the facility (i.e., not reduced by the
proceeds of the collateral sale). This reflects the contractual
possibility that the covered company may still be required to
provide the counterparty the full value allowed under the facility,
even though under many circumstances the covered company's exposure
would be reduced.
---------------------------------------------------------------------------
Similarly, a letter of credit that meets the definition of credit
or liquidity facility may entitle a seller to obtain funds from a
covered company if a buyer fails to pay the seller. If the seller is
legally entitled to obtain the funds available under the letter of
credit as of the calculation date (because the buyer has defaulted) or
if the buyer should reasonably be expected to default within the NSFR's
one-year time horizon, then the funds available under the letter of
credit are undrawn amounts. However, if, under the terms of the letter
of credit, the seller is not legally entitled to obtain funds from the
covered company as of the calculation date because the buyer has not
failed to perform under the agreement with the seller, and the covered
company does not reasonably expect nonperformance within the NSFR's
one-year time horizon, then the funds potentially available under the
letter of credit are not undrawn amounts.
The agencies expect that a covered company would conduct an
analysis of the likelihood of contingent contractual milestones or
other events to be reached or occur, which may include reliance on
historical experience, including consideration of both internal and
industry-wide data. The agencies also expect a covered company to be
able to provide sufficient supporting documentation that justifies its
assessment that a contractual milestone or other event cannot
reasonably be expected to be reached or occur within the one-year time
horizon. The sufficiency and appropriateness of that documentation
would be reviewed by supervisory staff.
The agencies are finalizing the assigned 5 percent RSF factor to
the undrawn amount of committed credit and liquidity facilities that a
covered company provides to its customers and counterparties as
proposed. The final rule requires a covered company to recognize
committed facilities in its aggregate stable funding requirement to a
limited extent, even though they are generally not included on a
covered company's balance sheet. The 5 percent RSF factor is the lowest
non-zero RSF factor and is applied uniquely to off-balance sheet
commitments.
c) 15 Percent RSF Factor
The final rule applies a 15 percent RSF factor to unencumbered
level 2A liquid assets held on a covered company's balance sheet and
lending to financial counterparties that matures in less than six
months, other than secured lending transactions backed by
rehypothecatable level 1 liquid assets. Based on their liquidity
characteristics, including their high credit quality, these assets may
also not need to be funded for the entirety of the NSFR's one-year time
horizon, and covered companies may have the ability to recognize
inflows from such assets within one year across a range of market
conditions.
Unencumbered Level 2A Liquid Assets
Section __.106(a)(4)(i) of the proposed rule would have assigned a
15 percent RSF factor to level 2A liquid assets, as defined in Sec.
__.20(b) of the LCR rule, but would not have taken into consideration
the operational requirements described in Sec. __.22 or the level 2
cap in Sec. __.21. As set forth in the LCR rule, level 2A liquid
assets
[[Page 9159]]
include certain obligations issued or guaranteed by a Government
Sponsored Enterprise (GSE) and certain obligations issued or guaranteed
by a sovereign entity or a multilateral development bank. The LCR rule
requires these securities to be liquid and readily-marketable, as
defined in Sec. __.3, to qualify as level 2A liquid assets.
Commenters requested more favorable treatment for certain GSE
securities under the NSFR rule. Several commenters recommended that
mortgage-backed securities issued by the Federal National Mortgage
Association (Fannie Mae) and Federal Home Loan Mortgage Corporation
(Freddie Mac) should receive the same 5 percent RSF factor proposed for
level 1 liquid assets, as long as Fannie Mae and Freddie Mac remain
under the conservatorship of the Federal Housing Finance Agency (FHFA).
One commenter argued these securities exhibit favorable liquidity
characteristics and are low risk, and expressed concern that the
proposed 15 percent RSF factor would discourage banks from purchasing
these mortgage-backed securities, which would result in increased
mortgage interest rates for homeowners. Another commenter noted that
the European Union allows covered bonds with similar liquidity
characteristics to qualify as level 1 liquid assets. Another commenter
recommended that FHLB consolidated debt obligations should receive a 5
percent RSF factor based on the historical performance of these
obligations during financial stress and their strong market attributes,
including narrow bid-ask spreads, numerous active and diverse market
makers, timely market prices, and high trading volumes.
Similar to other HQLA, level 2A liquid assets held by covered
companies on their balance sheets have a broad range of residual
maturities and are held for a variety of purposes. For example, covered
companies hold such securities as long-term investments, as instruments
to maintain medium-term hedges or as part of the covered company's
eligible HQLA under the LCR rule. Holdings of unencumbered level 2A
liquid assets on a covered company's balance sheet present only modest
risks to the covered company or financial system in the event of
funding disruptions. A 15 percent RSF factor is appropriate for GSE-
issued or GSE-guaranteed obligations because they have high credit
quality and are traded in deep, liquid markets. For example, mortgage-
backed securities issued by GSEs have a higher credit quality, higher
average daily trading volume, and lower bid-ask spreads relative to
corporate debt securities, which are assigned a higher RSF factor.
However, these securities have different liquidity characteristics than
U.S. Treasury securities and other level 1 liquid assets. For instance,
GSE obligations are not subject to the same unconditional sovereign
guarantee as certain securities that are level 1 liquid assets, which
are assigned a zero percent RSF factor. Moreover, while certain GSEs
are currently operating under the conservatorship of the FHFA, GSE
obligations are not explicitly guaranteed by the full faith and credit
of the United States, and they should not receive the same treatment as
obligations that have such an explicit guarantee. This treatment is
consistent with the agencies' risk-based capital rule, which
differentiates between obligations and guarantees of U.S. GSEs,
including those operating under conservatorship of FHFA and securities
explicitly guaranteed by the full faith and credit of the United
States.\149\ With respect to covered bonds, the agencies have
determined that covered bonds do not meet the liquid and readily-
marketable standard in the United States and thus do not meet the
liquidity characteristics to qualify as a level 1 or level 2A liquid
asset. The final rule adopts a 15 percent RSF factor for level 2A
liquid assets as proposed.
---------------------------------------------------------------------------
\149\ 12 CFR 3.32 (OCC); 12 CFR 217.32 (Board); 12 CFR 324.32
(FDIC).
---------------------------------------------------------------------------
Secured Lending Transactions Secured by All Other Collateral and
Unsecured Wholesale Lending With a Financial Sector Entity or a
Subsidiary Thereof That Mature Within Six Months
Section __.106(a)(4)(ii) of the proposed rule would have assigned a
15 percent RSF factor to a secured lending transaction with a financial
sector entity or a consolidated subsidiary thereof that is secured by
assets other than rehypothecatable level 1 liquid assets and that
matures within six months of the calculation date. The proposal also
would have assigned a 15 percent RSF factor to unsecured wholesale
lending to a financial sector entity or a consolidated subsidiary
thereof that matures within six months of the calculation date.\150\
---------------------------------------------------------------------------
\150\ See supra note 102.
---------------------------------------------------------------------------
The comments received by the agencies regarding the treatment of
secured lending transactions generally, as well as the agencies'
response to the comments, are summarized above in section VII.D.3.a of
this Supplementary Information section. The agencies did not receive
any comments specific to the proposed treatment of unsecured wholesale
lending to a financial sector entity or a subsidiary thereof that
matures within six months.
The final rule adopts the proposed treatment for these transactions
without any modification. A 15 percent RSF factor reflects that these
transactions contribute less to a covered company's aggregate funding
requirement because of their shorter tenors relative to loans with a
longer remaining maturity, when considering cash inflows upon maturity
of the loan. In addition, these loans also generally present lower
reputational risk if a covered company chooses not to roll over the
transaction because of the financial nature of the counterparty. For
these reasons, a 15 percent RSF factor for these assets is lower than
the RSF factor assigned to longer-term secured transactions to similar
counterparties or to similar-term loans to non-financial
counterparties. However, the assignment of a higher RSF factor to these
assets compared to similar short-term secured lending transactions to
financial counterparties that are secured by rehypothecatable level 1
liquid assets reflects the covered company's more limited ability to
monetize assets that are not level 1 liquid assets for the duration of
the transaction.
d) 50 Percent RSF Factor
Based on the NSFR's one-year time horizon, the final rule applies
the median RSF factor of 50 percent to unencumbered level 2B liquid
assets of all maturities. Covered companies may not need to fund these
securities for the entirety of the NSFR's one-year time horizon, and
covered companies may have the ability to recognize inflows from such
assets within one year, each across a range of market conditions.
The final rule also applies a 50 percent RSF factor to most loans
with remaining maturities of less than one year and to operational
deposit placements. Lending that matures in less than one year is less
likely to require funding for a full year relative to loans that have
residual maturities of one year or more, which generally receive a
higher RSF factor under the final rule. While certain loans that mature
in less than one year may be renewed, covered companies are generally
more likely to receive cash inflows when these loans mature compared to
longer maturities. With respect to operational deposit placements, the
50 percent RSF factor reflects that covered companies as recipients of
operational services likely would face limitations to making
significant changes to their operational activities during the NSFR's
one-year
[[Page 9160]]
time horizon across a range of market conditions.
Unencumbered Level 2B Liquid Assets
Section __.106(a)(5)(i) of the proposed rule would have assigned a
50 percent RSF factor to level 2B liquid assets, as defined in Sec.
__.20(c) of the LCR rule, but without taking into consideration the
operational requirements described in Sec. __.22 or the level 2 caps
in Sec. __.21. At the time of proposal, level 2B liquid assets
included certain publicly traded corporate debt securities and publicly
traded common equity shares that are liquid and readily-marketable. To
qualify as a level 2B liquid asset, the asset must meet certain
criteria under Sec. __.20 of the LCR rule. For example, among other
criteria, equity securities must be part of a major index and both
corporate debt securities and municipal obligations must be
``investment grade'' under 12 CFR part 1.
Subsequent to the issuance of the proposed rule, EGRRCPA was
enacted, which requires the agencies to treat certain municipal
obligations as a level 2B liquid asset for purposes of the LCR rule and
any other regulation that incorporates a definition of the term ``high-
quality liquid asset'' or substantially similar term.\151\ Consistent
with EGRRCPA, the agencies amended the LCR rule to treat municipal
obligations that are investment grade and liquid and readily-marketable
as level 2B liquid assets.\152\
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\151\ Public Law 115-174, 132 Stat. 1296-1368 (May 24, 2018).
\152\ See 84 FR 25975 (June 5, 2019). As a result, the agencies
are not also finalizing proposed Sec. __.106(a)(5)(iv).
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Several commenters expressed concern that the proposed RSF factor
for level 2B liquid assets was too high and argued that these
securities should be considered more liquid over the NSFR's one-year
horizon. For example, one commenter requested a 15 percent RSF factor
for equity securities that are included in major market indices, such
as exchange-traded funds that track a major market index. Some
commenters recommended revised RSF treatment for level 2B liquid asset
eligible corporate debt securities. For example, some commenters
requested that the RSF factor for corporate debt securities be more
granular and calibrated based on the tenor of the securities, the
issuer's creditworthiness, or the desired tenor of funding used to
purchase the securities. One commenter requested eliminating the
requirement that a corporate debt security be investment grade.\153\
Another commenter recommended the agencies adopt the RSF factors
assigned to various types of corporate debt in the Basel NSFR standard.
One commenter recommended that the agencies more closely align the RSF
factor for these assets to the market haircuts in secured funding
markets. Another commenter expressed concern that the proposed RSF
treatment would make it more expensive for banking organizations to
hold debt and equity securities intended for trading, which would
result in decreased willingness to hold inventories and negatively
impact capital markets. The commenter asserted that, given the
importance of capital markets in the United States, the proposed RSF
factor would place the United States at a competitive disadvantage to
other jurisdictions.
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\153\ Pursuant to the LCR rule, corporate debt securities must
be investment grade in order to qualify as a level 2B liquid asset.
12 CFR 249.20(c)(1)(i).
---------------------------------------------------------------------------
The final rule maintains as proposed the 50 percent RSF factor for
level 2B liquid assets, which include certain investment grade publicly
traded corporate debt securities and municipal obligations \154\ and
certain publicly traded common equity shares included on the Russell
1000 or an index that a foreign supervisor recognizes for purposes of
including equity shares in level 2B liquid assets under applicable
regulatory policy of a foreign jurisdiction. As described in section
V.C of this Supplementary Information section, the final rule uses
definitions common to the LCR rule to increase the efficiency of the
rule. The agencies did not propose and the final rule does not adopt
any changes to the definition of level 2B liquid assets. The agencies,
therefore, are not changing the requirements for corporate debt
securities to qualify as a level 2B liquid asset. Such changes would be
outside the scope of this rulemaking. Assets that meet the definition
of level 2B liquid assets have distinctive liquidity characteristics as
described in the LCR rule, which include either relatively higher
credit risk, lower trading volumes, or elevated price volatility across
market conditions when compared to level 1 and level 2A liquid assets.
These securities also have relatively greater liquidity relative to
assets that are not HQLA under the LCR rule. For these reasons, the RSF
factor assigned to level 2B liquid assets is materially higher than the
RSF factor of 15 percent applied to level 2A liquid assets, but lower
than the RSF factor applied to securities that do not qualify as HQLA.
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\154\ Section __.106(a)(5)(iv) of the proposed rule, which would
have assigned a 50 percent RSF factor to general obligation
securities of a public sector entity, is removed because such
securities now are encompassed by the definition of municipal
obligations in Sec. __.3 of the LCR rule. Consistent with section
403 of EGRRCPA, Sec. __.3 of the LCR rule defines a ``municipal
obligation'' as ``an obligation of (1) a state or any political
subdivision thereof, or (2) any agency or instrumentality of a state
or any political subdivision thereof.''
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Covered companies may be holding level 2B liquid assets on balance
sheet at a calculation date that have a wide range of residual
maturities and for a range of purposes, each of which may require
various contractual or anticipated holding periods. While some portion
of level 2B liquid assets may mature or be contractually scheduled to
be sold within one year, a covered company may need to fund certain of
these securities over a one-year time horizon. Similar to level 2A
liquid assets, covered companies may hold these securities for
investment purposes or as part of a covered company's HQLA amount. Over
a range of market conditions, a covered company may be generally less
likely to have to fund these securities for one year compared to
securities that do not qualify as HQLA. For the reasons above, it is
appropriate for the RSF factor applied to level 2B liquid assets to be
materially higher than the RSF factor of 15 percent applied to level 2A
liquid assets but lower than that applied to securities that do not
qualify as HQLA.
In response to commenters' requests for additional granularity, the
agencies note that the purpose of the NSFR is to provide a broad,
standardized measure of funding stability that can be compared across
covered companies. As discussed in section V.C, to achieve this
purpose, the final rule uses a small number of standardized maturity
buckets rather than using granular maturity buckets of debt instruments
or the funding used to purchase such assets. In addition, the final
rule does not differentiate between assets based on other difficult to
monitor criteria, such as a covered company's intent for holding or
funding the asset or the characteristics of the issuer, because to do
so would require the agencies to make determinations about each covered
company's intent or the credit risk of each issuer. Such individualized
determinations would be contrary to the NSFR's purpose as a
standardized measure. In addition, contrary to commenters' concerns,
the agencies expect that the final rule will strengthen the U.S.
financial system, including capital markets, by ensuring banking
organizations maintain sufficiently stable funding on an ongoing basis.
[[Page 9161]]
Secured Lending Transactions and Unsecured Wholesale Lending to a
Financial Sector Entity or a Subsidiary Thereof or a Central Bank That
Mature in Six Months or More, But Less Than One Year
Section __.106(a)(5)(ii) of the proposed rule would have assigned a
50 percent RSF factor to a secured lending transaction or unsecured
wholesale lending transaction that matures in six months or more, but
less than one year from the calculation date, where the counterparty is
a financial sector entity or a consolidated subsidiary thereof or the
counterparty is a central bank.\155\ As discussed above, a covered
company faces lower reputational risk if it chooses not to roll over
secured or unsecured loans to financial counterparties or claims on a
central bank than it would with loans to non-financial counterparties.
Even though loans in this category have terms greater than six months
(and liquidity from principal repayments will not be available in the
near term) these loans mature within the NSFR's one-year time horizon
so the proposed rule would not have required them to be fully supported
by stable funding. For the reasons discussed in the proposal, the
agencies are finalizing a 50 percent RSF factor for these transactions
as proposed.
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\155\ Section __.106(a)(5)(ii) of the final rule does not apply
to an operational deposit placed at a financial sector entity or
consolidated subsidiary thereof. The treatment of such an
operational deposit is covered by Sec. __.106(a)(4)(iii) of the
final rule.
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Operational Deposits Held at Financial Sector Entities
Section __.106(a)(5)(iii) of the proposed rule would have assigned
a 50 percent RSF factor to an operational deposit, as defined in Sec.
__.3 of the LCR rule, placed by the covered company at a financial
sector entity. Consistent with the reasoning for the ASF factor
assigned to operational deposits placed at a covered company, described
in section VII.C.3.d of this Supplementary Information section, such
operational deposits placed by a covered company are less readily
monetizable by the covered company compared to non-operational
placements. These deposits are placed for operational purposes, and
covered companies likely would face legal or operational limitations to
making significant withdrawals during the NSFR's one-year time horizon.
While the agencies received comments addressing the ASF factor assigned
to operational deposits received by a covered company, as discussed
above at section VII.C.3.d, the agencies did not receive any comments
addressing the RSF factor assigned to operational deposits placed by a
covered company at an unaffiliated financial sector entity. For the
reasons discussed in the proposed rule, the final rule adopts the 50
percent RSF factor for operational deposits placed by a covered company
at another financial sector entity as proposed.
Secured Lending Transactions and Unsecured Wholesale Lending to
Counterparties That Are Not Financial Sector Entities and Are Not
Central Banks and That Mature in Less Than One Year
Section __.106(a)(5)(v) of the proposed rule would have assigned a
50 percent RSF factor to lending to a wholesale customer or
counterparty that is not a financial sector entity or central bank,
including a non-financial corporate, sovereign, or public sector
entity, that matures in less than one year from the calculation date.
Unlike with lending to financial sector entities and central banks, the
proposed rule would have assigned the same RSF factor to lending to
these entities with a remaining maturity of less than six months as it
would have assigned to lending with a remaining maturity of six months
or more, but less than one year. The proposed rule would not have
required this lending to be fully supported by stable funding based on
its maturity within the NSFR's one-year time horizon and the assumption
that a covered company may be able to reduce its lending to some degree
over the NSFR's one-year time horizon. However, the proposed rule's
assignment of a 50 percent RSF factor reflected the stronger incentives
that a covered company is likely to have to continue to lend to these
wholesale counterparties due to reputational risk and a covered
company's need to maintain its franchise value, even when the lending
is scheduled to mature in the nearer term, as discussed in section
VII.D.2.c of this Supplementary Information section. The agencies did
not receive any comments addressing the proposed RSF factor assigned to
this category. For the reasons discussed in the proposal, the agencies
are adopting this provision as proposed.\156\
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\156\ This provision is adopted at Sec. __.106(a)(4)(iv)(A) of
the final rule.
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Lending to Retail Customers and Counterparties That Matures in Less
Than One Year
Section __.106(a)(5)(v) of the proposed rule would have assigned a
50 percent RSF factor to lending to retail customers or counterparties
(including certain small businesses), as defined in Sec. __.3 of the
LCR rule, that matures less than one year from the calculation date for
the same reputational and franchise value maintenance reasons for which
it would have assigned a 50 percent RSF factor to lending to wholesale
customers and counterparties that are not financial sector entities or
central banks. The agencies did not receive any comments specific to
the RSF factor assigned to this asset category. For the reasons
described in the proposed rule, the agencies are adopting this
provision as proposed.\157\
---------------------------------------------------------------------------
\157\ This provision is adopted at Sec. __.106(a)(4)(iv)(B) of
the final rule.
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All Other Assets That Mature in Less Than One Year
Section __.106(a)(5)(v) of the proposed rule would have assigned a
50 percent RSF factor to all other assets that mature within one year
of the calculation date but are not described in the categories above.
The shorter maturity of an asset in this category reduces a covered
company's funding needs, since the asset may not need to be retained on
the covered company's balance sheet past maturity and provides for cash
inflows upon maturity during the NSFR's one-year time horizon. However,
a covered company generally may be less able to monetize these assets
due to their lower credit quality and their relevant market
characteristics as compared to the enumerated asset classes that are
assigned lower RSF factors.
One commenter expressed concern that this category would capture
asset-backed commercial paper that is fully supported by a credit or
liquidity facility provided by another bank and has a maturity of six
months or less, while unencumbered loans to banks with maturities of
less than six months are assigned a 15 percent RSF factor. The
commenter argued that a covered company's risk exposure for purchasing
asset-backed commercial paper that is fully supported by a facility
provided by a bank is equivalent to its risk exposure for a loan to
another bank. Accordingly, the commenter argued that such asset-backed
commercial paper should receive the same 15 percent RSF factor as a
short-term loan to a financial sector entity. Another commenter argued
that the RSF factor assigned to commercial
[[Page 9162]]
paper should be based on the creditworthiness of the issuing company.
In response, the agencies note that the final rule generally
assigns RSF factors to exposures as of a point in time. For holdings of
asset-backed commercial paper that are supported by a credit or
liquidity facility provided by a bank, a covered company would not have
an exposure to a financial sector entity unless the facility has been
drawn upon; therefore, such asset-backed commercial paper is not
treated as a loan to a financial sector entity under the final rule.
Although the contractual features of an individual asset or the credit
worthiness of its issuer can affect the funding needs related to
holding that particular asset, the final rule is intended to provide a
standardized measure of funding stability that can be compared across
covered companies. Differentiating between holdings of commercial paper
based on contractual features or the issuer's credit worthiness would
require the agencies to make determinations based on each contractual
arrangement and the credit risk of each issuer. Such individualized
determinations would be contrary to the NSFR's purpose as a
standardized measure.
For the reasons discussed in the proposed rule, the agencies are
finalizing this provision as proposed.\158\
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\158\ This provision is adopted at Sec. __106(a)(4)(iv) of the
final rule.
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e) 65 Percent RSF Factor
Under the final rule, loans that mature in one year or more (other
than operational deposit placements) are assigned higher RSF factors
than loans that mature in less than one year. The final rule assigns a
65 percent RSF factor to retail mortgages that mature in one year or
more and are assigned a risk weight of no greater than 50 percent under
the agencies' risk-based capital rule and loans to retail and non-
financial wholesale counterparties that mature in one year or more and
are assigned a risk weight of no greater than 20 percent.
Retail Mortgages That Mature in One Year or More and Are Assigned a
Risk Weight of No Greater Than 50 Percent
Section __.106(a)(6)(i) of the proposed rule would have assigned a
65 percent RSF factor to retail mortgages that mature one year or more
from the calculation date and are assigned a risk weight of no greater
than 50 percent under subpart D of the agencies' risk-based capital
rule. Under the agencies' risk-based capital rule, residential mortgage
exposures secured by a first lien on a one-to-four family property that
are prudently underwritten, are not 90 days or more past due or carried
in nonaccrual status, and that are neither restructured nor modified
generally receive a 50 percent risk weight.\159\
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\159\ See 12 CFR 3.32(g) (OCC); 12 CFR 217.32(g) (Board); 12 CFR
324.32(g) (FDIC). The final rule is consistent with the Basel NSFR
standard, which assigns a 65 percent RSF factor to residential
mortgages that receive a 35 percent risk weight under the Basel II
standardized approach for credit risk, because the agencies' risk-
based capital rule assigns a 50 percent risk weight to residential
mortgage exposures that meet the same criteria as those that receive
a 35 percent risk weight under the Basel II standardized approach
for credit risk.
---------------------------------------------------------------------------
Some commenters argued that the proposed rule's treatment for
mortgage loans would be overly conservative in comparison to the 15
percent RSF factor assigned to certain GSE-issued or GSE-guaranteed
mortgage-backed securities. One commenter noted that prudently
underwritten mortgages can be pooled into GSE or private label
mortgage-backed securities and argued that, as a result, they should
receive an RSF factor no higher than 50 percent. Similarly, another
commenter noted that single family mortgage loans should not receive an
RSF factor above 50 percent because such loans can be used as
collateral for FHLB loans. One commenter suggested that the proposed
RSF factor for mortgage loans under the NSFR could encourage banks to
originate and sell loans rather than hold them in portfolio.
Mortgage lending to households is an important form of financial
intermediation conducted by banking organizations, including during
times of funding disruptions. To support financial intermediation, and
based on the residual maturity and other liquidity characteristics of
mortgage loans, the final rule requires individual mortgages that meet
certain criteria to be supported by a greater amount of stable funding
than assets assigned a 50 percent RSF factor. Individual mortgage loans
have substantially different credit and liquidity characteristics than
mortgage-backed securities eligible for a lower RSF factor. In
particular, GSE-issued and GSE-guaranteed securities have a much higher
trading volume than individual mortgage loans. Mortgage loans also do
not have the same liquidity characteristics as assets that are assigned
a 50 percent RSF factor, such as assets that are either securities that
satisfy certain benchmark market thresholds or assets with relatively
short maturity. In contrast, mortgage loans in the 65 percent RSF
category mature in more than one year from the calculation date, and
typically have many years until they mature. Prior to maturity, it may
be difficult to monetize an individual mortgage loan in a timely
fashion or without incurring a relatively higher haircut in a secured
funding transaction compared to HQLA.
In addition, the agencies acknowledge that covered companies will
take into account the final rule's assignment of a 65 percent RSF
factor when deciding whether to sell mortgage loans or retain them in
portfolio. However, covered companies may choose to retain or sell
mortgage loan originations for a variety of reasons including earnings,
liquidity, and capital management. Accordingly, the 65 percent RSF
factor for mortgage loans would not significantly impact a covered
company's decision to retain a mortgage loan in portfolio. The primary
purpose of the final rule is to ensure that a banking organization's
assets are adequately funded. For the reasons described above, the
final rule assigns a 65 percent RSF factor to mortgage loans that meet
certain criteria as proposed.
Secured Lending Transactions, Unsecured Wholesale Lending, and Lending
to Retail Customers and Counterparties That Mature in One Year or More
and Are Assigned a Risk Weight of No Greater Than 20 Percent
Section __.106(a)(6)(ii) of the proposed rule would have assigned a
65 percent RSF factor to secured lending transactions, unsecured
wholesale lending, and lending to retail customers and counterparties
that are not otherwise assigned an RSF factor, that mature one year or
more from the calculation date, that are assigned a risk weight of no
greater than 20 percent under subpart D of the agencies' risk-based
capital rule, and where the borrower is not a financial sector entity
or a consolidated subsidiary thereof.\160\ As discussed in the proposed
rule, these loans generally have more favorable liquidity
characteristics because of their lower credit risk than loans that have
a risk weight greater than 20 percent under the agencies' risk-based
capital rule. However, these loans require more stable funding than
loans that mature and provide liquidity within the NSFR's one-year time
horizon. The agencies did not receive any comments on this provision.
For the reasons discussed in
[[Page 9163]]
the proposed rule, the agencies are adopting this provision as
proposed.
---------------------------------------------------------------------------
\160\ See 12 CFR 3.32(g) (OCC); 12 CFR 217.32(g) (Board); 12 CFR
324.32(g) (FDIC). This aspect of the proposed rule would have been
consistent with the Basel NSFR standard, which assigns a 65 percent
RSF factor to loans that receive a 35 percent or lower risk weight
under the Basel II standardized approach for credit risk, because
the standardized approach in the agencies' risk-based capital rule
does not assign a risk weight that is between 20 and 35 percent to
such loans.
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f) 85 Percent RSF Factor
The final rule assigns an 85 percent RSF factor to all other retail
mortgages not assigned an RSF factor above, all other loans to non-
financial sector counterparties, publicly traded common equity shares
that are not HQLA, other non-HQLA securities that mature in one year or
more, and certain commodities.
Retail Mortgages That Mature in One Year or More and Are Assigned a
Risk Weight of Greater Than 50 Percent
Section __.106(a)(7)(i) of the proposed rule would have assigned an
85 percent RSF factor to retail mortgages that mature one year or more
from the calculation date and are assigned a risk weight of greater
than 50 percent under subpart D of the agencies' risk-based capital
rule. As noted above, under the agencies' risk-based capital rule, a
retail mortgage is assigned a 50 percent risk weight if it is secured
by a first lien on a one-to-four family property, prudently
underwritten, not 90 days or more past due or carried in nonaccrual
status, and has not been restructured or modified.\161\ Mortgages that
do not meet these criteria are assigned a risk weight of greater than
50 percent.\162\ The proposed rule would have treated these mortgages
as generally riskier than mortgages that receive a risk weight of 50
percent or less and would have required them to be supported by more
stable funding because of the possibility that they would be more
difficult to monetize.
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\161\ See supra note 159.
\162\ Under the agencies' risk-based capital rule, the risk
weight on mortgages may be reduced to less than 50 percent if
certain conditions are satisfied. In these cases, the final rule
assigns an RSF factor of 65 percent, which is the RSF factor
assigned to retail mortgages that mature in one year or more and are
assigned a risk weight of no greater than 50 percent. See 12 CFR
3.36 (OCC); 12 CFR 217.36 (Board); 12 CFR 324.36 (FDIC).
---------------------------------------------------------------------------
For the reasons discussed in the proposed rule, the final rule
assigns an 85 percent RSF factor to these mortgage exposures as
proposed.
Secured Lending Transactions, Unsecured Wholesale Lending, and Lending
to Retail Customers and Counterparties That Mature in One Year or More
and Are Assigned a Risk Weight of Greater Than 20 Percent
Section __.106(a)(7)(ii) of the proposed rule would have assigned
an 85 percent RSF factor to secured lending transactions, unsecured
wholesale lending, and lending to retail customers and counterparties
that are not otherwise assigned an RSF factor (such as retail
mortgages), that mature one year or more from the calculation date,
that are assigned a risk weight greater than 20 percent under subpart D
of the agencies' risk-based capital rule, and for which the borrower is
not a financial sector entity or consolidated subsidiary thereof.
Several commenters requested lower RSF factors for certain lending
transactions. For example, a few commenters argued that commercial real
estate mortgages should be assigned an RSF factor lower than 85 percent
because commercial real estate loans are low risk, and covered
companies already are subject to regulatory requirements related to
their real estate portfolios, which renders an RSF requirement
unnecessary. Another commenter requested the agencies reduce the RSF
factor for credit card exposures to customers who pay their entire
account balances each month. This commenter argued that credit card
exposures to these customers are analogous to short-term loans that
receive a 50 percent RSF factor.
The final rule retains the 85 percent RSF factor for this category
of lending. These loans mature in one year or more and have less
favorable liquidity and market characteristics, including greater
credit risk associated with higher risk weights under the agencies'
risk-based capital rule. Commercial real estate loans generally present
a higher risk profile, heightened vulnerability to changing market
conditions, and greater monetization difficulty than loans that are
assigned a lower RSF factor. Although commercial real estate lending is
subject to other regulations designed to promote safe and sound lending
practices, these regulations do not specifically address the funding
risks presented by these loans. Accordingly, the agencies consider the
85 percent RSF factor appropriate for these loans in order to ensure
covered companies maintain sufficient funding to support these assets.
In addition, the agencies decline to adopt a commenter's suggestion
to apply a lower RSF factor to credit card exposures to customers who
repay their entire account balances each month. Although some credit
card customers fully and regularly repay account balances, assigning
different RSF factors to credit card exposures based on a covered
company's assumptions of a credit card customer's future repayment
behavior would be inconsistent with the NSFR's purpose as a
standardized measure of funding stability. Accordingly, the final rule
assigns an 85 percent RSF factor to all credit card exposures that
mature in one year or more and have a risk weight of greater than 20
percent under the agencies' risk-based capital rule as proposed. The
agencies are clarifying, however, that contractual minimum payment
amounts due on credit card exposures would generally be considered to
be a loan to a retail customer maturing in less than one year and would
be subject to the 50 percent RSF factor.
Publicly Traded Common Equity Shares That Are Not HQLA and Other
Securities That Mature in One Year or More That Are Not HQLA
Sections __.106(a)(7)(iii) and (iv) of the proposed rule would have
assigned an 85 percent RSF factor to publicly traded common equity
shares that are not HQLA and other non-HQLA securities that mature one
year or more from the calculation date. For example, these assets would
have included equity shares not listed on a recognized exchange, low
rated corporate debt securities and municipal obligations, private-
label mortgage-backed securities, and other types of asset-backed
securities.
As described above, commenters generally expressed concern that the
proposed rule's assignment of RSF factors to equity shares was overly
conservative and not reflective of market haircuts for such securities.
Commenters, however, also expressed specific concerns related to the 85
percent RSF factor assigned to non-HQLA publicly traded common equity
shares and other securities that mature in one year or more. One
commenter expressed concern that higher RSF factors for non-HQLA
securities would be procyclical and incentivize covered companies to
sell non-HQLA securities in favor of HQLA securities in a crisis. Other
commenters argued that even though equity and debt securities issued by
a financial sector entity are precluded from qualifying as HQLA, these
assets should receive a lower RSF factor because there is no empirical
basis for assigning a higher RSF factor to securities issued by a
financial sector entity than to securities issued by a non-financial
sector entity. These commenters also asserted that the 85 percent RSF
factor would adversely impact capital flows to financial sector
entities, which would impair their ability to provide market-making and
other services. Another commenter argued that the 85 percent RSF factor
is overly conservative because it fails to take into account a bank's
ability to mitigate its exposure risk with liquid options, swaps, or
future instruments.
Several commenters also requested that lower RSF factors be
assigned to
[[Page 9164]]
specific types of equities and securities. For example, one commenter
recommended a 50 percent RSF factor for equities traded on an exchange
that are included in certain global stock indexes. Other commenters
requested lower RSF factors for certain private-label residential
mortgage-backed securities, commercial mortgage backed securities, and
certain asset-backed securities. Commenters argued that the 85 percent
RSF factor was overly punitive and would discourage covered companies
from holding these securities, which would impair the markets served by
these securities. Some of these commenters argued that residential
mortgage-backed securities, in particular, should receive the same RSF
treatment as level 2 liquid assets consistent with the Basel NSFR
standard and the EU NSFR rule. Other commenters requested lower RSF
factors for certain traditional securitizations, which commenters
asserted are safer assets as a result of certain changes to regulatory
requirements and rating agency protocols. One commenter recommended the
agencies examine recent initiatives by the BCBS and International
Organizations of Securities Commission to identify specific securities
that warrant lower RSF factors.
The final rule retains the 85 percent RSF factor for publicly
traded securities that are not HQLA and mature in one year or more.
Non-HQLA securities, including securities issued by financial sector
entities, historically have demonstrated greater price volatility and
lower marketability across market conditions than securities that
qualify as HQLA. Given this historical experience, it is appropriate to
assign a higher RSF factor to these securities than HQLA securities.
Although a banking organization may have some ability to mitigate its
risk exposure to these assets, the final rule is designed as a
standardized measure of the stability of a covered company's funding
profile and therefore does not take into account the company's
idiosyncratic risk management practices. With respect to the concern
that the 85 percent RSF factor would incentivize covered companies to
liquidate non-HQLA during a stress period, the 85 percent RSF factor
will reduce this risk because covered companies would be holding large
amounts of stable funding to support these assets, decreasing the need
to immediately monetize these assets.
For the reasons described above, the agencies decline to reduce the
RSF factor for certain types of securities which are not eligible as
HQLA, as requested by commenters. As previously explained, equities
that are not HQLA generally exhibit less favorable liquidity
characteristics relative to equities that qualify as HQLA, regardless
of the country location of the index or exchange on which that equity
is traded. Although specific issuances of private-label residential
mortgage-backed securities, commercial mortgage backed securities, or
asset-backed securities may exhibit liquidity characteristics similar
to HQLA, the final rule assigns RSF factors based on asset class to
ensure standardization and ease of comparability of the measure. These
securities can exhibit high price volatility, depending on the
performance of their underlying assets and specific contractual
features. In addition, the bespoke characteristics of securitization
structures may be tailored to a limited range of investors, which can
limit a banking organization's ability to monetize a given
securitization issuance. Although changes in regulatory requirements
and rating agency protocols regulations may have reduced certain risks
associated with certain securitizations, many of these assets do not
have a proven history of liquidity. As a result, the final rule assigns
an 85 percent RSF factor as proposed.
Commodities
Section __.106(a)(7)(v) of the proposed rule would have assigned an
85 percent RSF factor to commodities held by a covered company for
which a liquid market exists, as indicated by whether derivative
transactions for the commodity are traded on a U.S. board of trade or
trading facility designated as a contract market (DCM) under sections 5
and 6 of the Commodity Exchange Act \163\ or on a U.S. swap execution
facility (SEF) registered under section 5h of the Commodity Exchange
Act.\164\ The proposed rule would have assigned a 100 percent RSF
factor to all other commodities held by a covered company. The proposed
rule would have required a covered company to support its commodities
positions with a substantial amount of stable funding because, in
general, commodities as an asset class have historical material price
volatility.
---------------------------------------------------------------------------
\163\ 7 U.S.C. 7 and 7 U.S.C. 8.
\164\ 7 U.S.C. 7b-3.
---------------------------------------------------------------------------
The proposed rule would have assigned an 85 percent RSF factor,
rather than a 100 percent RSF factor, to commodities for which
derivative transactions are traded on a U.S. DCM or U.S. SEF because
the exchange trading of derivatives on a commodity tends to indicate a
greater degree of standardization, fungibility, and liquidity in the
market for the commodity.\165\ As noted in the Supplementary
Information section to the proposed rule, a market for a commodity for
which a derivative transaction is traded on a U.S. DCM or U.S. SEF is
more likely to have established standards (for example, with respect to
different grades of commodities) that are relied upon in determining
the commodities that can be provided to effect physical settlement
under a derivative transaction. In addition, the exchange-traded market
for a commodity derivative transaction generally increases price
transparency for the underlying commodity. A covered company could
therefore more easily monetize a commodity that meets this requirement
than a commodity that does not, either through the spot market or
through derivative transactions based on the commodity. The proposed
rule accordingly would have required less stable funding to support
holdings of commodities for which derivative transactions are traded on
a U.S. DCM or U.S. SEF than it would have required for other
commodities, which a covered company may not be able to monetize as
easily.
---------------------------------------------------------------------------
\165\ Examples of commodities that currently meet this
requirement are gold, oil, natural gas, and various agricultural
products.
---------------------------------------------------------------------------
One commenter argued that the stated rationale for assigning an 85
percent RSF factor to commodities traded on U.S. exchanges should apply
equally to commodities traded on non-U.S. exchanges. The commenter
requested that rather than assigning a 100 percent RSF factor to
commodities traded on non-U.S. exchanges, the final rule assign an 85
percent RSF factor to commodities that are traded on non-U.S. exchanges
that are registered in non-U.S. jurisdictions in order to provide
consistent treatment with commodities traded on a U.S. exchange. These
commodities, the commenter argued, have similar liquidity
characteristics to commodities traded on U.S. exchanges.
As noted by the commenter, commodities for which derivative
transactions are traded on exchanges registered outside the United
States may have a similar degree of liquidity as commodities for which
derivative transactions are traded on a U.S. DCM or U.S. SEF. To
provide consistent treatment of commodities traded on U.S. and non-U.S.
exchanges, the final rule assigns an 85 percent RSF factor to any
commodity held by a covered company for which derivative transactions
are
[[Page 9165]]
authorized to be traded on an U.S. DCM, U.S. SEF, or any other
exchange, whether located in the United States or in a jurisdiction
outside of the United States.\166\ The agencies note that covered
companies are limited in the types of physical commodities activities
in which they are able to engage. For example, the Board has approved
requests from certain financial holding companies to engage in certain
physical commodities trading activities for which derivative contracts
are approved for trading on a U.S. futures exchange by the U.S.
Commodity Futures Trading Commission (CFTC) (unless specifically
excluded by the Board) or other commodities that have been specifically
authorized by the Board under section 4(k)(1)(B) of the Bank Holding
Company Act of 1956.\167\ The legal restrictions applicable to bank
holding companies and financial holding companies under the BHC Act (as
well as restrictions applicable to national banks and state-chartered
banks under the National Bank Act and the FDI Act, respectively)
continue to apply, and the final rule does not grant a covered company
the authority to engage in any commodities activities not otherwise
permitted by applicable law.
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\166\ As with all derivatives, commodity derivatives are subject
to Sec. __.107 of the final rule.
\167\ 12 U.S.C. 1843(k)(1)(B). The types of commodities
permitted by the Board for financial holding companies generally are
assigned an 85 percent RSF factor under the final rule. For example,
under Board precedent, commodity trading activities involving any
type of coal would be permissible for a financial holding company,
even though the CFTC has authorized only Central Appalachian coal.
Therefore, under the final rule, the carrying value of any type of
coal would be assigned an 85 percent RSF factor. Any derivative
transaction based on coal, though, would be subject to Sec. __.107
of the final rule. With respect to commodities for which a
derivative is traded on a non-U.S. exchange, the agencies note that
such non-U.S. exchanges will be supervised by a prudential regulator
in the relevant jurisdiction.
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g) 100 Percent RSF Factor
All Other Assets Not Described Above
Section __.106(a)(8) of the proposed rule would have assigned a 100
percent RSF factor to all other performing assets not otherwise
assigned an RSF factor under Sec. __.106 or Sec. __.107. These assets
include, but are not limited to, loans to financial institutions
(including to an unconsolidated affiliate) that mature in one year or
more; assets deducted from regulatory capital; \168\ common equity
shares that are not traded on a public exchange; unposted debits; and
trade date receivables that have failed to settle within the lesser of
the market standard settlement period for the relevant type of
transaction, without extension of the standard settlement period, and
five business days from the date of the sale.
---------------------------------------------------------------------------
\168\ Assets deducted from regulatory capital include, but are
not limited to, goodwill, certain deferred tax assets, certain
mortgage servicing assets, and certain defined benefit pension fund
net assets. See 12 CFR 3.22 (OCC); 12 CFR 217.22 (Board); 12 CFR
324.22 (FDIC). These assets, as a class, tend to be difficult for a
covered company to readily monetize.
---------------------------------------------------------------------------
The agencies received a number of comments suggesting that certain
trade date receivables receiving a 100 percent RSF factor under the
proposed rule should receive a lower RSF factor. As described above,
several commenters opposed the proposal's assignment of a 100 percent
RSF factor to trade date receivables that fail to settle within the
lesser of five business days and the standard settlement period but are
still expected to settle. Another commenter argued that, in the case of
trade date receivables generated by primary offerings, settlement
delays reflect unique timing needs rather than increased funding risk.
Accordingly, the commenter recommended that the agencies assign a zero
percent RSF factor to trade date receivables generated by primary
offering settlements for the duration of the primary offering.
As described above, the agencies are amending the final rule to
assign a zero percent RSF factor to trade date receivables due to a
covered company that result from the sale of a financial instrument,
foreign currency, or commodity that are required to settle no later
than the market standard for the particular instrument, and have yet to
settle but are not more than five business days past the scheduled
settlement date. The final rule otherwise retains the assignment of a
100 percent RSF factor as proposed. Assets in this category do not
consistently exhibit liquidity characteristics that would suggest a
covered company should support them with anything less than full stable
funding.
Nonperforming Assets RSF Factor
Section __.106(b) of the proposed rule would have assigned a 100
percent RSF factor to any asset on a covered company's balance sheet
that is past due by more than 90 days or that has nonaccrual status.
Because these assets have an elevated risk of non-payment, these assets
tend to be illiquid regardless of their tenor. The agencies did not
receive any comments on this aspect of the proposal. Consistent with
the proposed rule, the final rule requires a covered company to assign
a 100 percent RSF factor to nonperforming assets.\169\
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\169\ The final rule's description of nonperforming assets in
Sec. __.106(b), like the proposed rule's description, is consistent
with the definition of ``nonperforming exposure'' in Sec. __.3 of
the LCR rule.
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h) RSF Factors for Encumbered Balance Sheet Assets
Consistent with the criteria used for assigning RSF factors
described above, the RSF factor that the proposed rule would have
assigned to an asset would have depended on whether or not the asset is
encumbered and the length of any encumbrance. As discussed in section
VI of this Supplementary Information section, the proposed rule would
have defined ``encumbered'' (a new defined term under Sec. __.3), as
the converse of the term ``unencumbered'' currently used in the LCR
rule. Encumbered assets must generally be retained for the period of
encumbrance and generally cannot be monetized during this period. Thus,
Sec. __.106(c) of the proposed rule would have assigned the RSF factor
to encumbered assets based on the tenor of the encumbrance.
The agencies received one comment regarding the potential impact of
the proposed rule's treatment of assets pledged for six months or
longer by a covered company to an FHLB under a blanket, but not asset-
specific, lien to secure an extension of credit to the covered company.
As is the case for an asset pledged to any other counterparty to
secure or provide credit enhancement to a transaction, a covered
company generally must retain or replace an asset pledged to an FHLB
during the period in which it is encumbered and cannot monetize the
asset while encumbered.\170\ However, where an asset of a covered
company is subject to a blanket, rather than asset-specific lien, in
favor of an FHLB, such asset would not be considered ``encumbered'' if
credit secured by the asset is not currently extended to the covered
company or its consolidated subsidiaries. Where credit has been
extended and is secured by a blanket
[[Page 9166]]
lien, a covered company may identify which specific assets covered by
the blanket lien secure the amount of extended credit, consistent with
the requirements of the LCR rule.
---------------------------------------------------------------------------
\170\ As discussed in section VI.B of this Supplementary
Information section, the final rule's definition of ``encumbered''
does not consider an asset to be encumbered solely because the asset
is pledged to a central bank or GSE to secure a transaction if (i)
potential credit secured by the asset is not currently extended to
the covered company or its consolidated subsidiaries and (ii) the
pledged asset is not required to support access to the payment
services of a central bank. The final rule's definition of
``encumbered'' does not include any substantive changes to the
concept of encumbrance included in the LCR rule. See 79 FR at 61469.
---------------------------------------------------------------------------
The final rule retains the treatment of encumbered assets as
proposed. Under the final rule, an asset that is encumbered for less
than six months from the calculation date is assigned the same RSF
factor as would be assigned to the asset if it were not encumbered
because the covered company will not need to retain the asset beyond
six months. For an asset that is encumbered for a period of six months
or more, but less than one year, the final rule assigns an RSF factor
equal to the greater of 50 percent and the RSF factor that would be
assigned if the asset were not encumbered. This treatment ensures that
a covered company's RSF amount reflects the effect of the encumbrance
on an asset that would be assigned a lower RSF factor if unencumbered
based on its tenor and other liquidity characteristics. Additionally,
the final rule assigns a 100 percent RSF factor to an asset that is
encumbered for a remaining period of one year or more because the asset
would be retained and unavailable to the covered company for the
entirety of the NSFR's one-year time horizon. Finally, in cases where
the duration of an asset's encumbrance exceeds the maturity of that
asset, the final rule assigns an RSF factor to the asset based on its
encumbrance period. For example, if a covered company provides a level
1 liquid asset security that matures in three months as collateral in a
one-year repurchase agreement, the covered company would need to
replace that security upon its maturity with another asset that meets
the requirements of the repurchase agreement. Thus, even though the
maturity of the asset currently provided as collateral is short-dated,
a covered company must fully support an asset with stable funding for
the duration of the one-year repurchase agreement. As a result, the RSF
factor determined by on the one-year encumbrance period.
Table 3 sets forth the RSF factors for assets that are encumbered.
Table 3--RSF Factors for Encumbered Assets
----------------------------------------------------------------------------------------------------------------
RSF factors for encumbered assets *
--------------------------------------------------------------------------
Asset encumbered <6 Asset encumbered >=6 Asset encumbered >=1
months months <1 year year
----------------------------------------------------------------------------------------------------------------
If RSF factor for unencumbered asset RSF factor for the 50 percent............. 100 percent.
is <=50 percent:. asset as if it were
unencumbered.
If RSF factor for unencumbered asset RSF factor for the RSF factor for the 100 percent.
is >50 percent:. asset as if it were asset as if it were
unencumbered. unencumbered.
----------------------------------------------------------------------------------------------------------------
* If the remaining encumbrance period exceeds the effective maturity of the asset, the final rule assigns an RSF
factor to the asset based on its encumbrance period.
i) Assets Held in Certain Customer Protection Segregated Accounts
Section __.106(c)(3) of the proposed rule would have specified that
an asset held in a segregated account maintained pursuant to statutory
or regulatory requirements for the protection of customer assets would
not have been considered to be encumbered solely because it is held in
such a segregated account.\171\ Instead, the proposed rule would have
assigned an asset held in such a segregated account the RSF factor that
would be assigned to the asset under Sec. __.106 if it were not held
in a segregated account. For example, a covered company must segregate
customer free credits, which are customer funds held prior to their
investment, until the customer decides to invest or withdraw the funds.
The proposed rule would have treated the funds that a covered company
places on deposit with a third-party depository institution in
accordance with segregation requirements as a short-term loan to a
financial sector entity, which would have been assigned a 15 percent
RSF factor.
---------------------------------------------------------------------------
\171\ For example, the proposed rule would not consider an asset
held pursuant to the SEC's Rule 15c3-3 (17 CFR 240.15c3-3) or the
CFTC's Rule 1.20 or Part 22 (17 CFR 1.20; 17 CFR part 22) to be
encumbered solely because it is held in a segregated account.
---------------------------------------------------------------------------
Several commenters argued that segregated client assets should have
no stable funding requirement because, among other reasons, they
already are funded by liabilities to the client and pose limited
funding risks to covered companies. Some commenters noted that SEC and
CFTC rules require client assets to be segregated and accounted for
separately from the covered company's assets, protected from the
bankruptcy of the covered company, and held in cash or other limited
investments. Commenters also argued that segregated client assets
should be treated analogously to currency and coin, which are assigned
a 0 percent RSF factor. One commenter argued that the proposed
treatment for segregated client assets would conflict with the
treatment of such assets under the LCR rule, which recognizes some
inflows from anticipated changes in the value of segregated client
accounts and 100 percent outflows for non-operational deposits placed
by financial institution counterparties.
Several commenters claimed that requiring stable funding for
segregated client assets would inappropriately incentivize covered
companies to maintain such balances in non-cash form (e.g., U.S.
Treasury securities) rather than hold them in a deposit account at a
third-party bank in order to reduce the RSF factor. Other commenters
expressed concern that covered companies may pass the cost of
maintaining stable funding for segregated client assets on to the
client or stop providing services that require segregated accounts.
The agencies are finalizing the treatment of customer segregated
account assets as proposed.\172\ As discussed in section V.C of this
Supplementary Information section, the NSFR applies to a covered
company's entire balance sheet, does not differentiate between assets
based on business line or the reason for which they are held, and is
not designed to mirror the treatment of assets under the LCR rule.
Regulatory or contractual requirements to segregate certain assets for
the benefit of customers do not necessarily reduce a covered company's
funding risks relative to holding the same assets absent segregation,
based on the covered company's funding stability relative to the tenor
and other liquidity characteristics of its assets. The NSFR measure
generally utilizes the carrying value of assets where possible and,
[[Page 9167]]
consistent with GAAP, does not distinguish segregated balance sheet
assets from other assets, except to the extent the final rule does not
consider assets to be encumbered solely as a result of segregation.
Additionally, regulatory requirements to hold specified amounts of
assets for clients, in the form of cash, limited investments, or other
assets, may result in a covered company holding additional assets
relative to the absence of such regulatory requirements and the need to
fund such assets is treated consistently in the final rule relative to
assets of the same type. For example, the covered company may hold, and
need to fund, identical level 1 liquid asset securities for the purpose
of customer protection and as a hedging instrument to provide
protection to the covered company; therefore, the final rule would
assign the RSF factor corresponding to the level 1 liquid asset
securities. Further, the NSFR applies to an aggregate balance sheet and
generally does not associate specific assets with specific
funding.\173\ For example, the NSFR does not associate aggregate
deposit placements for the protection of clients collectively that may
be funded with individual liabilities due to certain clients, as
described by commenters.
---------------------------------------------------------------------------
\172\ Comments requesting treatment as interdependent assets and
liabilities are discussed in section VII.H of this Supplementary
Information section.
\173\ The final rule does include certain netting of specific
assets against certain liabilities as described in sections VII.A.2
and VII.E.2 of this Supplementary Information section.
---------------------------------------------------------------------------
As discussed above, the final rule assigns a zero percent RSF
factor to unencumbered level 1 liquid assets and generally assigns a 15
percent RSF factor to a deposit placed at a third-party financial
institution with a remaining maturity of less than six months, based on
the tenor and other liquidity characteristics of these assets. A
covered company's requirement to comply with certain customer
protection segregation requirements that result in a deposit at a
third-party financial institution does not, by itself, adjust the tenor
of such a placement or serve to improve the covered company's ability
to withdraw the funds or otherwise monetize the asset in comparison to
other deposits placed with a third-party banking organization. For
example, unlike coin and currency, a covered company cannot directly
use customer segregated account assets to satisfy its own
obligations.\174\
---------------------------------------------------------------------------
\174\ See section VII.D.3.a of this Supplementary Information
section.
---------------------------------------------------------------------------
For these reasons, it would not be appropriate to assign a zero
percent RSF factor to assets based on their segregated status and an
asset held in this type of segregated account is assigned the RSF
factor that would be assigned to the asset under Sec. __.106 as if it
was not held in a segregated account.
4. Treatment of Rehypothecated Off-Balance Sheet Assets
As discussed in section V of this Supplementary Information
section, the NSFR calculation is based on the carrying value of assets
on a covered company's balance sheet consistent with GAAP. However,
certain assets that can affect a covered company's aggregate funding
risks may not be included on a covered company's balance sheet under
GAAP. The proposed rule, therefore, would have included provisions to
address the funding risks associated with certain off-balance sheet
assets that a covered company may obtain through lending transactions,
asset exchanges, or other transactions. These assets can affect a
covered company's balance sheet risk profile where they are
rehypothecated and used to obtain funding. For example, a covered
company may use off-balance sheet assets to generate funding. The
assignment of an ASF factor to this liability without recognizing the
encumbrance placed on a covered company's balance sheet would distort
the NSFR assessment of a covered company's overall balance sheet risks.
Therefore, it is appropriate that such reuse of off-balance sheet
assets should be associated with an appropriate contribution to a
covered company's RSF amount regardless of the source of the assets.
This is especially the case if the off-balance sheet asset is
encumbered to generate funding that has a longer tenor than the
transaction through which the off-balance sheet asset was sourced. In
that case, a covered company may need to roll over the transaction
through which it obtained the off-balance sheet asset before the
encumbrance of the asset terminates. Alternatively, the covered company
may need to obtain a replacement asset to close out the sourcing
transaction under which it obtained the asset before the encumbrance
expires. Under either approach, the covered company must fund an asset
for the duration of the encumbrance.
Section __.106(d) of the proposed rule specified how a covered
company would have assigned an RSF factor to a transaction involving an
off-balance sheet asset that secures an NSFR liability or the sale of
an off-balance sheet asset that results in an NSFR liability (for
instance, in the case of a short sale). The proposed rule would have
assigned an RSF factor to a receivable of a lending transaction, a
security provided in an asset exchange, or to the off-balance sheet
asset itself depending on the transaction through which the covered
company obtained the off-balance sheet asset. Specifically, for an off-
balance sheet asset obtained under a lending transaction, Sec.
__.106(d)(1) of the proposed rule would have assigned an RSF factor to
the receivable of the lending transaction as if it were encumbered for
the longer of (1) the remaining maturity of the NSFR liability secured
by or resulting from the sale of the off-balance sheet asset and (2)
any other encumbrance period already applicable to the lending
transaction. For an off-balance sheet asset obtained through an asset
exchange, Sec. __.106(d)(2) of the proposed rule would have assigned
an RSF factor to the asset provided by the covered company in the asset
exchange as if it were encumbered for the longer of (1) the remaining
maturity of the NSFR liability secured by or resulting from the sale of
the off-balance sheet asset and (2) any other encumbrance period
applicable to the provided asset. For an off-balance sheet asset not
obtained under either a lending transaction or asset exchange, Sec.
.106(d)(3) of the proposed rule would have assigned an RSF factor to
the off-balance sheet asset as if it were encumbered for the longer of
(1) the remaining maturity of the NSFR liability secured by or
resulting from the sale of the off-balance sheet asset and (2) any
other encumbrance period applicable to the off-balance sheet asset.
The agencies received several comments on the proposed treatment of
rehypothecated off-balance sheet assets under Sec. __.106(d) of the
proposed rule. Commenters argued that the proposed treatment would be
inconsistent with the concept of the NSFR as a balance-sheet metric
because it would assign RSF factors based on assets not included on the
covered company's balance sheet under GAAP. Some commenters also argued
that the agencies should not adopt the proposed treatment because it
would result in stable funding requirements that would be greater than
specified under the Basel NSFR standard. Commenters also argued that
the proposed rule lacked a clear empirical foundation for the treatment
of rehypothecated off-balance sheet assets. One commenter argued that
the proposed treatment would result in the assignment of ASF and RSF
factors that do not accurately reflect the funding risk of the
underlying transactions. One commenter objected to the proposed
treatment for rehypothecated off-balance sheet assets received in an
asset exchange, asserting
[[Page 9168]]
that the final rule should assign an ASF factor to the value of the
asset received in an asset exchange, based on the type of asset and the
remaining maturity of the asset exchange. Another commenter asserted
that asset exchanges enable a covered company to manage its collateral
at reduced funding costs and lower funding risks, so the proposed
treatment of rehypothecated off-balance sheet assets received in an
asset exchange is unnecessary to achieve the agencies' stated goal of
ensuring that off-balance sheet assets are not used to generate ASF
while not reducing the covered company's overall funding risk.
Commenters requested additional clarification as to the scope of
activities intended to be covered by Sec. __.106(d) of the proposed
rule, in particular by proposed Sec. __.106(d)(3), which would have
addressed off-balance sheet assets that are sourced through all other
types of transactions. One of these commenters stated that proposed
Sec. __.106(d)(3) is extremely punitive and could lead to unintended
consequences.
Another commenter asserted that it would be operationally difficult
to comply with Sec. __.106(d) of the proposed rule if a covered
company is required to link each source and use of off-balance sheet
assets to on-balance sheet assets and liabilities. This commenter also
suggested that the final rule should recognize the benefits to a
covered company of collateral substitution rights, for example, where a
covered company has provided two assets to a single counterparty or a
single tri-party repurchase agreement intermediary to secure two
separate NSFR liabilities, and the covered company has the operational
and legal capability to determine the allocation of the assets to each
NSFR liability.
To address the funding risks presented when a covered company has
an NSFR liability that is secured by, or results from the sale of, an
off-balance sheet asset and to prevent distortion of the NSFR metric,
the agencies are finalizing the treatment of rehypothecated off-balance
sheet assets under Sec. __.106(d) generally as proposed, but are
narrowing the scope of the section such that Sec. __.106(d) does not
apply to off-balance sheet assets received as variation margin under a
derivative transaction. The agencies also are modifying Sec.
__.106(d)(3), as explained in this Supplementary Information section.
As noted by commenters, the NSFR is a balance-sheet metric, and the
treatment for rehypothecated off-balance sheet assets under the final
rule assigns RSF factors to assets recorded on a covered company's
balance sheet, rather than to off-balance sheet assets. The agencies
also note that the BCBS clarified the treatment of certain off-balance
sheet assets under the Basel NSFR standard as a result of
rehypothecation, which is generally consistent with the treatment under
the final rule.\175\
---------------------------------------------------------------------------
\175\ BCBS, ``Basel III--The Net Stable Funding Ratio:
frequently asked questions,'' February 2017, available at https://www.bis.org/bcbs/publ/d396.pdf.
---------------------------------------------------------------------------
a) Off-Balance Sheet Assets Obtained in Lending Transactions
Where a covered company obtains an off-balance sheet asset through
a lending transaction,\176\ the lending transaction will be included as
a receivable asset on the covered company's balance sheet. Under Sec.
__.106(d)(1) of the final rule, if a covered company obtained an off-
balance sheet asset through a lending transaction (e.g., a reverse
repurchase agreement), the final rule treats the balance sheet
receivable associated with the lending transaction as encumbered for
the longer of: (1) The remaining maturity of the NSFR liability secured
by the off-balance sheet asset (e.g., a repurchase agreement) or
resulting from the sale of the off-balance sheet asset (e.g., a short
sale), as the case may be, and (2) any other encumbrance period already
applicable to the lending transaction. The remaining maturity of the
liability secured by the off-balance sheet asset, or resulting from the
sale of the off-balance sheet asset, restricts the ability of a covered
company to monetize the lending transaction receivable and the lending
receivable is therefore treated as encumbered.\177\ For example, Sec.
__.106(d)(1) applies if a covered company obtains a level 2A liquid
asset as collateral under an overnight reverse repurchase agreement
with a financial counterparty and subsequently pledges the level 2A
liquid asset as collateral in a repurchase transaction with a maturity
of one year or more but, consistent with GAAP, does not include the
level 2A liquid asset on its balance sheet. In this case, the final
rule treats the covered company's balance-sheet receivable associated
with the reverse repurchase agreement as encumbered for a period of one
year or more, since the remaining maturity of the repurchase agreement
secured by the rehypothecated level 2A liquid asset is one year or
more. Accordingly, the final rule assigns the reverse repurchase
agreement receivable an RSF factor of 100 percent (under Sec.
__.106(c)(1)(iii)) instead of 15 percent (under Sec. __.106(a)(3)(i)).
---------------------------------------------------------------------------
\176\ As described in section VI.A.2 of this Supplementary
Information section, the final rule defines the term ``secured
lending transaction'' to mean any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the covered
company that is secured under applicable law by a lien on securities
or loans provided by the wholesale customer or counterparty, which
gives the covered company, as holder of the lien, priority over the
securities or loans. Section .__106(d)(1) applies to an off-balance
sheet asset obtained under any lending transaction, regardless of
the nature of the counterparty or the off-balance sheet asset. For
the purposes of this section of this Supplementary Information
section, a lending transaction is not an asset exchange or a
derivative transaction.
\177\ As described in section VI.B of this Supplementary
Information section, the final rule includes a new definition of
``Encumbered'' based on any legal, regulatory, contractual or other
restrictions on the ability of a covered company to monetize an
asset. See Sec. __.3 of the LCR rule.
---------------------------------------------------------------------------
A commenter asserted that this type of position poses less funding
risk, because the on-balance sheet receivable has a shorter maturity
than the liability and the off-balance sheet asset is highly liquid.
However, the asset funding need for this type of transaction is driven
by the obligation to continue to collateralize the liability for a
period of one year or more relative to the short-term sourcing
transaction rather than the liquidity characteristics of the asset
pledged. Therefore, the effective funding need of the receivable
associated with the asset pledged must take into account the one-year
period of encumbrance, consistent with a 100 percent RSF factor.
b) Off-Balance Sheet Assets Obtained in an Asset Exchange
Where a covered company provides a security in an asset exchange,
the security provided remains on the covered company's balance sheet
under GAAP. However, the security received by the covered company in
the asset exchange may be an off-balance sheet asset under GAAP (for
example, because the covered company acted as a securities borrower in
the asset exchange). Under Sec. __.106(d)(2) of the final rule, if a
covered company obtains an off-balance sheet asset under an asset
exchange and has an NSFR liability secured by, or resulting from the
sale of, the off-balance sheet asset, the final rule treats the on-
balance sheet asset provided by the covered company in the asset
exchange as encumbered for the longer of: (1) The remaining maturity of
the NSFR liability secured by the off-balance sheet asset or resulting
from the sale of the off-balance asset, as the case may be, and (2) any
encumbrance period already applicable to the provided asset. For
example, assume a covered company, acting as a securities borrower,
provides a level 2A liquid asset as collateral and obtains a level 1
liquid asset security under an asset
[[Page 9169]]
exchange with counterparty A and with a remaining maturity of six
months, and subsequently provides the level 1 liquid asset security as
collateral to secure a repurchase agreement with counterparty B and
that matures in one year or more. In such a case, the covered company
typically would not include the level 1 liquid asset security on its
balance sheet.\178\ Under Sec. __.106(d)(2) of the final rule, the
level 2A liquid asset provided by the covered company (which remains on
the covered company's balance sheet) is treated as encumbered for a
period of one year or more (equal to the remaining maturity of the
repurchase agreement secured by the rehypothecated level 1 liquid asset
security) instead of six months (equal to the remaining maturity of the
asset exchange) and the carrying value of the level 2A liquid asset
provided is assigned an RSF factor of 100 percent (in accordance with
Sec. __.106(c)(1)(iii)) instead of 50 percent.
---------------------------------------------------------------------------
\178\ Under GAAP, where a covered company acting as a securities
borrower engages in an asset exchange, the asset provided by the
covered company typically remains on the covered company's balance
sheet while the received asset, if not rehypothecated, would not be
on the covered company's balance sheet. To the extent a covered
company includes on its balance sheet an asset received in an asset
exchange and the covered company subsequently uses the on-balance
sheet asset as collateral to secure a separate NSFR liability, Sec.
__.106(d) of the final rule does not apply. For example, if a
covered company acts as a securities lender in an asset exchange and
recognizes the collateral securities received on its balance sheet,
the covered company should treat those collateral securities
received as encumbered if the covered company sells or
rehypothecates the collateral securities received, taking into
account the remaining maturity of the transaction in which they have
been rehypothecated. While the covered company should treat the
securities it provided in the asset exchange as encumbered, the
covered company would not be required to treat the securities it
provided in the original asset exchange as encumbered for a period
other than the remaining maturity of the asset exchange. The on-
balance sheet asset used as collateral to secure the NSFR liability
is assigned an RSF factor in the same manner as other assets on the
covered company's balance sheet (including by taking into account
the asset's encumbrance) pursuant to Sec. Sec. __.106(a) through
(c) or Sec. __.107 of the final rule, as applicable. See section
VII.A.3 of this Supplementary Information section for assets
received that remain unencumbered and section VII.D.3.h of this
Supplementary Information section for any balance sheet assets that
are encumbered.
---------------------------------------------------------------------------
With regard to comments that the final rule should recognize the
funding value of the off-balance sheet asset received in an asset
exchange (in the example above where the covered company acts a
securities borrower, the level 1 liquid asset) and for the reasons
described in section VII.A.3 of this Supplementary Information section,
the final rule provides that a covered company must assign an RSF
factor to the on-balance sheet asset provided (in the example above,
the level 2A liquid asset) rather than the off-balance sheet asset
received because the on-balance sheet asset is a component of the
covered company's aggregate funding need at the calculation date.
Unlike the LCR rule, where an off-balance sheet asset received in an
asset exchange can potentially qualify as eligible HQLA available to
satisfy short-term cash-flow needs, the NSFR is a measure of the
stability of a covered company's funding profile relative to its
assets. As discussed in section V of this Supplementary Information
section, the final rule generally does not consider the future
availability of an asset as a source of liquidity and assigns RSF
factors to assets rather than ASF factors as suggested by commenters.
c) Off-Balance Sheet Assets Obtained Through Other Transactions
Where a covered company obtains an off-balance sheet asset through
a transaction that is not a lending transaction or an asset exchange
(source transaction), there is the potential that the covered company
might not record the source transaction on its balance sheet. At the
same time, the covered company may rehypothecate the off-balance sheet
asset obtained in the source transaction to obtain funding and generate
an NSFR liability. This funding could increase the covered company's
ASF amount, depending on the maturity and other characteristics of the
NSFR liability, without the source transaction or the off-balance sheet
asset itself being reflected in its RSF amount. However, due to the
rehypothecation of the off-balance sheet asset, a covered company may
record a liability to return the asset to the counterparty of the
source transaction or a liability secured by the off-balance sheet
asset.\179\ Further, the covered company may need to roll over the
source transaction if this transaction matures before the encumbrance
of the rehypothecated asset terminates. Alternatively, the covered
company may need to obtain a replacement asset to close out the source
transaction before the encumbrance expires.
---------------------------------------------------------------------------
\179\ If the NSFR liability is a short sale that is booked on an
open basis or otherwise has a remaining maturity of less than six
months, the asset resulting from the NSFR liability would be treated
as unencumbered.
---------------------------------------------------------------------------
To address this risk and prevent potential distortions of the NSFR,
under Sec. __.106(d)(3) of the final rule, if a covered company has an
off-balance sheet asset that it did not obtain under either a lending
transaction or an asset exchange, the covered company is required to
treat any associated on-balance sheet asset resulting from the
rehypothecation transaction as encumbered for a period equal to the
greater of the remaining maturity of the NSFR liability or the
encumbrance of the source transaction. This provision would apply to
any proceeds that appeared on a covered company's balance sheet as a
result of a rehypothecation transaction. For example, if a covered
company rehypothecates an off-balance sheet asset for a period of one
year more and receives cash as proceeds of the rehypothecation, the
covered company would be required to treat the cash received as
encumbered and assigned a 100 percent RSF factor. Covered companies are
not required to treat the off-balance sheet asset as if the off-balance
sheet asset was included on a company's balance sheet. Even if a
covered company reuses the proceeds of the rehypothecated transaction,
the covered company should still apply an RSF factor, based on the
encumbrance, to the on-balance sheet asset that was the direct result
of the transaction. Without this treatment, a covered company's RSF
amount would not reflect the funding risk that the covered company must
maintain the asset, or a similar asset, or the fact that the covered
company has limited its ability to monetize or recognize inflows from
the source transaction for the duration of the rehypothecation.
Additionally, Sec. __.106(d)(3) of the proposed rule would have
applied in the case of an NSFR liability secured by, or resulting from
the sale of, an off-balance sheet asset that a covered company had
received in the form of variation margin under a derivative
transaction. The final rule modifies the proposal by not subjecting
assets received as variation margin under a derivative transaction to
the requirements of Sec. __.106(d).\180\ Excluding such variation
margin from Sec. __.106(d) of the final rule is appropriate because
the final rule accounts for variation margin within the derivatives RSF
amount calculation specified in Sec. __.107.\181\ Section __.106(d)(3)
of the final rule therefore
[[Page 9170]]
applies where a covered company has rehypothecated an off-balance sheet
asset not received under a lending transaction or asset exchange or as
variation margin under a derivative transaction. For example, the
agencies note that Sec. __.106(d)(3) of the final rule applies if a
covered company obtains an asset as initial margin under a derivative
transaction or borrows an asset for a fee without providing collateral
and uses the asset to generate an NSFR liability without including the
asset on its balance sheet under GAAP.
---------------------------------------------------------------------------
\180\ This treatment applies to both assets received as
variation margin necessary to cover the current exposure of a
derivative or derivative netting set and variation margin received
in excess of such an amount.
\181\ Section __.107 of the final rule provides for netting of
certain rehypothecatable level 1 liquid assets received as variation
margin by the covered company against the value of the underlying
derivative asset for purposes of a covered company's derivatives RSF
amount. See section VII.E.2 of this Supplementary Information
section. The final rule's modifications to Sec. __.106(d)(3) of the
proposed rule are consistent with Sec. __.107 of the final rule.
Table 4--Treatment of Off-Balance Sheet Assets
------------------------------------------------------------------------
------------------------------------------------------------------------
Transaction through which a covered RSF factor is applied to the
company obtains an off-balance sheet following on-balance sheet
asset (source transaction) and whether asset, taking into account the
the asset is subsequently used in a remaining maturity of the NSFR
transaction to generate a NSFR liability and the encumbrance
liability. period of the source
transaction.
Off-balance sheet asset received in any No RSF factor applied.
source transaction and is not
rehypothecated.
Off-balance sheet asset received in a RSF factor is applied to on-
lending transaction and subsequently balance sheet lending
used to generate a NSFR liability. transaction receivable under
Sec. __.106(d)(1).
Off-balance sheet asset received in an RSF factor is applied to the on-
asset exchange (e.g., where a covered balance sheet asset provided
company acts as securities borrower) in the asset exchange under
subsequently used to generate a NSFR Sec. __.106(d)(2).
liability *.
Off-balance sheet asset received as See derivative treatment under
variation margin under a derivative Sec. __.107 of the final
transaction. rule.
Off-balance sheet asset received in a RSF factor is applied to the on-
source transaction other than a balance sheet asset resulting
lending transaction, or asset from the NSFR liability under
exchange, and the asset is not Sec. __.106(d)(3).
received as variation margin under a
derivative transaction, and
subsequently used to generate a NSFR
liability.
------------------------------------------------------------------------
* For assets received in an asset exchange recorded on balance sheet
(e.g., when a covered company acts as a securities lender) see
sections VII.A.3 and VII.D.3.h of this Supplementary Information
section.
Consistent with the proposed rule, Sec. __.106(d) of the final
rule does not apply in cases where a covered company has an NSFR
liability secured by, or resulting from the sale of, an on-balance
sheet asset.
d) Technical and Operational Clarifications
(i) Amounts of Rehypothecated Off-Balance Sheet Assets Relative to
Transactions Through Which the Assets Are Obtained
If the value of rehypothecated off-balance sheet assets obtained in
lending transactions or asset exchanges is less than the carrying value
of the on-balance sheet receivables for the lending transactions or
assets provided under the asset exchanges, respectively, the covered
company should treat the value of the receivables or assets provided as
encumbered in an amount equivalent to the value of the rehypothecated
off-balance sheet assets, for purposes of Sec. Sec. __.106(d)(1) and
(2).\182\ This treatment recognizes that when a covered company
rehypothecates only a portion of the value of off-balance sheet assets
obtained in a lending transaction or an asset exchange, it would be
overly conservative to apply an RSF factor based on such encumbrance to
the entire value of the lending transaction receivable, or to the full
value of assets provided in the asset exchange, as applicable.
Accordingly, the covered company need not treat the entire value of the
receivables or assets provided as encumbered.
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\182\ A covered company would assign appropriate RSF factors to
the value of the lending transaction receivables, or assets provided
in the asset exchanges, equivalent to the value of the
rehypothecated off-balance sheet assets based on the appropriate
encumbrance periods and categories of RSF factors under Sec. __.106
of the final rule.
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Conversely, the value of rehypothecated off-balance sheet assets
received by a covered company in a lending transaction, asset exchange,
or other transaction might exceed the value of the on-balance sheet
receivable for the lending transaction, the assets provided under the
asset exchange, or the asset resulting from the NSFR liability,
respectively. In such cases, a covered company potentially could
rehypothecate an amount of off-balance sheet assets to produce an NSFR
liability that exceeds the value of the on-balance sheet lending
transaction receivable or assets provided (excess rehypothecated
assets). Under the final rule, on-balance sheet assets resulting from
the rehypothecation of the off-balance sheet assets are assigned the
appropriate RSF factor consistent with other on-balance sheet assets.
Covered companies should use appropriate and justifiable assumptions in
identifying and attributing the sources and uses of off-balance sheet
assets, including excess rehypothecated assets, consistent with the
operational clarifications below.
(ii) Operational Clarifications
With regard to a commenter's concerns about the operational burden
associated with linking assets and liabilities for purposes of Sec.
__.106(d), if a covered company provides an asset as collateral, and
the covered company operationally could have provided either an off-
balance sheet asset or the same security in the form of on-balance
sheet asset, the final rule permits the covered company to identify
either the off-balance sheet asset or the on-balance sheet asset as the
provided collateral for purposes of determining encumbrance treatment
under Sec. Sec. __.106(c) and (d). Similarly, if a covered company
operationally could have provided either of two equivalent off-balance
sheet assets, one received under a lending transaction and the other
under an asset exchange, the final rule does not restrict the covered
company's ability to identify either asset as the provided collateral
for purposes of determining encumbrance treatment under Sec.
__.106(d). In either case, the covered company's identification for
purposes of Sec. Sec. __.106(c) and __.106(d) must be consistent with
contractual and other applicable requirements on the relevant
calculation date. The same treatment would apply for a covered
company's use of a security as collateral and the covered company's
ability to identify whether the security is already owned by the
covered company or is an identical security received from a lending
transaction, asset exchange, or other transaction.
For example, if a covered company receives a security in a reverse
repurchase agreement that is identical to a security the covered
company already owns, and the covered company provides one of these
securities as collateral to secure a repurchase
[[Page 9171]]
agreement, the final rule permits the covered company to identify, for
purposes of determining encumbrance treatment under Sec. Sec.
__.106(c) and (d), either the owned security or the security received
in the reverse repurchase agreement as the encumbered collateral for
the repurchase agreement, provided that the covered company had the
operational and legal capability to provide either one of the
securities as of the calculation date. If the covered company chooses
to treat the off-balance sheet security received in connection with the
reverse repurchase agreement as the collateral securing the repurchase
agreement at the calculation date, Sec. __.106(d)(1) would apply and
the covered company would treat the reverse repurchase agreement as
encumbered for purposes of assigning an RSF factor. If the covered
company instead chooses to treat the owned security as the collateral
encumbered by the repurchase agreement, the covered company would apply
the appropriate RSF factor (reflecting the encumbrance) to the owned
security under Sec. __.106(c) and no additional adjustment would need
to be made to the encumbrance of the reverse repurchase agreement under
Sec. __.106(d).
The agencies anticipate that a covered company would be able to
comply with this section based on aggregate information (because much
of the data is currently collected and monitored for other purposes,
including the FR 2052a and compliance with the LCR rule) rather than
through transaction-by-transaction tracking. For example, a covered
company may determine its requirements under Sec. Sec. __.106(c) and
__.106(d) based on the aggregate value of an asset class pledged at
each of the NSFR rule's encumbrance periods (less than six months, six
months or more but less than one year, or one year or more); the
aggregate value of the asset class on the covered company's balance
sheet; and the values and maturity categories of balance sheet
receivables or assets provided by the covered company under
transactions sourcing each type of borrowed asset.\183\ The agencies
expect this approach to substantially limit any incremental operational
costs of compliance for covered companies.
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\183\ In the case of securities, this approach would involve a
covered company identifying its aggregate encumbrances by each
security identifier (e.g., CUSIP or ISIN) for each of the NSFR's
encumbrance periods; the aggregate value held in a covered company's
inventory by each security identifier; and the aggregate value of
on-balance sheet receivables or assets associated with transactions
sourcing each security identifier. Since the NSFR generally applies
the same funding requirement to all transaction types that have
similar counterparty, collateral and maturity characteristics (e.g.,
a margin loan to a financial sector entity maturing in six months
and a reverse repo to a financial sector entity maturing in six
months would have the same funding requirement), a covered company
may consider transactions that are treated equivalently by the NSFR
in aggregate when calculating the receivable amounts that are
subject to Sec. __.106(d) of the final rule.
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In addition, when the covered company has provided two assets to a
single counterparty to secure two different NSFR liabilities, and the
covered company had the sole legal right and operational capability to
determine the allocation of the collateral provided to each of the NSFR
liabilities at the calculation date, the final rule permits the covered
company to identify which asset secures which NSFR liability for
purposes of determining encumbrance treatment under Sec. Sec.
__.106(c) and __.106(d). As an example, assume that a covered company
enters into two secured funding transactions with a single counterparty
(or with a single tri-party repo intermediary), one with an overnight
maturity and one with a maturity of one year, and provides level 2A
liquid assets as collateral for one secured funding transaction and
level 2B liquid assets as collateral for the second secured funding
transaction. If the covered company had the legal right and operational
capability to allocate the provided level 2A and level 2B liquid assets
between the two secured funding transactions, the final rule permits
the covered company to identify which of the securities are encumbered
for a period of one year and which are encumbered overnight for
purposes of Sec. Sec. __.106(c) and __.106(d). As described above, the
covered company's determinations for purposes of these sections must be
consistent with contractual and other applicable requirements,
including accounting treatment.\184\ Similar considerations apply where
a covered company has borrowed an asset of one type from a counterparty
pursuant to an asset borrowing transaction and the covered company has
the legal right and operational capability to substitute another type
of asset to return.
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\184\ Covered companies may allocate collateral encumbered at
the calculation date between transactions secured by such collateral
based on the eligibility of the currently encumbered pool of
collateral using justifiable and consistent assumptions. For the
purposes of Sec. __.106 of the final rule, a covered company should
not make assumptions regarding the potential future substitution of
encumbered collateral with other assets.
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E. Derivative Transactions
The proposed rule would have required a covered company to maintain
stable funding to support its on-balance sheet derivative activities.
Under the proposed rule, a covered company would have calculated its
required stable funding amount relating to its derivative transactions
\185\ (derivatives RSF amount) separately from its other assets,
commitments, and liabilities due to the variable nature and generally
more complex features of derivative transactions relative to other on-
balance sheet assets and liabilities of covered companies.\186\ For
similar reasons, the proposed rule would not have separately treated
derivative liabilities in excess of derivative assets as available
stable funding to support non-derivative assets and commitments, as
described below.
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\185\ As defined in Sec. __.3 of the LCR rule, ``derivative
transaction'' means a financial contract whose value is derived from
the values of one or more underlying assets, reference rates, or
indices of asset values or reference rates. Derivative contracts
include interest rate derivative contracts, exchange rate derivative
contracts, equity derivative contracts, commodity derivative
contracts, credit derivative contracts, forward contracts, and any
other instrument that poses similar counterparty credit risks.
Derivative contracts also include unsettled securities, commodities,
and foreign currency exchange transactions with a contractual
settlement or delivery lag that is longer than the lesser of the
market standard for the particular instrument or five business days.
A derivative does not include any identified banking product, as
that term is defined in section 402(b) of the Legal Certainty for
Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to
section 403(a) of that Act (7 U.S.C. 27a(a)).
\186\ The proposed rule would have included mortgage commitments
that are derivative transactions in the general derivative
transactions treatment, in contrast to the LCR rule, which excludes
those transactions and applies a separate, self-contained mortgage
commitment treatment. See Sec. Sec. __.32(c) and (d) of the LCR
rule.
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Under the proposed rule, a covered company's derivatives RSF amount
would have consisted of three general components, each described
further below: (1) A component reflecting the current net value of a
covered company's derivative assets and liabilities, taking into
account variation margin provided by and received by the covered
company (current net value component); (2) a component to account for
initial margin provided by a covered company for its derivative
transactions and assets contributed by a covered company to a CCP's
mutualized loss-sharing arrangement in connection with cleared
derivative transactions (initial margin component); and (3) a component
to account for potential future derivatives valuation changes (future
value component). For the current net value component, a covered
company would have netted its derivatives transactions and certain
variation margin amounts to identify whether the current net value of
its
[[Page 9172]]
derivatives positions was either an NSFR derivatives asset amount or an
NSFR derivatives liability amount (described below) and assigned a 100
percent RSF factor or zero percent ASF factor, respectively. For the
initial margin component, the proposed rule would have assigned an 85
percent RSF factor to CCP contributions and a minimum 85 percent RSF
factor to initial margin provided by a covered company. The proposed
rule also would have assigned a 100 percent RSF factor to the future
value component, which would have equaled 20 percent of the sum of a
covered company's gross derivative liabilities. The final rule makes
certain adjustments to the current net value component's treatment of
variation margin received by covered companies and the calibration of
the future value component.
1. Scope of Derivatives Transactions Subject to Sec. __.107 of the
Final Rule
The proposed rule would have required a covered company to measure
its derivatives exposures in its calculation of the NSFR, regardless of
the counterparty. A few commenters suggested that all derivative
transactions with commercial end-users--specifically, entities that are
not subject to the clearing requirement under the Commodity Exchange
Act \187\ or the margin requirements for non-cleared swaps under the
agencies' swap margin rule (swap margin rule)--should be excluded from
the NSFR rule.\188\ These commenters argued that derivative activities
of commercial end-users do not pose a threat to financial stability and
that applying funding requirements for such activities would be
inconsistent with Congress's intent in the Dodd-Frank Act that the
regulation of derivative trading not impose costs on commercial end-
users.\189\
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\187\ Although the term ``commercial end-user'' is not defined
in the Dodd-Frank Act, it is used in this Supplementary Information
section to mean a company that is eligible for the exception to the
mandatory clearing requirement for swaps under section 2(h)(7)(A) of
the Commodity Exchange Act and section 3C(g)(1) of the Securities
Exchange Act, respectively. This exception is generally available to
a person that (1) is not a financial entity, (2) is using the swap
to hedge or mitigate commercial risk, and (3) has notified the CFTC
or SEC how it generally meets its financial obligations with respect
to non-cleared swaps or security-based swaps. See 7 U.S.C.
2(h)(7)(A) and 15 U.S.C. 78c-3(g)(1).
\188\ See 12 CFR part 45 (OCC); 12 CFR part 237 (Board); 12 CFR
part 349 (FDIC); see also Final Rule, Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840 (November 30,
2015).
\189\ These commenters cited to 7 U.S.C. 2(h)(7), 6s(e)(4) as
examples within the Dodd-Frank Act. One commenter noted that certain
regulatory requirements relating to derivative transactions in
jurisdictions outside the United States also exempt certain
derivative transactions with non-financial sector entities, which
the commenter argued provided support for an exemption from the
NSFR.
---------------------------------------------------------------------------
The final rule does not distinguish between derivative transactions
with commercial end-users and other counterparty types. Unlike the
clearing and margin requirements cited by commenters, which apply
specifically to derivative transactions and include statutory
exemptions for certain transactions with non-financial sector
counterparties, the final rule seeks to measure and address funding
risks of a covered company's aggregate balance sheet. The final rule
therefore includes derivative transactions as one of many types of
exposures that contribute to a covered company's aggregate funding
risk.\190\ Derivative transactions are subject to a range of funding
risks driven by the underlying economic exposures and contractual
features, such as their variable nature and the regular need to
exchange collateral. These funding risks are not primarily determined
by the derivative transaction's counterparty, and therefore
transactions with commercial end-user counterparties could contribute
to funding risk in a manner similar to derivative transactions with
financial sector entity counterparties. In addition, although the
agencies' regulatory capital rule differentiates the capital
requirements for derivative transactions with commercial end-user and
financial sector counterparties in certain cases, such distinction is
based largely on the potential for the transactions with commercial
end-users to be primarily used to hedge or mitigate commercial risks,
which can be a material consideration in determining the counterparty
credit risk for an exposure.\191\ By contrast, the NSFR is not designed
to measure the risks associated with counterparty defaults, but instead
presumes a covered company would continue to intermediate and fund its
derivatives portfolio over a one-year horizon. Accordingly, the final
rule does not provide an exclusion for derivative transactions with
commercial end-user counterparties and requires a covered company to
include all its balance sheet derivatives exposures in its calculation
of the NSFR.
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\190\ As discussed further below, the final rule, like the
proposed rule, also applies a stable funding requirement based on a
covered company's derivative transactions in the aggregate, using a
standardized measure rather than a more granular approach that would
consider in greater detail specific features of individual
transactions, such as counterparty type.
\191\ For example, the standardized approach for calculating the
exposure amount of derivative contracts under the agencies'
regulatory capital rule removes the alpha factor from the exposure
amount formula for derivative contracts with commercial end-user
counterparties, resulting in lower requirements in comparison to
similar derivative contracts with a counterparty that is not a
commercial end-user.
---------------------------------------------------------------------------
2. Current Net Value Component
Under the proposed rule, the stable funding requirement for the
current net value component of a covered company's derivative assets
and liabilities would have been based on the value (as of the
calculation date) of each of its derivative transactions (not subject
to a QMNA) and each QMNA netting set and the variation margin provided
by and received by the covered company. For the current net value
component, the proposed rule would have measured a covered company's
aggregate derivative activities on a net basis by: (i) Reducing
exposures with each counterparty by taking into account QMNA netting
sets; (ii) determining the value of each derivative asset, liability or
QMNA netting set after netting certain variation margin amounts; and
(iii) offsetting a covered company's overall total derivatives asset
amount with its total derivatives liability amount, each as described
below (i.e., the proposed rule's NSFR derivatives asset or liability
amount). Through these netting calculations, a covered company would
have determined whether the current net value of its derivatives
positions was either an NSFR derivatives asset amount or an NSFR
derivatives liability amount. The proposed rule would have assigned a
100 percent RSF factor to a covered company's NSFR derivatives asset
amount or a zero percent ASF factor to a covered company's NSFR
derivatives liability amount. By netting across assets and liabilities
in addition to counterparties and transactions, the current net value
component would have reflected the current stable funding needs
associated with the covered company's overall derivatives activities.
The agencies received a number of comments regarding this
component, including comments on the calculation of the NSFR derivative
asset or liability amount, the proposed RSF and ASF factors for these
amounts, and how the proposed calculation would have accounted for
variation margin received and provided by a covered company. The final
rule modifies the calculation of the current net value component with
certain adjustments to the types of variation margin that are eligible
for netting in such component, but otherwise adopts the treatment as
proposed. Due to the variable nature of derivative transactions, the
interdependencies within the derivative
[[Page 9173]]
portfolios of covered companies, and the connection to assets and
liabilities related to margin provided and received by a covered
company, the final rule, like the proposed rule, assesses the funding
risks of derivatives activities on a net basis. Under the final rule,
the NSFR point-in-time measure generally reflects the funding provided
by derivative transactions and associated variation margin in
supporting a covered company's funding needs for its derivative
portfolio. Under the final rule, the current net value component is
calculated as follows:
Step 1: Calculation of Derivative and QMNA Netting set Asset and
Liability Values
First, a covered company determines the asset or liability value of
each derivative transaction (not subject to a QMNA) and each QMNA
netting set. Each derivative transaction or QMNA netting set has either
a derivatives asset value or derivatives liability value, depending on
(1) the derivative transaction's or QMNA netting set's asset or
liability valuation and (2) the value of variation margin provided or
received under the derivative transaction or QMNA netting set that is
eligible for netting under the final rule.\192\
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\192\ See Sec. __.107(f) of the final rule.
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A derivatives asset value of a derivative transaction or QMNA
netting set is the asset value after netting variation margin received
in the form of cash or rehypothecatable level 1 liquid asset securities
by the covered company that meets the eligibility conditions described
in Sec. __.107(f)(1) of the final rule and discussed in section
VII.E.2.b of this Supplementary Information section.
A derivatives liability value of a derivative transaction or QMNA
netting set is the liability value after netting any variation margin
provided by the covered company, regardless of the type of variation
margin. The final rule also specifies that a covered company may not
reduce its derivatives asset or liability values by initial margin
provided to or received from counterparties.\193\
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\193\ Initial margin includes payments provided and received by
a covered company to provide credit protection relative to a
derivative exposure, including independent amounts. Such payments
should be considered as initial margin under the final rule except
in instances where a payment, such as the return of part or all of
an independent amount, has occurred due to the change in the value
of a derivative exposure and the payment has been netted against the
covered company's exposure, in which case the payment should be
treated as variation margin.
---------------------------------------------------------------------------
Step 2: Calculation of Total Derivatives Asset Amounts and Total
Derivatives Liability Amounts
Second, a covered company sums its derivatives asset values, as
calculated in step 1, to determine its total derivatives asset amount,
and separately sums its derivatives liability values, as calculated in
step 1, to determine its total derivatives liability amount.\194\
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\194\ See Sec. __.107(e) of the final rule.
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Step 3: Calculation of NSFR Derivatives Asset Amount or NSFR
Derivatives Liability Amount
Third, a covered company calculates its overall NSFR derivatives
asset amount or NSFR derivatives liability amount by calculating the
difference between its total derivatives asset amount and its total
derivatives liability amount, each as calculated in step 2.\195\ If a
covered company's total derivatives asset amount exceeds its total
derivatives liability amount, the covered company would have an NSFR
derivatives asset amount. Conversely, if a covered company's total
derivatives liability amount exceeds the total derivatives asset
amount, the covered company would have an NSFR derivatives liability
amount. The NSFR derivatives asset or NSFR derivatives liability amount
represents a covered company's overall derivatives activities on a net
basis.
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\195\ See Sec. __.107(d) of the final rule.
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Step 4: Application of RSF or ASF Factors to the NSFR Derivatives Asset
Amount or NSFR Derivatives Liability Amount
Fourth, and finally, the final rule assigns a 100 percent RSF
factor to a covered company's NSFR derivatives asset amount or a zero
percent ASF factor to a covered company's NSFR derivatives liability
amount. \196\
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\196\ See Sec. Sec. __.107(b) and (c) of the final rule.
---------------------------------------------------------------------------
a) Comments Regarding NSFR Derivatives Asset Amount and NSFR
Derivatives Liability Amount
A number of commenters recommended that the approach for
calculating the NSFR derivatives asset amount or NSFR derivatives
liability amount should be based on the remaining maturity of a covered
company's derivative transactions or netting sets, which commenters
asserted would be more consistent with the proposed rule's
consideration of tenor for assigning an RSF factor for certain other
assets. Moreover, commenters asserted that short-dated derivatives do
not require as much long-term funding as long-dated derivatives because
a covered company could generally expect to allow its short-dated
derivative transactions to mature within the NSFR's one-year horizon,
there are generally no market or client expectations that firms would
roll over derivative transactions, and the agencies did not provide
empirical evidence suggesting otherwise. For example, commenters
suggested reducing the RSF factor for assets based on individual
derivative transactions with a remaining maturity of less than one
year, with a further reduction for asset values based on individual
derivative transactions with a remaining maturity of six months or
less. Some commenters suggested that the agencies should rely on other
regulatory measures to determine the remaining maturity of derivative
netting sets, such as the calculation of maturity for derivative
netting sets under the internal models methodology for counterparty
credit risk under the agencies' advanced approaches risk-based capital
rule.\197\ As an alternative to incorporating tenor considerations to
determine a covered company's derivatives asset amount, one commenter
suggested that the final rule assign reduced RSF factors for an asset
purchased by a covered company as a hedge to a derivative transaction
based on the remaining maturity of the derivative it is meant to hedge.
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\197\ See 12 CFR 3.132(d)(4) (OCC); 12 CFR 217.132(d)(4)
(Board); 12 CFR 324.132(d)(4) (FDIC).
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The agencies are not adopting in the final rule a more granular
approach to the calculation of the NSFR derivatives asset amount and
are instead adopting the approach under the proposed rule. The current
net value component is an operationally simple measure of the funding
needs associated with a covered company's aggregate derivatives
portfolio. Relative to other approaches, such as the more granular
approaches suggested by commenters that would take into account the
remaining maturity of certain derivative transactions or hedging
transactions, the final rule's approach allows for a consistent and
comparable measure of net derivative exposures across covered
companies. Further, while a more complex approach based on a covered
company's internal models methodology as suggested by commenters may be
appropriate in other contexts, such an approach would be contrary to
the NSFR's standardized calculation of a relatively simple measure of
the risks raised by a covered company's derivative positions. Although
this simplified approach may overstate the funding risk of certain
short-maturity derivative assets, it may
[[Page 9174]]
also understate the funding risk of certain short-maturity derivative
liabilities. As described above, the current net value component is
arrived at through a series of netting procedures to determine the NSFR
derivatives asset amount. Derivative asset exposures to a counterparty
with varying maturities may be offset by derivative liabilities within
a netting set. Additionally, total derivative assets are netted with
total derivative liabilities. Given the inclusion of many different
transactions in the calculation, the remaining maturity of the
resulting NSFR derivatives asset amount or NSFR derivatives liability
amount to which the RSF or ASF factor is applied would not be intuitive
or meaningful for the NSFR's one-year time horizon and estimating its
effective maturity would require complex calculations. Under the final
rule's approach, a covered company's current net value component can be
reduced by the value of derivative liabilities of any maturity,
including short-dated positions. This simplified approach should serve
as a reasonable and balanced approximation of the current stable
funding needs associated with a covered company's overall derivatives
activities.
In response to comments requesting the assignment of reduced RSF
factors to assets that hedge derivative transactions, the agencies
similarly note that the current net value component of the final rule
is designed as a simplified approach that nets all derivative
liabilities against derivative assets. An alternative approach that
permits a covered company to match particular derivative assets or
liabilities to specific hedging positions (whether derivative
transactions or otherwise) to determine the assignment of RSF factors
for the current net value component would introduce significant
complexity, reduce standardization, and, depending on the approach,
introduce an additional operational burden or increased reliance on
covered companies' internal models. In addition, although derivative
assets or liabilities may reduce certain risks of the specific
positions for which they are hedging, they would still require stable
funding to enable the covered company to continue to intermediate and
fund its derivatives portfolio and hedging positions over a one-year
time horizon. The final rule therefore adopts the same calculation
structure as the proposed rule for the current net value component,
with modifications discussed below with respect to consideration of
variation margin received by a covered company.
The agencies are adopting the proposed rule's assignment of a 100
percent RSF factor to an NSFR derivatives asset amount and a zero
percent ASF factor to an NSFR derivatives liability amount. The
calculation of a covered company's NSFR derivatives asset amount
already recognizes the contribution made by variation margin and
derivative liabilities to the funding for derivative asset positions,
based on their treatment under the final rule. As a result, the NSFR
derivatives asset amount represents overall derivatives activities that
are not fully margined, based on the eligibility of variation margin
for netting under the rule. Derivative transactions are complex
financial instruments that can significantly and quickly fluctuate in
value. Given these risks, the final rule, like the proposed rule, would
require full stable funding for these net residual exposures. Moreover,
while the final rule's current net value component recognizes the
contribution made by derivative liabilities to the funding for
derivative asset positions, the agencies do not consider a covered
company's NSFR derivatives liability amount, if any, to be available
stable funding to support assets outside of the covered company's
derivative portfolio.
b) Variation Margin Received and Provided
Under the proposed rule's calculation of a covered company's
current net value component, a covered company would have been
permitted to offset derivative assets only by variation margin received
that was in the form of cash that met criteria at Sec.
__.10(c)(4)(ii)(C)(1) through (7) of the SLR rule (SLR netting
criteria).\198\ Additionally, under the proposed rule, all variation
margin provided by the covered company would have been taken into
account in determining derivatives liability values. The proposed rule
also would have assigned RSF factors to on-balance sheet assets that
the covered company has provided or received as variation margin under
a derivative transaction (not subject to a QMNA netting set) or QMNA
netting set, and an ASF factor to any liability that arises from an
obligation to return variation margin.
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\198\ See 12 CFR 3.10(c)(4)(ii)(C) (OCC); 12 CFR
217.10(c)(4)(ii)(C) (Board); 12 CFR 324.10(c)(4)(ii)(C) (FDIC).
Specifically, under the proposed rule, these conditions were: (1)
Cash collateral received is not segregated; (2) variation margin is
calculated and transferred on a daily basis based on mark-to-fair
value of the derivative contract; (3) variation margin transferred
is the full amount necessary to fully extinguish the net current
credit exposure to the counterparty, subject to the applicable
threshold and minimum transfer amounts; (4) variation margin is cash
in the same currency as the settlement currency in the contract; (5)
the derivative contract and the variation margin are governed by a
QMNA between the counterparties to the contract, which stipulates
that the counterparties agree to settle any payment obligations on a
net basis, taking into account any variation margin received or
provided; (6) variation margin is used to reduce the current credit
exposure of the derivative contract and not the PFE (as that term is
defined in the SLR rule); and (7) variation margin may not reduce
net or gross credit exposure for purposes of calculating the Net-to-
gross Ratio (as that term is defined in the SLR rule).
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(i) Criteria for Netting of Variation Margin Received or Provided
Against Derivative Assets or Liabilities, Respectively
The agencies received comments regarding the proposed rule's
criteria for variation margin received to be eligible for netting
against derivatives asset values. Commenters argued that the proposed
rule lacked a rationale for recognizing all forms of variation margin
provided by a covered company against derivatives liability values,
while only permitting derivatives asset values to be netted by
variation margin received by a covered company if the variation margin
met the SLR netting criteria. These commenters argued that the proposed
treatment for netting variation margin received was overly conservative
and would increase costs to covered companies. Commenters requested
that the agencies allow additional forms of variation margin received
to be netted against derivatives assets.
Operational and Contractual Criteria for Netting Variation Margin
Received
Many commenters requested that the final rule permit netting of
additional variation margin received against the covered company's
derivative assets because the amounts received would represent a
funding benefit to the covered company. Commenters argued that, unlike
the SLR rule, the NSFR rule is designed to measure the funding risk of
a covered company's balance sheet and, therefore, should recognize the
value of collateral received when the receipt of collateral represents
a source of liquidity or facilitates the monetization of the underlying
derivative asset. These commenters asserted that the final rule should
recognize netting for any cash collateral that is received by a covered
company, specifically criticizing the proposed criteria that variation
margin be calculated and transferred on a daily basis or provide for
the full extinguishment of a net current credit exposure, as the
amounts of cash collateral received would represent a funding benefit
to the covered company. Commenters noted that, under the proposed rule,
a small shortfall of variation margin would result in a
[[Page 9175]]
derivative asset being considered as entirely un-margined, which could
lead to volatility in the amounts allowed for netting due to periodic
shortfalls. Certain commenters requested that, at a minimum, this
requirement be revised so that margin disputes or operational
shortfalls would not have an impact on the netting amount. Commenters
also argued that, if the SLR netting criteria are retained in the final
rule, the criteria should be changed to align with proposed changes to
the Basel Leverage Ratio Framework to avoid the final rule being more
be more stringent than the Basel NSFR standard, which incorporates the
Basel Leverage Ratio Framework netting criteria by reference.\199\
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\199\ See BCBS, Consultative Document: Revisions to the Basel
Leverage Ratio Framework (April 2016), p. 7, Annex ] 24(iv).
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Commenters also specifically recommended that the final rule not
include the proposed criterion that cash variation margin received must
be in the same currency as the settlement currency in the contract.
These commenters noted that the LCR rule treats HQLA denominated in a
foreign currency as a source of liquidity that can be used to meet
near-term outflows denominated in a different currency and the swap
margin rule permits the receipt of cash collateral denominated in a
currency different from the settlement currency of the derivative
transaction if the currency falls within swap margin rule's definition
of ``major currency'' or, if the cash variation margin is not in a
``major currency,'' subject to an 8 percent haircut under that
rule.\200\ Commenters expressed concern that the proposed criterion
would discourage covered companies from accepting variation margin in
certain currencies. These commenters argued the proposed criterion
would make transactions more expensive if covered companies passed
along any increased costs to counterparties by requiring them to
provide variation margin in certain currencies.
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\200\ See 12 CFR 45.6 (OCC); 12 CFR 237.6. (Board); 12 CFR 349.6
(FDIC).
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After considering these comments, the agencies have revised the
proposal by: (1) Removing the requirement that variation margin be
received in the full amount necessary to extinguish the net current
credit exposure to a counterparty in order to be recognized for netting
purposes; and (2) modifying the currency requirement. In the final
rule, to be recognized for netting purposes, the variation margin (1)
must not be segregated; (2) must be received in connection with a
derivative transaction that is governed by a QMNA or other contract
between the counterparties to the derivative transaction, which
stipulates that the counterparties agree to settle any payment
obligations on a net basis, taking into account any variation margin
received or provided; (3) must be calculated and transferred on a daily
basis on mark-to-fair value of the derivative contract; and (4) must be
in a currency specified as an acceptable currency to settle payment
obligations in the relevant governing contract.
In response to commenters, the final rule does not include the
requirement that variation margin be received in the full amount
necessary to extinguish the net current credit exposure to a
counterparty in order to be recognized for netting purposes. This
change will avoid unduly penalizing a covered company if variation
margin the covered company has received does not fully extinguish the
underlying derivative exposure due to short-term margin disputes or
operational reasons and would avoid volatility in a covered company's
funding requirement due to periodic, short-term shortfalls in variation
margin received.\201\
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\201\ Because the final rule does not include the proposed
criterion regarding full extinguishment, the agencies note that
comparisons of this criterion to the Basel Leverage Ratio Framework
are accordingly no longer relevant.
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The final rule includes a modified version of the proposed netting
criterion for currency. Specifically, the final rule requires that in
order to qualify for netting treatment, variation margin received by a
covered company must be in a currency specified as an acceptable
currency to settle the obligation in the relevant governing contract.
Non-cash variation margin must be denominated in a currency specified
as an acceptable currency. The final rule does not adopt certain
commenters' suggestions to permit netting of variation margin only if
it is denominated in certain major currencies, or to apply discount
rates to account for costs of currency conversion, because such
requirements would have significantly increased the complexity of the
final rule. Allowing variation margin, whether cash or non-cash, that
is not in a currency specified as an acceptable currency would also
entail currency conversion risks and decrease the certainty about
whether the variation margin truly netted out a derivatives exposure.
The final rule retains the requirement that variation margin is
calculated on a daily basis based on the fair value of the derivative
contract. To satisfy this criterion, derivative positions must be
valued daily, and margin must be transferred daily when the threshold
and daily minimum transfer amounts are satisfied according to the terms
of the derivative contract. While variation margin exchanged less
frequently may reduce the funding risk associated with a derivative
position, the requirement that margin be exchanged daily makes the
funding flows associated with derivative positions more predictable and
manageable. Derivative positions with less frequent or episodic
transfers of variation margin present more significant funding concerns
than derivative positions subject to daily margin exchanges.
Netting Variation Margin Received in the Form of Non-Cash Collateral
With respect to non-cash variation margin received by a covered
company, commenters recommended that the final rule recognize variation
margin received in the form of rehypothecatable securities. In
particular, commenters argued that variation margin received in the
form of rehypothecatable level 1 liquid assets represents stable
funding to a covered company with respect to derivative assets. The
commenters cited the treatment of level 1 liquid assets under the LCR
rule as evidence that such securities have limited liquidity and market
risk.
Other commenters recommended that all classes of rehypothecatable
HQLA, not only rehypothecatable level 1 liquid assets, should be
recognized for netting under Sec. __.107 of the final rule. Some
commenters urged the agencies to permit netting of variation margin
received in the form of rehypothecatable HQLA, subject to haircuts
equivalent to the applicable RSF factors for such assets. One commenter
also suggested applying the haircuts used by the Board for collateral
accepted at the discount window to determine the amount by which such
collateral received as variation margin would offset a derivatives
asset. Other commenters asserted that market practices--such as
haircuts and daily exchange of collateral--ensure that non-cash
variation margin received would provide a sufficiently stable source of
funding for purposes of netting against a covered company's derivative
assets.
Commenters also asserted that permitting netting of non-cash
variation margin received would better align with the treatment of
collateral under the swap margin rule, which allows certain non-cash
collateral to be used to meet variation margin requirements.\202\
[[Page 9176]]
Commenters further argued that recognition of non-cash variation margin
received would be consistent with the proposed rule's treatment of
variation margin provided as well as other parts of the proposed rule
that would have assigned lower RSF factors to an asset based on receipt
of collateral.\203\
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\202\ See 12 CFR 45.6 (OCC); 12 CFR 237.6. (Board); 12 CFR 349.6
(FDIC).
\203\ Commenters noted that short-term secured lending
transactions with a financial sector entity secured by
rehypothecatable level 1 liquid assets would have received a lower
RSF factor than other secured and unsecured lending transactions
under the proposed rule.
---------------------------------------------------------------------------
Commenters argued that the proposed treatment of non-cash variation
margin received would have a disproportionately adverse impact on
certain counterparties, such as mutual funds, pension funds, and
insurance companies, which generally provide securities as variation
margin due to their business models. Commenters stated that, in order
to be able to provide cash variation margin to a covered company, these
counterparties would have to engage in securities lending or repurchase
agreements, which could increase interconnectedness and systemic risks
within the financial system, adversely affect the liquidity of such
securities, and reduce returns to these counterparties.\204\ Another
commenter argued that the NSFR rule would create a substantial new
funding requirement across all covered companies if it did not allow
netting of non-cash variation margin received in the form of HQLA.
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\204\ The commenters also noted that a covered company may then
have an incentive to invest the cash variation margin received in
securities for business and risk management reasons.
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In a change from the proposed rule, for purposes of determining
derivatives asset values under the final rule, a covered company may
take into account variation margin received in the form of
rehypothecatable level 1 liquid asset securities. Level 1 liquid asset
securities tend to have very stable value and reliable liquidity across
market conditions. However, other types of non-cash collateral (i.e.,
non-level 1 liquid asset securities) are less likely to hold their
value across market conditions, are more likely to be difficult to
monetize, and may fluctuate in value to a greater degree. Therefore,
the final rule does not permit a covered company to net against a
derivatives asset variation margin received in the form of non-level 1
liquid asset securities or other non-cash assets. Moreover, the
contractual ability to rehypothecate the level 1 liquid asset
securities ensures that the covered company is able to monetize the
collateral without a triggering event, such as a default by the
counterparty, across market conditions. Therefore, in order to be
recognized for netting under the final rule, level 1 liquid asset
securities received as variation margin must be rehypothecatable, in
addition to meeting the other netting criteria that are required for
recognition of cash variation margin.\205\
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\205\ As noted above, for purposes of the netting criterion for
currency, rehypothecatable level 1 liquid assets received as
variation margin must be denominated in a currency that is specified
as an acceptable currency to settle the obligation in the relevant
governing contract.
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The final rule's allowance of rehypothecatable level 1 liquid
assets to be netted against derivatives assets will further align the
final rule and the agencies' swap margin rule. Although the swap margin
rule permits certain non-level l liquid assets to be used as variation
margin for certain swap transactions, limiting the final rule's
permissible netting to variation margin received in the form of cash
and rehypothecatable level 1 liquid asset securities is appropriate
because permitting a covered company to reduce its derivative assets by
other types of non-cash collateral could increase the funding risk
associated with its derivative portfolio and reduce its ability to
continue to intermediate and fund its derivatives portfolio over a one-
year horizon. The agencies also recognize that, when measured by total
volume, a significant majority of variation margin exchanged by swap
dealers continues to be comprised of cash, with the majority of the
remaining variation margin comprised of government securities.\206\ As
a result, the agencies do not expect that the final rule's allowance of
rehypothecatable level 1 liquid assets for the purposes of netting will
materially alter counterparties' behaviors regarding variation margin
or result in substantial new funding requirements.
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\206\ The swap margin rule requires variation margin exchanged
between swap entities to be cash, which represents a significant
portion of the swaps market. See 12 CFR 45.6(a) (OCC); 12 CFR
237.6(a) (Board); 12 CFR 349.6(a) (FDIC). According to the ISDA's
Margin Survey for 2019, the 20 counterparties with the largest
outstanding notional amounts of derivative transactions reported
that their regulatory and discretionary variation margin delivered
is comprised of approximately 84.6 percent cash, and 13.2 percent
government securities, and regulatory and discretionary variation
margin received is approximately 76.5 percent cash and 14.2 percent
government securities. See ISDA Margin Survey 2019 (September 2019),
available at https://www.isda.org/a/1F7TE/ISDA-Margin-Survey-Year-end-2019.pdf.
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Accordingly, Sec. __.107(f)(1)(ii) of the final rule provides that
a covered company must calculate the derivatives asset value of the
underlying derivative transaction or QMNA netting set by subtracting
the value of variation margin received that is in the form of
rehypothecatable level 1 liquid asset securities from the asset value
of the derivative transaction or QMNA netting set.\207\
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\207\ To the extent a covered company receives variation margin
in excess of the asset value of the derivative transaction or QMNA
netting set, the derivative asset value may not be reduced below
zero, treated as a derivative liability value, or netted against
other derivative asset values.
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(ii) RSF and ASF Factors Assigned to Assets Provided or Received as
Variation Margin and Associated Liabilities
The proposed rule would have required a covered company to include
in its RSF amount on-balance sheet assets that the covered company has
provided (that remain on a covered company's balance sheet) and
received as variation margin in connection with its derivative
transactions.
On-Balance Sheet Variation Margin Provided by a Covered Company
The proposed rule would have assigned an RSF factor to on-balance
sheet variation margin \208\ provided by a covered company based on
whether the variation margin reduces the covered company's derivatives
liability value or whether it is excess variation margin. The agencies
did not receive any comments regarding this proposed treatment.
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\208\ For example, if a covered company uses securities from its
trading inventory to satisfy a requirement to provide variation
margin in respect to a derivative liability, these securities would
remain on its balance sheet under GAAP. For cash variation margin
provided in respect to a similar derivative transaction, a covered
company's cash balance would already have been reduced, and the
covered company would have recorded a receivable. The receivable
amount may reflect amounts of cash variation margin previously
provided in excess of a covered company's liability and owed by a
counterparty.
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As described above, under the final rule, the liability value of a
derivative transaction or QMNA netting set, as applicable, takes into
account any variation margin provided by a covered company. A covered
company may have provided variation margin in an amount that reduces
its liability to a counterparty or variation margin in excess of this
amount. For example, the amount of a receivable or of securities
recorded on a covered company's balance sheet may represent both an
amount of variation margin provided that reduces a covered company's
derivative liability, as calculated under the final rule, and excess
variation margin provided. Consistent with the
[[Page 9177]]
proposed rule, if the variation margin provided by a covered company
reduces the derivatives liability value of a derivative transaction or
QMNA netting set, the final rule assigns a zero percent RSF factor to
the carrying value of such variation margin. This variation margin
already reduces the covered company's derivatives liabilities,
resulting in a lower total derivatives liability amount that, in turn,
offsets the covered company's total derivatives asset amount when
calculating its NSFR derivatives asset amount. As a result, the funding
needs for this variation margin provided is already reflected in a
covered company's RSF amount through the current net value component.
To the extent a covered company provides excess variation margin--
that is, an amount of variation margin that does not reduce the
liability value of a derivative transaction or QMNA netting set--and
includes the excess variation margin asset on its balance sheet, the
final rule assigns such excess variation margin an RSF factor under
Sec. __.106, based on the characteristics of the asset or balance
sheet receivable associated with the asset, as applicable. Since excess
variation margin does not reduce a covered company's derivatives
liabilities values, the covered company's current net value component
does not reflect these on-balance sheet assets. The final rule assigns
RSF factors to excess variation margin on a covered company's balance
sheet to reflect the need for stable funding for such assets as part of
the covered company's aggregate balance sheet. The RSF factor applied
to excess variation margin provided depends on the asset provided. If a
covered company has provided different types of variation margin (for
example, both cash and securities), the covered company can determine
which variation margin should be treated as excess and apply the
appropriate RSF factor.
On-Balance Sheet Assets for Variation Margin Received by a Covered
Company
The proposed rule would have assigned an RSF factor to all
variation margin received by a covered company that is on the balance
sheet of the covered company,\209\ according to the characteristics of
each asset received. The agencies received no comments on this aspect
of the proposal.
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\209\ Under the final rule, RSF factors are assigned to
variation margin received that are recorded as on-balance sheet
assets of a covered company regardless of whether the variation
margin received has reduced the covered company's derivative asset
value under the rule. GAAP's treatment of variation margin assets
received by a covered company depends on whether the variation
margin was received in the form of cash or securities. Variation
margin received that is eligible for netting under GAAP reduces the
value of derivative assets under GAAP.
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The agencies are adopting the requirement for variation margin
received by a covered company that is on the covered company's balance
sheet as proposed. As described above, under the final rule, the
derivatives asset value of a derivative transaction or QMNA netting
set, as applicable, takes into account certain variation margin
received by a covered company. This variation margin received reduces
the covered company's derivative assets, resulting in a lower total
derivatives asset amount. As a result, the funding needs for this
variation margin received is not reflected in the current net value
component. Therefore, regardless of whether on-balance sheet variation
margin received is eligible for netting under the current net value
component calculation, assignment of an RSF factor to these on-balance
sheet assets under Sec. __.106 is necessary to capture the funding
risk associated with these assets.
ASF Assignment for Balance Sheet Liabilities Representing the Return of
Variation Margin Received by a Covered Company
The proposed rule would have assigned a zero percent ASF factor to
any liability that arises from an obligation to return \210\ variation
margin received by a covered company related to its derivative
transactions. One commenter suggested that the final rule assign an ASF
factor of greater than zero to the liability to return variation margin
received by a covered company. The commenter argued that this change
would be consistent with the BCBS and the International Organization of
Securities Commission guidelines for acceptable classes of derivatives
collateral.
---------------------------------------------------------------------------
\210\ A covered company generally will record a liability on its
balance sheet representing its obligation to return a value of
variation margin received.
---------------------------------------------------------------------------
As discussed in the proposed rule, given that these liabilities can
change based on the underlying derivative transactions and remain on
balance sheet, at most, only for the duration of the associated
derivative transactions, they do not represent stable funding for a
covered company. Additionally, the contribution of variation margin
received to the covered company's funding risk is appropriately
recognized through the final rule's calculation of the NSFR derivatives
asset amount described above and an additional contribution to a
covered company's ASF amount in respect to an accounting liability to
return such assets would be duplicative. For these reasons, the final
rule assigns a zero percent ASF factor to liabilities representing an
obligation to return variation margin received by a covered company.
3. Initial Margin Received by a Covered Company
For initial margin received by the covered company that is recorded
as an asset on its balance sheet, the proposed rule would not have
treated the asset received as initial margin differently from other
balance sheet assets and would have assigned an RSF factor according to
the characteristics of each asset received. Additionally, the proposed
rule would have assigned a zero percent ASF factor to any liability
that arises from an obligation to return initial margin received by a
covered company related to its derivative transactions.\211\
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\211\ Similar to variation margin received, a covered company
will record a liability for its obligation to return initial margin
and independent amounts received.
---------------------------------------------------------------------------
Some commenters argued that the final rule should recognize the
receipt of initial margin by a covered company as a potential source of
stable funding, especially if the covered company has the contractual
and operational ability to re-use the collateral assets in the future,
which commenters asserted is common market practice in the over-the-
counter derivatives market. Commenters requested that the final rule
more closely align the ASF treatment of liabilities for initial margin
received with the RSF treatment of initial margin assets provided by a
covered company, in particular with respect to initial margin received
from a counterparty that is a commercial end-user. Some commenters
requested that the final rule apply an ASF factor of at least 50
percent to liabilities for initial margin received by a covered company
and permit initial margin received to reduce the RSF amount for initial
margin provided by a covered company in the initial margin component.
As another approach, commenters requested that the NSFR rule permit
initial margin assets received by a covered company that can be
rehypothecated in the future to offset the current RSF amount derived
from the related derivative asset, subject to haircuts on the initial
margin assets, because such initial margin is contractually linked to
the covered company's rights and obligations under the derivative
transaction and is
[[Page 9178]]
available to the covered company for the duration of the derivative
contract.
The agencies are adopting the treatment of initial margin received
as proposed. As discussed in section V of this Supplementary
Information section, the general design of the final rule requires a
covered company to assess of the amount of its stable funding based on
NSFR regulatory capital and liabilities at a point in time, and the
adequacy of such funding based on the characteristics of assets and
commitments. The NSFR generally does not determine current stable
funding based on the potential future reuse of assets. Consistent with
this approach, the derivative framework under the final rule does not
recognize as stable funding the potential reuse at a future date of
assets received as initial margin. Additionally, the amount of initial
margin received by a covered company, and the liability to return such
margin, can change based on the aggregate underlying derivative
transactions and customer preferences, such as counterparties' demand
for derivatives exposure, which may fluctuate over time. Moreover, the
extent to which the initial margin assets received are available to a
covered company may also fluctuate. Initial margin received by a
covered company, including initial margin subject to the swap margin
rule, often is subject to segregation requirements that arise from
regulatory or contractual requirements, which limits the ability of the
covered company to re-use initial margin assets. Even absent a
segregation requirement, a covered company may voluntarily agree to
segregate the initial margin received at the request of its
counterparties or novate the position from the covered company to
another counterparty at some point in the future in order to preserve
franchise value and avoid negative signaling to market participants,
making unsegregated initial margin also an unstable source of funding.
This is true also in those cases where a covered company currently has
the ability to re-use the initial margin assets that it receives, as
the initial margin is only available to the covered company at most for
the duration of the derivative transaction. Consistent with the general
treatment of balance sheet assets, the final rule applies an RSF factor
to a covered company's on-balance sheet assets received as initial
margin. These assets result from the current level of activity with
derivative counterparties and likely will be held on balance sheet for
the duration of the associated derivative transactions or counterparty
relationships. It is therefore appropriate to assign RSF factors to
these assets based on their liquidity characteristics.
With respect to the liability to return initial margin received,
this liability is subject to change based on a covered company's
counterparties and their derivative positions and remains, at most,
only for the duration of the associated derivative transactions, such
that it does not represent stable funding for a covered company. In
response to commenters' request that initial margin received be
permitted to reduce the RSF amount for initial margin provided, the
agencies note that unlike variation margin that is exchanged to account
for changes in the current valuations of a derivative transaction or
QMNA netting set, initial margin received from counterparties is
intended to cover a covered company's potential losses in connection
with a counterparty's default (e.g., the cost to close out or replace
the transaction with a defaulted counterparty) and therefore would not
factor into the measure of the current value of a covered company's
derivatives portfolio.
For these reasons, the final rule assigns a zero percent ASF factor
to any liability representing an obligation to return initial margin
received and assigns an RSF factor under Sec. __.106 to an asset
received as initial margin that is on the covered company's balance
sheet based on the characteristics of the asset.
4. Customer Cleared Derivative Transactions
Under the proposed rule, the treatment of a covered company's
cleared derivative transaction would have depended on whether the
covered company was acting as an agent or as a principal. A covered
company's NSFR derivatives asset amount or NSFR derivatives liability
amount would have taken into account the asset or liability values of
derivative transactions between a CCP and a covered company, acting as
principal, where the covered company has entered into an offsetting
transaction (commonly known as a ``back-to-back'' transaction) with a
customer. Because a covered company would have obligations as a
principal under both derivative transactions comprising the back-to-
back transaction, any asset or liability values arising from these
transactions, or any variation margin provided or received in
connection with these transactions, would have been taken into account
in the covered company's calculations of its NSFR derivatives asset or
liability amount.
If a covered company was a clearing member of a CCP, it would not
have included in its NSFR derivatives asset amount or NSFR derivatives
liability amount the value of a cleared derivative transaction that the
covered company, acting as agent, has submitted to the CCP on behalf of
a customer, including when the covered company has provided a guarantee
to the CCP for the performance of the customer. As the proposed rule
explained, these cleared derivative transactions are assets or
liabilities of a covered company's customer and not the covered
company. Similarly, a covered company would not have included in its
calculations under Sec. __.107 of the proposed rule variation margin
provided or received in connection with customer cleared derivative
transactions.
To the extent a covered company includes on its balance sheet under
GAAP a derivative asset or liability value (as opposed to a separate
receivable or payable in connection with a derivative transaction)
associated with a customer cleared derivative transaction, the
derivative transaction would have constituted a derivative transaction
of the covered company under the proposed rule.\212\ If a covered
company includes on its balance sheet an asset associated with a
guarantee of a customer's performance on a cleared derivative
transaction and that balance sheet entry is substantially equivalent to
a derivative contract, the asset should be treated as a derivative.
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\212\ The proposed rule requested comment regarding whether the
value of a cleared derivative transaction that a covered company,
acting as agent, has submitted to a CCP on behalf of a customer of
the covered company would be included on the covered company's
balance sheet under any circumstances other than in connection with
a default by the customer. Commenters did not identify any such
circumstances.
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To the extent a covered company has an asset or liability on its
balance sheet associated with a customer derivative transaction that is
not a derivative asset or liability--for example, if a covered company
has extended credit on behalf of a customer to cover a variation margin
payment or a covered company holds customer funds relating to
derivative transactions in a customer protection segregated account--
such asset or liability of the covered company would have been assigned
an RSF or ASF factor under Sec. Sec. __.106 or __.104 of the proposed
rule, respectively. Accordingly, to the extent a covered company's
balance sheet includes a receivable asset owed by a CCP or payable
liability owed to a CCP in connection with customer receipts and
payments under derivative
[[Page 9179]]
transactions, this asset or liability would not have constituted a
derivative asset or liability of the covered company and would not have
been included in the covered company's calculations under Sec. __.107
of the proposed rule.
Commenters supported the proposed exclusion from a covered
company's NSFR for a cleared derivative transaction that the covered
company, acting as agent, has submitted to a CCP on behalf of a
customer, stating that this treatment appropriately reflected the
limited funding risks of these activities. Some commenters suggested
that certain back-to-back derivative transactions with a customer and a
CCP also should be excluded from a covered company's NSFR derivatives
asset or liability amount because they present minimal funding risks
that are similar to cleared derivative transactions where the covered
company is acting as an agent. Specifically, commenters highlighted as
low risk a derivative transaction where the covered company is not
contractually required to make a payment to the customer unless and
until the covered company has received a corresponding payment from the
CCP. These commenters noted that in both a back-to-back arrangement and
a cleared derivative transaction submitted by a covered company as
agent with a guarantee of the customer's performance, the covered
company faces the same risk upon customer default of being required to
make payments to the CCP without receiving a corresponding payment from
the customer.
One commenter asked how the proposed rule would treat initial
margin that a covered company receives from customers in excess of
amounts provided to the CCP in connection with a cleared derivative
transaction. The commenter asked how the proposed rule would treat a
customer's initial margin that a covered company maintains in
segregated accounts and invests in accordance with applicable rules,
regulations and agreements with the customer. The commenter also
asserted that the customer's initial margin functions as funding for
the resulting assets.
Under the final rule, and consistent with the proposal, a covered
company's NSFR derivatives asset amount or NSFR derivatives liability
amount does not include the value of a cleared derivative transaction
that the covered company, acting as agent, has submitted to a CCP on
behalf of a customer. This includes instances when the covered company,
acting as agent, has provided a guarantee to the CCP for the
performance of the customer, as long as the cleared derivative
transaction does not appear on a covered company's balance sheet.
Additionally, consistent with GAAP, the final rule requires a covered
company to include in its NSFR the derivative asset or liability
amounts related to back-to-back derivative transactions that the
covered company has executed with a CCP and a customer of the covered
company as proposed.
As discussed in section V of this Supplementary Information
section, the NSFR rule is a standardized metric that generally relies
on the assets and liabilities on a covered company's balance sheet. The
treatments of submitted agency transactions and executed back-to-back
derivative transactions are consistent with the final rule's reliance
of on-balance sheet items. Since exposures due to back-to-back
derivative transactions are recorded on the balance sheet of a covered
company, the final rule's treatment for these exposures will ease
administration of the rule by aligning with the balance sheet
treatment, consistent with the design of the NSFR. The agencies note
that in the case of back-to-back derivative transactions executed with
a customer and a CCP where the covered company maintains equal
exposures to each counterparty (which reflects the amount of variation
margin posted and collected), the covered company's derivative asset
and liability positions facing the customer and CCP should generally
offset within the covered company's NSFR derivatives asset or liability
amount, reflecting a neutral stable funding requirement. However, by
taking this approach, the final rule reflects the incremental funding
risk that is present when these exposures are not fully offset, such as
in the case where there are differences in the amount of eligible
variation margin received and collected. In addition, these net
exposures are not excluded from the final rule as certain funding risks
may still be present. For example, as commenters noted, a covered
company in a back-to-back arrangement may be required to make payments
to the CCP even if the covered company's customer has failed to make a
corresponding payment to the covered company. Initial margin received
by a covered company from customers in excess of amounts provided to a
CCP in connection with a cleared derivative transaction, including
initial margin maintained in segregated accounts and other permitted
assets, is treated the same as other initial margin received by a
covered company, as described in section VII.E.3 of this Supplementary
Information section. Additional RSF amounts could also result from
initial margin provided by a covered company to the CCP and the
derivatives future value component, each as described below.
5. Initial Margin Component
The proposed derivative framework included an initial margin
component that would address the treatment of assets contributed to a
CCP's mutualized loss-sharing arrangement and initial margin provided
by a covered company in respect to its derivative transactions. Under
the proposed rule, a covered company's contribution to a CCP's
mutualized loss-sharing arrangement would have been assigned an RSF
factor of 85 percent. Similarly, under the proposed rule, initial
margin provided by a covered company for derivative transactions
(except where the covered company acts as an agent for a customer's
cleared derivative transaction, as described below) would have been
assigned an RSF factor equal to the higher of 85 percent or the RSF
factor applicable under Sec. __.106 to each asset comprising the
initial margin provided. The proposed rule would have assigned an 85
percent RSF factor to the fair value of a covered company's
contributions to a CCP's mutualized loss-sharing arrangement or initial
margin provided by a covered company regardless of whether the
contribution or initial margin is included on the covered company's
balance sheet. This treatment reflects the fact that a covered company
would have faced the same funding needs and risks as a result of having
to provide these assets, regardless of their balance sheet treatment
under GAAP. Under the proposed rule, to the extent a covered company
included on its balance sheet a receivable for its contributions to a
CCP's mutualized loss-sharing arrangement or for initial margin
provided for derivative transactions, the covered company would have
assigned an RSF factor to the fair value of the asset, but not the
receivable, in order to avoid double-counting.
Under the proposed rule, a covered company would not have assigned
an RSF factor to initial margin provided by the covered company when it
is acting as an agent for a customer's cleared derivative transaction
and the covered company does not guarantee return of the initial margin
to the customer. The preamble to the proposal noted that a covered
company would have had limited liquidity risk for such initial margin
because, following certain timing delays, the customer would have been
obligated to fund the initial margin for the duration of the
transaction.
[[Page 9180]]
However, to the extent a covered company would have included such
initial margin on its balance sheet, the proposed rule would have
required the covered company to assign an RSF factor to the resulting
initial margin asset under Sec. __.106 of the proposed rule and an ASF
factor to the corresponding liability under Sec. __.104 of the
proposed rule, similar to the treatment of other on-balance sheet
items.
One commenter asserted that the agencies should not adopt the 85
percent RSF factor because the process by which this percentage was
developed for the Basel NSFR standard did not include public input or
publication of supporting evidence by the BCBS. Commenters also
requested that a lower RSF factor be assigned to a covered company's
contributions to a CCP's mutualized loss-sharing arrangement (e.g., one
commenter requested an RSF factor of 50 percent, other commenters
recommended assigning the RSF factor that applies to operational
deposits held at a financial sector entity). To support a lower RSF
factor, one commenter asserted that the amount of such contributions
tend to exhibit low variability over time and are typically redeemable
within a three-month time horizon. The commenter also asserted that
there is a low probability of a CCP drawing on the funds available in
the mutualized loss-sharing account, which are used in very rare cases
of a clearing member default and only after exhaustion of the defaulter
clearing member's resources and the CCP's first loss contributions to
the mutualized loss-sharing resources. Finally, the commenter argued
that a lower RSF amount could be more appropriately set by assigning
RSF factors directly to the underlying assets contributed to a CCP's
mutualized loss-sharing arrangement, given the low probability that the
assets will be used by a CCP.
With respect to the treatment of initial margin provided by a
covered company for derivative transactions, the agencies received
several comments recommending that such initial margin should be
assigned an RSF factor of less than 85 percent and also that the RSF
factor should be assigned based on the remaining contractual maturity
of the relevant derivative transaction or QMNA netting set. Commenters
argued that such treatment is warranted because a covered company may
choose to not re-enter into a short-dated derivative transaction
following its maturity if the covered company has liquidity needs at
that point and a covered company will be able to liquidate the initial
margin provided for the transaction in a short period of time after the
contract matures.
One commenter argued that initial margin provided to a CCP for
cleared derivative transactions should be assigned a lower RSF factor
than initial margin provided for non-cleared derivative transactions
because cleared derivatives tend to be more standardized and liquid,
and turn over more frequently, than non-cleared derivatives. The
commenter asserted that a covered company could choose to reduce its
cleared derivative activities with a CCP in the future and realize the
return of initial margin provided to a CCP within a six-month time
horizon. Therefore, the commenter argued, the final rule should assign
an RSF factor of 50 percent to initial margin provided for cleared
derivative transactions, similar to the RSF factor assigned to secured
lending transactions with a financial sector entity that matures in six
months or more but less than one year. The commenter also argued that
providing favorable treatment for initial margin provided for cleared
derivative transactions would be consistent with the CFTC's margin
requirements for derivatives clearing organizations, which assume short
liquidation periods,\213\ and the agencies' swap margin rule.\214\
---------------------------------------------------------------------------
\213\ See 17 CFR 39.13(g).
\214\ See supra note 188.
---------------------------------------------------------------------------
One commenter supported the proposed rule's treatment of initial
margin provided by a covered company when the covered company is acting
as an agent for the client and does not guarantee the performance of
the CCP to the client. This commenter stated that the proposed rule
appropriately reflects the central clearing market structure and noted
that the majority of initial margin that a covered company receives
from a client for the client's cleared derivative transactions is
passed through to the CCP.
After reviewing these comments, the agencies are adopting the
treatment of assets provided to a CCP's mutualized loss sharing
arrangement and initial margin provided by a covered company for
derivative transactions as proposed.
The final rule assesses a covered company's funding profile for its
derivative activities on an aggregate net basis based on its current
contractual positions. In addition, the final rule generally does not
consider the range of potential activities that covered companies or
counterparties may take in the future.\215\ For example, the
standardized initial margin component is applied consistently to all
covered companies and does not take into account an individual covered
company's ability to adjust its level of cleared derivative activities
or the probability of individual CCP's usage of a covered company's
contributions to a default fund upon a member default. Additionally, an
individual covered company may face challenges in meaningfully reducing
its derivative exposures and initial margin requirements without
impacting its customer relationships and intermediation. Moreover,
during periods of market volatility, initial margin requirements may
increase, which would increase a covered company's funding needs
related to initial margin assets.
---------------------------------------------------------------------------
\215\ See section V of this Supplementary Information section.
---------------------------------------------------------------------------
The final rule does not incorporate more granular assignments of
RSF factors to initial margin provided by a covered company based on
the maturity of the underlying derivative transactions. As discussed
above, the final rule's treatment of initial margin provided is
consistent with the overall approach taken in the rule to utilize an
aggregate portfolio framework with respect to derivative transactions
that does not take into account the scheduled maturity of individual
transactions. For the reasons discussed, while there may be some
benefits to a more granular approach, the agencies have determined that
a change from the proposal is not justified because such an approach
would unnecessarily increase the complexity of the measure and require
reliance on covered companies' internal modeling, which is contrary to
the NSFR's design as a standardized measure.
Specifically, the final rule assigns an RSF factor of 85 percent to
the fair value of assets provided to a CCP's mutualized loss sharing
arrangement and an RSF factor of at least 85 percent to the fair value
of initial margin provided for derivatives transactions. The
application of these RSF factors is based on the assumption that a
covered company generally must maintain most of its CCP mutualized loss
sharing arrangement contributions or initial margin provided in order
to continue to support its customers and intermediate in derivative
markets. For similar reasons, the treatment applies regardless of
whether the contribution or initial margin is included on the covered
company's balance sheet. The final rule's assignment of an 85 percent
RSF factor reflects a standardized assumption across all derivative
transactions based on an assumption of derivatives activities at an
aggregate level. In addition, the standardized
[[Page 9181]]
minimum 85 percent RSF factor reflects the difficulty for covered
companies generally to significantly reduce the aggregate level of
derivative activity (both principal and client-driven behavior) without
damaging their customer relationships or reputations as intermediaries.
Another commenter asked that the agencies clarify whether initial
margin provided by a covered company in connection with cleared
derivative transactions of a customer that have a remaining maturity of
one year or more would be assigned an RSF factor of 100 percent,
similar to the proposed treatment of assets encumbered for a period of
one year or longer.
Like the proposed rule, Sec. __.107 of the final rule does not
assign an RSF factor to initial margin provided by a covered company
acting as agent for a customer's cleared derivative transactions where
the covered company does not guarantee the return of the initial margin
to the customer. To the extent a covered company includes on its
balance sheet any such initial margin provided, this initial margin
would instead be assigned an RSF factor pursuant to Sec. __.106 of the
final rule and any corresponding liability would be assigned an ASF
factor pursuant to Sec. __.104.
6. Future Value Component
In addition to the current net value component, which requires a
covered company to maintain stable funding relative to its net current
derivatives position as of the calculation date, the proposed rule
would have required a covered company to maintain stable funding to
support potential changes in the valuation of its derivative
transactions over the NSFR's one-year horizon (future value component).
Specifically, this future value component would have addressed the risk
that the covered company may need to provide or return margin or make
settlement payments to its counterparties as the net value of its
derivatives portfolio fluctuates.
Under the proposed rule, the future value component would have
equaled 20 percent of the sum of a covered company's gross derivative
values that are liabilities (i.e., liabilities related to each of its
derivative transactions not subject to a QMNA and each of its QMNA
netting sets that are liabilities prior to consideration of margin,
hereinafter gross derivative liabilities), multiplied by an RSF factor
of 100 percent. Gross derivative liabilities in this context would have
referred to derivative liabilities calculated without recognition of
variation margin or settlement payments provided or received based on
changes in the value of the covered company's derivative transactions.
For example, if the value of a covered company's derivative transaction
moves from $0 to a liability position of -$10, the covered company's
gross derivative liability value would be $10, even if the covered
company has provided $10 of variation margin to cover the change in
value.
While some commenters supported addressing funding risk associated
with changes in the value of derivative transactions in the final rule,
other commenters asserted that this component should not be included in
the final rule because the NSFR, as a business-as-usual and point-in-
time funding metric, should not take into account funding needs that
could result from potential future market changes. One commenter argued
that the future value component was unnecessary because the LCR rule
already adequately addresses the risks associated with potential
valuation changes in a covered company's derivatives portfolio.
The agencies also received a number of comments on the specific
design and calibration of the proposed future value component. Many of
these commenters asserted that the proposed calibration was overly
conservative and was not sufficiently supported by empirical evidence.
Commenters also argued that gross derivative liabilities are a poor
indicator of a covered company's potential contingent funding
obligation. The value of a covered company's derivatives portfolio may
fluctuate over time (e.g., due to a covered company having to provide
or return margin to its counterparties) in a way that results in a
material increase to its funding requirements over the one-year time
horizon. It is necessary to address the contingent funding risk
associated with derivatives in the final rule in order to adequately
ensure the resilience of a covered company's funding profile and to
address a funding need not picked up by the current net value
component. Covered companies require sufficient stable funding to
support margin flows in a range of market conditions, including a
stress event.\216\
---------------------------------------------------------------------------
\216\ For example, during the 2007-2009 financial crisis, some
covered companies experienced volatility in their derivatives
portfolios, which led to margin payments that were a significant
drain on liquidity and contributed to systemic instability. Since
the 2007-2009 crisis, banking organizations continue to experience
funding needs in their net margin flows over time, with the size and
impact of the funding needs varying across covered companies
depending on the size and composition of their derivatives
portfolios.
---------------------------------------------------------------------------
The current net value component relies on a uniform netting
treatment that assumes payment inflows and outflows related to
derivatives assets and liabilities would be perfectly offsetting across
QMNAs, counterparties, derivative types, and maturities. On its own,
this assumption generally benefits covered companies by resulting in a
lower funding requirement under the NSFR than might occur in practice.
In addition, even if a covered company's payment inflows and outflows
under its derivatives are matched, as the first component assumes, the
covered company's margin inflows and outflows may not be. For example,
even where a covered company has entered into offsetting positions in
terms of market risk, its margin rights and obligations (based on
changes in the value of its derivatives, contractual triggers such as
changes in the covered company's financial condition, or business
considerations such as customer requests) may differ. This could occur
if it faces different types of counterparties, such as a commercial
end-user on one side and a dealer on the other side, for each
offsetting position. For covered companies with substantial derivatives
activities, margin flows can be a significant source of liquidity risk.
The final rule generally retains the proposed rule's treatment of
derivative portfolio potential valuation changes but reduces the
weighting of this component from 20 percent to 5 percent of gross
derivative liabilities. This revision should reduce the potentially
pro-cyclical effects raised by commenters in response to the proposed
rule's calibration at 20 percent. To the extent the proposed rule's
requirement could have disincentivized covered companies from
maintaining longer-dated derivative transactions used by clients for
hedging purposes, this change also should reduce such effects. This
calibration also ensures covered companies maintain at least a minimum
amount of stable funding for funding risks associated with potential
valuation changes in derivatives portfolios. In addition, the agencies
expect the final rule's reduction of the calibration from 20 percent to
5 percent should lessen the incentive for a covered company to reduce
its NSFR funding requirement without meaningfully changing its risk
profile by closing out derivative transactions with large gross
derivative liabilities and re-entering into equivalent transactions
with zero liability exposure. The agencies will monitor this risk
through supervisory processes and evaluate the appropriateness of the 5
percent calibration as more data, reflective of a
[[Page 9182]]
wider variety of economic conditions, become available.\217\
---------------------------------------------------------------------------
\217\ Any change to the 5 percent calibration would be subject
to the agencies' notice and comment rulemaking process.
---------------------------------------------------------------------------
The final rule relies on gross derivative liabilities as the basis
for measuring a covered company's funding risks associated with
derivatives portfolio potential valuation changes. Gross derivative
liabilities tend to positively correlate with cumulative losses
realized over the life of outstanding contracts. Thus, large amounts of
gross derivative liabilities are likely to be positively correlated
with derivatives portfolios characterized by higher average volatility
and collateral and settlement flows. In addition, although gross
derivative liabilities may include transactions that are not currently
subject to the exchange of variation margin, the agencies note that
these transactions may become subject to margin calls or early
repayment due to contractual triggers or client requests, for example
in response to a change in the covered company's financial condition.
Consistent with the proposed rule, the final rule requires a
covered company to treat settlement payments based on changes in the
fair value of derivative transactions equivalently to variation margin
for purposes of calculating the covered company's gross derivative
liabilities. While these settlement payments fully extinguish a covered
company's current derivative exposure from an accounting perspective,
they do not reduce a derivative transaction's funding risk related to
potential valuation changes. Under both the collateralized-to-market
and settled-to-market approaches, a covered company may be required to
fund equivalent flows of margin or settlement payments based on changes
in the value of its derivative transactions. Permitting settlement
payments to reduce the gross derivatives liability measure could
inappropriately incentivize covered companies to re-characterize
variation margin as settlement payments in order to evade the stable
funding requirement for potential derivative valuation changes.
Therefore, derivative liabilities that have been extinguished from the
balance sheet by such settlement payments must still be included in the
covered company's calculation of gross derivative liabilities for the
purposes of this component. This requirement also should reduce
opportunities for evasion.\218\
---------------------------------------------------------------------------
\218\ As noted above, some commenters argued that the agencies
should not include the proposed treatment of variation margin
exchanged characterized as settlement payments because the
commenters believed such an approach would be more stringent than
the Basel NSFR standard. While it is possible that covered companies
could be subject to a more stringent requirement with respect to
this component of the final rule than banking organizations in
foreign jurisdictions that adopt a different approach, the final
rule's treatment of settlement payments is necessary to prevent
evasion of the final rule's requirements.
---------------------------------------------------------------------------
The agencies also considered a range of alternative approaches for
addressing funding risks associated with derivatives portfolio
potential valuation changes, including alternative approaches suggested
by commenters. The agencies, however, have determined to adopt this
component as proposed because the benefits of a simpler measure with
less operational costs outweighs its shortcomings. Although many of the
alternatives could have increased this component's risk sensitivity,
they also would have introduced increased complexity and pro-
cyclicality. In addition, the suggested alternative of applying the 20
percent calculation as a floor to the overall NSFR derivatives RSF
amount would not reflect the funding risks arising from the other
components of the NSFR derivatives treatment.
7. Comments on the Effect on Capital Markets and Commercial End Users
The agencies received a number of comments arguing that the
proposed rule would increase the cost to covered companies of engaging
in derivative transactions, which commenters argued would harm capital
markets and the economy. Some of these commenters asserted that covered
companies would pass on increased costs to derivatives end-users,
making it more expensive for commercial firms to hedge business risks.
The final rule promotes stable funding by a covered company of
derivatives activities and restricts a covered company's ability to
fund such activities with unstable liabilities in a manner that could
generate undue risks to the safety and soundness of the covered company
or impose costs on U.S. businesses, consumers, and taxpayers in the
event of a disruption to the U.S. financial system. In addition, in
comparison to the proposed rule, certain modifications included in the
final rule will reduce the RSF amount in connection with derivative
transactions, thereby also reducing any incremental funding cost
increases for covered companies that would have resulted from the
proposed requirement. Section X of this Supplementary Information
section further discusses the expected impacts of the rule, including
potential benefits and costs for covered companies and other market
participants.
8. Derivatives RSF Amount Calculation
Under the final rule, a covered company must sum the required
stable funding amounts calculated under Sec. __.107 to determine the
covered company's derivatives RSF amount. A covered company's
derivatives RSF amount includes the following components:
(1) The RSF amount for the current net value component, which is
equal to the covered company's NSFR derivatives asset amount,
multiplied by an RSF of 100 percent, as described in section VII.E.2 of
this Supplementary Information section;
(2) The RSF amount for non-excess variation margin provided by the
covered company, which, as described in section VII.E.2 of this
Supplementary Information section, equals the carrying value of
variation margin provided by the covered company that reduces the
covered company's derivatives liability value of the relevant QMNA
netting set or derivative transaction not subject to a QMNA netting
set, multiplied by an RSF factor of zero percent;
(3) The RSF amount for excess variation margin provided by the
covered company, which as described in section VII.E.2 of this
Supplementary Information section, equals the sum of the carrying
values of each excess variation margin asset provided by the covered
company, multiplied by the RSF factor assigned to the asset pursuant to
Sec. __.106;
(4) The RSF amount for variation margin received, which comprises
the total of the carrying value of variation margin received by the
covered company, multiplied by the RSF factor assigned to each asset
comprising the variation margin pursuant to Sec. __.106, as described
in section VII.E.2 of this Supplementary Information section; and
(5) The RSF amount for potential future valuation changes of the
covered company's derivatives portfolio, which, as described in section
VII.E.6 of this Supplementary Information section, equals 5 percent of
the sum of the covered company's gross derivatives liabilities,
calculated as if no variation margin had been exchanged and no
settlement payments had been made based on changes in the values of the
derivative transactions, multiplied by an RSF factor of 100 percent;
(6) The fair value of a covered company's contributions to CCP
mutualized loss sharing arrangements, multiplied by an RSF factor of 85
percent, as described in section VII.E.5
[[Page 9183]]
of this Supplementary Information section.
(7) The fair value of initial margin provided by the covered
company, multiplied by the higher of an RSF factor of 85 percent and
the RSF factor assigned to the initial margin asset pursuant to Sec.
__.106, as described in section VII.E.5 of this Supplementary
Information section.
9. Derivatives RSF Amount Numerical Example
The following is a numerical example illustrating the calculation
of a covered company's derivatives RSF amount under the final rule.
Table 5 sets forth the facts of the example, which assumes that: (1)
Each transaction is covered by a QMNA between the covered company and
each counterparty; (2) any cash and U.S. Treasury securities received
as variation margin by the covered company meet the conditions
specified in Sec. __.107(f)(1); (3) variation margin provided by the
covered company is not included on the covered company's balance sheet;
(4) the covered company has provided U.S. Treasuries as initial margin
to its counterparties; and (5) the derivative transactions are not
cleared through a CCP.
Table 5--Derivatives RSF Amount Numerical Example
----------------------------------------------------------------------------------------------------------------
Derivatives RSF amount numerical example
--------------------------------------------------------------------
Asset (liability)
value for the Variation margin provided Initial margin
covered company, (received) by the covered provided by the
prior to netting company covered company
variation margin
----------------------------------------------------------------------------------------------------------------
Counterparty A:
Derivative 1A.......................... 10 (1) cash..................... 2
Derivative 2A.......................... (2) (1) U.S. Treasury securities.
Counterparty B:
Derivative 1B.......................... (10) 3 cash....................... 1
Derivative 2B.......................... 5
Counterparty C:
Derivative 1C.......................... (2) 0............................ 0
----------------------------------------------------------------------------------------------------------------
Calculation of derivatives assets and liabilities.
(1) The derivatives asset value for counterparty A = (10-2)-2 = 6.
(2) The derivatives liability value for counterparty B = (10-5)-3 =
2.
(3) The derivatives liability value for counterparty C = 2.
Calculation of total derivatives asset and liability amounts.
(1) The covered company's total derivatives asset amount = 6.
(2) The covered company's total derivatives liability amount = 2 +
2 = 4.
Calculation of NSFR derivatives asset or liability amount.
(1) The covered company's NSFR derivatives asset amount = max (0,
6-4) = 2.
(2) The covered company's NSFR derivatives liability amount = max
(0, 4-6) = 0.
Required stable funding relating to derivative transactions.
The covered company's derivatives RSF amount is equal to the sum of
the following:
(1) NSFR derivatives asset amount x 100% = 2 x 1.0 = 2;
(2) Non-excess variation margin provided x 0% = 3 x 0.0 = 0;
(3) Excess variation provided x applicable RSF factor(s) = 0;
(4) Variation margin received x applicable RSF factor(s) = 2 x 0.0
= 0;
(5) Gross derivatives liabilities x 5% x 100% = (5+2) x 0.05 x 1.0
= 0.35;
(6) Contributions to CCP mutualized loss-sharing arrangements x 85%
= 0 x 0.85 = 0; and
(7) Initial margin provided x higher of 85% or applicable RSF
factor(s) = (2+1) x max (0.85, 0.0) = 2.55.
The covered company's derivatives RSF amount = 2 + 0 + 0 + 0 + 0.35
+ 0 + 2.55 = 4.90.
F. NSFR Consolidation Limitations
The proposed rule would have required a covered company to
calculate its NSFR on a consolidated basis. When calculating its
consolidated ASF amount, the proposed rule would have required a
covered company to take into account restrictions on the availability
of stable funding at a consolidated subsidiary to support assets,
derivative exposures, and commitments of the covered company held at
entities other than the subsidiary.
To determine a consolidated ASF amount, a covered company would
have calculated the contribution to its consolidated ASF and RSF
amounts, respectively, associated with each consolidated subsidiary,
each as calculated by the covered company for purposes of the covered
company's consolidated NSFR (subsidiary ASF contribution and subsidiary
RSF contribution). Where a subsidiary's ASF contribution is greater
that the subsidiary's RSF contribution, the amounts above the
subsidiary RSF contribution would have been considered an ``excess''
ASF amount of the subsidiary, as calculated for the purpose of the
consolidated firm (excess ASF amount). The proposed rule would have
permitted the covered company to include in its consolidated ASF amount
each subsidiary ASF contribution: (1) Up to the subsidiary RSF
contribution, as calculated from the covered company's perspective,
plus (2) any excess ASF amount above the subsidiary's RSF contribution,
only to the extent the consolidated subsidiary could transfer assets to
the top-tier entity of the covered company, taking into account
statutory, regulatory, contractual, or supervisory restrictions. This
approach to calculating a covered company's consolidated ASF amount
would have been similar to the approach taken in the LCR rule to
calculate a covered company's HQLA amount.
ASF amounts associated with a consolidated subsidiary, in this
context, refer to those amounts that would be calculated from the
perspective of the covered company. That is, in calculating the ASF
amount of a consolidated subsidiary that can be included in the covered
company's consolidated ASF amount, the covered company would not
include certain transactions between consolidated subsidiaries that are
netted under GAAP. For this reason, an ASF amount of a consolidated
subsidiary that is included in a covered company's consolidated NSFR
calculation may not always be equal to the ASF amount of
[[Page 9184]]
the consolidated subsidiary when calculated on a standalone basis if
the consolidated subsidiary is itself a covered company.
The proposed rule would have required a covered company that
includes a consolidated subsidiary's excess ASF amount in its
consolidated NSFR to implement and maintain written procedures to
identify and monitor restrictions on transferring assets from its
consolidated subsidiaries. The covered company would have been required
to document the types of transactions, such as loans or dividends, a
covered company's consolidated subsidiary could use to transfer assets
and how the transactions would comply with applicable restrictions. The
proposed rule would have required the covered company to be able to
demonstrate to the satisfaction of the appropriate agency that assets
may be transferred freely in compliance with statutory, regulatory,
contractual, or supervisory restrictions that may apply in any relevant
jurisdiction. A covered company that did not include any excess ASF
amount from its consolidated subsidiaries in its NSFR would not have
been be required to have such procedures in place. The proposal also
requested alternative approaches that the agencies should consider
regarding the treatment of excess ASF amounts.
Two commenters requested that the agencies clarify how the proposed
consolidation provisions would apply to inter-affiliate transactions,
including those that qualify as regulatory capital of a covered
company's consolidated subsidiary. One commenter supported the proposed
rule's treatment of certain inter-affiliate transactions for purposes
of determining the subsidiary ASF and RSF contributions because
ignoring such inter-affiliate transactions is consistent with the GAAP
accounting treatment of such transactions. Another commenter argued
that the ASF and RSF contribution amounts of a consolidated subsidiary
should reflect the calculation of ASF and RSF from the subsidiary's
perspective on a standalone basis. For example, under this approach,
the funding raised by a covered company that is downstreamed to a
consolidated subsidiary and included as capital at that subsidiary
(downstream funding) would be counted as ASF of the subsidiary and part
of the subsidiary ASF contribution. In addition, one commenter
requested that the agencies clarify whether the consolidation
provisions would apply to securitization vehicles that must be
consolidated on the covered company's balance sheet in accordance with
GAAP.
The agencies also received comments on the calculation of the
consolidated NSFR for covered companies that are subject to a reduced
NSFR requirement. Several commenters requested that covered companies
subject to a reduced NSFR requirement be allowed to automatically
include in their consolidated NSFR a subsidiary's ASF contribution up
to 100 percent of the subsidiary's RSF contribution, rather than
limiting the automatically included amount based on a reduced
requirement at the subsidiary. These commenters asserted that the
subsidiary's ASF contribution would be available to meet its full RSF
contribution without regards to a reduced consolidated requirement and
that this approach would be consistent with the Board's originally
proposed modified NSFR treatment.
The final rule includes the consolidation provisions as proposed.
Consistent with the proposed rule, the final rule permits a covered
company to include in its consolidated ASF amount any portion of the
subsidiary ASF contribution of a consolidated subsidiary that is less
than or equal to the subsidiary RSF contribution because the
subsidiary's NSFR liabilities and NSFR regulatory capital elements
generating that ASF amount are available as stable funding for the
subsidiary's assets, derivative exposures, and commitments. The final
rule limits the automatic inclusion of excess ASF amounts, however,
because the stable funding at one consolidated subsidiary of the
covered company may not always be available to support assets,
derivative exposures, and commitments at another consolidated
subsidiary.
For example, if a covered company calculates a subsidiary RSF
contribution of $90 based on the assets, derivative exposures, and
commitments of a consolidated subsidiary and a subsidiary ASF
contribution of $100 based on the NSFR regulatory capital elements and
NSFR liabilities of the consolidated subsidiary, the consolidated
subsidiary would have an excess ASF amount of $10 for purposes of the
consolidation provision in the final rule. The covered company may only
include an amount of this $10 excess ASF amount in its consolidated ASF
amount to the extent the consolidated subsidiary may transfer assets to
the top-tier entity of the covered company (for example, through a
dividend or loan from the subsidiary to the top-tier covered company),
taking into account any statutory, regulatory, contractual, or
supervisory restrictions. Examples of restrictions on transfers of
assets that a covered company must take into account in calculating its
NSFR include sections 23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 12 U.S.C. 371c-1); the Board's Regulation W (12 CFR part 223);
any restrictions on a consolidated subsidiary by state or Federal law,
such as restrictions imposed by a state banking or insurance
supervisor; and any restrictions on a consolidated subsidiary or
branches of a U.S. entity domiciled outside the United States by a
foreign regulatory authority, such as a foreign banking supervisor.
This limitation on the excess ASF amount of a consolidated subsidiary
includable in a covered company's consolidated NSFR applies to both
U.S. and non-U.S. consolidated subsidiaries.
The agencies are not modifying the consolidation provisions, as
suggested by one commenter, to require a covered company to determine
the excess ASF amount of a consolidated subsidiary based on ASF and RSF
amounts of the subsidiary as calculated from the subsidiary's
perspective on a standalone basis. The final rule aligns with the
netting of exposures under GAAP at the consolidated level, and the
final rule's consolidation provisions would not require a covered
company to take into account, in the calculation of the subsidiary ASF
contribution, ASF and RSF amounts resulting from transactions between
consolidated subsidiaries that are netted under GAAP.
As described in section V of this Supplementary Information
section, the NSFR uses carrying value on a covered company's balance
sheet where appropriate. The calculation of subsidiary ASF contribution
does not include certain inter-affiliate transactions that are
eliminated when a covered company constructs its consolidated balance
sheet under GAAP. For example, if consolidated subsidiary ``A'' makes a
loan to consolidated subsidiary ``B'', the loan asset of subsidiary A
and the liability of subsidiary B generally would be eliminated when a
covered company constructs a consolidated balance sheet in accordance
with GAAP. Therefore, in this example, subsidiary B's liability is not
included in the calculation of subsidiary B's subsidiary ASF
contribution.
The scope of the inter-affiliate transactions that are excluded
from the calculation of a subsidiary's excess ASF amount includes
transactions between a covered company and its consolidated subsidiary,
including where the covered company downstreams funding that is
recognized as capital at the consolidated subsidiary. For example, if a
[[Page 9185]]
subsidiary's ASF contribution equals $110, consisting of $10 of capital
placed by the parent and $100 of retail deposits, only the retail
deposits would be subject to the excess ASF calculation. If the
subsidiary's RSF contribution was $90 (calculated from the perspective
of the parent covered company, after excluding inter-affiliate
transactions), then there would be $10 of excess ASF.
To the extent a large depository institution subsidiary of a
covered company is subject to a stand-alone NSFR requirement under the
final rule, the subsidiary's compliance with its stand-alone NSFR
requirement could potentially constitute a restriction on the
subsidiary's ability to transfer assets to the covered company,
depending on the circumstances. Such a restriction would limit the
parent covered company's ability to include portions of the depository
institution's excess ASF amount (calculated from the perspective of the
consolidated parent covered company), but would not change the
calculation of the ASF amount of the subsidiary, as calculated on a
standalone basis for purposes of its NSFR requirement. Likewise,
regulatory capital requirements applicable to a consolidated subsidiary
of a covered company could limit the extent to which the covered
company may count the excess ASF amount of the subsidiary towards the
covered company's consolidated ASF amount, but would not change the
calculation of the subsidiary's ASF amount.
Similar to other balance sheet items, the assets and liabilities of
securitization vehicles that are consolidated onto a covered company's
balance sheet under GAAP are included in the calculation of the
consolidated vehicle's ASF contributions and RSF contributions. For
example, securities issued by a securitization vehicle that are
liabilities on a consolidated covered company's balance sheet, and
assets of a securitization vehicle that are included on a covered
company's balance sheet are included in the calculation of the ASF
contributions and RSF contributions.
In cases where a covered company is subject to a reduced NSFR
requirement, the covered company must calculate the subsidiary ASF
contribution and subsidiary RSF contribution amount of each
consolidated subsidiary from the perspective of the covered company for
purposes of its consolidated reduced NSFR requirement. Specifically, a
covered company must apply the appropriate adjustment factor to its
consolidated subsidiary's RSF contribution amount when determining the
amount of the subsidiary RSF contribution for purposes of determining
the amount of the consolidated subsidiary's ASF that can automatically
be included in the covered company's consolidated ASF amount. Any
amount of the consolidated subsidiary's ASF in excess of its adjusted
RSF contribution amount, as calculated by the covered company, may only
be included in the covered company's consolidated NSFR to the extent
the consolidated subsidiary can transfer assets to the covered company,
taking into account statutory, regulatory, contractual, or supervisory
restrictions. It is important that covered companies consider funding
needs across the consolidated entity for the NSFR calculation as
required. Accordingly, covered companies must consider the extent to
which assets held at a consolidated subsidiary are transferable across
the organization and ensure that a minimum level of ASF is positioned
or freely available to transfer to meet funding needs at the subsidiary
where they are expected to occur. Although ASF contribution amounts at
a consolidated subsidiary in excess of its adjusted RSF contribution
amount may be available to support that subsidiary during the NSFR's
one-year time horizon, permitting the automatic inclusion of such ASF
contribution amounts up to 100 percent of the subsidiary's standalone
RSF contribution amounts, as requested by commenters, without
appropriate consideration of transfer restrictions, may make the
consolidated NSFR requirement less effective.
G. Treatment of Certain Facilities
In light of recent disruptions in economic conditions caused by the
outbreak of the coronavirus disease 2019 and the stress in U.S.
financial markets, the Board, with the approval of the U.S. Secretary
of the Treasury, established certain liquidity facilities pursuant to
section 13(3) of the Federal Reserve Act.\219\
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\219\ 12 U.S.C. 343(3).
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In order to prevent disruptions in the money markets from
destabilizing the financial system, the Board authorized the Federal
Reserve Bank of Boston to establish the Money Market Mutual Fund
Liquidity Facility (MMLF). Under the MMLF, the Federal Reserve Bank of
Boston may extend non-recourse loans to eligible borrowers to purchase
assets from money market mutual funds. Assets purchased from money
market mutual funds are posted as collateral to the Federal Reserve
Bank of Boston. MMLF collateral generally comprises securities and
other assets with the same maturity date as the MMLF non-recourse
loan.\220\
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\220\ The maturity date of a MMLF advance equals the earlier of
the maturity date of the eligible collateral pledged to secure the
advance and 12 months from the date of the advance.
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In order to provide liquidity to small business lenders and the
broader credit markets, and to help stabilize the financial system, the
Board authorized each of the Federal Reserve Banks to extend credit
under the Paycheck Protection Program Liquidity Facility (PPPLF).\221\
Under the PPPLF, each of the Federal Reserve Banks may extend non-
recourse loans to institutions that are eligible to make Paycheck
Protection Program (PPP) covered loans as defined in section 7(a)(36)
of the Small Business Act.\222\ Under the PPPLF, only PPP covered loans
that are guaranteed by the Small Business Administration (SBA) with
respect to both principal and accrued interest and that are originated
by an eligible institution may be pledged as collateral to the Federal
Reserve Banks. The maturity date of the extension of credit under the
PPPLF equals the maturity date of the PPP covered loans pledged to
secure the extension of credit.\223\
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\221\ The Paycheck Protection Program Liquidity Facility was
previously known as the Paycheck Protection Program Lending
Facility.
\222\ 15 U.S.C. 636(a)(36). Congress created the PPP as part of
the Coronavirus Aid, Relief, and Economic Security Act and in
recognition of the exigent circumstances faced by small businesses.
PPP covered loans are fully guaranteed as to principal and accrued
interest by the Small Business Administration (SBA) and also afford
borrower forgiveness up to the principal amount and accrued interest
of the PPP covered loan, if the proceeds of the PPP covered loan are
used for certain expenses. Under the PPP, eligible borrowers
generally include businesses with fewer than 500 employees or that
are otherwise considered to be small by the SBA. The SBA reimburses
PPP lenders for any amount of a PPP covered loan that is forgiven.
In general, PPP lenders are not held liable for any representations
made by PPP borrowers in connection with a borrower's request for
PPP covered loan forgiveness. For more information on the Paycheck
Protection Program, see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.
\223\ The maturity date of the loan made under the PPPLF will be
accelerated if the underlying PPP covered loan goes into default and
the eligible borrower sells the PPP covered loan to the SBA to
realize the SBA guarantee. The maturity date of the loan made under
the PPPLF also will be accelerated to the extent of any PPP covered
loan forgiveness reimbursement received by the eligible borrower
from the SBA.
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Eligible borrowers under the MMLF and PPPLF include certain banking
organizations that are currently subject to the LCR rule and that will
be subject to the final rule upon its effective date. Advances from the
MMLF and PPPLF facilities are non-recourse, and the maturity of the
advance generally aligns with the maturity of the collateral.
Accordingly, a covered company is not
[[Page 9186]]
exposed to credit or market risk from the collateral securing the MMLF
or PPPLF advance that could otherwise affect the banking organization's
ability to settle the loan and generally can use the value of cash
received from the collateral to repay the advances at maturity.
To facilitate the use of the MMLF and the PPPLF, on May 6, 2020,
the agencies published in the Federal Register an interim final rule to
require a banking organization subject to the LCR rule to neutralize
the effect on its LCR of participation in the MMLF and PPPLF (LCR
interim final rule).\224\ The LCR interim final rule requires a covered
company to neutralize the LCR effects of the advances made by the MMLF
and PPPLF together with the assets securing these advances.
Specifically, the LCR interim final rule added a new definition to the
LCR rule for ``Covered Federal Reserve Facility Funding'' to identify
MMLF and PPPLF advances separately from other secured funding
transactions under the LCR rule. The LCR interim final rule requires
outflow amounts associated with Covered Federal Reserve Facility
Funding and inflow amounts associated with the assets securing this
funding to be excluded from a covered company's total net cash outflow
amount under the LCR rule.\225\ The treatment under the LCR interim
final rule better aligns the treatment of these advances and collateral
under the LCR rule with the liquidity risk associated with funding
exposures through these facilities, and to ensure consistent and
predictable treatment of covered companies' participation in the
facilities under the LCR rule. The agencies received one comment
letter, from a trade association, on the LCR interim final rule. The
commenter supported the requirements under the LCR interim final rule,
arguing that the requirements encourage participation in the
facilities, which ultimately provides benefits to small businesses,
households, and investors.
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\224\ 85 FR 26835 (May 6, 2020). The agencies also adopted
interim final rules to address the capital treatment of
participation in the MMLF (85 FR 16232 (Mar. 23, 2020)) and capital
treatment of participation in the PPPLF (85 FR 20387 (Apr. 13,
2020)). These interim final rules were adopted as final on September
29, 2020.
\225\ See 12 CFR 50.34 (OCC); 12 CFR 249.34 (Board); 12 CFR
329.34 (FDIC). Section __.34 does not apply to the extent the
covered company secures Covered Federal Reserve Facility Funding
with securities, debt obligations, or other instruments issued by
the covered company or its consolidated entity.
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For the same reasons that the agencies issued the LCR interim final
rule, the agencies are adopting, as final, provisions to better align
the treatment of these advances and collateral under the NSFR rule with
the liquidity risk associated with funding exposures through these
facilities, and to ensure consistent and predictable treatment of
covered companies' participation in the facilities under the NSFR
rule.\226\ Specifically, the final rule adds a new Sec. __.108 that
requires liability and asset amounts associated with Covered Federal
Reserve Facility Funding to be excluded from a covered company's NSFR.
Consistent with the LCR rule, this new Sec. __.108 does not apply to
the extent the covered company secures Covered Federal Reserve Facility
Funding with securities, debt obligations, or other instruments issued
by the covered company or its consolidated entity. This arrangement
presents liquidity risk due to the asymmetric cash flows of the covered
company because the covered company would not have an inflow to offset
its cash outflows.
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\226\ The new definition of ``Covered Federal Reserve Facility
Funding'' was added into the common definitions section of the LCR
and NSFR rules. Consistent with the LCR interim final rule, the
final rule does not amend the agencies' definitions of average
weighted short-term wholesale funding in the common definitions
section of the LCR and NSFR rules and the Board is not amending the
calculation of weighted short-term wholesale funding on reporting
form FR Y-15 related to Sec. __.108 of the final rule. Weighted
short-term wholesale funding measures a banking organization's
typical dependency on certain types of funding and generally does
not measure funding risks related to the composition of a banking
organization's assets and commitments.
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Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefore in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' The agencies have
determined that it is in the public interest to finalize these changes
without notice and comment. The MMLF and PPPLF were established in
response to urgent and severe economic disruptions, and these changes
will provide certainty to covered companies regarding the NSFR
treatment of transactions under the facilities, thereby facilitating
the continued operation of, and covered companies' participation in the
facilities. In addition, the agencies note that it may be unnecessary
to provide notice or the opportunity to comment prior to adopting these
changes because the public recently had an opportunity to comment on
substantively similar changes to the LCR rule, and no adverse comments
were submitted to the agencies in connection with those changes.
H. Interdependent Assets and Liabilities
The Basel NSFR standard provides that, subject to strict conditions
and in limited circumstances, it may be appropriate for an asset and a
liability to be considered interdependent and assigned a zero percent
RSF factor and a zero percent ASF factor, respectively.\227\ The
proposed rule did not include a framework for interdependent assets and
liabilities because, as stated in the proposal, the agencies did not
identify transactions conducted by U.S. banking organizations that
would meet the conditions in the Basel NSFR standard.
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\227\ See supra note 6 at para 45.
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As the proposed rule noted, in order for an asset and liability to
be considered interdependent, the Basel NSFR standard would require all
of the following conditions to be met: (1) The interdependence of the
asset and liability must be established on the basis of contractual
arrangements, (2) the liability cannot fall due while the asset remains
on the balance sheet, (3) the principal payment flows from the asset
cannot be used for purposes other than repaying the liability, (4) the
liability cannot be used to fund other assets, (5) the individual
interdependent asset and liability must be clearly identifiable, (6)
the maturity and principal amount of both the interdependent liability
and asset must be the same, (7) the bank must be acting solely as a
pass-through unit to channel the funding received from the liability
into the corresponding interdependent asset, and (8) the counterparties
for each pair of interdependent liabilities and assets must not be the
same.
The Basel NSFR standard's conditions for establishing
interdependence are intended to ensure that the specific liability
will, on the basis of contractual terms and under all circumstances,
remain for the life of the asset and all cash flows during the life of
the asset and at maturity are perfectly matched with cash flows of the
liability. Under such conditions, a covered company would face no
funding risk or benefit arising from the interdependent asset and
liability. For example, the proposed rule noted that if a sovereign
entity establishes a program where it provides funding through
financial institutions that act as pass-through entities to make loans
to third parties, and all the conditions set forth in the Basel NSFR
standard are met, the liquidity profile of a financial institution
would not be
[[Page 9187]]
affected by its participation in the program. As such, the assets of
the financial institution created through such a program could be
considered interdependent with the liabilities that would also be
created through the program, and the assets and liabilities could be
assigned a zero percent RSF factor and a zero percent ASF factor,
respectively. The proposed rule noted that no such programs at that
time existed in the United States. Therefore, the proposed rule did not
include a provision for assigning zero percent RSF and ASF factors to
assets and liabilities that are ``interdependent.'' However, the
proposed rule requested comment as to whether any assets and
liabilities of covered companies should receive such treatment under
the NSFR rule.
Commenters requested that the final rule recognize as
interdependent various assets and liabilities. Specifically, commenters
requested interdependent treatment in connection with securities
borrowing and lending transactions to facilitate client short
positions; securities borrowing transactions and covered company short
positions; certain client segregated assets and liabilities for client
claims on those assets; assets and liabilities arising from derivatives
clearing activities on behalf of clients; initial margin received by a
covered company under client-facing derivative transactions and used to
fund hedge positions for the derivative transactions, and assets and
liabilities related to mortgage servicing activities. Commenters
asserted that these transactions present no funding risk to covered
companies. Discussions below address comments on the treatment of
assets and liabilities as interdependent.
As discussed in section V of this Supplementary Information
section, the NSFR is a broad measure of the funding profile of the
whole balance sheet of a covered company at a point in time and the
final rule generally does not apply separate requirements to individual
lines of business or to subsets of assets and liabilities of a covered
company. The treatment of specific assets and liabilities as
interdependent would effectively remove these items from the assessment
of the covered company's stable funding profile overall. As discussed
in sections VII.C.2.a and VII.D.2.a of this Supplementary Information
section, the final rule uses the remaining maturity of assets and
liabilities to assess a covered company's funding risks. As a general
principle, it would be inconsistent with the purposes and design of the
NSFR to provide interdependent treatment to a specific asset and
liability where the specified asset can contractually persist on the
balance sheet of the covered company after the extinguishment of the
specified liability. Additionally, the final rule generally does not
consider the range of actions that a covered company may take in the
future that would adjust the maturity of an asset in response to the
maturity of a liability. Consistent with the purposes and design of the
NSFR, as discussed above, the agencies have concluded that it would be
inappropriate to recognize any assets and liabilities as
interdependent. Additionally, including in the final rule the criteria
under which certain transactions could qualify as interdependent would
add considerable complexity and undermine the NSFR's design as a simple
and standardized measure. In the discussion below, the agencies discuss
concerns about why particular transactions suggested by commenters will
not qualify as interdependent.
Short Sales
Commenters requested that the agencies reconsider interdependent
treatment for transactions conducted by a covered company that
facilitate the covered company or its customers entering into short
positions. Commenters provided examples of certain secured funding
transactions, such as firm shorts or loans of collateral to customers,
that they asserted directly fund certain secured lending transactions,
such as a reverse repurchase agreement or a securities borrowing
transaction. These commenters asserted that the short sale of a
security by a covered company represents a liability on its balance
sheet. In a similar manner, a client short sale may result in a covered
company receiving the cash proceeds as collateral for the security
provided to cover the client's short position, increasing the covered
company's balance sheet liability to its clients. In each case, the
covered company may use the proceeds from its short sale or the cash
collateral from the client's short sale to collateralize a secured
lending transaction to source the security sold short. The secured
lending transaction is recorded as an asset on the covered company's
balance sheet.
At the time of terminating its short exposure, the covered company
extinguishes its short position liability. Similarly, at the unwind of
the client short transaction, the client may return the security to the
covered company in return for the cash proceeds of the initial short
sale, closing out the covered company's liability to the client. In
either case, to close out the asset the covered company may return the
security to the securities lender or reverse repurchase agreement
counterparty and receive back the cash collateral. Commenters asserted
that when either type of short position is unwound, the associated
balance sheet liabilities and assets would roll off simultaneously.
These commenters argued that such transactions are substantially
similar to transactions in which a covered company acts as riskless
principal; that the transactions are linked by regulation, internal
procedures, and business practices; that the principal amounts of the
asset and liability generated by a customer short position are
generally the same; and that such treatment would be consistent with
the Basel NSFR standard that provides special treatment for securities
borrowing transactions. As a result, commenters requested that the
agencies assign no funding requirement to the secured lending
transaction that sources the security, which is the covered company's
balance-sheet asset.
Commenters also noted that certain securities borrowing
transactions conducted by a covered company are subject to the Board's
Regulation T and requested that the agencies recognize that conducting
a stock borrow for a permitted purpose under Regulation T creates a
clear link between the liability to the client and the secured lending
transaction. One commenter speculated that covered companies would need
to raise additional long-term funding to support the stable funding
requirement for activities that facilitate short positions and that the
cash raised through such issuance may increase a covered company's
balance sheet leverage, which in turn may cause the covered company to
reduce other financial intermediation activities. One commenter argued
that failing to reduce the funding requirement for facilitating short-
sale activities would impede market liquidity and cited a report by the
Federal Reserve Bank of New York concerning the short-sale ban in the
United States from September 18, 2018, to October 8, 2018, as evidence
that impeding the short-sale market would damage equities markets.
The agencies have concluded that because there is a risk that the
maturities of the assets and liabilities for these transactions may not
match, it would be inappropriate to treat these assets and liabilities
as interdependent. It is unclear whether the consequence of the
maturity of all short sales liabilities on related assets would be the
same in practice. For example, the related assets may potentially
persist beyond the maturity of the liability. In addition,
[[Page 9188]]
although there are regulatory requirements that could require broker-
dealers to take a capital charge if they do not return securities to a
securities lender, these regulations may not subject all potential
transactions to capital charges and a covered company could still
technically retain a security if it is was willing to incur such
capital charges.
Secured funding and lending transactions conducted by a covered
company that facilitate the covered company, or its customers, entering
into a short exposure contribute to the funding profile of the covered
company similar to secured funding and lending transactions conducted
for other purposes, such as matched book repurchase and reverse
repurchase agreements. Providing interconnected treatment for assets
and liabilities related to short positions could incent covered
companies to engage in regulatory arbitrage by transforming some
matched book repurchase agreements into customer shorts covered by
sourcing an asset from a third party. Further, covered companies
frequently conduct short-facilitation transactions on an open basis, or
with significant embedded optionality, and with highly sophisticated
financial counterparties. A covered company may have limited control
over the maturity of either the related asset or liability and may be
exposed to the asymmetric timing of the maturities or the termination
amounts. The decision to terminate the funding received from a short
sale may be influenced by a range of factors outside the control of the
covered company, such as market volatility or the investment priorities
of a covered company's client. In the case of a short exposure covered
by a security borrow from a third party, the decision to terminate the
secured lending transaction by the covered company may be influenced by
the presence of alternative eligible uses for the security borrowed.
The secured lending transaction maturity is also dependent upon the
capacity of the securities lender to terminate the transaction by
returning cash collateral on demand. Conversely, the securities lender
may disrupt the symmetry of the transactions by terminating the secured
lending transaction prior to the termination of the short. The covered
company may not be able to source the securities elsewhere or may not
be able to demand additional collateral from the customer but may have
to continue facilitating the customer short. As discussed in section
VII.D.3.c of this Supplementary Information section, the relatively low
RSF factor applied to short-term secured lending transactions with
financial counterparties is designed to address uncertainty as to
whether assets may persist on the balance sheet. For these reasons, the
agencies are not applying interdependent treatment to transactions
facilitating short positions.
Assets Held in Certain Customer Protection Segregated Accounts and
Associated Liabilities
In another example, commenters requested that the agencies
recognize as interdependent assets that are required to be segregated
according to regulations and the associated liabilities for client
claims on these assets. In particular, a covered company may be
required to hold a certain amount of segregated assets in order to
comply with regulations applicable to customer funds of a broker-dealer
or futures commission merchant. Under the proposed rule, segregated
assets that are included on a covered company's balance sheet under
GAAP would be assigned RSF factors in the same manner as other assets
of the covered company. Commenters asserted that this treatment would
overstate the funding requirement associated with these assets since
the assets are held for the benefit of clients, covered companies have
limited reinvestment rights over the assets, and the assets are funded
by associated liabilities to customers. Commenters also argued that the
proposed treatment would incentivize covered companies to hold
segregated client assets in non-cash form rather than deposit cash with
third parties.\228\
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\228\ See section VII.D.3.i of this Supplementary Information
section, which discusses the assignment of RSF factors to assets
held in certain customer protection segregated accounts.
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Covered companies face funding risk with respect to such segregated
accounts due to potential asymmetry between the relevant assets and
liabilities. Accordingly, it would be inappropriate to treat such
assets and the corresponding liabilities as interdependent. Covered
companies have the ability to exercise control over client assets held
in segregated accounts, and covered companies may be able to earn a
return on those assets depending on reinvestment choices. Additionally,
the amount and maturity of segregated assets may not be directly
connected to the amount and maturity of liabilities to customers. In
cases where a covered company is required to segregate an amount of
assets, the determination of the aggregate value segregated may be
dependent on many different activities and liabilities to customers,
each subject to optionality exercisable at the discretion of the
customer. For example, the amount of assets to be segregated for client
protection under the SEC's Rule 15c3-3 may be based on a substantial
volume of individual customer free credit balances, margin loans
extended to customers, and short positions.
Clearing Activities
Commenters requested that the agencies treat clearing activities
conducted on behalf of clients as interdependent transactions. Under
these transactions, covered companies would guarantee the performance
of a client to the CCP and would collect any necessary margin
requirements from the client and post them to the CCP on behalf of the
client. Commenters argued that these client clearing activities should
be considered as interdependent transactions, as the covered company
would be acting solely on behalf of the client.
As discussed in section VII.E.4 of this Supplementary Information
section, if a covered company is engaged in clearing activities as an
agent for a client, it may be that the covered company would record no
balance sheet entries associated with such activities. Accordingly,
there would be no RSF factor assigned to such activities. Under these
circumstances, interdependent treatment would be unnecessary. To the
extent that a covered company guarantees the performance of its client
or otherwise engages in activities that cause these transactions to be
recorded on its balance sheet, it would be inappropriate to de-
recognize them for purposes of the NSFR. In some situations, a covered
company may continue to face funding risk as the intermediary between
its client and the CCP.
Hedges of Derivative Transactions Financed With Initial Margin
Commenters stated that a covered company in certain circumstances
can use initial margin that is provided by a client to purchase a
security that can then be used to hedge the market risk of a client-
facing derivative transaction. In these cases, commenters asserted that
a covered company's liability to return initial margin may be viewed as
directly funding the hedge security on the covered company's balance
sheet. Commenters argued that interdependent treatment is warranted for
the assets and liabilities generated by such activity because the
covered company acts as an intermediary when using client funds to
hedge the risk created by the client-
[[Page 9189]]
facing derivative. Additionally, the covered company generally sells
the hedge asset when the client's derivative position is unwound,
regardless of the remaining maturity of the hedge asset. The commenters
alternatively recommended that the agencies could limit interdependent
treatment in these cases to circumstances where the sale of the hedge
asset and the unwind of the derivative (together with the associated
liability to return the initial margin) occur simultaneously pursuant
to a contract or internal procedures. One commenter argued that
contractual provisions and auditable internal policies and procedures
create links between assets and liabilities that are sufficiently
formal and enforceable such that interdependent treatment is warranted.
For example, in the case of initial margin provided by a client and
used by a covered company to purchase a security to hedge the customer-
facing derivative exposure, one commenter argued that force majeure
clauses relieve a covered company from returning initial margin to a
client when the company is unable to sell the hedge security asset. In
this case, the commenter argued that the hedge asset and initial margin
liability are linked because the firm will not be required to return
the initial margin until it is able to sell the hedge security.
In these cases, commenters requested that the agencies either
assign a non-zero ASF factor for rehypothecatable initial margin
received by a covered company or reduce the RSF factor assigned to the
hedge asset purchased using initial margin provided by a client.
Commenters asserted that the proposed rule should provide greater
funding value to initial margin received by a covered company from
clients and used by the covered company to hedge its derivative
position with the client because this source of funding is more closely
related to the covered company's derivatives activities than other
sources of funding that receive higher ASF factors, like retail
deposits. The commenters also expressed the view that failure to give
interdependent treatment to initial margin liabilities and related
hedge assets under these circumstances effectively punishes covered
companies for financing corporate entities, which would adversely
impact corporate financing.
While a covered company may be unlikely in practice to continue to
hold a hedge asset without a corresponding liability to its client,
there is generally no absolute contractual bar against this. A covered
company generally could continue to hold an asset formally used as a
hedge despite a change in or elimination of a particular client's
derivative position. A covered company could, for example, return a
client's initial margin but continue to hold the asset purchased as a
hedge, if only for a short time. It is not the case that the asset and
liability necessarily fall due at the same time. Accordingly, it would
not be appropriate to treat these assets and liabilities as
interdependent.
Mortgage Servicing
A commenter also suggested that mortgage servicing rights and
deposits related to mortgage servicing be granted interdependent
treatment. The commenter argued that the asset (mortgage servicing
rights) and liability (mortgage borrower deposits consisting of the
principal, interest, tax, and insurance payments collected from the
borrowers to be remitted to investors, insurers, and state and local
governments) are linked and treated as self-funding by the industry.
The commenter also argued that deposits arising from mortgage servicing
should be considered stable because they have predictable inflow and
outflow patterns.
It would be inconsistent with the NSFR's aggregated balance sheet
approach to remove from the ratio calculation, through interdependent
treatment, an asset and a liability that are not each clearly
identifiable or where the maturities and amounts of the asset and the
liability do not align. While certain assets and liabilities may be
closely linked (such as mortgage servicing rights and borrower
liabilities), there is not enough certainty that the size and maturity
of these assets and liabilities would always align.
Other Comments on Interdependent Assets and Liabilities
Commenters also submitted several general comments applicable to
many types of transactions that they argued should receive
interdependent treatment. Commenters suggested that the agencies could
impose data reporting requirements to verify that internal policies and
procedures are maintaining a link between the various parts of the
transactions they believe should be granted interdependent treatment.
Another commenter argued that, if covered companies engage in the
transactions outlined above in accordance with the BCBS haircut floors
for non-centrally cleared securities financing transactions,\229\ then
the transactions should be treated as interdependent. Several
commenters also warned that failure to provide interdependent treatment
for the positions described above would significantly reduce liquidity
in the relevant markets.
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\229\ Basel Committee, Haircut floors for non-centrally cleared
securities financing transactions (November 2015), available at
http://www.bis.org/bcbs/publ/d340.htm.
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A discussed in section V of this Supplementary Information section,
the NSFR is a broad measure of the funding profile of the whole balance
sheet of a covered company and the final rule does not apply separate
requirements to individual lines of business or to subsets of assets
and liabilities of a covered company. The treatment of specific assets
and liabilities as interconnected would effectively remove these items
from the assessment of the covered company's stable funding profile
overall. As a general principle, it would be inconsistent with the
purposes and design of the NSFR to provide interdependent treatment to
a specific asset and liability where the specified asset can
contractually persist on the balance sheet of the covered company after
the extinguishment of the specified liability. While internal processes
and procedures may increase the probability of such assets and
liabilities aligning, it would be impractical to expand the final rule
to create or regulate such processes in a manner that would ensure
alignment.
VIII. Net Stable Funding Ratio Shortfall
As noted above, the proposed rule would have required a covered
company to maintain an NSFR of at least 1.0 on an ongoing basis. The
agencies expect circumstances where a covered company has an NSFR below
1.0 to arise rarely. However, given the range of reasons, both
idiosyncratic and systemic, a covered company could have an NSFR below
1.0 (for example, a covered company's NSFR might temporarily fall below
1.0 during a period of extreme liquidity stress), the proposed rule
would not have prescribed a particular supervisory response to address
a violation of the NSFR requirement. Instead, the proposed rule would
have provided flexibility for the appropriate Federal banking agency to
respond based on the circumstances of a particular case. Potential
supervisory responses could include, for example, an informal
supervisory action, a cease-and-desist order, or a civil money penalty.
The proposed rule would have required a covered company to notify
the appropriate Federal banking agency of an NSFR shortfall or
potential shortfall. Specifically, the proposed rule would have
required a covered company to notify its appropriate Federal banking
agency no later than 10 business days, or such other period as
[[Page 9190]]
the appropriate Federal banking agency may otherwise require by written
notice, following the date that any event has occurred that has caused
or would cause the covered company's NSFR to fall below the minimum
requirement.
In addition, a covered company would have been required to develop
a plan for remediation in the event of an NSFR shortfall. As set forth
in the proposed rule, such a plan would have been required to include
an assessment of the covered company's liquidity profile, the actions
the covered company has taken and will take to achieve full compliance
with the proposed rule (including a plan for adjusting the covered
company's liquidity profile to comply with the proposed rule's NSFR
requirement and a plan for fixing any operational or management issues
that may have contributed to the covered company's noncompliance), and
an estimated time frame for achieving compliance. The proposed rule
would have required a covered company to submit its remediation plan to
its appropriate Federal banking agency no later than 10 business days,
or such other period as the appropriate Federal banking agency may
otherwise require by written notice, after: (1) The covered company's
NSFR falls below, or is likely to fall below, the minimum requirement
and the covered company has or should have notified the appropriate
Federal banking agency, as required under the proposed rule; (2) the
covered company's required NSFR disclosures or other regulatory reports
or disclosures indicate that its NSFR is below the minimum requirement;
or (3) the appropriate Federal banking agency notifies the covered
company that it must submit a plan for NSFR remediation and the agency
provides a reason for requiring such a plan.
Finally, the covered company would have been required to report to
the appropriate Federal banking agency no less than monthly (or other
frequency, as required by the agency) on its progress towards achieving
full compliance with the proposed rule. These reports would have been
mandatory until the firm's NSFR was equal to or greater than 1.0.
The agencies would have retained the authority to take supervisory
action against a covered company that fails to comply with the NSFR
requirement.\230\ Any action taken would have depended on the
circumstances surrounding the funding shortfall, including, but not
limited to, operational issues at a covered company, the frequency or
magnitude of the noncompliance, the nature of the event that caused a
shortfall, and whether such an event was temporary or unusual.
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\230\ See Sec. __.2(c) of the final rule.
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The agencies received one comment requesting clarification of how
frequently a covered company must calculate its NSFR to meet the
proposed rule's requirement to maintain an NSFR of 1.0 on an ``ongoing
basis.'' The commenter suggested that the final rule should require a
covered company to calculate its NSFR in the same manner as it
calculates its regulatory capital levels. The commenter argued that,
because the NSFR is a long-term funding metric calculated primarily by
reference to a covered company's balance sheet, it would not be
possible to calculate a firm's NSFR more frequently than monthly.
The agencies also received two comments related to the proposed
rule's shortfall provisions. One commenter asserted that the proposed
rule did not have a mechanism similar to the LCR permitting a covered
company's NSFR to fall below 1.0. Another commenter responded to the
agencies' request for comment as to whether the proposed shortfall
framework should include a de minimis exception, such that a covered
company would not be required to report a shortfall if its NSFR
returned to the required minimum within a short grace period. This
commenter requested a de minimis exception when the cause of an NSFR
shortfall is beyond a covered company's control and the shortfall would
not be expected to increase systemic risk because of an expected short
duration and minimal amount. This commenter also requested that the
final rule include a cure period where a shortfall is caused by a
merger or acquisition by a covered company. Another commenter requested
that the requirement to submit a formal remediation plan should be
determined on a case-by-case basis by the covered company's appropriate
Federal banking agency. The commenter also requested that the
requirement to respond to an NSFR shortfall be calibrated to the
materiality and likely persistence of the shortfall.
Consistent with the proposed rule, the final rule requires a
covered company to maintain an NSFR of at least 1.0 on an ongoing
basis. The NSFR is designed to ensure that covered companies have the
ability to serve households and businesses in both normal and adverse
economic situations. The agencies would generally support a covered
company that chooses to reduce its NSFR during a liquidity stress
period in order to continue to lend and undertake other actions to
support the broader economy in a safe and sound manner.
While the final rule requires a covered company that is a U.S.
depository institution holding company or U.S. intermediate holding
company to disclose its NSFR for each quarter on a semi-annual
basis,\231\ a covered company needs to monitor its funding profile on
an ongoing basis to ensure compliance with the NSFR requirement. If a
covered company's funding profile materially changes intra-quarter, the
agencies expect the company to be able to calculate its NSFR to
determine whether it remains compliant with the NSFR requirement,
consistent with the notification requirements of Sec. __.110 of the
final rule.\232\ The agencies are adopting the shortfall provisions of
the final rule as proposed. Consistent with the shortfall framework in
the LCR rule, the final rule's shortfall framework provides supervisory
flexibility for the appropriate agency to respond to an NSFR shortfall
based on the particular circumstances of the shortfall. Depending on
the circumstances, an NSFR shortfall would not necessarily result in
supervisory action, but, at a minimum, would result in a notification
to the appropriate agency and heightened supervisory monitoring through
a remediation plan.
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\231\ See section IX of this Supplementary Information section.
\232\ The ability for a covered company to calculate its NSFR at
any point in which its funding profile materially changes intra-
quarter is similar to the application of minimum capital
requirements under the agencies regulatory capital rule. For
example, Prompt Corrective Action requires an insured depository
institution to provide written notice to its primary supervisor that
an adjustment to its capital category may have occurred no later
than 15 calendar days following the date that any material event has
occurred that would cause the insured depository institution to be
placed in a lower capital category. See 12 CFR 6.3 (OCC); 12 CFR
208.42 (Board); 12 CFR 324.402 (FDIC).
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The agencies have determined not to include a cure period or de
minimis exception to the shortfall notification requirement in the
final rule. The shortfall notification procedures are intended to help
the agencies identify a covered company that has a heightened liquidity
risk profile, and identify and evaluate shortfall patterns over time
and across covered companies. Timely notification of a shortfall allows
the appropriate Federal banking agency to make an informed
determination as to the appropriate supervisory response. As a result,
the agencies are finalizing the requirement that a covered company must
provide such notification no later than 10 business days, or such other
period as the appropriate agency may otherwise require by written
notice, following the date that any shortfall event has occurred.
Similarly, timely submission of a remediation plan
[[Page 9191]]
facilitates evaluation of shortfalls and the efforts undertaken by
covered companies to address them, which assists the agencies in
determining the appropriate supervisory response. Such supervisory
monitoring and response could be hindered if notice were to occur or
remediation plans were only submitted after a shortfall persisted in
duration or increased in amount.
IX. Disclosure Requirements
A. NSFR Public Disclosure Requirements
The disclosure requirements of the proposed rule would have applied
to certain bank holding companies and savings and loan holding
companies. The tailoring proposals would have amended the scope of
application of the proposed disclosure requirements to apply to
domestic top-tier depository institution holding companies and U.S.
intermediate holding companies of foreign banking organizations subject
to the proposed NSFR rule.\233\ The disclosure requirements of the
proposed rule would not have applied to depository institutions.\234\
The proposed rule would have required public disclosure of a company's
NSFR and components, as well as discussion of certain qualitative
features to facilitate an understanding of the company's calculation
and results. The final rule adopts the public disclosure requirements
for domestic top-tier depository institution holding companies and U.S.
intermediate holding companies of foreign banking organizations that
are subject to the final rule (covered holding companies).
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\233\ The FBO tailoring proposal would have applied NSFR public
disclosure requirements to a U.S. intermediate holding company of a
foreign banking organization subject to Category II or III liquidity
standards, or subject to Category IV liquidity standards with $50
billion or more in weighted short-term wholesale funding. 84 FR at
24320.
\234\ The Board noted in the Supplementary Information section
of the proposed rule that it may develop a different or modified
reporting form that would be required for both depository
institutions and depository institution holding companies subject to
the proposed rule. The Board stated that it anticipated that it
would solicit public comment on any such new reporting form.
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B. Quantitative Disclosure Requirements
The proposals would have required a company subject to the proposed
disclosure requirements to publicly disclose the company's NSFR and its
components. The proposed NSFR disclosure template would have included
components of a company's ASF and RSF calculations (ASF components and
RSF components, respectively), as well as the company's ASF amount, RSF
amount, and NSFR. For most ASF and RSF components, the proposed rule
would have required disclosure of both ``unweighted'' and ``weighted''
amounts.\235\ For certain line items in the proposed NSFR disclosure
template relating to derivative transactions that include components of
multi-step calculations before an ASF or RSF factor is applied, a
company would only have been required to disclose a single amount for
the component.
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\235\ The ``unweighted'' amount generally refers to values of
ASF or RSF components prior to applying the assigned ASF or RSF
factors, whereas the ``weighted'' amount generally refers to the
amounts resulting after applying the assigned ASF or RSF factors.
---------------------------------------------------------------------------
Two commenters argued that the proposed NSFR disclosure template
should not include certain information that is more granular than, or
in addition to, the information specified in the BCBS common template,
such as the requirement for additional detail regarding a company's
HQLA and certain other assets. One of these commenters asserted that
the proposed level of detail of required disclosures could constrain a
company's ability to execute its funding and related business
strategies because a firm subject to the disclosure requirements would
be wary of adjusting its funding structure in a way that would appear
to market participants to diverge from the funding structures of peer
firms. The commenter also argued this anticipation of a market response
would inappropriately force firms with different business models and
funding needs to maintain similar funding structures. The commenter
acknowledged that these concerns could be mitigated if firms explain
the difference between their funding structures and those of other
firms in the qualitative portion of the public disclosure, but argued
that market participants are likely to pay more attention to the
quantitative portion of a firm's disclosure. To address these concerns,
the commenter argued that reducing the required granularity of the
proposed disclosures would provide the market with sufficient
information about a company's liquidity profile without resulting in
what the commenter argued would be negative effects of overly detailed
disclosures.
Other commenters suggested that the final rule require a company to
disclose its average NSFR over the relevant reporting period, rather
than the company's NSFR at the end of the quarter. The commenters
argued that liquidity positions, and consequently a company's NSFR, can
be volatile. Accordingly, disclosing a company's NSFR for the day
ending a reporting period could suggest that the company's liquidity
position is more volatile than an average of the company's NSFR over
the entire reporting period would suggest. One commenter also argued
that using an average value would be consistent with the disclosure
requirements for the LCR. The final rule retains the quantitative
disclosure requirements largely as proposed.\236\ However, in a change
from the proposal, the final rule requires covered holding companies to
use simple daily averages rather than quarter end data in its public
disclosures. This change from the proposal will reduce the possibility
of ``window dressing'' by covered holding companies and will benefit
the public by more accurately reflecting the long term funding profile
of the reporting covered holding companies.
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\236\ As described in section V.E.3 of this Supplementary
Information section, the final rule includes reduced NSFR
requirements for certain covered companies. The final rule makes
certain adjustments to the NSFR disclosure template in Sec. __.131
of the final rule to incorporate the reduced requirements.
---------------------------------------------------------------------------
Although the final rule requires disclosure of certain liquidity
data, it does not require a covered holding company to disclose
specific asset-, liability-, or transaction-level details. This should
limit the risk that public disclosures will prevent a covered holding
company from executing its risk management and business strategies. The
disclosure requirements in the final rule are generally consistent with
the items specified in the BCBS common template, with some relatively
small differences, as described below. By using a standardized tabular
format that is generally similar to the BCBS common template, the final
rule's NSFR disclosure template enables market participants to compare
funding characteristics of covered holding companies in the United
States and other banking organizations subject to similar requirements
in other jurisdictions.
For most ASF or RSF components, the final rule's NSFR disclosure
template, like the proposed NSFR disclosure template, requires
separation of the unweighted amount based on maturity categories
relevant to the NSFR requirement: Open maturity; less than six months
after the calculation date; six months or more, but less than one year
after the calculation date; one year or more after the calculation
date; and perpetual. While the BCBS common template does not
distinguish between the ``open'' and ``perpetual'' maturity categories
(grouping them together under the heading ``no maturity''), the final
rule requires a company to disclose
[[Page 9192]]
amounts in the ``open'' and ``perpetual'' maturity categories
separately because the categories are on opposite ends of the maturity
spectrum for purposes of the final rule. The ``open'' maturity category
is meant to identify instruments that do not have a stated contractual
maturity and may be closed out on demand, such as demand deposits. The
``perpetual'' category is intended to identify instruments that
contractually may never mature and may not be closed out on demand,
such as equity securities. The final rule's NSFR disclosure template
separates these two categories into different columns to improve the
transparency and quality of the disclosure without undermining the
ability to compare the NSFR component disclosures of banking
organizations in other jurisdictions that utilize the BCBS common
template because these two columns can be summed for comparison
purposes. For certain ASF and RSF components that represent
calculations that do not depend on maturities, such as the NSFR
derivatives asset or liability amount, the final rule's NSFR disclosure
template, like the proposed NSFR disclosure template, does not require
a covered holding company to separate its disclosed amount by maturity
category.
As described further below, the final rule, like the proposed rule,
identifies the ASF and RSF components that a covered holding company
must include in each row of the NSFR disclosure template, including
cross-references to the relevant sections of the final rule. In some
cases, the final rule's NSFR disclosure template requires instruments
that are assigned identical ASF or RSF factors to be disclosed in
different rows or columns, and some rows and columns combine disclosure
of instruments that are assigned different ASF or RSF factors.
For consistency, the final rule's NSFR disclosure template requires
a covered holding company to clearly indicate the as-of date for
disclosed amounts and report all amounts on a consolidated basis and
expressed in millions of U.S. dollars or as a percentage, as
applicable.
1. Disclosure of ASF Components
The proposed rule would have required a company subject to the
proposed requirement to disclose its ASF components, separated into the
following categories: (1) Capital and securities, which includes NSFR
regulatory capital elements and other capital elements and securities;
(2) retail funding, which includes stable retail deposits, less stable
retail deposits, retail brokered deposits, and other retail funding;
(3) wholesale funding, which includes operational deposits and other
wholesale funding; and (4) other liabilities, which include the
company's NSFR derivatives liability amount and any other liabilities
not included in other categories. The Board is adopting the ASF
component disclosure categories as proposed.
The final rule's NSFR disclosure template differs from the BCBS
common template by including some additional ASF categories that are
not separately broken out under the Basel NSFR, such as retail brokered
deposits. The final rule's NSFR disclosure template also includes
additional information regarding a covered holding company's total
derivatives amount. These differences from the BCBS common template
provide greater transparency by requiring disclosure of additional
information relevant for understanding a covered holding company's
liquidity profile. These differences would not impact comparability
across jurisdictions, as the more specific line items can be added
together to produce a comparable total amount.
2. Disclosure of RSF Components
The proposed disclosure requirements would have required a company
to disclose its RSF components, separated into the following
categories: (1) Total HQLA and each of its component asset categories
(i.e., level 1, level 2A, and level 2B liquid assets); (2) assets other
than HQLA that are assigned a zero percent RSF factor; (3) operational
deposits; (4) loans and securities, separated into categories including
retail mortgages and securities that are not HQLA; (5) other assets,
which include commodities, certain components of the company's
derivatives RSF amount, and all other assets not included in another
category (including nonperforming assets); \237\ and (6) undrawn
amounts of committed credit and liquidity facilities.
---------------------------------------------------------------------------
\237\ A company would have been required to disclose
nonperforming assets as part of the line item for other assets and
nonperforming assets, rather than as part of a line item based on
the type of asset that has become nonperforming.
---------------------------------------------------------------------------
As discussed in section VII.D.3.h of this Supplementary Information
section, the proposed rule would have assigned RSF factors to
encumbered assets under Sec. Sec. __.106(c) and (d). A company subject
to the proposed disclosure requirements would have been required to
include encumbered assets in a cell of the NSFR disclosure template
based on the asset category and asset maturity rather than based on the
encumbrance period. Similar treatment would have applied for an asset
provided or received by a company as variation margin to which an RSF
factor is assigned under Sec. __.107.
The final rule includes the RSF component disclosure categories as
proposed with adjustments to incorporate the reduced requirements under
the final rule. The final rule's NSFR disclosure template differs in
some respects from the BCBS common template to provide more granular
information regarding RSF components without undermining comparability
across jurisdictions. For example, the final rule requires disclosure
of a covered holding company's level 1, level 2A, and level 2B liquid
assets by maturity category, which is not required under the BCBS
common template, to assist market participants and other parties in
assessing the composition of a covered holding company's HQLA
portfolio.\238\ Additionally, because some assets that are assigned a
zero percent RSF factor under the final rule are not HQLA under the LCR
rule, such as currency and coin and certain trade date receivables, the
template includes a distinct category for zero percent RSF assets that
are not level 1 liquid assets. The NSFR disclosure template also
differs from the BCBS common template in its presentation of the
components of a covered holding company's NSFR derivatives asset
amount, generally to improve the clarity of disclosure by separating
components into distinct rows and by including the total derivatives
asset amount so that market participants and other parties can better
understand a covered holding company's NSFR derivatives asset
calculation.
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\238\ The Board notes that the information to be disclosed
relating to HQLA is consistent with the design and purpose of the
NSFR and is different from disclosures under the LCR rule. The
carrying values of the various types of liquid assets at the
reporting date, together with their maturity profile, provide
additional clarity regarding the structure of the reporting
company's balance sheet. In contrast, the LCR rule focuses on the
ability to monetize assets in a period of stress and the LCR
disclosure template contains averages of market values of eligible
HQLA.
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C. Qualitative Disclosure Requirements
A company subject to the proposed disclosure requirements would
have been required to provide a qualitative discussion of the company's
NSFR and its components sufficient to facilitate an understanding of
the calculation and results. The proposed rule would not have
prescribed the content or format of a company's qualitative
disclosures; rather, it would have allowed flexibility for discussion
based on each company's particular circumstances. The proposed rule
would, however, have provided guidance through examples of topics
[[Page 9193]]
that a company may discuss, to the extent they would be significant to
the company's NSFR. These examples would have included: (1) The main
drivers of the company's NSFR; (2) changes in the company's NSFR over
time and the causes of such changes (for example, changes in strategies
or circumstances); (3) concentrations of funding sources and changes in
funding structure; (4) concentrations of available and required stable
funding within a company's corporate structure (for example, across
legal entities); and (5) other sources of funding or other factors in
the NSFR calculation that the company considers to be relevant to
facilitate an understanding of its liquidity profile.
One commenter requested that under the final rule a company only be
required to provide a qualitative discussion of items that are
``material'' rather than ``significant'' to the company's NSFR, which
the commenter argued would be consistent with disclosure requirements
applicable under U.S. federal securities laws and facilitate more
effective compliance.
The final rule, like the proposed rule, uses the term
``significant'' to describe the examples of items affecting a covered
holding company's NSFR about which a covered holding company should
provide a qualitative discussion. However, a covered holding company
may determine the relevant qualitative disclosures based on a
materiality concept. Information is regarded as material for purposes
of the disclosure requirements in the final rule if the information's
omission or misstatement could change or influence the assessment or
decision of a user relying on that information for the purpose of
making investment decisions. This approach is consistent with the
disclosure requirements under the Board's regulatory capital rules and
the LCR public disclosure requirement.\239\
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\239\ See 12 CFR 217.62, 217.172 and ``Regulatory Capital Rules:
Regulatory Capital, Implementation of Basel III, Capital Adequacy,
Transition Provisions, Prompt Corrective Action, Standardized
Approach for Risk-Weighted Assets, Market Discipline and Disclosure
Requirements, Advanced Approaches Risk-Based Capital Rule, and
Market Risk Capital Rule,'' 78 FR 62018, 62129 (October 11, 2013);
12 CFR 249.91(d) and ``Liquidity Coverage Ratio: Public Disclosure
Requirements; Extension of Compliance Period for Certain Companies
to Meet the Liquidity Coverage Ratio Requirements,'' 81 FR 94922,
94926 (December 27, 2016).
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As noted above, the proposed rule would have required a company to
provide a qualitative discussion of its NSFR and included an
illustrative list of potentially relevant items that a company could
discuss, to the extent relevant to its NSFR. Among the illustrative
list of potentially relevant items was an item titled ``Other sources
of funding or other factors in the net stable funding ratio calculation
that the covered depository institution holding company considers to be
relevant to facilitate an understanding of its liquidity profile.'' The
Board has determined that this item would have been redundant given the
proposed rule's general requirement that a covered holding company must
provide a qualitative discussion of its NSFR. For this reason, the
final rule eliminates this example.
Disclosure requirements under the LCR rule also include a
qualitative disclosure section.\240\ Given that the proposed rule and
the LCR rule would be complementary quantitative liquidity
requirements, a company subject to both disclosure requirements would
have been permitted to combine the two qualitative disclosures, as long
as the specific qualitative disclosure requirements of each are
satisfied. In response to a comment that the Board received on the
proposed rule for the LCR public disclosure requirements suggesting
that required qualitative disclosures include an exemption for certain
confidential or proprietary information, the final LCR public
disclosure rule clarified that a firm subject to that rule is not
required to include in its qualitative disclosures any information that
is proprietary or confidential.\241\ Instead, the covered holding
company is only required to disclose general information about those
subjects and provide a reason why the specific information has not been
disclosed. To maintain consistency between the qualitative disclosure
requirements of the LCR and final rules, the final rule does not
require a covered holding company to include in the qualitative
disclosure for its NSFR any information that is proprietary or
confidential so long as the company discloses general information about
the non-disclosed subject and provides a specific reason why the
information is not being disclosed.
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\240\ 81 FR 94922.
\241\ 81 FR at 94926.
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D. Frequency and Timing of Disclosure
The proposed rule would have required a company to provide timely
public disclosures after each calendar quarter. One commenter argued
that the frequency of the required disclosure should be increased to
daily because market participants need more timely information to
adequately adjust their risk management and business activities based
on the liquidity risk of companies. The commenter also argued that
quarterly NSFR disclosures could increase market instability relative
to more frequent disclosures, because, the commenter argued, large
changes in a company's NSFR between quarters would be more disruptive
to the market compared to more frequent disclosures that revealed
smaller incremental changes to a company's NSFR. Finally, the commenter
argued that more frequent disclosure would make it more difficult for a
company to engage in ``window dressing'' its NSFR to create the
appearance that its liquidity profile is more stable than the company
normally maintains.
Like the proposed rule, the final rule requires public disclosures
for each calendar quarter. However, in a change from the proposal, the
quarterly NSFR disclosures are required to be reported on a semiannual
basis for every second and fourth calendar quarter. For example,
following the end of the second quarter of 2023, covered holding
companies are required to publicly disclose their NSFRs and ASF and RSF
components for the first quarter of 2023 and the second quarter of
2023. This approach balances the benefits of quarterly disclosures,
which includes allowing market participants and other parties to assess
the funding risk profiles of covered holding companies, with the
concerns that more frequent disclosure could result in unintended
consequences. The Board will continue to assess the potential effects
that public disclosures have on the ability of banking organizations to
engage in banking activities that support the economy, especially in
times of stress. The Board will work with international groups, such as
the BCBS, as part of its continuing evaluation of the efficacy of
timely public disclosures.
For supervisory purposes, the Board will continue to monitor on a
more frequent basis any changes to a covered holding company's
liquidity profile through the information submitted on the FR 2052a
report.\242\
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\242\ The Board will issue a separate proposal for notice and
comment to amend its information collection under its FR 2052a to
collect information and data related to the requirements of the
final rule.
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As noted above, the proposed rule would have required a company
subject to the proposed requirements to publicly disclose, in a direct
and prominent manner, the required information on its public internet
site or in its public financial or other public regulatory reports. The
Board requires that the disclosures be readily accessible to the
general public for a period of at least five years after the disclosure
date.
[[Page 9194]]
The Board received no comments on this aspect of the proposed rule and
are including it in the final rule without modification.
Under the proposed rule, the first reporting period for which a
company would have been required to disclose its NSFR and its
components would have been the calendar quarter that begins on the date
the company becomes subject to the proposed NSFR requirement. Several
commenters suggested that companies be given additional time to comply
with disclosure and reporting requirements after becoming subject to
the final rule. In addition, one commenter suggested that the
disclosure requirements not be effective until at least two years after
a final NSFR rule is adopted. Some argued that companies need
additional time to build and implement the data collection systems
necessary to meet the NSFR disclosure requirements. Other commenters
argued that companies need additional time to align their existing
liquidity data reporting processes under the FR 2052a and the LCR
public disclosure requirements with those required for the NSFR rule.
Another commenter also argued that additional time is necessary to
allow the Board to clarify, through interpretation, the definitions of
various terms used in the LCR rule and the proposed NSFR, and to allow
companies to modify their compliance systems consistent with such
interpretations.
To allow covered holding companies sufficient time to modify their
reporting and compliance systems, the final rule does not require
covered holding companies to provide public NSFR disclosures until the
first calendar quarter that includes the date that is 18 months after
the covered holding company becomes subject to the NSFR
requirement.\243\ This means that covered holding companies that are
subject to the final rule beginning on the effective date of July 1,
2021, are required to make public disclosures for the first and second
quarters of 2023 approximately 45 days after the end of the second
quarter of 2023.
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\243\ The LCR rule similarly does not require covered holding
companies to provide public LCR disclosures until the first calendar
quarter that includes the date that is 18 months after the covered
holding company becomes subject to the LCR rule. 12 CFR 249.90(b).
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As discussed in the Supplementary Information section of the
proposed rule, the timing of disclosures required under the Federal
banking laws may not always coincide with the timing of disclosures
required under other Federal laws, including disclosures required under
the Federal securities laws. For calendar quarters that do not
correspond to a company's fiscal year or quarter end, under the
proposals the Board would have considered those disclosures that are
made within 45 days of the end of the calendar quarter (or within 60
days for the limited purpose of the company's first reporting period in
which it is subject to the proposed rule's disclosure requirements) as
timely. In general, where a company's fiscal year end coincides with
the end of a calendar quarter, the Board would have considered
disclosures to be timely if they are made no later than the applicable
SEC disclosure deadline for the corresponding Form 10-K annual report.
In cases where a company's fiscal year end does not coincide with the
end of a calendar quarter, the Board would have considered the
timeliness of disclosures on a case-by-case basis.
This approach to timely disclosures is consistent with the approach
to public disclosures that the Board has taken in the context of other
regulatory reporting and disclosure requirements. For example, the
Board has used the same indicia of timeliness with respect to the
public disclosures required under its regulatory capital rules and the
LCR public disclosure requirements.\244\ The Board did not receive any
comments regarding this aspect of the proposed rule, and the final rule
includes it as proposed.
---------------------------------------------------------------------------
\244\ See 78 FR 62018, 62129 (capital); 12 CFR 249.94 (LCR).
---------------------------------------------------------------------------
X. Impact Assessment
A. Impact on Funding
The agencies analyzed the potential impact of the final rule on the
funding structure of covered companies and estimated the potential
increase in funding costs for covered companies. In addition, the
impact analysis considered the potential costs and benefits of an
alternative policy of incorporating a small RSF requirement for level 1
liquid assets and certain short-term secured lending transactions with
financial sector counterparties secured by level 1 liquid assets.
Finally, this section presents responses to impact-related comments
received on the NSFR proposed rule.
The agencies used bank funding data from the second quarter of 2020
to obtain the latest available view of the impact of the final rule.
While the second quarter of 2020 represents a period of macroeconomic
stress as a result of economic disruptions related to the COVID-19
pandemic, the banking system was healthy and bank funding markets
remained open and functioning, partly due to the establishment of
facilities by the Board that supported market functioning and provision
of credit to households and businesses.\245\ The impact of the final
rule could vary through the economic and credit cycle based on the
liquidity profile of a covered company's assets and appetite for
funding risk. However, the agencies expect the impact of the final rule
to be broadly similar if estimated using assets, commitments, and
liabilities data from periods immediately preceding the onset of the
COVID-19 pandemic.
---------------------------------------------------------------------------
\245\ Short-term funding markets experienced a period of
significant stress in March 2020 that was alleviated by financial
and economic policy interventions.
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The agencies approximated ASF and RSF amounts at the consolidated
level for covered companies that would be subject to the full or
reduced NSFR requirement, as applicable, to estimate stable funding
shortfalls and excesses. These estimates were based on confidential
supervisory data collected on the FR 2052a report and publicly
available data from the FR Y-9C. As the available regulatory reports do
not correspond perfectly to the final rule's categories of assets,
commitments, and liabilities to which RSF and ASF factors are assigned,
the estimation entailed the use of staff judgment, which may introduce
some measurement error and hence, uncertainty into the estimates.
The scope of application for the final rule includes 20 banking
organizations, 11 of which would be Category III banking organizations
subject to a reduced NSFR requirement.\246\ Additionally, 27 depository
institutions with $10 billion or more in total consolidated assets that
are consolidated subsidiaries of the 20 banking organizations described
above are also covered by the final rule. The initial proposal would
have included a broader set of covered companies, but the agencies
subsequently established a modified scope as part of their recent
efforts to tailor regulations for domestic and foreign banks to more
closely match their risk profiles.\247\ The final rule
[[Page 9195]]
aligns its scope of application with the LCR rule.
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\246\ Eleven banking organizations that would be subject to
Category III standards that have less than $75 billion in average
weighted short-term wholesale funding and would be subject to a
reduced NSFR requirement calibrated at 85 percent.
\247\ As described above in Supplementary Information section
III, the tailoring proposals would have modified the scope of
application of the LCR rule and the proposed NSFR rule to apply to
certain U.S. banking organizations and U.S. intermediate holding
companies of foreign banking organizations, each with $100 billion
or more in total consolidated assets, together with certain of their
depository institution subsidiaries. In 2019, the agencies adopted a
tailoring final rule that amended the scope of the LCR rule. See
``Changes to Applicability Thresholds for Regulatory Capital and
Liquidity Requirements,'' 84 FR 59230.
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Using the approach described above, and assuming uncertainty of 5
percent in the NSFR due to measurement errors and management buffers,
the agencies estimate that nearly all of these covered companies would
be in compliance with the applicable NSFR requirement in the second
quarter of 2020. The agencies estimate that a small number of GSIBs
subject to the full NSFR could face an expected NSFR shortfall. The
total shortfall is estimated to be $10 to $31 billion of stable
funding. The agencies' estimates of shortfalls at these individual
covered companies range from a negligible amount to 8 percent of the
company's current level of ASF of their estimated NSFR. Beyond this
small number of companies with shortfalls, the additional change in
stable funding necessary to comply with the final rule at other covered
companies, including all depository institution subsidiaries, is zero.
Considering all banking organizations that would be subject to the
final rule, the agencies estimate that there is a total ASF of $8.5
trillion, a $1.3 trillion surplus over the total RSF.
As the final rule has differential effects on the use of funding of
different tenors, the agencies studied the effect of the final rule on
overall bank funding costs. The agencies do not expect most covered
companies to incur an increase in funding costs to comply with the NSFR
requirements. Across the companies with possible NSFR shortfalls, the
agencies estimate that the annual funding costs of raising additional
stable funding ranges from $80 to $250 million. For the individual
companies, estimates of the funding costs range from a negligible
amount to about 3 percent of net income from the third quarter of 2019
to the second quarter of 2020. The cost estimate assumes companies with
a shortfall would elect to eliminate it by replacing liabilities that
are assigned a lower ASF factor with longer maturity liabilities that
are assigned a higher ASF factor. This cost is based on an estimated
difference in relative interest expense between 90 day AA-rated
commercial paper (assigned a zero percent ASF factor) and unsecured
debt that matures in one year (assigned a 100 percent ASF factor). The
estimated difference is approximately 80 basis points, based on the
average cost difference between these two sources of funding from
January 2002 to February 2020.
Covered companies have multiple avenues by which to adjust their
funding sources to increase their NSFRs, such as raising more retail
deposits, raising capital, or lengthening funding terms. In general,
covered companies would be expected to adjust to changes in regulation
in a manner that provides the most favorable tradeoff between revenues
and the cost of compliance. For this analysis, the agencies assumed
that covered companies would resolve any NSFR shortfall by increasing
their use of 12-month term funding, which is the shortest term that
qualifies for a 100 percent ASF factor, and thus is a good proxy for
the lowest cost way of resolving an NSFR shortfall through additional
funding.
Instead of changing their funding mix to increase available stable
funding, covered companies with a stable funding shortfall could
instead change their asset mix to reduce their required stable funding.
Covered companies may do so if the forgone revenues from such assets
are smaller than the cost of raising additional stable funding. In this
scenario, the costs incurred by covered companies would be even smaller
than the agencies' estimates. Due to the depth and competitiveness of
U.S. financial markets, such portfolio changes, if they were to occur,
would likely have little knock-on effects on households and businesses.
Maintaining stable funding requirements may reduce the risk of
covered company failure and the vulnerability of the financial system
more broadly. To assess this, the agencies examined measures of stable
funding for financial institutions leading up to and during the 2007-
2009 financial crisis. The agencies found that, during the crisis,
financial institutions that held low amounts of stable funding were
significantly more likely to fail, be resolved, or receive liquidity
and funding assistance from federal programs such as the FDIC's
Temporary Liquidity Guarantee Program. This analysis indicates that the
final rule is likely to increase the overall resilience of the banking
system.
To assess changes since the financial crisis, the agencies examined
broad measures of funding stability, including the loans-to-deposits
ratio and an approximation of the NSFR that, unlike the more precise
measure used to estimate the shortfall, can be calculated back to the
mid-2000's. These measures show clear improvement since the mid-2000's.
Much of this improvement appeared soon after the financial crisis,
potentially reflecting the combined effects of the post-crisis
regulatory reforms as well as the release of the BCBS's draft NSFR
standard in 2010. These broader improvements in funding stability
suggest that the total adjustments that banking organizations have made
in response to the NSFR standard and proposed rule may be greater than
the stable funding shortfalls suggested by the most recent data.
To assess changes in stable funding since the NSFR notice of
proposed rulemaking, the agencies compared the stable funding shortfall
under the proposed rule, estimated at the time of the proposed rule
(December 2015), and the stable funding shortfall under the final rule.
Under the proposed rule, the agencies estimated an aggregate stable
funding shortfall of $39 billion as of December 2015. The agencies
estimate that, as of June 2020 under the final rule, the shortfall is
between $10 and $31 billion, or a difference of $8 to $29 billion from
the proposed rule in December 2015.\248\ This difference is similar to
the difference in stable funding requirements caused by the changes in
the RSF factors in the final rule for level 1 high quality liquid
assets and gross derivative liabilities from the proposal. The agencies
estimate that the aggregate required stable funding needed by banking
organizations to comply with the NSFR would have been $28 to $65
billion had these changes not been implemented. The comparable figures
suggest that the change in the shortfall from the proposal to the final
rule is comparable to the isolated impact of the changes implemented in
the final rule. More broadly, the historical perspective suggests that
the final rule will help lock in the gains in funding stability made
since the financial crisis.
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\248\ The agencies have explored the methodological differences
between the proposal and final rule estimates and concluded these
differences likely would not substantially affect the estimates.
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B. Costs and Benefits of an RSF Factor for Level 1 HQLA, Both Held
Outright and as Collateral for Short-Term Lending Transactions
The final rule establishes a zero percent RSF factor for level 1
liquid assets held outright and short-term secured lending transactions
with financial sector counterparties that are secured by level 1 high
quality liquid assets. The agencies analyzed the costs and benefits of
an alternate policy of a 5 percent RSF factor for such assets. As
discussed above, the agencies estimated that the marginal cost of
additional stable funding is about 80 basis points.\249\ Based on this
estimate, the
[[Page 9196]]
agencies predict that covered companies with an NSFR shortfall would
have to incur an annual cost of about four basis points for each dollar
of level 1 liquid assets needed to comply with a 5 percent stable
funding requirement.\250\ For such a covered company, the increase in
funding costs due to a 5 percent RSF factor on level 1 liquid assets
would offset about 3 percent of interest revenues on U.S. Treasury and
Agency securities and about 2 percent of interest revenues on reverse
repurchase agreements.
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\249\ The agencies also analyzed the costs and benefits of a 10
percent RSF factor for short-term secured lending transactions to
financial sector counterparties, and came to the same conclusion as
with the 5 percent RSF factor. This reflects the fact that a higher
RSF factor on these assets increases both the associated costs and
benefits,
\250\ A stable funding requirement of 5 percent multiplied by an
80 basis points stable funding annual premium equals an annual cost
of four basis points.
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By reducing the profitability of holding these assets, the funding
cost of a non-zero RSF factor on level 1 liquid assets could discourage
intermediation in U.S. Treasury and repo markets by covered companies
that have an NSFR close to or below 100 percent or are concerned that
they could have an NSFR below 100 percent under stress. To the extent
that higher costs discourage private sector intermediation in these
markets, these costs could reduce intermediation activity. Robust
intermediation activity is seen as beneficial to the smooth functioning
of these key components of the financial system. During past periods of
significant market stress or impaired liquidity, the Federal Reserve
has taken actions to support the smooth functioning of the markets for
Treasury securities and short-term U.S. dollar funding markets. These
actions have been taken to prevent strains in the Treasury market from
impeding the flow of credit in the economy or to mitigate the risk that
money market pressures could adversely affect monetary policy
implementation.
In addition, a non-zero RSF factor for level 1 liquid assets would
make it more costly for covered companies to hold level 1 liquid assets
than to hold central bank reserves, which have a zero percent RSF
factor. The differential treatment of these assets, which count equally
towards HQLA requirements under the LCR rule, may increase demand for
central bank reserves relative to other level 1 liquid assets. Having a
range of high-quality assets that can serve as near substitutes for
each other allows more flexibility in monetary policy implementation
and supports banking organizations' ability to manage liquidity risks
efficiently as the supply of these different asset types varies over
time, further supporting smooth market functioning.
The agencies identified two benefits of a small RSF requirement on
level 1 liquid assets. The first benefit is that the stable funding
requirement would help insulate covered companies against sharp price
declines of level 1 liquid assets. Such price declines might put
liquidity pressure on covered companies by triggering collateral and
margin calls, and, in more severe cases, fire sales. Although level 1
liquid assets are less volatile and more liquid than other securities,
selling large quantities of them in a short period can depress their
price further. In particular, using BrokerTec data, the agencies
estimated that the price impact of selling $100 million of on-the-run
U.S. Treasury securities ranges from 2 to 13 basis points during
financial market stress. A small RSF requirement on level 1 liquid
assets would ensure that covered companies fund a small portion of
these securities from stable sources, which could ease the liquidity
pressure caused by price declines and thus potentially reduce the need
for Federal Reserve liquidity support in times of stress.
The second benefit of a small RSF requirement is that it would
insulate covered companies against the systemic risk associated with
the interconnectedness of short-term financing positions secured by
level 1 liquid assets. In particular, covered companies may want to
provide short-term financing to counterparties during financial market
stress to preserve client relationships, thus maintaining a set of
interconnected positions. In the event of counterparty default, covered
companies might be forced to sell the level 1 liquid asset collateral
securing these positions to be able to perform on their short-term
obligations. However, unwinding such interconnected positions could
potentially put further liquidity stress on both covered companies and
short-term financing markets, especially during periods of stress.
Importantly, the agencies found that, over the last 15 years, there
were several episodes where the typical 1 to 2 percent haircuts used in
U.S. Treasury repurchase agreements did not provide sufficient
protection against day-to-day losses on U.S. Treasury securities. A
small RSF requirement would incentivize covered companies to fund level
1 liquid assets with more stable funding, which would reduce the risks
associated with interconnected short-term financing positions.
After considering the above costs and benefits, importantly
including the concern that a small RSF requirement could interfere with
the functioning of U.S. Treasury and repo markets by disincentivizing
covered companies from acting as intermediaries, the agencies are
adopting as part of the final rule a zero percent RSF factor for level
1 liquid assets held as securities and for short-term secured lending
transactions secured by level 1 liquid assets.
C. Response to Comments
The agencies received many comments concerning the potential impact
of the proposal, most of which argued that the cost of the proposal
would have been greater than predicted by the agencies. Commenters
argued the impact of the NSFR alone and together with other more
recently finalized regulations would have adverse impacts on banking
activities, markets, and the real economy. For example, one commenter
argued that the NSFR would further reduce the ability of covered
companies to act as financial intermediaries, extend credit, promote
price discovery, and conduct segregation and custody of client assets,
which the commenters argued has already been reduced by recent
regulation, including the SLR rule and the GSIB capital surcharge rule.
This commenter also argued that the NSFR would reduce liquidity in the
markets for securities, raise costs for derivatives end-users, make
pricing less efficient, and result in a sunk cost to covered companies
in the form of a liquidity buffer. The commenter further argued that
the increase in costs to covered companies stemming from the NSFR could
be passed on to a covered company's clients. The commenters noted that
the predicted cost of the Basel NSFR standard has been cited by other
jurisdictions as justification to change the standard, and that the
agencies should consider changes to reduce the costs of the proposal.
In regard to commenters' concerns that the proposal would decrease
financial intermediation, reduce market liquidity, and increase costs
to customers, the estimates from the analysis demonstrated that nearly
all covered companies are already in compliance with their NSFR
requirements, and there is a substantial surplus of ASF in excess of
RSF across covered companies at an aggregate level. The agencies also
studied the effect of the final rule on overall bank funding costs and
do not expect most covered companies to incur an increase in funding
costs to comply with the final NSFR requirements. As such, the final
rule would not require further changes by most covered companies to
comply with the rule, limiting adverse effects on financial
intermediation or market liquidity.
[[Page 9197]]
In developing the final rule, the agencies considered commenters'
concerns regarding potential costs of specific aspects of the NSFR, and
in some cases have made certain targeted changes that reduce potential
negative impacts on covered companies. For example, the proposal set
the RSF factors for level 1 liquid asset securities held outright and
short-term reverse repos secured by level 1 liquid assets to 5 percent
and 10 percent, respectively. The final rule establishes a zero percent
RSF factor for both level 1 liquid asset securities held outright and
short-term reverse repos secured by level 1 liquid assets, in part to
avoid disincentivizing covered companies from U.S. Treasury and repo
market intermediation. The proposal also required a 20 percent RSF add-
on factor for gross derivatives liabilities. Many commenters expressed
concerns that this treatment would reduce the willingness of covered
companies to act as derivatives counterparties and could thus aggravate
financial market liquidity stress. The final rule establishes a 5
percent RSF add-on factor for gross derivatives liabilities to take
these concerns into account. The change in the RSF factor from 20
percent to 5 percent reduces estimated aggregate RSF by $77 billion, or
1 percent of the estimated total RSF.
Commenters also asserted that the agencies had insufficient data to
estimate the impact of the NSFR on covered companies. The agencies note
that the impact analysis for the final rule used publicly available FR
Y-9C report data and confidential data from the FR 2052a report data
from the second quarter of 2020, which is the most up-to-date and
comprehensive information on covered companies.\251\ Although the
confidential supervisory and publicly available data in the analysis
does not perfectly correspond to the categories of assets, commitments,
and liabilities used in the final rule, the data is sufficient to
construct informative estimates in the impact analysis.
---------------------------------------------------------------------------
\251\ The impact analysis reported in the proposal used a
different data collection that was less comprehensive in its
coverage of banking companies covered by the NSFR, and less detailed
in its description of balance sheet items.
---------------------------------------------------------------------------
The agencies also received comments suggesting that a point-in-time
estimate of the amount of ASF relative to RSF, as provided above, is an
inadequate measure of the economic effect of the NSFR. In particular,
the commenters argued that the NSFR fluctuates over the business cycle
because categories with high RSF factors, such as nonperforming assets
and gross derivatives liabilities, tend to increase during economic
downturns. The commenters expressed concerns that, as a result, the
NSFR requirement could have pro-cyclical effects. The agencies partly
address this concern by reducing the RSF factor for gross derivative
liabilities from 20 percent to 5 percent. In addition, the agencies
note that the NSFR of nearly all covered companies increased over the
first half of 2020, while nonperforming assets and gross derivative
liabilities increased for most covered companies. Notably, this
increase in the NSFR was partly driven by the inflow of retail deposits
at covered companies, which was similar to the inflow of retail
deposits during the global financial crisis of 2007-2009. Therefore,
the available empirical evidence currently available suggests that
retail deposit inflows can partially counteract the potential pro-
cyclicality of the NSFR requirement on covered companies during
economic downturns.
One commenter agreed with the agencies' statement in the
Supplementary Information section to the proposal that even a slight
reduction in the probability of another financial crisis would far
outweigh the additional costs of the proposal. This commenter cites a
study showing that the estimated cost of the 2007-2009 financial crisis
was greater than $20 trillion.\252\ The BCBS finds banking crises
typically have smaller but still very large cumulative discounted costs
of 20 to 60 percent of GDP, which translates to a total cost of $4 to
$12 trillion.\253\ The final rule promotes safety and soundness by
protecting covered companies against an extended period of liquidity
and market stress by mandating a minimum amount of stable funding
commensurate to the liquidity risks of their assets and certain
contingent exposures.
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\252\ Better Markets, The Cost of the Crisis: $20 Trillion and
Counting (2015).
\253\ The Basel Committee on Banking Supervision, an Assessment
of the Long-Term Economic Impact of Stronger Capital and Liquidity
Requirements (2010).
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Several commenters questioned whether the impact assessment in the
proposal adequately accounts for costs to the intermediate holding
companies of foreign banking organizations, noting that the impact
assessment was developed prior to the finalization of the requirement
that certain foreign banking organizations form an intermediate holding
company in the United States under the Board's enhanced prudential
standards rule. The commenters asserted that this timing likely
resulted in the impact assessment in the proposal not including or
underestimating the impact to intermediate holding companies. The
impact analysis in the final rule considered all covered companies,
including intermediate holding companies, using data from the second
quarter of 2020.
XI. Effective Dates and Transitions
A. Effective Dates
Under the proposed rule, the NSFR requirement would have been
effective as of January 1, 2018. At the time the proposal was issued in
April 2016, the agencies set this effective date to provide covered
companies with sufficient time to adjust to the requirements of the
proposal, including to make any changes to ensure their assets,
derivative exposures, and commitments are stably funded and to adjust
information systems to calculate and monitor their NSFR ratios. The
NSFR is a balance-sheet metric and its calculations would generally be
based on the carrying value, as determined under GAAP, of a covered
company's assets, liabilities, and equity. As a result, covered
companies should generally be able to leverage current financial
reporting systems to comply with the NSFR requirement.
Under the proposed rule, the updated definitions were set to become
effective for purposes of the LCR rule at the beginning of the calendar
quarter after finalization of the proposed NSFR rule, instead of on
January 1, 2018. The agencies proposed that revisions to definitions in
the LCR rule become effective sooner than the proposed NSFR effective
date because they would enhance the clarity of certain definitions used
in the LCR rule. Several commenters requested additional time to adjust
the revised LCR definitions into their liquidity compliance systems.
One commenter requested at least 180 days after the final rule is
published for the revised LCR definitions to be effective. Another
commenter requested that the Board issue additional guidance on how the
revised definitions should be incorporated into FR 2052a reporting
requirements prior to implementation of the final rule, particularly
the definitions of ``secured funding'' and ``secured lending.''
Many commenters requested that the January 1, 2018 effective date
be delayed to provide covered companies additional time to achieve
compliance with the NSFR requirement. For example, one commenter
requested that the effective date be delayed to at least January 2020.
One commenter argued that the agencies should take additional time to
better understand the multiple new regulatory initiatives, including
[[Page 9198]]
proposed and potential total loss absorbing capacity requirements,
before introducing a new NSFR requirement. Commenters argued that
covered companies should be given additional time to build and update
internal reporting systems and comply with public disclosure
requirements given their ongoing work to implement existing
requirements under the LCR rule and the Board's FR 2052a reporting
form.\254\ These commenters asserted that covered companies required
additional time beyond 2018 to develop necessary staffing, management,
compliance, and information technology resources. Some commenters also
noted that certain covered companies would likely require additional
time to make structural adjustments to their balance sheets to be in
compliance with the NSFR requirement and other pending rulemakings. One
commenter suggested that the final rule should be implemented in three
transitional phrases consisting of a study of the cumulative impacts of
existing post-crisis regulatory reforms on the economy, finalizing the
NSFR with an initial ratio of ASF to RSF of 0.70, and adjusting the
NSFR requirement to 1.0 only for certain of the largest banking
organizations.\255\ The commenter also suggested that the agencies
should not implement beyond the first phase if they find that economic
impacts are not minimal or the rule is found to be ineffective. Another
commenter suggested that the treatment for derivatives should be
instituted through a phased-in transition to better align with the
agencies' margin requirements for non-cleared swaps.\256\
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\254\ On November 17, 2015, the Board adopted the revised FR
2052a report to collect quantitative information on selected assets,
liabilities, funding activities, and contingent liabilities from
certain large banking organizations.
\255\ https://www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.
\256\ See 12 CFR 45.1(e) (OCC); 12 CFR 237.1(e) (Board); 12 CFR
349.1(e) (FDIC).
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In response to commenters' concerns and in light of the revised
date on which the agencies are finalizing the NSFR rule, the agencies
are revising the final rule to require covered companies to maintain an
NSFR of 1.0 beginning on July 1, 2021. This effective date provides
sufficient time for covered companies to take into account the new
requirement and, as necessary, to make infrastructure and operational
adjustments that may be required to comply with the final rule. To the
extent a covered company is required to change its funding profile to
comply with the final rule, the effective date should be sufficient to
allow the firm to assess the prevailing market conditions to achieve
optimal results.
The final rule also adopts an effective date of July 1, 2021 for
revisions to definitions currently used in the LCR rule. The effective
date for revisions to the definitions in the LCR rule is appropriate,
as the revisions will provide additional clarity on the meaning of such
terms. In addition, covered companies will be able to modify their
compliance systems to incorporate the revised definitions by the
effective date, especially since the revisions will likely require
covered companies to make adjustments to their existing systems and not
require covered companies to develop entirely new systems.
B. Transitions
1. Initial Transitions for Banking Organizations That Become Subject to
NSFR Rule After the Effective Date
Under the tailoring proposals, a banking organization that would
have become subject to the LCR rule or proposed rule after the
effective date of the final rule would have been required to comply
with the LCR rule or proposed rule on the first day of the second
quarter after the banking organization became subject to it (newly
covered banking organizations), consistent with the amount of time
previously provided under the LCR rule or proposed rule.
Some commenters requested additional time to comply with the LCR
rule, and the tailoring final rule provided an additional quarter to
comply for newly covered banking organizations to comply with the LCR
rule. Consistent with the LCR rule, the final rule provides an
additional quarter to comply with the final rule, such that a newly
covered company will be required to comply with these requirements on
the first day of the third quarter after becoming subject to these
requirements. A covered company becomes subject to the NSFR based on
its category of applicable standards. A covered company's category is
determined based on risk-based indicators as reported on its Call
Report, FR Y-9LP or FR Y-15, or on averages of such reported items.
2. Transitions for Changes to an NSFR Requirement
Under the tailoring proposals, a banking organization subject to
the LCR rule or proposed rule that becomes subject to a higher outflow
or required stable funding adjustment percentage would have been able
to continue using a lower calibration for one quarter. A banking
organization that becomes subject to a lower outflow or required stable
funding adjustment percentage at a quarter end would have been able to
use the lower percentage immediately, as of the first day of the
subsequent quarter. Some commenters requested longer transitions before
a banking organization is required to meet an increased LCR
requirement.
The tailoring final rule provided an additional quarter in the LCR
rule to continue to use a lower outflow adjustment percentage after a
banking organization becomes subject to a higher outflow adjustment
percentage, but retained the one quarter transition period for a
banking organization that transitions to a lower outflow adjustment
percentage. Consistent with the LCR rule, the final rule allows a
covered company an additional quarter to continue using a lower
required stable funding adjustment percentage after becoming subject to
a higher required stable funding adjustment percentage.\257\ The
agencies are finalizing the transition period for a banking
organization that transitions to a lower required stable funding
adjustment percentage as proposed. A depository institution subsidiary
with $10 billion or more in total consolidated assets must begin
complying on the same dates as its top-tier banking organization.\258\
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\257\ Section __.105 of the final rule assigns required stable
funding adjustment percentages to banking organizations based on
their category of standards and amount of average weighted short-
term wholesale funding. A banking organization's category and
average weighted short-term wholesale funding are deemed to change
during the quarter in which the banking organization files the
reporting form demonstrating it meets the definition of a new
category or its level of average weighted short-term wholesale
funding triggers an increased or decreased required stable funding
adjustment percentage under section __.105 of the final rule.
Accordingly, the banking organization is deemed to be subject to a
new required stable funding adjustment percentage in the quarter
during which the relevant information (used to determine category
eligibility or level of average weighted short-term wholesale
funding) is reported. For example, if a banking organization subject
to Category III standards and an 85 percent required stable funding
adjustment percentage subsequently files an FR Y-15 during the
fourth quarter of a calendar year (representing a September 30 as-of
reporting date) that reports an amount of weighted short-term
wholesale funding such that the banking organization's average
weighted short-term wholesale funding is $75 billion or more, the
banking organization would be deemed to be subject to the higher
required stable funding adjustment percentage (100 percent) as of
the fourth quarter of that calendar year. Such a banking
organization would have a two-quarter transition period and be
required to comply with the higher adjustment percentage by the
first day of the third calendar quarter of the next calendar year
(July 1st).
\258\ See supra note 19.
[[Page 9199]]
Table 6--Example Dates for Changes to an NSFR Requirement
------------------------------------------------------------------------
Continue to apply
prior required Apply new required
stable funding stable funding
adjustment adjustment percentage
percentage
------------------------------------------------------------------------
Example 1:
Banking organization that 1st and 2nd Beginning July 1,
becomes subject to a quarter of 2024. 2024.
higher required stable
funding adjustment
percentage as of December
31, 2023,\259\ as a
result of having an
average weighted-short-
term wholesale funding
level of greater than $75
billion based on the four
prior calendar quarters.
Example 2:
Covered subsidiary No prior Comply with required
depository institution of requirement. stable funding
banking organization that adjustment
moves from Category IV to percentage
another category as of applicable to new
December 31, 2023. category beginning
July 1, 2024.
Example 3:
Banking organization that 1st quarter of Beginning April 1,
becomes subject to a 2024. 2024.
lower required stable
funding adjustment
percentage as of December
31, 2023, as a result of
having an average
weighted-short-term
wholesale funding level
of less than $75 billion
based on the four prior
calendar quarters.
------------------------------------------------------------------------
3. Reservation of Authority To Extend Transitions
---------------------------------------------------------------------------
\259\ That is, the banking organization filed reports in the 4th
quarter of 2023 (as of September 30 report date) demonstrating that
it had an average weighted-short-term wholesale funding level of
greater than $75 billion during the four prior calendar quarters.
---------------------------------------------------------------------------
The final rule includes a reservation of authority that provides
the agencies with the flexibility to extend transitions for banking
organizations where warranted by events and circumstances. There may be
limited circumstances where a banking organization needs a longer
transition period. For example, an extension may be appropriate when
unusual or unforeseen circumstances, such as a merger with another
entity, cause a banking organization to become subject to an NSFR
requirement for the first time. However, the agencies expect that this
authority would be exercised in limited situations, consistent with
prior practice.
4. Cessation of Applicability
Under the tailoring proposals, once a banking organization became
subject to an LCR or proposed NSFR requirement, it would have remained
subject to the rule until the appropriate agency determined that
application of the rule would not be appropriate in light of the
banking organization's asset size, level of complexity, risk profile,
or scope of operations. The tailoring final rule repealed this
provision in the LCR rule because the revised scope of application
framework made this cessation provision unnecessary. Consistent with
the LCR rule, the agencies are repealing this provision in the final
rule. A banking organization that no longer meets the relevant criteria
for being subject to the final rule will not be required to comply with
the final rule.
XII. Administrative Law Matters
A. Congressional Review Act
For purposes of the Congressional Review Act, the Office of
Management and Budget (OMB) makes a determination as to whether a final
rule constitutes a ``major'' rule.\260\ If a rule is deemed a ``major
rule'' by the OMB, the Congressional Review Act generally provides that
the rule may not take effect until at least 60 days following its
publication.\261\
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\260\ 5 U.S.C. 801 et seq.
\261\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in (A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions; or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\262\
---------------------------------------------------------------------------
\262\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
As required by the Congressional Review Act, the agencies will
submit the final rule and other appropriate reports to Congress and the
Government Accountability Office for review.
B. Plain Language
Section 722 of the Gramm-Leach-Bliley Act,\263\ requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The agencies sought to
present the final rule in a simple and straightforward manner and did
not receive any comments on the use of plain language in the proposed
rule.
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\263\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999),
12 U.S.C. 4809.
---------------------------------------------------------------------------
C. Regulatory Flexibility Act
The Regulatory Flexibility Act \264\ (RFA) generally requires an
agency to either provide a regulatory flexibility analysis with a final
rule or to certify that the final rule will not have a significant
economic impact on a substantial number of small entities. The U.S.
Small Business Administration (SBA) establishes size standards that
define which entities are small businesses for purposes of the
RFA.\265\ Except as otherwise specified below, the size standard to be
considered a small business for banking entities subject to the final
rule is $600 million or less in consolidated assets.\266\ In accordance
with section 3(a) of the RFA, the Board is publishing a regulatory
flexibility analysis with respect to the final rule. The OCC and FDIC
are certifying that
[[Page 9200]]
the final rule will not have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------
\264\ 5 U.S.C. 601 et seq.
\265\ U.S. SBA, Table of Small Business Size Standards Matched
to North American Industry Classification System Codes, available at
https://www.sba.gov/document/support-table-size-standards.
\266\ See id. Pursuant to SBA regulations, the asset size of a
concern includes the assets of the concern whose size is at issue
and all of its domestic and foreign affiliates. 13 CFR 121.103(6).
---------------------------------------------------------------------------
Board
Based on its analysis and for the reasons stated below, the Board
believes that the final rule will not have a significant economic
impact on a substantial number of small entities.
The final rule is intended to implement a quantitative liquidity
requirement applicable for certain bank holding companies, savings and
loan holding companies, and state member banks.
Under regulations issued by the Small Business Administration, a
``small entity'' includes firms within the ``Finance and Insurance''
sector with total assets of $600 million or less.\267\ The Board
believes that the Finance and Insurance sector constitutes a reasonable
universe of firms for these purposes because such firms generally
engage in activities that are financial in nature. Consequently, bank
holding companies, savings and loan holding companies, and state member
banks with asset sizes of $600 million or less are small entities for
purposes of the RFA.
---------------------------------------------------------------------------
\267\ 13 CFR 121.201.
---------------------------------------------------------------------------
As discussed in section V.E of this Supplementary Information
section, the final rule will generally apply to certain Board-regulated
institutions with $100 billion or more total consolidated assets, and
certain of their depository institution subsidiaries with $10 billion
or more in total assets.
Companies that are subject to the final rule therefore
substantially exceed the $600 million asset threshold at which a
banking entity is considered a ``small entity'' under SBA regulations.
Because the final rule does not apply to any company with assets of
$600 million or less, the final rule is not expected to apply to any
small entity for purposes of the RFA. As discussed in the Supplementary
Information section, including section V of the Supplementary
Information section, the Board does not believe that the final rule
duplicates, overlaps, or conflicts with any other Federal rules. In
light of the foregoing, the Board does not believe that the final rule
will have a significant economic impact on a substantial number of
small entities.
OCC
The OCC considered whether the final rule is likely to have a
significant economic impact on a substantial number of small entities,
pursuant to the RFA. The OCC currently supervises approximately 745
small entities. Because the final rule will only apply to OCC-regulated
entities that have $10 billion or more in assets, the OCC concludes the
rule will not have a significant economic impact on a substantial
number of small OCC-regulated entities.
FDIC
The RFA generally requires an agency, in connection with a final
rule, to prepare and make available for public comment a final
regulatory flexibility analysis that describes the impact of a final
rule on small entities.\268\ However, a regulatory flexibility analysis
is not required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The SBA has defined ``small entities'' to include banking organizations
with total assets of less than or equal to $600 million that are
independently owned and operated or owned by a holding company with
less than $600 million in total assets.\269\ Generally, the FDIC
considers a significant effect to be a quantified effect in excess of 5
percent of total annual salaries and benefits per institution, or 2.5
percent of total noninterest expenses. The FDIC believes that effects
in excess of these thresholds typically represent significant effects
for FDIC-supervised institutions. For the reasons described below and
under section 605(b) of the RFA, the FDIC certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities.
---------------------------------------------------------------------------
\268\ 5 U.S.C. 601 et seq.
\269\ The SBA defines a small banking organization as having
$600 million or less in assets, where ``a financial institution's
assets are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See 13 CFR
121.201 (as amended, effective August 19, 2019). ``SBA counts the
receipts, employees, or other measure of size of the concern whose
size is at issue and all of its domestic and foreign affiliates.''
See 13 CFR 121.103. Following these regulations, the FDIC uses a
covered entity's affiliated and acquired assets, averaged over the
preceding four quarters, to determine whether the covered entity is
``small'' for the purposes of RFA.
---------------------------------------------------------------------------
The FDIC supervises 3,270 institutions,\270\ of which 2,492 are
considered small entities for the purposes of the RFA.\271\
---------------------------------------------------------------------------
\270\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\271\ Call Report data, June 30, 2020.
---------------------------------------------------------------------------
The final rule applies the full NSFR requirement to companies that
are subject to the Category I and Category II liquidity standards.
Companies subject to the Category III liquidity standards with $75
billion or more in average weighted short-term wholesale funding are
also subject to the full NSFR requirement. All other companies subject
to the Category III standards, and companies subject to the Category IV
standards with $50 billion or more in average weighted short-term
wholesale funding, are subject to a reduced NSFR requirement calibrated
at 85 percent and 70 percent, respectively. Depository institution
subsidiaries of companies subject to the Category I, II, or III
liquidity standards are subject to the same NSFR requirement as their
top tier holding company if the depository institution subsidiary has
total consolidated assets of $10 billion or more. Depository
institution subsidiaries of companies subject to Category IV liquidity
standards are not subject to the NSFR.
As of June 30, 2020, the FDIC supervises four depository
institutions that would be subject to an NSFR requirement calibrated at
85 percent.\272\ No depository institutions that are subject to the
NSFR requirements would be considered small entities for the purposes
of the RFA because the NSFR requirements apply only to depository
institutions with at least $10 billion in total consolidated assets,
and whose parent company is subject to the Category I, II, or III
liquidity standards and, therefore, has least $100 billion in total
consolidated assets.\273\
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\272\ Call Report data, June 30, 2020.
\273\ No companies with less than $100 billion in total
consolidated assets would be subject to the capital and liquidity
standards set forth in the agencies' tailoring rule. See 84 FR
59230, 59235 (November 1, 2019).
---------------------------------------------------------------------------
Because this rule does not apply to any FDIC-supervised
institutions that would be considered small entities for the purposes
of the RFA, the FDIC certifies that this final rule will not have a
significant economic impact on a substantial number of small entities.
D. Riegle Community Development and Regulatory Improvement Act of 1994
Section 302(a) of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) \274\ requires that each Federal
banking agency, in determining the effective date and administrative
compliance requirements for new regulations that impose additional
reporting, disclosure, or other requirements on insured depository
institutions, consider, consistent with principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of
[[Page 9201]]
such regulations. The agencies have considered comments on these
matters in other sections of this Supplementary Information section.
---------------------------------------------------------------------------
\274\ 12 U.S.C. 4802(a).
---------------------------------------------------------------------------
In addition, under section 302(b) of the RCDRIA, new regulations
that impose additional reporting, disclosures, or other new
requirements on insured depository institutions generally must take
effect on the first day of a calendar quarter that begins on or after
the date on which the regulations are published in final form.\275\
Therefore, the final rule will be effective on July 1, 2021, the first
day of the third calendar quarter of 2021.
---------------------------------------------------------------------------
\275\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------
E. 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. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently valid OMB control number. The
OMB control numbers are 1557-0323 for the OCC, 7100-0367 for the Board,
and 3064-0197 for the FDIC. These information collections will be
extended for three years, with revision. The information collection
requirements contained in this final rule have been submitted by the
OCC and FDIC to OMB for review and approval under section 3507(d) of
the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's
implementing regulations (5 CFR part 1320). The Board reviewed the
final rule under the authority delegated to the Board by OMB. The
agencies did not receive any specific public comments on the PRA
analysis.
The agencies have a continuing interest in the public's opinions of
information collections. 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 listed in the ADDRESSES section. All comments will become a
matter of public record. A copy of the comments may also be submitted
to the OMB desk officer for the agencies: By mail to U.S. Office of
Management and Budget, 725 17th Street NW, #10235, Washington, DC
20503; by facsimile to (202) 395-5806; or by email to:
[email protected], Attention, Federal Banking Agency Desk
Officer.
Proposed Revision, With Extension, of the Following Information
Collections
Title of information collection and OMB control number: Reporting
and Recordkeeping Requirements Associated with Liquidity Coverage
Ratio: Liquidity Risk Measurement, Standards, and Monitoring (1557-0323
for the OCC); Reporting, Recordkeeping, and Disclosure Requirements
Associated with Liquidity Risk Measurement Standards (7100-0367 for the
Board); and Liquidity Coverage Ratio: Liquidity Risk Measurement,
Standards, and Monitoring (LCR) (3064-0197 for the FDIC).
Frequency of Response: Biannually, quarterly, monthly, and event
generated.
Affected Public: Businesses or other for-profit.
Respondents:
OCC: National banks and federal savings associations.
Board: Insured state member banks, bank holding companies, and
savings and loan holding companies, and U.S intermediate holding
companies of foreign banking organizations.
FDIC: State nonmember banks and state savings associations.
Current actions: The reporting requirements in the final rule are
found in section __.110, the recordkeeping requirements are found in
sections __.108(b) and __.110(b), and the disclosure requirements are
found in sections __.130 and __.131. The disclosure requirements are
only for Board supervised entities. Since the burden estimates for the
NSFR revisions were inadvertently included in the November 1, 2019,
tailoring final rule (84 FR 59230), the burden estimates will not
change for this submission with the exception of the FDIC's burden
estimates which have been updated to reflect the addition of two
additional supervised institutions.
Section __.110 requires a covered company to take certain actions
following any NSFR shortfall. A covered company would be required to
notify its appropriate Federal banking agency of the shortfall no later
than 10 business days (or such other period as the appropriate Federal
banking agency may otherwise require by written notice) following the
date that any event has occurred that would cause or has caused the
covered company's NSFR to be less than 1.0. It must also submit to its
appropriate Federal banking agency its plan for remediation of its NSFR
to at least 1.0, and submit at least monthly reports on its progress to
achieve compliance.
Section __.108(b) provides that if an institution includes an ASF
amount in excess of the RSF amount of the consolidated subsidiary, it
must implement and maintain written procedures to identify and monitor
applicable statutory, regulatory, contractual, supervisory, or other
restrictions on transferring assets from the consolidated subsidiaries.
These procedures must document which types of transactions the
institution could use to transfer assets from a consolidated subsidiary
to the institution and how these types of transactions comply with
applicable statutory, regulatory, contractual, supervisory, or other
restrictions. Section __.110(b) requires preparation of a plan for
remediation to achieve an NSFR of at least equal to 1.0, as required
under Sec. __.100.
Section __.130 requires that a depository institution holding
company subject to the NSFR publicly disclose on a biannual basis its
NSFR calculated for each of the two immediately preceding calendar
quarters, in a direct and prominent manner on its public internet site
or in its public financial or other public regulatory reports. These
disclosures must remain publicly available for at least five years
after the date of disclosure. Section __.131 specifies the quantitative
and qualitative disclosures required and provides the disclosure
template to be used.
Estimated average hour per response:
Reporting
Sections __.40(a) and __.110(a) (filed monthly)--0.5 hours.
Sections __.40(b) and __.110(b)--0.5 hours.
Sections __.40(b)(3)(iv) and __.110(b) (filed quarterly)--0.5
hours.
Recordkeeping
Sections __.22(a)(2), __.22(a)(5), and __.108(b)--40 hours.
Sections __.40(b) and __.110(b)--200 hours.
Disclosure (Board only)
Sections 249.90, 249.91, 249.130, and 249.131 (filed biannually)--
24 hours.
OCC:
OMB control number: 1557-0323.
Number of Respondents: 13.
Total Estimated Annual Burden: 4,722 hours.
Board:
OMB control number: 7100-0367.
Number of Respondents: 19 for Recordkeeping Sections 249.22(a)(2),
249.22(a)(5), and 249.108(b) and Disclosure Sections 249.90, 249.91,
249.130, and 249.131; 1 for all other rows.
Total Estimated Annual Burden: 2,793 hours.
FDIC:
OMB control number: 3064-0197.
Number of Respondents: 4.
Total Estimated Annual Burden: 994 hours.
[[Page 9202]]
F. OCC Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in the expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more, adjusted for inflation (currently $157 million), in
any one year. The OCC interprets ``expenditure'' to mean assessment of
costs (i.e., this part of our UMRA analysis assesses the costs of a
rule on OCC-supervised entities, rather than the overall impact). The
OCC's estimate of banks' operational costs to comply with mandates is
approximately $26 million in the first year. In addition to these
operational expenditures, the OCC anticipates that in order to comply
with the final rule, banks may have to substitute lower RSF-factor
assets for higher yielding assets that have higher RSF factors. The OCC
estimates the impact of this substitution may cost two affiliated banks
approximately $240 million per year. The total UMRA cost is
approximately $266 million ($26 million in compliance related
expenditures + $240 million in shortfall funding). Therefore,
consistent with the UMRA, the OCC has concluded that the final rule
will result in private sector costs that exceed the threshold for a
significant regulatory action. When the final rule is published in the
Federal Register, the OCC's UMRA written statement will be available
at: http://www.regulations.gov, Docket ID OCC-2014-0029.
Text of Common Rule
0
(All agencies)
PART [ ]--LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING
Subpart K--Net Stable Funding Ratio
Sec.
__.100 Net stable funding ratio.
__.101 Determining maturity.
__.102 Rules of construction.
__.103 Calculation of available stable funding amount.
__.104 ASF factors.
__.105 Calculation of required stable funding amount.
__.106 RSF factors.
__.107 Calculation of NSFR derivatives amounts.
__.108 Funding related to Covered Federal Reserve Facility Funding.
__.109 Rules for consolidation.
Subpart L--Net Stable Funding Shortfall
Sec. __.110 NSFR shortfall: supervisory framework.
Subpart K--Net Stable Funding Ratio
Sec. __.100 Net stable funding ratio.
(a) Minimum net stable funding ratio requirement. A [BANK] must
maintain a net stable funding ratio that is equal to or greater than
1.0 on an ongoing basis in accordance with this subpart.
(b) Calculation of the net stable funding ratio. For purposes of
this part, a [BANK]'s net stable funding ratio equals:
(1) The [BANK]'s available stable funding (ASF) amount, calculated
pursuant to Sec. __.103, as of the calculation date; divided by
(2) The [BANK]'s required stable funding (RSF) amount, calculated
pursuant to Sec. __.105, as of the calculation date.
Sec. __.101 Determining maturity.
For purposes of calculating its net stable funding ratio, including
its ASF amount and RSF amount, under subparts K through N, a [BANK]
shall assume each of the following:
(a) With respect to any NSFR liability, the NSFR liability matures
according to Sec. __.31(a)(1) of this part without regard to whether
the NSFR liability is subject to Sec. __.32;
(b) With respect to an asset, the asset matures according to Sec.
__.31(a)(2) of this part without regard to whether the asset is subject
to Sec. __.33 of this part;
(c) With respect to an NSFR liability or asset that is perpetual,
the NSFR liability or asset matures one year or more after the
calculation date;
(d) With respect to an NSFR liability or asset that has an open
maturity, the NSFR liability or asset matures on the first calendar day
after the calculation date, except that in the case of a deferred tax
liability, the NSFR liability matures on the first calendar day after
the calculation date on which the deferred tax liability could be
realized; and
(e) With respect to any principal payment of an NSFR liability or
asset, such as an amortizing loan, that is due prior to the maturity of
the NSFR liability or asset, the payment matures on the date on which
it is contractually due.
Sec. __.102 Rules of construction.
(a) Balance-sheet metric. Unless otherwise provided in this
subpart, an NSFR regulatory capital element, NSFR liability, or asset
that is not included on a [BANK]'s balance sheet is not assigned an RSF
factor or ASF factor, as applicable; and an NSFR regulatory capital
element, NSFR liability, or asset that is included on a [BANK]'s
balance sheet is assigned an RSF factor or ASF factor, as applicable.
(b) Netting of certain transactions. Where a [BANK] has secured
lending transactions, secured funding transactions, or asset exchanges
with the same counterparty and has offset the gross value of
receivables due from the counterparty under the transactions by the
gross value of payables under the transactions due to the counterparty,
the receivables or payables associated with the offsetting transactions
that are not included on the [BANK]'s balance sheet are treated as if
they were included on the [BANK]'s balance sheet with carrying values,
unless the criteria in [Sec. __.10(c)(4)(ii)(E)(1) through (3) of the
AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE] are met.
(c) Treatment of Securities Received in an Asset Exchange by a
Securities Lender. Where a [BANK] receives a security in an asset
exchange, acts as a securities lender, includes the carrying value of
the received security on its balance sheet, and has not rehypothecated
the security received:
(1) The security received by the [BANK] is not assigned an RSF
factor; and
(2) The obligation to return the security received by the [BANK] is
not assigned an ASF factor.
Sec. __.103 Calculation of available stable funding amount.
A [BANK]'s ASF amount equals the sum of the carrying values of the
[BANK]'s NSFR regulatory capital elements and NSFR liabilities, in each
case multiplied by the ASF factor applicable in Sec. __.104 or Sec.
__.107(c) and consolidated in accordance with Sec. __.109.
Sec. __.104 ASF factors.
(a) NSFR regulatory capital elements and NSFR liabilities assigned
a 100 percent ASF factor. An NSFR regulatory capital element or NSFR
liability of a [BANK] is assigned a 100 percent ASF factor if it is one
of the following:
(1) An NSFR regulatory capital element; or
(2) An NSFR liability that has a maturity of one year or more from
the calculation date, is not described in paragraph (d)(9) of this
section, and is not a retail deposit or brokered deposit provided by a
retail customer or counterparty.
(b) NSFR liabilities assigned a 95 percent ASF factor. An NSFR
liability of a [BANK] is assigned a 95 percent ASF factor if it is one
of the following:
[[Page 9203]]
(1) A stable retail deposit (regardless of maturity or
collateralization) held at the [BANK]; or
(2) A sweep deposit that:
(i) Is deposited in accordance with a contract between the retail
customer or counterparty and the [BANK], a controlled subsidiary of the
[BANK], or a company that is a controlled subsidiary of the same top-
tier company of which the [BANK] is a controlled subsidiary;
(ii) Is entirely covered by deposit insurance; and
(iii) The [BANK] demonstrates to the satisfaction of the [AGENCY]
that a withdrawal of such deposit is highly unlikely to occur during a
liquidity stress event.
(c) NSFR liabilities assigned a 90 percent ASF factor. An NSFR
liability of a [BANK] is assigned a 90 percent ASF factor if it is
funding provided by a retail customer or counterparty that is:
(1) A retail deposit (regardless of maturity or collateralization)
other than a stable retail deposit or brokered deposit;
(2) A brokered reciprocal deposit where the entire amount is
covered by deposit insurance;
(3) A sweep deposit that is deposited in accordance with a contract
between the retail customer or counterparty and the [BANK], a
controlled subsidiary of the [BANK], or a company that is a controlled
subsidiary of the same top-tier company of which the [BANK] is a
controlled subsidiary, where the sweep deposit does not meet the
requirements of paragraph (b)(2) of this section; or
(4) A brokered deposit that is not a brokered reciprocal deposit or
a sweep deposit, that is not held in a transactional account, and that
matures one year or more from the calculation date.
(d) NSFR liabilities assigned a 50 percent ASF factor. An NSFR
liability of a [BANK] is assigned a 50 percent ASF factor if it is one
of the following:
(1) Unsecured wholesale funding that:
(i) Is not provided by a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) Matures less than one year from the calculation date; and
(iii) Is not a security issued by the [BANK] or an operational
deposit placed at the [BANK];
(2) A secured funding transaction with the following
characteristics:
(i) The counterparty is not a financial sector entity, a
consolidated subsidiary of a financial sector entity, or a central
bank;
(ii) The secured funding transaction matures less than one year
from the calculation date; and
(iii) The secured funding transaction is not a collateralized
deposit that is an operational deposit placed at the [BANK];
(3) Unsecured wholesale funding that:
(i) Is provided by a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) Matures six months or more, but less than one year, from the
calculation date; and
(iii) Is not a security issued by the [BANK] or an operational
deposit;
(4) A secured funding transaction with the following
characteristics:
(i) The counterparty is a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) The secured funding transaction matures six months or more,
but less than one year, from the calculation date; and
(iii) The secured funding transaction is not a collateralized
deposit that is an operational deposit;
(5) A security issued by the [BANK] that matures six months or
more, but less than one year, from the calculation date;
(6) An operational deposit placed at the [BANK];
(7) A brokered deposit provided by a retail customer or
counterparty that is not described in paragraphs (c) or (e)(2) of this
section;
(8) A sweep deposit provided by a retail customer or counterparty
that is not described in paragraphs (b) or (c) of this section;
(9) An NSFR liability owed to a retail customer or counterparty
that is not a deposit and is not a security issued by the [BANK]; or
(10) Any other NSFR liability that matures six months or more, but
less than one year, from the calculation date and is not described in
paragraphs (a) through (c) or (d)(1) through (d)(9) of this section.
(e) NSFR liabilities assigned a zero percent ASF factor. An NSFR
liability of a [BANK] is assigned a zero percent ASF factor if it is
one of the following:
(1) A trade date payable that results from a purchase by the [BANK]
of a financial instrument, foreign currency, or commodity that is
contractually required to settle within the lesser of the market
standard settlement period for the particular transaction and five
business days from the date of the sale;
(2) A brokered deposit provided by a retail customer or
counterparty that is not a brokered reciprocal deposit or sweep
deposit, is not held in a transactional account, and matures less than
six months from the calculation date;
(3) A security issued by the [BANK] that matures less than six
months from the calculation date;
(4) An NSFR liability with the following characteristics:
(i) The counterparty is a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) The NSFR liability matures less than six months from the
calculation date or has an open maturity; and
(iii) The NSFR liability is not a security issued by the [BANK] or
an operational deposit placed at the [BANK]; or
(5) Any other NSFR liability that matures less than six months from
the calculation date and is not described in paragraphs (a) through (d)
or (e)(1) through (4) of this section.
Sec. __.105 Calculation of required stable funding amount.
(a) Required stable funding amount. A [BANK]'s RSF amount equals
the [BANK's] required stable funding adjustment percentage as
determined under paragraph (b) of this section multiplied by the sum
of:
(1) The carrying values of a [BANK]'s assets (other than amounts
included in the calculation of the derivatives RSF amount pursuant to
Sec. __.107(b)) and the undrawn amounts of a [BANK]'s credit and
liquidity facilities, in each case multiplied by the RSF factors
applicable in Sec. __.106; and
(2) The [BANK]'s derivatives RSF amount calculated pursuant to
Sec. __.107(b).
(b) Required stable funding adjustment percentage. A [BANK's]
required stable funding adjustment percentage is determined pursuant to
Table 1 to this paragraph (b).
Table 1 to Paragraph (b)--Required Stable Funding Adjustment Percentages
------------------------------------------------------------------------
Required stable funding adjustment percentage Percent
------------------------------------------------------------------------
Global systemically important BHC or GSIB depository 100
institution............................................
Category II [BANK]...................................... 100
[[Page 9204]]
Category III [BANK] with $75 billion or more in average 100
weighted short-term wholesale funding and Category III
[BANK] that is a consolidated subsidiary of such a
[BANK].................................................
Category III [BANK] with less than $75 billion in 85
average weighted short-term wholesale funding and any
Category III [BANK] that is a consolidated subsidiary
of such a Category III [BANK]..........................
Category IV [BANK] with $50 billion or more in average 70
weighted short-term wholesale funding..................
------------------------------------------------------------------------
(c) Transition into a different required stable funding
adjustment percentage. (1) A [BANK] whose required stable funding
adjustment percentage increases from a lower to a higher required
stable funding adjustment percentage may continue to use its
previous lower required stable funding adjustment percentage until
the first day of the third calendar quarter after the required
stable funding adjustment percentage increases.
(2) A [BANK] whose required stable funding adjustment percentage
decreases from a higher to a lower required stable funding
adjustment percentage must continue to use its previous higher
required stable funding adjustment percentage until the first day of
the first calendar quarter after the required stable funding
adjustment percentage decreases.
Sec. __.106 RSF factors.
(a) Unencumbered assets and commitments. All assets and undrawn
amounts under credit and liquidity facilities, unless otherwise
provided in Sec. __.107(b) relating to derivative transactions or
paragraphs (b) through (d) of this section, are assigned RSF factors as
follows:
(1) Unencumbered assets assigned a zero percent RSF factor. An
asset of a [BANK] is assigned a zero percent RSF factor if it is one of
the following:
(i) Currency and coin;
(ii) A cash item in the process of collection;
(iii) A Reserve Bank balance or other claim on a Reserve Bank that
matures less than six months from the calculation date;
(iv) A claim on a foreign central bank that matures less than six
months from the calculation date;
(v) A trade date receivable due to the [BANK] resulting from the
[BANK]'s sale of a financial instrument, foreign currency, or commodity
that is required to settle no later than the market standard, without
extension, for the particular transaction, and that has yet to settle
but is not more than five business days past the scheduled settlement
date;
(vi) Any other level 1 liquid asset not described in paragraphs
(a)(1)(i) through (a)(1)(v) of this section; or
(vii) A secured lending transaction with the following
characteristics:
(A) The secured lending transaction matures less than six months
from the calculation date;
(B) The secured lending transaction is secured by level 1 liquid
assets;
(C) The borrower is a financial sector entity or a consolidated
subsidiary thereof; and
(D) The [BANK] retains the right to rehypothecate the collateral
provided by the counterparty for the duration of the secured lending
transaction.
(2) Unencumbered assets and commitments assigned a 5 percent RSF
factor. An undrawn amount of a committed credit facility or committed
liquidity facility extended by a [BANK] is assigned a 5 percent RSF
factor. For the purposes of this paragraph (a)(2), the undrawn amount
of a committed credit facility or committed liquidity facility is the
entire unused amount of the facility that could be drawn upon within
one year of the calculation date under the governing agreement.
(3) Unencumbered assets assigned a 15 percent RSF factor. An asset
of a [BANK] is assigned a 15 percent RSF factor if it is one of the
following:
(i) A level 2A liquid asset; or
(ii) A secured lending transaction or unsecured wholesale lending
with the following characteristics:
(A) The asset matures less than six months from the calculation
date;
(B) The borrower is a financial sector entity or a consolidated
subsidiary thereof; and
(C) The asset is not described in paragraph (a)(1)(vii) of this
section and is not an operational deposit described in paragraph
(a)(4)(iii) of this section.
(4) Unencumbered assets assigned a 50 percent RSF factor. An asset
of a [BANK] is assigned a 50 percent RSF factor if it is one of the
following:
(i) A level 2B liquid asset;
(ii) A secured lending transaction or unsecured wholesale lending
with the following characteristics:
(A) The asset matures six months or more, but less than one year,
from the calculation date;
(B) The borrower is a financial sector entity, a consolidated
subsidiary thereof, or a central bank; and
(C) The asset is not an operational deposit described in paragraph
(a)(4)(iii) of this section;
(iii) An operational deposit placed by the [BANK] at a financial
sector entity or a consolidated subsidiary thereof; or
(iv) An asset that is not described in paragraphs (a)(1) through
(a)(3) or (a)(4)(i) through (a)(4)(iii) of this section that matures
less than one year from the calculation date, including:
(A) A secured lending transaction or unsecured wholesale lending
where the borrower is a wholesale customer or counterparty that is not
a financial sector entity, a consolidated subsidiary thereof, or a
central bank; or
(B) Lending to a retail customer or counterparty.
(5) Unencumbered assets assigned a 65 percent RSF factor. An asset
of a [BANK] is assigned a 65 percent RSF factor if it is one of the
following:
(i) A retail mortgage that matures one year or more from the
calculation date and is assigned a risk weight of no greater than 50
percent under subpart D of [AGENCY CAPITAL REGULATION]; or
(ii) A secured lending transaction, unsecured wholesale lending, or
lending to a retail customer or counterparty with the following
characteristics:
(A) The asset is not described in paragraphs (a)(1) through
(a)(5)(i) of this section;
(B) The borrower is not a financial sector entity or a consolidated
subsidiary thereof;
(C) The asset matures one year or more from the calculation date;
and
(D) The asset is assigned a risk weight of no greater than 20
percent under subpart D of [AGENCY CAPITAL REGULATION].
(6) Unencumbered assets assigned an 85 percent RSF factor. An asset
of a [BANK] is assigned an 85 percent RSF factor if it is one of the
following:
(i) A retail mortgage that matures one year or more from the
calculation date and is assigned a risk weight of greater than 50
percent under subpart D of [AGENCY CAPITAL REGULATION];
(ii) A secured lending transaction, unsecured wholesale lending, or
lending to a retail customer or counterparty with the following
characteristics:
[[Page 9205]]
(A) The asset is not described in paragraphs (a)(1) through
(a)(6)(i) of this section;
(B) The borrower is not a financial sector entity or a consolidated
subsidiary thereof;
(C) The asset matures one year or more from the calculation date;
and
(D) The asset is assigned a risk weight of greater than 20 percent
under subpart D of [AGENCY CAPITAL REGULATION];
(iii) A publicly traded common equity share that is not HQLA;
(iv) A security, other than a publicly traded common equity share,
that matures one year or more from the calculation date and is not
HQLA; or
(v) A commodity for which derivative transactions are traded on a
U.S. board of trade or trading facility designated as a contract market
under sections 5 and 6 of the Commodity Exchange Act (7 U.S.C. 7 and 8)
or on a U.S. swap execution facility registered under section 5h of the
Commodity Exchange Act (7 U.S.C. 7b-3) or on another exchange, whether
located in the United States or in a jurisdiction outside of the United
States.
(7) Unencumbered assets assigned a 100 percent RSF factor. An asset
of a [BANK] is assigned a 100 percent RSF factor if it is not described
in paragraphs (a)(1) through (a)(6) of this section, including a
secured lending transaction or unsecured wholesale lending where the
borrower is a financial sector entity or a consolidated subsidiary
thereof and that matures one year or more from the calculation date.
(b) Nonperforming assets. An RSF factor of 100 percent is assigned
to any asset that is past due by more than 90 days or nonaccrual.
(c) Encumbered assets. An encumbered asset, unless otherwise
provided in Sec. __.107(b) relating to derivative transactions, is
assigned an RSF factor as follows:
(1)(i) Encumbered assets with less than six months remaining in the
encumbrance period. For an encumbered asset with less than six months
remaining in the encumbrance period, the same RSF factor is assigned to
the asset as would be assigned if the asset were not encumbered.
(ii) Encumbered assets with six months or more, but less than one
year, remaining in the encumbrance period. For an encumbered asset with
six months or more, but less than one year, remaining in the
encumbrance period:
(A) If the asset would be assigned an RSF factor of 50 percent or
less under paragraphs (a)(1) through (a)(4) of this section if the
asset were not encumbered, an RSF factor of 50 percent is assigned to
the asset.
(B) If the asset would be assigned an RSF factor of greater than 50
percent under paragraphs (a)(5) through (a)(7) of this section if the
asset were not encumbered, the same RSF factor is assigned to the asset
as would be assigned if it were not encumbered.
(iii) Encumbered assets with one year or more remaining in the
encumbrance period. For an encumbered asset with one year or more
remaining in the encumbrance period, an RSF factor of 100 percent is
assigned to the asset.
(2) Assets encumbered for period longer than remaining maturity. If
an asset is encumbered for an encumbrance period longer than the
asset's maturity, the asset is assigned an RSF factor under paragraph
(c)(1) of this section based on the length of the encumbrance period.
(3) Segregated account assets. An asset held in a segregated
account maintained pursuant to statutory or regulatory requirements for
the protection of customer assets is not considered encumbered for
purposes of this paragraph solely because such asset is held in the
segregated account.
(d) Off-balance sheet rehypothecated assets. When an NSFR liability
of a [BANK] is secured by an off-balance sheet asset or results from
the [BANK] selling an off-balance sheet asset (for instance, in the
case of a short sale), other than an off-balance sheet asset received
by the [BANK] as variation margin under a derivative transaction:
(1) If the [BANK] received the off-balance sheet asset under a
lending transaction, an RSF factor is assigned to the lending
transaction as if it were encumbered for the longer of:
(i) The remaining maturity of the NSFR liability; and
(ii) Any other encumbrance period applicable to the lending
transaction;
(2) If the [BANK] received the off-balance sheet asset under an
asset exchange, an RSF factor is assigned to the asset provided by the
[BANK] in the asset exchange as if the provided asset were encumbered
for the longer of:
(i) The remaining maturity of the NSFR liability; and
(ii) Any other encumbrance period applicable to the provided asset;
or
(3) If the [BANK] did not receive the off-balance sheet asset under
a lending transaction or asset exchange, an RSF factor is assigned to
the on-balance sheet asset resulting from the rehypothecation of the
off-balance sheet asset as if the on-balance sheet asset were
encumbered for the longer of:
(i) The remaining maturity of the NSFR liability; and
(ii) Any other encumbrance period applicable to the transaction
through which the off-balance sheet asset was received.
Sec. __.107 Calculation of NSFR derivatives amounts.
(a) General requirement. A [BANK] must calculate its derivatives
RSF amount and certain components of its ASF amount relating to the
[BANK]'s derivative transactions (which includes cleared derivative
transactions of a customer with respect to which the [BANK] is acting
as agent for the customer that are included on the [BANK]'s balance
sheet under GAAP) in accordance with this section.
(b) Calculation of required stable funding amount relating to
derivative transactions. A [BANK]'s derivatives RSF amount equals the
sum of:
(1) Current derivative transaction values. The [BANK]'s NSFR
derivatives asset amount, as calculated under paragraph (d)(1) of this
section, multiplied by an RSF factor of 100 percent;
(2) Variation margin provided. The carrying value of variation
margin provided by the [BANK] under each derivative transaction not
subject to a qualifying master netting agreement and each QMNA netting
set, to the extent the variation margin reduces the [BANK]'s
derivatives liability value under the derivative transaction or QMNA
netting set, as calculated under paragraph (f)(2) of this section,
multiplied by an RSF factor of zero percent;
(3) Excess variation margin provided. The carrying value of
variation margin provided by the [BANK] under each derivative
transaction not subject to a qualifying master netting agreement and
each QMNA netting set in excess of the amount described in paragraph
(b)(2) of this section for each derivative transaction or QMNA netting
set, multiplied by the RSF factor assigned to each asset comprising the
variation margin pursuant to Sec. __.106;
(4) Variation margin received. The carrying value of variation
margin received by the [BANK], multiplied by the RSF factor assigned to
each asset comprising the variation margin pursuant to Sec. __.106;
(5) Potential valuation changes. (i) An amount equal to 5 percent
of the sum of the gross derivative values of the [BANK] that are
liabilities, as calculated under paragraph (b)(5)(ii) of this section,
for each of the [BANK]'s derivative transactions not subject to a
qualifying master netting agreement and each of its QMNA netting sets,
multiplied by an RSF factor of 100 percent;
[[Page 9206]]
(ii) For purposes of paragraph (5)(i) of this section, the gross
derivative value of a derivative transaction not subject to a
qualifying master netting agreement or of a QMNA netting set is equal
to the value to the [BANK], calculated as if no variation margin had
been exchanged and no settlement payments had been made based on
changes in the value of the derivative transaction or QMNA netting set.
(6) Contributions to central counterparty mutualized loss sharing
arrangements. The fair value of a [BANK]'s contribution to a central
counterparty's mutualized loss sharing arrangement (regardless of
whether the contribution is included on the [BANK]'s balance sheet),
multiplied by an RSF factor of 85 percent; and
(7) Initial margin provided. The fair value of initial margin
provided by the [BANK] for derivative transactions (regardless of
whether the initial margin is included on the [BANK]'s balance sheet),
which does not include initial margin provided by the [BANK] for
cleared derivative transactions with respect to which the [BANK] is
acting as agent for a customer and the [BANK] does not guarantee the
obligations of the customer's counterparty to the customer under the
derivative transaction (such initial margin would be assigned an RSF
factor pursuant to Sec. __.106 to the extent the initial margin is
included on the [BANK]'s balance sheet), multiplied by an RSF factor
equal to the higher of 85 percent or the RSF factor assigned to each
asset comprising the initial margin pursuant to Sec. __.106.
(c) Calculation of available stable funding amount relating to
derivative transactions. The following amounts of a [BANK] are assigned
a zero percent ASF factor:
(1) The [BANK]'s NSFR derivatives liability amount, as calculated
under paragraph (d)(2) of this section; and
(2) The carrying value of NSFR liabilities in the form of an
obligation to return initial margin or variation margin received by the
[BANK].
(d) Calculation of NSFR derivatives asset or liability amount.
(1) A [BANK]'s NSFR derivatives asset amount is the greater of:
(i) Zero; and
(ii) The [BANK]'s total derivatives asset amount, as calculated
under paragraph (e)(1) of this section, less the [BANK]'s total
derivatives liability amount, as calculated under paragraph (e)(2) of
this section.
(2) A [BANK]'s NSFR derivatives liability amount is the greater of:
(i) Zero; and
(ii) The [BANK]'s total derivatives liability amount, as calculated
under paragraph (e)(2) of this section, less the [BANK]'s total
derivatives asset amount, as calculated under paragraph (e)(1) of this
section.
(e) Calculation of total derivatives asset and liability amounts.
(1) A [BANK]'s total derivatives asset amount is the sum of the
[BANK]'s derivatives asset values, as calculated under paragraph (f)(1)
of this section, for each derivative transaction not subject to a
qualifying master netting agreement and each QMNA netting set.
(2) A [BANK]'s total derivatives liability amount is the sum of the
[BANK]'s derivatives liability values, as calculated under paragraph
(f)(2) of this section, for each derivative transaction not subject to
a qualifying master netting agreement and each QMNA netting set.
(f) Calculation of derivatives asset and liability values. For each
derivative transaction not subject to a qualifying master netting
agreement and each QMNA netting set:
(1) The derivatives asset value is equal to the asset value to the
[BANK], after taking into account:
(i) Any variation margin received by the [BANK] that is in the form
of cash and meets the following conditions:
(A) The variation margin is not segregated;
(B) The variation margin is received in connection with a
derivative transaction that is governed by a QMNA or other contract
between the counterparties to the derivative transaction, which
stipulates that the counterparties agree to settle any payment
obligations on a net basis, taking into account any variation margin
received or provided;
(C) The variation margin is calculated and transferred on a daily
basis based on mark-to-fair value of the derivative contract; and
(D) The variation margin is in a currency specified as an
acceptable currency to settle obligations in the relevant governing
contract; and
(ii) Any variation margin received by the [BANK] that is in the
form of level 1 liquid assets and meets the conditions of paragraph
(f)(1)(i) of this section provided the [BANK] retains the right to
rehypothecate the asset for the duration of time that the asset is
posted as variation margin to the [BANK]; or
(2) The derivatives liability value is equal to the liability value
of the [BANK], after taking into account any variation margin provided
by the [BANK].
Sec. __.108 Funding related to Covered Federal Reserve Facility
Funding.
(a) Treatment of Covered Federal Reserve Facility Funding.
Notwithstanding any other section of this part and except as provided
in paragraph (b) of this section, available stable funding amounts and
required stable funding amounts related to Covered Federal Reserve
Facility Funding and the assets securing Covered Federal Reserve
Facility Funding are excluded from the calculation of a [BANK]'s net
stable funding ratio calculated under Sec. __.100(b).
(b) Exception. To the extent the Covered Federal Reserve Facility
Funding is secured by securities, debt obligations, or other
instruments issued by the [BANK] or one of its consolidated
subsidiaries, the Covered Federal Reserve Facility Funding and assets
securing the Covered Federal Reserve Facility Funding are not subject
to paragraph (a) of this section and the available stable funding
amount and required stable funding amount must be included in the
[BANK]'s net stable funding ratio calculated under Sec. __.100(b).
Sec. __.109 Rules for consolidation.
(a) Consolidated subsidiary available stable funding amount. For
available stable funding of a legal entity that is a consolidated
subsidiary of a [BANK], including a consolidated subsidiary organized
under the laws of a foreign jurisdiction, the [BANK] may include the
available stable funding of the consolidated subsidiary in its ASF
amount up to:
(1) The RSF amount of the consolidated subsidiary, as calculated by
the [BANK] for the [BANK]'s net stable funding ratio under this part;
plus
(2) Any amount in excess of the RSF amount of the consolidated
subsidiary, as calculated by the [BANK] for the [BANK]'s net stable
funding ratio under this part, to the extent the consolidated
subsidiary may transfer assets to the top-tier [BANK], taking into
account statutory, regulatory, contractual, or supervisory
restrictions, such as sections 23A and 23B of the Federal Reserve Act
(12 U.S.C. 371c and 12 U.S.C. 371c-1) and Regulation W (12 CFR part
223).
(b) Required consolidation procedures. To the extent a [BANK]
includes an ASF amount in excess of the RSF amount of the consolidated
subsidiary, the [BANK] must implement and maintain written procedures
to identify and monitor applicable statutory, regulatory, contractual,
supervisory, or other restrictions on transferring assets from any of
its consolidated subsidiaries. These procedures must document which
types of transactions the [BANK] could use to
[[Page 9207]]
transfer assets from a consolidated subsidiary to the [BANK] and how
these types of transactions comply with applicable statutory,
regulatory, contractual, supervisory, or other restrictions.
Subpart L--Net Stable Funding Shortfall
Sec. __.110 NSFR shortfall: Supervisory framework.
(a) Notification requirements. A [BANK] must notify the [AGENCY] no
later than 10 business days, or such other period as the [AGENCY] may
otherwise require by written notice, following the date that any event
has occurred that would cause or has caused the [BANK]'s net stable
funding ratio to be less than 1.0 as required under Sec. __.100.
(b) Liquidity Plan. (1) A [BANK] must within 10 business days, or
such other period as the [AGENCY] may otherwise require by written
notice, provide to the [AGENCY] a plan for achieving a net stable
funding ratio equal to or greater than 1.0 as required under Sec.
__.100 if:
(i) The [BANK] has or should have provided notice, pursuant to
Sec. __.110(a), that the [BANK]'s net stable funding ratio is, or will
become, less than 1.0 as required under Sec. __.100;
(ii) The [BANK]'s reports or disclosures to the [AGENCY] indicate
that the [BANK]'s net stable funding ratio is less than 1.0 as required
under Sec. __.100; or
(iii) The [AGENCY] notifies the [BANK] in writing that a plan is
required and provides a reason for requiring such a plan.
(2) The plan must include, as applicable:
(i) An assessment of the [BANK]'s liquidity profile;
(ii) The actions the [BANK] has taken and will take to achieve a
net stable funding ratio equal to or greater than 1.0 as required under
Sec. __.100, including:
(A) A plan for adjusting the [BANK]'s liquidity profile;
(B) A plan for remediating any operational or management issues
that contributed to noncompliance with subpart K of this part; and
(iii) An estimated time frame for achieving full compliance with
Sec. __.100.
(3) The [BANK] must report to the [AGENCY] at least monthly, or
such other frequency as required by the [AGENCY], on progress to
achieve full compliance with Sec. __.100.
(c) Supervisory and enforcement actions. The [AGENCY] may, at its
discretion, take additional supervisory or enforcement actions to
address noncompliance with the minimum net stable funding ratio and
other requirements of subparts K through N of this part (see also Sec.
__.2(c)).
[End of Proposed Common Rule Text]
List of Subjects
12 CFR Part 50
Administrative practice and procedure, Banks, Banking, Liquidity,
Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 249
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Liquidity, Reporting and
recordkeeping requirements.
12 CFR Part 329
Administrative practice and procedure, Banks, Banking, Federal
Deposit Insurance Corporation, FDIC, Liquidity, Reporting and
recordkeeping requirements, Savings associations.
Adoption of the Common Rule Text
The proposed adoption of the common rules by the agencies, as
modified by agency-specific text, is set forth below:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble, part 50 of
chapter I of title 12 of the Code of Federal Regulations is amended as
follows:
PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
0
1. The authority citation for part 50 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, 1828, and 1462
et seq.
0
2. Amend Sec. 50.1 by revising paragraphs (a) and (b)(1) introductory
text to read as follows:
Sec. 50.1 Purpose and applicability.
(a) Purpose. This part establishes a minimum liquidity standard and
a minimum stable funding standard for certain national banks and
Federal savings associations on a consolidated basis, as set forth
herein.
(b) Applicability. (1) A national bank or Federal savings
association is subject to the minimum liquidity standard, minimum
stable funding standard, and other requirements of this part if:
* * * * *
0
3. Amend Sec. 50.2 by redesignating paragraph (b) as paragraph (c),
adding new paragraph (b), and revising newly redesignated paragraph (c)
to read as follows:
Sec. 50.2 Reservation of authority.
* * * * *
(b) The OCC may require a national bank or Federal savings
association to maintain an amount of available stable funding greater
than otherwise required under this part, or to take any other measure
to improve the national bank's or Federal savings association's stable
funding, if the OCC determines that the national bank's or Federal
savings association's stable funding requirements as calculated under
this part are not commensurate with the national bank's or Federal
savings association's funding risks. In making determinations under
this section, the OCC will apply notice and response procedures as set
forth in 12 CFR 3.404.
(c) Nothing in this part limits the authority of the OCC under any
other provision of law or regulation to take supervisory or enforcement
action, including action to address unsafe or unsound practices or
conditions, deficient liquidity levels, deficient stable funding
levels, or violations of law.
0
4. Amend Sec. 50.3 by:
0
a. Removing the definition for ``Brokered sweep deposit'', ``Covered
nonbank company'', and ``Reciprocal brokered deposit'';
0
b. Adding definitions for ``Brokered reciprocal deposit'', ``Carrying
value'', ``Encumbered'', ``NSFR liability'', ``NSFR regulatory capital
element'', ``QMNA netting set'', ``Sweep deposit'', ``Unconditionally
cancelable'', and ``Unsecured wholesale lending''; and
0
c. Revising definitions for ``Brokered deposit'', ``Calculation date'',
``Collateralized deposit'', ``Committed'', ``Operational deposit'',
``Secured funding transaction'', ``Secured lending transaction'', and
``Unsecured wholesale funding.''
The additions and revisions, in alphabetical order, read as
follows:
Sec. 50.3 Definitions.
* * * * *
Brokered deposit means any deposit held at the national bank or
Federal savings association that is obtained, directly or indirectly,
from or through the mediation or assistance of a deposit broker as that
term is defined in section 29 of the Federal Deposit Insurance Act
[[Page 9208]]
(12 U.S.C. 1831f(g)) and the Federal Deposit Insurance Corporation's
regulations.
Brokered reciprocal deposit means a brokered deposit that a
national bank or Federal savings association receives through a deposit
placement network on a reciprocal basis, such that:
(1) For any deposit received, the national bank or Federal savings
association (as agent for the depositors) places the same amount with
other depository institutions through the network; and
(2) Each member of the network sets the interest rate to be paid on
the entire amount of funds it places with other network members.
Calculation date means, for subparts B through J of this part, any
date on which a national bank or Federal savings association calculates
its liquidity coverage ratio under Sec. 50.10, and for subparts K
through M of this part, any date on which a national bank or Federal
savings association calculates its net stable funding ratio under Sec.
50.100.
* * * * *
Carrying value means, with respect to an asset, NSFR regulatory
capital element, or NSFR liability, the value on the balance sheet of
the national bank or Federal savings association, each as determined in
accordance with GAAP.
* * * * *
Collateralized deposit means:
(1) A deposit of a public sector entity held at the national bank
or Federal savings association that is required to be secured under
applicable law by a lien on assets owned by the national bank or
Federal savings association and that gives the depositor, as holder of
the lien, priority over the assets in the event the national bank or
Federal savings association enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or
distribution held at the national bank or Federal savings association
for which the national bank or Federal savings association is a
fiduciary and is required under 12 CFR 9.10(b) (national banks) or 12
CFR 150.300 through 150.320 (Federal savings associations) to set aside
assets owned by the national bank or Federal savings association as
security, which gives the depositor priority over the assets in the
event the national bank or Federal savings association enters into
receivership, bankruptcy, insolvency, liquidation, resolution, or
similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or
distribution held at the national bank or Federal savings association
for which the national bank's or Federal savings association's
affiliated insured depository institution is a fiduciary and where the
national bank or Federal savings association under 12 CFR 9.10(c)
(national banks), 12 CFR 150.310 (Federal savings associations), or
applicable state law (state member and nonmember banks, and state
savings associations) has set aside assets owned by the national bank
or Federal savings association as security, which gives the depositor
priority over the assets in the event the national bank or Federal
savings association enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding.
Committed means, with respect to a credit or liquidity facility,
that under the terms of the facility, it is not unconditionally
cancelable.
* * * * *
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other
restriction on the ability of the national bank or Federal savings
association to monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide
credit enhancement to any transaction, not including when the asset is
pledged to a central bank or a U.S. government-sponsored enterprise
where:
(i) Potential credit secured by the asset is not currently extended
to the national bank or Federal savings association or its consolidated
subsidiaries; and
(ii) The pledged asset is not required to support access to the
payment services of a central bank.
* * * * *
NSFR liability means any liability or equity reported on a national
bank's or Federal savings association's balance sheet that is not an
NSFR regulatory capital element.
NSFR regulatory capital element means any capital element included
in a national bank's or Federal savings association's common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital, in each
case as defined in 12 CFR 3.20, prior to application of capital
adjustments or deductions as set forth in 12 CFR 3.22, excluding any
debt or equity instrument that does not meet the criteria for
additional tier 1 or tier 2 capital instruments in 12 CFR 3.22 and is
being phased out of tier 1 capital or tier 2 capital pursuant to
subpart G of 12 CFR part 3.
Operational deposit means short-term unsecured wholesale funding
that is a deposit, unsecured wholesale lending that is a deposit, or a
collateralized deposit, in each case that meets the requirements of
Sec. 50.4(b) with respect to that deposit and is necessary for the
provision of operational services as an independent third-party
intermediary, agent, or administrator to the wholesale customer or
counterparty providing the deposit.
* * * * *
QMNA netting set means a group of derivative transactions with a
single counterparty that is subject to a qualifying master netting
agreement and is netted under the qualifying master netting agreement.
* * * * *
Secured funding transaction means any funding transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of the national bank or Federal savings association to a
wholesale customer or counterparty that is secured under applicable law
by a lien on securities or loans provided by the national bank or
Federal savings association, which gives the wholesale customer or
counterparty, as holder of the lien, priority over the securities or
loans in the event the national bank or Federal savings association
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding. Secured funding transactions include
repurchase transactions, securities lending transactions, other secured
loans, and borrowings from a Federal Reserve Bank. Secured funding
transactions do not include securities.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the national bank
or Federal savings association that is secured under applicable law by
a lien on securities or loans provided by the wholesale customer or
counterparty, which gives the national bank or Federal savings
association, as holder of the lien, priority over the securities or
loans in the event the counterparty enters into receivership,
bankruptcy, insolvency, liquidation, resolution, or similar proceeding.
Secured lending transactions include reverse repurchase transactions
and securities borrowing transactions. Secured lending transactions do
not include securities.
* * * * *
Sweep deposit means a deposit held at the national bank or Federal
savings association by a customer or counterparty through a contractual
feature that automatically transfers to the national bank or Federal
savings
[[Page 9209]]
association from another regulated financial company at the close of
each business day amounts identified under the agreement governing the
account from which the amount is being transferred.
* * * * *
Unconditionally cancelable means, with respect to a credit or
liquidity facility, that a national bank or Federal savings association
may, at any time, with or without cause, refuse to extend credit under
the facility (to the extent permitted under applicable law).
Unsecured wholesale funding means a liability or general obligation
of the national bank or Federal savings association to a wholesale
customer or counterparty that is not a secured funding transaction.
Unsecured wholesale funding includes wholesale deposits. Unsecured
wholesale funding does not include asset exchanges.
Unsecured wholesale lending means a liability or general obligation
of a wholesale customer or counterparty to the national bank or Federal
savings association that is not a secured lending transaction or a
security. Unsecured wholesale lending does not include asset exchanges.
* * * * *
0
5. Amend Sec. 50.22 by revising paragraph (b)(1) to read as follows:
Sec. 50.22 Requirements for eligible high-quality liquid assets.
* * * * *
(b) * * *
(1) The assets are not encumbered.
* * * * *
0
6. In Sec. 50.30, amend paragraph (b)(3) to read as follows:
Sec. 50.30 Total net cash outflow amount.
* * * * *
(b) * * *
(3) Other than the transactions identified in Sec. 50.32(h)(2),
(h)(5), or (j) or Sec. 50.33(d) or (f), the maturity of which is
determined under Sec. 50.31(a), transactions that have an open
maturity are not included in the calculation of the maturity mismatch
add-on.
* * * * *
0
7. In Sec. 50.31, amend paragraphs (a)(1) introductory text, (a)(2)
introductory text, and (a)(4) to read as follows:
Sec. 50.31 Determining maturity.
(a) * * *
(1) With respect to an instrument or transaction subject to Sec.
50.32, on the earliest possible contractual maturity date or the
earliest possible date the transaction could occur, taking into account
any option that could accelerate the maturity date or the date of the
transaction, except that when considering the earliest possible
contractual maturity date or the earliest possible date the transaction
could occur, the national bank or Federal savings association should
exclude any contingent options that are triggered only by regulatory
actions or changes in law or regulation, as follows:
* * * * *
(2) With respect to an instrument or transaction subject to Sec.
50.33, on the latest possible contractual maturity date or the latest
possible date the transaction could occur, taking into account any
option that could extend the maturity date or the date of the
transaction, except that when considering the latest possible
contractual maturity date or the latest possible date the transaction
could occur, the national bank or Federal savings association may
exclude any contingent options that are triggered only by regulatory
actions or changes in law or regulation, as follows:
* * * * *
(4) With respect to a transaction that has an open maturity, is not
an operational deposit, and is subject to the provisions of Sec.
50.32(h)(2), (h)(5), (j), or (k) or Sec. 50.33(d) or (f), the maturity
date is the first calendar day after the calculation date. Any other
transaction that has an open maturity and is subject to the provisions
of Sec. 50.32 shall be considered to mature within 30 calendar days of
the calculation date.
* * * * * *
Sec. 50.32 [Amended]
0
8. Amend Sec. 50.32 by:
0
a. Removing the phrase ``reciprocal brokered deposits'' and adding the
phrase ``brokered reciprocal deposits'' in its place wherever it
appears.
0
b. Removing the phrase ``brokered sweep deposits'' and adding the
phrase ``sweep deposits'' in its place wherever it appears.
* * * * *
Subpart G through J [Added and Reserved]
0
9. Add and reserve subparts G through J to part 50.
Subparts K and L [Added]
0
10. Amend part 50 by adding subparts K and L as set forth at the end of
the common preamble.
Subparts K and L [Amended]
0
11. Amend subparts K and L of part 50 by:
0
a. Removing ``[AGENCY]'' and adding ``OCC'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
3'' in its place wherever it appears.
0
c. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
3.10(c)(2)(v)(A) through (C)'' in its place wherever it appears.
0
d. Removing ``[BANK]'s'' and adding ``national bank's or Federal
savings association's'' in its place wherever it appears.
0
e. Removing ``[BANK]'' and adding ``national bank or Federal savings
association'' in its place wherever it appears.
0
f. Amending Sec. 50.105 by revising paragraph (b) to read as follows:
Sec. 50.105 Calculation of required stable funding amount.
* * * * *
(b) Required stable funding adjustment percentage. A national
bank's or Federal savings association's required stable funding
adjustment percentage is determined pursuant to Table 1 to this
paragraph (b).
Table 1 to Paragraph (b)--Required Stable Funding Adjustment Percentages
------------------------------------------------------------------------
------------------------------------------------------------------------
GSIB depository institution that is a national bank or 100
Federal savings association............................
Category II national bank or Federal savings association 100
Category III national bank or Federal savings 100
association that:......................................
(1) Is a consolidated subsidiary of (a) a covered
depository institution holding company or U.S.
intermediate holding company identified as a Category
III banking organization pursuant to 12 CFR 252.5 or 12
CFR 238.10 or (b) a depository institution that meets
the criteria set forth in paragraphs (2)(ii)(A) and (B)
of the definition of Category III national bank or
Federal savings association in this part, in each case
with $75 billion or more in average weighted short-term
wholesale funding; or
[[Page 9210]]
(2) Has $75 billion or more in average weighted short-
term wholesale funding and is not a consolidated
subsidiary of (a) a covered depository institution
holding company or U.S. intermediate holding company
identified as a Category III banking organization
pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
depository institution that meets the criteria set
forth in paragraphs (2)(ii)(A) and (B) of the
definition of Category III national bank or Federal
savings association in this part.
Category III national bank or Federal savings 85
association that:......................................
(1) Is a consolidated subsidiary of (a) a covered
depository institution holding company or U.S.
intermediate holding company identified as a Category
III banking organization pursuant to 12 CFR 252.5 or 12
CFR 238.10 or (b) a depository institution that meets
the criteria set forth in paragraphs (2)(ii)(A) and (B)
of the definition of Category III national bank or
Federal savings association in this part, in each case
with less than $75 billion in average weighted short-
term wholesale funding; or
(2) Has less than $75 billion in average weighted short-
term wholesale funding and is not a consolidated
subsidiary of (a) a covered depository institution
holding company or U.S. intermediate holding company
identified as a Category III banking organization
pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
depository institution that meets the criteria set
forth in paragraphs (2)(ii)(A) and (B) of the
definition of Category III national bank or Federal
savings association in this part.
------------------------------------------------------------------------
0
12. Amend part 50 by adding subpart M to read as follows:
Subpart M--Transitions
Sec. 50.120 Transitions.
(a) Initial application. (1) A national bank or Federal savings
association that initially becomes subject to the minimum net stable
funding requirement under Sec. 50.1(b)(1)(i) after July 1, 2021, must
comply with the requirements of subparts K through M of this part
beginning on the first day of the third calendar quarter after which
the national bank or Federal savings association becomes subject to
this part.
(2) A national bank or Federal savings association that becomes
subject to the minimum net stable funding requirement under Sec.
50.1(b)(1)(ii) must comply with the requirements of subparts K through
M of this part subject to a transition period specified by the OCC.
(b) Transition to a different required stable funding adjustment
percentage.
(1) A national bank or Federal savings association whose required
stable funding adjustment percentage changes is subject to the
transition periods as set forth in Sec. 50.105(c).
(2) A national bank or Federal savings association institution that
is no longer subject to the minimum stable funding requirement of this
part pursuant to Sec. 50.1(b)(1)(i) based on the size of total
consolidated assets, cross-jurisdictional activity, total nonbank
assets, weighted short-term wholesale funding, or off-balance sheet
exposure calculated in accordance with the Call Report, or instructions
to the FR Y-9LP, the FR Y-15, or equivalent reporting form, as
applicable, for each of the four most recent calendar quarters may
cease compliance with the requirements of subparts K through M of this
part as of the first day of the first calendar quarter after it is no
longer subject to Sec. 50.1(b).
(c) Reservation of authority. The OCC may extend or accelerate any
compliance date of this part if the OCC determines such extension or
acceleration is appropriate. In determining whether an extension or
acceleration is appropriate, the OCC will consider the effect of the
modification on financial stability, the period of time for which the
modification would be necessary to facilitate compliance with the
requirements of subparts K through M of this part, and the actions the
national bank or Federal savings association is taking to come into
compliance with the requirements of subparts K through M of this part.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, part 249 of
chapter II of title 12 of the Code of Federal Regulations is amended as
follows:
PART 249--LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING
(REGULATION WW)
0
13. The authority citation for part 249 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1),
1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.
0
14. Revise the heading for part 249 as set forth above.
0
15. Revise Sec. 249.1 to read as follows:
Sec. 249.1 Purpose and applicability.
(a) Purpose. This part establishes a minimum liquidity standard and
a minimum stable funding standard for certain Board-regulated
institutions on a consolidated basis, as set forth herein.
(b) Applicability. (1) A Board-regulated institution is subject to
the minimum liquidity standard and a minimum stable funding standard,
and other requirements of this part if:
(i) It is a:
(A) Global systemically important BHC;
(B) GSIB depository institution;
(C) Category II Board-regulated institution;
(D) Category III Board-regulated institution; or
(E) Category IV Board-regulated institution with $50 billion or
more in average weighted short-term wholesale funding;
(ii) It is a covered nonbank company; or
(iii) The Board has determined that application of this part is
appropriate in light of the Board-regulated institution's asset size,
level of complexity, risk profile, scope of operations, affiliation
with foreign or domestic covered entities, or risk to the financial
system.
(2) This part does not apply to:
(i) A bridge financial company as defined in 12 U.S.C. 5381(a)(3),
or a subsidiary of a bridge financial company; or
(ii) A new depository institution or a bridge depository
institution, as defined in 12 U.S.C. 1813(i).
(3) In making a determination under paragraph (b)(1)(iii) of this
section, the Board will apply, as appropriate, notice and response
procedures in the same manner and to the same extent as the notice and
response procedures set forth in 12 CFR 263.202.
(c) Covered nonbank companies. The Board will establish a minimum
liquidity standard and minimum stable funding standard and other
requirements for a designated company under this part by rule or order.
In establishing such standards, the Board will consider the factors set
forth in sections 165(a)(2) and (b)(3) of the Dodd-Frank Act and may
tailor the application of the requirements of this part to the
designated company based on the nature, scope, size, scale,
concentration, interconnectedness, mix of the activities of the
designated company, or any other risk-related factor that the Board
determines is appropriate.
[[Page 9211]]
0
16. Amend Sec. 249.2, by revising paragraph (b) and adding paragraph
(c) to read as follows:
Sec. 249.2 Reservation of authority.
* * * * *
(b) The Board may require a Board-regulated institution to maintain
an amount of available stable funding greater than otherwise required
under this part, or to take any other measure to improve the Board-
regulated institution's stable funding, if the Board determines that
the Board-regulated institution's stable funding requirements as
calculated under this part are not commensurate with the Board-
regulated institution's funding risks. In making determinations under
this section, the Board will apply notice and response procedures as
set forth in 12 CFR 263.202.
(c) Nothing in this part limits the authority of the Board under
any other provision of law or regulation to take supervisory or
enforcement action, including action to address unsafe or unsound
practices or conditions, deficient liquidity levels, deficient stable
funding levels, or violations of law.
0
17. Amend Sec. 249.3 by:
0
a. Adding the definitions for ``Brokered reciprocal deposit'',
``Carrying value'', ``Encumbered'', ``NSFR liability'', ``NSFR
regulatory capital element'', ``QMNA netting set'', ``Sweep deposit'',
``Unconditionally cancelable'', and ``Unsecured wholesale lending''.
0
b. Revising the definitions for ``Brokered deposit'', ``Calculation
date'', ``Collateralized deposit'', ``Committed'', ``Covered nonbank
company'', ``Operational deposit'', ``Secured funding transaction'',
``Secured lending transaction'', and ``Unsecured wholesale funding''.
0
c. Removing the definitions for ``Reciprocal brokered deposit'' and
``Brokered sweep deposit''.
The additions and revisions, in alphabetical order, read as
follows:
Sec. 249.3 Definitions.
* * * * *
Brokered deposit means any deposit held at the Board-regulated
institution that is obtained, directly or indirectly, from or through
the mediation or assistance of a deposit broker as that term is defined
in section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f(g))
and the Federal Deposit Insurance Corporation's regulations.
Brokered reciprocal deposit means a brokered deposit that a Board-
regulated institution receives through a deposit placement network on a
reciprocal basis, such that:
(1) For any deposit received, the Board-regulated institution (as
agent for the depositors) places the same amount with other depository
institutions through the network; and
(2) Each member of the network sets the interest rate to be paid on
the entire amount of funds it places with other network members.
Calculation date means, for subparts B through J of this part, any
date on which a Board-regulated institution calculates its liquidity
coverage ratio under Sec. 249.10, and for subparts K through N of this
part, any date on which a Board-regulated institution calculates its
net stable funding ratio under Sec. 249.100.
* * * * *
Carrying value means, with respect to an asset, NSFR regulatory
capital element, or NSFR liability, the value on the balance sheet of
the Board-regulated institution, each as determined in accordance with
GAAP.
* * * * *
Collateralized deposit means:
(1) A deposit of a public sector entity held at the Board-regulated
institution that is required to be secured under applicable law by a
lien on assets owned by the Board-regulated institution and that gives
the depositor, as holder of the lien, priority over the assets in the
event the Board-regulated institution enters into receivership,
bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or
distribution held at the Board-regulated institution for which the
Board-regulated institution is a fiduciary and is required under 12 CFR
9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal
savings associations), or applicable state law (state member and
nonmember banks, and state savings associations) to set aside assets
owned by the Board-regulated institution as security, which gives the
depositor priority over the assets in the event the Board-regulated
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or
distribution held at the Board-regulated institution for which the
Board-regulated institution's affiliated insured depository institution
is a fiduciary and where the Board-regulated institution under 12 CFR
9.10(c) (national banks), 12 CFR 150.310 (Federal savings
associations), or applicable state law (state member and nonmember
banks, state savings associations) has set aside assets owned by the
Board-regulated institution as security, which gives the depositor
priority over the assets in the event the Board-regulated institution
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding.
Committed means, with respect to a credit or liquidity facility,
that under the terms of the facility, it is not unconditionally
cancelable.
* * * * *
Covered nonbank company means a designated company that the Board
of Governors of the Federal Reserve System has required by separate
rule or order to comply with the requirements of 12 CFR part 249.
* * * * *
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other
restriction on the ability of the Board-regulated institution to
monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide
credit enhancement to any transaction, not including when the asset is
pledged to a central bank or a U.S. government-sponsored enterprise
where:
(i) Potential credit secured by the asset is not currently extended
to the Board-regulated institution or its consolidated subsidiaries;
and
(ii) The pledged asset is not required to support access to the
payment services of a central bank.
* * * * *
NSFR liability means any liability or equity reported on a Board-
regulated institution's balance sheet that is not an NSFR regulatory
capital element.
NSFR regulatory capital element means any capital element included
in a Board-regulated institution's common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital, in each case as defined
in Sec. 217.20 of Regulation Q (12 CFR part 217), prior to application
of capital adjustments or deductions as set forth in Sec. 217.22 of
Regulation Q (12 CFR part 217), excluding any debt or equity instrument
that does not meet the criteria for additional tier 1 or tier 2 capital
instruments in Sec. 217.22 of Regulation Q (12 CFR part 217) and is
being phased out of tier 1 capital or tier 2 capital pursuant to
subpart G of Regulation Q (12 CFR part 217).
Operational deposit means short-term unsecured wholesale funding
that is a deposit, unsecured wholesale lending that is a deposit, or a
collateralized deposit, in each case that meets the requirements of
Sec. 249.4(b) with respect to that deposit and is necessary for the
[[Page 9212]]
provision of operational services as an independent third-party
intermediary, agent, or administrator to the wholesale customer or
counterparty providing the deposit.
* * * * *
QMNA netting set means a group of derivative transactions with a
single counterparty that is subject to a qualifying master netting
agreement and is netted under the qualifying master netting agreement.
* * * * *
Secured funding transaction means any funding transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of the Board-regulated institution to a wholesale customer
or counterparty that is secured under applicable law by a lien on
securities or loans provided by the Board-regulated institution, which
gives the wholesale customer or counterparty, as holder of the lien,
priority over the securities or loans in the event the Board-regulated
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding. Secured funding
transactions include repurchase transactions, securities lending
transactions, other secured loans, and borrowings from a Federal
Reserve Bank. Secured funding transactions do not include securities.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the Board-
regulated institution that is secured under applicable law by a lien on
securities or loans provided by the wholesale customer or counterparty,
which gives the Board-regulated institution, as holder of the lien,
priority over the securities or loans in the event the counterparty
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding. Secured lending transactions include
reverse repurchase transactions and securities borrowing transactions.
Secured lending transactions do not include securities.
* * * * *
Sweep deposit means a deposit held at the Board-regulated
institution by a customer or counterparty through a contractual feature
that automatically transfers to the Board-regulated institution from
another regulated financial company at the close of each business day
amounts identified under the agreement governing the account from which
the amount is being transferred.
* * * * *
Unconditionally cancelable means, with respect to a credit or
liquidity facility, that a Board-regulated institution may, at any
time, with or without cause, refuse to extend credit under the facility
(to the extent permitted under applicable law).
Unsecured wholesale funding means a liability or general obligation
of the Board-regulated institution to a wholesale customer or
counterparty that is not a secured funding transaction. Unsecured
wholesale funding includes wholesale deposits. Unsecured wholesale
funding does not include asset exchanges.
Unsecured wholesale lending means a liability or general obligation
of a wholesale customer or counterparty to the Board-regulated
institution that is not a secured lending transaction or a security.
Unsecured wholesale lending does not include asset exchanges.
* * * * *
0
18. Amend Sec. 249.22 by revising paragraph (b)(1) to read as follows:
Sec. 249.22 Requirements for eligible high-quality liquid assets.
* * * * *
(b) * * *
(1) The assets are not encumbered.
* * * * *
0
19. In Sec. 249.30, revise paragraph (b)(3) to read as follows:
Sec. 249.30 Total net cash outflow amount.
(b) * * *
(3) Other than the transactions identified in Sec. 249.32(h)(2),
(h)(5), or (j) or Sec. 249.33(d) or (f), the maturity of which is
determined under Sec. 249.31(a), transactions that have an open
maturity are not included in the calculation of the maturity mismatch
add-on.
* * * * *
0
20. In Sec. 249.31, revise paragraphs (a)(1) introductory text, (a)(2)
introductory text, and (a)(4) to read as follows:
Sec. 249.31 Determining maturity.
(a) * * *
(1) With respect to an instrument or transaction subject to Sec.
249.32, on the earliest possible contractual maturity date or the
earliest possible date the transaction could occur, taking into account
any option that could accelerate the maturity date or the date of the
transaction, except that when considering the earliest possible
contractual maturity date or the earliest possible date the transaction
could occur, the Board-regulated institution should exclude any
contingent options that are triggered only by regulatory actions or
changes in law or regulation, as follows:
* * * * *
(2) With respect to an instrument or transaction subject to Sec.
249.33, on the latest possible contractual maturity date or the latest
possible date the transaction could occur, taking into account any
option that could extend the maturity date or the date of the
transaction, except that when considering the latest possible
contractual maturity date or the latest possible date the transaction
could occur, the Board-regulated institution may exclude any contingent
options that are triggered only by regulatory actions or changes in law
or regulation, as follows:
* * * * *
(4) With respect to a transaction that has an open maturity, is not
an operational deposit, and is subject to the provisions of Sec.
249.32(h)(2), (h)(5), (j), or (k) or Sec. 249.33(d) or (f), the
maturity date is the first calendar day after the calculation date. Any
other transaction that has an open maturity and is subject to the
provisions of Sec. 249.32 shall be considered to mature within 30
calendar days of the calculation date.
* * * * *
Sec. 249.32 [Amended]
0
21. Amend Sec. 249.32 by:
0
a. Removing the phrase ``reciprocal brokered deposits'' and adding the
phrase ``brokered reciprocal deposits'' in its place wherever it
appears.
0
b. Removing the phrase ``brokered sweep deposits'' and adding the
phrase ``sweep deposits'' in its place wherever it appears.
Subparts K and L [Added]
0
22. Amend part 249 by adding subparts K and L as set forth at the end
of the common preamble.
Subparts K and L [Amended]
0
23. Amend subparts K and L of part 249 by:
0
a. Removing ``[AGENCY]'' and adding ``Board'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``Regulation Q
(12 CFR part 217)'' in its place wherever it appears.
0
c. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
217.10(c)(2)(v)(A) through (C)'' in its place wherever it appears.
[[Page 9213]]
0
d. Removing ``[BANK]'' and adding ``Board-regulated institution'' in
its place wherever it appears.
0
e. Removing ``[BANK]'s'' and adding ``Board-regulated institution's''
in its place wherever it appears.
0
24. Amend part 249 by adding subparts M and N to read as follows:
Subpart M--Transitions.
Sec. 249.120 Transitions.
(a) Initial application. (1) A Board-regulated institution that
initially becomes subject to the minimum net stable funding requirement
under Sec. 249.1(b)(1)(i) or (ii) after July 1, 2021, must comply with
the requirements of subparts K through N of this part beginning on the
first day of the third calendar quarter after which the Board-regulated
institution becomes subject to this part.
(2) A Board-regulated institution that becomes subject to the
minimum net stable funding requirement under Sec. 249.1(b)(1)(iii)
must comply with the requirements of subparts K through N of this part
subject to a transition period specified by the Board.
(b) Transition to a different required stable funding adjustment
percentage. (1) A Board-regulated institution whose required stable
funding adjustment percentage changes is subject to the transition
periods as set forth in Sec. 249.105(c).
(2) A Board-regulated institution that is no longer subject to the
minimum stable funding requirement of this part pursuant to Sec.
249.1(b)(1)(i) or (ii) based on the size of total consolidated assets,
cross-jurisdictional activity, total nonbank assets, weighted short-
term wholesale funding, or off-balance sheet exposure calculated in
accordance with the Call Report, or instructions to the FR Y-9LP, the
FR Y-15, or equivalent reporting form, as applicable, for each of the
four most recent calendar quarters may cease compliance with the
requirements of subparts K through N of this part as of the first day
of the first calendar quarter after it is no longer subject to Sec.
249.1(b).
(c) Reservation of authority. The Board may extend or accelerate
any compliance date of this part if the Board determines such extension
or acceleration is appropriate. In determining whether an extension or
acceleration is appropriate, the Board will consider the effect of the
modification on financial stability, the period of time for which the
modification would be necessary to facilitate compliance with the
requirements of subparts K through N of this part, and the actions the
Board-regulated institution is taking to come into compliance with the
requirements of subparts K through N of this part.
Subpart N--NSFR Public Disclosure
Sec. 249.130 Timing, method, and retention of disclosures.
(a) Applicability. A covered depository institution holding
company, U.S. intermediate holding company, or covered nonbank company
that is subject to the minimum stable funding requirement in Sec.
249.100 of this part must publicly disclose the information required
under this subpart.
(b) Timing of disclosure. (1) A covered depository institution
holding company, U.S. intermediate holding company, or covered nonbank
company that is subject to the minimum stable funding requirement in
Sec. 249.100 of this part must provide timely public disclosures every
second and fourth calendar quarter of all of the information required
under this subpart for each of the two immediately preceding calendar
quarters.
(2) A covered depository institution holding company, U.S.
intermediate holding company, or covered nonbank holding company that
is subject to this subpart must provide the disclosures required by
this subpart beginning with the first calendar quarter that includes
the date that is 18 months after the covered depository institution
holding company, U.S. intermediate holding company, or covered nonbank
company first became subject to the minimum stable funding requirement
in Sec. 249.100 of this part.
(c) Disclosure method. A covered depository institution holding
company, U.S. intermediate holding company, or covered nonbank company
must publicly disclose, in a direct and prominent manner, the
information required under this subpart on its public internet site or
in its public financial or other public regulatory reports.
(d) Availability. The disclosures provided under this subpart must
remain publicly available for at least five years after the initial
disclosure date.
Sec. 249.131 Disclosure requirements.
(a) General. A covered depository institution holding company, U.S.
intermediate holding company, or covered nonbank company must publicly
disclose the information required by this subpart in the format
provided in Table 1 to this paragraph:
BILLING CODE P
[[Page 9214]]
[GRAPHIC] [TIFF OMITTED] TR11FE21.000
[[Page 9215]]
[GRAPHIC] [TIFF OMITTED] TR11FE21.001
[[Page 9216]]
[GRAPHIC] [TIFF OMITTED] TR11FE21.002
BILLING CODE C
(b) Calculation of disclosed average amounts--(1) General. (i) A
covered depository institution holding company, U.S. intermediate
holding company, or covered nonbank company must calculate its
disclosed amounts:
(A) On a consolidated basis and presented in millions of U.S.
dollars or as a percentage, as applicable; and
(B) As simple averages of daily amounts for each calendar quarter.
(ii) A covered depository institution holding company, U.S.
intermediate holding company, or covered nonbank company must disclose
the beginning date and end date for each calendar quarter.
(2) Calculation of unweighted amounts. (i) For each component of a
covered depository institution holding company's, U.S. intermediate
holding company's, or covered nonbank company's ASF amount calculation,
other than the NSFR derivatives liability amount and total derivatives
liability amount, the ``unweighted amount'' means the sum of the
carrying values of the covered depository institution holding
company's, U.S. intermediate holding company's, or covered nonbank
company's NSFR regulatory capital elements and NSFR liabilities, as
applicable, determined before applying the appropriate ASF factors, and
subdivided into the following maturity categories, as applicable: Open
maturity; less than six months after the calculation date; six months
or more, but less than one year, after the calculation date; one year
or more after the calculation date; and perpetual.
(ii) For each component of a covered depository institution holding
company's, U.S. intermediate holding company's, or covered nonbank
company's RSF amount calculation, other than amounts included in
paragraphs (c)(2)(xvi) through (xix) of this section, the ``unweighted
amount'' means the sum of the carrying values of the covered depository
institution holding company's, U.S. intermediate holding company's, or
covered nonbank company's assets and undrawn amounts of committed
credit facilities and committed liquidity facilities extended by the
covered depository institution holding company, or U.S. intermediate
holding company, or covered nonbank company, as applicable, determined
before applying the appropriate RSF factors, and subdivided by maturity
into the following maturity categories, as applicable: Open maturity;
less than six months after the calculation date; six months or more,
but less than one year,
[[Page 9217]]
after the calculation date; one year or more after the calculation
date; and perpetual.
(3) Calculation of weighted amounts. (i) For each component of a
covered depository institution holding company's, U.S. intermediate
holding company's, or covered nonbank company's ASF amount calculation,
other than the NSFR derivatives liability amount and total derivatives
liability amount, the ``weighted amount'' means the sum of the carrying
values of the covered depository institution holding company's, U.S.
intermediate holding company's, or covered nonbank company's NSFR
regulatory capital elements and NSFR liabilities, as applicable,
multiplied by the appropriate ASF factors.
(ii) For each component of a covered depository institution holding
company's, U.S. intermediate holding company's, or covered nonbank
company's RSF amount calculation, other than amounts included in
paragraphs (c)(2)(xvi) through (xix) of this section, the ``weighted
amount'' means the sum of the carrying values of the covered depository
institution holding company's, U.S. intermediate holding company's, or
covered nonbank company's assets and undrawn amounts of committed
credit facilities and committed liquidity facilities extended by the
covered depository institution holding company, U.S. intermediate
holding company, or covered nonbank company, multiplied by the
appropriate RSF factors.
(c) Quantitative disclosures. A covered depository institution
holding company, U.S. intermediate holding company, or covered nonbank
company must disclose all of the information required under Table 1 to
paragraph (a) of this section including:
(1) Disclosures of ASF amount calculations:
(i) The sum of the average weighted amounts and, for each
applicable maturity category, the sum of the average unweighted amounts
of paragraphs (c)(1)(ii) and (iii) of this section (row 1);
(ii) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of NSFR regulatory capital
elements described in Sec. 249.104(a)(1) (row 2);
(iii) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of securities described in
Sec. Sec. 249.104(a)(2), 249.104(d)(5), and 249.104(e)(3) (row 3);
(iv) The sum of the average weighted amounts and, for each
applicable maturity category, the sum of the average unweighted amounts
of paragraphs (c)(1)(v) through (viii) of this section (row 4);
(v) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of stable retail deposits and
sweep deposits held at the covered depository institution holding
company, U.S. intermediate holding company, or covered nonbank company
described in Sec. 249.104(b) (row 5);
(vi) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of retail deposits other than
stable retail deposits or brokered deposits, described in Sec.
249.104(c)(1) (row 6);
(vii) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of sweep deposits, brokered
reciprocal deposits, and brokered deposits provided by a retail
customer or counterparty described in Sec. Sec. 249.104(c)(2),
249.104(c)(3), 249.104(c)(4), 249.104(d)(7), 249.104(d)(8) and
249.104(e)(2) (row 7);
(viii) The average weighted amount and, for each applicable
maturity category, the average unweighted amount of other funding
provided by a retail customer or counterparty described in Sec.
249.104(d)(9) (row 8);
(ix) The sum of the average weighted amounts and, for each
applicable maturity category, the sum of the average unweighted amounts
of paragraphs (c)(1)(x) and (xi) of this section (row 9);
(x) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of operational deposits placed
at the covered depository institution holding company, U.S.
intermediate holding company, or covered nonbank company described in
Sec. 249.104(d)(6) (row 10);
(xi) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of other wholesale funding
described in Sec. Sec. 249.104(a)(2), 249.104(d)(1), 249.104(d)(2),
249.104(d)(3), 249.104(d)(4), 249.104(d)(10), and 249.104(e)(4) (row
11);
(xii) In the ``unweighted'' cell, the average amount of the NSFR
derivatives liability amount described in Sec. 249.107(d)(2) (row 12);
(xiii) In the ``unweighted'' cell, the average amount of the total
derivatives liability amount described in Sec. 249.107(e)(2) (row 13);
(xiv) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of all other liabilities not
included in amounts disclosed under paragraphs (c)(1)(i) through (xiii)
of this section (row 14);
(xv) The average amount of the ASF amount described in Sec.
249.103 (row 15);
(2) Disclosures of RSF amount calculations, including to reflect
any encumbrances under Sec. Sec. 249.106(c) and 249.106(d):
(i) The sum of the average weighted amounts and the sum of the
average unweighted amounts of paragraphs (c)(2)(ii) through (iv) of
this section (row 16);
(ii) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of level 1 liquid assets
described in Sec. Sec. 249.106(a)(1) (row 17);
(iii) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of level 2A liquid assets
described in Sec. 249.106(a)(3)(i) (row 18);
(iv) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of level 2B liquid assets
described in Sec. 249.106(a)(4)(i) (row 19);
(v) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of assets described in Sec.
249.106(a)(1), other than level 1 liquid assets included in amounts
disclosed under paragraph (c)(2)(ii) of this section or secured lending
transactions included in amounts disclosed under paragraph (c)(2)(viii)
of this section (row 20);
(vi) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of operational deposits placed
at financial sector entities or consolidated subsidiaries thereof
described in Sec. 249.106(a)(4)(iii) (row 21);
(vii) The sum of the average weighted amounts and, for each
applicable maturity category, the sum of the average unweighted amounts
of paragraphs (c)(2)(viii), (ix), (x), (xii), and (xiv) of this section
(row 22);
(viii) The average weighted amount and, for each applicable
maturity category, the average unweighted amount of secured lending
transactions where the borrower is a financial sector entity or a
consolidated subsidiary of a financial sector entity and the secured
lending transaction is secured by level 1 liquid assets, described in
Sec. Sec. 249.106(a)(1)(vii), 249.106(a)(3)(ii), 249.106(a)(4)(ii),
and 249.106(a)(7) (row 23);
(ix) The average weighted amount and, for each applicable maturity
category, the average unweighted
[[Page 9218]]
amount of secured lending transactions that are secured by assets other
than level 1 liquid assets and unsecured wholesale lending, in each
case where the borrower is a financial sector entity or a consolidated
subsidiary of a financial sector entity, described in Sec. Sec.
249.106(a)(3)(ii), 249.106(a)(4)(ii), and 249.106(a)(7) (row 24);
(x) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of secured lending transactions
and unsecured wholesale lending to wholesale customers or
counterparties that are not financial sector entities or consolidated
subsidiaries thereof, and lending to retail customers and
counterparties other than retail mortgages, described in Sec. Sec.
249.106(a)(4)(iv), 249.106(a)(5)(ii), and 249.106(a)(6)(ii) (row 25);
(xi) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of secured lending
transactions, unsecured wholesale lending, and lending to retail
customers or counterparties that are assigned a risk weight of no
greater than 20 percent under subpart D of Regulation Q (12 CFR part
217) described in Sec. Sec. 249.106(a)(4)(ii), 249.106(a)(4)(iv), and
249.106(a)(5)(ii) (row 26);
(xii) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of retail mortgages described
in Sec. Sec. 249.106(a)(4)(iv), 249.106(a)(5)(i), and 249.106(a)(6)(i)
(row 27);
(xiii) The average weighted amount and, for each applicable
maturity category, the average unweighted amount of retail mortgages
assigned a risk weight of no greater than 50 percent under subpart D of
Regulation Q (12 CFR part 217) described in Sec. Sec.
249.106(a)(4)(iv) and 249.106(a)(5)(i) (row 28);
(xiv) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of publicly traded common
equity shares and other securities that are not HQLA and are not
nonperforming assets described in Sec. Sec. 249.106(a)(6)(iii), and
249.106(a)(6)(iv) (row 29);
(xv) The average weighted amount and average unweighted amount of
commodities described in Sec. Sec. 249.106(a)(6)(v) and 249.106(a)(7)
(row 30);
(xvi) The average unweighted amount and average weighted amount of
the sum of (A) assets contributed by the covered depository institution
holding company to a central counterparty's mutualized loss-sharing
arrangement described in Sec. 249.107(b)(6) (in which case the
``unweighted amount'' shall equal the fair value and the ``weighted
amount'' shall equal the unweighted amount multiplied by 85 percent)
and (B) assets provided as initial margin by the covered depository
institution holding company, U.S. intermediate holding company, or
covered nonbank company for derivative transactions described in Sec.
249.107(b)(7) (in which case the ``unweighted amount'' shall equal the
fair value and the ``weighted amount'' shall equal the unweighted
amount multiplied by the higher of 85 percent or the RSF factor
assigned to the asset pursuant to Sec. 249.106) (row 31);
(xvii) In the ``unweighted'' cell, the covered depository
institution holding company's, U.S. intermediate holding company's, or
covered nonbank company's average amount of the NSFR derivatives asset
amount under Sec. 249.107(d)(1) and in the ``weighted'' cell, the
covered depository institution holding company's, U.S. intermediate
holding company's, or covered nonbank company's average amount of the
NSFR derivatives asset amount under Sec. 249.107(d)(1) multiplied by
100 percent (row 32);
(xviii) In the ``unweighted'' cell, the covered depository
institution holding company's, U.S. intermediate holding company's, or
covered nonbank company's average amount of the total derivatives asset
amount described in Sec. 249.107(e)(1) (row 33);
(xix) (A) In the ``unweighted'' cell, the average amount of the sum
of the gross derivative liability values of the covered depository
institution holding company, U.S. intermediate holding company, or
covered nonbank company that are liabilities for each of its derivative
transactions not subject to a qualifying master netting agreement and
each of its QMNA netting sets, described in Sec. 249.107(b)(5), and
(B) in the ``weighted'' cell, such sum multiplied by 5 percent, as
described in Sec. 249.107(b)(5) (row 34);
(xx) The average weighted amount and, for each applicable maturity
category, the average unweighted amount of all other asset amounts not
included in amounts disclosed under paragraphs (c)(2)(i) through (xix)
of this section, including nonperforming assets (row 35);
(xxi) The average weighted and unweighted amount of undrawn credit
and liquidity facilities described in Sec. 249.106(a)(2) (row 36);
(xxii) The average amount of the RSF amount as calculated in Sec.
249.105(a) prior to the application of the applicable required stable
funding adjustment percentage in Sec. 249.105(b) (row 37);
(xxiii) The applicable required stable funding adjustment
percentage described in Table 1 to Sec. 249.105(b) (row 38);
(xxiv) The average amount of the RSF amount as calculated under
Sec. 249.105 (row 39);
(3) The average of the net stable funding ratios as calculated
under Sec. 249.100(b) (row 40);
(d) Qualitative disclosures. (1) A covered depository institution
holding company, U.S. intermediate holding company, or covered nonbank
company must provide a qualitative discussion of the factors that have
a significant effect on its net stable funding ratio, which may include
the following:
(i) The main drivers of the net stable funding ratio;
(ii) Changes in the net stable funding ratio results over time and
the causes of such changes (for example, changes in strategies and
circumstances);
(iii) Concentrations of funding sources and changes in funding
structure; or
(iv) Concentrations of available and required stable funding within
a covered company's corporate structure (for example, across legal
entities).
(2) If a covered depository institution holding company, U.S.
intermediate holding company, or covered nonbank company subject to
this subpart believes that the qualitative discussion required in
paragraph (d)(1) of this section would prejudice seriously its position
by resulting in public disclosure of specific commercial or financial
information that is either proprietary or confidential in nature, the
covered depository institution holding company, U.S. intermediate
holding company, or covered nonbank company is not required to include
those specific items in its qualitative discussion, but must provide
more general information about the items that had a significant effect
on its net stable funding ratio, together with the fact that, and the
reason why, more specific information was not discussed.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the common preamble, part 329 of
chapter III of title 12 of the Code of Federal Regulations is amended
as follows:
PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS
0
25. The authority citation for part 329 continues to read as follows:
Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1,
5412.
[[Page 9219]]
0
26. Amend Sec. 329.1 by revising paragraphs (a) and (b)(1)
introductory text to read as follows:
Sec. 329.1 Purpose and applicability.
(a) Purpose. This part establishes a minimum liquidity standard and
a minimum stable funding standard for certain FDIC-supervised
institutions on a consolidated basis, as set forth herein.
(b) * * *
(1) An FDIC-supervised institution is subject to the minimum
liquidity standard, minimum stable funding standard, and other
requirements of this part if:
* * * * *
0
27. Amend Sec. 329.2 by revising paragraph (b) and adding paragraph
(c) to read as follows:
Sec. 329.2 Reservation of authority.
* * * * *
(b) The FDIC may require an FDIC-supervised institution to maintain
an amount of available stable funding greater than otherwise required
under this part, or to take any other measure to improve the FDIC-
supervised institution's stable funding, if the FDIC determines that
the FDIC-supervised institution's stable funding requirements as
calculated under this part are not commensurate with the FDIC-
supervised institution's funding risks. In making determinations under
this section, the FDIC will apply notice and response procedures as set
forth in 12 CFR 324.5.
(c) Nothing in this part limits the authority of the FDIC under any
other provision of law or regulation to take supervisory or enforcement
action, including action to address unsafe or unsound practices or
conditions, deficient liquidity levels, deficient stable funding
levels, or violations of law.
0
28. Amend Sec. 329.3 by:
0
a. Removing the definitions for ``Brokered sweep deposit'', ``Covered
nonbank company'', and ``Reciprocal brokered deposit'';
0
b. Adding definitions for ``Brokered reciprocal deposit'', ``Carrying
value'', ``Encumbered'', ``NSFR liability'', ``NSFR regulatory capital
element'', ``QMNA netting set'', ``Sweep deposit'', ``Unconditionally
cancelable'', and ``Unsecured wholesale lending''; and
0
c. Revising definitions for ``Brokered deposit'', ``Calculation date'',
``Collateralized deposit'', ``Committed'', ``Operational deposit'',
``Secured funding transaction'', ``Secured lending transaction'', and
``Unsecured wholesale funding.''
The additions and revisions, in alphabetical order, read as
follows:
Sec. 329.3 Definitions.
* * * * *
Brokered deposit means any deposit held at the FDIC-supervised
institution that is obtained, directly or indirectly, from or through
the mediation or assistance of a deposit broker as that term is defined
in section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f(g))
and the Federal Deposit Insurance Corporation's regulations.
Brokered reciprocal deposit means a brokered deposit that an FDIC-
supervised institution receives through a deposit placement network on
a reciprocal basis, such that:
(1) For any deposit received, the FDIC-supervised institution (as
agent for the depositors) places the same amount with other depository
institutions through the network; and
(2) Each member of the network sets the interest rate to be paid on
the entire amount of funds it places with other network members.
Calculation date means, for subparts B through J of this part, any
date on which an FDIC-supervised institution calculates its liquidity
coverage ratio under Sec. 329.10, and for subparts K through M of this
part, any date on which an FDIC-supervised institution calculates its
net stable funding ratio under Sec. 329.100.
* * * * *
Carrying value means, with respect to an asset, NSFR regulatory
capital element, or NSFR liability, the value on the balance sheet of
the FDIC-supervised institution, each as determined in accordance with
GAAP.
* * * * *
Collateralized deposit means:
(1) A deposit of a public sector entity held at the FDIC-supervised
institution that is required to be secured under applicable law by a
lien on assets owned by the FDIC-supervised institution and that gives
the depositor, as holder of the lien, priority over the assets in the
event the FDIC-supervised institution enters into receivership,
bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or
distribution held at the FDIC-supervised institution for which the
FDIC-supervised institution is a fiduciary and is required under
applicable state law to set aside assets owned by the FDIC-supervised
institution as security, which gives the depositor priority over the
assets in the event the FDIC-supervised institution enters into
receivership, bankruptcy, insolvency, liquidation, resolution, or
similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or
distribution held at the FDIC-supervised institution for which the
FDIC-supervised institution's affiliated insured depository institution
is a fiduciary and where the FDIC-supervised institution under 12 CFR
9.10(c) (national banks), 12 CFR 150.310 (Federal savings
associations), or applicable state law (state member and nonmember
banks, and state savings associations) has set aside assets owned by
the FDIC-supervised institution as security, which gives the depositor
priority over the assets in the event the FDIC-supervised institution
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding.
Committed means, with respect to a credit or liquidity facility,
that under the terms of the facility, it is not unconditionally
cancelable.
* * * * *
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other
restriction on the ability of the FDIC-supervised institution to
monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide
credit enhancement to any transaction, not including when the asset is
pledged to a central bank or a U.S. government-sponsored enterprise
where:
(i) Potential credit secured by the asset is not currently extended
to the FDIC-supervised institution or its consolidated subsidiaries;
and
(ii) The pledged asset is not required to support access to the
payment services of a central bank.
* * * * *
NSFR liability means any liability or equity reported on an FDIC-
supervised institution's balance sheet that is not an NSFR regulatory
capital element.
NSFR regulatory capital element means any capital element included
in an FDIC-supervised institution's common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital, in each case as defined
in 12 CFR 324.20, prior to application of capital adjustments or
deductions as set forth in 12 CFR 324.22, excluding any debt or equity
instrument that does not meet the criteria for additional tier 1 or
tier 2 capital instruments in 12 CFR 324.22 and is being phased out of
tier 1 capital or tier 2 capital pursuant to subpart G of 12 CFR part
324.
Operational deposit means short-term unsecured wholesale funding
that is a deposit, unsecured wholesale lending that is a deposit, or a
collateralized deposit, in each case that meets the requirements of
Sec. 329.4(b) with respect to that deposit and is necessary for the
[[Page 9220]]
provision of operational services as an independent third-party
intermediary, agent, or administrator to the wholesale customer or
counterparty providing the deposit.
* * * * *
QMNA netting set means a group of derivative transactions with a
single counterparty that is subject to a qualifying master netting
agreement and is netted under the qualifying master netting agreement.
* * * * *
Secured funding transaction means any funding transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of the FDIC-supervised institution to a wholesale customer
or counterparty that is secured under applicable law by a lien on
securities or loans provided by the FDIC-supervised institution, which
gives the wholesale customer or counterparty, as holder of the lien,
priority over the securities or loans in the event the FDIC-supervised
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding. Secured funding
transactions include repurchase transactions, securities lending
transactions, other secured loans, and borrowings from a Federal
Reserve Bank. Secured funding transactions do not include securities.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the FDIC-
supervised institution that is secured under applicable law by a lien
on securities or loans provided by the wholesale customer or
counterparty, which gives the FDIC-supervised institution, as holder of
the lien, priority over the securities or loans in the event the
counterparty enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding. Secured lending
transactions include reverse repurchase transactions and securities
borrowing transactions. Secured lending transactions do not include
securities.
* * * * *
Sweep deposit means a deposit held at the FDIC-supervised
institution by a customer or counterparty through a contractual feature
that automatically transfers to the FDIC-supervised institution from
another regulated financial company at the close of each business day
amounts identified under the agreement governing the account from which
the amount is being transferred.
* * * * *
Unconditionally cancelable means, with respect to a credit or
liquidity facility, that an FDIC-supervised institution may, at any
time, with or without cause, refuse to extend credit under the facility
(to the extent permitted under applicable law).
Unsecured wholesale funding means a liability or general obligation
of the FDIC-supervised institution to a wholesale customer or
counterparty that is not a secured funding transaction. Unsecured
wholesale funding includes wholesale deposits. Unsecured wholesale
funding does not include asset exchanges.
Unsecured wholesale lending means a liability or general obligation
of a wholesale customer or counterparty to the FDIC-supervised
institution that is not a secured lending transaction or a security.
Unsecured wholesale lending does not include asset exchanges.
* * * * *
0
29. Amend Sec. 329.22, by revising paragraph (b)(1) to read as
follows:
Sec. 329.22 Requirements for eligible high-quality liquid assets.
* * * * *
(b) * * *
(1) The assets are not encumbered.
* * * * *
0
30. Amend Sec. 329.30, by revising paragraph (b)(3) to read as
follows:
Sec. 329.30 Total net cash outflow amount.
* * * * *
(b) * * *
(3) Other than the transactions identified in Sec. 329.32(h)(2),
(h)(5), or (j) or Sec. 329.33(d) or (f), the maturity of which is
determined under Sec. 329.31(a), transactions that have an open
maturity are not included in the calculation of the maturity mismatch
add-on.
* * * * *
0
31. Amend Sec. 329.31, by revising paragraphs (a)(1) introductory
text, (a)(2) introductory text, and (a)(4) to read as follows:
Sec. 329.31 Determining maturity.
(a) * * *
(1) With respect to an instrument or transaction subject to Sec.
329.32, on the earliest possible contractual maturity date or the
earliest possible date the transaction could occur, taking into account
any option that could accelerate the maturity date or the date of the
transaction, except that when considering the earliest possible
contractual maturity date or the earliest possible date the transaction
could occur, the FDIC-supervised institution should exclude any
contingent options that are triggered only by regulatory actions or
changes in law or regulation, as follows:
* * * * *
(2) With respect to an instrument or transaction subject to Sec.
329.33, on the latest possible contractual maturity date or the latest
possible date the transaction could occur, taking into account any
option that could extend the maturity date or the date of the
transaction, except that when considering the latest possible
contractual maturity date or the latest possible date the transaction
could occur, the FDIC-supervised institution may exclude any contingent
options that are triggered only by regulatory actions or changes in law
or regulation, as follows:
* * * * *
(4) With respect to a transaction that has an open maturity, is not
an operational deposit, and is subject to the provisions of Sec.
329.32(h)(2), (h)(5), (j), or (k) or Sec. 329.33(d) or (f), the
maturity date is the first calendar day after the calculation date. Any
other transaction that has an open maturity and is subject to the
provisions of Sec. 329.32 shall be considered to mature within 30
calendar days of the calculation date.
* * * * *
Sec. 329.32 [Amended]
0
32. Amend Sec. 329.32 by:
0
a. Removing the phrase ``reciprocal brokered deposits'' and adding the
phrase ``brokered reciprocal deposits'' in its place wherever it
appears.
0
b. Removing the phrase ``brokered sweep deposits'' and adding the
phrase ``sweep deposits'' in its place wherever it appears.
Subparts G through J [Added and Reserved]
0
33. Add and reserve subparts G through J to part 329.
Subparts K and L [Added]
0
34. Amend part 329 by adding subparts K and L as set forth at the end
of the common preamble.
Subparts K and L [Amended]
0
35. Subparts K and L to part 329 are amended by:
0
a. Removing ``[AGENCY]'' and adding ``FDIC'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
324'' in its place wherever it appears.
0
c. Removing ``A [BANK]'' and adding ``An FDIC-supervised institution''
in its place wherever it appears.
[[Page 9221]]
0
d. Removing ``a [BANK]'' and add ``an FDIC-supervised institution'' in
its place wherever it appears.
0
e. Removing ``[BANK]'' and adding ``FDIC-supervised institution'' in
its place wherever it appears.
0
f. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
324.10(c)(2)(v)(A) through (C)'' in its place wherever it appears.
0
g. Amending Sec. 329.105, by revising paragraph (b) to read as
follows:
Sec. 329.105 Calculation of required stable funding amount.
* * * * *
(b) Required stable funding adjustment percentage. An FDIC-
supervised institution's required stable funding adjustment percentage
is determined pursuant to Table 1 to this paragraph (b).
Table 1 to Paragraph (b)--Required Stable Funding Adjustment Percentages
------------------------------------------------------------------------
------------------------------------------------------------------------
GSIB depository institution supervised by the FDIC...... 100
Category II FDIC-supervised institution................. 100
Category III FDIC-supervised institution that:.......... 100
(1) Is a consolidated subsidiary of (a) a covered
depository institution holding company or U.S.
intermediate holding company identified as a Category
III banking organization pursuant to 12 CFR 252.5 or 12
CFR 238.10 or (b) a depository institution that meets
the criteria set forth in paragraphs (2)(ii)(A) and (B)
of the definition of Category III FDIC-supervised
institution in this part, in each case with $75 billion
or more in average weighted short-term wholesale
funding; or
(2) Has $75 billion or more in average weighted short-
term wholesale funding and is not a consolidated
subsidiary of (a) a covered depository institution
holding company or U.S. intermediate holding company
identified as a Category III banking organization
pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
depository institution that meets the criteria set
forth in paragraphs (2)(ii)(A) and (B) of the
definition of Category III FDIC-supervised institution
in this part.
Category III FDIC-supervised institution that:.......... 85
(1) Is a consolidated subsidiary of (a) a covered
depository institution holding company or U.S.
intermediate holding company identified as a Category
III banking organization pursuant to 12 CFR 252.5 or 12
CFR 238.10 or (b) a depository institution that meets
the criteria set forth in paragraphs (2)(ii)(A) and (B)
of the definition of Category III FDIC-supervised
institution in this part, in each case with less than
$75 billion in average weighted short-term wholesale
funding; or
(2) Has less than $75 billion in average weighted short-
term wholesale funding and is not a consolidated
subsidiary of (a) a covered depository institution
holding company or U.S. intermediate holding company
identified as a Category III banking organization
pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
depository institution that meets the criteria set
forth in paragraphs (2)(ii)(A) and (B) of the
definition of Category III FDIC-supervised institution
in this part.
------------------------------------------------------------------------
0
36. Amend part 329 by adding subpart M to read as follows:
Subpart M--Transitions
Sec. 329.120 Transitions.
(a) Initial application. (1) An FDIC-supervised institution that
initially becomes subject to the minimum net stable funding requirement
under Sec. 329.1(b)(1)(i) after July 1, 2021, must comply with the
requirements of subparts K through M of this part beginning on the
first day of the third calendar quarter after which the FDIC-supervised
institution becomes subject to this part.
(2) An FDIC-supervised institution that becomes subject to the
minimum net stable funding requirement under Sec. 329.1(b)(1)(ii) must
comply with the requirements of subparts K through M of this part
subject to a transition period specified by the FDIC.
(b) Transition to a different required stable funding adjustment
percentage.
(1) An FDIC-supervised institution whose required stable funding
adjustment percentage changes is subject to the transition periods as
set forth in Sec. 329.105(c).
(2) An FDIC-supervised institution that is no longer subject to the
minimum stable funding requirement of this part pursuant to Sec.
329.1(b)(1)(i) based on the size of total consolidated assets, cross-
jurisdictional activity, total nonbank assets, weighted short-term
wholesale funding, or off-balance sheet exposure calculated in
accordance with the Call Report, or instructions to the FR Y-9LP, the
FR Y-15, or equivalent reporting form, as applicable, for each of the
four most recent calendar quarters may cease compliance with the
requirements of subparts K through M of this part as of the first day
of the first calendar quarter after it is no longer subject to Sec.
329.1(b).
(c) Reservation of authority. The FDIC may extend or accelerate any
compliance date of this part if the FDIC determines such extension or
acceleration is appropriate. In determining whether an extension or
acceleration is appropriate, the FDIC will consider the effect of the
modification on financial stability, the period of time for which the
modification would be necessary to facilitate compliance with the
requirements of subparts K through M of this part, and the actions the
FDIC-supervised institution is taking to come into compliance with the
requirements of subparts K through M of this part.
Brian P. Brooks,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System.
Ann Misback,
Secretary of the Board,
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on October 20, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-26546 Filed 2-4-21; 4:15 pm]
BILLING CODE P